Good morning. Welcome to Vornado Realty Trust first quarter 2018 earnings call. My name is Adrianne, and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in listen-only mode. Our speakers will address your questions at the end of the presentation during the question answer session. At any time, please press star 1 on your touch-tone phone. I'll now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
Welcome to Vornado Realty Trust first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website vno.com under the investor relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, actual results may differ materially from these statements due to existing risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10-K, for more information regarding these risks and uncertainties.
The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer, and David Greenbaum, President of the New York division. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer, Joseph Macnow, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, Mark Hudspeth, Executive Vice President and Head of Capital Markets, Matthew Iocco, Executive Vice President and Chief Accounting Officer, and Thomas Sanelli, Executive Vice President and Chief Financial Officer, New York division. I will now turn the call over to Steven Roth.
Thank you, Cathy. Good morning, everyone. Our industry-leading first quarter financial results were very strong. In fact, since all of our New York brethren have already reported, I can say definitively that Vornado's first quarter financial results were by far the best in town, with many of our business metrics outperforming by a wide margin. FFO as adjusted was $0.91 per share as compared to $0.84 per share for the prior year's first quarter, an 8.3% increase. On a cash basis, FFO as adjusted was $0.89 per share as compared to $0.81 per share for the prior year's first quarter, an even greater 9.9% increase. This quarter's cash basis NOI was $349 million, up 4.5% from the first quarter of 2017.
Cash basis same-store NOI increases were as follows: New York segment up 5.6%, with office up 8.1% and retail essentially flat, up 2.2%. theMART up 10.0%, and 555 California Street up 13.3%. Our office business continues to perform very well, while retail continues to be soft. I know that Wall Street is down on New York. We don't see it. In fact, we see just the opposite. 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. Notwithstanding our superior financial performance this quarter, we still expect the year to be flat GAAP, although nicely positive cash. We also reaffirm our previous guidance that retail cash NOI will not go below $304 million. We are pleased with the performance of our spinoffs, JBG SMITH Properties and Urban Edge Properties.
These companies will perform better on a standalone basis. We are also pleased with our over $6 billion of recent asset sales, which would likely command a lower price if sold today. Turning to the investment sales market. The office investment sales market has picked up smartly, although bidding pools are still not deep. Highest quality assets continue to trade at strong pricing levels. Investor interest and pricing for assets south and west in Manhattan is particularly strong. Overall, investor demand is fairly well-balanced between domestic and foreign capital. There continues to be scant 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, well-leased assets. Debt markets for New York assets remain as liquid and strong as we have seen, with all markets wide open.
Although rates are up, spreads remain tight, keeping all-in coupons at attractive levels. We have a highly liquid fortress balance sheet with $4 billion of liquidity, reasonable leverage, and well-staggered debt maturities. To David.
Dave, thank you. Good morning, everyone. Finally, a warm, sunny spring day in New York. Employment trends in New York continue to be fairly positive. The office sector employment number for 2017 has been revised upwards significantly by some 40% by the Bureau of Labor Statistics, adding 8,000 jobs, office sector jobs, to a total of 28,000 jobs for the year. What appeared to be a very good year now looks even better. Job growth in the first quarter of 2018 continues to be healthy, and the city continues to fire on all cylinders, with multiple sectors serving as engines of growth.
The quarter's two stunning announcements by J.P. Morgan and Google reflect the continued strength of the two most important engines, financial services and technology. The overall leasing market in Manhattan turned in another solid quarter. Manhattan absorption was a positive 1.2 million sq ft, bringing the vacancy rate down to 8.8%. Turning now to our own performance in our New York office portfolio, we leased 424,000 sq ft in 26 transactions at average starting rents of $82.07. Same store growth for our New York office portfolio was strong during the quarter, positive 6.6% on a GAAP basis and 8.1% cash. The broad diversity of our larger leases for the quarter is a reflection of the overall health of the New York economy.
The expansion of a tech tenant at 770 Broadway by 77,000 sq ft, the renewal of a financial services tenant for 76,000 sq ft at 20 Park, the expansion of a healthcare company by 53,000 sq ft at One Park, a renewal expansion with an apparel company for 84,000 sq ft at 100 West 33rd Street. The balance of our activity was with mid-size tenants that represent the sweet spot of our diverse portfolio. The mark-to-markets in our office business were a positive 62.5% GAAP and 50.3% cash. Even if you exclude a single lease at 770 Broadway, which was multiples of the old Kmart rent of $33.50 per sq ft, the mark-to-markets for the quarter were still a very strong positive 20.2% GAAP and 12.5% cash. At 96.8% occupancy, our office portfolio with over 1,300 tenants remains substantially full.
