Vornado Realty Trust Q1 2016 Results Earnings Conference Call

Vornado Realty Trust (NYSE:VNO)

Q1 2016 Results Earnings Conference Call

May 03, 2016 10:00 AM ET

Executives

Cathy Creswell – Director, IR

Steven Roth – Chairman and CEO

David Greenbaum – President, New York Division

Mitchell Schear – President, Washington, DC Division

Stephen Theriot – Chief Financial Officer

Michael Franco – EVP and Chief Investment Officer

Joseph Macnow – EVP and Chief Administrative Officer

Analysts

Manny Korchman – Citigroup

Jamie Feldman – Bank of America

Nick Yulico – UBS

Alex Goldfarb – Sandler O’Neill

Steve Sakwa – Evercore ISI

Michael Lewis – SunTrust

Jed Reagan – Green Street Advisors

John Guinee – Stifel

Brad Burke – Goldman Sachs

Operator

Good morning and welcome to the Vornado Realty Trust First Quarter 2016 Earnings Call. My name is Vanessa, and I’ll be your operator for today’s call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. [Operator Instructions]

I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations.

Cathy Creswell

Thank you. Welcome to Vornado Realty Trust’s first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com under the Investor Relations section. In these documents and during today’s call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement.

Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission including our Form 10-K for more information regarding these risks and uncertainties. The call may include time sensitive information that maybe accurate only as of today’s date. The Company does not undertake a duty to update any forward looking statements.

On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer; David Greenbaum, President of the New York Division; Mitchell Schear, President of the Washington, DC Division; and Stephen Theriot, Chief Financial Officer. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer; and Joseph Macnow, Executive Vice President and Chief Administrative Officer.

I will now turn the call over to Steven Roth.

Steven Roth

Thank you, Cathy. Good morning, everyone. Welcome to Vornado’s first quarter call. At Vornado, we have a treasure trove of great assets such as the Bank of America Tower in San Francisco the 3.7 million square foot Mart in Chicago, all of our office, residential, and development properties in Washington, a couple of billion dollars of cash and much more. But the main event here at Vornado is our New York office and our dominant New York street retail business. And that business having — has industry-leading asset quality, is performing at very high levels and is growing like crazy. The growth here is organic. Most profitable climb coming from our existing assets where taxes and operating expenses are already baked in. So, that substantially all of each dollar of incremental revenue falls right to the bottom line.

And this growth requires us to spend only TIs and leasing commissions of say $100 per square foot, which is a small fraction of the capital required to buy or build in New York, which by course $1,000 or $1,500 or even $2,000 per square foot. And none of this growth is yet transparent to the market.

So, here’s the math. Over the past two years, we did 7.1 million square feet at share of leasing in New York at theMART and at 555 California Street. 2.3 million, which is 2.3 million square feet higher than our two-year average. As of today from this leasing, we have $200 million plus of incremental additive cash NOI on deck, not yet in our numbers, which will be recognized between now and 2018 as follows: $41 million in the remainder of this year; a $120 million in 2017; and another $39 million in 2018, all from signed leases which have not yet commenced paying cash rent. The breakdown is a $123 million from New York office, $57 million from New York Street retail and 20 million from theMART and 555 California Street. These are not projections, all of this is from signed leases from tenants such as PwC at 90 Park Avenue, Neuberger Berman at 1290 Avenue of the Americas, Facebook and AOL and Verizon at 770 Broadway, Amazon at 7 West 34th Street, Macy’s at Eleven Penn, Footlocker and Structure Tone at 330 West 34th Street, Victoria’s Secret at 640 Fifth Avenue, Swatch, Harry Winston at St. Regis, ConAgra at theMART and many, many others.

The equivalent GAAP increment that has yet to come into income over that period is $83 million. As you know GAAP rent recognition commences earlier than cash rent recognition due to free rent periods. Importantly, because NAV, the principal measure of value is calculated based on cash NOI, this additional $200 million increment will increase our NAV by a very meaningful $20 to $25 per share, depending upon the cap rate one uses. For those of you who are in the modeling business, our internal budget showed 2017 cash NOI from our New York office and Street retail plus theMART and 555 California is about $1.1 billion, give or take. As a point of reference, 2015 was $900 million, that’s $1.1 billion in 2017 versus $900 million already booked in the year 2015. You should note that we will of course have leases that will expire during these periods and other leasing activity which could positively or negatively affect, both NOI and EBITDA.

Now, onto the quarter, our comparable FFO was $1.08 per share for the first quarter compared to $1.07 for last year’s first quarter. Our New York business produced $14.9 million of comparable EBITDA growth or $0.08 per share even after being penalized by $5.1 million non-cash write-off or straight line rent receivable from early lease terminations we initiated to make way for replacement leases at 20 plus mark-to-markets. Excluding that straight line — straight final write-off, growth was $20 million or $0.10 per share. The New York business produced a 5.5% same-store increase.

Focusing on the entire Company, the way we look at it, the Washington business declined by an expected $5 million of which negative $2.1 million is from increasing vacancy at Skyline and properties taken out of service and negative $2.9 million is from the core, all on track with our guidance. The fair value earnings of our real estate fund declined by $5.2 million quarter-over-quarter. As you know the fund is in harvest phase and continues to shrink, all on plan. And we are carrying $1.9 billion of cash, $900 million more than the prior year’s quarter and that has a quarterly opportunity cost of say $0.05 per share. Adjusting for these items, our pro forma comparable FFO per share would have been $0.10 higher, a 9.3% increase from the prior year’s quarter.

Now to other business, on April 22nd, a little over a week ago, we submitted two comprehensive proposals in response to the state’s RFP and RFEI, one for the Farley building in partnership with the related companies at Skanska, and a second on our own for Penn Station. We welcome Governor Cuomo’s spotlight on Penn Station and the Penn Plaza District. Were the early mover in Penn Plaza. We have accumulated 9 million square feet here in a very heart of Manhattan’s New West Side. And as I have said repeatedly, Penn Plaza is Vornado’s big Kahuna.

