Welcome to the Vornado Realty Trust Third Quarter 2018 Earnings Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Cathy Creswell, Director of Investor Relations. You may begin.
Thank you. Welcome to Vornado Realty Trust's 3rd quarter earnings call. Yesterday afternoon, we issued our 3rd quarter earnings release and filed our quarterly report on Form 10Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.bno.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 these 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 ks for more information regarding these risks and uncertainties. The call may include time sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward looking statements.
On the call today from management for our opening comments are Stephen 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 Macknow, Executive Vice President, Chief Financial Officer and Chief Administrative Officer Mark Husbus, 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.
Thanks, Kathy. Good morning, everyone. If I may, let me start by bragging a little bit. Our leasing numbers continue to be the best in the business. Year to date for 3 quarters across the entire business including New York office, retail, the mart and 555 California Street, our leasing activity totals over 2,000,000 square feet and 179 leases with outstanding mark to markets of 33.8% GAAP and 24.1 percent cash.
Thanks to Glenn and our best in the business leasing team. Yesterday, we posted 3rd quarter numbers. Here's the math. FFO as adjusted was $0.97 per share even with the prior year's Q3. Our GAAP basis financial results for this quarter were negatively affected by $4,500,000 largely from non cash straight line rent receivable write offs.
These GAAP accounting items did not affect our cash basis results. Remember, we run the business on cash numbers. Our 3rd quarter cash basis FFO as adjusted was $0.95 per share as compared to $0.89 per share for the prior year's Q3 up a strong 6.7%. This quarter's company wide cash basis NOI was $340,900,000 up 2.7% from the Q3 of 2017. Adjusting for the sale of our half interest in the 666 5th Avenue Office condominium, the increase was at even greater 3.8%, more about 6 66 in a minute.
Cash basis same store NOI increased by 4.3% comprised of New York office was up 5.1%, retail was up 4.2% benefiting by a $4,900,000 one time real estate tax abatement catch up with the total New York segment up 3.9%. The Mart was up 2.2% and 555 California Street was up 19.9%. This quarter's leasing activity was robust which David will cover in a minute. Our office business continues to perform very well. I'll say again what I've said for the last several quarters.
We are experiencing lowest demand from all manner of industries in all of our submarkets. Our tenants are optimistic, aggressive, growing and upbeat about New York. Everybody knows that I think our Penn Plaza assets are our main event. I have even called Penn Plaza the promised land. Our transformation here will begin with PENN1 and PENN2 where we will create a 2 building 4,400,000 square foot campus right on top of Penn Station.
It will include a 3 block grand plaza along Seventh Avenue covered by a giant new bustle across the entire 400 foot frontage of Penn 2. This bustle will extend out 70 feet from the building and will be 45 feet above the street. It will serve a dual purpose. It will be striking, creating a huge covered plaza in front of our PENN2 and the main entrance to Penn Station and bring the neighborhood into the modern age. And at the same time, it will create 140,000 square feet of very valuable new 20 foot high best in class creative space.
Images of this design will be posted on our website tomorrow under the call sign www.vno.com /portfolio/development. The scale of our campus here allows us to provide our tenants with the biggest and best unparalleled amenity package, even a giant leap forward from what many of you've seen we have done at the mall. Also at Penn Plaza, we are well underway at Farley to deliver in 2020 the best creative space in Manhattan. We will be announcing later today that we are increasing our ownership in Farland. And there is much more to come in the Penn District.
These assets are at the heart of the New York adjacent to the Hudson Yards and Manhattan West developments and sit literally on top of the busiest transportation hub in North America. And don't forget the adjacencies to Macy's, the biggest department store in the country and Madison Square Garden. Speaking of Lamar, David will tell you about a huge art projection we launched last month. A rotating group of artists will design images projected over the entire facade of the building. This is really innovative and exciting stuff, a must see in Chicago.
Our objective here is to increase the franchise value and renowned of this iconic 3,700,000 square foot building. Times Square is the best performing retail submarket in Manhattan. The highlight of the quarter was our September 24th acquisition from Host Hotels of the 46% interest in 1535 Broadway Retail Condominium that we did not already own. The original transaction provided that we would the 100 percent owner through a put call arrangement based on a pre negotiated formula. This acquisition satisfied the put call arrangement.
We now own 100% of the retail, which is 100% leased to T Mobile, Invictus, Swatch, Levi's and Sephora, as well as the largest digital sign in New York. This project has now completed as a 1st year cash on cash yield of 8.5%, obviously very accretive and value creating. Elsewhere, retail continues to be soft, albeit there is increased retailer activity and tours. At the beginning of the year, we guided that our 2018 retail cash NOI would not go below $304,000,000 We are now comfortable that retail cash NOI on a recurring basis will be at least $315,000,000 We have begun closings at our 220 Central Park South Super Tall condominium project. Closings will continue throughout 2019 as we climb up the building.
