Good morning, and welcome to the Vornado Realty Trust Second Quarter 2018 Earnings Call. My name is Christine, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen only mode. I will now turn the call over to Ms.
Kathy Creswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust's 2nd quarter earnings call. Yesterday afternoon, we issued our Q2 earnings release and filed our quarterly report on Form 10 Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.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 the most directly comparable GAAP measures are included in our earnings release, Form 10 Q and financial supplement. Please be aware that statements made during this call may be deemed forward looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10 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 Stephen Ross.
Thank you, Kathy. Good morning, everyone. Yesterday, we posted 2nd quarter numbers that I can say are once again the best in town. Here's the math. FFO as adjusted was $0.98 per share as compared to 0.95 dollars per share for the prior year's Q2, a 3.2% increase.
On a cash basis, FFO as adjusted was $0.96 per share as compared to $0.88 per share for the prior year Q2, up a very strong 9.1%. Cash basis NOI was $341,900,000 up 5.6% from the Q2 of 2017. This quarter's company wide cash basis same store NOI increase was 7.0% comprised of New York office up 11.0 percent, retail down 1.3% with the total New York segment up 5.9%. The Mart up 10.8 percent and 555 California Street up 23.8%. This quarter's leasing activity was robust.
We leased 611,000 square feet of New York office space at a record average starting rent of $88.28 per square foot. The mark to market increase on 502,000 square feet of 2nd generation space was 41.3 percent GAAP and 28.4% cash. We leased 49,000 square feet of street retail space at an average starting rent of $165.98 per square foot, call it $166 The mark to market increase on 38,000 square feet of 2nd generation space was 11.6% GAAP and 8.7% cash. At the mark, we leased 50,000 square feet at an average starting rent of $51.66 per square foot. The mark to market increase on 2nd generation space was 9.4% GAAP and 1.6% cash.
As David will tell you in a minute, across the board we are full. All of these metrics are very strong and industry leading. By the way, these numbers validate why we believe the MART and 555 California Street have a lot of room to run. Our office business continues to perform very well. As I have said before, we are experiencing robust demand from all manner of industries in all of our submarkets.
Our tenants are optimistic, aggressive, growing and upbeat about New York. As you can see from our New York office mark to mark cash increases of 50.3% in the 1st quarter and 28.4% in the 2nd quarter, great things happen when rents reprice. The best example of this to come in New York and probably in the country is our Penn Plaza assets. Here we are physically transforming 1 Penn Plaza and 2 Penn Plaza, which aggregate 4,200,000 square feet. Our efforts here will take in place rents for these assets from the low 60s per square foot to market rents approaching $90 per square foot.
These assets are in the heart of the New York adjacent to the Hudson Yards and Manhattan West developments and sit literally on top of the busiest train hub in North America. And I can't say it enough that we have actually positioned our portfolio actively positioned our portfolio so that full 50% of our office assets are located in the fast growing Westside submarkets. Retail continues to be soft, while I am certainly not calling a bottom. There is noticeably increased retailer activity and tours, albeit at rents in most submarkets substantially below the top tick. We reaffirm our previous guidance that retail cash NOI will not go below $304,000,000 and we still expect GAAP FFO as adjusted for the year to be flat, albeit very nicely positive on a cash basis.
The office investment sales market remains healthy but disciplined with volume up 15% year over year. Demand and pricing is very strong for assets in the South and West of Manhattan and for deals under $400,000,000 a function of investor preference to keep check sizes smaller at this point in the cycle. Pricing for large assets is stable, though bidding pools are thin and it's taking longer to execute. I would the just announced $900,000,000 sale of Terminal Warehouse, a 1,100,000 square foot, 130 year old warehouse type building bounded by 27th 28th Streets and 10th and 11th Avenues, which just so happens to be across the street from our 260 11th Avenue. 26011th which is currently fully leased is on deck for our next generation of transformations.
We are working here with the renowned architect Richard Rogers to reimagine this brilliantly located asset. By the way, the terminal sale comes right on top of the blockbuster Chelsea market sale to Google as another data point in the red hot Chelsea market. There continues to be very little sales activity in the retail sector due to both a lack of quality product on offer and understandable investor skittishness. Pricing is clearly off for everything except prime AAA well leased assets. I would note that we are beginning to see the first signs of distress where retail assets that were bought at the top tick and loaded up with debt are starting to struggle.