At 220 Central Park South, our for sale condo project traffic has ticked up in the sales room, benefitting from the rising building now being very clearly visible from Central Park and the calming of the financial — the global financial markets. We continue to explore separating the Washington business and we have begun a process to dispose of the Skyline properties, which are subject to a $678 million mortgage loan. At our request, loan has been transferred to the special servicer. Consequently, based on our shortened estimated holding period, we’ve recognized the $160.7 million non-cash impairment loss in this quarter.

Now to leasing, Company-wide in the first quarter we leased 1,403,000 square feet in 106 separate transactions. In New York, we leased 737,000 square feet of office space, at starting rents of $84.32 and positive mark-to-markets of 32.6% GAAP and 28.2% cash. Business in New York is really good.

And asset pricing in New York continues to set records. Here are two examples hot off the press. First, the 50th front foot Valentino flagship on Upper Avenue, mid block between 54th and 55th streets on the east side has just gone to contract to a European high net worth individual. We hear the prices $525 million, well through the $480 million asking price, which equates to $11.3 million per retail front foot. Vornado owns the balance of this block. Both sides of the mid block Valentino property including both quarters consisting of the St. Regis Retail’s 100 front feet and 689 Fifth Avenue with 50 front feet, which gives us a total of a 150 front feet on this super premium block, which I guess, based upon the comp is now with for sure well over $1.5 billion. This sale certainly validates Upper Fifth Avenue values. Two years ago in my annual letter to shareholders pages 14 and 15, if you would like to look at up, I provided a numerical tour of Upper Fifth Avenue values. We own 20% of the retail frontage on Upper Fifth including stores for Victoria’s Secret; Ferragamo; Swatch; Harry Winston; Mac Cosmetics; Massimo Dutti, Uniqlo Hollister et cetera.

The second recent sale of note the Sony building 550 Madison Avenue at 56th Street, coincidentally just behind the St. Regis, has also just got the contract to a high net worth Middle Eastern family for $1,800 a foot. The seller abandoned plans for a residential conversion. The building will be delivered vacant intended for high-end office use. These two noteworthy sales, both involving high net worth individuals, not countries, not sovereign wealth funds, not pension plans or the like further validate the strength of New York, the enormous liquidity in the marketplace and the global appeal of prime New York little state as the store of that. It’s important to note that these two assets are very high quality. And by the way, I can’t resist the plug. Our portfolio is filled with assets of equivalent value — equivalent quality.

This is proxy season. Our Annual Shareholders Meeting is May 19th. This year we have modernized our governance to conform the best practices. Special thanks to Candace Beinecke, our Corporate Governance Committee Chair, who has led the charge here and has now taken on the additional responsibility of Lead Trustee. Thank you to Candace.

To sum it up, business is really good. We are excited to be putting growth numbers from our on deck leases and our highest priorities are to resolve Washington and to dig in and get to work in Penn Plaza.

Now over toe Steve Theriot.

Stephen Theriot

Thank you, Steve. Steve covered our financial results, so I will limit my comments to a couple of items. I want to highlight two items that will affect the quarterly comparison of our New York business growth in comparable EBITDA and FFO for the remainder of 2016.

First, in the second, third and fourth quarters of 2015, we recognized $27 million of non-cash, non-recurring income from the acceleration of FAS 141 below market leases related to our early termination of the leases at the St. Regis retail property and the Crate and Barrel lease at 1650 Madison. Second, during the remainder of 2016, we will write off straight line rent receivable balances totaling $9.7 million triggered by our early termination of leases with J. Crew and Rocket Fuel which enabled us to sign new replacement leases for that space with mark-to-markets of 20% plus GAAP and cash. While the write-off of straight line rent receivable balances will reduce EBITDA in 2016, the new replacement leases are accretive from an economic perspective, increasing future EBITDA. Together, these two non-cash adjustments to recapture and re-let space at much higher rents will negatively affect the quarterly comparison of our growth in our New York business’s comparable EBITDA and FFO in the second quarter of 2016 by $11.3 million, the third quarter by $12.5 million and the fourth quarter by $12.9 million. We reaffirm our guidance that comparable EBITDA from our Washington business for the full year 2016 will be $7 million to $11 million lower than 2015.

Now, turning to capital markets, in March, we completed a $300 million refinancing of One Park Avenue, a 947,000 square foot Manhattan office building in which we own a 55% interest. The five-year loan is interest only at LIBOR plus 1.75% with realized net proceeds of approximately $45 million. The property was previously encumbered by a 4.99% fixed rate $250 million loan.

In February, we completed a $700 million refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.75%, which was swapped for 4.5 years to a fixed rate of 2.56%. We realized net proceeds of approximately $330 million. The property was previously encumbered by a 5.65% fixed rate $353 million loan. Our remaining 2016 consolidated debt maturities are $709 million, consisting primarily of the $515 million Mart loans, which matures in December 2016.

Our share of partially owned entities’ 2016 debt maturities is $697 million, consisting primarily of $361 million at 280 Park Avenue and 161 million at the Warner Building. We are well along on these refinancings and expect to close the Warner Building refinancing in a couple of days.

Excluding the financing of our 220 Central Park South project which will self liquidate from signed sales contracts, our consolidated debt metrics are fixed rate accounted for 77% with a weighted average debt of 3.99% and a weighted average term of 4.8 years and floating rate debt accounted for 23% of debt with a weighted average interest rate of 2.18% and a weighted average term of 5.1 years. Debt to enterprise value is 31%, debt to EBITDA ratio is 7.5 times. Pro forma, excluding debt related to Skyline which was recently transferred to the special servicer and using say $1 billion of excess cash to reduce debt, our pro forma consolidated debt to EBITDA ratio strengthens to 6.3 times. In addition, including our share of partially on entities’ debt excluding ToyotaRus, our pro forma total debt to EBITDA ratio calculated on the same basis increases to 7.0 times from 6.3 times.

