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Vornado Realty Trust (VNO 1.01%)
Q2Â 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 Ms. Cathy Creswell, Director of Investor Relations. Please go ahead, Cathy.
Catherine Creswell -- Director, Investor Relations
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 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 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 Franco -- Executive Vice President and Chief Investment Officer
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 and our portfolio and the important new disclosure, we provided on our Penn District redevelopments in our earnings release and supplement. While FFO 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 2.1%, 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 5th Avenue and Times 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 ho-hum 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 2 locations at 608 5th 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 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 treated as non-comparable the write-off is 608 5th Avenue of the straight-line rent and the right of use asset in this location. Under the new lease accounting standard, on January 1 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 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 event, FFO will be permanently reduced by $10 million per year, which will nicker 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 at this bull's-eye location and 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 12 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 20 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 2019 and 2020 and importantly from here we will retain all future net proceeds which will redeployed primarily under 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 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 than a buy. Over our 20-year hold period, we made 8 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 looks like it will be approximately $1.75 per share. To give you some visibility into the comparable FFO for the second half of the year, the aforementioned asset sales after the unsecured no repayment will reduce FFO by approximately $21 million or $0.10 per share and the lost rents from Topshop will reduce FFO by approximately $30 million or $0.6 per share. We expect 2019 will represent a trough year for comparable FFO per share.
As we continually say, cash analyse is the most important metric in our business. That's how real estate 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 Mart 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 town 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% since 2009. This has played an important role in attracting large tech tenants to the city and continues to feed the 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 actively looking for space, it's a who's who. In fact, almost all the well managed companies and 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 for office space. Private sector jobs increased 54000 in the first 6 months as compared to 76000 for all of 2018 with 6-month office sector jobs increasing 12000 as compared to 20000 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 132000 square feet of remaining expirations in 2019. Our Midtown portfolio which has been completely modernized and redeveloped for long term remains very resilient and highly sought after by tenants. In the second quarter, our leasing team completed 221000 square feet of office leases in 29 separate transactions in New York at a very healthy average starting rent of $83.54 for square foot. Our mark-to-market rents were positive of the $950 million loan. The property is now debt free, closings will continue throughout 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 at 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 than a buy.
Over our 20-year hold period, we made 8 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 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 will 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 analyze is the most important metric in our business, that's how real estate is traditionally valued. Companywide, 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 Mart 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% 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 who's who. In fact almost all the well-managed companies and 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 6 months as compared to 76,000 for all of 2018 with 6-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 redeveloped 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 and Page 30 of our supplement the projected costs and returns for the Farley Building Penn 1 and Penn 2 redevelopments. In total, these 3 projects comprised 5.2 million square feet consisting of an 845,000 square feet new build at 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 overtime 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 the 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 Westside 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 stands at 1.1 million square feet with 560,000 of this amount coming at Penn 2 primarily McGraw-Hill, which will be taken out of service as this redevelopment kicks into high gear. It is here at Penn 1 and Penn 2 where we are creating a unique campus and will be providing today's workforce with the office of 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 communal spaces to work alongside colleagues. Anticipating our redevelopment program during the second quarter, we signed a 38,000 square foot lease at Penn 1 with a Fortune 200 company at a starting rent of $93 per square foot, a sign of things to come.
This is a first generation lease. If 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 Penn 2, we are deep in negotiations with multiple large users for anchor spaces, all in the triple digits. All of this validates the unique nature of what we're delivering here in our underwritten pricing for space in the New Penn District. In addition to the capital we are spending in the Penn district, the government is also investing an estimated $3 billion on various infrastructure improvements, including the Moynihan Train Hall, the Western Concourse, 34 Street Subway Station improvements and the new 33 Street Train Station entrance.
In addition, we have entered into a memorandum of understanding with New York State to redevelop the Long Island Railroad Concourse under Penn 1. This redevelopment will tie together 7 and 8 Avenues underground, dramatically widen the corridor and raise the ceiling height, 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 Mart, 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 4 and 5, 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 of showroom leases at an average starting rent of $63.83 per square foot. Our mark-to-market rents were positive 6% cash and 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% 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 the leasing velocity slow and assets prone to negative surprises. a lot Topshop. I have also pointed out Forever 21 has hired 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 Broadway and 435 7th Avenue. The 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 its store and are actively negotiating to release the balance of their space at higher rents.