In many cases, the mezz debt mostly made by non bank lenders and debt funds and in some cases even the 1st mortgage will be impaired. Debt markets for New York assets remain as liquid and strong as we have seen them with all markets wide open. Although rates are up, spreads continue to remain tight keeping all in coupons at attractive levels. We have a highly liquid fortress balance sheet with $3,800,000,000 in liquidity, reasonable leverage and well staggered debt maturities.
David? Steve, thank you. Good morning, everyone. Both total private sector as well as office using employment in New York City continues to grow to record levels, albeit at a bit slower pace than in recent quarters. For the first half of this year, TAMI sector growth has been particularly robust at 7,000 new jobs, offset by slight declines in financial services and professional business services.
This dynamic is yet another indicator of a phenomenon I have spoken about in recent quarters, which is the health and durability of the New York economy that has multiple growth engines. In 2017, it was financial services and professional business services that powered the job growth. For the last 6 months, it's been the TAMI sector that's driven the growth. This diversity is a key underpinning of a very durable period of steady job growth. No surprise then that Manhattan leasing activity remained robust with 9,100,000 square feet of new leases for the quarter.
Absorption was a positive 2,800,000 square feet, bringing the total year to date to positive 4,200,000 square feet for the first half of the year and dropping the vacancy rate to 8.8%. Large deals continue to drive the market with 13 new leases greater than 100,000 square feet in the Q2, 2 of which were our deals. Average asking rents in Manhattan are now hovering at $75 a foot and significantly for the first time led by rents in Midtown South. The overall market remains strong. Turning now to our own performance, as Steve noted, we turned in another very strong quarter in our New York office business with 611,000 square feet of leasing activity and 37 transactions at average starting rents of $88.28 a new high watermark for us with very strong mark to markets of 41.3% GAAP and 28.4% cash and importantly locking in these robust rents for term with an average lease term of 10.5 years.
In the quarter, we completed 2 substantial growth deals for anchor tenants at 770 Broadway and at One Park Avenue. At One Park, NYU grew its healthcare related tenancy by 110,000 square feet across 3 floors. When we first acquired One Park Avenue in 2011, NYU occupied 144,000 Square Feet. With this most recent lease, NYU now occupies 632,000 Square Feet, a quadrupling of its tenancy. This expansion by NYU is reflective of continued growth in New York's healthcare sector, which over the last 12 months represented almost 37% of the city's new jobs more than any other sector.
And at 770 Broadway, our anchor tenant expanded again by 240,000 square feet taking its total space in the building to 755,000 square feet. At PENN1, we executed 10 leases representing 70,000 square feet at average starting rents of just under $70 a foot. Our office occupancy remains very strong at 96.6%. Our remaining 2018 expirations totaled 397,000 square feet, including only 3 blocks larger than 25,000 square feet. This includes Yonge and Rubicam's departure from 80,000 Square Feet at share at 825 7th Avenue where we and our 50 percent joint venture partner are undertaking a significant redevelopment.
More than a third of our remaining 2018 expirations are at PENN1, where as Steve mentioned, we will embark on a major upgrade later this year. Our pipeline remains strong over 1,100,000 square feet, including 260,000 square feet of leases out in active negotiation. On the development front, we will deliver 2 top quality boutique new builds in the 3rd quarter, 512 West 22nd Street directly on the High Line and 606 Broadway at the Gateway to Soho. At the Farley Building, Skanska's work on the dramatic new Moynihan Train Hall continues at a rapid pace. Already 75% of the new escalators down to track level have been installed and the 1st class will appear in the mid block skylight in the next month, while framing of the acre size skylight over the train hall is well underway.
We've commenced the demolition of the old post office installations to begin the preparation of the future office floors, which will be available for tenant fit out in a little over 2 years and are busy with tours and RFPs both for the 730,000 square feet of office space as well as the 120,000 square feet of ancillary retail train hall space. The bottom line for our office business in New York is our industry leading same store growth of 8.3% GAAP and 11% cash. Let me now turn to our best in class street retail business. For the quarter, we signed 8 retail leases totaling 49,000 square feet at mark to markets of positive 11.6 percent GAAP and 8.7% cash. The retailer flight to quality continues and activity has increased this year as brands begin to take advantage of lower asking rents and prime available corners.