We are approaching 85% sold. Here is a factoid for you. In the 1,000 foot tower, we built 27 large full floor apartments, of which 26 are under contract. The press is telling us that the condo market in New York is soft or even worse than that. That may well be for some, but I point out that we went the contract on 2 large full floor apartments just this month, leaving only 1 out of 27 left.
220 Central Park South has exceeded all expectations and is well into record setting territory. It's old news now, but we didn't cover the sale of our interest in 666 5th Avenue Office on last quarter's call, but here it goes. Some time ago we made a decision and announced that we preferred to sell out of 666 office rather than participate in a 5 year capital eating renovation. As previously announced, the sale was completed on August 3. We received proceeds of 100 and $20,000,000 plus $57,000,000 from loan repayments.
The financial statement gain here was 142,000,000 dollars and the tax gain was $244,000,000 We wish our former partners and their new partners all success. Capital markets are pretty much unchanged over the last year or so. The office investment sales market remains healthy, but disciplined with volume up 20% year over year. The smaller the deal size, the easier to execute. Pricing for large core Manhattan assets is stable, though bidding pools are thin and it's taking longer to execute these sales.
There is continued strong demand and pricing particular for assets in the West and South of Manhattan. While foreign capital continues to be active, more of the activity this year is being driven by U. S.-based capital sources. Debt markets for New York assets remain as liquid and strong as we have seen. While the base rate for 10 year treasuries and LIBOR is up about 75 basis points this year, tightening spreads have offset about a third of this increase.
We count at least 50 and maybe as much as double that number of debt funds that have been formed since the beginning of the cycle, who are all competing aggressively on a rate and loan to value basis for both whole loans and mezzanine positions. We have a highly liquid fortress balance sheet with $3,300,000,000 in immediate liquidity, measured leveraged and well staggered maturities. And this doesn't count a couple of $1,000,000 to come from 220 closings and non core asset sales. Now to my partner, David.
Steve, thank you. Good morning, everyone. The New York City economy remains strong. We've now had 35 consecutive quarters of private sector job growth, truly an extraordinary run. September marked the 12th consecutive month that New York City unemployment remained below 4.5%, the longest such period on record.
While office using employment has been flat this year, the city has seen more than 22,000 new healthcare positions, which are not captured in office using employment. In our own portfolio, we have Columbia University at 1290 Avenue of the Americas with 123,000 feet, Memorial Sloan Kettering at 650 Madison with 100,000 feet and NYU Langone at 1 Park Avenue with a total of 630,000 square feet, of which 150,000 was growth this year. Over the last two quarters, new leasing activity in Manhattan reached 18,600,000 square feet, the strongest 2 quarter total on record. Overall, asking rents held firm at almost $73 a foot, while Class A rents in Manhattan and Midtown remained robust at $83 a foot. With year over year financial services sectors earnings growth of 24%, the fire sector in fact is now on fire with 53% of Manhattan's 3rd quarter leasing activity.
The 2 dominant themes in the market remain the growth of co working tenancies and the flight to new and renovated product. Let me now turn to our own performance in the Q3, where we executed 23 office leases totaling 312,000 square feet, driving occupancy up 70 basis points to 97.3%. Our average starting rent for the quarter was just over $67 a foot. Of course, starting rents obviously fluctuate quarter to quarter based on the mix of buildings and the space leased. The key statistic is the mark to market increase and our mark to markets remain very strong, an increase of 26.5 percent GAAP and 11.8% cash.
Our office business in New York saw same store NOI growth of 1.2% GAAP and 5.1% cash. Our most significant lease in the quarter was a headquarters deal at 909 Third Avenue with Saad Verbanen, a large and important strategic communications firm that took 65,000 feet. Another important transaction took place at 330 West 34th Street, where IAC owned HomeAdvisor expanded, doubling its footprint to 90,000 square feet and bringing 330 West to 100 percent occupancy, completing the redevelopment of this asset. At PENN1, we leased 82,000 square feet with 80% of that activity representing the movement of tenants from PENN2. As you know, prior to year end, we will commence our significant renovation program at PENN1 that will transform this 2,600,000 square foot asset with an expanded double height lobby, an acre of upgraded plazas, co working and conferencing facilities and a robust amenity package with food offerings and tenant services spanning the entire second and third floors.
At PENN2, we are now finalizing plans for a dramatic renovation and expansion of this existing 1,600,000 square foot asset located directly on top of Penn Station, turning the 2 buildings, PENN1 and PENN2 into what will be a 4,400,000 square foot campus. The PENN2 project will include a full recladding of the facade, new mechanical systems, a new tenant entry sequence adjacent to Plaza 33, all integrated with a full amenity package. And as Steve mentioned, the addition of a striking 4 story bustle that will transform both the existing building and the public realm. In connection with this redevelopment, we will be vacating PENN2 up to the 10th floor and we have begun relocating a number of the tenants from PENN2 into PENN1. We anticipate starting physical work in PENN2 in the Q1 of 2020.