435 7th Avenue is a new 5-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% at quarter end, down from 97.1% last quarter, all due to Topshop and the 4 Seasons restaurant. In the second quarter, we leased a total of 70,000 square feet of retail space achieving mark-to-markets at 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 South, the premier asset in that submarket. They are enlarging and remodeling this high volume store.
To conclude we continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity there 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&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 Manny 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 versus '19?
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Manny, it's Joe. Our forecast shows a substantial recruitment of this year's diminution next year. So when you did a pencil to paper and took Michael's one-times that affect the rest of this year. [Indecipherable] comparable FFO in the 140s somewhere -- I'm sorry, 340 somewhere around there. Our projections on next year, notwithstanding a bigger piece of Two Penn will be out of service is greater than that. Don't forget, we have 2 of the other Westside assets coming back into service. We have growth in the core business, we have steps, we have many pluses offsetting those minuses.
Emmanuel Manny 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 time you talked about costs, can you just tell us what's going into that project, as maybe taking a little bit more money to get on?
Michael Franco -- Executive Vice President and Chief Investment Officer
So, Manny. That we've probably gotten a little better given the road map here, but I think the short answer is that, the cost we publish 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 was $800 million plus the 230 plus related etc. you essentially get back to the number we publish now. There are some minor scope changes, but net-net, you're pretty close with all those additions.
Emmanuel Manny 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 want 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 just -- 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 are there any other ground leases in the next say 10 or 15 years that have any kind of renewals or resets that we should be aware of?
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
The current rent at One Penn is $2.5 million, the reset is in 23, the term of that lease goes all the way out to 2098, so it is 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 where we will end up. One thing is that if you look at One Penn as an asset, the income is in round numbers, the better part of $100 million today. We project that income is going to go up by another 40 million, 50 million odd dollars as a result of the redevelopment that they bought improvements. 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 asset can easily and comfortably withstand an increase in the land value. We have 3 other ground leases that I can recall, we have one at 330 West 34th Street View, which has a reset coming up in 2022 -- in 2020, which will be -- it's a small asset, so whatever the rent reset might be is going to be immaterial.
We have another one at 888 7th Avenue, which comes out up for reset at the end of the decade of 20 -- late in the 2020s. And we have a 3rd ground lease at 909 3rd Avenue, which has an expiry of when David?
Unidentified Speaker
2063.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
2063 that is flat from now, there are no resets whatever and the rent is an extraordinarily low as favorable number to us. One comment about the ground lease reset process. There are plenty of things kicking around and the recent resets over the last year or two have been in my mind. pretty stupid. I mean, you just take the Barneys reset, take a look at that, that has basically -- the numbers had no reality and basically will bankrupt Mr. Barneys. So we believe that, there will be core reality in the reset process coming or going forward.
The issue that really was -- 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 -- that we expect those 2 bubbles are coming out of the market. So we can get -- 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 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.
Unidentified Speaker
Jo, you have an answer for that one?
Michael Franco -- Executive Vice President and Chief Investment Officer
Steve, -- without getting too specific. We did disclose almost 300,000 square feet out of service today. We project that will go up to about 0.5 million feet and at the end of this year, it will go up in 2020 as more of the building is taken out of service. Approximately 2/3 of the building will be taken out of service at peak and then of course start to come back in as the also was built as the top 2 floors rented etc.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
So, but look. Steve, I know you can't do this because I know modeling is the essence 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. We will be taking this building and we will be transforming the building from $60 rents to $90 and $100 rents. We will be taking a building which has -- is long up to and bringing it into the modern age and making it be one of the most competitive buildings in terms of a work environment for our tenants.
We believe that this will be an 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 400 odd feet of frontage on 7th Avenue from 31st Street to 33rd Street, all of which will look totally different when we complete it. You've seen 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 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 will look like when we're done and how it will increase our earnings of our NAV. Furthermore, the market is, has been --the market -- tenants and brokers community have been extensively exposed to the product and they love it and the example of which is that we are going to lease now 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 the 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 -- Analyst
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.
Catherine Creswell -- Director, Investor Relations
We have -- Michael, you did a great job, Michael. Thank you. I thank you for multiple reasons OK. First you did a great job and second of all, I didn't do. So, Michael said in his remarks that we have executed a lease with a Fortune 200 company, so a large important company at Penn 2 at $93 -- sorry Penn 1 for $93 a foot. Now obviously that's a significant gap from the market value or the perceived market value of the building today.
