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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 Fourth Quarter 2017 Earnings Call. My name is Nicole and I'll be your operator for today's call. [Operator Instructions]
I'll now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust's fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our Annual Report on Form 10-K 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-K 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 our management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer; David Greenbaum, President of the New York Division; and Joseph Macnow, Executive Vice President, Chief Financial Officer and Chief Administrative Officer. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer; Mark Hudspeth, Executive Vice President and Head of Capital Markets; and Matt Iocco, Executive Vice President and Chief Accounting Officer.
I will now turn the call over to Steven Roth.
Thank you, Cathy. Good morning, everyone.
Well, volatility seems to be back in a big way taking stocks down meaningfully, especially at our space. I've been saying for the past couple of years that the easy money has been made for this cycle, asset prices are high, it's a better time to sell, than it is to buy, and most importantly, now is the time in the cycle and this books stock when the smart guys build cash.
We did build cash, and we did sell assets, and we did give birth to two new important and focused company's through spin-off. We pushed away from acquisitions at [top-tech] prices. We have identified another billion dollars of assets to be sold, and cash will further increase meaningfully from 220 Central Park South closings beginning in 2019. We are in great shape for whatever is the come, whether it'd be defense or opportunity.
Our office business is performing well, while retail continues to be soft and accordingly we expect 2018 to be a flattish year. Here are a few operational highlights for the fourth quarter. David will of course do a complete review in a moment.
We are full. New York office occupancy was 97.1% up 10 basis points from the third quarter. We're also full at the theMART and we are working on a lease at the Q, which will bring us the full at 555 California Street at San Francisco.
New York average starting rents were at near record $76 per square foot for the fourth quarter, and they were a record $79 per square foot for the year. New York office mark-to-market was 7.3% GAAP, and 6.9% cash on 319,000 square feet of leasing for the quarter.
Cycles are a way of life and right now the market seems to be down on New York. I can tell you we don't see it. Demand for office space in New York continues to be robust coming from all manner of users in all sub markets. The hottest submarkets in town runs from Hudson Yards to Penn Plaza and extent south through Chelsea and Meatpacking. For those who say there is no rent growth in New York, I suggest you take a very close look at these submarkets and Fifth Avenue will always be Fifth Avenue.
New York is the financial capital in the world and the media capital, and the marketing and advertising capital, and the legal and accounting capital, you get the message. And New York has the second highest concentration of tech employees only to Silicon Valley. As the new supply, we believe job growth will be sufficient to absorb it.
I would comment that Google's purchase of the 1.2 million square foot Chelsea market announced last week which brings their ownership to over 4 million square feet in New York further validates New York as a talent center and further reinforces the importance of the Westside. All great companies must have a major presence in New York. And I can't help but mention that we own two buildings right across the street from Google.
Last week and to be recorded in our first quarter 2018 office leasing activity, we completed an important lease with Facebook at 770 Broadway where additional 78,000 square feet the entire third floor. That brings them to a total of 513,000 square feet in the building.
What made this deal unique is that we bought back the floor from Kmart who had 18 years remaining on their lease at $33.50 per square foot. This is the first deal we've done with Kmart and Kmart still has 82,000 square feet at 770 Broadway and 141,000 square feet at One Penn Plaza at the same low rents.
Now to recap. In the fourth quarter retail occupancy was 96.9% up 120 basis points from last quarter. Retail mark-to-markets were 66.6% GAAP, and 54.6% cash on a total of 39,000 square feet of leasing. With all due respect the GAAP accounting, assets are valued, bought and sold on cash numbers and we run the business on cash numbers.
Fourth quarter total cash basis NOI was $342.3 million up 7.4% from the fourth quarter of 2016. New York segment cash basis same-store NOI was up 7.0%. theMart cash basis same-store NOI was up 13.7% and 555 California Street cash basis same-store NOI was up 32.4%. As Joe will discuss in a few minutes, we reaffirm the guidance I first provided in my April 2017 annual letter to shareholders that retail cash basis NOI will not go below 309 million.
As is our custom, we publish management's estimate of NAV once a year in the fourth quarter supplement. Please we see Page 10. Adjusting for a $23 reduction from our July 2017 spin-off of Washington, our updated spot NAV is 96 per share, down from $112 per share a year ago.
The primary reasons for this; first, we are no longer capitalizing the incremental NOI from signed leases not yet commenced. This resulted in a $6 reduction. So all the substantial amount of cash and GAAP incremental NOI from signed leases has not changed, we do not think it's appropriate to add the pluses without recognizing the minuses.
Second, a $5 reduction resulting from increasing the cap rate on Street retail 50 basis points from 3.75% from [2.75% from 3.75%] which we believe more accurately reflects current market conditions.
And third, a $5 reduction resulting primarily from recognizing and capitalizing market management expense, adjusting 220 Central Park South value for dividends paid, and marking to market Alexander's, Urban Edge and PREIT stock prices.
On January 17, 2018 we increased our quarterly dividend to $0.63 per share at an annual rate of $2.52, a 7.7% increase. Please note this is RemainCo's dividend adjusted for the Washington spit. In the last two years we have raised our dividend three times by 29%. Based on yesterday's closing price, the dividend yield is 3.7%.
Now turning to the investment sales market. Office investment sales activity slowed meaningfully in 2017 bidding pools are thin or about average price per pound, and average cap rate had held up well. Pricing for the few AI assets that have come to market was strong and demand and pricing for assets South and West in Manhattan is very strong and record-setting consistent with tenant demand. Overall, buyers remained discipline giving where we are at the cycle.
In the retail sector, there continues to be little sales activity due to the lack of quality product towards the market and investor skittishness and maybe those should be in reverse order.
Debt markets for New York remains solid - remain as liquid and strong as we had seen with all markets wide open. In the face of rising rates, spreads have continued to tighten keeping all in coupons attractive. To sum up that, I’m very pleased with both our operating performance and our financial performance.