The government continues to focus on the transformation of Penn Station and the area around it. Just last month, Governor Cuomo made a speech that included several significant announcements. With the construction of the new Moynihan Train Hall on time and to be delivered in 2020, the Governor reiterated his intent to upgrade the Long Island Railroad Concourse beneath 33rd Street, doubling the width of the most congested corridor in the station. As a reminder, we own the retail on the north side of this concourse, which is under One Penn Plaza. The Governor also announced a plan to transform the temporary plaza in 33rd Street into a permanent plaza, including a new station entrance, as well as announcing that the state would undertake a collaborative planning effort for the entire neighborhood.
We of course applaud all of these initiatives and the area's local representatives as importantly are doing the same. In a recent address, City Council Speaker, Corey Johnson, whose district includes Penn Plaza, strongly endorsed a new planning framework to increase density in the district, improve all public spaces and transform the station. It is clear that the momentum for major change in the district is accelerating. In other development activity, we have substantially completed 512 West 22nd Street, where we are in active negotiations with prospective tenants and have also substantially completed 606 Broadway, where we have leases out for both the office and retail space in the building. Looking ahead, our leasing pipeline remains active at over 700,000 square feet, including 200,000 square feet of leases out and in active negotiation.
Our remaining 2000 expirations totaled just over 300,000 square feet and our 2019 expirations are a modest 675,000 feet. Let me now turn to our street retail business. For the quarter, we signed 10 retail leases totaling 104,000 feet, including a 78,000 square foot renewal with Old Navy on 34th Street. Similar to our strategy earlier this year with Forever 21 at 435 7th Avenue, we elected to renew Old Navy short term for 5 years and eliminated any further tenant renewal options. This positions us to take advantage of rent growth as our transformation of the district proceeds, as well as maintaining our development options for the site.
With retailers drawn to the neighborhood's extraordinary foot traffic, we also signed new leases with Schuh store Naturalizer at 7 West 34th Street, Starbucks at 330 West 34th Street and fast casual food purveyor dig in at 11 Penn Plaza. Our retail mark to markets for the quarter were negative 40% GAAP and positive 36.3% cash. It is counterintuitive to have a large GAAP negative and a large cap cash positive. Let me explain. While the Old Navy renewal was at a significantly higher cash rent, which drove the strong cash mark to market, FAS 141 purchase price accounting required us at acquisition of this asset to mark the rent up to the then market, which has now proved to be too high, producing the negative GAAP number.
If you back out the Old Navy lease, our mark to markets were up 13.9% on a GAAP basis and 10% on a cash basis. Our retail occupancy stands at 96.6%, up 30 basis points from the 2nd quarter. Same store NOI growth for our retail business was up positive 2.9% GAAP and 4.2% cash. Turning to the Martin Chicago, we have good activity on the former Publicis space, a 132,000 square foot block spread across portions of the 4th and 5th floors that we just got back in the 3rd quarter. This is a growth opportunity as the rents on the former Publicis space was significantly below market at less than $32 per square foot.
We're in discussions with an existing Mark tenant seeking to expand, as well as with a Tammy tenant in our New York portfolio that also has submitted a proposal for a portion of the space. For the quarter, we signed 9 showroom leases and 3 retail leases, including an Amazon Go store, all totaling 28,000 square feet at an average starting rent of $57.92 per square foot. The mark to market increase for the quarter was positive 14.4 percent GAAP and 1.9% cash. As Steve mentioned, on September 29, we launched our permanent exhibition of Art on the Mart. More than 32,000 Chicagoans descended on Wacker Drive to see the inaugural display of the work of 4 digital artists, which will continue 5 nights a week for 2 hours, 10 months of the year.
With twice the clarity of a 4 ks Ultra HD TV, this 2.5 acre campus is simply extraordinary. Mayor Rahm Emanuel called the display a visionary project that brings Chicago's legacy of public art and iconic architecture into the future. As the largest permanent art installation in the United States, city officials expect the display to become as much of a Chicago staple as the Anishkafor Bean at Millennium Park and the Picasso at Daley Center Plaza. From our perspective, the art display strengthens the franchise value of the Mart and cements its position as nothing less than the most important office building in Chicago. For the Q3 at the Mart, our GAAP same store NOI performance dropped 3.8 percent primarily due to the July 31 Publicis departure, while cash same store was up 2.2%.
Let me conclude with San Francisco, where our 555 California Street Complex remains the most iconic office location in the city. As I told you in the last call, in the early days of this quarter, we signed a 15 year lease with the spaces concept of Regis IWG for the entirety of the former banking hall, the Cube at 345 Montgomery. We are making good progress on this $45,000,000 redevelopment, transforming it from the old banking hole into a 78,000 square foot modern co working environment that we will deliver next summer. We have largely completed the abatement and demolition activities and are now progressing with the main structural elements that support the expanded and additional floors. In the tower at 555, we signed 3 leases totaling over 82,000 feet, including a 2 floor 10 year renewal with UDS and a full floor expansion with Bank of America, bringing its occupancy in the complex to almost 330,000 feet.