The reason for that is this tenant and the community believe in what we're doing and is willing to pay the fare price that we believe the market price for the building -- as we lease it up now and as we complete our redevelopment is well into the 90s . Think about where it is. Okay. We are in the west side of New York, which is the hottest area in New York and we are directly on top of the transportation network.
So we have that as a -- for a skeptic, we have that as a validation in Penn 2, we have as validations 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 analysts wrote in a report that I read overnight that his -- while we haven't announced any leasing at Farley, his broker 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 says that we won't exceed our underwriting.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay, thank you. Can you talk about operating expenses in those buildings and whether they'll will change post renovation.
Michael Franco -- Executive Vice President and Chief Investment Officer
Somebody is going to have to do that other than me.
Catherine Creswell -- Director, Investor Relations
I think Jamie our general view is that not meaningfully right there -- we're obviously expanding and dramatically enhancing the Plaza's etc. so at Penn 1, let's 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.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Let me handle the question slightly differently. Increase in space rent that we are underwriting almost all of it will drop to the bottom. 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 are 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 to FFO. By the way, that's an important comment, I'd say drop to 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 for our balance sheet with no new debt, which we think is an extraordinary thing.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay, thank you. Do I get another or that is counted as my second.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
With that.
Unidentified Participant
Do I get another question or that counted as my second.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Yes, sir.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
So can you just talk about, I mean with Topshop bankruptcy, just some thoughts on credit risk in the retail portfolio going forward.
Unidentified Speaker
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 are large and important credit-worthy companies.
The issue is not their credit worthiness, although Topshop was obviously an issue and Forever 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 a few weeks, that is, of course as everybody does, but by and large the credit of the portfolio is pretty cool.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay, all right, thank you.
Operator
Thank you. The next question in the queue comes from John Kim with BMO. Please proceed.
John Kim -- BMO. -- Analyst
Thank you. On the incremental cash yield of 8.3% at Penn, can you clarify how you calculate that number? Is it new rent over incremental cost or is it the incremental rent over the incremental cost.
Michael Franco -- Executive Vice President and Chief Investment Officer
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 cost to be spent.
John Kim -- BMO. -- Analyst
Okay. So the numerator would be the $70 difference in rents between 60-90.
Michael Franco -- Executive Vice President and Chief Investment Officer
That's right.
John Kim -- BMO. -- Analyst
Okay, great.
Michael Franco -- Executive Vice President and Chief Investment Officer
Essentially what Steve said. Right. It's the incremental rents multiplied by the square footage, obviously we're adding some square footage at Penn 2 with the addition of the bustle and then converting some of the top 2 floors from mechanical to office. But accepting that, it's the incremental rent with this slight leakage for taxes and OpEx.
John Kim -- BMO. -- 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 basically?
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Principally common area in between the buildings -- the putting plazas and plinths in the common areas and not inside the building. So it's principally exterior work. But it includes safety balance, it includes some other miscellaneous improvements connecting the buildings.
John Kim -- BMO. -- Analyst
Has that increased more than you expected or was that within budget?
Unidentified Speaker
This is the first time that we have published anything about this. And we thought it was appropriate to list in the budgeting that we released. But we can't allocate it and we didn't allocate it to any specific building, we didn't allocate a return on it either. So we just put it together as part of the neighborhood.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
And of course, John, its Jo. We gave you the yield on the total course inclusive of that.
John Kim -- BMO. -- Analyst
Very helpful, thank you.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
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 questions. 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 closer to 60, may be low 60. Given sort of all the move-outs you mentioned in the potential moving pieces including Forever 21. How should we think about a run rate heading into 2020? I know you've given some -- 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.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Vikram, tell 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. If I adjust for that, I think you're cash NOI should be closer to the low 60 range. But if we look forward, you talked about Topshop, Forever 21 potentially.
Michael Franco -- Executive Vice President and Chief Investment Officer
I got it. Thank you. 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 $309 million as a result of some space at 770 Broadway coming out of the K-Mart store and another 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. [Speech Overlap] 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, it's a 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, a superb execution and very important. We will reduce the running rate NOI of the Retail segment by $84 million and that basically is simplistically taking the income that was included 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.