After a solid holiday season, the luxury sector has begun to reenter the market, but only for the very, very best locations. We signed a lease with Saline, an LVMH brand at 650 Madison Avenue moving them from 71st Street to 1 of Madison Avenue's most heavily tracked traffic corners at 59th Street. Our retail occupancy stands at 96.3%. For the Q2, our retail business was basically flat with a small same store decline of 1.5% GAAP and 1.3% cash. Turning to the Martin Chicago, it was a quiet quarter with no new office leases.
No surprise when you consider that the office space is 99.5 percent leased. Same store growth was strong at 5.2% GAAP and 10.8% cash. As we've mentioned on the last couple of calls, we have a large lease with Publicis that expires in Q3 that is well below market and will continue to drive our same store growth. While the office leasing was quiet, we signed 19 showroom leases totaling 50,000 square feet at average starting rents of just over $52 a foot. The Mart, which is the commercial hub of River North Subdistrict soon will also be the cultural heart of the district with the launch of our Art on the Mart project.
It's a nightly video projection on the 115,000 square foot masonry facade of the building, equivalent to a 2.6 acre canvas facing the Chicago River. In announcing the installation, Mayor Rahm Emanuel described the projection as the largest permanent art installation in the United States. We hope you can join us in Chicago on Saturday evening, September 29 as we launch the inaugural exhibition. Finally, at our 555 California Street Complex in San Francisco, we've also been very busy. In our last call, I told you that we have completed the lease up of the redeveloped historic 315 Montgomery Street Building.
Today, I'm pleased to tell you that in the early days of Q3, we signed the lease for the entirety of the iconic cube, the former Bank of America Banking Hall. We are presently well underway on a $45,000,000 redevelopment of this grand building that was purpose built as a retail bank, but which will now become a flagship 77,000 square foot co working environment for the recently launched spaces division of Regis IWG, the publicly held co working giant. We're very proud that IWG selected this highly visible site to showcase its latest offering. We've also been active in the tower and within the last week we executed a lease with Bank of America to expand by 30,000 square feet bringing BofA's total occupancy in the building to 316,000 square feet. With the lease with IWG as well as Bank of America, we effectively have now brought the entire 1,800,000 Square Foot 555 California Street Complex to 100 percent occupancy.
Same store growth for this asset in the 2nd quarter continued very strong at 13.5% GAAP and 23.8% cash. For the business as a whole, our same store growth was 4.7% GAAP and 7% cash. With the best office and retail properties in the best submarkets, we remain very confident in our position and our prospects.
Thank you, David. We'll be happy to take questions.
Thank you. We will now begin the question and answer Our first question is from Steve Sakwa of Evercore ISI. Please go ahead.
Thanks. Good morning, everyone. Steve, I was just wondering if you could maybe talk about sort of the portfolio repositioning that Vornado has been going through over the last couple of years. And kind of where would you describe it in terms of its evolution? Meaning, how much do you think you have left to sell, including some of the stock positions?
And what do you think the timing is behind those?
Good morning, Steve. Pardon me. First off, our office business in New York and in Chicago and San Francisco, we think has a perfect mix of assets. As I said in the call and as I've said over the last number of quarters, we think San Francisco, we think we own the best asset in San Francisco, the rents are rising, it's 100% leased now and the growth rate of the mark to market in the building is pretty extraordinary. So we think we've created an enormous amount of value in San Francisco.
That asset is a cheaper. Ditto in the merchandise mart in Chicago, I'm still in the old days. Ditto the mart in Chicago, where we think we have created the most amenity centric 3,700,000 square foot asset. That asset has lots of room to run. That's a keeper.