With average starting rents over $91 a foot, our mark to markets were very strong at 30.4% GAAP and 10.4% cash. Same store NOI growth in the 3rd quarter also remained very strong at 17.2% GAAP and 19.9% cash. We look forward to showing off this flagship asset next week during NAREIT and hope you will join us for the festivities on the Plaza of 555 California on Tuesday evening. I'm also pleased to announce that Vornado earned NAREIT's 2018 Leader in the Light Award. This is the 9th consecutive year we've been recognized as the highest scoring diversified REIT.
Contributing to our success in earning the Leader of the Light award was Vornado's highest standing in the global real estate sustainability benchmark, what's referred to as GRESP. In 2018, Vornado is the number 3 among all listed real estate companies in the United States and placed in the top 6% of 847 GRES respondents worldwide. For the business as a whole, in the Q3, our same store NOI growth was positive, 0.9% GAAP and 4.3% cash. Across our portfolio, we leased 604,000 Square Feet in the quarter at mark to markets of 20.6 percent cap and 13% cash. We have the right assets in the right submarkets, all with significant embedded value and well positioned development and redevelopment opportunities.
Now back to Steve.
Thanks, David. We're delighted to take your questions.
Thank you. We will now begin the question and answer session. And our first question comes from Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you and good morning. Steve, I want to go back to your one of your initial comments, which was robust demand across many industries, across many submarkets. There's clearly concerns of things slowing out there. Just want to get your thoughts on kind of where you think how it feels and where we are in the cycle and any concerns you do have about where we might be in the real estate cycle?
Jamie, hi, good morning. First of all, we're always concerned. We live our life by being concerned. That's part of the job. I'll give you a quick overview and turn it over to David for more detail.
What we're seeing is that in the better buildings, in the better submarkets, there is robust demand and in fact even increasing rents. If you are not in the right submarkets or if you have tired buildings, you are seeing a totally different New York. But the New York that we operate in looks very robust to us. David, what do you think?
Jamie, I'll give you one statistic that I find interesting and that is year to date in New York, we have leased a little less than 1,400,000 square feet, 1,347 dollars Of that 600 plus 1000 square feet was all growth by existing tenants. It's Facebook, it's NYU Langone, it's HomeAdvisor, it's Alex Partners. So, we are still seeing tenants increasing their footprints, looking for more space. As I was coming upstairs for this call, I heard Glenn and one of his leasing guys talking about the action that they've got in terms of proposals that we're working on for our building. So I will tell you generally the environment for good buildings well located as I mentioned one of the major themes is renovated buildings, and well located buildings in the right districts.
We've got a lot of action.
Jamie, I'll add to that and say this. We are very, very attentive to a change in the demographic chain the demographic trends that have made New York so great. So the essential part of New York is its enormous infrastructure of talent, headquarters, business, arts, restaurants, etcetera. I would be remiss if I don't mention theater because that's my family business. And the inflow of talent into New York continues unabated and we watch it very carefully.
People would want to be in New York. They want to be in the right spot. And so we think that New York continues to have an enormous future and we watch it very carefully.
Okay. Thank you. And then just a follow-up for me. You talked about being in the right submarkets. Can you talk about the decision to increase your ownership of the Farley building?
And then as you think about 110, 210, just any early conversations with tenants in terms of interest in the renovated space, I guess, especially at 2 Penn, and what they might be looking for?
Yes. We love Farley. We think Farley is an extraordinary property. It is we learned the lesson. Last summer, we went out to Silicon Valley to call on our customers.
And we're talking about the Facebooks and the Googles and the big boys. They have out in the valley their preferences, they have campuses which are horizontal, not vertical. So what we have in Farley is a horizontal campus. It's a double wide block. It's the largest footprint in town.
It's right on it's adjacent to the train station. We think that we are in the midst of creating a very, very, very exciting project. We love it. And naturally, we want to own as much of it as we can. And so we saw eye to eye with our friends and our partners that related and we will be announcing later on today that we're increasing our ownership.
So there's that. What was the second half of your question, sir?
Just tenant demand for some of the you talked you're going to lay out plans for the 2 Penn renovation. Just what kind of discussions you're having with tenants that might be interested in that space or the Farley Building space?
We have tenants who want to talk to us about those properties. The tenants who are in the neighborhood, the tenants who are in the buildings now are very interested in perpetuating their occupancy and we have outsiders. Everybody that we have shown our plan to in the brokerage marketplace is beyond excited. It's transformative. It's a very exciting prospect of what we're doing.