The Topshop, so that's a $84 million [Indecipherable]. The Topshop, the 2 stores in Topshop that lift will nick the income stream by running -- an annual running rate of $17 million. So if you take those $324 million, which was the actual, less $84 million, which is the loss of the 45% of the JV retail, less $17 million for the two Topshops, you get to a $223 million number. I'm not comfortable with that number, but I am comfortable is something in the low 200s. So that's where we think that will go now. Understand this is only the retail segment, 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 anyway, that's where we see it.
Vikram Malhotra -- Morgan Stanley -- Analyst
Okay.
Unidentified Speaker
Hang on, Vikram. Jo is going to improve my answer.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Two things, when you look at Chairman's letter as it was amended. He talked about $109 million, is $84 million is the retail piece of that.
Vikram Malhotra -- Morgan Stanley -- Analyst
Yes, the retail. Got it. And then the 223 that may be adjusted. I mean, I'm assuming there is no assumption there for 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.
Michael Franco -- Executive Vice President and Chief Investment Officer
Vikram. When I went to 223 and I said I'm not comfortable with that number yet, but I'm comfortable in the low 200s.
Vikram Malhotra -- Morgan Stanley -- Analyst
Okay, I got it.
Michael Franco -- Executive Vice President and Chief Investment Officer
Just in my mind for move-ins, move-outs that other things that may happen, which will affect it, but not in a significant amount.
Vikram Malhotra -- Morgan Stanley -- Analyst
Got it, OK. And then just a bigger picture question. [Speech Overlap] Just a bigger picture question. You sort of mentioned or I think, maybe Michael mentioned you're disappointed with sort of the oh-hum 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. 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 of the NAV GAAP?
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
There is 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 from your perspective -- on a buyback.
Michael Franco -- Executive Vice President and Chief Investment Officer
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's 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.
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 billion dollar buyback It would increase our NAV by maybe -- for the remaining shareholders by maybe $1.5 or some such number. And that our management and our Board would rather have the billion dollars 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. 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 math is that, for every billion dollars that we would do it, we would increased NAV to the remaining shareholders by $1.5.
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 a billion dollars at an 18.3% return on our own assets and that's -- and that doesn't take the knock on effect of the value we will create on the buildings that surround the buildings that we are redeveloping at Penn Plaza. And now if you take that math, if you can invest billion dollars at 8% that generates $80 million of income at a 4.5% cap rate, that's a $1.7 billion of value creation. that $1.7 billion divided by 200 odd million shares is rounded $9 a share. So would you rather invest $1 billion in buying back your stock where by the way the $1 billion goes away, you lose the liquidity and you increase your NAV by $1.5 or would you rather invest it in the buildings, where you will be creating $9 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 1 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 3 buildings alone, there are multiple billions of dollars of additional liquidity available to the company for whatever corporate purposes we have.
So we think that we are on the right track here.
Vikram Malhotra -- Morgan Stanley -- Analyst
Fair enough. Fair enough. That's fair.
Michael Franco -- Executive Vice President and Chief Investment Officer
I'm not done yet -- we're not inflexible, and we think we try to learn. One of our pals is doing a buyback. Okay, very committed to it. It hasn't worked yet, but if as and when it does work we will learn from that. 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. I am convinced it's going to be a spectacular product.
Steve. Why would anybody want to be in Hudson Yards or Manhattan West if they can be at Penn Station.
Steven Roth -- Chief Executive Officer
Welcome to the team John. Hey John that's not a -- John, John, John, John that's not a serious question, but the answer to that is, first of all look, my. pal Stevie who did a great job and Jeff and the boys, they did a great job at Hudson Yards. I mean all of our friends that are developing in our neighborhood.
We're all friends, it all plays off each other, at all makes the entire district of the west side of Manhattan better. 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 at our Penn Plaza assets had not Hudson Yards preceded us.
So that's Step 1. By the way, John, since I've got you. You wrote something on June 12 and normally, I'm not much about what you write. But this one, I'm going to read out loud because I I love you[Phonetic] You said on June 12 expect Phase 1 of Penn Plaza to be extremely well done sparing no expense to create transformative environment and landmark on the west side. We expect the finished product to be completely different than the current landscape, the cost and return on cost are as of now unknown, but now you know by the way.
So anyway. Thank you for that. We appreciate your support.
John Guinee -- Stifel -- Analyst
Thank you. Can I ask one more question.
Steven Roth -- Chief Executive Officer
No, I want to stop while I am at it. Go ahead.
