Good morning and welcome to the Vornado Realty Trust's Third Quarter 2021 Earnings Call. My name is Vanessa and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. [Operator Instructions]. I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our 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 annual report on Form 10-K for the year ended December 31, 2020 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 are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thanks, Cathy and good morning everyone. I begin by saying that I am feeling quite optimistic about the economy, about New York City and about our business. New York City is recovering rapidly. The apartment market is a case in point. It suffered a vicious decline to 17% occupancy, nothing like that nothing even close to that has ever happened before as renters gave up their apartments and the work from anywhere period to now having recovered to pre-COVID occupancies at even higher than pre-COVID rents. This will go down as the most rapid V shaped rebound of history. Public transit utilization rates are picking up and public transportation is of course the lifeblood of the city. Restaurants and sporting venues are literally jam packed, and Broadway and other cultural venues have reopened. With travel restrictions coming off this month, international tourists will be returning, we can see increased automobile and pedestrian traffic everywhere. Vaccination rates among office workers are at high levels, I'm guessing around 90%. We're hearing unanimously that our tenants want their employees back in the office. Occupancy has been climbing and this week we are now at 43%. I must admit that our tenants and we are a little frustrated as to how long the return to work process is taking. But there is no doubt that work in office will win over work alone at the kitchen table. Key themes we're hearing every day are health, wellness, culture, collaboration, purpose, productivity, socialization, all under the mantra of it's time to get back to work. Well, the timing of complete return to the office and each company's hybrid plan are still unknowable, it is clear to me that the office is still and will be the center of work and our success. Importantly, our business is…

Thank you, Steve, and good morning, everyone. I will start with our third quarter financial results and then end with a few comments on the leasing and capital markets. With the recovery in New York City occurring, as Steve described in his opening remarks, so is our business and financial results. Third quarter comparable FFO as adjusted was $0.71 per share compared to $0.61 for last year's third quarter, an increase of $0.10 or 16%. The increase would have been 26%, but for the once every third year Mart real estate tax increase which is largely reimbursed by tenants next year, sort of a timing issue if you will. We have provided a quarter-over-quarter bridge in our earnings release on page five and our financial supplement on page seven. The increase was driven by the following items. $0.10 from tenant related activities, including $0.06 from the commencement of new leases and $0.04 from the non-recurrence of straight line rent and tenant receivable write-offs impacting the prior period. $0.04 from the continued improvement in our variable businesses, $0.02 from the acquisition of our partner's 45% interest in One Park Avenue in August and $0.02 from lower G&A resulting from our overhead reduction program last December. The total of these increases is partially offset by the following decreases: $0.06 from the already mentioned real estate tax expense accrual due to an increase in the triennial tax assessed value of the Mart, which, as I said, will be largely billed back to tenants beginning of January 2022, and $0.02 from an increase in other miscellaneous expenses primarily related to our new preferred issuance, partially offset by interest expense savings. Our third quarter comparable results are ahead of the 2020 fourth quarter run rate we discussed at the beginning of the year and on…

[Operator Instructions] We have our first question from Emmanuel Korchman with Citi.

Hey good morning. It's Michael Bilerman here with Manny. Maybe if I can just start on putting capital to work. What's your current appetite to go out and buy assets? You obviously did the Park Avenue buyout of your joint venture partner. And so is that something, Michael, you talked about the market with increased activity that you want to participate in? Or are you just hoarding your capital at this point to pursue all the development and redevelopment types of activities? And maybe just talk a little bit about if you are going to go external, whether you look at other property types rather than just office?