Quite frankly, we are holding off a little bit, okay, because we are this is not the right time for us to go to lease. So the answer is we are confident in demand. We have gotten enormous support from the real estate community and we couldn't be more optimistic about what we are doing. David, do
you anything to add? Jamie, just one other quick thought and that is Glenn I and all of his leasing guys are just beginning to introduce what we're doing in the Penn District to the marketplace. We are having meetings with the brokerage houses with the key brokers that we all do business with. As Steve said, an enormous wow to the brokers when they begin to focus on the scale of what we're doing, the transformation of what we're doing, everybody recognizes that Seventh Avenue, the Penn District will be the epicenter of the new New York as we look out 5 10 years from now. It is at the busiest transportation hub of North America.
And I will tell you, the packages that we are doing in the building in terms of the amenity packages for the tenants, we think we will be doing something that will be truly transformative and the brokers understand we really deliver on everything that we say we are going to do. So, it's really very early days to talk about any specific tenants for space.
We are also excited about posting on our website a handful of images of what we're doing so that when you take a look at those, you can get a feel for our level of for why we are so enthusiastic about what we're doing. Thanks.
Okay. All right. Thank you.
Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks. Good morning. Steve, in your opening comments, you really didn't talk about sort of return of capital or how you may use kind of the growing cash balance that you've currently got plus the money coming in from 220 over the next year. Can you just sort of speak to that and how you plan to use that and help try and close the NAV discount?
We are an extremely liquid well financed real estate business. We have great financial resources. Those resources are growing and that's by our intent. We look at every single deal that comes along in the marketplace and we have decided that we can't make money at the offering prices of most of the deals. So we've been very selective.
We're in business to make money for our shareholders. So the rather than just we don't follow the policy, well, let's just look at the marketplace and take the best deal that's available because the best deal that's available may not work. So the answer is that we have pushed away in the current part of the cycle. There will be opportunities. The opportunities will be extraordinary and you have to have dry powder to take advantage of those opportunities.
So what I'm really saying is not yet. In the interim, the cash that we have will be used to pay down debt, etcetera. So as an example, we bought for $400,000,000 I think it was $42,000,000 from host Marriott the half of the 1535 Broadway block that we didn't own. We bought that for cash. We now have an asset that has a value of well over $1,000,000,000 that we own free and clear, no financing on it whatsoever.
So if you remember when we put out that press release a couple of months ago, that transaction is doubly accretive. It's accretive because of the earnings, but it's even more it's even because of the rents, but it's even more accretive because we use 2% cash to buy it. So the answer to your question is not yet. Liquidity is good. We will pay down debt selectively, which also increases our liquidity.
And so there you have it. This is the part time of the cycle when it's the right time to be selective in acquisition and to build liquidity.
And just to kind of follow-up, are buybacks sort of not part of that equation at this point?
The answer to that is that I think you know my feeling about buybacks. I was very clear about it in the letter in my annual letter, my last annual letter. If we thought that buybacks would increase shareholder value, we would do it, okay? There is no sign that buybacks other than putting your attempting to put your finger in the dike creates long term shareholder value unless they are done by a company that has a recurring cash flow and they're done continuously over long, long periods of time. That doesn't fit our profile.
So we'll see.
The other hand
Can I just ask quickly on the street retail? I mean, you certainly had a more positive
Steve, hang on for a minute. The other thing is you should know that we are not cavalier about buybacks. We cover it at every Board meeting. We discuss it and rediscuss it. So we are not closed minded.
We just think that we are practical. What is your question about retail?
Sorry, I just wanted to circle out. Your commentary was a bit more positive this quarter than last quarter, certainly raising the number from $304,000,000 to $315,000,000 I guess I'm just trying to find out, was that largely due to the Old Navy deal sort of getting completed and that risk being taken off the table? I'm just trying to gauge kind of where your temperature is on street retail today versus say 3 months ago? I'd love
to call the bottom, but maybe I'm not that smart or maybe I'm not that stupid. The street retail business continues to be soft. Our business continues to be strong because of very strong leases in place and the best properties in the business. And all that we're saying is that the cautious number that we put out of 30 $9,000,000 that reduced to $304,000,000 because of a reclassification of I think it was 770 Broadway Retail. That number we are going to exceed that number.
I just wanted to make sure that you and all your colleagues knew that as soon as we did. So and we think the number in 2019 will be even a little bit better, okay. But the tone of retail continues to be bottom fishing and caution.
Okay. Thanks very much.
Thanks, Steve.
Our next question comes from Manny Korchman from Citi. Please go ahead.
Thanks. Michael Bilerman here with Manny. Just a couple of quick questions. Steve, on Moynihan, I assume related shares your enthusiasm about the demand and the prospects given how successful Hudson Yards has been. So what gives them the desire to want to sell additional interest to you?
And maybe just talk a little bit about the math surrounding your purchase? I don't know if it was an option that you called or whether it was a negotiation.
So I lovingly called you Mr. Yada, yada, yada this morning. You get it? You get my mind?
I got it.
Okay. So, look, Related loves the asset and the neighborhood as well as we do, but they're in a different business, okay? They're in a business where basically they invest, They have 3rd party capital and they're in it for a profit. What we did was we they sold us or they for the money. So we paid them what we thought was an appropriate uptick from our basis to make them happy to sell and make us very happy to buy.
