Catherine Creswell - Director, IR Steven Roth - Chairman and CEO David Greenbaum - President, New York Division Joseph Macnow - EVP, CFO, and Chief Administrative Officer.

Jamie Feldman - Bank of America Merrill Lynch Steve Sakwa - Evercore ISI Michael Bilerman - Citi John Kim - BMO Capital Markets Vikram Malhotra - Morgan Stanley John Guinee - Stifel Nicolaus Alex Goldfarb - Sandler O'Neill Nicholas Yulico - Scotiabank.

Welcome to the Vornado Realty Trust Third Quarter 2018 Earnings Call. My name is Paulette, and I will be your Operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

During the question-and-answer session [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Cathy Creswell, Director of Investor Relations. You may begin. .

Thank you. Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third 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 Web site, 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 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; Matt Iocco, Executive Vice President and Chief Accounting Officer; and Tom Sanelli, Executive Vice President and Chief Financial Officer, New York Division.

I will now turn the call over to Steven Roth..

Thanks, Cathy. Good morning, everyone. If I may, let me start by breaking a little bit. Our leasing numbers continue to be the best in the business.

Year-to-date for three quarters across the entire business, including New York Office, Retail, theMART, and 555 California Street, our leasing activity totals over 2 million square feet and 179 leases with outstanding mark-to-markets of 33.8% GAAP and 24.1% cash. Thanks to Glen and our best in the business leasing team.

Yesterday, we posted third quarter numbers. Here's the math. FFO as adjusted was $0.97 per share even with the prior year's third quarter. Our GAAP based as financial results for this quarter were negatively affected by $4.5 million, largely from non-cash, straight-line rent receivable write-offs.

These GAAP accounting items did not affect our cash, our cash basis results. Remember, we run the business on cash numbers. Our third quarter cash basis FFO was adjusted with $0.95 per share, as compared to $0.89 per share for the prior year's third quarter up a strong 6.7%.

This quarter's companywide cash basis NOI was $340.9 million, up 2.7% from the third quarter of 2017. Adjusting for the sale of our half interest in the 666 Fifth Avenue office condominium, the increase was an even greater 3.8%; more about 666 in a minute.

Cash basis same-store NOI increased by 4.3%, comprised of New York office was up 5.1%, retail was up 4.2% benefiting by $4.9 million one-time real estate tax abatement catch up, with the total New York segment up 3.9%. theMART was up 2.2% and 555 California Street was up 19.9%.

This quarter's leasing activity was robust, which David will cover in a minute. Our office business continues to perform very well. I'll say again what I've said for the last several quarters, we are experiencing robust demand from all manner of industries in all of our submarkets.

Our tenants are optimistic, aggressive, growing, and upbeat about New York. Everybody knows that I think our Penn Plaza assets are our main events.

I have even called Penn Plaza the "Promised Land." Our transformation here will begin with Penn One and Penn Two, where we will create a two building 4.4 million square foot campus right on top of Penn Station.

It will include a three block, Grant Plaza along Seventh Avenue covered by a giant new bustle across the entire 400 foot frontage of Penn Two. This plaza will stand out 70 feet from the building and will be 45 feet above the street. It will serve a dual purpose.

It will be striking, creating a huge covered plaza in front of our Penn Two and the main entrance to Penn Station, and bring the neighborhood into the modern age. And at the same time, it will create a 140,000 square feet of very valuable new 220 foot high best-in-class creative space.

Images of this design will be posted on our Web site tomorrow under the call sign www.vno.com/portfolio/development. The scale of our campus here allows us to provide our tenants with the best -- with the biggest and best unparalleled amenity package. Even a giant leap forward from what many of you seen we have done at theMART.

Also in Penn Plaza, we are well underway at Farley to deliver in 2020 the best creative space in Manhattan. We will be announcing later today that we are increasing our ownership in Farley, and there is much more to come in the Penn district.

These assets are at the heart of the new New York adjacent to the Hudson Yards and Manhattan West developments, and sit literally on top of the busiest transportation hub in North America. And don't forget the adjacencies to the Macy's, the biggest department store in the country and Madison Square Garden.

Speaking of theMART, David will tell you about a huge art projection we launched last month. A rotating group of artists will design images projected over the entire facade of the building. This is really innovative and exciting stuff, a Musti in Chicago.

Our objective here is to increase the franchise value and renounce of this iconic 3.7 million square foot building. Time Square is the best performing retail submarket in Manhattan. A highlight of the quarter was our September 24th acquisition from host hotels of the 46% interest in 1535 Broadway retail condominium that we did not already own.

The original transaction provided that we would become a 100% owner through a put/call arrangement based on a pre-negotiated formula. This acquisition satisfied the put/call arrangement. We now own 100% of the retail, which is a 100% lease to T-Mobile and [indiscernible] as well as the largest digital site in New York.

This project has now completed as a first year cash on cash yield of 8.5%, obviously very accretive and value creative. Elsewhere, retail continues to be soft albeit there is increased retailer activity and tours. At the beginning of the year, we guided that our 2018 retail cash NOI would not go below $304 million.

