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Alexander's Inc. (NYSE:ALX)
Q2 2019 Earnings Call
Jul 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Vornado Realty Trust Second Quarter 2019 Earnings Call. My name is Michelle and I will be your operator for today's conference. [Operator Instructions]. And 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 Mrs. Cathy Creswell, Director of Investor Relations. Please go ahead, Cathy.

David R. Greenbaum -- Vice Chairman

Thank you. Welcome to Vornado Realty Trust second quarter earnings call. Yesterday afternoon we issued our second 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 of the statements made during this call may be be 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 may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements.

On the call today from management for our opening comments is Michael Franco, President; in addition, Steven Roth, and our senior team are present and available for questions. I will now turn the call over to Michael Franco.

Michael J.Franco -- President

Thank you, Cathy and good morning everyone. Let me start with a few comments on our second quarter financial results before giving some thoughts on the markets in our portfolio and the important new disclosure we provided on our Penn district redevelopments in our earnings release and supplement. Our FFO [Phonetic] as adjusted on a GAAP basis for the second quarter was $0.91 per share ,$0.07 lower than last year's second quarter. Cash basis FFO was up 0.1%, reflecting the underlying strength of our core business was strong same-store results, which I will review shortly.

Let me explain the GAAP numbers as they contain a little noise. First this year so far, we have sold assets which aggregated almost $3 billion. Notably, the 45.4% stake in our upper Fifth Avenue and Time Square assets, and our stock interest in Lexington Realty Trust and Urban Edge Properties. Even though these sales were applauded by all and they were done at NAV and should have been accretive to our share price. Earnings go down as a result. As an aside, we were surprised and disappointed by the stock market's home reaction. FFO decreased by $10 million or $0.05 per share in the second quarter due to these sales, partially offset by $5 million or $0.02 per share of interest savings from the retirement of the 5%, $400 million unsecured notes. So that accounts for a $0.03 per share net decrease. Next FFO was reduced by almost $0.02 per share from the non-cash impact of one-time equity awards issued to the new leadership group. Net of the savings from the accelerated vesting of restricted stock awards in the first quarter. We also had a couple of retail tenant issues impact our second quarter results. At the end of June Topshop closed all its US stores, including our two locations at 608 [Phonetic] Fifth Avenue and 478 Broadway. Following the topshop US retail operating entity being placed in UK administration in the commencement by the UK administrators of a chapter 15 case in New York. But we were paid rent at the end of June, we wrote off the straight line rent balances associated with this tenant. The increase in the straight line write-offs in this year's second quarter over last year's second quarter amounted to $9.9 million or $0.05 per share. which is included in both same-store NOI and comparable FFO results, primarily attributable to Topshop at Broadway. We treat it as non-comparable, the write-off is 608 5th Avenue of the straight line rent and the right of use asset dislocation. Under the new lease accounting standard, on January 1st of this year, we recorded as an asset, the present value of the rents we pay under this 14-year non-recourse building ground lease. We have the right to cancel this non-recourse ground lease. In terms of the bottom line and impact of Topshop, upon such a cancellation of the ground lease at 608 5th Avenue, we will no longer have the asset and in such events, FFO will be permanently reduced by $10 million per year, which will Nick [Phonetic] our NAV by roughly $1 per share.

At 478 Broadway FFO will be temporarily reduced by $8 million per year from the vacancy. This is great space, which we will release in the ordinary course. We may convert some of the upper floors to office given the attractiveness in this this bull's-eye location at SoHo to creative types. So to summarize, the aggregate of all these items that affected second quarter comparable results was a $0.10 per share decrease. This was partially offset by $0.03 of growth from the core business, which I will cover in a minute. In our July 12th press release, we covered the details of the non-comparable items in the quarter, which includes a $2.559 billion net gain on the retail joint venture, the previously discussed non-cash charge on 608 5th Avenue, which was $77.2 million and an $88.9 million after-tax net gain on unit closings at 220 Central Park, South. Speaking of 220 Central Park South, sales continue apace. To date, we have closed on 38 units for net proceeds of $1.03 billion and earlier this month paid off the remainder of the $950 million loan. The property is now debt free. Closings will continue throughout in 2019 and 2020 and importantly from here, we will retain all future net proceeds which will be redeployed primarily into the Penn district redevelopments turning this capital into highly accretive earnings.

On July 11, just after the close of the second quarter, we sold our interest of 25% interest in 330, Madison Avenue to our partner, at a $900 million valuation, netting us approximately $100 million after our share of the mortgage. This asset was the subject of a buy-sell and the pricing offered we concluded it was a better sale we're [Phonetic] going to buy. Over our 20-year hold period we made eight times our investment and by the way, we have quite a few like this. The taxable gain related to this sale coming on top of the big Retail deal will increase the special dividend requirement at year-end, which as of now, it looks like it will be approximately $1.75 per share. To give you some visibility into comparable FFO for the second half of the year, the aforementioned asset sales after the unsecured note repayment will reduce FFO by approximately $21 million or $0.10 per share and the lost rent from Topshop or reduce FFO by approximately $13 million or $0.06 per share. We expect 2019 will represent a trough year for comparable FFO per share. As we continually say, cash NOI is the most important metric in our business, that's a real estate is traditionally valued. Company wide, our second quarter cash basis, same store NOI increased by a healthy 4.3% broken down as follows. New York office was up 3.3%, street retail was up 4.2%, the market was up 15.5% and 555 California Street was up 12.9%. Let me now turn to the New York market.

New York's deep pool of talent and the fact that they want to live and work here coupled with record venture capital investment has led to enormous technology sector employment growth of 80% into it, since 2009. This has played an important role in attracting large tech tenants to the city and continues to feed their insatiable appetite to grow their footprints in Manhattan. These tenants not only want to be in New York, they need to be in New York. Just think of the names in the last 90 days, who have either committed or are actively looking for space. It's a [Indecipherable], in fact almost all the well managed companies in every other industry are copying this template in their efforts to attract the best talent. As a result, the New York City economy continues to enjoy sustained job growth, driving strong tenant demand for office space, private sector jobs increased 54,000 in the first six months as compared to 76,000 for all of 2018 with six month office sector jobs, increasing 12,000 as compared to 20,000 again for all of 2018. Overall, our office portfolio is in great shape and continues to perform well. Occupancy stands at 96.7% with only 132,000 square feet of remaining expirations in 2019. Our Midtown portfolio, which has been completely modernized and redevelop for the long-term remains very resilient and highly sought after by tenants. In the second quarter, our leasing team completed 221,000 square feet of office leases in 29 separate transactions in New York at a very healthy average starting rent of $83.54 per square foot. Our mark to market rents were positive 3.3% cash and 5.9% GAAP. While the first half leasing activity of 617,000 square feet is on the lighter side for us historically, realistically our portfolio is substantially full, but there is more to the story, we have a robust leasing pipeline with more than 2 million square feet of deals in various stages of negotiation. We are experiencing strong leasing activity across all submarkets from tenants in all industry sectors. We have our first leases out at the recently delivered 512 West 22nd Street, including one with a leading media company all at triple-digit rents. Now turning to the next major driver of growth and value creation in our business, the Penn district. First, and most importantly, yesterday we published on page 8 our earnings release, in page 30 of our supplement the projected costs and returns for the Farley Building Penn One and Penn Two redevelopments. In total, these three projects comprised 5.2 million square feet consisting of an 845,000 square feet new build it Farley, and 4.3 million square feet of renovated and new space at Penn 1 and Penn 2. The redevelopments will be transformative for these buildings and for the district overall.