The single largest block of space currently available is 89,000 sq ft. Of our remaining 2018 lease expirations of 576,000 sq ft and our 2019 lease expirations of only 691,000 sq ft, 40% is concentrated in PENN1 and PENN 2 where we remain aggressively focused on advancing our redevelopment efforts, which will commence later this year as we combine these buildings into a 4.3 million sq ft complex that it can offer best-in-class amenities along unmatched access to transportation. Our leasing machine remains very active with over 400,000 sq ft of leases in active negotiation and an additional 1.2 million sq ft in the pipeline. On the development front, we've been very busy. We will soon deliver 61 Ninth to Aetna as its sublease efforts advance. In the second quarter, we will also complete 512 West 22nd Street along the High Line. The building looks great.
You should go see it, we have robust leasing interest across all floors at triple digit rents. We expect to complete our boutique Soho new development at 606 Broadway in the fourth quarter, we're working on a lease for all of the office space in the building, again, at triple digit rents. Of course, there's the Farley Building, where extraordinary progress is being made on the dramatic Moynihan Train Hall. This includes the installation of new escalators and advanced work on the two monumental skylights. We're also moving forward with the private development work, which will include 730,000 rentable sq ft of office space and 120,000 sq ft of train hall retail, all to be delivered by 2020.
We are seeing great interest in the space, and as you may have read in The Wall Street Journal, part of our leasing effort is directed at the life sciences industry. Many of the major pharmaceutical and other life science companies are headquartered in suburban New Jersey office parks. As these companies think about how to compete for millennial and post-millennial employees, they're thinking hard about expanding in Manhattan. Where better to do that than directly on top of the expanded Penn Station, which also will be directly accessible to Amtrak and the Northeast Corridor from Washington to Boston and Cambridge. We're confident that the future of the life sciences industry in New York is on the West Side. Our life science leasing effort also dovetails with city and state programs to grow this industry. Stay tuned.
Let me now turn briefly to our best-in-class street retail business, where our same store performance for the quarter was down 1.3% on a GAAP basis and up 0.2% cash. The overall retail market remains relatively weak, but a number of successful retailers are choosing strategically to relocate and build new stores. Those moves have accrued to the benefit of our portfolio. Witness Sephora and Levi's at our 1535 Broadway in Times Square, and now Forever 21, which is relocating along 34th Street, a block and a half west of the corner of 7th Avenue, across the street from both Macy's and Penn Station. The submarkets with the highest footfall and greatest visibility continue to generate the greatest interest from retailers, and that includes Times Square and Penn Plaza. For the quarter, we signed seven retail leases totaling 77,000 square feet, all of which were in the Penn Plaza district.
While we're pleased with the 43,000 square foot Forever 21 lease, as expected, the reduction in rent relative to the former H&M lease for that space resulted in negative mark-to-markets in our retail business of 12.3% GAAP and 20.1% cash. However, if you isolate that lease out, our remaining retail leases produced positive mark-to-markets of 19.2% GAAP and 4.9% cash. Again, all of those leases were in the Penn Plaza district. This rent growth shows the resilience of our Penn Plaza retail portfolio, thanks to the unmatched foot traffic. We limited the Forever 21 lease to just a five-year term, positioning us to take advantage of rent growth as our transformation of the district proceeds, as well as maintaining our development options for this site. At theMART in Chicago, this 3.7 million square foot asset literally is full, with an occupancy now at 99.1%.
We signed a 40,000 square foot lease expansion with a tech tenant, which now occupies 149,000 square feet. For the quarter, on a total of 119,000 square feet of leasing activity at average starting rents of $50.39, our mark-to-markets were positive 36.6% GAAP and 28% cash. Same-store growth at theMART was 3.4% GAAP and 10% cash. This strong growth should continue as we bring to market the former Publicis' space, which expires later this summer, a 132,000 square foot block that is well below market. Finally, turning to 555 California Street, in the first quarter, we completed 89,000 square feet of leasing activity and finalized the lease up of the redeveloped adjacent historic 315 Montgomery building.
Next door, our redevelopment of the iconic cube, the old B of A banking hall, is underway, and we're trading paper on a triple net lease for the entire 77,000 sq ft building at this iconic San Francisco corner. For the quarter, our same-store growth for the three building, 1.8 million sq ft complex, was 12.3% GAAP and 13.3% cash. Let me just conclude by saying the New York economy continues to grow, and with it, demand for office space. We remain full. We have a robust development and redevelopment pipeline, all of which is in the perfect submarkets. Let me turn the call back to Steve.