We are now comfortable that retail cash NOI on a recurring basis will be at least $350 million. We have begun closings that are 220 Central Park South Supertower 100 million projects. Closings will continue throughout 2019 as we climb up the building. We are approaching 85% sold. Here is a factoid for you.

In the 1,000 foot tower, we built 27 large full floor apartments of which 26 are under contract. The press is telling us that the condo market in New York is soft or even worse than that, that will may well it be for some, but I point out that we went to contract on two large full four apartments just this month leaving only one out of 27 left.

220 Central Park South has exceeded all expectations and is well into a record setting territory. Its old news now but we didn't cover the sale of our interest in 666 Fifth Avenue office on last quarter's call and here it goes.

Sometime ago we made a decision and announced that we preferred to sell out of 666 office rather than participate in a five year capital eating renovation. As previously announced the sale was completed on August 3. We received proceeds of $120 billion plus $57 million from loan repayments.

The financial statement gain in the year was $142 million and the tax gain was $244 million. We wish our former partners and their new partners all success.

Capital markets are pretty much unchanged over the last year with the [technical difficulty] same office, investment sales market remained healthy, but disciplined with volume up 20% year-over-year; the smaller the deal size, the easier to execute.

Phasing for large core Manhattan asset is stable is stable, the bidding pools are thin, and it's taking longer to execute these sales. There is continuously - there is continued strong demand and pricing in particular for assets in the west and south of Manhattan.

While foreign capital continues to be active, more of the activity this year is being driven by U.S. based capital sources. Debt markets for New York assets remain as liquid and strong as we have seen. While the base rate for 10 year treasury at LIBOR is up about 75 basis points this year, tightening spreads have offset about a third of this increase.

We count can at least 50, and maybe as much as double that number of debt funds that have been formed since the beginning of this cycle, who are all competing aggressively on a rate and loan-to-value loan to value basis for both whole loans and mezzanine positions.

We have a highly liquid fortress balance sheet, with $3.5 billion in immediate liquidity, measured leveraged and well-staggered maturities. And this doesn't count a couple of million dollars to come from 220 closings and non-core asset sales. Now, to my partner, David..

Steve, thank you. Good morning, everyone. The New York City economy remains strong. We've now had 35 consecutive quarters of private sector job growth, truly an extraordinary run. September mark the 12th consecutive month at that New York City unemployment remained below 4.5%, the longest such period on record.

While office using employment has been flat this year, the city has seen more than 22,000 new healthcare positions, which are not captured in office using employment.

In our loan portfolio, we have Columbia University at 1297 Avenue the Americans with 123,000 feet, Memorial Sloan Kettering at 650 Madison with 100,000 feet, and NYU line going at One Park Avenue with a total of 630,000 square feet which are 150,000 with the growth this year.

Over the last two quarters, new leasing activity in Manhattan reached 18.6 million square feet; the strongest two quarter total on record. Overall, asking rents held the firm at almost $73 a foot. Class-A rents in Manhattan in midtown remain robust at $83 a foot.

With year-over-year financial services sectors earnings growth of 24%, a fire sector in fact is now on fire with 53% of Manhattan's third quarter leasing activity. The two dominant themes in the market remain in the growth of co-working tenancies and the flight to New and renovated products.

Let me now turn to our own performance in the third quarter, where we executed 23 office leases totaling 312,000 square feet, driving occupancy up 70 basis points to 97.3%. Our average starting rent for the quarter was just over $67 a foot.

Of course, starting rents obviously fluctuate quarter-to-quarter based on the mix of buildings and the space leased. The key statistics is the mark-to-market increase and our mark-to-markets remain very strong, an increase of 26.5% GAAP and 11.8% cash. Our office business in New York, sort of same store NOI growth of 1.2% GAAP and 5.1% cash.

A most significant lease in the quarter with a head quarter's deal at 90930 Avenue [indiscernible] a large and important strategic communications firm that took 65,000 feet. Another important transaction took place at 330 West 34th Street where IAC owned HomeAdvisor 65,000 feet.

Another important transaction took place to 330 West 34th Street where IAC owned HomeAdvisor expanded doubling its footprint to 90,000 square feet and bringing 330 West to 100% occupancy completing the redevelopment of this asset. At Penn One, we've used 82,000 square feet with 80% of that activity representing the movement of tenants from Penn Two.

As you know, our prior year end, we will commence our significant renovation program at Penn One that will transform the 2.6 million square foot asset with an expanded double height lobby and acre of upgraded Plaza's co-working and conferencing facilities and a robust amenity package with food offerings and tenant services spanning the entire second and third floors.

At Penn Two, we are now finalizing plans for a dramatic renovation and expansion of its existing 1.6 million square foot asset located directly on top of Penn Station. Turning the two buildings and Penn One and Penn Two into what will be a 4.4 million square foot campus.

Penn Two project will include a fully [indiscernible] new mechanical systems, a new tenant entry sequence adjacent to Plaza 33 all integrated with a full amenity package and as Steve mentioned, the addition of a striking four-storey Basel that will transform both the existing building and the public realm.