Before I turn it over to David, I want to clear something up. Two weeks ago, a couple of media outlets speculated incorrectly that I might be opposed to the Gateway Tunnel project based on the two [sent emails] that I sent to Transportation Secretary, Elaine Chao back in order. So I just want to state the following for the record.
Like everyone I know in the business in civic communities of New York and New Jersey, I believe that Gateway is far and away the most important infrastructure project at our region and one of the most critical for our nation. I'm also confident that the federal government and both states political leaders will devise an equitable core sharing agreement to get this project built, which undoubtedly will involve substantial federal participation.
David?
Steve, thank you, and good morning to all. I will begin as I usually do with my thoughts on the New York real estate market over the past 12 months.
2017 was a breakthrough year for the financial services sector. Employment grew by 13,000 jobs, a largest annual increase in over a decade. As a result, financial services employment ended the year at 11 last seen back in 2000.
Importantly, much of this growth took place prior to the passage and the recent tax bill and with deregulation still work in progress, and we believe we are in the early innings of significant growth in the financial services sector employment.
If you look at the recent announcements, Bank of America reached the entirety of 1100 Avenue of the Americas and MasterCard took all of 150 Fifth Avenue. And there are now reports of JPMorgan Chase's potential expansion by 400,000 square feet at 390 Madison Avenue after committing earlier last year to 430,000 square feet at Five Manhattan West.
Much of the growth in financial services employment is attributable not to traditional banking and insurance roles but rather the so-called fintech. This convergence of tech and non-tech is why I do not put much stock in reported decrease of 9,000 TAMI jobs in 2017.
I noted last quarter that the state controller estimates that nearly 50% of technology jobs in New York City are found in traditional sectors from retail to healthcare and from insurance to banking. We believe that tech remains strong and reported decline in TAMI employment is offset in a significant way by tech jobs in traditional sectors.
Overall for the year, office using employment grew by 20,000 jobs in 2017 and is now up by 173,000 jobs in the last five years. With this continuing strong employment numbers, our market experienced strong leasing velocity over the past 12 months.
Total Manhattan office leasing reached almost 40 million square feet in 2017, the highest level in 15 years. The story of 2017 was also the important large leases for an all time high of 22 deals greater than 250,000 square feet. In addition, there were 27 new relocation leases larger than 100,000 square feet more than 40% of which were in the Penn Plaza West side submarket.
Tenant and in particular large tenants continue to demonstrate a preference for new product and for high quality redevelopment. Class A product captured more than 68% of the total leasing volume largest share since 1995.
With the continuing strong job growth, our markets should be able to absorb the new office supply coming online and that is particularly true where as we, as many observers believe the trend toward the intensification is slowing as employees continue to invest in larger amenitized shared spaces to foster collaboration and employee retention.
Overall Manhattan vacancy at year-end 2017 was 8.9%, an improvement of 40 basis points over the prior year. Our overall Manhattan asking rents generally were flat as the island of Manhattan continues to tilt to South and to the West. We have seen significant rent growth in the new growing neighborhood with rents in West Chelsea now well above rents on Park Avenue.
With the backdrop of a robust market, let me now turn to Vornado's performance over the past year. In 2017 we leased nearly 1.9 million square of office space in our 139 separate transactions across our New York office portfolio. We achieved a high watermark average starting rent of $79 per square foot with strong mark-to-market of 12.8% GAAP and 9.9% cash.
Almost 30% of our 1.9 million square feet of 2017 leasing activity represented real growth by tenants in New York both tenants expanding, as well as tenants moving into the city for the first time. This included names such as Bertelsmann, HomeAdvisor IAC, Facebook, Google, Glencore, United Talent Agency, Guggenheim Partners and Cushman & Wakefield.
Financial services and fire tenants represented the largest share of our 2017 leasing activity, about 45% in total. Behind that number is an extraordinary diversity of companies and industries from banks to hedge funds and from insurers to private equity investors including Wells Fargo, Lone Star, Hudson Advisors, Fidelity, Morgan Stanley, Principal Global Investors and Whitebox Advisors.
TAMI tenants represented the second largest share of our activity at about 27% with tenants including EMC, automotiveMastermind and Google. And just last week as Steve mentioned, Facebook expanded yet again at 770 Broadway this time leasing the entire 78,000 square foot third floor previously leased by Kmart.
We had another strong year in our trophy assets as team completed 17 deals in seven of our buildings at or above $100 a foot more than any other owner. These 17 leases with an average starting rent of $117 per foot totaled 363,000 square feet, 20% of our total activity. It's worth noting that whereas market wise, substantially all of the trophy leasing activity took place in newbuildings, all of our transaction other than 61 Ninth were in our redeveloped assets, 90 Park, 280 Park, 350 Park, 650 Madison, 770 Broadway and our headquarters at 888 Seventh Avenue.
We have proven our ability to reposition existing buildings to compete with the best new construction. At One Penn during 2017, we leased 340,000 square feet across 39 separate transactions including a new headquarters lease with Siemens Mobility for 34,000 square feet.
The average starting rent at One Penn was nearly $69 a foot, the highest average ever achieved and that is before we kickoff a major redevelopment later this year with a new double high class lobby upgrades to storefronts and public plazas, the addition of social and amenity spaces on the first and second floors, new destination dispatch elevators, and a new entrance in the Penn Station. Our goal is to transform the building which will now be rebranded as Penn One as we have the rest of our fleet and to generate commensurate top-level rents.
We remain focused on the 4. 2 million square foot One and Two Penn duo and the surrounding district. The public sector also is focused on the Penn Plaza neighborhood, as I mentioned last quarter the district was front and center in the city's proposal to Amazon. Governor Cuomo has reiterated his intention to transform Penn Station that sits at his heart, as senior team continues to engage actively with our partners and government.
Let me now turn briefly to the fourth quarter which as I stated in our last call will be relatively quiet given that we had little large vacancy and only modest rollover. During the quarter we executed 34 leases totaling 319,000 square feet with average starting rents of $76 a foot and positive mark-to-markets was 7.3% GAAP and 6.9% cash. Our year-end occupancies stood at 97.1% up 80 basis points over the past year.