In closing, Vornado has the fortress balance sheet with modest leverage and our maturities are well staggered. We have as of today $4.4 billion in liquidity which comprises of $1.9 billion of cash — restricted cash and marketable securities and $2.5 billion undrawn under our $2.5 billion revolving credit facilities.

I’ll now turn the call over to David Greenbaum to cover our New York business.

David Greenbaum

Steve, thank you and good morning to all. On our year-end call, just 10 weeks ago, we took a deep dive into the Manhattan leasing environment and focused on private sector employment as well as office using employment, both of which ended 2015 at all time record highs. In the first quarter, Manhattan leasing market continued to perform well, as this city’s highly diversified economy continues to create tenant demand across all industries and submarkets. Despite global volatility, the overall leasing market remains resilient with first quarter leasing volume of better than 8 million square feet, which included 10 large block transactions comprised of a balanced mix of financial services, TAMI and professional business services tenancies.

Asking rents in Midtown continue to increase quarter-over-quarter having now eclipsed the $80 per square foot mark. The overall availability rate continues to hover around 10%, importantly which includes sub let availability, which is now down to a nominal 1.5%, representing the lowest rate since the first quarter of 2008.

New York City’s job growth continues to be solid in the first quarter of 2016 with total private sector employment growth of 24,200 jobs including 7,100 office using jobs, both on par with a string job creation we realized in 2015. And by the way, these are actual reported job growth numbers, not seasonally adjusted. As the Wall Street Journal recently reported, “Companies Flock to Cities with Top Talent.” And New York continues to be a top magnet for top talent. I’ll repeat what I said last quarter, business has been and remains very good.

Let me now turn to our own office portfolio. During the first quarter, we completed 737,000 square feet of leasing activity in 36 transactions. This quarter’s average starting rents reached $84.32 per square foot with very strong positive mart-to-markets of 32.6% GAAP and 28.2% cash. I might add that even if you exclude one large lease extension we executed this quarter, our starting rents would still be over $79 per square foot and our mark-to-markets would be over 30% GAAP and 28% cash.

Our quarter ending office occupancy was 96.4%; we remain full. And reflecting on the city’s continuing healthy job growth, I would note that of the 737,000 square feet we leased in the first quarter, 41% of the activity was comprised of tenants expanding their footprints in New York, in our case attributable to two significant leases, I’ll talk it about in a minute, PwC, PricewaterhouseCoopers and Facebook.

In anticipation of the scheduled expiration of the space formally occupied by big pharma companies, Sterling Winthrop and Sanofi at 90 Park Avenue, during 2015, we completed a significant $70 million redevelopment of the building, which has been extremely well-received by the marketplace. As we reposition and transform buildings in our portfolio, time and time again, we successfully have attracted large credit headquarters tenants, Neuberger Berman at 1290 Sixth Avenue, Guggenheim in 330 Madison Avenue, Amazon in 7 West 34th Street, PJT Partners and Franklin Templeton Investments at 289 Park Avenue, Footlocker and Deutsch Advertising in 330 West 34th Street, Facebook and AOL, Verizon in 770 Broadway and on and on.

And this quarter’s leasing highlight was our 241,000 square foot headquarters leased with PwC at 90 Park Avenue. PwC is the largest professional services firm in the world, and this new lease is pure expansion for PwC, creating a campus-like environment for its New York workforce in close proximity to its present office at 300 Madison Avenue. This was a competitive deal, and we are delighted that PwC selected 90 Park Avenue as its headquarters location in New York.

The transformation at 90 Park Avenue has totally modernized the infrastructure of this asset as well as dramatically reimagining the aesthetic of the building to attract both the millennial generation, note here that 80% of PwC’s New York workforce are millennials as well as the more traditional financial services tenants. In this 950,000 square foot Class A property, in the past year, we have leased 540,000 square feet and have an additional lease out for signature of another 120,000 square feet, bringing the building to 93% occupancy, all at robust mark-to-markets of 25% GAAP and 20% cash.

We have now secured three major tenants in the building, PwC, FactSet, and national law firm Foley & Lardner along with a concentration of boutique financial services tenants will occupy the midrise and tower of the building including Nuveen, EverBank, Aegon and the Guggenheim Foundation.

Speaking to the quality of our New York portfolio, in the quarter, we continued to outperform the market, as it relates to deals of $100 per square foot or greater. We executed six leases this quarter, totaling 340,000 square feet with starting rents averaging $116 per square foot. Driving these numbers, Level 3 renewed at 60,000 square foot lease at 85 Tenth Avenue. Facebook added another 80,000 square feet at our 770 Broadway, where we were able to recapture a below market lease in order to satisfy Facebook’s ever growing need for space. And Bloomberg extended its lease in the tower office floors at 731 Lexington Avenue to 2029 to be coterminous with its 700,000 square foot main lease.

In our retail portfolio, during the first quarter, we completed 38,000 square feet of leasing activity in seven transactions. The highlight of the quarter was our 20,000 square foot lease with Starbucks for its new reserve roastery and tasting room concept, which will be Starbucks’ largest outlet in the world modeled on the concept store that debuted in the company’s home town of Seattle two years ago. Even we were surprised by the worldwide business press this lease received. Looking for the perfect location to open the second outpost of its high-end brand, Starbucks after an extensive process selected our development site at 61 Ninth Avenue at 15th Street because of its close proximity to the Chelsea market, Google’s offices, the Apple Store and the High Line.

We broke ground on the 61 Ninth development just a few weeks ago and we will be delivering the iconic 170,000 square foot building designed by Rafael Viñoly by the end of the next year. The balance of our retail activities for the quarter was a series of small leases with positive mark-to-markets of 15.8% GAAP and 5% cash.

I’m now going to turn to our activity in Penn Plaza where our efforts to reposition our massive holdings continue to pick up momentum this quarter. In our last call, we told you that we were optimistic that after our temporary experiment last year, we would receive approval to close a portion of 33rd Street between One Penn and Two Penn Plaza year round. In March, the community board voted unanimously to approve the closure and the city has now given us the green light to close this street indefinitely starting this summer. This is an important opportunity to improve the public realm in this area.