In connection with this redevelopment, we will be vacating Penn Two up to the 10th floor and we have begun relocating number the tenants from Penn Two into Penn One. We anticipate starting physical work in Penn Two in the first quarter of 2020. The government continues to focus on the transformation of Penn Station and the area around it.

Since last month, Governor Cuomo made a speech that included several significant announcements.

With the construction of the new Moynihan Train Hall on-time and to be delivered in 2020, the governor reiterated his intent to upgrade the Long Island Railroad concourse beneath 33rd Street, doubling the width of the most congested corridor in the station.

As a reminder, we own the retail on the north side of this concourse, which is on to One Penn Plaza. The governor also announced a plan to transform the temporary Plaza in 33rd Street into a permanent Plaza, including a new station entrance as well as announcing that the state would undertake a collaborative planning effort, the entire neighborhood.

We of course applaud all these initiatives and the area's local representatives as importantly are doing the same. In a recent address, City Council speaker, Corey Johnson, whose district includes Penn Plaza, strongly endorsed a new planning framework to increase density in the district, improve all public spaces and transform the station.

It is clear that the momentum for a major change in the district is accelerating.

In other development activity, we have substantially completed 512 West 22nd Street where we are in active negotiations with perspective tenants and I've also substantially completed 606 Broadway where we have leases out for both the office and retail space in the building.

Looking ahead, our leasing pipeline remains active at over 700,000 square feet, including 200,000 square feet of leases out and an active negotiation. Our remaining 2,000 expirations total just over $300,000 square feet and our 2019 explorations are a modest 675,000 feet. Let me now turn to our street retail business.

For the quarter, we signed 10 retail leases totaling 104,000 feet including a 78,000 square feet renewal with Old Navy 134 Street. Similar to our strategy earlier this year, we're forever 21 at 435 Seventh Avenue. We elected to renew Old Navy short-term for five years and eliminated any further tenant renewal options.

This positions us to take advantage of rent growth as our transformation of the district proceeds as well as maintaining our development options for the site.

With retailers drawn to the neighborhood extraordinary foot traffic, we also assign new leases with shoe store naturalizer at Seven West 34th Street, Starbucks at 330 West 34 Street, and Fast Casual Food Purveyor dig in at 11 Penn Plaza. Our retail mark-to-markets for the quarter were negative 40% GAAP and positive 36.3% cash.

It is counter-intuitive to have a large GAAP negative and a large GAAP cash positive. Let me explain. While the Old Navy renewal was at a significantly higher cash rent, which drove the strong cash mark-to-market.

Faz 141 purchase price accounting required us at acquisition of this asset to mark the rent up to the then market which is now proved to be too high producing the negative GAAP number. If you back out the Old Navy lease, our mark-to-markets were up 13.9% on a GAAP basis and 10% on a cash basis.

Our retail occupancy stands at 96.6%, up 30 basis points for the second quarter. Thanks to our NOI growth for our retail business was up, a positive a 2.9% GAAP and 4.2% cash.

Turning to theMART in Chicago, we have good activity on the former [indiscernible] space, a 132,000 square foot block spread across portions of the fourth and fifth floors, and we just got back in the third quarter.

This is a growth opportunity as the rent on the former [indiscernible] space was significantly below market at less than $32 per square foot. We're in discussions with an existing Mark tenant seeking to expand as well as where the TAMI tenants in our in New York portfolio that also has submitted a proposal for a portion of space.

For the quarter we saw nine showroom leases and three retail leases including an Amazon Go, gauche store all totaling 28,000 square feet and an average starting rent of $57.92 per square foot. The mark-to-market increase for the quarter was positive 14.4% GAAP and 1.9% cash.

As Steve mentioned on September 29, we launched our permanent exhibition of Art on theMART, more than 32,000 Chicagoans descended on Wacker Drive to see the inaugural display of the work of four digital artists which will continue five nights a week for two hours 10 months of the year.

With twice the clarity of a 4K Ultra HD TV this 2.5 acre campus is simply extraordinary. Mayor Rahm Emanuel called the displayed "a visionary project to that bring Chicago's project" that brings Chicago's legacy of public art and iconic architecture into the future.

As the largest permanent art installation in the United States, city officials expect to display to become as much of the Chicago staple as the 00:21:56 being at Millennium Park and the Picasso at Daley Center Plaza.

From our perspective the art display strengthens the franchise value of theMART and cements its position as nothing less than the most important office building in Chicago. For the third quarter at theMART our GAAP same store NOI performance dropped 3.8% primarily due to the July 31 publicist departure while cash same store was up 2.2%.

Let me conclude with San Francisco where our 555 California Street complex remains the most iconic office location in the city. As I told you in the last call in the early days of this quarter we signed a 15-year lease with the spaces concept of Regus IWG the entirety of the former banking hall of the Cube at 345 Montgomery.

We're making good progress on this $45 million redevelopment transforming it from the old banking hall into a 78,000 square foot modern co-working environment that we will deliver next summer.