So it's very simple. They're in a different business model than we are. They're in the business to create assets, create value and then harvest that value. We're in the same business, but we're much longer term than they are. So they love the asset, we love the asset and off we go.
We'll put out a press release at the close of business today.
And then just thinking about the cash that's going to be coming in over the next couple of years, and congratulations on starting the sales process, the official closings at 2 20. How should we think about both the cash that comes in from 220 against the loan that you had for the construction costs? I don't know if it has to be paid down initially versus taking the cash. And then secondly, how we should think about the $1,000,000,000 of non core sales? What is the current process that's in place there and how should we think about that cash coming in?
Michael, that's a very good question. With respect to we used the $750,000,000 term loan to partially finance the development of 220 Central Park South, which as I think you and everybody is beginning to see is one hell of a brilliant deal. As the closings of that, as we climb up the building and we close apartments that will liquidate that investment or that will liquidate the loan. We will use the proceeds to roll into financing Moynihan, okay? So as you can see, that term loan is 100 basis points over LIBOR.
It gives us the lowest cost of capital in the universe. And so that cost of capital, which benefited us at 220, will now be rolled into Moynihan. With respect to the other half of your question, I would refer you to exactly what I said to Steve Sakwa a couple of seconds a couple of minutes ago.
Okay. And then in terms of the yada, yada, yada, is there any update on sort of everything being on the table and anything on strategic alternatives in terms of spinning off street retail, contributing assets to a fund? Is there anything new on that front?
Michael, we think we've done more than anybody else over the recent years to create value and to focus our company. I would just call you to the attention that our Washington we call I call them spin child. So it's a spin off which we think is we continue to think of the child of ours. JBG Smith, which is performing very well. So we're actually pretty excited about what we have done.
We are still they're still on the table other kinds of structuring, restructuring, which will create shareholder value, okay? We will have more to say about that, but we have nothing to say about it today.
Okay, great. Thanks Steve for your time.
Thanks, Michael.
Our next question comes from John Kim from BMO Capital Markets. Please go ahead.
Thank you. On 220 Central Park South, spent a lot of capital, time and effort on the building. You're going to earn potentially $1,000,000,000 in cash profit, which is about a year and a half of FFO. But from a reported earnings perspective, it's going to basically show up as a 0, I think. And in fact, it's actually been an earnings drag over the last few years.
I realize it's in your NAV, it's in all of our NAVs, but I'm questioning if that's the correct way to state your earnings given it is cash profit?
I think I'm a little startled. I think that your question implies that maybe we shouldn't have done $220,000,000 and sacrificed that $1,000,000,000 But with respect to the accounting details of your question, I'm going to turn it over to Joe.
John, it's Joe. How are you? John, the profit on 2 20 will flow through FFO. It's non depreciable real estate and accordingly under the narrow definition of FFO, the gains on the sale of that land parcel now fully developed will show up in FFO. We're going to treat it as not part of recurring FFO, but only as part of FFO as adjusted because it's not recurring.
But there will be $1,000,000,000 of income flowing through the income statement and $1,000,000,000 of cash generated. As Steve said, that was after paying off the $750,000,000 it was also after paying off the $950,000,000 first mortgage. That's $1,700,000,000 of debt. You can do the math to understand what the gross proceeds are.
I think, John, your question implies that it is a one and I'll say it is a one timer. There's no doubt. And there is, it's possible, in fact, maybe even likely that a one timer, even a massive one timer like this gets no credit in our trading price of our stock. If that's the case, so be it. But we will benefit by having a very significant increase in our cash at the end of this project.
I just wanted to clarify. It will be included in NAREIT FFO, but when you do FFO as adjusted, will you be taking it out? So therefore, it's more of a normalized figure without CPS?
No, the opposite will be as part yes, exactly what you said. It was part of NAREIT FFO, but FFO as adjusted, which in our mind is a recurring type of number, we'll exclude it.
Okay. So I'm just saying, I think a lot of investors will focus on your reported number, which is the as adjusted. So it will look like there's no earnings coming from it when in fact it is hugely profitable.
Well, I think that a number of the people on this call focus on both, the as adjusted because that's the number that gets reported bottom line, but as well as the recurring number, which won't include it, which will include it rather.
Yes. John, I give investors a little bit more credit than that. I mean, I think the project is smashingly successful. It creates an enormous amount of value and that will be recognized. I think investors are smarter than maybe we're giving them credit for.
The bottom line is in our NAV, we have $1,000,000,000 for value creation from that asset. That's the right way to think of it. Shareholders have been enriched $1,000,000,000 to $5 a share. Okay.
On your dispositions of your commercial assets, you recorded a $141,000,000 net gain, which is a GAAP figure. I'm wondering if you could disclose what the cash gain was on those sales?
Joe, that's yours.