In New York, as you know, over the following us for a long time, we are wildly enthusiastic about the prospects for Penn Plaza, the validation of the neighborhood at the bull's eye in what I call the New York. And we think that the rent growth that we can achieve there is quite extraordinary, will be industry leading and is probably certainly the best in New York and maybe even in the country. We have curtailed our acquisition activity in the face of rising prices. And I think that I can say right now that I don't think I have any remorse on any asset that we haven't bought in the last 2 or 3 years and we've looked at every single one of them and chose to be extremely disciplined. With respect to the balance of our office with respect to the mix of our portfolio where we have been adding assets in the Westside market, in the Chelsea market and what have you, we think we've been exactly correct in that.
We think that's where the rapid growth will be. And I would point to the 61 ninth Avenue building that we built as a new build where we achieved $140 rents, which are, I might say, handsomely higher than even Park Avenue. Now we announced some quarters ago that we have identified over $1,000,000,000 of non core assets that we have on the for sale list, okay? They are legacy real estate fund assets, they are some securities positions, they are some other assets that we have that don't get into our core. We are actively involved in marketing all of those assets, and but it's slow going.
Some of them are illiquid, some of them are complicated, some of them have a little bit of hair. So we will accomplish that program, but it will take us a little bit more time. What else do I need to answer your question, Steve?
That's it for now. Let me just as a follow-up, you mentioned the distress in the retail area. It sounds like you might find some acquisition opportunities there. What is your sense as to kind of the timing and when some of those kind of may fall in your lap? Is that a second half of twenty eighteen event or do you think that's more of a 2019 beyond event?
Certainly not 'eighteen. This game plays out very slowly. And what I referenced was we're beginning to see struggling cracks. We're beginning to see lenders who are out of the money. We're beginning to see mezz lenders and debt funds and private lenders beginning to become aware of the fact that they are impaired.
The process will take time. Now if we can buy an asset at 10% discount to what it sold for 3 or 4 years ago at a top tick, we wouldn't touch it with a 10 foot pole. So what I'm saying basically is, is that we will get into that market and we will become an aggressive acquirer, but we will do it at the right time in the cycle and at the right prices.
Thank you.
Next question please.
Our next question is from Jamie Feldman of Bank of America. Please go ahead.
Great. Thank you. Starting with the Chairman's letter and in recent conversations, there was a lot of talk about methods to close the NAV gap. So Steve, I was just hoping to get your latest thoughts on any activities that might be in process or just kind of where your head is in terms of I know you guys are doing a great job operating, but any other thoughts out there?
I fluctuate between being frustrated and pissed off. And you can probably quote me on that, which I'm sure you will. We're not alone in the fact that our stock sells at a discount. If you go down the roster, everybody does, some a little greater, some a little less. But there is in New York, all the New York centric operators sell for approximately the same discount with the exception of Austin Properties, which sells at a discount, but a little bit better discount, a little bit less of a discount.
So these discounts and I wrote in my letter that these discounts seem to be chronic and they seem to be I said it I think I said in my letter that private LP investors which represent 90% of the property ownership in the country, 90% are willing to pay 100% to 105% for assets that they are going to hold for a very long time on behalf of their pension peers or their employees or whatever the fund is, public company investors seem to be willing to pay more than 80% of the value of an asset. So this is a chronic thing. Now we have done, I think, way more than anybody else has done to begin to handle the difference between public and private market values. We've spun off $10,000,000,000 of assets in 2 companies by the way, which are faring and performing very well. So we think it was a we think that was a great transaction.
We've sold $5,000,000,000 or $7,000,000,000 of assets. We got ahead of the curve and sold our more assets before the market break, etcetera. So now and I've said this and it's been speculated, but we're not done yet. We will continue to strive to restructure so as to get the maximum value we can, the optimum shareholder value that we can. And so there's been speculation we may spin this, we may spin that, we may do other things.
So I can only tell you that we are actively thinking about every possibility and we're not done yet. It's premature for me to speculate or to say anything about what our plans might be in the future. Okay. That's helpful. Thanks, Jamie.
Sure. And then can you just walk us through just as we think about street retail for the back half of the year or even into maybe first half of next year, just what the major moves are in terms of large NOI moves in and out of the portfolio?
We have guided to a that the portfolio will not go lower than $304,000,000 of cash, okay? I shouldn't say this and Joe is probably going to slap me, but I will. As we go through the math, we think that we will better that number, maybe even better that number by a fair amount. So basically what's going on is that we have chosen to on some of the known move outs, we have chosen to give very short term leases to tenants at low prices. So that nicks our our numbers.