Thank you, David. We're happy to take questions.
Thank you. We'll now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using speakerphone, you may need to pick up the handset first before pressing the numbers. Please limit yourself to one question and one follow-up question. Once again, if you have a question, please press star then one on your touchtone phone. Our first question is from Michael Bilerman from Citi. Please go ahead.
Good morning. Steve, I was wondering if you could talk about Penn Plaza, the promised land, as you noted it in your Chairman's letter. Talk about it from the perspective of the potential capital over time to develop and redevelop against the backdrop of your comments that the public market has been more challenged from a real estate perspective. It hasn't grown. A lot of people want to invest in private relative to public. How do you sort of see the public markets being able to fund that development and redevelopment within Vornado?
Morning, Michael. How are you?
Fantastic.
I'll define that as a seven-part question. Let me see. Where to start? First of all, Vornado has been rewarded for its contrarian early investment in Penn Plaza enormously. Our basis in most of the assets in Penn Plaza, and I'm talking about millions and millions of feet, is about $200 a foot. I don't know what the buildings would sell for today. Pick a number, say $900 a foot. You all can do the multiplication. $700 a foot times all that square footage is an enormous value creation. That's the first thing. The second is that Penn Plaza had always been, years ago, the cheapest submarket in town. Okay? That's going to change, and it's going to change monumentally. The timing of Penn Plaza was not yesterday, it was not the day before. It's really now and the day after today.
By that I mean Penn Plaza is ripe in lots of different ways. It's ripe for rent growth. It's ripe for tenant demand. Now, we have plans that we've already announced to spend $200 million on One Penn Plaza, which we have already announced we believe will drive market rents up $220 a foot. $20 a foot, that's over time, but the leases turn over a five-year cycle in One Penn Plaza, or as David calls it now, Penn One. If you take a look at the math, $20 a foot times a 2.5 million, 2.6 million square foot building is roughly $50 million. That $50 million you can value, net $200 to accomplish the transformation of the building. That's a $4 a share increase in value, okay? On a $200 million investment at the increment.
Obviously, $200 million is an investment that Vornado can handle very easily with no capital raise, no selling shares, no dilution, and no partners. On Two Penn, we have various different plans, but it looks like we're going to go to plan B. Let's talk about that for a second. I think you could characterize Penn Station, now I'm talking about the underground now. We own the overground, but not the underground, obviously. The underground of Penn Station is probably Joe, what's a good word, reviled? That's too tough.
Hell, yeah.
Okay. The Penn Station is probably one of the most disrespected pieces of infrastructure for something that is the most important and busiest transportation hub in North America. From an aesthetic point of view, an operational point of view, what have you, it's not something that we're proud of, okay? Not something that the community is proud of, okay? 10 years ago, as you might remember Vornado, the related companies at Madison Square Garden all got together, and actually we signed agreements. This was not a dream, this was a reality or potential reality. To move Madison Square Garden to the Farley Building, which would allow for a total transformation, which would daylight the station, remove the building that was on top of it, and allow for a total transformation of Penn Station in every way. That would've been the government's responsibility.
We invested years in that plan when it became pretty obvious that the public sector was not going to be able to do it or get their act together, that plan dissolved. While we were working on that plan, we were the subject of a fair amount of community criticism. The Farley Building was a landmark building, lots of other things that it's not necessary to go into. All of which were very small, and I might even say petty, okay? When the proposal was withdrawn and it wouldn't happen, the amount of remorse on the part of the entire community, government officials, The New York Times, et cetera, was astonishing. Okay. Fast-forward to today. Vornado has initiated a plan, which granted is very ambitious. To basically, and I said this in my letter, and I assume this is one of the things you're interested in.
To take down PENN 2, take down Two Penn Plaza, and build back, unlock the 5 million sq ft of air rights that are trapped on top of Madison Square Garden, daylight the train station, and build a very significant, maybe even two large buildings. That would involve at the increment, incremental taxes, real estate taxes, et cetera, which would have allowed a pilot to be created, which is a financing scheme which would have given the government a very substantial amount of money, $ billions, to transform Penn Station. Okay? It looks as if. One of the things that we needed was we needed some help, as you could imagine, because it was a fairly massive undertaking and an enormous public good.
It does not appear that that plan is going to go forward or that it's feasible, for lots of different reasons, although we're ready and willing to do it. If that's the case, and if that plan is not going to go forward, we are going to go quickly to plan B. Plan B is taking PENN 2, which is a 1.6 million sq ft building, skinning it, putting on a new skin, which will allow for basically floor to ceiling glass, et cetera. New lobbies, entirely new arrival, new mechanical systems, et cetera. Plus adding, how many feet, David?