We have largely completed the abatement and demolition activities and are now progressing with the main structural elements that support the expanded and additional floors.

In the tower at 555, we signed three leases totaling over 82,000 feet including two-floored tenure renewal with UBS and a full floor expansion with Bank of America bringing its occupancy in the complex to almost 330,000 feet. With average starting rents over $91 a foot, our mark-to-markets were very strong at 30.4% GAAP and 10.4% cash.

Same-store NOI growth in the third quarter also remain very strong at 17.2% GAAP and 19.9% cash. We look forward to showing off this flagship asset next week during new week, and hope you'll join us for these festivities on the plaza of 555 California on Tuesday evening.

I'm also pleased to announce that Vornado 00:24:17 2018 Leader in the Light Award. This is the ninth consecutive year we've been recognized as the highest scoring diversified REIT.

Contributing to our success in earning the Leader in the Light Award was Vornado's highest standing in the global real estate sustainability benchmark was referred to as Grez. In 2018, Vornado is the number three among all listed real estate companies in the United States, and placed in the top 6% of 847 gross respondents worldwide.

The business as a whole in the third quarter, our same-store NOI growth was positive, .0.9% GAAP and 4.3% cash. Across our portfolio, we leave 604,000 square feet in the quarter at mark-to-markets of 20.6% GAAP and 13% cash.

We have the right assets in the right sub markets or with significant embedded value and well-positioned developments and redevelopment opportunities. Now back to Steve..

Thanks, David. We are delighted to take your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jamie Feldman from Bank of America. Please go ahead..

Great. Thank you and good morning. Steve, I want to go back to your -- one of your initial comments which was robust demand across many industries across many submarkets, you know there is clearly concerns of things flowing out there.

I just wanted to get your thoughts on kind of where you think you know how it feels and where we are in the cycle and any concerns you do have about where we might be in the real estate cycle?.

Jamie, hi, good morning. First of all, we're always concerned. We live our life by being concerned. That's part of the job. I'll give you a quick overview and turn it over to David for more detail. What we're seeing is that in the better buildings in the better submarkets, there is robust demand, and in fact even increasing rents.

If you are not in the right submarkets, or if you have tired buildings, you are seeing a totally different New York, but the New York that we operate in looks very robust to us.

David, what do you think?.

Jamie, I'll give you one statistic that I find interesting, and that is year-to-date in New York we have leased little less than 1.4 million square feet, 1.347 million. Of that, 600 plus thousand square feet was all growth by existing tenants; it's Facebook, it's NYU Langone, it's HomeAdvisor, it's AlixPartners.

So we are still seeing tenants increasing their footprints, looking for more space. As I was coming upstairs for this call, I heard Glen and one of his leasing guys, talking about the actions that they've got in terms of proposals that we're working on for our building.

So I will tell you generally the environment for good buildings, well-located, as I mentioned, one of the major themes is renovated buildings and well-located buildings in the right districts, we've got a lot of action..

Jamie, I'll add to that and say this, we are very, very attentive to a change in the demographic trends that have made New York so great. So the essential part of New York is it's an enormous infrastructure of talent, headquarters, business, arts, restaurants et cetera. I would be remiss, if I don't mention theater because that's my family business.

And the inflow of talent into New York continues unabated and we watch it very carefully. People want to be in New York, they want to be in the right spot. And so, we think that New York continues to have an enormous future. And we watch it very carefully..

Okay. Thank you.

And then just a follow-up for me, you talked about being in the right submarkets, can you talk about the decision to increase your ownership of the Farley building? And then as you think about One Penn, Two Penn, just any early conversations with tenants in terms of interest in the renovated space, I guess especially at Two Penn and what they might be looking for?.

Yes, we love Farley. We think Farley is an extraordinary property. We learned a lesson. Last summer, we went out to Silicon Valley to call on our customers, and we're talking about the Facebooks and the Googles and the big boys. They have out in the valley their preferences; they have campuses which are horizontal, not vertical.

So what we have in Farley is a horizontal campus. It's a double-wide block. It's the largest footprint in town. It's right on -- you know it's adjacent to the train station. We think that we are in the midst of creating a very, very, very exciting project. We love it.

And naturally we want to own it as much as we can, and so, we so we saw eye to eye with our friends and our partners that related and we will be announcing later on today that we're increasing our ownership. So there's that.

What was the second half of your question, sir?.

Just tenant demand for some of the -- you talked you're going to lay out plans for the Two Penn renovation, I'm just -- what kind of discussions you're having with tenants that might be interested in that space or the Farley building space?.

We have tenants who want to talk to us about those properties. The tenants who are in the neighborhood, the tenants who are in the buildings now are very interested in perpetuating their occupancy, and we have outsiders. Everybody that we have shown our plan to -- in the brokerage marketplace is beyond excited. It's transformative.

It's a very exciting prospect of what we're doing. Quite frankly, we are holding off a little bit. Okay? Because we're -- this is not the right time for us to go to lease. So the answer is we are confident in demand, we have gotten enormous support from the real estate community, and we couldn't be more optimistic about what we're doing.