We have 1 or 2 properties which will go vacant over the next year or so, which we do not yet currently have a replacement tenant for. And if we got a replacement tenant, it would be for lower rents than we are losing. So it's that which makes up the retail. Now on Fifth Avenue and Times Square, which represents a full 50% or more of our retail values, We are leased, we are 100% leased for term and that income is rock solid and will rise as the contractual increases in rent come about. The only vacancy that we have coming up, which we have reported multiple times is 689 5th Avenue, where we have a lease expiry sometime in the middle of year, I forget the exact date.
And the lease income on that is below market. So we expect to achieve an increase there. So I think there you have it.
Thank you. Our next question is from Manny Korchman of Citi. Please go ahead.
Hey, good morning. It's Michael Bilerman here with Manny. Steve, I wanted to come back to sort of the strategic alternatives, strategic options, everything being on the table. Just in the sense of time, at what point do you start to eliminate certain things and tell the market XYZ is not going to work, we're going to go with ABC instead. When should the market be prepared to get sort of an update in terms of everything being on the table versus things being removed and certain paths that you want to get go down?
Michael, hi. How are you? What you're asking is something that we can't do and we shouldn't do. We cannot we have to run the company. And it's really not appropriate for us to communicate what happens in our boardroom and what happens with our bankers as we deliberate and as we go forward.
We just can't do that, okay? So we have a history of activity. We have a history of doing smart things and we're going to try very hard to continue that. But we just can't get into speculation or premature announcements of big companies.
Right. Just the sense of how critical it is at this juncture, whether we should be expecting things to come about this year versus time that just goes by and the stock trades up, trades down, trades sideways, wherever it may go?
Well, the answer to that is the same answer as I just gave you 30 seconds ago.
All right. On 260 11th Avenue, you bought 537 West 26 as well last quarter in the Q1. Can you talk a little bit about maybe the entirety scope in terms of what you have as right build with the assemblage that you have, the timing upon which you would commence something and something in terms of total capital additional capital that may be required for it?
Well, so 260 11th Avenue is a great asset. We bought it, how many years ago, David? 3. 3, 4 years ago, which I think was exactly the right time to invest there. It's directly across the street from Starrett Lehigh.
It's catty corner across the street from this terminal warehouse that just sold for $900,000,000 So it's 3 blocks south of Hudson Yards. So it's a pretty terrific asset. It's exactly the kind of it's the old Otis Elevator headquarters. It's exactly the kind of asset that our creative class tenants want. And by the way, we also have had look sees from some more traditional businesses who want to transform their business by creating by attracting and recruiting a different kind of team.
So there's that. Now we own there the building. We also own a lot, which is vacant. So we will expand the building with a new build that will what's the word, David, that will Integrate. Integrate, good.
Thank you. That will integrate into the Otis Elevator building. We have brought in Richard Rogers, who has an incredibly interesting skill set to reimagine this building and mill the old and the new into the modern age. So we think we're going to create something that's pretty extraordinary. We bought something that's called Cedar Lake, which is a 1 story landmark district event space.
How big are the floors there David, 10,000 feet? Yes. Which has 10,000 square feet and we bought it as an adjunct to the it's contiguous to and we bought it as an adjunct to 26011 because if you think about it for a second, a company that goes in and takes that full building can use that adjacent space for presentations, for sales, for events, for whatever. So we thought it was interesting. By the way, that's the only building in town that has that kind of an adjacency.
The building is fully leased now to one tenant and what we're doing is we're going through landmarks, we're preparing for a reimagination of that building. We will not start that until maybe 3 years from now, 2 years from now. And that will involve canceling the lease, getting all our approvals, getting ready to go, etcetera. What might accelerate that is if a tenant comes in and by the way, we're not really actively marketing the building. If a tenant comes in, but the community knows about the asset.
So if a tenant came in and had to have the building, then maybe we would accelerate it. But we're not going to start this thing for, I guess, 3 years. We are not ready to release budgets or statistics on this. And so I think that's my answer.
Okay. Thank
you. Thank you, Michael.