Please see our latest renderings and videos of these projects on our website. We are projecting to spend 2.2 billion to redevelop these assets, along with other districtwide improvements of which we have spent 514 million to date. We project these redevelopments will generate $183 million of incremental cash NOI upon stabilization, a very strong 8.3% initial stabilized yield on cost. This is before ground lease rent reset on Penn 1 in 2023, which will be comfortably absorbed by that assets increased NOI. Overall, we expect to replace $60 plus per square foot office rents at Penn 1 and Penn 2 with $90 plus per square foot rents and expect to achieve triple-digit rents at Farley. These redevelopments will begin to contribute to earnings in 2022 and accelerate over time as the projects are finished and leased up. As we have mentioned previously, the capital for these projects will be funded from the net proceeds of 220 Central Park South without the need for any new debt, which will be very accretive to earnings.We expect that this will put our earnings growth at the head of the pack. Notably, the projected returns in these projects do not include the knock-on effects on all of our other existing assets in the Penn district and the multiple additional development opportunities we control. All will clearly benefit enormously. As a Penn district transformation takes hold we believe that the Hotel Pennsylvania will be one of the best development sites in the city. Once redeveloped we are confident the Penn district, which is located directly on top of all major transportation serving the city and region will become the heart of the new West side, where companies will plant their flag in order to attract and retain talent by creating new workplace environments in our buildings.

Looking toward 2020. Our lease expiration stand at 1.1 million square feet with 560,000 of this amount coming at Penn 2 primarily [Indecipherable]. which will be taken out of service as this redevelopment kicks into high gear. It is here at PENN1 and PENN2, we are creating a unique campus and we'll be providing today's workforce with the Officer tomorrow. The scale of our 4.3 million square foot campus at these buildings enables us to provide our tenants with an unrivaled amenity package. These buildings will operate and feel much like a full-service hotel with fitness and wellness centers, abundant conferencing facilities, large town hall spaces, food and beverage facilities as well as many Cumulus space is to work side to work alongside colleagues.

Anticipating our redevelopment program. During the second quarter, we signed a 38,000-square-foot lease at PENN1 with a Fortune 200 company at a starting rent of $93 dollars per square foot, a sign of things to come. This is a first generation lease and this lease would have been included in our mark-to-markets, the mark-to-market for New York office would have been approximately 20% on a cash basis. In addition, both at Farley and PENN2, we are deep negotiations with multiple large users for anchor spaces. All in the triple digits. All of this validates the unique nature of what we are delivering here in our underwritten pricing for space in the new Penn district. In addition to the capital we are spending on the Penn district, the government is also investing an estimated $3 billion on various infrastructure improvements, including the Moynihan Train Hall, the West and Concourse, 34th Street subway station improvements and the new 33rd Street train station entrants. In addition, we have entered into a Memorandum of Understanding with New York State to redevelop the Long Island Railroad Concourse under PENN1. This redevelopment will tie together 7th and 8th Avenues underground dramatically wide in the corridor and raise the ceiling [Indecipherable], allow natural light into the Concourse and substantially improve the user experience.

Overall, we couldn't be more excited about what we're doing here. At the Martin, Chicago occupancy was 94.8% at quarter end. We have strong leasing activity with term sheets in negotiation for much of the 125,000 square feet of vacant space on floors four and five. In addition to discussions with two large tenants, regarding early renewals fueled by their expansion needs. During the quarter, we completed 30,000 square feet, a showroom leases and on average starting and of $63.83 per square foot, our mark-to-market rents were positive 6% cash in 14.9% GAAP. At our 555 California Street complex in San Francisco we are 100% leased. During the quarter, we completed a 30,000 square foot renewal with one of our blue-chip financial services tenants at an initial starting rent of $86 per square foot. Our mark-to-market rents were positive 12.8% in cash and 32.2% GAAP. As an aside, we believe rents at 555 California are under market by say 25%, which will result in continued strong growth over the next few years as leases roll.

Finally, turning now to our New York Street Retail business. Overall, the retail market continues to be challenging with leasing velocity slow and assets prone to negative surprises, highlight [Phonetic] Topshop. I will also point out, Forever [Phonetic] 21 is higher restructuring advisors and is working with the mall owners to provide rent relief to help stabilize the company. They are a continuing tenant of ours at 1540 [Phonetic] Broadway and 435 7th Avenue. Their lease at 4 Union Square expires this November and we chose not to renew them. We have released a portion to Whole Foods, for an expansion of the store and are actively negotiating to release the balance of their space at higher rents. 435 7th Avenue is a new five-year lease where they recently opened. At 1540 Broadway we will likely participate with the mall owners for rent relief and some small measure. Retail occupancy was 94.7% a quarter end, down from 97.1% last quarter all due to Topshop in the 4 Seasons restaurant. In the second quarter, we leased a total of 70,000 square feet of retail space achieving mark to markets of 18.7% cash and 44.4% GAAP, the highlight was a significant 20 year 61,000 square foot renewal and expansion with Whole Foods at 4 Union Square sales, the premier asset in that sub-market. They are enlarging and remodeling this high volume stores.

To conclude, we continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity day [Phonetic] and growing over the next few years. Our current liquidity is $3.77 billion, comprised of $1.1 billion in cash, restricted cash and securities and $2.6 billion undrawn on our revolving credit facilities. With that, I'll turn it over the operator for Q and A.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first caller in the queue is from Manny Korchman with Citi. Please proceed with your question.

Emmanuel Korchman -- Citi -- Analyst

Hey, good morning everyone. Michael, I think you mentioned that 2019 would be a trough year for FFO, just given the bigger move-outs like McGraw-Hill and some of the retail vacancies are going to come into the year. Can you walk us through why 2020 wouldn't get [Phonetic] versus '19?