David, do you have anything to add?.

Jamie, this is -- I'd just one other quick thought and that is Glen, I, and Tom is leasing guys are just beginning to introduce what we're doing in the Penn district to the marketplace. We are having meetings with the brokerage houses, with the key brokers that we all do business with.

As Steve said, an enormous 'wow' to the brokers when they begin to focus on the scale of what we're doing, the transformation of what we're doing. Everybody recognizes that Seventh Avenue, the Penn District will be the epicenter of the new New York as we look out five and 10 years from now. It is at the busiest transportation hub of North America.

And I will tell you the packages that we are doing in the building in terms of the amenity packages for the tenants, we think we will be doing something that will be truly transformative, and the brokers understand we really deliver on everything that we say we're going to do.

So it's really very early days to talk about any specific tenants or space..

We're also excited about posting on our Web site a handful of images of what we're doing, so that when you take a look at those, you can get a feel for our level of, for why we are so enthusiastic about what we're doing. Thanks..

Okay. All right. Thank you..

Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead. .

Thanks. Good morning.

Steve, in your opening comments, you really didn't talk about sort of return of capital or how you may use kind of the growing cash balance that you've currently got plus the money coming in from 220 over the next year, can you just sort of speak to that and how you plan to use that and help try and close the NAV discount?.

We are an extremely liquid, well-financed real estate business. We have great financial resources. Those resources are growing and that's by our intent.

We look at every single deal that comes along in the marketplace and we have decided that we can't make money at the offering prices of most of the deals so we've been very selective, we're in business to make money for our shareholders.

So, rather than just -- we don't follow the policy, well, let's just look at the marketplace and take the best deal that's available because the best deal that's available may not work. So the answer is that we have pushed away in the current part of the cycle. There will be opportunities.

The opportunities will be extraordinary and you have to have dry powder to take advantage of those opportunities. So, what I'm really saying is not yet. In the interim, the cash that we have will be used to pay down debt et cetera.

So as an example, we bought for $400 million, I think it was $42 million dollars from host Marriott, the half of the 15:35 Broadway block that we didn't know. We bought that to a cash We now have an asset that has a value of a well over a billion dollars that we own free and clear, no financing on it whatsoever.

So if you remember when we put out that press release a couple of months ago that transaction is doubly accretive, it's accretive because of the earnings but it's even more -- it's even because of the rents but it's even more accretive because we used 2% cash to buy it.

So the answer to your question is not yet, liquidity is good, we will pay down debt selectively which also increases our liquidity and so there you have it. This is the time of the cycle when it's the right time to be selective in acquisition and to build liquidity..

And just to kind of follow up or buybacks sort are not part of that equation at this point?.

The answer to that is that I think you know my feeling about buybacks I was very clear about it in my annual letter. If we thought that buybacks would increase shareholder value we would do it. Okay.

There's no sign that buybacks other than putting your –tempting to put your finger in the dike creates long-term shareholder value unless they are done by a company that has a recurring cash flow and they're done continuously over long, long periods of time. That doesn't fit our profile. So we'll see. On the other hand….

Can I just ask quickly on the Street retail, I mean you certainly had a more positive….

Steve, Steve, Steve, hang on for a minute. The other thing is you should know that we are not cavalier about buybacks. We cover it at every board meeting. We discuss it and re-discuss it, so we are not closed minded. We just think that we are practical. We just think that we are -- we are practical.

Is your question about street retail?.

Sorry, I just wanted to circle up, you know your commentary was a bit more positive this quarter than last quarter, certainly raising the number from 304 to 315, I guess I'm just trying to find out was that largely due to the old navy deal or sort of getting completed and that risk being taken off the table I'm just trying to gauge kind of where your temperature is on street retail today versus say a three months ago?.

I'd love to call a bottom but maybe I'm not that smart or maybe I'm not that stupid. The street retail business continues to be soft. Our business continues to be strong because of very strong leases in place and the best properties of the business.

And all that we're saying is that the cautious numbers that we put out $309 million that reduced to $304 million because of a reclassification of I think it was 770 Broadway retail. That number we are going to see that number and I just wanted to make sure that you and all your colleagues knew that as soon as we did.

So, and we think the number in 2019 will be even a little bit better, okay. But the tone in retail continues to be bottom fishing and caution..

Okay. Thanks very much..

Thanks, Steve..

Our next question comes from Emmanuel Korchman from Citi. Please go ahead..

Hey, it's Michael Bilerman here with Manny. Just a couple of quick questions, Steve, I assume related shares your enthusiasm about the demand and the prospects given how successful Hudson Yards has been.

So what gives them the desire to want to sell additional interest to you and maybe just talk a little bit about the math surrounding your purchase, I don't know if it was an option that you called or whether it was a negotiation?.

So, I lovingly called you Mr. Yada, Yada, Yada, this morning. You get it. You get my name..

I got it..

Okay. So look related love the asset and the neighborhood as well as we do, but they're in a different business, okay, they're in a business where basically they invest, they have third party capital and they're in it for a profit. What we did was we -- they sold us for the money.

