Vornado's Charles E. Smith Division is the largest owner of office space in the Washington, DC area and is the largest landlord to the Federal Government. Vornado made minority investments in Smith in 1997, and then again in 1999, and acquired the remainder on January 1, 2002, so that we now own 100%. Smith today owns 14.0 million square feet, about half of which is located in 26 buildings in Crystal City, Arlington, VA, adjacent to Reagan National Airport, overlooking the Capitol. (8)

Mitchell Schear has now completed his first full year as President of Charles E. Smith. He has finished the integration of Smith and Kaempfer and is fully focused on leasing – our Washington office

    team leased 2,848,000 square feet in 2003. He and David have become quite a team. Mike and I are delighted.

When we acquired Smith our underwriting accounted for the fact that its largest tenant, the Patent and Trademark Office (PTO), would be relocating in late 2004 and 2005, vacating approximately 1.9 million square feet in Crystal City. Our underwriting accounted for this both in terms of price (9) – we acquired the portfolio at an above market 10.3% cap rate – and by mentally allocating $75 million for capital expenditures to re-lease these buildings.

The table below shows the move-out schedule of PTO.



(8) Smith also owns 4.8 million square feet inside the Beltway, including 2.5 million square feet in the I-395 Corridor (Skyline), 1.5 million square feet in the District of Columbia and .8 million square feet in Rosslyn/Ballston and 1.7 million square feet outside the Beltway in Tysons Corner, Reston and Bethesda.
(9) Our purchase price for 100% of Smith was $2.45 billion based on a 10.3% cap rate on EBITDA. Same store EBITDA grew at the rate of 5% per annum to $278.7 million in 2003, which we believe would be valued in the current market at a cap rate in the 7s. But even at an 8% cap rate, we have a mark-to-market profit in this investment of approximately $1 billion.

It's not that simple, however. In this acquisition we issued a security convertible into 5.7 million common shares at $44 and issued 15.6 million operating partnership units at $39. In effect, the sellers who took our shares instead of cash participated to the tune of 14% in the increase in value of the Smith assets and the Vornado assets as well.