Same-store growth during the fourth quarter was a robust 4.6% on a GAAP basis and an excellent 8.9% cash, which caps the year in which our office same-store numbers for 2017 were up 3.7% GAAP and even better 11.5% cash.
Over the past five years since the starting 2013, mark-to-markets and our office portfolio have averaged 17.9% GAAP and 12.8% cash. We have industry-leading levels as is our same-store performance of the same period. Since 2013, we have average same-store growth of 4.7% GAAP and 7.6% cash.
Our leasing team has been active in the first quarter of 2018 with more than 40,000 square feet of leases either signed year-to-date or in negotiation and an additional 900,000 square feet in the pipeline including a sizable number of new and expansion deals.
Now let me spend a minute updating you about our development and redevelopment efforts which will drive future leasing. At 61 Ninth Avenue and the red-hot Meatpacking district, last October Starbucks commenced the buildout of the East Coast first reserve roastery and tasting room, a giant 20,000 square foot experiential retail space.
In the second quarter of this year, we will deliver the remainder of the building at 145,000 square feet to Aetna which looks like it has changed its plan in the wake of its pending $68 billion merger with CVS. Our 13-year lease is a fully binding obligation and it is our understanding that Aetna currently intends to sublease the space.
Also in the second quarter and just a few blocks north, we will complete another ground-up best-in-class boutique office building at 512 West 22nd Street directly on the highline. With the building nearing completion, tenant interest has increased dramatically. 512 West 22 is a building we have always expected will be a multitenant building. In fact, as we had expected at 61 Ninth prior to Aetna coming along where tenants will need to see the completed building to a fully appreciated unique spaces with outdoor terraces on each floor. Our full leasing effort will begin this spring.
In the third quarter, we will complete 606 Broadway in heart of Soho. And next up for our growing roster of boutique properties will be 260 11th Avenue where we are on track to complete the landmark process in the first half of this year so that we can begin the Richard Rogers design transformation of the historic Otis Elevator Building.
To augment the redevelopment, just last week we acquired 537 West 26 Street, the contiguous property to the East of 260 11th Avenue, a grand historic building with large column free spaces and roofs peaking at 29 feet.
Last but certainly not least, the redevelopment of the Boulevard Farley Building is well underway, as Penn Station's construction of the new Moynihan Train Hall is on schedule. The existing skylights in the building have been demolished with new skylights steel deliveries beginning this month. The future Train Hall construction is moving swiftly and the 850,000 square feet of office and retail space is not far behind with delivery on track for the second half of 2020.
And remember, all of this development activity plus our repositioning of One Penn is taking place in the neighborhood, employers and employees prefer and where rents are growing the fastest.
Turning now to our retail portfolio, let me say a few words about the market. Our e-commerce penetration continues to grow in New York as in every city, in New York we are the beneficiary of 62 million annual tourists. As they shop here, they are increasingly encountering successful brick-and-mortar outlets of leading online brands such as Amazon, Warby Parker and Bonobos. In the wake of these strong early experiments this multichannel approach is likely to grow.
As tenants continue to test the market before making long-term commitments, short-term deals and pop-up opportunities are becoming more prevalent. In November, we launched the very successful SJP's shoe store with Sarah Jessica Parker at our 640 Fifth Avenue on 52nd Street. With strong early performance before Christmas, we are working to refresh the store for another launch and another run of this store this spring.
In a challenging retail leasing environment, we continue to see a slight to the highest quality submarkets of markets that we are in Times Square Upper Fifth Avenue. In 2017, our retail team leased 126,000 square feet across 17 transactions with strong mark-to-markets of 26.5% GAAP and 25.4% cash. This included leases with creditworthy tenants such as Amazon, Citibank, JPMorgan Chase, Fidelity Investments, Levi's and Sephora. Our retail occupancy ended the year at 96.9%.
1535 Broadway in the very heart of Times Square exemplifies the strength of our portfolio. If you watch the ball drop on New Year's Eve we saw the dominating presence of our 4K LED screen, the world's largest. Retailers also have recognized the unique visibility of this block fund and later this year we will welcome the new flagship stores from both Sephora and Levi's to this property which is now fully leased with a top-notch roster that also includes T-Mobile and Swatch Group USA.
Over on Fifth Avenue at the end of last year Dyson opened a spectacular new emporium at 640 Fifth Avenue and at 731 Lexington in the former workspace, we will introduce the first U.S. restaurant of the award-winning Hutong from the U.K.-based Aqua Restaurant Group.
That lease is one of four fourth-quarter transactions totaling 39,000 square feet as mark-to-markets of 66.6% GAAP and 54.6% cash. For the quarter, our retail same-store performance was flattish at a negative 1.4% GAAP and a positive 3.2% cash. For the year, retail same-store numbers were again a flattish negative 0.3% GAAP and a strong positive 11.3% cash.
I’m now going to turn to theMART. In 2017 at theMART we signed 71 leases for a total of 345,000 square feet, an average starting rent of 4760 with positive mark-to-markets of 26% GAAP and 16.6% cash. Last quarter I mentioned that we were in the process of taking back an additional 40,000 square feet of showroom space on the ninth floor to create more best-in-class office space. We have now signed an LOI for all of the space with an existing tenant at theMART and are now on lease documentation.
This summer, Publicis, a tenant on the fourth and fifth floors will vacate its 132,000 square feet and when it's lease expires in July. This represents an opportunity for us with the Publicis lease well below the current market for this iconic asset.
Our same-store growth at theMART for the fourth quarter was 7.1% GAAP and 13.7% cash and for the full year was 4.2% GAAP and 7.6% cash. Looking back over the last five years, since 2013 our mark-to-markets at theMART by 22.5% GAAP and 14.4% cash and during that five-year period of time we averaged a remarkable annual 8.8% on a same-store GAAP basis positive and a 9.1% cash staggering numbers.