Thank you. Our next question is from Vikram Malhotra of Morgan Stanley. Please go ahead.
Thanks taking the questions. Maybe just some specific questions about street retail. Within the portfolio, I believe you had expirations coming up on Madison, 3 stores in particular, which I think were likely to move out 8:30 Madison. Can you give us any update on those 3 tenants?
We expect those tenants will likely vacate and we do not have replacement tenants for them yet.
Okay. And then just
on that street retail, if I look at next year and I'm not looking for guidance or any specific number, but just for the leases signed essentially Sephora, Levi's and Forever 21, can you give us a sense of the cash NOI contribution from those 3 in 2019?
Who's got that number? Faster, faster. It's going to be roughly 20% to 23%. Tom says it's going to be roughly 20% to 23%. I'd like to have the accurate number.
Yes, I can follow-up with you guys.
We'll take your next question and then
when we find the number
Okay. Just last thing, Some of your peers, especially in New York City, have called for a midtown, have called for a rebound in midtown rents maybe during the next 6 to 9 months. Maybe can you give us your sense? Do you agree, disagree? What are you seeing in terms of rent trends in your markets?
What we're seeing is the Westside is on fire. What we're seeing is Penn Plaza is doing wonderfully well. What we're seeing is that space is getting tight. The economy is very strong. People want to expand.
Traditional mid town market, but it is nowhere near as vibrant as the Westside market. What's more, we are looking over our shoulder at the new supply that is coming to the as a result of the Westside Hudson Yards Manhattan West Development sucking millions of feet out of the traditional midtown market. So it's difficult to understand what that will do. There are some folks who think the job growth will absorb that space. That may be a little bit aggressive, but over time certainly it will be.
So what we're saying is that we're 100% leased in our Midtown assets, but the growth that we are realizing, the extraordinary growth comes from the 20.
Do you want to say?
In 20. In 2019,
the cash coming out of those three leases is approximately $20,000,000 By the time they fully stabilize in 2020, it's about $28,000,000 $29,000,000 Got it.
Okay. Thank you very much.
Forever 21, Levi's Sephora. Forever 21, let's get that. Okay. So that's the number.
Great. Thank you very much. Thank you.
Yes, sir. Thank you.
Our next question is from John Kim of BMO Capital Markets. Please go ahead.
Thanks. Good morning. A question on the March. The office conversion has been a success. Steve, you mentioned there's still room to run.
But in this market, you have the owners of Willis Tower and the main post office basically trying to emulate what you've achieved on large scale iconic buildings. And I'm wondering how this impacts your ability to achieve the kind of rental growth that you've had so far going forward?
The answer is that the room to grow and the room to run is that we have, for example, the publicist how do you pronounce it? Publicist. Publicist. The Publicist lease that expires is in the low 30s and the market rent for that space is in the mid to high 40s. So there you have a 25% to a 35% increase right there.
Almost every piece of space that we will get back and rollover is under market and what have you, okay? That's step 1. Step 2 is that We have the dominant building in the marketplace by far. We have a franchise and we get a premium to our competitors, which I believe will hold. And if it doesn't hold, we're still doing great, okay?
So we own this building. We have the lowest basis in town and the most attractive space in town. We do not shy from competition because the competition makes the district that our building in makes it even better and more in demand. For example, if there were one building on Park Avenue, Park Avenue wouldn't be Park Avenue. What makes Park Avenue is the 50,000,000 square feet of tenants that are there doing business with each other, etcetera.
So we can't stop the competition and we will all be fine.
I might just add that over the next 3 years in the building, there is a total of about 425,000 square feet, all of which as Steve referred to are rents well, well below market office space.
And that represents 10% or 11% of the building. It's not a significant number.
Got it. Okay. And then a question on retail.
By the way, if you haven't seen the building lately, give us a call and we'd love to show it to you. And that invitation, of course, is open to everybody on the call.
We'll take you up on that.
What's that?
We'll take you up on that.
Okay, good. We want you to. And by the way, similarly, I think married this November is in San Francisco and we intend to do tours and an event of 555 California on that occasion. So you're all invited to that too.