Sure. Good morning Michael. Look, the - in terms of the capital deployment, we look at everything in the marketplace. As you know, there's been very little that's transacted for probably the first 12 months of the pandemic. And frankly, with short-term rates at basically zero and long-term rates quite low as well, there's been very little pressure on sellers. So you've seen very little transaction activity. You're starting to see that pick up now with assets being brought out. And to-date, the buyer universe, I would say, has generally been driven by players that use higher leverage, although we're still in the early days. So to the extent we see compelling opportunities, we would act on those. So far, the pricing has frankly not been compelling. And as we compare both to what we're doing in Penn and prospectively what we can do in Penn, those continue to be more attractive than just buying another asset that we're going to stabilize at a 5% yield after spending a lot of money and capital to lease it up or just to buy it. So we look, we're going to continue to look. If we find something interesting, we would certainly act on it. We have the capital to do that. But to date, capital continues to price assets quite aggressively, notwithstanding the volume of activity that's still down.

And then can you just...

Michael, hang on.

Yes, Steven.

Let me just add a little bit to what Michael said, Michael Franco said. I mean, look there has to be accretion in anything that we would buy. Right now, the math is topsy turvy. So our stock filled in the marketplace, I don't know what it is, probably close to an 8% cap rate. Assets in our in Manhattan office buildings that we would even consider, all sell at sub five. So you can't, that math is topsy turvy. It makes no sense to buy an asset for 5%. And by the way, when you take the capital that's required for these asset services, that's year-over-year, maybe the cash on cash is 4%, when our stock is selling for 7%. So anything that we would do there would be dilutive to shareholder will. And obviously, we're not going to do that. If we saw an empty building by the way, that we could buy, where we thought we could create a great deal of value, we might do that. So generally speaking, it's very difficult to for us to transact and grow right now. And so what we do have on the other side of that is we do have liquidity. We do have a very, very, very dry powder balance sheet, and we still have great opportunities to accretively spend that capital that's on our balance sheet in the Penn District. So that's our main focus right now. It was in the Penn District. So I'm just sort of doubling down with what Michael said.

Well, that's helpful. And maybe just as a follow-up, Steve, just on the Penn District, where do things currently stand in terms of pursuing the tracker? I know it's probably a little bit longer than you would like to have everything prepared and ready to go. So maybe just give us a little bit of an update where you are internally in terms of preparing all the financials and getting all of that done and also externally with a lot of new governmental partners coming in to new seats? How is that all playing into sort of the timing of getting this tracker out to the marketplace?

Michael, thanks for that question. I remain committed to the tracker. And let's understand what I remain committed to. I remain committed to allowing our investors to use between our stable core business on the one hand, and then the Penn District, which is our high growth development segment of our business and to be able to invest in either of those individually or both of those. We are very, very, very strong believers that we will create enormous values in the Penn District. We will create a district that will command premium pricing, and we couldn't be more excited about it. So I remain committed to it, number one. Number two is we are well along with the paperwork and what have you that would be required to do it, to launch. We recognize what you said, and that is we're seeing a complete turnover in government and senior government officials. And we have pending matters with them. And so obviously, we're going to maybe slide a little bit as we, as that goal plays out. We are very, very, very optimistic that the new government leaders at the city and state will be, let me say, how do I say this, will be constructive, will be business friendly, and I recognize that the Penn District is something that requires and demands their attention, and we believe we will get that, they are positive attention. The next thing is, I've read in, amongst the analysts, some skepticism about the idea of separating the Penn District. I'm very surprised at that. There's sort of a, I'm as enthusiastic about this as I've ever been about any project in my career. So I'm having trouble understanding it. Also we have had conversations with multiple, multiple real estate investors as opposed to stock investors who share our judgment and my judgment about the potential of the Penn District. So, but from the point of view of the analyst community, I am almost starting to believe that we are in a show me mode. So what that means is that we have to knock off some more leasing to be able to service the values. So that's basically what's going on. We have no counterparty in the tracker. We have no timetable, it's going to slide a little bit, not too much, and we think it's going to be smashingly successful.