In addition to improving the public realm, we will invest in our holdings to upgrade them for today’s tenants. In Steve’s annual Chairman’s letter, he included a link to renderings of a Bjarke Ingels design for Two Penn called the Skirt. Our intent here is to transform a good 48-year old building with its punched windows into a modern age building with new floor to ceiling glass curtain wall. The main event here is the massive undulating canopy; in spots, it will be 85 feet high and extend out 65 feet, which has been inspired by the iconic photograph of Marilyn Monroe standing over a subway grate. The statue will provide grand entrances for Penn Station, Madison Square Garden and our two Penn Plaza office building. We believe that this design will become world famous and in fact a symbol of New York.

Our transformation of the area is in the early stages, but you can already see the potential. As starting rents in one Penn Plaza for the quarter for nine leases, a mix of renewals and new leases covering 51,000 square feet was over a $71 per square foot, good but still well below what we believe the building can achieve, given its unmatched access to transportation and its location from the center of Manhattans new West Side. [Indiscernible] announced publicly that its location on the north side of the Long Island rail road concourse in Penn station is its best performing store in the country on a sales per square foot basis, we own that retail on the north side where we also just signed a lease with Shake Shack, and Magnolia Bakery recently opened.

Finally as Steve mentioned, April 22nd was the due date for the state’s request for submissions for both the transformation of the Farley building and Penn Station itself. That morning Vornado submitted comprehensive proposals for both, and we believe we can play an important role in the transformation of this area into the gateway that New York deserves, a new empire state station complex. We welcome Governor Cuomo’s focus on this area and know that with his involvement, great things are possible.

Let me now turn to theMart in Chicago, where our redevelopment of the communal areas on both the ground and the second floors is well underway with an anticipated completion this June. This transformation includes a grand stair connecting tenants and visitors from the ground floor entry of the building off river drive up to a new food and beverage experience overlooking the Chicago river along with our new urban food hall on the second floor which is within steps of the most active transit line in the city of Chicago which directly empties tenants and visitors into theMart. Continuing the trend of major corporations moving their headquarters into Downtown Chicago from the suburbs. Beam Suntory, the spirits company completed a 113,000 square foot sublease for Motor Mobility, adding another great brand name to our tenant roster. While we did not execute any significant direct leases in the first quarter, taking account of our very active 750,000 square feet of leasing activity in 2015, theMart same store numbers for the first quarter were a positive 11.3% gap and 25.1% cash.

A word about the hotel business in New York. While both domestic and international tourism remains strong, the hotel industry is in a down cycle, the victim of gross oversupply. The results of our Hotel Pennsylvania have been weak. We continue to look at this hotel as a parking lot for future development as part of our overall Penn Plaza strategy.

As I look at our entire business excluding the Hotel Pennsylvania, our New York same-store numbers for the first quarter were a positive 6% GAAP. As we noted on our yearend call, we anticipated that same-store growth in our New York business would be back to our historic and consistently strong levels, as in fact reflected in these quarter’s numbers. While the cash same-store for the first quarter as expected was only a positive 1.7%, as the year continues and free rent periods burn off, we expect to realize cash same-store growth approaching double digit numbers in the second half of this year, and we will continue to see that strong cash same-store growth continue into 2017 as the massive amount of leasing we completed during 2014 and 2015 in both our office portfolio and our street retail business cycles into our cash NOI.

To conclude my remarks, the entire New York business had a very quarter. Strong same-store increase, strong leasing volume, strong average starting rent, strong and new creditworthy tenants and strong occupancy levels. Our 1.2 million square foot pipeline of leasing activity is robust with 475,000 square feet of leases in documentation and an additional 750,000 square feet of proposals we are negotiating. We are very constructive on the New York marketplace.

Thank you. And with that I’ll turn the call over to Mitchell to cover Washington.

Mitchell Schear

Thank you, David and good morning everybody. In Washington, story continues to be about recovery. In 2015, Washington added 68,000 jobs and the projection is about the same for this year. We seem to be on track thus for with 25,000 jobs added in the first quarter. The region’s economy has diversified with job growth focusing professional services, IT, associations and advocacy groups, security tax and cyber and biotech. We should see this job growth translate into more robust office demand as the market continues to recover. The above average job growth is pushing the unemployment rate down to extremely low level, now at 4.1% for the region.

We believe that Washington, our nation’s capital is a forever market that will continue to strengthen. In the first quarter of 2016, we completed 579,000 square feet of office and retail leases in 43 transactions. Office leases signed in the first quarter were flattish, generating a GAAP mark-to-market of negative 3.9% and a cash mark-to-market of negative 2.5%. Our first quarter TIs and leasing commissions were 7.8% of initial rent or $3.01 per square foot per annum, down from Q4, which was 11.5% or $5.06 per square foot per annum. Our overall occupancy was flat at 84.8%. Our office only occupancy excluding Skyline, increased by 60 basis points to 90.6%. Skyline declined to 47.4%. Our residential occupancy increased by 70 basis points to 96.8%.

In downtown Washington DC where we own approximately 3.2 million square feet of office space in 11 buildings that are now 96.8% leased, there are several highlights. At the Warner Building where we own 65% in a joint venture, we are finalizing our refinancing. We have largely released the 600,000 square foot landmark, currently to 88% to a great roster of high quality tenants that include Baker Botts, General Electric, Facebook, Hewlett-Packard, APCO Worldwide, Cooley, EMD Serono and The ONE Campaign.

Last week, Treasury’s Office of Inspector General moved into our Bowen building at 875 15th Street occupying 58,400 square feet. Here, we have a prestigious agency who required a quality building close to the main Treasury building two blocks away. The move coincided precisely with the expiration of the previous tenant.

At the corner of 17th and M Streets, we are emptying tenants at the contiguous 1726 M Street and 1150 17th Street building to make way for our new 335,000 square foot Trophy Office building, 1700 M Street. Our plan is to begin demolition of these outdated buildings within the next 90 days and build the new garage and foundation back to grade while actively marketing the building. With the garage and foundation complete, this will put us in an excellent competitive position to go vertical when the time is right.