Had a question on retail and the impact of discount retailers like 5 Below entering Fifth Avenue. I realize that's a few blocks south of where most of your assets are, but I'm wondering how do you think this impacts the perception of Fifth Avenue retail and potentially rents and values going forward?
I don't know. The 5 Below thing has sort of a desperation look to it. The difference between Upper Fifth Avenue and Lower Fifth Avenue is enormous. The demographic and profile of the customer, of the street traffic, of the occupants, of the tenants, etcetera. It's like night and day.
So there's that. And by the way, the rents are multiples, Upper Fifth Avenue's rents are multiples of what Lower Fifth Avenue is. So I don't think it will have any effect. It's not something that I worry about actually. So while 5 Below may be going 20 blocks south or something like that, Nike is opening their world flagship and you have to come see it on adjacent to our Victoria's Secret store, they're on we share the same block on the 50 First Street side, they're on the 50 Segment Street side.
It's a 7 story behemoth. It's going to be extraordinary. And I'd rather focus on what Nike will do to traffic and values rather than what 5 Below will do.
Thanks. If I could just squeeze one more in. This morning, we had the announcement of Brookfield buying for Citi and you talked about a number of office companies trading at significant discounts to NAV. And I'm wondering if you think we'll see more consolidation or privatizations in the sector?
Possibly. Possibly.
Can you argue that there's an advantage to being private rather than public? Is there an advantage to being private and privately run versus public company?
That's too loaded a question for me. I will tell you that the business format, the asset light business format of the real estate funds is one might think a better format than the public companies which basically are asset heavy. So there's that. I can tell you that the comp for the private real estate companies and funds is better than the public companies by a wide margin. And I can tell you in easy money times such as this, which may be coming to an end but may not be, the advantage that the public companies have access to capital is it does not exist.
Private companies have as much access to capital, it's not more. So it's fun to be the head of a public company, it's fun to be the head of a private company, it's all fun.
Great. Thank you.
Thank you. Our next question is from Daniel Santos of Sandler O'Neill. Please go ahead.
Hey, good morning. Thanks for taking my questions. I was wondering if you could comment specifically on what the tax implications would be if you were to sell some of those non core assets you've identified?
Joe?
Daniel, we said that originally there was about 1,250,000,000 dollars of assets and we would be able to retain $1,000,000,000 of that, meaning that there was tax gains of about 2 $50,000,000 which would be distributed to shareholders barring some other events negating that need. That really hasn't changed much. Now look, some assets have been added like 666 5th Avenue, some assets have been sold, over $100,000,000 has been realized to date, but that's roughly the numbers, about $1,000,000,000 of $1,000,000,000 and a quarter would be retained by us.
Got it. That's helpful. So that's pretty good and pretty attractive, we think.
Agreed. My next question is on Crowne Plaza.
By the way, Dan, Daniel, let me just say one last thing about Now, you know that it's not a free lunch. These assets have on average a return to them, this $1,000,000,000 we're talking about in the 4% to 5% range. So selling them is dilutive until we replace those earnings, But we're very, very cognizant of that. The second thing is that we spend a lot of time understanding what the clearing price and the clearing strategy of knocking those assets out more quickly is possible that the clearing price to get speed on that might be $100,000,000 less than we've projected, which in the scheme of thing is a great deal of money, but in the scheme of thing, it's not. Thanks.
Got it. That's helpful. And my next question is on Crowne Plaza. I was wondering if you could give us an update there and your ability to rebrand it?
We have a franchisee and we have a relationship. There is litigation pending about that relationship and other than that I have no comment.
Got it. Thank you.
Thank you. Our next question is from Jed Ragan of Green Street Advisors. Please go ahead.
Hey, good morning guys. Just a follow-up to an earlier question in terms of rent growth. Can you quantify how much net effective rent growth you're seeing on the Westside, the Penn Plaza, Chelsea area? And then maybe related to that, just curious how you'd characterize concession trends across Manhattan at this point?
David?