In San Francisco our 1.8 million square foot 3-building complex includes the iconic 555 California Street Tower, as well as the historic building at 315 Montgomery and the former Bank of America Banking Hall at 345 Montgomery.
Let me first spend a moment on what we've accomplished at 315 Montgomery Street, where BofA originally leased the entire 235,000 square foot building at fully escalated rents of $43 a foot. We embark on a lobby redesigned to update the building and appeal to TAMI tenants. The redesigned preserve the building's historic features for installing modern elements such as a glass entry portal, exterior lighting programming, and destination dispatch elevators with new cabs.
We completed the project in July of last year. Fast-forward today with a lease we just signed last week, and a second lease that is out for signature, the entire building will have been fully released at an average starting rent of $63, an increase is nearly 50% on a cash basis.
Next up is 345 Montgomery, and one of San Francisco's most iconic corners where we have secured government approval to kickoff the redevelopment of what we call the cube. SOM has designed creative office space with a large atrium that will offer a tenant a distinct branding opportunity in the center of San Francisco's Financial District. We have signed a letter of intent for a net lease of the entire 64,000 square foot building.
The highlights of our fourth quarter in San Francisco is a 30,000 square foot expansion in renewal with Kirkland Ellis bringing their total tendency to 150,000 square feet while extending the lease to 2030. For the fourth quarter in San Francisco, our mark-to-markets were positive 26.7% GAAP and 11.5% cash.
For the year in San Francisco, we signed 10 office leases for a total of 285,000 square feet at an average starting rent north of $88 per foot at strong mark-to-markets of 24.2% GAAP and 11.1% cash. In total across all of our retail and office properties in New York, Chicago and San Francisco for the year in 2017 we leased over 2.6 million square feet at a blended average starting rent of $86.90 across all asset classes and had positive mark-to-markets of 13% GAAP and 9.8% cash.
We remain proud of our industry leading numbers and as I've said before these numbers were credit both to the quality of our portfolio and to the hard work of our enormously talented professionals.
Joe?
Thank you, David. Good morning, everyone.
Fourth quarter total FFO was $0.80 per share compared to $4.20 in the prior year's fourth quarter. Please see our earnings release Form 10-K or our financial supplement for details of the items that affect comparability.
Fourth quarter FFO was adjusted for comparability with $0.98 per share compared to a $1.2 in the prior year's fourth quarter, a decline of $0.04 or $5.7 million primarily due to the following. First, as previously disclosed in December of 2016, we received $192 million a repayment of our created mezzanine loans on 85 Tenth Avenue, and also received a 49.9% equity interest in the property for $1. Fourth quarter FFO from our 49.9% equity interest was $6.4 million less than the FFO in 2016s fourth quarter from the mezzanine loan.
Second, a $5.8 million increase in interest expense inclusive of our share partially owned entities comprised of $3.1 million from $356 million of higher average debt balances, $2.1 million from higher floating-rates, $2.5 million of additional rent expense of 1535 Broadway which is treated as interest on the capital lease accounting, partially offset by $900,000 of interest savings from a lower average rate on our fixed rate debt.
Third, due to a change in New York state's tax TRS filing methodology which was permitted combined tax returns from the TRS, that resulted in refunds of taxes previously expense and in 2016 therefore reduced 2016 tax expense by $5.5 million which of course do not reoccur into 2017.
Partially offsetting this was $10.9 million of higher same store net operating income as a result of strong performance which I will discuss next and $1.1 million increase in non-same store income primarily from a straight-line write-off in 2016 fourth quarter.
New York's fourth quarter same-store NOI increased by $8.2 million or 2.8% on the GAAP basis, an increase by $18.2 million or 7% on the cash basis. theMART in 555 California Street produced a weighted average same-store NOI increase of 8.1% on a GAAP basis and increased by 19.4% on a cash basis.
Now to our results for the full year. FFO's adjusted for the year was $3.73 per share compared to $3.59 per share for 2016, an increase of $0.14 or a strong 3.9%. On a cash basis, 2017 FFO was adjusted was $3.39 per share compared to $3.06 per share for 2016, an increase of $0.33 or a very strong 10.8%.
New York's full year 2017 same store NOI increased by $29.5 million or 2.7% on a GAAP basis an increase by an extraordinary $108.2 million or 11.3% on a cash basis. Our other segment produced the same-store NOI increase of $5.1 million or 3.5% on a GAAP, an increase by $19.1 million or 15.2% on a cash basis.
Now let me spend a minute focusing on 2018. We expect retail 2018 cash NOI to be at the low end of the guidance that Steve mentioned, close to $309 million due to the following. A $9 million reduction in rent from H&M at 435 Seventh Avenue where we extended on a temporary basis, a $16 million reduction from other retail tenant expires in 2018, none of which are in the Upper Fifth Avenue or Times Square properties partially offset by 8 million of contractual rent step ups, and 7 million from new leases commencing in 2018 or full year in 2018 versus a partial year in 2017 including Dyson at 640 Fifth Avenue which commences September 2017 and the Starbucks Roastery at 61 Ninth Avenue which will commence in June 2018.
For the purposes of what I just given you, it's a worst-case scenario and we don't assume any new leasing and a retail portfolio. We are projecting 2018 interest expense including our share of partially owned entities to be approximately $16 million or $0.08 per share higher than in 2017 primarily due to a $15 million increase from estimated higher average floating-rate. As a result of these items, we expect 2018 NOI and therefore FFO on a comparable basis to be flattish.
Now to capital markets activity. We were very active in the fourth quarter. On October 17, we extended one of our two $1.25 billion unsecured revolving credit facilities from November 2018 to January 2022 with two six-month extension options. This was over subscribe and very well executed.
Interest rate on the extended facility was lowered from LIBOR plus 105 to LIBOR plus 100. The interest rate and facility fees are now the same as our other $1.25 billion revolving credit facility which matures in February 2021 with two six-month extension options.