Across the Potomac, we are also continuing to make progress in Crystal City. We are actively replacing BRAC tenants with a wide array of associations and advocacy groups, professional services and creative companies. Our efforts to revitalize and energize neighborhood are at full speed and taking shape. A full page New York Times story that ran on Wednesday April 20th gave a good sense of the creative authentic community that’s growing in Crystal City.

WeWork worked recently opened its first location in Northern Virginia in our building at 2221 South Clark Street in Crystal City. Here, we transformed an obsolete office building into a WeWork community that combines for the first time the exciting new residential concept with their proven co-working office space. The office space on the top two floors of the building and is now 85% occupied after only three months. The balance of the building includes WeLive, 216 new collaborative living community style apartments that officially opened yesterday to great response in press. This morning a Washington Post story described the new WeLive as a fresh take of what apartment life should be like. WeLive is bringing a whole new crowd to Crystal City and we are delighted to partner with them.

In adjacent Pentagon City, we have begun preleasing our new 699 units apartment project, The Bartlett. We are seeing strong activity, resulting in 125 units already leased at better than budgeted rents. We look forward to the first tenant moving in June, located directly atop a new Whole Foods, this 23-storey building has great view of DC and the best residential amenity package in town.

In addition to finishing and opening WeLive and The Bartlett, we’re putting the final touches on our design for 1770 Crystal Drive. 1770 Crystal Drive is a 270,000 square foot building in the bull’s eye location that we recaptured when we extended the U.S. Marshals and moved them down the street to another building of ours. Located right at the metro, the existing building will go out of service next year as well fully redevelop it with the new skin, new lobby, new system, and a top floor conference center for delivery in 2018. It will be our first good as new office product in Crystal City in a long time. We’re excited about it and expecting great things from it. We will surround it with restaurants and entertainment, adding to the street vitality and heightening the urban experience of Crystal City.

And finally, we have a tremendous 8 million plus square foot development pipeline on land that we own outright for significant value creation. Included in that number is our 7.5 acre parcel in Rosslyn which we own in a joint venture, arguably the best beach front location in all of the Washington region. In March, we received long thought entitlement approval to build 2.5 million square feet of new office, residential, hotel and retail; clearly a big step forward in realizing the value of irreplaceable site.

I’d like to thank you very much and I’ll turn the call over to the operator for our Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Manny Korchman with Citigroup.

Manny Korchman

Steve, I appreciate the color on the $1.1 billion of NOI in 2017, but you seem to have overlooked DC when you were giving those numbers. Are we reading too much into it that DC will be out of Vornado my then or were you just waiting to talk about it later in your scripts?

Steven Roth

I wouldn’t read anything into it. We were focusing on our New York segment, which is clearly the dominant segment in our business. Notwithstanding that we have said repeatedly and hinted that we are studying, analyzing separating Washington. So, while we are not announcing that and it may or may not happen, you could read into that whatever you care to.

Manny Korchman

And then David, how do you think about the new supply coming on in New York, especially with Sony coming back and that’s sort of near term than people expected. Do you think we’re about to head to a place where there’s just too much supply?

David Greenbaum

I guess the first thing I would say is New York is a big city. So, if you think of the supply coming into that marketplace, 15 million square feet, 18 million square feet on an absolute number sounds like a very large number but as a percentage of the overall stock, what we’re looking at is increasing the stock by in the 3%, 4% kind of range, which is going to be coming on line over the next really fourish plus years. So, as we look at historical absorption in the New York City marketplace, in a good year, we certainly can absorb 4 million square feet, 5 million square feet, and in some great years, we can absorb 8 million square feet and 10 million square feet.

I think the math is basically, and we’ve actually done some work here with some econometric types that provided the job growth stays relatively positive, and when I say relatively positive, the job growth has been somewhere in the kind of 2.5% to 3% growth range for office sector jobs, if that number moderates to the 1.5% to 2% range, I think we’re going to be just fine as it relates to the absorption of that space. Steve, do you want to add anything else to that or…?

Steven Roth

Well, clearly, a lot of it has to do with the state of the economy at the time. Clearly, a lot of it has to do with the price points in question and also the geography. So, Sony building is coming back. We know what they pay for the building, we know — by the way we know the buyer. And they are very nice rate — obviously competent and very, very well capitalized family. So, we know what they pay for the building, we know what the downtime TI leasing commission sit up et cetera will be. So, they are obviously — and we know the quality of the building. They are obviously going to be targeting a very, very high rental market where they will be catering to one and two floor elite kinds of companies.

So, there’s that; there’s a couple of — there’s a new building on Park Avenue, which is famously going after the very, very, very highest rents. There is another building kicking around in the grand central area which is also going to go with –compete for very, very high rents. So, those are in — that’s all fine. I care more about the Hudson Yards competition, which I in the mid 80s of dollars a foot. And so that competes with the general marketplace. And so, that’s fine; that will be gone and then everything will be fine. So, I relish competition that comes on at a $150 a foot because that gives us a tremendous opportunity to compete at much lower prices and beat and be extremely successful. And so that’s my comment.

The other thing is that each building competes in for its tenants in a different geography and each building has a different culture. So, there you have it. Obviously we will get through this, we would absorb it we will thrive. And a lot of it has to do with what the world looks like as these buildings get a little bit closer.

Operator

Thank you. Our next question comes from Jamie Feldman with Bank of America.

Jamie Feldman

So, can you help us think about — you just submitted your bid for Moynihan Station. You talked about 8 million square feet plots of potential development in DECLINED. I know that will take some time. You gave a lot of good color this quarter in the supplemental on the development pipeline. Can you help frame how people should think about the capital needs of both the DC platform and the New York platform in the next couple of years?

Steven Roth

Our plans are not specific enough in Penn Plaza to be able to do that, Jaime. And I don’t want to go from the hip on that because it’s important. Obviously we will be spending hundreds and hundreds of millions of dollars in Penn Plaza to accomplish our objectives there. But until we’re prepared to make full disclosure of what our plans are in a very reasoned way, I’m not going to speculate.