So we paid them and what we thought was an appropriate uptick from our bases to make them happy to sell and make us very happy to buy. So it's very simple. They're in a different business model than we are. They're in the business to create assets, create value, and then harvest that value.

We're in the same business but we're a much longer term than they are. So they love the asset, we love the asset, and off we go, we put out a press release at the -- and to close of business today..

And then just thinking about the cash it's going to be coming in over the next couple of years and congratulations on starting the sales process, the official closing for 220. How should we think about both the cash that comes in from 220 against the loan that you had for the construction costs.

I don't know if it has to be paid down initially versus taking the cash? And then secondly how we should think about the billion dollars of non-core sales, what is the current process that's on place there and how should we think about that cash coming in?.

Michael, that's a very good question. With respect to we used the $750 million term loan we use the $750 million term loan to partially finance the development of 220 Central Park South which as I think, you and everybody is beginning to see is one hell of a Budian [ph] deal.

As the closings of that -- as we climb up the building and we close apartments, that will liquidate that investment or that will liquidate the loan.

We will use the proceeds to roll into financing Moynihan, okay? So, as you can see that term loan is 100 basis points over LIBOR, which is it gives us the lowest, it gives us the lowest cost of capital in the universe. And so, that cost of capital which benefit our -- benefit [technical difficulty] we will now be rolled into Moynihan.

With respect to the other half of your question, I would refer you to exactly what I said to Steve Sakwa a couple of seconds, a couple of minutes ago..

Okay.

And then in terms of the Yada, Yada, Yada, is there any update on sort of everything being on the table and anything on strategic alternatives in terms of spinning off street retail, contributing assets to a fund, is there anything new on that front?.

Michael, we think we've done more than anybody else over the recent years to create value and to focus our company. I would just call into the attention that our Washington's -- our Washington, I call them "Spin Child." So it's a spin off which we think is - we continue to take as the child of ours.

JBG Smith, which is performing very well, so we're actually pretty excited of what we have done. We are still - they are still on the table, other kinds of structuring restructuring which will create shareholder value, okay. We will have more to say about that. We have nothing to say about it today. .

Okay. Great. Thanks for your time..

Thanks, Michael..

Our next question comes from John Kim from BMO Capital Markets. Please go ahead..

Thank you. On 220 Central Park South, you spent a lot of capital time and effort on the building, even earn potentially a billion dollars in cash profit which is about a year-and-a-half of FFO. But from a reported earnings perspective, it's going to basically shelf at zero, I think.

And in fact, it's actually been an earnings drag over the last few years.

I realize it's in your NAVs and all our NAVs but I am questioning if that's the correct way to figure earnings given it is cash profit?.

I think I am a little startled. I think that your question implies that maybe we shouldn't have done 220 and sacrificed that billion dollars. But with respect to the accounting details of your question, I want to turn it over to Joe. .

Hey, John, it's Joe. How are you? John, the profit on 220 will fall through FFO on it's non-depreciable real estate and accordingly under the NARIET definition of FFO, the gains on the sale of that land parcel is now fully developed, will show up in FFO.

We're going to treat it as not part of recurring FFO but only as part of FFO as adjusted because it's not recurring but there will be a billion dollars of income flowing through the income statement and a billion dollars of cash generated. As Steve said that was after paying off the $750 million.

It was also after paying of the $950 million first mortgage. That's a $1.7 billion of debt. You can do the math to understand what the gross proceeds are..

I think John, your question implies that it is a one - and I'll say, it is a one-timer, there's no doubt. And there is, it's possible in fact maybe even likely that at one-timer, even a massive one-timer like this gets no credit in our trading price of our stock. If that's the case, so be it.

But we will benefit by having a very significant increase in our cash at the end of this - at the end of this project..

I just wanted to clarify, it will be included in NAREIT FFO, but when you do FFO as adjusted, will you be taking it out, so therefore it's more of a normalized figure without CPS?.

No, the opposite will be as part, yes, exactly what you said, it's part of NAREIT FFO but FFO as adjusted which in our mind is a recurring type of number we'll exclude it..

Okay.

So I'm just saying, I think a lot of investors will focus on your reported number, which is the as adjusted so to look like there's no earnings coming from it when in fact, it is hugely profitable?.

Well, I think that a number of the people on this call focus on both. The as adjusted because that's the number that gets reported bottom line but as well as the recurring number which won't include it, it will include it rather..

Yes. John, I give investors a little bit more credit than that. I mean, I think the project is smashingly successful, it creates an enormous amount of value and that will be recognized. I think investors are smarter than maybe we're giving them credit for. .

The bottom line is in our NAV, we have a $1 billion for value creation from that asset. That's the right way to think of it, shareholders have been rich a $1 billion, $5 a share..

Okay..

Okay. On your dispositions of your commercial assets, you recorded a $141 million net gain which is a GAAP figure. I'm wondering if you could disclose what the cash gain was on that..

Joe, that's yours..

I'm sorry I didn't understand the question.

[Technical Difficulty] Can you repeat it once?.