On December 27, 2017 we redeemed our $450 million, 2.5% senior unsecured notes due 2019. We refinanced these notes with 450 million of seven-year 3.5% senior unsecured notes with January 15, 2025. The notes were sold at 99.596% of the face amount to produce a yield of 3.565%. In connection therewith, we expensed $4.8 million of debt prepayment costs and unamortized deferred financing cost from the debt we retired which is treated as a non-comparable item.
Also in December 2017, we called through redemption our 200 million 6 and 5 days percent Series G preferred shares and our 270 million, 6 and 5 [days percent] Series I preferred shares, a total of 470 million. We funded these redemptions with a new issue of $319.5 million, a 5.25% Series M perpetual preferred shares with net proceeds of $309.6 million and supplemented that with $160 million of cash.
Since we called for the redemption of the Series G and I preferred shares in December, they were classified as a liability on our December 31, 2017 balance sheet, as opposed to being included in shareholders' equity. Upon the redemption January 2018, we expensed the $14.5 million of issuance cost which will be included in our financial results for the first quarter ended March 31, 2018 and treated as a non-comparable item.
As of today we have no 2018 consolidated debt maturities and our share partially owned entities 2018 maturity is $422 million, the largest of which is $276 million at share for Independence Plaza the three tower 1327 unit rental residential complex in Tribeca in which we own a 50.1% interest.
Excluding the financing on our 220 Central Park South project which will self liquidate as signed contracts close, our consolidated net debt metrics are fixed rate debt account of 78% of debt with a weighted average rate of 3.72% and the weighted average term of 4.3 years. And floating rate debt account for 22% of debt with a weighted average interest rate of 3.21% and a weighted average term of 3.3 year.
Debt to enterprise value is 27.3% based on last night's closing stock price. Consolidated debt, net of cash to EBITDA is 5.8 times. Including our share partially owned entities net debt, excluding the nonrecourse debt of 666 Fifth Avenue and Toys "R" Us debt, net of cash to EBITDA is 6.9 times.
I would like to point out that in response to stakeholders request, our fourth quarter financial statements contain additional NOI disclosures which are also in our financial supplement on Pages 16 through 18. As Steve mentioned, our supplement also contains our updated annual NAV on Pages 10 and 11.
One word on the NAV, needless to say 220 Central Park South is a component of that NAV. We have used $900 million for the estimated after-tax profit coming from that job. That has not changed. If you go to last year's the same $900 million. We update that based upon the transfer pricing portion of Vornado's regular dividend, cash dividend to shareholders which is represented by fees and interest charge to 230 Central Park South.
Last year, 12/31/16 in our NAV that was $100 million. In this year's NAV, that's $250 million, the correct number for that should be $175 million this year. As we had in our press release when we announced dividend is approximately $0.36 of transfer pricing included in 2017 dividend was $75 million. The other $75 million increased our tax basis and was used to determine the after-tax gain that we started with of $900 million. On the website we’re going to correct that.
In closing Vornado continues to maintain a fortress balance sheet with reasonable leverage, well staggered debt maturity. We have $4.1 billion in liquidity comprised of a $1.6 billion of cash restricted cash and marketable securities and our undrawn $2.5 billion revolving credit facility.
I’ll now turn the call back to Steven.
Thank you, David, thank you Joe. We’re happy to take your questions.
[Operator Instructions] Our first question comes from Vikram Malhotra from Morgan Stanley. Your line is open.
Want to just check on Penn One, any other of any other details you can provide on potential spend, incremental return just timing?
We are finalizing our drawings in connection with the work that we're doing to Penn One. That work as I said is in the final stages. The budget should be available in the next three to six months at which point in time we'll disclose those budgets fully as we do it with all of our major capital projects.
And then just one clarification on the retail comment. Steve I think you mentioned the NOI will not drop below I think 309. So just wanted to get your sense of, is that sort of comment on 2018 and 2019 meaning 309 this year could be the low point?
The answer is yes.
Okay, thanks.
Vikram I want to go back to One Penn for a minute. One Penn is a 2.6 million maybe 2.7 million square foot building in the very heart of Penn Plaza. It sits right adjacent to and has direct access into Penn Station. It's a formidable action which has spectacular views. The plan that we have to upgrade, modernize it and redevelop it is pretty spectacular. It has $73 in place rents we believe that there is huge opportunity for rent growth in that asset and we couldn’t be more enthusiastic about it. We think when we combine the - as David call as the duo, One Penn is Two Penn - did I say $63 in place rents?
You said $73.
David is correcting me and slapping me a little bit, the in-place rent in One Penn are $63 a foot which leaves enormous room for uptick there. So we couldn't be more enthusiastic about it and similarly when we accomplish the connection of One Penn and Two Penn into a four odd million square foot complex, where we can afford to do extraordinarily significant amenity packages and food operations we’re very enthusiastic about this.
And just to clarify when - so you’ll give us details potentially over the next three to six months and - it just sort of high level should we think about this as sort of one year project to two project, a just big picture how should we think about this?
Yes, it’s a couple of year project and our teams are in the process of completing the design group drawings and taking the bids and as soon as we have the cost estimates that we're comfortable with, we will of course make that information available.
And our next question comes from Jamie Feldman from Bank of America/Merrill Lynch. Your line is open.
I guess sticking with Penn Plaza you know, if you think about Two Penn what needs to be in place for you to come up with some plans there and you know whether it’s a thinking about leases and leases are expiring there or what happens with Gateway or any kind Penn Station redevelopment. How long should we be thinking until you can get some clarity there?
Two Penn actually sits right a top of the train station so the first point Jamie is that the Gateway project which is a huge enormously important project, but a very long-term project has no bearing whatsoever in our plans for Two Penn or the Penn Plaza district so that step one.
Step two is, is that there's lot of stuff going on with Two Penn and our planning and different alternatives which is premature to talk about now, but whichever way they come out we think that they’re incredibly exciting.
And then I guess back to Joe's comments on the outlook for retail in 2018, I think you said you assume no additional leasing in the portfolio. So I mean just a handicap like if you were to get some leasing done like what's the drag there from no additional leasing as opposed to - you know probably a more reasonable outcome which is some renewals?
Which I mean not only is the non-leasing but there is a credit loss built in and multimillion of dollars that typically we haven't incurred. So what we’re telling you is 309, 310 is low end it could go up 5 million, 10 million.
And our next question comes from Michael Lewis with SunTrust. Your line is open.
Joe at the end of your comments you gave some detail on Central Park South, maybe I’m slow I just want to make sure I'm clear on this. It looks like the budget for that project went up about $150 million. I don't know if it's safe to assume you still think the sellout is going to be about $3.2 billion. Could you help bridge that how they’re still with those numbers they’re still 900 million after the - and taxes and everything?
The budget the producer project went up but so did the revenues go up - the budget and revenues go up and so did a reduction in the tax rate of the TRS go down. So net-net we think that the profit estimates that were originally made continue to hold.
By the way we are pretty far along the job - you know the job is probably 70%, 80% built, the job is well sold and so we have very good visibility into the numbers?
My second question, I know you get asked every quarter about 666 Fifth, there was a change this quarter kind of how you categorize that. So I guess you know it sounds like you think the future of the office component is as office. I was wondering - if you think there's material equity value in your interest or is this a case where you know you think that the plans that were presented don't really create value and now maybe you just give this back?
First of all I mean there is no new news on 666 Fifth Avenue, I said a call or two ago in response to a question that it’s complicated situation with lots of moving parts and I said at the end of my remarks a call or two ago that this was the rare instance where we may be sellers and the market and the press picked that up as saying that we were sellers. That is true and in our financials that were just published, we basically just formalized that fact, okay so that's step one.
Step two is, is that we have a relatively small investment in the property which we expect to get back.
Our next question comes from Michael Bilerman from Citi Financial. Your line is open.
It's a Michael Bilerman, I’m here with Emmy Korchman. Steve in your opening comments you talked about being in great shape for either defense or opportunity. So what are you looking at to know whether you should start spending some of this $2 billion cash forward and take advantage of opportunity or accelerate being a defense and selling more assets or stakes in assets because of what you see as the environment?
Michael, we see every deal that goes down which has any relation to what our sweet spot is and believe me if we saw a deal that cancelled, we would pull the trigger. So one of the things that I use in order to gauge how a cycle is going is the pencil. So assets - we just are not a buyer of assets at the offered prices today okay. So we would rather keep our powder dry. So there is - that's where we are I mean we look at everything and we are very, very, very disciplined in investing.
And Emmanuel has a follow-up as well.
We expect them to be more opportunities in the future as there always is.
Maybe a question for Joe or David. You spoke about the retail move-outs if you will or stresses in NOI. Is there anything in office bucket that we should expect to come up versus that would offset the contractual and why do we spoke about on previous calls?
We have well call Jamie you know the normal turnover, I'm sorry Michael, we have the normal turnover in the office portfolio. So we do expect we’re going to have a couple of move-outs. We also I mentioned Publicis in Chicago. Publicis also is a tenant at One Penn which is going to be moving out towards the latter part of this year, but it’s the normal ins and outs.
And our next question comes from Steve Sakwa from Evercore ISI. Your line is open.
Steve in your comments you talked about $1 billion of assets to be sold and I know that at least one or two quarters ago you identified another bucket of $1 billion of assets including some of the stakes you have in public companies. I'm just curious, is this the same billion you referenced in the past or is this a different billion of assets?
I think it’s the same Michael and I think it was last quarter that we referenced this - I’d love to get that second billion but it’s not there. So this is in a way of clean up - hang on, okay. So this is in a way of clean up and so that is - as I said this will take a couple of years to liquidate those assets.
So in addition, as I said in my remarks at 220 Central Park South as closings begin in 2019, we expect that also to augment our cash balances for the year definitely.
And I guess as a follow-up maybe to Michael's question about you know kind how to deploy capital with the stock down in the kind of mid 60s here and your NAV at 96. I mean how do you just sort of think about share repurchases as a way to play offense and take advantage of opportunities we don't like I guess deals in the marketplace. How do you sort of way on stock price or?
Steve that's a very good question. We look at buybacks all the time, we look at it at the management level. We look at it at every board meeting. So a buyback now would be accretive to NAV by a relatively smallish number but it would, it would - basically require reducing our balance sheet by a fairly significant number.
So for example, if we did a buyback of $500 million or a $1 billion that cash is gone and you get an accretion to the NAV of you know a number which is say a $1 a share give or take a little bit. So currently our board basically believes that we'd rather keep that keep that $1 billion of dry powder than increase it a very marginal amount though. Increase our NAV by a marginal amount. So that's step one although we know how to do buybacks we have done buyback they’re not off the table they’re on – in fact they are on the table at every meeting.
The second thing is that we discussed this with our bankers and other experts, there is no real evidence that a smallish buyback and for us a smallish buyback would be like for example a $1 billion actually increases stock price. So the answer to that is that right now we are not in the buyback business although we may in the future.
And our next question comes from Vincent Chao with Deutsche Bank. Your line is open.
Maybe just sticking with capital deployment here, could you just remind us sort of where your current thinking is on the return expectations for the developments in the progress pipeline and specifically maybe some push on the new ones that were out this quarter.
I'm sorry Vincent, could you say that again, returns on the development pipeline and what was the tail-end…
Just in particular the news that we’re added to the pipeline this quarter?
You broke up again could you?
So Joe why don’t you publish a way across burn expectations?
We have not.
So as a policy we do not publish - return expectation in the beginning of a project because the numbers are subject to moving around too much. We do have a very strong confidence in the cost side of the development, but lesser in the income side. And our history has been that we almost always exceed our expectations on the income side. So the answer is that that when we get visibility into the numbers we published it and we don't like the publish speculative numbers.
And maybe a different question here just in terms of the NAV you alluded to the 50 basis point increase in the cap rate for the retail portfolio as well as some challenges facing the market today. I guess as you think about that I think the new cap rate assumption, do you think there is more risk to that going higher or lower at this point?
That's speculation. I mean I think we are in the truth telling business and we thought that it was absolutely appropriate to raise the cap rate for retail to reflect what we believe is the market. And we think that that's a right number today that number could go down it could go up or it could stay the same that’s too speculative for me.
And our next question comes from John Guinee from Stifel. Your line is open.
First Joe you had mentioned I think flat year-over-year FFO it was I correct in understanding that. And then could you talk about what your basis is are you looking at your FFO as a $0.98 fourth quarter run rate times four or what are you looking at as your 2017 number?
John we did give our annual FFO we did give - all adjusted for comparability we did give fourth quarter a $0.98 a share. We said flattish but we’re not going to say more than that flattish.
So flattish off of 3.73 for…
Yes.
So we should look at essentially 2018 FFO in the 3.73 range?
Flattish.
Second David Greenbaum, I don’t know why I haven’t notice this before I'm looking at Page 32 full year and your GAAP rents are $74 and your cash rents are $76 on your second generation relet space which is highly unusual to have cash be higher than GAAP. That implies a rent roll down over the course of the year. Is that an accurate way to think about it?
John, we're scrambling - our team is scrambling to find that page and give you an answer what I prefer to do is let them contemplate the answer and get back to you offline.
Our next question comes from Nick Yulico from UBS. Your line is open.
Just going back to the street retail portfolio could you give us a feel for where in-place rents are today versus market specifically I guess going back to your cap rate assumption of 4.25% is that reflective of portfolio where rents are at market?
The answer your first question there are some pluses and some minuses there are some I mean it’s a large portfolio by far the largest in the city. There are many leases that are below market, there are some leases that are above market I don't - I’m not so sure with what the net would be number one. Number two is, is that the cap rate is a number by the way NAVs are in precise numbers. The NAV or the cap rate or the new cap rate for the quarter is applied to the - income to the current income stream. It doesn’t apply above market rents, it doesn’t apply below market rent.
I guess I was just wondering if that cap rate is reflective of you know where values would be for portfolio where rents are at market?
Yes, I think so.
Just second question is on G&A, last call there was some talk about your re-concentrating efforts on reducing G&A and that you said you might provide analysis on this I didn’t see anything new on that topic. Could just gives us some detail on how you thinking about where you could reduce G&A this year and what would you assume maybe for 2018 G&A?
Nick let’s just talk about G&A for a moment it’s a complicated analysis because each company has different accounting processes. So in our company the expense is in the G&A line but there is $20 million a year $5 million a quarter of income that comes in from the transitional services agreement and other fees for the two spins et cetera. So the published number of our G&A really when you look at it you should reduce that by $20 million so that step one.
Step two is we look at our sister company all the time and one of them has a $15 million of G&A that they push into the operating line and another one of them has lots of capitalized G&A or what have you. So when you take that altogether, the G&A of all the companies that are in very similar businesses are pretty much right on top of each other. Notwithstanding that we are going to make a major push in zero based budgeting on our G&A. And hopefully we will get some returns out of that.
Our next question comes from Alexander Goldfarb from Sandler O'Neill. Your line is open.
Two questions. So for the first one is the billion of dispositions that you outline if we assume sort of like you know 5% to 7% earnings yield on those assets it’s t like if 50% 70% million. How do you think about replacing that on a FFO basis in a way that it’s tangible for folks to see the earnings growth of the company versus the NAV stuff that you've done which is left tangible from a public stock perspective?
The number is close to five and maybe even a little bit below five the number one. Number two is we are focusing our efforts on the assets that really have low yield or no yield. And then the second is that the trick is to reinvest the capital and by the way the billion dollars that we project is after taxes and so we retain that. So the idea is to reinvest that capital into assets which are core and which have higher return expectations.
And then just a second is - the perennial question is on your succession the CFO search is almost coming up on a year and obviously there is talk for who would replace you. Are there certain things that you're at this point looking to achieve before we hear something new on the CFO or is your view to figure out what you want to do as CEO before coming out with the CFO?
I mean I think those are all cogent thoughts which have - each of which has validity. So first of all I’m clearly on the back nine I’m clearly not going to go forever and I may even be on the back half of the back nine. So with respect to me, our Board focuses on that every meeting we have a succession plan in place if I were to be hit by a truck or whatever. And so you know that's enough about me there still is a fair amount to be done and there is no news other than what I just said about me.
With respect to the CFO search that’s actually pretty interesting we have had a very good reception in the marketplace that people really think that this is a great job and a great opportunity. So we’ve seen a lot of very nice very capable people. Interestingly enough we have some very nice and capable people here and we've learned in this search that our old warrior Joe Macnow is probably the number one candidate accept he is a little bit over the hill too.
So it's not a priority because we have a great staff in both in our premise operation and in Joe and there is other things involved that we don't have any news to report on that other than what I said.
Our next question comes from Jed Reagan from Green Street Advisors. Your line is open.
Joe I think I heard you say that you expect portfolio cash same-store NOI growth would also be flattish this year versus last year, is that accurate?
I'm sorry Jed the portfolio of cash did you say?
Yes, cash same-store NOI growth to be flattish 2018 versus 2017 was that right when I heard that?
Yes, when you taken that retail going down flattish.
And just a clarification to follow-up on a question earlier on 666 Fifth office condominium in terms of deciding not to hold the asset longer-term. Just curious if you can talk a little about why you made that decision and what kind of time horizon you're looking at for potentially exiting your position there?
The decision asset-by-asset is complicated we basically believe that the returns and the structure and the time is such that we would rather exit then stick it out, pretty much as simple as that.
Is that a 12 month type of horizon or two years or?
I can’t predict the timing I can't predict what we would like to have is the eventual outcome.
Got it that’s helpful. And then one more if I may so the stocks been obviously trading at pretty a significant NAV discount for some time now and the discount increased a little bit here recently. I guess can you talk about your strategy for closing that NAV gap I mean do you see this as just a moment in time with the market kind of bearish on New York City. Are you looking at change course at all the respond to those discounts?