Yes. And I appreciate those comments. And look, Steve, I think part of the skepticism out of the investment community, I think everyone recognizes what the Penn District represents. I've been following your company for almost 25 years. And we've watched that area transform and there's always been that opportunity. We can go through the list of things you've called it, the big kahuna, a lot of other things. I think it is similar to the same business that you are in, even though I would concur with your phrasing that you have core assets in this big development opportunity. I think trackers have typically been used where it's a business that is different than the parent company and has other comps or other things in there in terms to highlight that value. Your comments about the private market are much more akin to where I think investors sort of want to be able to highlight that value. But to your point, you don't want to give up a part of that project to a private, that's going to make all the money versus something that you believe should endure to Vornado shareholders? Is that a fair comment?

I guess so. I mean, the comment was so lengthy, I didn't really follow all of it. And the answer is that I understand the skepticism. I said, I'm looking at it as a show me project. And believe me, we will show you.

Great, all right, thanks for the time, Steve.

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

Thanks, good morning. I guess, first, Michael, I wanted to just follow-up on your comments about the robust leasing pipeline. If you could just maybe provide a little more color on how much of that activity is for either Penn 2 or some of the other developments? And how much is for current vacancy or how much of that is forward renewals? I guess kind of a split on new versus renewals would be helpful. Thanks.

I'm going to let Glen take it, Steve, but the answer is yes. Glen, why don't you give some color on that?

Hi, Steve. So it's a very strong mix of everything. New deals, both in Penn, new deals in the core portfolio, strong renewal activity throughout all of it and expansions everywhere. We're seeing strength throughout the portfolio, both in Penn and the core portfolio in all different shapes and sizes with all different industry types. Things have picked up really well since we last spoke.

And maybe just as a quick follow-up. When you're sort of talking to the tenants about space needs and space planning, what does the densities look like, particularly on sort of the new deals and how do they compare from a space per employee perspective to maybe deals from two years ago?

I've said this the last couple of calls, we've seen no change at all in density. You're seeing maybe a different mix of collaborative space, communal space for cubicle office, but generally no change. People are planning for the future. They're back at it. A lot of them were acting as if it's pre-pandemic times, growth, new fresh start, all about talent recruitment and moving forward.

Steven, in your question, and then a lot of the questions or comments in the reports from different analysts, there remains skepticism, as to whether New York is going to recover whether people want to be in the office, et cetera. And a little bit picking up on Steve's comment, I think we're sort of in the show me mode, in terms of when we put the points up on the board, people see it, but as we look at the pipeline, I mean, there is activity literally, at every building. All types of users. I mean, Steve comment on the voracious appetite of tech is stronger now than it was pre-COVID. And the financial types are booming, we're seeing heavy activity there. You have an economy where companies are doing very well. They're in growth mode, and that's reflective - reflected in our pipeline. So I think the leasing market is sending a very strong signal that New York is going to be fine. New York is going to be one of the winners, companies want to locate here. And I think you're going to see those stats continue to get posted over the next several quarters, obviously, this quarter was a good start. But there's much more in the queue across our portfolio.

Great. And then again…

Steve, this is Steve. Good morning. Look, the stock market, if you look at the price of our stock, and the sister companies in the industry, they're all extremely, extremely depressed, and they are doubling the price from where they were pre-COVID. There is in the stocks, the sense in my mind, the sentiment, that nobody - everybody is confused uncertain, and worried about work from home, and how it will affect the CBD office business, okay? We acknowledge that. We believe two things. Number one, we're actually living - number one, we believe in New York, we are seeing in the field, that people are committed to the New York, they're committed to stay in New York, they're committed to grow in New York, that's for the financial services industry, et cetera, the media industry, the entertainment industry, and double and triples for the tech industry. Because the body of the scam of New York can't be replicated anywhere, I mean, if you just take two or three of the leading trillion dollar tech firms, the leases they've signed in the last 14, 15 months, they need 15,000 engineers to fill that space, you can't get that in Austin or Nashville or wherever, okay. So the scale of New York is winning the day, plus the talent pool. So that's factor number one. Factor number two is, the business leaders that we deal with every day, they understand work from home. They're grappling with, what their policies are going to be, what the hybrid solutions are going to be three days in the office, four days in the - whatever it is. They know that they're grappling with that. Yet, they continue to believe that they need office space, lots of it, in fact, higher quality office space to recruit their talent, and retain their talent. So we're finding in the marketplace of the economy between actually a very aggressive and robust demand for space from the big boys in each of the major industries, and the uncertainty, the skepticism of work from home in the marketplace. So we're betting that our tenants know what they're doing. And we think that - so we think that work from the office will win. It'll be nipped around the edges by some hybrid thing. People work from home some number of days a week. But the people we talk to everybody, they want the people back in the office, that's the way to grow their businesses, and they're really serious about it. So we think that that's the answer. We are very, very pleased with the demand for space, notwithstanding the uncertainty that's in the securities market.