Jamie Feldman

Okay. And then, what about in the DC side?

Steven Roth

In the DC side, as we — once again, as we start our projects, we will publish the budgets and the expected yields, just like we did with The Bartlett, for example.

Operator

Thank you. Our next question comes from Ross Nussbaum with UBS.

Nick Yulico

Thanks. It’s Nick Yulico here with Russ. I just want to make sure I understood the commentary about the New York City, the impact from straight line FAS 141. So, a lot of this impact I guess happened in the first quarter because you booked income last year from FAS 141, so went down in the first quarter. And when you talked about to close the $10 million straight line write off balances; that happened all in the second quarter or is that spread through the rest of the year?

Steven Roth

Yes. Nick, the 141 acceleration that was recorded in the prior year was concentrated in the second half of the year, it was the heaviest in the third and fourth quarters of last year; it is non-recurring in nature, so on a relative basis will reoccur in 2016. As it relates to the straight line write offs, there was $5.1 million in the first quarter and then there will be another $9.7 million as we go through this year. The heaviest amount of that will be in the second quarter, but it will — the way that that accounting works is that the straight-line balances related to the early terminated leases is accelerated over the shortened remaining lease term for those tenants. And so, it’s causing us to have to immediately write off the straight line balances, but there will be another $9.7 million, the heaviest slug of that will be in the second quarter of this year. Is that the information you were looking for?

Nick Yulico

Yes, that’s helpful. Thanks. And then, David, can you just talk little bit more about the leases that you had that are sort of in documentation or under negotiation today; how much of that is renewals? I think you may have had a law firm tenant you working with in 90 Park? And how much is expansionary space like you just had with the PwC lease?

David Greenbaum

Of the 1.2 million square feet that we really have in our pipeline, and as I said, of that about 0.5 million is actually in lease documentation with the balance, another 700,000 square feet in the pipeline. In the aggregate, it’s probably about 50% renewal and 50% new deals. I think of the deals that we actually have in active lease documentation, which we fully expect to get closed in the second quarter, I think that’s going to be probably a little bit more heavily weighted toward actual renewals where we are working on a couple of renewals, one some space that’s coming up in early 2017 and then as I mentioned, the law firm who actually comes up in 2018.

Operator

Thank you. Our next question comes from Alex Goldfarb with Sandler O’Neill.

Alex Goldfarb

Good morning. And first Steve, thank you for the NOI roadmap. Just as part of that, can you just talk about, one, I think you mentioned $83 million of GAAP but can you just — how we should think about that that $83 million was this year or was that something else? And then second is while you have the $200 million of NOI that you laid out, what should we think about as far as move-outs that would offset that amount over the next — this year and next?

Steven Roth

With respect to the timing of how the $83 million of GAAP that is yet to be recognized — Steve, I don’t have that. Steve, do you or Joe have it.

Joseph Macnow

We do. Alex it’s Joe. That’s approximately $53 million this year and $31 million next year.

Alex Goldfarb

So, it’s 53 in ‘16; and how much?

Joseph Macnow

31 in ‘17.

Alex Goldfarb

And 31 in ‘17, okay?

Joseph Macnow

We round it, Alex. It’s really 84.

Alex Goldfarb

And then, what should we be thinking about as far as lease move-out that would offset the $200 million?

Steven Roth

Well, the answer to that is none. Now, let me explain that to you. The $200 million of cash NOI that is yet to be recognized on our book is totally additive. So, there is no move-outs that will offset that. However, that only for that segment of our portfolio. So, we will have for the balance of the portfolio, normal move-outs, normal move-in and normal turnover, okay? So, if — the presentation that I made in my opening remark is that all things being equal, in steady state, we have $200 million of additive cash NOI that will feed in — as I mentioned, so much this year, so much ‘17, and a little bit — and little tail in ‘18.

Alex Goldfarb

And then second is as far as the potential DC spinout, if you could just comment, it sounds like you are not willing to give timing yet, but if you could just give a comment as far as, if it were to occur, what you would see the balance sheet structure as far leverage? And then, what the cash position of that entity would be? Obviously it sounds like, there is still a lot of redevelopment going on, both in Crystal City as well as the Rosslyn side you discussed?

Steven Roth

That’s a great question. First of all with respect of timing. As we — when we make our decision we’re going to do it in a — as we did with Urban Edge. By the way, we have a history in doing this; we have done it before. So, we are sort of experienced hands at this. So, we will do it with major speed, so that’s step one. Step two is that as we did with Urban Edge, it was properly capitalized; it had fine assets; it had enough money; it had enough capital and credit in its entity to complete its mission; it had a well-defined mission; it had basically inherited our management team plus the addition of one very, very talented CEO that we recruited on the outside, and then he added a CFO et cetera. So, the business will be, if as and when we make that decision and launch, it will be set up for success from a balance sheet point of view, from a capital plan point of view, from a team point of view.

Operator

Thank you. Our next question comes from Steve Sakwa with Evercore ISI.

Steve Sakwa

I guess, Steve, to follow up on that question, I understand the Urban Edge spinout and the rationale behind it; it was kind of a small part of the portfolio that didn’t get a lot of attention, but the DC portfolio is pretty large. And I guess I’m just trying to understand maybe what opportunities are not being taken full advantage of down in DC with this division being part of the Company, and trying to just understand what it may do differently, if it were standalone entity?

Steven Roth

The answer to that is — Hi, Steve, how are you? If we do separate Washington, it will be for the reasons that we have already enunciated. And that is to have a focused management team with a very specific mission in Washington, which may or may not involve capital partners et cetera and will have its own report card, namely its own stock price, and basically have its own board and be able to make its own decisions. So, we are capitalists, we believe in incentive, we believe in report cards et cetera. So, we think that the Washington business, not that much unlike the Urban Edge business, will benefit enormously from being its own man and woman, so to speak.

We also believe that the New York business will benefit by being a focused New York business, so that global investors can invest in the New York platform, the New York assets, and our New York activities, separately from Washington or shopping centers or whatever. So that’s what our objectives would be. There is nothing — there are significant things that will be accomplished, in our mind by investors being able to choose Washington or New York as opposed to having to take both of them in the current structure.

Steve Sakwa

And then I guess to follow up on this $200 million, just to try and make sure I understand, so Steve, all of this activity is already done and taken place. And therefore, I’m assuming it’s already out of the lease expiration schedules and therefore, as we are trying to look at the upside from leasing, this income is effectively there but not part of that schedule. Are you looking at different disclosures going forward on how we sort of monitor these figures, because they are obviously going to be sort of a constantly changing set of numbers? And it seems like there’s income but it’s missing and it’s not part of the rollover schedule unless I’m mistaken on that point.

Steven Roth

Hang on. You said this is already done. Well, so, it is done and it isn’t done. The leases are signed, the income that will come from those leases is already big. But they have not yet hit our financials because either they’re in free rent period or they haven’t been delivered or whatever, so that they are in the bag; I call them they are in the on deck circle. All that income is absolutely legally bound, but it’s just — it’s a matter of timing and delivery and free rent burn off et cetera. And it’s huge — one of the reasons, I mean what we — it’s huge when you think about it. So, it comes on top of $900 million base. And so, that’s that. In terms of disclosure, I don’t know — I really don’t know. We will have to sit down and figure out what more if anything that we have just said today and in what format we will increase our disclosure. We think our disclosure is not bad, but. So, really, I can’t answer that question right now. I’m stuttering; I can’t answer right now.

Operator

Thank you. Our next question comes from Michael Lewis with SunTrust.

Michael Lewis

So, I appreciate the enhanced development disclosure in the supplemental. I just have a question about how it’s working, right? So, if I use, on page 30, if I look at 512 West 52nd for example. I believe that’s a $235 million development. And so, I see the CIP is $8 million, the incremental budget is $72 million. How do I get those numbers to add up and should I assume that this is all your share on this page as well?

Steven Roth

Alright, I now have that schedule in front of me what. What’s…

Michael Lewis

I’m using 512 West 52nd as an example but — because I think that project last quarter or two quarters ago, you said that was a $235 million project, and right here, you are showing $8 million of CIP, $72 million of incremental budget. I’m just wondering how all the costs are accounted for here.

Steven Roth

What we’re trying to show is — and the numbers as far as the budget and the amounts that are — construction progress and line costs, those are at our shares, so, these are all our share numbers.

Michael Lewis

So, so that gets me closer.

Michael Franco

The 235 is a 100% for the development and that’s a full cost at a 100%. The numbers here to the — show here our share.

Steven Roth

Our share, that’s correct.

Michael Lewis

So, that gets me closer to the number

Steven Roth

And this excludes land.

Michael Lewis

My second question is about — you guys noted how you got your proposal in for Penn Station and the post office. I think all the proposals were due last week, if I’m correct. And so, I’m wondering if you know what the timetable is for developer to be chosen? And then, if it’s you, what are the next steps and kind of how quickly do you move on something?

Steven Roth

We really can’t answer that question. We are in the government’s hands. And so we had submitted our proposals on the due date. And we do not know the process that the reviewers and selectors will adopt and what their time table is. So, we just don’t know. And I really — until I know more, I don’t think it’s wise to speculate.

Michael Lewis

Fair enough, sounds about right for the government. Thanks.

Steven Roth

No, no, I didn’t say that, you did. I’m in full suck up mode.

Operator

And thank you. Our next question comes from Jed Reagan with Green Street Advisors.

Jed Reagan

In terms of 220 Central Park South, can you discuss your expectations for the amount of time it might take to sell the remaining condos and at what kind of price point relative to units that have already been sold?

Steven Roth

Our enthusiasm for 220 Central Park South and the quality of the project, the market reception of the product is not diminished at all. There was a low in the market over the end of last year and the first of couple of months of this year, I guess in response to general fatigue, too many other projects coming on board, extreme worldwide global financial volatility, and I think the most interesting of which is we are not delivering for 2.5 years. So, the project is off to a roaring start, the marketplace accepts it as being the class A plus project. And so that’s the status. Now, in the recent weeks, we have had a significant uptick in traffic through our sales room, as I said in my prepared remarks. And we are now negotiating two very important deals. The pricing of the project will — we have no expectation that the pricing of the project will diminish more than — by the way it could go up from the in place contracts that have already been signed. In terms of timing, since we basically have our course of the project and we have 2.5 years to go to delivery, we are optimistic that we will have either the entire project or almost the entire project totally sold before we deliver.

Jed Reagan

Okay. Thanks for that. And just to be clear, the budget for that project is still in line with last quarter?

Steven Roth

Yes.

Jed Reagan

And in terms of the valuation environment, are you seeing signs of cap rates changing for lower quality or value-add assets, either on the office or retail side of things, and are you seeing the mix or depth of bidding times changing?

Steven Roth

I’ll let Michael Franco — our CIO will answer that. And then I’ll pipe in.

Michael Franco

In general, I’d say the first quarter was less active than last year, but for our segments, office, retail, I think activity is down. I don’t think pricing has changed. I think Steve highlighted two premium quality assets. And I think as we said in the last call, our expectation was the capital environment for high quality assets was going to remain very favorable and it does. Capital continues to be very interesting in New York and the pricing for assets like that reflects that. So the value added assets, there have not been many examples yet, although I think the Watchtower trade is an example, it’s not close yet but it’s under contract. And I think that pricing was very full, not really reflecting a capital markets impact. So, I think pricing for office, retail generally continues to be strong, even when there is value add components.

Steven Roth

So, Jed, from my point of view, I see a reduction in the pace of activity at all price points, which is not unusual. These things fluctuate. I see if anything, a scarcity of highest quality product, a scarcity of highest quality product. I know that incomings that we get from global investors interested in partnering, buying et cetera at the highest quality is increasing rather than decreasing. And the incomings are now coming from very, very far and wide geographies including Asia, the Middle East, Europe et cetera, and domestically by the way and Canada obviously.