That’s a $64 question isn’t it. So over the last number – but the first thing is that our observation is that we are not alone in the discount penalty box that all the companies in our industry segment and in other industry segments also have the same situation. And so there are a few industry segments that are selling at NAV or above. Our office is not one of them neither is retail. Okay, so that's the first observation Jed.
The second observation is that if you look back in history and not that far back we have moved heaven and earth to close that discount and to recognize shareholder value. We have sold over $5 billion of assets. We have simplified, we have spun Urban Edge, we have spun JBG Smith, so a total of $15 billion of transactions in that.
And so we think we have done a heroic job and more than anybody else has done and we acknowledge and admit with great unhappiness that it has not yet affected main course performance, okay. So having said all that we think we're resourceful, we have lots of ideas as I said some years ago everything continues to be on the table and it will be on the table. And closing that gap or getting our shares to reflect fair value is the number one priority in the day-to-day running of our business.
Our next question comes from Michael Bilerman from Citi Financial. Your line is open.
Just had a couple of quick follow-ups. Just in terms of the NAV and I recognize Steve you said you don't think it’s appropriate to have the pluses so that recognizing the minuses. I guess two things in relation to that. The first is, you guys are using full year 2017 NOI in the calculation and just thinking about where in places today its almost 3.5% higher using 4Q annualize which would probably be another almost $4 a share in NAV. So how I guess how do you think about using a historical trailing 12 versus spot.
And then the second part is in removing the schedule of the pluses the signed leases, can you give some details in terms of what has been signed that is going to commence, so at least we have that in our mindset from previous disclosure.
NAV is a very, very in precise calculation, everybody does their own version of NAV you do, the analyst do, our investors do, and we do. So we have put out a NAV which we believe is very, very conservative and we think it's important that we do that. We are using a trailing number and actual number not a forward number. We're not making any projections as the income which is not commenced yet. We're not offsetting that. We are not taking any reductions in income they happens from move-out of vacancies and what have you. So we're happy with where we are, we spent a great deal of time thinking about it.
With respect to some other things basically most NAVs that the market participants use don't have a management fee in for running the assets. So we thought that was a little quirky so we put it in. So we’re not unhappy with it. We think if we wanted to get the NAV up another 5 or 7 or 8,000 share we surely could, okay. But as of right now we think the conservative road is the road to go. By the way the stock doesn’t seem to care what the NAV is anyway.
No that’s a separate question, but okay, I didn't know whether it was how you thought about in place signed current versus a trailing number. You obviously had a lot of growth over the course of the year as of a lot of that leasing took place and so I just didn't know whether it was a discussion point?
Michael all that's true, but we found that it was intellectually barren put in the plusses without speculating what the minuses would be and we ended up just saying, okay, just leave them both. Michael let me just - so we’re basically taking the trailing actual hard number right out of our docs and using that as a road map, which we think is a okay way to go.
And then Joe just want to come back to this NOI, you talked a lot about flattish, I understand the retail this year was 3.24, the bottom end of 3.09 for 2018, in the fourth quarter you’re actually at 3.33 annualized but put that aside. I am more interested on the office side of the business, the schedule that you had in the prior stuff on Page 9 still had about $36 million of signed leases incremental NOI that was on the come. And so I don’t why the office business would be effectively flattish?
First of all we don't give guidance as you know, okay, we are starting to link some statistics around the Edge, but we don't give guidance. We expect the office business to perform well next year and to grow. We expect the retail business to decline slightly, okay so when you put those two together we think the operating part of our businesses will have decent numbers next year.
When you go below the line, interest and other things we end up with the conclusion that give or take we're going to be flattish. Now flattish is a word that we have coined and we're going to - what's the word when you get - right, we had to copy write that word so that's where we are. We expect the office business to perform well, we expect New York to perform very well. The retail business will decline a little bit and that's where we are.
My two sense would be you give the bottom line answer, I think we would appreciate all the components in terms of NOI, acquisitions, disposition, timing, capital markets activities, debt, equity, development spend, development timing, G&A, you gave us interest expense and a topline number. And then a bottom line flattish number you know and it's just - you go all the way or not basically, I guess it’s more of comment then a question?
Thank you. You got a lot of work to do.
And our next question comes from Jamie Feldman from Bank of America/Merrill Lynch. Please go ahead.
Just a follow-up for David. You had talked about the leasing pipeline, I think you said 900,000 square feet and 400, I think you said got done in the first quarter. Can you just talk more about the composition of that 900,000 and is it more kind of 34th Street area, is it more Midtown just to give a sense and the types of tenants?
The mix of the tenant that we're continuing to see just as we had a wide dispersion throughout all of 2017 with the fire sector having come back. So we're seeing the TAMI tenants, the fire tenants we're even seeing the medical institutions in New York that are expanding into office space all being players for space over in terms of the pipeline.
And in terms of you know where the activity is dispersed, the reality Jamie is it’s basically all over the portfolio what I said is about 400,000 square feet that either have been signed or in lease negotiation, the balance of the space that we talked about the 900,000 square feet is pipelines in which case we’re in the early stages of some lease discussion.
And for example in the last two weeks we've actually received a couple of proposals for 512 West 22nd Street, the new build on the high line each of which we’re about 50,000 square feet. So we're seeing activity really everywhere in the portfolio Jamie and again broad spectrum in terms of tenant types.
And then just back to Joe on the interest expense comment, can you just repeat what you did say about what interest expense will look like in 2018. And then just the earnings volatility or sensitivity to higher rates in 2018 and 2019?
I think we've been pretty conservative in our estimate when I gave you that 15 million that took LIBOR over 2% at the end of next year and that's what built into our model.
We have no further questions at this time. I would like to turn it back over to the host for final remarks.
Thanks everybody very much. Our first quarter 2018 call is scheduled for 10 O'clock on Tuesday, May 1. We will see everybody there. Thank you. Have a good day.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.