I'm sorry. I didn't understand the question.
The asset sales that you had during the quarter recorded you had recorded $141,000,000 of gains, which is a GAAP figure. I think you also disclosed what the taxable figure was, but I was just wondering what the cash figure was if
you have
that? The cash figure was $120,000,000 on the sale of the building, dollars 7,000,000 coming from the collection of our share of the mortgage in excess of our basis on the mortgage.
Was there another little asset in that? Yes, there was, but
really tiny. That's the lion's share of the gains.
So the answer is that the cash is directionally the same as the gap. Right. Exactly right.
Our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks for taking the question. So just on the street retail numbers coming in better than you originally anticipated. Can you kind of maybe walk us through what may have surprised to the upside? I know in your original number, you did bake in any renewal from expiration. So did you see better trends in terms of renewing or is there something specific about any of the assets?
I can tell you, I'm surrounded by 7 accounting geniuses. So one of your geniuses will have to handle that one.
Well, first of all, there was a discussion of a tax abatement and a piece of it being nonrecurring in Steve's remarks, a piece of it was recurring. We didn't count on that in the 304. And as we've always do when we project something, we take the worst case basis. For the past two quarters, we've been saying that the 304 seemed low, Steve said it even stronger in the last quarter. But the individual items that make it up are basically very conservative in the 304 and some things went our way.
We didn't have credit losses that we anticipated and a few other things like that.
Vikram, the difference between $304,000,000 $315,000,000 is it's a couple of percentage So these are small movements. We will offline do a reconciliation and get a hold of you.
Okay. Can I just briefly ask about any update on Massimo Dutti and the asset, the 3 expirations at Madison that I believe were expiring this quarter?
All of those will go empty before we fill them. So they will all have a period where they will be vacant. And that's in our projections.
So the 3 assets and the three stores at Madison with were they expiring this Q3 or they will expire in the Q4?
The expiration of 6 when is that expiration?
The Westbury.
Yes, the Westbury when is the Westbury expiration?
We are doing a couple of short term renewals for a couple of the tenants at the Westbury, which will take those expirations out to the early part of next year.
Got it. Okay. Okay. That helps. And then just last question.
Hang on.
Sorry, go ahead.
On the Westbury, which is a pretty interesting, exciting asset. We are when the building when the tenants move out, we are going to renovate the building. We're going to clean the facade. We're going to light it, landscape it. We're going to make improvements to it and then go out and remarket the property.
Got it. Okay. And then just last question, given sort of potential redevelopment of future assets and the moving parts at Penn, maybe Steve, if you could give us just thoughts around the WeWork model, maybe creating a bigger partnership with WeWork at any of the assets, would they fit into any of the bigger plans?
The answer is yes and yes.
And any specific in terms of types of assets or any thoughts on like size wise or what would you consider assets in terms of good partnership with them?
I really can't get into any detail. We are we talked to WeWork. They are friends of ours. We think that they have a very interesting business model and we aspire to do business with them. With respect to talking about specific assets, I think that's inappropriate.
Okay. Thank you.
Our next question comes from John Guinee from Stifel. Please go ahead.
Great. First, for Steve.
I'm
not going to ask you
how much it costs
to bring Jerry Seinfeld to California because that's such a cool event. But any thoughts on the midterms next week? And is New York City still involved in Amazon HQ2? I can't recall.
With respect to Jerry Seinfeld, we own what we think is the best building in California. We think married comes to California once every dozen years something like that to San Francisco. And we thought about it long and hard. We really want to celebrate this great asset by inviting the real estate community into tour it, taste it, walk around it, feel it. And so that they can appreciate we can appreciate the asset the way we do.
So we just thought that Jerry Seinfeld, who we know and who has done things for me before, would be a draw. So what we're really doing is we're incentivizing the real estate community to come see our asset and come see Jerry at the same time. So we think it's valuable dollars spent. And are you coming or not? I don't remember.
We're conflicted with you much as we'd love to. How about the midterms and how about Amazon HQ2?
Okay. Well, to my knowledge, I don't know anything about HQ2 more than anybody else does. But to my knowledge, the activity level between HQ2 and New York City is not high. With respect to the midterms, I have nothing whatsoever to say.
Okay. And then David, just a big picture, Penn Plaza 1, Penn Plaza 2, Farley, the Long Island Railroad Concourse, the 33rd Street Plaza, when should that be completely finished, buttoned up, all the construction done, look 100% complete. Is that 2023, 2026? What's the timeframe just so we can get our arms around?
PENN1 as we told you is starting now And we've told you that that's a project that's probably around a 2 year project. The Long Island River concourse, realistically, we think that is work likely that could start sometime in the next 12 or 18 months and also is manageable in terms of the duration. I think the outside date for what you're talking about realistically is the total redevelopment of PENN2. It's a massive job that as I indicated in my remarks is going to require us to vacate the lower 10 floors of the building. The major tenant, as we've said in the past, in that building, the lease comes up in the it's April of 2020.