Great. And just as a quick second question, Michael, the trade shows, I know we're back a little bit in the third quarter. And I know I think last quarter, you had mentioned that the NeoCon was moving in the fourth quarter. Do you have any sense at this point as to how big trade shows, could be in the fourth quarter and I guess what's on the books for next year already? And how did the sizes shape up to kind of pre-pandemic?

We had since July, Steve, we produced a trade shows, including our two largest shows NeoCon and the Armory Show in New York. Obviously, there were travel restrictions, particularly internationally, which impacted attendance. And so I would say levels are probably closer to half of what they were historically, but they were put on success for that. We got the machine working again, and obviously, performance, year-over-year was positive. So, our expectation is that we're going to put on a full set of trade shows next year. We're going to see a substantial recovery. I think just being realistic, we don't think trade shows come back fully in '22. It's probably '23 before that fully stabilizes, but in 2021, overall, trade shows don't contribute a lot to our variable businesses as we currently project. And next year, we think the number will be several million dollars incremental. I don't want to give you a number today, just because we need to spend a little time with our team refining that. And obviously, it's a guest, but we do think the trend line, now that the machinery is working, people are getting used to it. International travels open back up, we'll see a decent recovery next year.

Great, thanks.

Steve, the overriding fact is, is that these trade shows are desperately important to our clients, as the major sales activity for each of these individual companies. So the trade shows are here to stay, they're really important, okay. So we can't predict what's going to happen this quarter, next quarter. But our budgets show that a couple of years out, the trade show business will get back to where it was pre-COVID. And the main reason is because this is a really important business to our clients.

Great, thanks. That's it.

And thank you so much. We have our next question from Nick Yulico with Scotiabank.

Thanks. Good morning, everyone. Just going back to the leasing activity, you talked about the pipeline being pretty strong, not that much in expirations next year. I mean, how should we - is there any preview that you can give us about how to think about occupancy and how it could trend - I guess, in particular, the New York City office portfolio?

Glen.

So Michael - Nick, Michael mentioned it in his remarks, we believe our office occupancy is bottom were now at 91.6%. And we think it's going to continue to improve quarter-to-quarter based on the action we have. Historically, we were at 96%, 97%. So where we are was all due to COVID. We're on our way back. We feel it's getting better, and that we have hit the inflection point and going back up.

Okay, thanks. And then second question is just about the Penn District, I know, you talked about, Hotel Penn being the prime development site in the city. And going back to your prior disclosures on that you had I think about it from your NAV estimated $500 million for that project, which is about $250 a foot of zoning, per zoning, I guess. And I guess I'm wondering if that's still the thought on the value of that there. And then as well, how we should think about Penn 1, where you have the ground lease reset coming in 2023, if you have any update there and how we should think about, if Hotel Penn at $250 a foot number, a good way to think about, the potential land value reset at Penn 1?

We continue to be happy with the number that's in our NAV. We see no reason to raise it. And with respect to the rent arbitration, we have no comments.