Michael J.Franco -- President

Joe, Manny, it's Joe. Our forecast shows a substantial recruitment of this year's diminution, next year. So when you did that pencil to paper and took Michael's one-time or is that affect the rest of this year,[Technical issues] comparable FFO, 140 somewhere, I'm sorry, 340 somewhere around there, our projections on next year notwithstanding that a bigger piece of 2 Penn will be out of service is greater than that, don't forget, we have two of the other West side assets coming back into service. We have growth in the core business. We have steps, we have many pluses offsetting those minus.

Emmanuel Korchman -- Citi -- Analyst

Thanks, Joe. And then on Farley, it looks like the costs, sort of on a pro forma basis ticked up versus where you had them the last when you talked about costs, can you just tell us what's going into that project that's maybe taking a little bit more money to get done?

Michael J.Franco -- President

So, Manny. But we've probably gotten a little better given the road map here, but I think the short answer is that the cost that we published now include the initial land contribution of 230 plus the amount we paid related which was I think $41.5 million. So when you take the previous costs, which when you grossed up it was $800 million plus the 230 plus related etc, you essentially get back to the number we published now, there are some minor scope changes, but net-net, you're pretty close with all those additions.

Emmanuel Korchman -- Citi -- Analyst

Thanks, Michael.

Operator

Thank you. The next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. I guess I wanted to first touch on kind of the ground lease at One Penn, I know you probably can't get into a lot of detail, but could you whatever you can sort of tell us about maybe what you're paying today and maybe how we think about the fair market value, reset, and then other -- any other ground leases in the next say 10 or 15 years and have any kind of renewals or resets that we should be aware of?

Michael J.Franco -- President

The current rent at 1 Penn is $2.5 million, the reset is in 23, the term of that lease goes all the way out and [Indecipherable] to 2098. So it is a truly a long-term control over the land, it's a fairly standard fair market value. Reset and we don't really have very much else to say about the where we will end up. One thing is that if you look at one Penn as an asset, the income is it around that the better part of $100 million today. We projected that income is going to go up by another $40, $50 million [Phonetic] as a result of the redevelopment that they bought an improvement. So somewhere around the reset date the income will be on that building somewhere around $140 million, $150 million, maybe a pinch less may be a pinch more so that that asset can easily and comfortably withstand an increase in the land bank. We have three other ground leases that I can recall, we have one at 330 West 34th Street View, which has a reset coming up in 2022 [Phonetic] in 2020, which will be -- it's a small assets so whatever the rent reset might be is going to be immaterial. We have another one at 888 7th Avenue, which comes out up it for reset at the end of the decade of 20 toward late in the 2020 and we have a third ground lease at 909 Third Avenue, which has an expiry of when David --

David R. Greenbaum -- Vice Chairman

2063.

Michael J.Franco -- President

2063 and what is flat from now there are no resets whatever and the rent is an extraordinarily low as favorable numbers. One comment about the ground lease reset process. There are plenty of these kicking around, the recent resets over the last year or two, have been in my mind pretty stupid. I mean you just take the body's reset and take a look at that has basically the numbers have no reality and basically will bankrupt Mr. [Indecipherable]. So we believe is that there will be more reality in the reset process coming -- going forward. The issue is that really cores -- the issue, the problem is that retail rents went crazy and therefore land for retail became extremely inflated, hyper inflated a bubble and similarly the condo market went crazy, and that was a bubble. Those -- we expect those two bubbles are coming out of the market, so we -- so the answer is that we believe that the resets will be more realistic, whatever they happen to be, we can handle economically easily and I think that's pretty fulsome explanation, Steve.

Steve Sakwa -- Evercore ISI -- Analyst

Okay, thank you. And then I guess the second question, just to kind of circle back on kind of McGraw-Hill and some of the move-outs. As we think about 2 Penn going into kind of redevelopment you're showing about 1.3 million square feet in service of the kind of 1.6 outside of the McGraw Hill space coming offline, is there really any other space in that building that needs to come offline for you to effectuate this redevelopment?

Michael J.Franco -- President

So you have an answer for that one.

So Steve. You're right, we're not getting too specific. We did disclose, almost 300,000 square feet out of service today. We project that we'll go up to about 0.5 million feet and at the end of this year, we will go up in 2020 as more of a building is taken out of service, approximately two-thirds of the building will be taken out of service at peak and then of course, start to come back in as the also built as the top two floors rented et cetera, etc.

So, but look, Steve, I know you can't do this because I know modeling is the essence of of what you do, but I would ask you to look at the real estate business that we're in, from a different point of view. Okay? We will be taking this building and we will be transforming the building from $60 rents to $90 and $100 rents. Okay? We will be taking a building, which has as long of two and bringing into the modern age and making it be one of the most competitive buildings in terms of a work environment for our tenants. Okay? We believe that this will be extremely profitable activity, I'm not even getting into how it will help to transform the entire neighborhood. It's an enormous undertaking the building has let's feet of frontage on debut from 31st to 33rd Street, all of which will look totally different but we complete it.You've seen in the pictures. I'm sure you've seen the pictures. So this will be in the interim while we do our work. It will have a slight dilution but the objective is to convert $60 space to $90 space, which will be extremely accretive to earnings and NAV, when we complete this in just a few years. So I know that you have to be -- you have to be extremely interested in model what happens month-by-month and quarter-by-quarter. Our perspective is on the end game as to what the product would look like. When we're done and how it will increase our earnings of our NAV. Furthermore, the market has been -- the market tenants and brokerage community have been extensively exposed to the product and they love it, and the example of which is that we are going to leave that with the first very large anchor tenant at a triple-digit number. So the building will be a success. It is a success. And just while you have to model, take a look at the long view. Okay, thank you.

Operator

Okay. The next question in the queue comes from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Jamie Feldman -- Bank of America Merrill Lynch -- Analsyt

Great, thank you and good morning. I was just hoping to dig a little deeper into your yield assumptions. Can you just talk about kind of what gives you comfort on those rents and what the leasing pipeline looks like in detail for these projects?

Michael J.Franco -- President

We have -- Michael did a great job. Michael, Thank you. I thank you for multiple reasons. Okay. You did a great job. And second of all, I think so, Michael said in his remarks, that we have executed a lease with a Fortune 200 companies, or a large important company at PENN2 at $93 [Phonetic] and PENN1 for $93 a foot. Now, obviously that's a significant GAAP from the market value of the perceived market value of the building today. The reason for that is that in this tenant and the community believe in what we're doing and is willing to pay the fair price that we believe in the market price for the building that with as we lease it up now, and as we complete our redevelopment is well into the night. So. Okay. Think about where it is. Okay. We are in the west side of New York, which is the hottest area in New York and with directly on top of of the transportation network. So we have that as a -- for a skeptic. We have that as a The validation intend [Phonetic] to, we have as validation that we are going to lease with an anchor tenant at a triple-digit number. With respect to Farley, we are in the market. I think one of the analyst wrote in a report that I read overnight that his, well, we haven't announced that a leasing at Farley is brokered checks indicate that there is intense activity on the building. That is correct. The activity is at triple digits and that's all, I think that's all we have to say about these important negotiations going on at Farley. So we have our view, we have the markets view, we have lead tenants executing leases at our underwritten numbers, by the way, there is nothing that that we won't exceed our underwriting.