The asset sales that you had during the quarter you had recorded a $141 million of gain which is a GAAP figure. I think you also disclosed what the taxable figure was but I just wondering what the cash figure was that you have..

The cash figure was $120 million on the sale of the building, $7 million coming from the collection of our share of the mortgage in excess of our basis on the mortgage..

Was there 00:47:51 lasted in that?.

Yes, there was but tiny really tiny. That's the lion share of the gains..

So the answer is that the cash is directionally the same as the GAAP. .

Right. Exactly right..

Got it. Okay. Thank you..

Thank you..

Our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead..

Thanks for taking the question. So just on the Street retail numbers coming in better than you originally anticipated. Can you kind of maybe walk us through what may have surprised to the upside. I know in your original number you didn't bake in any renewal from expiration.

So did you see - did you see you know better trends in terms of renewing or is there something specific about any of the assets?.

I can tell you I'm surrounded by seven accounting geniuses so one of you geniuses will have to handle that one..

Well, first of all, there was a discussion of a tax abatement and a piece of that being nonrecurring in Steve's remarks a piece of it was recurring. We didn't count on that in the $304 million. And as we always do when we project something we take the worst case basis.

To the past two quarters, we've been saying that the 304 seem low, Steve said, it's even stronger in the last quarter. But the individual IMs that make it up are basically conservative -- very conservative in the 304. And some things went our way. We didn't have credit losses that we anticipated and a few other things like that. .

The difference between 304 and 315 is, it's a couple of percentage points. So these are small movements. We will offline, do a reconciliation, and get a hold of you..

Okay.

Can I just specifically ask about any update on Massimo Dutti and the three asset -- the three expirations at Madison that I believe were expiring this quarter?.

All of those will go empty before we fill. So they will have a period where they will be vacant..

Okay..

And that's in our projections..

So the three assets and the three stores at Madison with -- were they expiring this third quarter or they will expire in the fourth quarter?.

The expiration of six -- when is the expiration..

The Westbury..

Oh, the Westbury, when is the Westbury expiration? We are doing a couple of short-term renewals for a couple of the tenants at the Westbury, which will take those expirations out to the early part of next year..

Oh, God, Okay. That helps. And then just last question….

On the Westbury which is a pretty interesting exciting asset when the building, when the tenants move out, we are going to renovate the building, we're going to clean the façade, we get a lighted landscape and we're going to make improvements to it and then go out and remarket the property. .

Got it, okay. And then just last question given sort of potential redevelop of future assets and the moving parts that been, maybe Steve, if you could give us just thoughts around the WeWork model, may be creating a bigger partnership with WeWork at any of the assets.

Would they fit into any of the bigger plans?.

The answer is yes, and yes..

And any -- just, I can term those types of assets or any thoughts on like size-wise or what would you consider assets in terms of good partnership with them?.

I really can't get into any detail. We are - we talked to WeWork. They're friends of ours. We think that they have a very interesting business model and we aspire to do business with them. With respect to talking about specific assets, I think that's inappropriate. .

Okay. Thank you. .

Our next question comes from John Guinee from Stifel. Please go ahead. .

Great. First for Steve, I'm not going to ask you how much it costs to bring Jerry Seinfeld to California because that's such a cool event.

But any thoughts on the mid-terms next week and is New York City still involved in Amazon HQ too, I can't recall?.

With respect to Jerry Seinfeld, we own, what we think is a - it's the best feel in California. We think NAV comes to California One, certainly has thus it seems like that -- is something like that -- hard. We really want to celebrate this great asset by inviting the real estate community and to tour it, paste it, walk around and just feel it.

And so that they can appreciate that if we can - they can appreciate the assets the way we do. So we just thought that Jerry Seinfeld who we know has done some things for 00:53:47 would be a draw. So what we're really doing is, we're incentivizing the real estate community to come see our asset that comes to each area at the same time.

So we think, its valuable dollar spent. And are you coming or not? I don't remember..

We're conflicted with you much as we'd love to.

How about the midterm to have at Amazon HQ2?.

Okay. Well, to my knowledge, I don't know anything about HQ2 more than anybody else but to my knowledge, the activity level between HQ2 and the New York city is not high. With respect to the midterms, I have nothing whatsoever to say..

Okay. And then, David just a big picture Penn Plaza One, Penn Plaza Two, Farley the Long Island Railroad concourse, the 33rd Street Plaza. When should that be completely finished buttoned up all the construction done.

Look - look 100% complete, is that 2023, 2026 what's timeframe just so we can get our arms around?.

Penn One, as we told you is starting now and we've told you that that's a project that's probably around the two-year project. The Long Island Railroad at concourse realistically, we think that is, we're likely that we could share at some time in the next 12 months or 18 months and also is manageable in terms of the duration.

I think the outside date for what you're talking about realistically is the total redevelopment of Penn Two. It's a massive job that as I indicated in my remarks is going to require us to vacate the lower 10 floors of the building. The major tenant, as we've said in the past in that building where lease comes up in the April of 2020.