Okay, I guess, just in terms of - I mean, should we think about that $250 a foot value that was employed for Hotel Penn being a reasonable number to think about Penn 1, which is right across the street?

It would be inappropriate for us to lead you either way, in terms of your internal calculation. I'm not going to do that. I don't think it's appropriate. And I'm not going to talk about a very important financial arbitration in this format.

Okay. Yes, I mean, just the reason I asked is because you do have that footnote in the supplement talking about the ground value reset could be material impacting the yield on the project. So at some point, it would be helpful to understand, potential land value reset there? Thanks.

I think the disclosure in the footnote is appropriate. And obviously, the final answer is unknowable, and we'll go through the process, and we'll hope for the best.

Thanks.

Thank you.

We have our next question from Jamie Feldman with Bank of America.

Thank you and good morning. I'd like to go back to your comments on retail. It sounds like you think it could be bottoming here. Just your thoughts on why and what we should expect going forward?

I mean, Jamie, look, I think the comments on retail are reflective of what we're seeing on the ground from tenants. Tenants were in a shell for a year. Obviously, there were a few people on the streets. Vacancy was high and not much was going on. Right now the transaction machine is working again, people are back out on the streets. You're seeing tourism pick up, albeit it's all been domestic so far. International tourism will kick off actually in the next week, which should be another shot in the arm for the city. And we don't expect to snap back to 60 million people immediately, but that's the trend line from the city being opening and the attendance that, at sporting events and Broadway shows and other things is quite good and quite indicative of what we think is going to happen. So retailers want to know there are shoppers out there. And there are clearly shoppers out there again. And we've talked about the flight to quality in the best locations, and that's continuing to occur. We've been a beneficiary of that at a place like a Fuller, for example. At a place like a 770, which is a prime spot for Wegmans to go to. And fundamentally, we're just seeing more interest from retailers. By the way, that's all submarkets, right? The tourist oriented submarkets, the Fifth Avenue and Times Square, obviously, you would expect to be the ones to come back the last because that's so dependent on tourism. And with that now opening up, retailers wanted to see it happen. But again, even there, we're seeing inquiry from tenants in both those submarkets. Rents are obviously down. That's inducing demand. And so there's discussions that are underway and an action that's occurring. So that's what gives us, I think, the confidence to make that statement. I think Steve was pretty clear. Activity has to happen before you start getting rental movement, and it's going to take, I think, a decent amount of activity before that happens. So I wouldn't expect rents to rise near-term. But once we start getting some pace of transactions, I think that will be a shot in the arm for the market.

But to be clear, Jamie, this is going to be a multi-year recovery. This is not going to be a rapid V-shaped rebound. It's going to take years for this market to recover and it may never recover to the peaks that were five or seven years ago.

Okay. Thank you. And then I guess...

It has bottomed. And it will recover. And think about it this way. The shutdown from COVID was probably the most traumatic event that any of us have ever lived through. The total shutdown of the global economy. I mean, that's never happened before. The retailers, hotels, airlines, et cetera, or I mean the suffering was monumental. So the first reaction from the retailers was to go into a shell, stop everything and shed liability. So the market went stone cold for the better part of two years. People are now understanding that there is life after it. People are succeeding, the better retailers are actually flying from the pent-up demand, and we are seeing a very, very robust pickup in interest and demand. We are not seeing an aggressive increase in pricing that people are willing to pay. So we're bottomed, we're in a recovery. We are budgeting and underwriting that the recovery will be slow paced.

Okay. And then I guess as you think about...

I'm sorry, just to continue, the last thing. And we did reaffirm our guidance on retail in my prepared remarks.

Right. Do you see, I know in your prepared remarks, you had mentioned the sales? I mean, do you see yourself selling more? Or do you see yourself actually buying, going forward?