Jamie Feldman -- Bank of America Merrill Lynch -- Analsyt

Okay, thank you. Can you talk about operating expenses in those buildings and whether it will change post renovation?

Michael J.Franco -- President

Somebody is going to have to do better than that.

Unidentified Participant

I mean I think Jamie, our general view is that, not meaningfully right there, we're obviously expanding and dramatically enhancing the plazas etc, so if Penn 1, play a little bit additional increase from an OpEx standpoint, obviously taxes go up proportion with rents, but from an OpEx standpoint, I think the answer is not meaningfully other than maybe a little bit on Penn 1.

Michael J.Franco -- President

Let me let me handle the question slightly differently. The increase in face rent that we are underwriting, almost all of it will drop to the bottom. The -- what will not drop is a marginal increase in taxes and the maintenance expense of the building, will remain basically the same, the building is the building, the cleaning is the cleaning, the common areas of the common areas. So we believe that almost all of, call it 90% or whatever, of the increase in face rent will go to -- will drop the FFO. By the way, that's an important comment, I'd say drop the FFO because there will be no interest against any of this incremental increase in income because we are funding it with cash coming in from 220 and other places all our balance sheet with no new debt, which we think is an extraordinary thing.

Jamie Feldman -- Bank of America Merrill Lynch -- Analsyt

Okay, thank you. Do I get another that kind of as my second?

Unidentified Speaker

What's that?

Unidentified Participant

Do I get another question or that kind of as my second?

Unidentified Speaker

Yes, sir.

Jamie Feldman -- Bank of America Merrill Lynch -- Analsyt

So can anyone just talk about, I mean with Topshop bankruptcy, just some thoughts on credit risk in the retail portfolio going forward.

Michael J.Franco -- President

Well. The first thing is that somebody asked the question about whether who is on our watch list. And the answer is, everybody is on our watch list. So that's the way we run the business. The second thing is by and large, almost all of the retailers that we do business with our large and important credit, the company. The issue is not their credit worthiness, Topshop was obviously an issue and forever with 21 by the way, is a little shaky, but the issue really is that what happens when the leases expire. So the answer is that we have -- we have a few weeks, said it's of course as everybody does, but by and large the credit of the portfolio is pretty cool.

Jamie Feldman -- Bank of America Merrill Lynch -- Analsyt

Okay. Right, thank you.

Operator

Thank you. The next question in the queue comes from John Kim with BMO. Please proceed.

John Kim -- BMO Capital Markets -- Analyst

Thank you. On the incremental cash yield of 8.3% at 10, can you clarify what -- how you calculate that number? Is it new rent over incremental cost or is it the incremental rent over there? Incremental cost.

Michael J.Franco -- President

It's basically the Farley is a new build. Right. So that's NOI over the budget and then for the balance, it's the incremental NOI over the -- the cost to be spent.

John Kim -- BMO Capital Markets -- Analyst

Okay. So the numerator would be the $30 difference in rands between 16 90?

Michael J.Franco -- President

That's right.

John Kim -- BMO Capital Markets -- Analyst

Okay.

Michael J.Franco -- President

It's great.

Essentially Steve said, it's the incremental rents multi the square footage, obviously we're adding some square footage at PENN2 with the addition to the bustle and then converting some of the top two floors from mechanical to office. But accepting that it's the incremental rent with these slight leakage for taxes and OpEx.

John Kim -- BMO Capital Markets -- Analyst

Okay, great. Thank you. And can you also describe what is in the $100 million of districtwide improvements, are those investments in your assets or is that infrastructure costs?

Michael J.Franco -- President

Basically -- principally common area in between the buildings, the putting plazas and plants in the common areas and not inside the building so it's principally exterior work. It includes safety ballads. It includes some other miscellaneous improvements interconnecting.

John Kim -- BMO Capital Markets -- Analyst

Has that increased more than you expected within budget?

Michael J.Franco -- President

This is the first time that we have was there anything about this. And it was, we thought it was appropriate to list it in the budgeting that we released, but we can't [Phonetic][/Phonetic] allocate it and we didn't allocated to any specific building, we didn't allocate a return on it either. So we just put it together as as part of the neighborhood.

And of course, John, it's Joe, we gave you the yield on the total course inclusive of that.

John Kim -- BMO Capital Markets -- Analyst

Very helpful, thank you.

Unidentified Speaker

Yes, sir.

Operator

Thank you. The next question in the queue comes from Vikram Malhotra with Morgan Stanley, your line is open. Please proceed.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. So just around street retail, you had cash NOI of about 66 million this quarter, and if I just, for the full quarterly impact of the JV, it's probably in closer to the -- closer to 60, maybe low 60. Given sort of all the move-outs you mentioned and the potential moving pieces including Forever 21, how should we think about a run rate heading into 2020? I know you've given some, that you had given disclosure earlier but just now post the JV in the numbers, how should we think about the run rate even if there is a range you can provide that will be helpful going into '20 [Phonetic][/Phonetic].

David R. Greenbaum -- Vice Chairman

Vikram, give me the question again. Please.

Vikram Malhotra -- Morgan Stanley -- Analyst

Your street retail cash NOI was 66 million this quarter, but if I adjust for the full quarter because the JV occurred in April, mid-April, so if I adjust for that, I think your cash NOI should be closer to the low 60 range. But if we look forward, you talked about Topshop Forever 21 potentially, just looking at --

Michael J.Franco -- President

So -- I got it. I got it. Thank you, sir. So let me give you some numbers, which may, which I think is a direct, a very direct answer to your question. Last year we gave guidance on the retail income. We started out with $304 million number. We then raised it to $309 million as a result of some space at 770 Broadway coming out of the K-Mart store and other retail lease that was converted from the Retail segment to the office segment. So we then got up to $309 million. In this year, we, is it the other way around?

Unidentified Speaker

Yes, it is the other way around.

Michael J.Franco -- President

Oh, Gosh. So we started out with 309, we reduced it to 304 because we took space out of the Retail segment into the office segment. We then raised to 315 on performance during the year and we ended up the year at $324 million on performance. So that's the starting point. Okay? The Retail JV which we believe was a monumental deal -- monumental no deal a superb execution and very important. Okay. We will reduce the running rate NOI of the Retail segment by $84 million. Okay, and that basically is simplistically taking the income that was included in that -- in that venture and saying, we lose 45% of it. Now that's not an economically good number because that is offset by the proceeds of the cash that we got and the huge preferred dividend that we're getting, etc. So, but that is just -- if you just look at the Retail segment, that's a number. But Topshop, so that's $84 million deduct, but Topshop -- the two floors in Topshop that lift will [Indecipherable] the income stream by running -- an annual running rate of $17 million. So if you take those 324, which was the actual less $84 million, which is the loss of the 45% of the JV Retail plus 17 billion for the two tops shops you get to a $223 million number. Okay. I'm not comfortable with that number but I am comfortable with something in the low 200s. So that's where we think that that will go now understand this is only the Retail segment. It doesn't -- it doesn't account for several ins and outs on the financial side of our balance sheet, etc. So that the economic number is actually much higher. But that's the way -- that's where we see it.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay.

Unidentified Speaker

[Speech Overlap] I should think, you look at Chairman's letter as it was amended he talked about 109 million, he is 84 is the retail pieces.

Vikram Malhotra -- Morgan Stanley -- Analyst

Yep, the Retail. Got it. And then the 223 that may be adjusted. I mean, I am assuming there is no assumption there of a potential lease up of the Massimo space or any other like the Madison Avenue assets. This 223 just is the math that you gave, there is no other assumption behind those two.

Unidentified Speaker

[Phonetic]Vikram [/Phonetich] when I went to 223, I said I'm not comfortable with that number yet, but I'm comfortable in the loan book 200's.

Vikram Malhotra -- Morgan Stanley -- Analyst

[Indecipherable] OK, got it.

Michael J.Franco -- President

That's in my mind for move-ins, move-out at other things that may happen, which will affected but not in other than a significant amount.

Vikram Malhotra -- Morgan Stanley -- Analyst

Got it, OK. And then just a bigger picture question. Okay, just a bigger picture question. You sort of mentioned or I think, maybe Michael mentioned we're disappointed with sort of home sort of reaction to the Retail JV, which was indeed very good execution. I'm just sort of thinking bigger picture either similar, are you thinking about similar structures on the office side or tactically strategically anything else just to kind of start to close this NAV gap [Phonetic][/Phonetic]. I know you have a lot operationally going on, but just more strategically, anything else you can sort of offer in terms of thoughts around closing the NAV gap.

David R. Greenbaum -- Vice Chairman

Obviously we were extremely disappointed with the reaction to the Retail deal, which we thought was a spectacular deal and a spectacular execution, in a challenging market and obviously we continue to work away at all -- many different alternatives to create value. Nothing that we are prepared to discuss today or hint that or get into.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay and no changes on the buyback in your -- from your perspective on A buyback?

David R. Greenbaum -- Vice Chairman

Since you mentioned it, let's spend a second on buyback. So I wrote extensively about it in my shareholders letter 18 months ago. And there is a paragraph in there on page 23 of that letter that if you have a mind go back and reread it, but basically what it says is that buybacks are a -- are very useful if you have, if they are funded out of a recurring stream of earnings, so that you can continuously do it. And there is lots of Fortune 500 companies that are in continuous buyback mode, but they are doing it out of retained earnings, recurring to retained earnings. We don't have that, and so we have to do it out of basically off our balance sheet by selling assets or whatever. So and I think I said in my letter that if we did a $1 billion buyback, it would increase our NAV by maybe for the remaining shareholders by maybe a $1.5 or some such number and then our management and our Board would rather have the $1 billion spend than the $1.5 NAV increase, when we're already selling at some huge number below NAV. But now there is a better way to look at it. Okay? So what I've said if we use, if we took cash of our balance sheet or we sold an asset or whatever it is and we bought back our shares, my message is that if for every $1[Phonetic] billion that we would do it we would increase NAV each of the remaining shareholders by $1.5 and here but we're not doing that. We may do it, but we're not doing that, what we are doing is we're going to spend $1 billion that is 18.3% return on our own assets and that's and that doesn't take the not kind of effect of the value we will create on the building sites, around the buildings that we are redeveloping in Penn1. And now if you that math, if you can invest $1 billion at 8%, that generates $80 million of income at a 4.5% cap rate, that's $1.7 [Phonetic][/Phonetic] billion of value creation. That $1.7 [Phonetic][/Phonetich] billion divided by 200 odd million shares is rounded $9 a share. So would you rather invest $1 billion in buying back your stock, we are by the way the $1 billion goes away, you lose the liquidity and you would appreciate NAV by $1.5 or would you rather invest it in the buildings where you will be creating $9 [Phonetic][/Phonetic] a share for the remaining shareholders at NAV. I don't think that's a difficult question. Now what's more, when we get done with this we will have Farley with no debt whatsoever. We will have one Penn with no debt whatsoever. And 2 Penn with debt of about $500 million, which is debt that is on there now and we're not going to increase. So with those three buildings alone, there are multiple billions of dollars of additional liquidity available to the company for whatever corporate purposes, we have. So we think we're on the right track here. We're not in --

Vikram Malhotra -- Morgan Stanley -- Analyst

Fair enough. That's fair enough.

David R. Greenbaum -- Vice Chairman

I'm not done yet.

Vikram Malhotra -- Morgan Stanley -- Analyst

Sorry.

Unidentified Speaker

We're not inflexible [Phonetic][/Phonetic], and we think we try to learn. One of our pals is doing a buyback. Okay? Very committed to it. Okay? It hasn't worked yet, but if it -- if as and when it does work we will learn from that. Okay. But as of right now, we would rather invest a couple of billion dollars on our own assets and create 150 odd million dollars of new earnings rather than buying back our stock, that's where we are.

Vikram Malhotra -- Morgan Stanley -- Analyst

Great, thank you very much.

Operator

Thank you. The next question in the queue comes from John Guinee with Stifel. Please proceed.

John Guinee -- Stifel -- Analyst

Well, thank you for all the information on Penn Station, Penn district campus time convinced is going to be a spectacular product. Steve, why would anybody want to be in Hudson Yards Manhattan West if they can be a Penn Station?

Steve Sakwa -- Evercore ISI -- Analyst

Welcome to the team, John.

David R. Greenbaum -- Vice Chairman

Hey, John, John, that's not a serious question. But the answer to that is, first of all look, my pal Steven has did a great job and Jeff and the boys, they did a great job at Hudson Yards. I mean all our friends that are developing in our neighborhood, we were all friends, it all plays off each other, it all makes the entire district of the west side of Manhattan, better. Okay? So I'm not sure that we would be able to, no, I am sure. I am sure that we would not be able to create the value that we are going to create our Penn Plaza assets, have not Hudson Yards preceded us, so that's step one. By the way John since I got you. That's a the road I think on June 12, normally, I'm not about what you're right. Okay. But this one, I'm going to read out loud, because I learnt. Okay. We said on June 12, expect Phase 1 of Penn Plaza to be extremely well done sparing no expense to greater transformative environment and Mark on the west side. We expect the finished product to be completely different than the current landscape, the cost and return on cost. The call is that return on or as of now are known, but now you know by the way. So anyway. Thank you for that. We appreciate your support.