John Guinee -- Stifel -- 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, ex the land new build about $1200 to $1300 a foot, but your budget for Penn 2 is only 416 a foot and it seems to me kind of difficult to demo down to the frame, beef up the steel, all new skin, couple of hundred thousand square feet of new space, elevators, MEP, IT, [Indecipherable] commission soft costs for 416 a foot seems like a really low number, is that fair.
Steven Roth -- Chief Executive Officer
No, it's not a low number, it's an accurate number. So let me give you -- I'm looking for something here, a big stack of paper.
So, here's our budget. So, the $750 million that remember that doesn't include carry because we're basically funding it with cash. So our budget in round numbers is that we are going to be creating 90,000 square feet -- call it a 100,000 square feet of new space in the bustle and at the top of the building where we're converting mechanical space into highly leasable at triple-digit rent space and that in round numbers is a couple of hundred million dollars. We are going to skin the building. We're not taking it down to the frame. We are going to take portions of the frame off it and reimage . We are going to skin 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 convectors at the perimeter of the building.
So there is $200 million to create new space, which is income producing and return space, and there's a good return on that, $200 million to do the basics curtain wall project and then the balance of the $350 million is for lobbies, elevators, new bathrooms, new corridors, etc. and the new amenity space. So we -- you can even yelling at me for quarter after quarter after quarter for not having -- not having made our cost and 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.
By the way, a significant portion of this job is already in construction drawings at already bought. And when you drive by it, you'll see that the first mark-up of what this enormous bustle which projects 45 feet off the Plaza and 75 feet on the ground, which includes the better part of a couple of 100,000 square feet of new space is already marked up, so 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.
Michael Franco -- Executive Vice President and Chief Investment Officer
Thanks, John. One last thing to be totally clear the budget includes TI and leasing commissions for the new bustle created space. It does not include TI and leasing commissions in the normal course or rerenting all of the other space in the building, which we think is an appropriate way to do the cost accounting.
John Guinee -- Stifel -- Analyst
Right, OK. Thank you.
Michael Franco -- Executive Vice President and Chief Investment Officer
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
Thanks. Just wanted to go back to Farley. We have heard it is good interest in the building's 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 showing as being available, though it is now. I mean is it fair to say that these two floors are spoken for.
Michael Franco -- Executive Vice President and Chief Investment Officer
We have nothing more to say about Farley other than what we've already said. We have activity, it does us no good to speculate on what these important negotiations are 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, 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 for some other companies we've seen or buildings that could be 45% of land value. What's the formula calculation here.
Michael Franco -- Executive Vice President and Chief Investment Officer
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 the reason I asked you is if you do assume it's 4.5% of land value then it looks like the land value is about less than $50 a foot, which seems pretty low and would require -- you could be facing as you mentioned in your supplemental material reset on the ground lease. So I think it'll be pretty helpful to first understand how that could work. So we can think about the ultimate yields on the project
Steven Roth -- Chief Executive Officer
Well, the answer is it will be material, but we're not prepared to speculate.This is a reset, which is subject to 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 10 to 15 minutes ago, we strongly believe that the land value is coming our way and I really don't want to say anything more about it.
Nick Yulico -- Scotiabank -- Analyst
Thanks.
Steven Roth -- Chief Executive Officer
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 -- it will be a material number but it will not be significant in the scheme of the of the huge income coming in from 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. Good morning over there. said two questions. First, Steve, sort of a two-part on Penn, you talked about 100 million of 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 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 start work on Penn 1 and Penn 2, just as we think about year 2020 earnings.
Steven Roth -- Chief Executive Officer
The first is that $100 million of neighborhood improvements really is improvements. It does include improving the street bed that we have closed in between the two buildings, but the rest of it basically is capital that we're spending on behalf of our build -- buildings. 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. In 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 the 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 -- and all the surrounding land, then we have assets that we own and we are going to take a $60 building and take it into the $90 . That's the big picture. We have not given guidance about quarter-by-quarter results.
By quarter-by-quarter in service and 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 rent seems really low especially given what your neighbors signed with Puma 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 more than what the actual street retail rents would be there.
Steven Roth -- Chief Executive Officer
You know, Alex. It's all of the above. First of all, we have not said that we are abandoning the ground lease that may cause it, it's an option that we have in the future, that's just one. The accounting is that there is a liability and an asset for this right to use is, that's 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 lease that will be that liability will be taken at the income and extinguished. So that's the accounting. In terms of the business side of it, the way we do the math, if you take the ground rent payments 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, these would be retail, the building is pushed to slightly underwater.