We certainly are open to buy. We are certainly probably the most expert in retails around. And we will buy the highest quality at very attractive prices, and there hasn't been that kind of availability or offering yet. I said, let me give you a feeling for the five assets that we have either sold the contract, that's what our thinking was, okay? number one, those assets this year are losing, actually have a negative income of more than $3 million. I think we said in the press release that the occupancy was 30% and the vacancy, therefore, was 70%. That is accurate, of course, but there's one track that you have to consider. There is one tenant in those five properties that is basically a swing tenant who is rebuilding a store. And so if you take that out, and we know for sure that, that tenant is going to leave in a couple of years because it's a swing set. It's not a pop up. It's a swing tenant. And so if you take that out, I think the occupancy is 11%. So if you take that into account, and by the way, if you take the, so that would make the, when that goes away, the earnings are, the negative earnings are greater than $3 million. The capital, if you add the capital that would be required to lease up those five properties. And we have to lease up 90% of them. So it's almost a total lease up job. You take the time and you take our underwriting as to how long it will take to climb up to a decent return. Our judgment was that for our business, it's a proper strategy to sell those assets. And so the proceeds where the assets are unencumbered,…

So as you think about putting capital to work, I mean do you still think luxury is the way to go? Or now you're thinking actually more middle of the road type brand?

We're agnostic to that. We are retail investors. We love our Times Square assets, which are obvious, which are not really luxury. We love our Fifth Avenue assets. And so we're agnostic as to the price point of our customers. We're in the landlord business, not in the retail business.

Okay. And then if I could just ask, you had talked about no debt on any of the assets at Penn Station, at least the development, redevelopment assets. What's the plan there to put more permanent capital on those projects? And how do you think about using those funds?

We will obviously have a financing plan for the growth of the Penn District. We're very comfortable now having those assets unencumbered for the moment. And I think it's premature to start getting into what our, what we will, what we, how we will permanently finance those assets if we do. Our balance sheet strength is based upon a mix of secured debt, unsecured debt, lines of credit and unencumbered assets are an important part of that. So right now, we're very comfortable having those assets unencumbered. We're even more comfortable with having, I don't know, those assets are worth an enormous amount of money, many billions of dollars. We're very comfortable having those assets available, should it available as a source of credit should the opportunities come up.

Okay. And I assume that helps with the tracking stock if they're not encumbered or does that have nothing to do with it?

The tracking stock will have its own financing plan which we'll get to when we launch the tracker. I mean low debt on the tracker is an important part of that strategy.

Okay, all right, thank you.

And we have our next question from John Kim with BMO Capital Markets.

Thank you. Good morning. I realize the tax sustenance at the Mart is backward looking, but are you surprised by the level of increase? Just given you renovated the asset five years ago over the last year and half, almost two years, there's been a lot of disruption to the trade shown up and office occupancy of the asset. I was just wondering if you were surprised by the amount of increase on taxes there.

I didn't hear the question.

John, look, I would say anytime your taxes go up 4% to 7%, you're surprised at the magnitude of that. So we knew there would be an increase. I think the magnitude has surprised the entire market. We were not alone, right? I think there's been a number of articles written about how most of the large landlords have been impacted by similar increases. So it's high. We're certainly going to appeal it. We don't make any promises on that, but it is what it is. And as we said, the meaningful portion of that will be reimbursed by tenants beginning in 2022. And we're, I think we're no different than the balance of the market, frankly.

A few years ago, you gave indication that you thought you could collect 80% of the tax increase as the tenant reimbursement. Do you feel like you could still obtain that level of reimbursement from your tenants?

Yes, I mean I think look, it's obviously dependent on the occupancy in the building, which is down a little bit now. But I think 75% to 80% is not an incorrect assumption. It will be in that neighborhood.

Okay, my second question is on Facebook or now it's called Meta, I suppose, looking to expand in New York. I'm wondering if they do expand at 770 Broadway, can you accommodate them without losing Verizon as a tenant?

No.

So the net impact would be like nothing?