Steve Sakwa -- Evercore ISI -- Analyst

Thank you. Can I ask one more question.

David R. Greenbaum -- Vice Chairman

No. I want to start. Well, go ahead.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. So Farley, $1220 a square foot if you take out the land and the payment to related about 900 a foot. Manhattan what I understand, [Indecipherable] the land new build about $1200 a foot to $1300 a foot,but your budget for PENN2 is 416 of foot and it seems to me kind of difficult to demo down to the frame beef up the steel, all New Skin couple of 100,000 square feet of new space, elevators MEP, TI, leasing commission, soft costs for 416 and it seems like a really low number, is that fair?

David R. Greenbaum -- Vice Chairman

No, it's not a low number. It's is an accurate number. So let me give you value, which you -- I think looking for something here. We expect to -- So the $750 million that remember that doesn't include carry because we're basically funding it with cash. Okay. So our budget around numbers is that we are going to be creating by 90,000 square feet all of one 100,000 square feet of new space. In the bustle and at the top of the building where we converting mechanical space into highly leasable at triple-digit rent space, and that is around round numbers is a couple of $100 million. Okay. We are going to skin the building. When I thinking it sounds of the frame, we got it take portions of the framework of and reimage it, we're going to [Indecipherable] the building and put a new beautiful glass front on it and that in round numbers is $200 million in our budget. That budget also includes the heating and [Indecipherable] at the graph at the Of the building. Okay? So there is $200 million to create new space, which is income producing and return space and there is a good return on that. $200 million to do the basics curtain wall project. And then the balance of $350 million is for lobbies, elevators, new bathrooms, new corridors, et cetera and the new amenity space. So we -- even yelling at me for quarter -- if the quarter for not having cost in the -- not having made our cost projections and our budget public and the reason for that is that it's a big project. We've been working on them. We're trying to get some accurate, and this is our best guess as to what the numbers are. Okay? By the way, a significant portion of this job is already in construction drawings and already bought, OK. And when you drive by, you'll see that the first mark up of what this enormous bustle which projects 45 feet off the Plaza and 75 feet of the ground which includes the better part of a couple of 100,000s [Phonetic][/Phonetic] square feet of new space is already marked up, so we can get -- you can get a feel for it. So this is our budget, we're happy with our budget.

John Guinee -- Stifel -- Analyst

Great. All right, thank you and good luck. Great job.

David R. Greenbaum -- Vice Chairman

Thanks, John. One last thing. To be totally clear the budget includes TI and leasing commissions for new bustle created space. Okay. It does not include TI and leasing commissions in the normal course where rerent all of the other space in the building, which we think is an appropriate way to do the cost accounting.

John Guinee -- Stifel -- Analyst

Great. Okay, thank you.

David R. Greenbaum -- Vice Chairman

Thanks. I love what you wrote on June 12, John. Thanks.

Operator

And the next question comes from Nick Yulico with Scotiabank. Please proceed with your question.

Nick Yulico -- Scotiabank -- Analyst

Well. Thanks. Just wanted to go back to Farley we have heard it is good interest in the buildings high floors and even if you look at your website right now the fifth floor is not showing as being available and earlier this month, the fourth floor wasn't shown is being available, though it is now. I mean is it fair to say that these two floors are spoken for?

David R. Greenbaum -- Vice Chairman

We have nothing more to say about Farley other than what we've already said. Okay? We have activity, it does us no good to speculate on what these important negotiations that are ongoing now. It does us no good to speculate on that in this venue.

Nick Yulico -- Scotiabank -- Analyst

Okay. And then going back to 110 [Phonetic][/Phonetic]. I think you gave the annual rent on the ground lease being $2.5 million Can you give us a formula about how that works? Is it a percentage of the value of the land on a fair market value reset. I mean, for some other companies, we've seen it or buildings that could be 45% of land value. What's the formula calculation here?

David R. Greenbaum -- Vice Chairman

I think we've disclosed what we are prepared to disclose at the present time, the current rent is $2.5 million. It's a normal fair market value reset. It happens in 2023.

Nick Yulico -- Scotiabank -- Analyst

Yeah. I guess if I mean the reason I ask is, if you -- I mean if you do assume it's 4.5% of land value then it looks like the land values about less than $50 a foot, which seems pretty low and would require -- you could be facing a -- as you've mentioned in your supplemental material reset on the ground lease. So I think it'll be pretty helpful. I understand how that could work? So we can think about the ultimate yields on the project.

David R. Greenbaum -- Vice Chairman

The answer is it will be material. And, but we're not prepared to speculate. This is a reset, which is subject the arbitration four years from now. It's impossible to predict what the land values will be four years from now. I have already said in my comments of 10 to 50 minutes ago, we strongly believe that the land value is coming in and coming our way. And I really don't want to say anything more about.

Nick Yulico -- Scotiabank -- Analyst

Thanks.

David R. Greenbaum -- Vice Chairman

I will say one last thing, in the last comments I made about that I said that the income of this building is going to go up to the sunny side of $150 million a year. Whatever the land resets to, will be a material number but it will not be significant in the scheme of the huge income coming in from this this great Building.

Operator

The next question in the queue comes from Alexander Goldfarb with Sandler O'Neill. Your line is open. Please proceed.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Good morning, over there. Two questions. First, Steve, sort of a two-part on Penn, you talked about $100 million of -- I'll just say sort of catchall development specific curious one. I don't know who the landowner is I don't know if it's the MTA but I'm assuming that that 100 million captures whatever public mandated improvements whether it's subway or train or whatever. I'm assuming that that 100 million includes that in that budget and then two, I still, maybe I missed it earlier, but I don't think that you guys have quantified the NOI, that's going to come offline when you -- when you start work on PENN1 and PENN2, just as we think about our 2020 earnings.