So, I think in terms of the highest quality, if anything, the demand looks like it’s increasing. In terms of lower quality, we don’t focus as, so I’m not that concerned about it. But I can tell you that a lot of that is get driven stuff with the entrepreneurial sponsors and buyers and sellers. And the debt markets that drive, kinds of speculation is getting very skinish. So, the availability of wild and wooly debt to finance that kinds of stuff is with withdrawing a little bit or maybe even a lot. So, that obviously affected that activity level. So, where I am is in New York and New York is in a class of its own by the way. In New York at the highest quality, if anything, I see it increasing demand and no diminishing in pricing.

Operator

Thank you. Our next question comes from John Guinee with Stifel.

John Guinee

One of the things that we like about Empire is we can back in and we figure that Empire State Realty Trust we think is valued at about $660 a square foot for the Manhattan office; we think SL Green is valued at about $760 a square foot for the Manhattan office. Do you have any sense for when you look at Vornado at the current share price, what you would ascribe to a per square foot value of say the DC office or the High Street retail or the Manhattan office?

Steven Roth

Do we have any idea? Sure. I can tell you that it’s substantially higher than the numbers that you just mentioned. But we are not in the business speculating or that’s — I have my concepts of values and you do yours.

John Guinee

But you don’t look at 100 bucks a share and come up with, boy, it looks like people are valuing our Manhattan office at $500 versus $1,000 a foot right now?

Steven Roth

Sure, John. I had a fairly long page in my annual shareholders letter this year which was titled I think public real estate is cheap. I think that was the title of that section, if remember. And it was basically a discussion about NAV versus share prices for our Company and the other New York folks, our colleagues in New York. So, what we do is we basically are an NAV focused management. We believe that NAV is the roadmap of value and that is the most accurate predictor of what the value of the companies are. NAV is based upon the private market values and a cap rate. And so, we do our work and you do yours, and all of the folks on the phone do theirs. So, we think that the NAV is the roadmap. And we have been very clear in saying; and by the way a lot of our colleagues in New York have been equally as clear in saying that we think that the NAVs are substantially above the stock prices.

Now, the punch line to my opening remarks today about the $200 million of cash NOI that is in the bag from signed leases that will flow into our financials over the next short period of time is that that creates $20 or $25 a share of NAV. Now, Empire is a friend of mine, but Vornado is Vornado. and so $25 a share is $5 billion of incremental increased value. Now, a lot of the analysts who do this kind of math have some forward number, which is more than the number of $900 million that I mentioned today, but clearly the vast majority of that $20 to $25 a share is not yet in anybody’s numbers. So, the long and the short of it is, is that we are NAV oriented; we do our NAVs, you do yours. And, we think the lessons are that the stocks sell for much less than the NAVs; in our case, very substantially less.

Now, as I’ve said before and I think I said this in the letter, I’m a lifelong public company executive. So, I worship to the God of the stock market. And the stock market says — the stock market is a weighing machine. And that’s my answer.

John Guinee

And just a question for David. David, if you’re looking at Hotel Pennsylvania as a parking lot and if you were able to build today, do you have any sense, excluding land what it would cost you to do a couple of million square foot office building; is it $600 a foot or $1,000 a foot above the land cost?

David Greenbaum

I think taking out land cost, and assuming you are talking about an office development, and obviously, you could do residential, you could do resi and a hotel, but on an office basis, I think all in including hard costs, soft costs, TIs, leasing commissions, construction costs that number is north of $1,000 a foot for a major $2.5 million square foot tower to develop today in New York.

John Guinee

Say it again.

David Greenbaum

The number I said Steve was well north of $1,000 a foot, probably could be $1,200 or even $1,300 or $1400 a foot, as you’re looking at developing a 2.5 million plus square foot tower.

John Guinee

I agree.

Operator

Thank you. Our next question comes from Brad Burke with Goldman Sachs.

Brad Burke

Just a two-part question on the New York same store. Last quarter, you indicated that you expect well over 5% same store growth in New York but it’d be back end loaded. So, first, is that a cash or a GAAP number? And second, does that still seem like a reasonable goal for same store for the full year?

Stephen Theriot

I think the cash number reflective of again what Steve talked about, as you cycle in, both GAAP and cash, the cash number is going to be significantly higher than the GAAP number. The cash number I think what I said was we would expect by the end of this year to be approaching double digit growth and that we would be looking at similar growth into 2017. I think the GAAP number that we had this quarter of about 6% is what we’re going to be looking at the balance of this year and into next year.

Joseph Macnow

Brad, it’s Joe Macnow. Let me pick up on David’s 6% GAAP, to make sure that there is a little less chance of confusion. So, if David’s business is doing $250 million a quarter and you expected a 6% GAAP same store, you would expect the comparable quarter in ‘16 to be $15 million higher than a $250 million quarter in 2015. David stands by that. That is what is. What Steve Theriot told you was that 2016’s third quarter — or second quarter, let’s take the one coming up, will have a negative comparison of $11.3 million from that $15 million, caused by non-cash income in 2015’s quarters and expense in 2016’s quarters. So, I know that earlier Nick asked that question, Steve Theriot answered it. I thought about giving an example then, but this is a better time. So, is that clear to Brad and everybody else?

Brad Burke

I can’t speak for everyone else. It’s clear to me.

Michael Franco

You can speak for everyone else. Goldman Sachs is Goldman Sachs.

Brad Burke

All right, everyone is on the same page.

Steven Roth

I can only tell you, I prefer cash numbers. They are much simpler. Next?

Operator

We are done.

Steven Roth

Okay. So, I think unless anybody else cares to ask a question, I think the queue is empty now; is that correct?

Operator

That is correct.

Steven Roth

So, we thank you very much; we appreciate your — this was a little bit less of a marathon than last quarter. We appreciate your joining our call. We appreciate your interest in our Company. We will see everybody at [indiscernible] I guess in June in New York. And thank you all very much.

End of Q&A

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for your participation. And you may now disconnect.