So realistically, that project will commence sometime in the early part of 20 It will be a project of scope of somewhere and we're really in the process right now of finalizing costs and timing of that project, but realistically it's a project that will take 24 months to 30 months.
John, I would give you another cut on that answer. I think that in 2021, there will be so much activity and so much construction going on in the Penn District that everybody will begin will understand for sure
a Hotel Pennsylvania kick in and how about Manhattan Mall?
What was your first question? When does Manhattan
Mall? Manhattan Mall is a parking lot, is a holding access for expansion. So that's going to be the last thing to happen. The Hotel Pennsylvania has been through different cycles of opportunities, which have not yet panned out. So that is also inventory and we expect that the value of the Hotel Pennsylvania land will increase geometrically as we get moving on what's going on across the street.
Our next question comes from Daniel Santos from Sandler O'Neill. Please go ahead.
Hey, good morning. It's actually Alex Goldfarb on for Dan. So just two questions for you. The first one is, as we look at 2019, last year you guys provided some thoughts on things that we should look for as far as either NOI moving in or out or one timers. Is there anything that you can provide as we think about 2019?
I don't know if it's maybe recapturing the Kmarts or anything that could be impacting our numbers that we may not see just by looking at the financials based on lease roll or some of the maybe swap burn off, etcetera?
Alex, as you know, we don't give guidance. And so I can't really it's not appropriate to answer that question. And Joe, do you have anything to add?
No. But if Alex is asking, are there things like recapturing the portion of the Kmart at 770. We're not prepared to say if there are going to be in 2019. Somehow this company always finds one of these hidden jewels to capitalize on.
Okay. That's helpful. And then the second question is for Steve. In the recent local press in New York, there's been some conversation about commercial rent control and New York City Council has been debating it. Do you have any views on the potential that this could become enacted in some way, shape or form?
Or your view is that enough of the key people in New York understand the ramifications of this and therefore it won't pass the way it hasn't for the 30 years that's been discussed?
Well, this is not a new idea. And as you said, it has not passed muster for decades decades. Look, I'm very sympathetic to political leadership being sensitive to empty storefronts and what have you. As a landlord, I'm unbelievably sympathetic. The idea of is really it's not a valid idea.
The concept that landlords are to blame for the empty storefronts because the rents are too high, that doesn't hold water. Now there's lots of different things that are going on in the retail business, especially affecting the local kinds of tenants that the political leadership are focusing on. The increase in the minimum wage has had a very, very, very serious effect on profitability, restaurants can't make it, etcetera. That's a very huge cost to them. The increase in real estate tax is a huge cost.
The decline in their margins, the pressure of the trend in retailing towards Amazon is an enormous number of headwinds affecting these smaller local businesses. Now the rent is not 1. And the reason I say the rent is not 1 because the landlords aren't totally stupid. Our business is keeping our keeping the income coming in and keeping our spaces full. So, you can be sure that universally across the city and all properties, the rents will go to the clearing price to fill up the space.
So that will happen because of market dynamics, not because of a misguided piece of legislation. I would remind you that we're all on the same side because the most important drivers of the financial health of the city are individual income taxes and property tax. So that's what I think. I think that I'm sensitive to the issue. I think getting these stores reoccupied is important for the health of the city.
But I think this legislation is misguided.
Our next question comes from Nick Yulico from Scotiabank. Please go ahead.
Okay. Thank you. So going back to this $315,000,000
of NOI now expected in retail, How do we square that up with Page 12 of the supplemental, which shows you have 244,000,000 dollars for the 1st 9 months of this year, which would imply something like $70,000,000 in the 4th quarter, which is down from the $85,000,000 in the third quarter. What's kind of driving that down in the 4th quarter? Am I missing something?
Joe, I hope is going to answer that, Dick.
Yes, because that requires a little reconciliation on our part. I think I prefer to do that offline with you after the meeting.
No problem. Yes, appreciate it. And then just second question. We'll reconcile. Okay.
Appreciate it. Just one other question is, how should we think about interest expense as you're heading into next year? You have some capitalized interest benefit that probably goes away, I assume, as the condos are sold and removed from construction in progress and at the same time you're paying off debt. So just trying to get a feel for how interest some of the moving parts on interest expense for next year? Thanks.
I would not expect capitalized interest to go down in 2019 versus 2018. We're still at the tail end of the expenditures for 2 20. Other projects are further along. I would remind you that the interest expense you saw in the past coming from the capital lease at 1535 Broadway, which was like $12,000,000 a year, that will disappear as a result of the acquisition.
Thank you. We're showing no further questions. I will now turn the call back to Stephen Roth for closing comments.
Thank you very much. We're very pleased with this quarter. We look forward to seeing you on the Q4 earnings call, which is scheduled for Tuesday, February 12, 2019. And we look forward to seeing many of you at Marriott San Francisco next week. Thank you very much.
Have a good day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.