Jed, I'll first talk about concessions, which I think have been flat. As we look at our numbers and so we went back over the last 3 years and on average and what we look at is the metric that I think most of you guys consider TI per square foot per annum as a percentage of the starting rent. Obviously, as the starting rents have significantly increased, so that in this quarter the number of $88.28 Now our average TIs as a percentage of starting rent were 7.8%, which to us is really well contained and it's been very level in the range of 7% to 8% range over the last 36 months. So we are seeing really no further pressure in terms of concessions and seeing those numbers stabilized. Obviously, that's having a positive impact on net effectives as we have seen continuing rent growth in the markets that Steve talked about, the West Chelsea market and also in our Penn Plaza district, where as I said on the call, rents for this quarter, average rents for all of our leases at One Penn were at $70 a foot.
Okay. That's helpful. And on a year over year basis recently, is that low single digits, mid single digits or sort of hard to put your finger on it?
Listen, it's all dependent obviously on which pieces of space are coming up in the buildings. But as you look at that whole Westside District, that's where we have really seen what I'll refer to as a fairly explosive growth in rents over the last number of years. Over the I would say the last 12 months or so, those numbers on the website basically have been stable to as you're fairly commenting probably low single digit growth.
Okay, thanks. And then I guess sticking on the Westside, any update on how you guys are thinking about plans at 2 Penn Plaza? And do you have any more clarity on whether you'd go the redevelopment route or potentially a full teardown and rebuild?
I think we said on the last call or the call before that we have abandoned the tear down and we are full steam ahead on the redevelopment and reimagining 2 Penn, which will go into a complex with 2 Penn and 1 Penn connected into a 4,200,000 square foot complex. The advantage of having a campus like that, which is on top of the train station, you can get from both buildings to the train station without going outside into the rain and snow. And you can get from one building to the other building with also without going outside is that we can service our tenants with greater amenities, because it's 4,000,000 feet, not 500,000 square feet. And the second is as our tenants grow, which is really the lifeline of our business, as our tenants grow, we can always find space for them for growth in the 4,000,000
feet. Great. Are you in any position to sort of size the cost of that project and economics around the 2 Penn project?
Not yet. I did say in my remarks that we expect to take the rents from the low 60s to approaching 90s. So that will give you a feel for what we think about the income side of that. Now remember, and I know you know this, that we only realize that uptick as leases roll. So what we're talking about is the in place rents are in the low 60s and we believe the market when we get done and I don't know how long it takes, we'll be in the approaching 90.
With respect to the cost of the project, we are still involved in bidding and plans and estimating, we are not ready to release that number.
Our next question is from John Guinee of Stifel. Please go ahead.
Great. Thank you. Hey, David, looks like you have had stunningly good lease spreads in the first half of this year. Looks to me with an average in place rent of mid-80s that should slow down in the second half, but then 2019 with an in place rent of 63, you have a potential to replicate the first half of this year. Is that accurate or are they're not the same magnitude of spreads available for the next 18 months?
I'll first talk for a minute about the second half of this year. So there are a number of leases that are coming back to us at the toward the end of this year that are at very high rents, which is the reason that you are seeing some average rents of I think it's about $82 a foot for the space coming up through year end. On those there most of the math will be flat and in a couple of cases there will be some roll downs of what have been some very, very high rents. As we look out into 2019 in the future, we remain very optimistic in terms of the spreads that we can achieve on the portfolio.
Okay, great. And then, Steve, 2005 to 2015 was the golden age of REITs, declining cap rates, declining interest rates, rising NAV, positive fundamental, lot of positive fund flows to the REDEDicated crowd, a real NAV bias in the way people looked at things. Your crystal ball said to you that that's just not going to happen again, there's not going to be an NAV biased in how people underwrite REITs And if multiples going forward with interest rates going up are more in the $15 to $16 range, which is on a $4 FFO, sub-sixty dollars a share for a company like Vornado. If your crystal ball said that to you, would you step up any thought process strategically or how would you think about things?
Well, first of all, I like you a lot, but I don't like your comments. Obviously, we think about that all the time. So the answer is yes. I don't know that we see the same level of ugliness in the marketplace that you do, but we are prepared for everything. So the answer is yes.
Great. Okay. Thank you.
Thanks, John. Thanks.
Thank you. We have no further questions at this time. Thank you,
his earnings call that he was a hero and won the race for the shortest prepared remarks. So I'm happy to let him win that, but we've completed this call in 58 minutes, which is a record for us. And so we thank you all very much and we'll see you on the next quarter.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.