David R. Greenbaum -- Vice Chairman

The first is $100 million of The improvement really is improvements, it does include improving the street that we have closed in between the two [Phonetic]buildings [/Phonetic] but the rest of it basically is capital that we're spending on behalf of our buildings. Okay? There is another project in the works which will enhance our situation in the underground in Penn station which is not yet ready for disclosure and that will probably come out next quarter or the quarter after. It's not a big deal, but it's, incrementally better and better and better. With respect to what comes offline, that comes online, etc, is the timing of it, quarter by quarter, we do not give guidance and we have not basically said other than some brief remarks that Joe made about what is that going to happen in terms of the details of that. I did make what I consider to be an important comment half an hour ago that says I know that you have model. I know it's important. But the big picture here is that, over a short period of development time, we're going to transform the neighborhood. We are going to add all the surrounding land that we have and assets that we own. And we are going to take a $60 building and take it into the '90s. That's the big picture. Okay? We have not given guidance about quarter-by-quarter results. Okay, quarter by quarter in service, added service, etc

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. And then the second question is on the Topshop on 5th Avenue. You guys wrote off the value of your improvements for that ground lease position, just based on sort of the market value being equivalent to what the ground rent is which I believe you guys said is $5.5 million. So just sort of curious, just given that that rent seems really low especially given what your neighbors signed [Indecipherable] with across the street. Just sort of curious, more about how you made the determination that the ground rent effectively represents market value. I don't know maybe it's accounting, all the fit-out, that you'd have to do or maybe it's the length of time left on that ground lease that drives it just more than the actual -- what the actual street retail rents would be there.

David R. Greenbaum -- Vice Chairman

Yeah. It's all the above. First of all, we have not said that we are abandoning the ground lease, that may come -- its option that we have in the future. That's one. The accounting is that there is a liability of an asset for this right to use, is that the terminal, right, of use and so, we wrote off the asset, right of use, we retain the liability, if as and when we cancel the non-recourse reach, that will be, that liability will be taken at the income and extinguished. So that's the accounting

Steven Roth -- Chairman and Chief Executive Officer

in terms of the business side of it, the way we do the math, if you take the ground rent payments and the -- and the expenses of operating the building and you take the expected income that comes from the small office portion and what we might get from the market vis-a-vis a retail at it the building is push to slightly underwater. If you then take the fact that there is a 14-year-ground lease, as you would have to amortize the tenant improvement, it becomes of the water more and if you take the fact that the ground lease goes up by its terms, I know that $2 million or $3 million a year. Shortly, then the so that -- on a whole, when you get done with the math, there is EBIT negative economics or no economics and the likelihood is -- this is not something that we want to spend our energy and time on.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. Now you with the 14 years left you answer the question. Thank you, Steve.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. Thanks, Alex.

Operator

The next question in the queue comes from [Phonetic]Daniel Ismail [/Phonetic] with Green Street Advisors. Your line is open. Please proceed.

Daniel Ismail -- Green Street Adviisors -- Analyst

Thanks and good morning. Just two quick ones on Penn Plaza. I appreciate all the new disclosure, but can you give an update on the refresher on the air rights that you own in Penn Plaza and the usability and perhaps ability to monetize those air rights in the future?

Steven Roth -- Chairman and Chief Executive Officer

No, there is plenty of Airbus. We own lots of them. The [Phonetic]air rights [/Phonetic] on top of -- we're guiding that we own a share of their air rights on top of the Landmark Farley building, that we have but we contracted to move those that we -- that we have access to. We don't have legal actively have access to. So there's plenty of air rights. Okay. And then now, where do you foot? And so we have -- we have multiple sites that we have that are in the future. The book the both interesting one of which is obviously the Hotel Pennsylvania, which has a current Euler approval for a 2.8 million square foot.

Unidentified Speaker

2.8 [Indecipherable].

Steven Roth -- Chairman and Chief Executive Officer

Okay. I think I said that for 2.8 million square feet, which would be a teardown in a rebuilding better. I mean we have multiple other sites in the neighborhood. So there is not a shortage of our rights. We own 20 of them. And there are plenty of them available to be purchased and move from different government sources and private owners.

Daniel Ismail -- Green Street Adviisors -- Analyst

And can you remind us how many air rights you directly own currently?

Steven Roth -- Chairman and Chief Executive Officer

I don't think so. I don't have that in my head. So we would have to get that to you. But I don't think it's a material calculation.

Daniel Ismail -- Green Street Adviisors -- Analyst

Okay. And just one on the redevelopment at Penn Plaza with the new Green New York building standards, did that cause any material uplift in total costs and will the new redevelopments be in compliance with the new standards?

Unidentified Speaker

It's not a material increase in cost today. And yes, the new developments will be in compliance with those standards.

Steven Roth -- Chairman and Chief Executive Officer

Well, the answer is, there is not compliance. There is a goal of the emission standard and if you do not meet the goal there are penalties. So actually if there is not a a binary comply or [Indecipherable] comply what there is that the assets will be measured for their emission [Phonetic][/Phonetic] and based upon that results, there will be a penalty tax, if you will. The interesting thing about it and we said this, I think on the last call and that is that we believe that we are already in substantial compliance with the 20-24 requirements. The ones that come at the end of the decade are more [Indecipherable] but if we retain our current position, the tax would be de minimis for non-compliance. Okay? Now there is two things that are going on with respect to the regulation. By the way this is in New York but it's going to go universal across the whole country, probably the world as well. The first is that 80% or 85% of the energy usage in our buildings is under the control of our tenants not under the control of landlords. So therefore, and we've been talking to the government authorities about this. But more needs to be modified, so that it gives incentives to the tenants to comply. And that will happen over time. The second is even more important. To the extent that alternative sources of energy are going to go into the creation of electricity, a transmission of it from where it's created down into New York City at other major cities that will cause the carbon footprint to increase substantially. Okay? So there is all of that kind of stuff that's going on.

Daniel Ismail -- Green Street Adviisors -- Analyst

That's helpful, thanks.

Operator

Okay. The next question in queue comes from Manny Korchman with Citi. Your line is open. Please proceed.

Emmanuel Korchman -- Citi -- Analyst

I mean with many, Michael or Joe, just to think about sources and uses from me just timing perspective. You think about, you've $1 billion today, an other $1 billion coming in from [Phonetic]$220 [/Phonetic] million to 100 million that closed post quarter from 330 Madison and then the eventual 1.8 billion redemption of the preferred, a couple of years out. You've outlined the [Phonetic]1.7 billion [/Phonetic], which is quite helpful to have the costs and the returns that incremental [Phonetic]1.7 billion [/Phonetic] that needs to go out the door, plus another 360 million for the dividend, toward the end of the year. How should we think about the timing of that 2 billion going out and then the draw down of cash in the influx of cash, just as we think about the ins and outs are going on.

Michael J.Franco -- President

Michael, it's Joe. That's a pretty complicated question to do by phone, but at least want to clarify. Once that you said 1 billion on coming from 220, that's two book not one book, two book.

Emmanuel Korchman -- Citi -- Analyst

Net -- of the net of the debt that you're going to repay .$1 billion of net cash.

Michael J.Franco -- President

There is no, that whole $950 million to zero today. And from that point forward we get $2 billion [Indecipherable] to a profit of $1 billion of our costs that we put into the project recoup the sales price. Right number two for you to take is 2 billion. Our NAV shows a properly, but the incremental cash coming to the company is 2 billion against the [Phonetic]1.7 billion [/Phonetic] that you accurately portrayed needs in the three projects in the Penn deposit -- Penn district area. We of course the capital needs, if we were to do the hope to PENN would be much, much larger or any of the other add-ons that we haven't talked about but the question on the air rights helpful.