Better part of 300,000 sq ft.
Plus adding the better part of 300,000 sq ft in a bustle, which would sort of like a donut, encompass the lower floors of that building, okay? That is a much more modest proposal than I just talked about. We're going to go to it, and we're going to go to it quickly. That will involve a sum of money. We have not announced yet the plans or the capital spend or the returns for that. on that, but they are certainly well within the ability of Vornado to finance totally off our balance sheet today with no dilution, no investors, et cetera. That will also be a plan that will start in a couple of years, I guess, and finish in a couple more years.
Great. Thank you.
Hang on, I'm not done yet, okay? I apologize, I'm not done yet.
That's fine.
Obviously, after a long pursuit, we and Vornado have been designated the developers, we bought a long-term leasehold on the Moynihan Building, that's under heavy construction now. We will create in there, as David said, 700,000 square feet of what I believe, and we believe, will be the best creative office space in town, plus 120,000 square feet of trade retail. Going across the street, I think I wrote about what our thinking was on PENN Plaza, we have numerous other sites, we're very excited about it. It's not impossible that development I think, by the way, PENN 1 and PENN 2, the development and the spend in there is extremely modest in relation to the returns and the results. The rest of it is pretty decent-sized. If we tear down the Hotel Pennsylvania, that's a big project.
It's not impossible that the public markets don't like development. It's also not impossible that we might do something about that. What might that be? Well, we might split up into a development company and an income company. I just don't know. It's very premature. Let me say one thing about development. This is turning out to be a longer answer than our prepared remarks, I apologize for that.
It's okay.
We're very proud of the two children that we've born over the last couple of years, Urban Edge and JBG SMITH. JBG SMITH is interesting because it's attracted a fair amount of attention recently over the HQ2 situation. Nobody knows how that's going to turn out, except I guess one man knows how that's going to turn out. The thing, and I've said this publicly, the exciting thing about JBG SMITH is that it has 18 million sq ft of development rights in the best sub-markets on the best land already paid for inside their investment. The one thing that HQ2 is doing is highlighting for the investing public and the real estate public, the scale, size, and quality of the development opportunities that it has, because if it's the leading contender for HQ2, that's certainly a validation.
JBG SMITH is going to be a development company, and they're going to build 18 million sq ft of brand-new, perfectly designed, perfectly located, amenity-rich product. We know one thing, as we learned when we did the Bartlett down there, that this new product trumps old product every day. That's sort of what's going on in Penn Station, Michael. Thanks.
Steve, thanks for the detailed comments. Appreciate it.
Our next question comes from Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you, and appreciate that thorough response as well. I guess sticking with the chairman's letter, we get a lot of questions here on footnote five, which talks about potentially seeding a core fund or funds with Vornado's highly sought-after assets. Then Joe's thoughts that maybe you should separate retail into a separate entity. I know you kind of touched on that in the last answer, but could you provide more color on your thoughts regarding those two ideas?
Jamie, hi. How are you?
Good.
Let's start with the obvious. The elephant in the room is that the office companies and all of our brethren are selling at a very substantial discount to NAV. Everybody's complaining about it. Every CEO that I know that I talk to is complaining about it. Our shareholders are complaining about it. Everybody's complaining about it. Now, in my letter, I tried to comment about my thoughts about that. What I started out with is that, let's just think about the REIT model for a second. In the REIT model, we have an industry that has grown from Kimco's IPO to today to $1 trillion of equity and probably something like $2 trillion of assets. Well, that's enormous growth, and that's a very big industry. It only has a 10% market share of the commercial properties that it could own.
That 10% market share has not grown for years and years and years and years. The obvious is that 90% of investors that want to own commercial real estate, office buildings, shopping centers, hotels, et cetera, do own them in a non-REIT format. That's a very interesting starting point, okay? The second starting point is that the public, the stocks fluctuate. Right now we are at a discount to NAV, which doesn't feel as good. That's going to change over time. Believe me, prices are going to cycle for sure. Right now, there's a very large discount, and it's chronic. Okay? The observation is that public shareholders are willing to pay $0.75 or $0.85 on the value of a real estate asset.
Investors, pension funds, LPs, et cetera, 90% of the investors in the world are happy to pay par or even 102% or 103% of par. Okay? They have long 20, 30-year points of view. Obviously, I and everybody else that I talk to who are in the management side of things are not happy. What are we doing about it? Well, the first thing is that in our industry, one guy is buying back stock, two or three or four others of our brethren are basically running their businesses. Okay? Now, we are, I think, neither of those. Without getting into stock buybacks, maybe we'll do that later, but we have been, I think we're the only publicly traded real estate company that has been mixing up our mix of assets. Over the years, we have sold out of the Americold business, making a double-digit return.
We've sold out of the Mart business, making a double-digit return. That's a misnomer because out of the Mart business, we got theMART building in Chicago, that's probably the single best real estate investment in the last 20 years. The numbers are extraordinary. We also spun off Urban Edge. We also spun off JBG SMITH. Okay? We are doing things. We are mixing up our businesses. Now, it's pretty obvious that what I believe is the softness in retail is what is hurting our stock the most. Okay? A lot of people say it's me. Okay? Well, I take full credit for that, and maybe a lot of people think that the problem is I haven't appointed a successor, or the board hasn't appointed a successor yet. Okay, that may well be.
I can tell you that in my opinion, the softness of retail is the biggest issue in Vornado right now. I think Joe's suggestion, which he made years ago, and I sort of hung out there as an idea, is that if we separated the strip retail and we separated Washington. We separated Washington for two reasons. The first was that it was not performing well, and it was dragging our stock down. The second is we thought it would perform much better with a world-class management team as a standalone company. Why don't we do the same with retail? I will tell you, I am dying to find out what retail would trade at from a transparency point of view as an isolated business. That's a thought, and we are considering it. Okay?
I said in the letter, we're not done yet. We will leave no stone unturned to create shareholder value. I meant it. With respect to the comment about seeding a core fund, if you just go through the math and you go through what I said and what you all know about the industry, obviously our assets in the hands of a core fund with a different investor group would be worth a lot more than they are today. We'll see. Thanks for the question.
Thank you. Just a quick follow-up. Do you think there's economies of scale of having retail and office together in New York?
I think there's economies of scale of having the same management team run them.
Okay. All right. Thank you for the color.
The next question comes from Steve Sakwa from Evercore ISI.
Hi, good morning. Thanks. A couple of my questions were asked and answered. I guess just a couple of quick things, Steve. Just 220 Central Park South, I know that we're kind of getting closer to completion on that asset, and I was just wondering if you could help us think through kind of the rest of the capital spend, then maybe when should we start to think about closings and capital coming back to Vornado. Then secondly, if you could just touch a little bit more on the retail and kind of maybe what your expectations are for just kind of trends in leasing spreads over the balance of this year and into 2019.
Steve, how are you? We have only a few apartments left. Can I sell you one?
Sure. I'll come talk to you later.
Okay, good. All right. 220 Central Park South is proceeding at pace. It is aesthetically and financially the best project that's ever been done in New York, and therefore in the whole country. The numbers are terrific, and what it looks like is terrific. If you have nothing to do one afternoon, give a call, and I'll have somebody take you through. We will begin closings in the end of the fourth quarter this year. We are not releasing information for competitive reasons, and I think that's absolutely the right thing to do. The only information that we have released is two pieces. The first is, I have said repeatedly that our sales are well in excess of our costs. We're well into profit already.
The second is, if you look at the NAV that we publish in the fourth quarter materials, there's a number that projects what we expect the cash build from 220 to be. What was your other question, Steve, about retail?
Yeah, I just wanted to get Obviously, you had some rolldowns this quarter, but you said if you backed out the one lease, they were marginally positive. Just without giving maybe specifics, what do you think that rollover would look like on the balance of leasing coming due this year and maybe into 2019 to help people think through the downside, or maybe we're getting close to the bottom here. How should we just be thinking about those rollovers over the next 30, 60 months?
The only thing that matters is three things, Steve. Number one, the locations that we have and the quality of this retail is the best in the world. There will always be a Fifth Avenue. There will always be a Times Square. Okay. The second thing is that our income is protected by long-term leases on our Fifth Avenue and our Times Square property from high-quality tenants. The third is that we have said repeatedly that our projections show, and we are guiding, that our income will not go below $304 million cash from retail. There's going to be people going out, people coming in, and that's the bottom that I see. Okay. With respect to the details of it, I'm not in a position to give you that.
Okay, thanks.
Thank you.
Our next question comes from Vikram Malhotra. Please go ahead from Morgan Stanley.
Thank you. Two quick questions. Just first on retail. Understand sort of the $304 million floor. Am I correct in assuming if we look into next year, given the Sephora, Levi's lease, some of the leasing you did this quarter, we should expect a nice bump in that cash number next year?
Joe, help.
I think he's asking about 2019. We expect it to be positive, we're not guiding to that just yet.
Okay. Just on the non-core sales, maybe two quarters ago, you outlined a bunch of non-core assets that you would start to look to sell, would generate in excess of $1 billion. Can you maybe just give us an update on plans there and timing?
Generally speaking, we are in the markets at active on about half of that. Okay? The remainder of it is some public security, which doesn't include any of the public securities, by the way. The remainder of those assets are either public securities that we have chosen not to execute on, or that have time delays, such as loans which have a maturity date at the end of this year or the end of next year or whatever. Or something like PENN 2, which we have tax protection, as you probably all know. We're in the market with half of those, and it's going to be slower going. This is not just a single trade. We expect that cash to come in over the next year or two.
Okay, thank you.
Thank you.
The next question comes from Daniel Santos in Sandler O'Neill. Please go ahead.
Hey, good morning. Morning, Steve. It's actually Alex on for Dan.
Hi, Alex.
Hey, how are you? One, I appreciate your succession comments that you discussed earlier. My two questions are on the development side. Penn Station, certainly there has been no shortage of political noise around the project between the governor, the mayor. You outlined a pretty bold redevelopment plan in the chairman's letter with options for doing more for that part of town. How much of your undertaking needs the governor and the mayor to play ball, or everything that you outlined you can undertake on your own without those two having to reconcile their differences there?
As you would expect, we must plan the business to be able to function on our own. We own the overground, or we own the real estate above ground. Our plans are to execute our development plans with no assistance from the governments or what have you. Okay? We don't need that, just like any other location. However, since Penn Plaza is a unique area, and the Penn Station situation is very interesting and very important from a community point of view, a political point of view, and a business point of view, there are potentially other things that we could do to improve the situation. Okay? While we pursue those, we also pursue plan B. Okay? If I had to handicap it, my guess is plan B is going to be more actionable than plan A.
Okay. The second is, in your letter, you also mentioned what J.P. Morgan is doing, the redevelopment of their 270 Park. You've for years talked about Manhattan tilting west and tilting to the south. Does what Jamie is doing at 270 affect how you think about future reinvestment for the company?
No. We have multiple children. We have multiple assets on Park Avenue, et cetera, and we love all our children equally. I think what Jamie did was stunning and courageous. I think it speaks volumes to, A, the fact that Park Avenue is still Park Avenue, and B, that 50-year-old buildings don't work for high-tech companies like their bank. What we think is the most important thing is that this doesn't affect demand on the West Side. There's still enormous demand on the West Side at very substantial rents. The difference is that a teardown on Park Avenue, and we think at 350 Park, we have the single best example or the best opportunity, requires rents which are very substantial and quite a bit higher than the West Side.
Each of those districts and submarkets will function, and I think with what's going on in New York, both the traditional Midtown submarkets and the new emerging West Side markets will both thrive enormously.
Okay. Thank you, Steve.
Thanks, Alex.
The next question comes from Nick Yulico from UBS.
Thanks. Just wanted to go back to the Forever 21 lease. David, I think when you said that it was a five-year term and you thought that was attractive since the Penn Station area gets revitalized, you'd be able to roll that lease in five years. What I'm wondering is whether you actually had retailer interest in a longer-term lease, because I think there's a perception out there that retailers continue to go for shorter-term deals.
Forever 21, Nick, in fact, their preference would have been to do a longer-term lease. We were the ones who, when we started the conversation with them, told them that we want to limit it to five years, and that's for two reasons. As I mentioned in my prepared remarks, one, because as the district continues to improve, we see continued growth in that marketplace, and two, that building on that piece of land on 34th Street, which runs through to 33rd Street, we also own another piece on that block and several others, we see someday as a potential development site.
Okay, that's helpful. Just following up on that deal, it looks like the roll down there alone on that lease could've been 35%-40% on a cash basis. How should we think about the risk of another roll down of that size in the next couple of years based on your lease expiration schedule or any retailers that you might be willing to get out of space early in any of your buildings?
It's going to depend realistically space by space in the portfolio. Just as the balance of the spaces that came up for this quarter, all of which were in the Penn Plaza district, had roll-ups. We've told you in the past, we see a number of roll-ups in the portfolio, including space in the Penn Plaza district, including space on Fifth Avenue. We see some of the spaces that are coming up over the next couple of years where there may be some roll downs, primarily on Madison Avenue.
Look, first of all, we've said that the income's not going to go below $304 million. Okay. That contemplates the roll downs that we expect, and the roll ups that we expect, and the vacancies that we expect, and the move outs that we expect. Okay. That's projected out for a period of time. That's the first thing. The second thing is that there are plenty of under-market rents in our portfolio. For example, just take Kmart. We have probably, I don't know, 300,000 feet of Kmart left at $33.50 a foot. I think we showed you at 770 what can happen with that space. There will be roll downs, there will be move outs. We are prepared for them.
This is a business which has a $1.5 billion of NOI, a $2 million or $3 million roll down here and there is part of the business. We are confident in our $304 million number. We're also confident in the quality of the real estate that we have. This is going to cycle out. Everything will be fine.
Okay, appreciate it. Thanks.
Thank you.
The next question comes from Jed Reagan from Green Street Advisors.
Good morning, guys. You mentioned cash same store NOI growth this year would be nicely positive, which seems more upbeat than the kind of flattish comments you'd provided on the last call. I guess, has something changed? Was that a comment for New York City specifically? Then I think you put up 5%-6% for the New York business this past quarter. Just wondering if we should expect that to decelerate over the rest of the year, or kind of how to think about that?
We strive to be respectable. Do you get it?
Not following you exactly.
That's the way you described our earnings in your two-sentence remarks overnight. Okay? Which we kind of chuckled over because we thought that our earnings were spectacular, and that spectacular is a better word than respectable. Anyway.
Fair enough.
I think that the way we have described Look, we took a whopping for the word flattish in the last call. We were trying to tell our investors what to expect, and I think a lot of people thought that was inarticulate way to do it, and we agreed. We tried to improve it a little bit by saying, "We expect GAAP to be flat, although cash to be up." What did I say? Nicely? Smartly? Okay. We're not defining nicely or smartly because we don't give guidance, but we're trying to put parameters around. We believe that notwithstanding the blowout quarter we had in the first quarter, the balance of the year will end up, at the end of the year, with flat GAAP.
Okay, that applies to New York specifically, business.
No. That's the entire business. Some pluses, some minuses, all of which zero out to New York office continues to roll along, in very good shape.
Okay. Thanks, appreciate that. In looking ahead to 2019, any retail move-outs you're expecting at this point?
Bill, I don't think I have that information at my fingertips right now. We have one move-out in the Fifth Avenue complex, and that's the Massimo Dutti Zara store at 689 Fifth Avenue, which we believe is under market. Other than that, in Penn Plaza I'm sorry, not in Penn Plaza. In Times Square and in Fifth Avenue, the answer is no, other than that one Zara store. In Penn Plaza and the rest of the place, there are small move-outs and small move-ins all over the place. It's a large portfolio.
Okay, that's helpful. Then maybe just one more from me. Steve, you mentioned earlier on the call about potentially splitting up into a development company and income company. Can you just elaborate on that a little bit, and how you think about splitting up assets between those two entities? Would there be just a pure development company, potentially?
Jed, I really can't. I'll tell you, though, I do make the observation, and you guys are the archetypes of this, that the public market doesn't like development. Okay? For lots of different reasons, all of which are right, but they're not right. Okay? We believe that in Penn Plaza, we have to do development because that's the nature of the asset. JBG SMITH has to do development because that's the nature of the raw land that they have. What I'm saying basically is that development is not a business that can be measured quarter-to-quarter. The objective of it is to end up with a series of brand-new, perfectly designed, perfectly located buildings. It's basically important.
If the public markets don't like development, and we're going to end up with a stock price that's going to be dinged for it for a long period of time because we have to do development, that doesn't make intellectual sense. We'll have to figure that out. All I'm saying is that's something that we're aware of and is something that in our council rooms, we are hard at work on what the next steps are to close the gap for Vornado.
Our next question comes from John Guinee from Stifel. Please go ahead.
Good morning. Wow, this has been intellectually very stimulating. By the way, there's this one guy down in Baltimore who just loves development, okay? Question. If you woke up tomorrow and found out that you were a stock, not a collection of real estate assets, and NAV was not a valuation metric and was never going to be a valuation metric anymore, and it was all going to be about cash flow and cash flow growth, how would you run your business differently?
You've outsmarted me with that question. I don't know. I don't think we would run it any differently. In other words, we're in the value creation business, through the media of real estate. I don't think we would run it any differently.
Great answer. Thank you.
Yes, sir.
Our next question comes from Michael Bilerman from Citi. Please go ahead.
Yes, Steve, I just had a follow-up. As you think about the variety of options that you sort of laid out on the call, this development versus income company, spinning a retail, seeding a core fund or funds with your assets. When you step back, how does sort of a privatization, given all the private capitalists out there, or a strategic public-to-public merger, which has been increasing of late in the REIT sector, how do those options sit alongside these other opportunities that you're examining?
Michael, of course, they are on the blackboard. Of course, as we do, we consider all the options, but I have no comment beyond that.
Just on this core fund idea, I guess, how does that create value for Vornado shareholders other than emulating the fact that the assets have an NAV value above and beyond, how does putting them into a fund and then that fund going out and acquiring assets at market prices, how does that ultimately derive value, in your view, for Vornado shareholders?
Michael, I'm not prepared to get into the complicated workings of an answer to that question here.
I wasn't sure how that idea sort of would be executed, whether it's in a private format or whether it's similar to the fund that you created coming out of the recession where you went out and bought assets, but instead of putting cash in, you put your assets in for your equity stake. I just wasn't sure whether that was contemplated in the public vehicle or a private vehicle. That was where I was going with it.
This is all premature. These are glimmers of value creation ideas. I can't get into a debate or a dialogue with you about execution details.
Sure. All right. Thank you.
Thank you.
Your next question comes from Jed Reagan from Green Street Advisors.
Hey, guys. Just a quick follow-up as well. In the shareholder letter, earlier, Steve, you talked about the potential ground-up development at Two Penn Plaza using transferred air rights, which sounds like maybe that's the less likely scenario at this point. Can you just talk a little about the ownership of those air rights and maybe the mechanism by which Vornado could obtain them if you decide to go with that, I guess, plan A?
The air rights on Two Penn Plaza and Madison Square Garden are on a single tax lot. In fact, when you go into Madison Square Garden, we manufacture.
Chilled water
We're compadres. When the original deal was created, and I say this sort of tearfully, the original grand limestone Penn Station was torn down, which by the way, as we all know, was the reason that the landmark laws were instituted in New York. In any event. At that point, there was an agreement to split the air rights on that block, and that agreement has been modified a couple of times over the years, and it still exists. We own the air rights together with Madison Square Garden in a proportion that is something we're not going to get into today. It's not totally even, but it's not that far from even.
In addition, those air rights are qualified for a transit bonus, which constitutes probably about one and a half million, 2 million square feet of the five?
A little over two, I think.
A little over two.
Two and a half maybe.
Basically, of the 5 million square feet of air rights that I speak about, 3 million of them are owned by we and Madison Square Garden, and then 2 million of them would come by virtue of transit bonuses, which would have a modest cost because the private party puts up the money to improve the transit in the region, the neighborhood. That's the math.
How do you guys account for that in your internal NAV, if at all, the one you publish periodically?
Zero.
Okay.
They may have a theoretical value to some people, but to me, they only have value when they're actionable.
Right. Makes sense. Just one other one. You talked about the life science at Farley potentially going that direction. Could that add to the cost of the project, and how could it maybe impact expected economics? Would that necessitate bringing another partner?
Jed, morning. It's David. No, there would be no reason to bring in another partner into this transaction. We obviously are exploring the life science industry and are walking a number of those tenants through the building. In fact, next month, actually later this month in May. We, of course, also are talking to what I will call the traditional tech companies that fully appreciate and understand the unique nature of this piece of space. As we look at the building, you think about the asset, it is effectively a 67-story building that is lying on its side as a five-story building. To give you an idea of the extraordinary footprints that this building can provide a tenant. As well, most importantly, the indoor-outdoor space, the roof space on this building can provide the better part of two acres of roof space.
Again, similar to what we learned when we were out in Silicon Valley. In terms of the incremental costs for doing life science, we basically budgeted those costs. We're not going to get into that today on the call. There are some incremental costs in terms of venting and air systems. Obviously that's only going to make sense to the extent the life science tenants are in fact to pay rents higher than some of the traditional tenants that we foresee for the space. Based off of our market knowledge in the Cambridge market and other areas, the life science tenants, in fact, seem to be paying significant premiums for that space.
There are a couple of REITs that specialize in that product type. There's one or two that have that product type buried into larger companies. Our observation is the math on that product type is satisfactory to even better than satisfactory, and is even better than conventional office. The answer to that is that we've accounted for all that. We have not before, heretofore, had assets that we thought were attractive to that industry. We now have, and we're pretty excited about it, actually. In terms of, you said something about bringing in a partner. We have no need nor interest in bringing in a partner.
Would you build in the flexibility to convert it to lab, even if you did go with a pure tech tenant?
The answer to that is, I don't know.
Okay. Thank you guys, appreciate it.
Later.
Thank you. That concludes the question and answer session. I'll now turn the call back over to Steven Roth for final remarks.
Thank you, everybody. We're proud of this quarter. We're happy to share all of our thoughts, however broad they may be, with you, and we look forward to the next call in three months. Thanks, everybody.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.