First of all, these are important clients and these are pending transactions. So we're really not going to speak about anything. We're really not going to get into the detail of it. But obviously, if a tenant moves in and a tenant moves out, the net result will be pretty much the same.

Are they looking elsewhere in your portfolio?

Say again?

Is Facebook looking also in your portfolio to expand?

We're not going to comment on Facebook or pending transactions with important clients.

Okay, thank you.

Thank you. [Operator Instructions] Our next question is from Alexander Goldfarb with Piper Sandler.

Hey, good morning. Good morning down there, Steve. So just want to go back to Michael's opening questions. I think you can appreciate the skepticism. I mean, the original Penn Station was around for about 50 years. And you guys have been talking about the redevelopment for 20, clearly enhanced by what's gone the west side. But if you're a VNO shareholder, you may or may not be able to hold the tracking stock when it's spun out for whatever fund mandates you have. And if the whole thing that we've been looking at the past 10, 15 years, has been this holy grail of confluence between midtown south, and the far west side, now Penn Station is going to be there. And you're a VNO shareholder, who is held out for that? How is the tracking stock helpful in that, if not every VNO shareholder can own the tracker? And also that's where a lot of that revenue growth or sorry, earnings growth is going to come from those lease up. So I think that's the area where people are grappling, which is how does this help an existing VNO shareholder will not be able to actually own a tracker versus right now, they can pencil and model all this upside that you guys have been laying out?

Well, obviously, if you sell the tracker, you're not going to benefit from it. I mean, that goes without saying…

Right, but some, not every fund can own the tracker because of mandates.

We are happy with the fact that as you say some of our shareholders will have to sell the tracker, we've done the calculation, we think at the margin, it is about a significant transfer. And so it's unfortunate that some investors have to sell it. But what we're looking at is the greater good is the investors that can keep it or buy it, we think will be enormously enhanced by the transaction. Said in another way, we think that the Penn districts future, in the larger company, where it's diluted is not as good at outcome as if it's separated, where it's a pure play for the Penn district. We understand what you're saying, we're unhappy about the fact that some funds will have to sell. They are not large numbers, we think - we think it's handleable, but what we believe is the greater good will be enhanced by the idea.

But it's still a synthetic, Steve, isn't it that I mean, it's just laying sort of paper claim to the - it's not like Alexander's which physically owns those assets. It's just laying claim on paper. It's a synthetic, it's not like it's a direct. Correct?

The answer is yes. But that's sort of argumentative, Alex. The tracker should perform as the assets or the underlying assets that it is than it tracks as they perform.

Actually I think your Alexander's analogy actually is an interesting one. If you think about Alexander's, Alexander's is an externally advised entity, right? The public owns one-third. That stock is done, when you look at it from the time that development really convinced substantially in that company has done extraordinarily well. And so I think the corollary here is actually quite similar, right, where we're in the - yes, we've been talking about it for a long time. But the reality is the development really just commenced in the last couple of years, right? And it's underway right now with Farley, Penn 1, Penn 2, and obviously a lot more behind that. So we've talked about the public owning a portion of it, not all of it, probably less than half of it. And so if you think about it, it's kind of like Alexander's in the sense of that public tracker is sort of an externally advised entity, managed by Vornado very similar to Alexander's. And in terms of the shareholders, that there's no - the only shareholders that are going to be forced to sell this are some of the index funds, by the way, not all of them, not most of them, but some of them, any investor, that is active investor that makes dedicated decisions about specific companies can contain on both pieces, by the way, they can stop up even more of the tracker. So we talked about this, like those four sellers, there's no buyers, on the other side, we know for a fact they're investors that have tremendous belief in the Penn district, would like to just own the Penn district, like the higher risk, higher reward, believe in what's going on in that part of the city and what we're doing. And prefer to own that directly not with everything else. So there's going to be, obviously, it'll settle out when we distribute it, and there'll be some net selling from some of the funds, as you alluded to that have to sell. But we also think there is a group of investors that are not in Vornado that will stop up at the demand. And our goal is for that to trade, very well, and I think your Alexander's analogy combat, that is a very good analogy in terms of the trajectory of that company once the development commenced.

Okay. And then Steve, going back to the politics, clearly the Mayor race, we can only do better. And either candidate is, obviously much more pro-business, much more understanding of the city than the prior. But when you look at the Governor's race, their whole goal is definitely tracking to the left as she tries to veer off, Attorney, State Attorney General James. So if you look at what's going on in the good eviction, probably end up with statewide rent control. Why are you optimistic at the state level that it will be as productive and supportive of real estate and business in New York, as the Mayor election when you look at the politics, it seems to be taking the opposite angle?

I can't answer that question, Alex. I mean we've met the Governor. She's a seasoned politician with a 25-year career. She has an entire career of being supportive of business. She understands what's going on in New York. She understands the Penn District. And we believe that she will be a perfectly fine leader. And other than that, I can't get into it. I want to get back for a moment to Michael's very fine answer to your question about the tracker. There are trade-offs here. In order to create a separate legal entity, a spin off, for example, which we have done twice before with JBG Smith and Urban Edge, we would have to have a totally separate management team, totally separate board, totally separate everything. That's an untenable. That's not a doable prospect, and it's untenable, and we can't do it. We need the same people with our leasing and development team, for example, okay? And also it would be very, the additional overhead would be enormous. So the trade-off is that we can use the same team, the same Board, the same governance, but we can get investors to be able to invest in whichever part of our company they want to or both, okay? So it's interesting, I expect that many investors will continue to hold both securities, which is actually the same thing as if we did nothing in terms of separating the tracker. But at the margin, there will be a new group, as Michael said, of investors who actually have an enormous level of enthusiasm for the west side of New York, for Penn coming into New York and for what we're doing in the Penn District. And at the margin, we think it will be a very successful investment.

Okay. Thank you, Steve. Thank you, Michael.

And we have our last question from Ronald Kamdem with Morgan Stanley.

Two quick ones from me. One is just going back to sort of the retail portfolio. Just curious in terms of just more commentary when retailers are looking at space today, what are they focused on? Is it occupancy cost? Is it gross margin? Is it foot traffic levels, just sort of what's making the marginal decision for retailers maybe today that may have been different sort of pre-pandemic and so forth? Thanks.

It's the same as it's always been forever, and that is what sales volume can they do in a particular store versus the cost structure versus the rent. Things are a little different today than they were. Some stores in Manhattan were sort of flagships and advertising for the brand, that's kind of gone by the wayside. Retailers today want to make money in each individual store. So the number one statistic is what their expected sales volumes will be versus what the health index would be to the occupancy cost.

Great. And then if I could just follow-up on the Wegmans deal. Just any sort of color on what the opportunity could be in the portfolio. Is there anything different about sort of their lease structure versus a typical structure? Any color would be helpful.

I don't think I have anything to add there. I mean, we're replacing, first of all, 770 Broadway is the Facebook building. We're replacing Kmart with Wegmans. That's a huge uptick. The rent is significantly higher, and it's a traditional lease, it's a long-term lease. And we're very, very excited about it. And there may be other opportunities with Wegmans and the rest of our portfolio.

Great. That's it for me. Thank you.

Thank you. We have no further questions in queue. I will now turn the call over to Mr. Steven Roth, Vornado's Chairman and CEO for closing remarks.

Thank you. I have one final important note before we end this call, and that is that Cathy Creswell, this is Cathy Creswell's final earnings call before she retires. I want to thank her for her many years of service and friendship. We wish her well, and I'm sure everybody on the call wishes her well. We'll see you at the next call. Thanks very much.

And thank you. Ladies and gentlemen, this conclude today's conference. Thank you for participating. You may now disconnect.