Emmanuel Korchman -- Citi -- Analyst

I got. I don't know if you are -- we can come back with a little more specificity on timing of the outflows, obviously Farley is well under way. PENN2 will be generally most 20 to 22 and PENN1 over a couple year period beginning next year, but I think you're trying to get it. I think the most important point is the cash will be in the door before that money has to be spent. All right. So 220, I think we've said on today. Joe, I'm wrong 1 billion one of liquidity as of quarter end right, that number will go well north of $2 billion by year-end, Michael. And so we look at the at post the special dividend. That's exactly right. So, net of the specialty and that will still be well north of $2 billion. Right. So that gives you a sense of the amount of Money that's going to flow out of 220 the balance of this year. And so as we look at the ins and outs, right, all the money will be in the door in advance of needing to spend the 1.7 [Phonetic][/Phonetic] billion that's laid out in the supplement and that's what our Avenue retail preferred ever etc. The money will be in the door.

Unidentified Speaker

All right, which gives you even more liquidity as you start thinking about the building A preferred but then also the refinancing that occur in 2020 and I don't know if you want to talk about 11 Penn and [Indecipherable] whether -- as you think about upsizing those mortgages or you thinking about using cash to repay and just reduce leverage further, how should we sort of thinking about the incremental cash that could -- that potentially could come from that or a use of cash.

Steven Roth -- Chairman and Chief Executive Officer

Michael, the answer is, first of all, with respect to [Indecipherable] the sellout published sell out is 3 maybe $3.25 billion. Okay? We sold a $1 billion so far that means that $2 odd billion coming out of that with no debt requirements that all comes into our treasury. Okay, that's step one, step two is our internal budget shows that our kit, that we are able to spend as it comes due -- over the next number of years, the $1.7 billion incremental that's going into Penn 1, Penn 2 and falling and at the same time our cash balances, will -- fund these out of our balance sheet with no new debt and our cash balances will grow. Okay? With respect to our balance sheet, we have been showing pro formas to you all. That shows that our debt ratios are actually -- if you pro forma for what's happening with certainty, our debt ratios are low and going lower and we're very comfortable with that. We have enormous [Speech Overlap] on our balance sheet and we have an enormous -- unfinanced assets as even under-financed assets that we can increase our liquidity form. So for example, being the right strategy we are principally a secured lender. We do that for lots of reasons that I have written about, which has to do with non-recourse debt and safety whatever. And we have, we are actually engaged in an internal conversation about this now, but we have, we rather than encumber a new asset which is currently on the unencumbered and we have $10 billion or $15 billion of those, we would rather increase the debt, on an unlevered asset which is encumbered. So all of that just what consider, but right now We have, we are in a spectacular financial condition and we are very happy with where we stand. And we are delighted to be able to deliver Penn1, Penn2 in Farley overall our balance sheet with no debt.

Emmanuel Korchman -- Citi -- Analyst

Yeah. Last question, Michael, in your prepared remarks, I think you made the comment, it's better to be a seller, then a buyer, is there anything else that's left in the disposition program today, any other clean up and anything else that you're contemplating from that perspective?

Michael J.Franco -- President

And the answer is yes, Michael. We've got, there's still a few cleanup items in the original $1 billion Steve referenced I don't know 18 months ago or what not, small one of which we just put under contract. And it's $70 million we've got two-three others in the works as well. So we're finishing that original $1 billion of non-core assets, team is hard at work on those.

Steven Roth -- Chairman and Chief Executive Officer

It's interesting. First of all, the community has been suggesting that we sell our non-New York City assets out there in the, what I call the suburbs of New York, mainly the Martin Chicago at 555 California Street in San Francisco for years now. The fact of the matter is that those two are two of our best assets with the highest growth trajectory and what we have sold 555 California three, four years ago when it was a big drumbeat to do it, we would have won the value of the asset by [Indecipherable] at least. I think Michael said in his remarks, that that asset is under rented by pick a number, 25%. And so whatever, so those two assets are not on the for sale list today. The other thing is that I think one of the analysts wrote when sell the assets, you dilute journey [Phonetic][/Phonetic] and so if you take our retail sale we sold it at NAV. We sold it a number, which we thought -- and the market I think thought was a very strong execution. But nonetheless, you are selling, the income to the buyer, and you are losing net income, so it's dilutive income. So there is a tension between selling assets when they dilute your income and your analyst, want to take your stock count for that. So it's a complicated thing.

Emmanuel Korchman -- Citi -- Analyst

I appreciate the color and --

Steven Roth -- Chairman and Chief Executive Officer

W will -- take on that, Michael, and that is that it's good to have cash the cash doesn't appreciate. Okay. Assets, appreciate it. So if you have a well-chosen assets that have a great future they can appreciate. So I mean that's just sort of a little bit about that. But you can be sure we look at every asset and every asset and every piece of debt in the company at least once a month.

Emmanuel Korchman -- Citi -- Analyst

Yeah. Then it was helpful to get your thoughts regarding using cash on the buyback versus investing it in new as well as redevelop assets and harvesting that value. It definitely sounds as though there's additional cash coming in and we'll continue to look for ways that the balance sheet in that cash can be used to drive value for existing and new shareholders.

Steven Roth -- Chairman and Chief Executive Officer

Yeah. And we can look at the investing the money and creating $9 of value versus $1,5 or 10 billion, it's a no-brainer. Right. The point that you're making is that's not our own cash. We've got more assets -- we've got more financial flexibility. We couldn't be more well aware of that. Thank you for blending it out.

Emmanuel Korchman -- Citi -- Analyst

[Indecipherable], Have a great rest of the summer.

Steven Roth -- Chairman and Chief Executive Officer

Thanks. You, too.

Operator

And gentlemen, there are no further questions at this time.

Unidentified Speaker

Great. Thank you everybody for listening, participating on our call today. We look forward to your participation in our third quarter earnings call, which will be on Tuesday, October 29th. Enjoy the rest of the summer as well. Thank you.

Operator

[Operator Closing Remarks].

Duration: 78 minutes

Call participants:

David R. Greenbaum -- Vice Chairman

Michael J.Franco -- President

Unidentified Speaker

Steven Roth -- Chairman and Chief Executive Officer

Emmanuel Korchman -- Citi -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analsyt

Unidentified Participant

John Kim -- BMO Capital Markets -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

John Guinee -- Stifel -- Analyst

Nick Yulico -- Scotiabank -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Daniel Ismail -- Green Street Adviisors -- Analyst

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