If you then take the fact that there is a 14-year ground lease and you would have to amortize the tenant improvement, it becomes underwater more and if you take the fact that the ground lease goes up by its terms by another $2 million or $3 million a year shortly, then on the whole, when you get on 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 answered the question. Thank you, Steve.
Steven Roth -- Chief Executive Officer
Thanks, Alex. See You.
Operator
The next question in the queue comes from Daniel Ismail with Green Street Advisors. Your line is open. Please proceed.
Daniel Ismail -- Green Street Advisors -- 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 ends, the usability and perhaps the ability to monetize those air rights in the future.
Steven Roth -- Chief Executive Officer
No, there is plenty of air rights, we own lots of them. There are air rights that are on top of Madison Square Garden that we own a share of, there is air rights on top of The Landmark -- Farley building that we have -- we contracted to move those that we have access to. We don't have legal actively have access to. So there's plenty of air rights. And then now where do you put and so we have multiple sites that are in the future.
The most interesting one of which is obviously the Hotel Pennsylvania, which has a current [Indecipherable] approval for a 2.8 million square feet.
Michael Franco -- Executive Vice President and Chief Investment Officer
2.8 million square feet.
Steven Roth -- Chief Executive Officer
2.8 million square feet, which would be a tear down and a rebuild etc. And then we have multiple other sites in the neighborhood. So there is not a shortage of air rights. We own plenty of them and there are plenty of them available to be purchased and moved from different government sources and private owners.
Daniel Ismail -- Green Street Advisors -- Analyst
And can you remind us how many air rights you directly own currently.
Michael Franco -- Executive Vice President and Chief Investment Officer
I don't think so, I don't have that in my head. So we would have to get that to you. I don't think it's a material calculation.
Daniel Ismail -- Green Street Advisors -- Analyst
Okay and then just one on the redevelopment of 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.
Steven Roth -- Chief Executive Officer
[Indecipherable] Barry?[Phonetic]
Unidentified Speaker
it's not a material increase in cost today and yes, the new developments will be in compliance with those standards. Well, the answer is, there is not a 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 binary comply or don't comply, what there is, is that the assets will be measured for their emission 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 2024 requirements. The ones that come at the end of the decade are more strenuous, but if we maintain our current position, the tax would be the de minimis for noncompliance.
Now, these 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 and 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 the 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 and transmission of it from where it's created down into New York City at other major cities that will cause the carbon footprints to increase substantially. So there is all of that kind of stuff that's going on.
Daniel Ismail -- Green Street Advisors -- Analyst
That's helpful, thanks.
Operator
The next question in queue comes from Manny Korchman with Citi. Your line is open. Please proceed.
Emmanuel Manny Korchman -- Citi -- Analyst
I am Manny, Michael or Joe, just to think about sources and uses for a just timing perspective. You think about, you've $1 billion today, another $1 billion coming in from 220, the 100 million that close 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 1.7 billion [Phonetic] which is quite helpful to have the costs and the returns that incremental 1.7 billion 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 going on.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Michael, it's Joe. That's a pretty complicated question to do by phone, but I at least want to clarify one thing, you said a 1 billion on coming from 220, that's 2 billion, not 1 billion.
Emmanuel Manny Korchman -- Citi -- Analyst
Well net of the debt that you're going to repay, the $1 billion of net cash.
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
No, there is no, that whole $950 million is today. And from that point forward, we get $2 billion, $1 billion of profit and $1 billion of our costs that we put into the project recoup through the sales process.
Right number to you to think of is 2 billion. Our NAV shows a properly, but the incremental cash coming to the company is 2 billion against the $1.7 billion that you accurately portrayed the needs in the three projects in the Penn District area catalog . Of course the capital needs, if we were to do the Hotel Penn would be much, much larger or any of the other add on's that we haven't talked about that the question on the air rights [Indecipherable] .
Emmanuel Manny Korchman -- Citi -- Analyst
I don't know if you are, I mean we can come back to you with a lot more specificity on timing of the outflows, honestly Farley is well under way, Penn 2 will be generally, what's called 20 to 22 [Phonetic] f and Penn 1 over a couple year period beginning next year, but I think you're trying to get and I think the most important point is the cash will be in the door before that money has to be spent, right so -- [Indecipherable] we said on today, Joe, correct me if I'm wrong, $1.1 billion 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 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.
Steven Roth -- Chief Executive Officer
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 billion that's laid out in the supplement. That's without need I retail preferred ever etc. the money will be in the door.
Emmanuel Manny Korchman -- Citi -- Analyst
Right, which gives you even more liquidity as you start thinking about the 1 billion a preferred but then also the refinancings that occur in 2020 and I don't know if you want to talk about [Indecipherable] it wasn't Penn maybe at 887 whether as you think about upsizing those mortgages are 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 use of cash.
Michael Franco -- Executive Vice President and Chief Investment Officer
The answer is this, first of all, with respect the 220 is a sellout, published sell out is $3.25 billion[Phonetic] We sold a $1 billion so far, that means there is two odd billion dollars coming out of that with no debt requirements, that all comes into our treasury. That's step 1.
Step 2, our internal budgets shows that we are able to the 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 Farley and at the same time our cash balances will be funded out of our balance sheet with no new debt and our cash balances will grow.
With respect to our balance sheet, we have been showing pro forma 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 are very comfortable with that. We have enormously [Indecipherable] on our balance sheet and we have a enormous queue of un-financed assets and 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 at safety and whatever and -- we have -- we are actually engaged in an internal conversation about this. Now 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 under leveraged asset which is encumbered.
So all of that is what considered, but right now we have -- we are in a spectacular financial condition and we are very happy with where we stand. We are delighted to be able to deliver Penn 1 and Penn 2 with Farley all from our balance sheet with no debt.
Emmanuel Manny Korchman -- Citi -- Analyst
Last question, Michael, in your prepared remarks, I think you made the comment, it's better to be a seller than 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 Franco -- Executive Vice President and Chief Investment Officer
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, but it's $70 million. We've got 2 or 3 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 -- 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 Mart in 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.
What we have sold 555 California 3 or 4 years ago, when there was a big drumbeat to do it, we would have undervalued the asset by $500 to $700 million at least. I think, Michael, said in his remarks that, that asset is under rented by pick a number, 25%, and so whatever. 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 assets you dilute earnings -- and so if you take our retail sale we sold it at NAV. We sold it at 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 diluted the income. So there is a tension between selling assets when they dilute their income and your analyst want to take your stock down for that. So it's a complicated thing.
Emmanuel Manny Korchman -- Citi -- Analyst
I appreciate the color.
Steven Roth -- Chief Executive Officer
[Indecipherable] take on to that, Michael, and that is that it's good to have cash. but cash doesn't and appreciate. 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 piece of debt in the company at least once a month.
Emmanuel Manny Korchman -- Citi -- Analyst
Yep. Then it was helpful to get your thoughts regarding using cash on the buyback versus investing it in new as well as redeveloped assets and harvesting that value 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 -- Chief Executive Officer
Yeah. And we shall look at the investing the money and creating $9 of value versus $1.5 from $1 billion is a no-brainer right. The point you're making is that, that's not our only cash. We've got more assets, we've got more financial flexibility, we couldn't be more well aware of that. Thank you for pointing it out.
Emmanuel Manny Korchman -- Citi -- Analyst
Thank you, have a great rest of the summer.
Steven Roth -- Chief Executive Officer
Thank you too.
Operator
And gentlemen, there are no further questions at this time.
Michael Franco -- Executive Vice President and Chief Investment Officer
Great, thank you everybody for listening, participating on our call today. We look forward to your participation. Our third quarter earnings call, which will be on Tuesday, October 29. Enjoy the rest of the summer as well. Thank you.
Operator
[Operator Closing Remarks]
Duration: 78 minutes
Call participants:
Catherine Creswell -- Director, Investor Relations
Michael Franco -- Executive Vice President and Chief Investment Officer
Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer
Unidentified Speaker
Steven Roth -- Chief Executive Officer
Emmanuel Manny Korchman -- Citi -- Analyst
Steve Sakwa -- Evercore ISI -- Analyst
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Unidentified Participant
John Kim -- BMO. -- Analyst
Vikram Malhotra -- Morgan Stanley -- Analyst
John Guinee -- Stifel -- Analyst
Nick Yulico -- Scotiabank -- Analyst
Alexander Goldfarb -- Sandler O'Neill -- Analyst
Daniel Ismail -- Green Street Advisors -- Analyst