So realistically that project will commence sometime in the early part of 2020. It will be a project scope of somewhere and 00:56:08 we're really in the process right now of finalizing costs and timing of that project. But realistically, it's a project that will take 24 months to 30 months..

So John I would give you another, another cut on that answer. I think that in 2021, there will be so much activity and so much construction going on in the Penn district that everybody will be begin to, will understand for sure exactly what we're doing and exactly the values we are creating. .

And then when does Hotel Pennsylvania kick-in and how about Manhattan Mall?.

What was the part of the question?.

When does Penn and Manhattan Mall kick-in?.

Manhattan Mall is a parking lot, is a holding action for expansion. So that's going to be the last thing to happen. The Hotel Pennsylvania has been through different cycles of opportunities which have not yet panned out. So that is also inventory.

We expect that the value of with the Hotel Pennsylvania land will increase geometrically as we get moving on what's going on across the street..

Great. Thank you very much..

Thanks, John..

Our next question comes from Daniel Santos from Sandler O'Neill. Please go ahead..

Hey, good morning. It's actually Alex Goldfarb on for Dan. So just two questions for you, the first one is as we look at 2019, last year you guys provided some thoughts on things that we should look for as far as either NOI moving in or out or one-timers.

Is there anything that you can provide as we think about 2019? I don't know if it's maybe recapturing the Kmarts or anything that could be impacting our numbers that we may not see just by looking at the financials based on lease roll or some of that maybe swap or burn off et cetera?.

Alex, as you know, we don't get guidance and so I can't really, it's not appropriate to answer that question.

And Joe, do you have anything to add?.

No, if Alex is asking or there are things like recapturing the portion of the Kmart at 770, we're not prepare to stay if they're are going to be in 2019. Somehow is company always finds one of these hidden jewels, to capitalize on..

Okay. That's helpful. And then the second question is for Steve, in the recent local press in New York, there has been some conversation about commercial rent control and New York City Council has been debating it.

Do you have any views on the potential that this could become enacted in some way shape or form or your view is that enough of the key people in New York understand the ramifications of this and therefore it won't pass the way it hasn't for the 30 years that's been discussed?.

Well, this is not a new idea and as you said it has not - that has not passed muster for decades and decades. But I'm very sympathetic to political leadership being sensitive to empty storefronts and what have you know that's a level that I'm unbelievably sympathetic.

The idea of is it really, really it's not a valid idea; the concept that landlords are to blame for the empty storefronts because the rents are too high. That doesn't hold the water. Now there's lots of different things that are going on in the retail business especially affect the local kinds of tenants that the political leadership are focusing on.

The increase in the minimum wage has had a very, very, very serious effect on profitability. Restaurants can't make it a center.

That's a very huge cost to them, increase in real estate taxes is a huge cost, the decline in their margins the pressure of the of the trend in retailing towards Amazon and that is an enormous number of headwinds affecting these smaller the smaller local businesses.

Now that rent is not one and the reason I say the rent is not one because the landlords aren't totally stupid. Our business is keeping, keeping the income coming in and keeping our spaces full.

So you can be sure that universally across the city at all properties, the rents will go to the clearing price to fill up the space, so that will happen because market dynamics not because of a misguided piece of legislation.

I would remind you that we're on the same side because the most important drivers of the financial health of the city are individual income taxes and property tax, so that's what I think. I think I'm sensitive to the issue.

And I think getting these stores for reoccupied is important for the health of the city, but I think this legislation is misguided..

Okay. Thank you, Steve..

Thanks, Alex..

Our next question comes from Nick Yulico from Scotiabank. Please go ahead. .

Okay. Thank you.

So going back to this $315 million of NOI now expected in retail, how do we square that up with page 12 of the supplemental, which shows you have you know $244 million for the first nine months of this year, which would imply something like $70 million in the fourth quarter, which is down from the $85 million in the third quarter, is there what's kind of driving that down in the fourth quarter or am I missing something?.

Joe I hope is going to answer that, Nick..

Nick, because that requires a little reconciliation on our part. I think I'd prefer to do that offline with you after the meeting..

No problem. Appreciate it. And then just second….

I will tell you we….

Okay. Appreciate it. Just one other question is, how should we think about interest expenses? You are heading into next year.

You have some capitalized interest benefit that probably goes away, I assume as the condos are sold and removed from construction in progress and at the same time you're paying off debt so just trying to get a feel for how, some of the moving parts on interest expense for next year? Thanks..

I would not expect capitalizing shares to go down in 2019 versus 2018. We're still at the tail end of the expenditures for 2020. Other projects are further along. I would remind you that the interest expense you saw in the past coming from the capital lease is 1535 Broadway, which was like $12 million a year.

That will disappear as a result of the acquisition..

Okay. Thank you everyone..

Thank you. We're showing no further questions. I will now turn the call back to Steven Roth for closing comments..

Thank you very much. We're very pleased with this quarter. We look forward to seeing you on the fourth quarter earnings call, which is scheduled for Tuesday, February 12, 2019, and we look forward to seeing many of you at Montgomery, San Francisco next week. Thank you very much. Have a good day..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect..