Good morning and welcome to the Vornado Realty Trust, 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. At that time, please press star then one on your touch tone phone. 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. 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 supplements. 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 31st, 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, Steven Roth, Chairman and Chief Executive Officer and Michael Franco, President 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 want to express my optimism about the economy, New York City, and our business. The city is recovering quickly, especially in the apartment market, which saw occupancy plunge to 17%. This was unprecedented as renters vacated their apartments during the work-from-anywhere period, but we've now bounced back to pre-COVID occupancy levels and even surpassed previously set rent prices. This is likely the most rapid recovery in history. Public transit usage is increasing, which is vital for the city. Restaurants and sporting venues are bustling, and Broadway along with other cultural locations have reopened. With the easing of travel restrictions this month, we expect a return of international tourists, and we're noticing heavier automobile and pedestrian traffic everywhere. Vaccination rates among office workers are high, around 90%, and there's a consistent message from our tenants that they want employees back in the office. Office occupancy is rising, and this week we're up to 43%. While there’s some frustration regarding how long the return to work is taking, it's clear that office work has significant advantages over remote work. Key messages we hear daily emphasize health, wellness, culture, collaboration, purpose, productivity, and socialization, underscoring the need to return to work. While exact timelines for full office returns vary by company, it's evident that the office remains central to work and success. Our business is definitely on a recovery path toward growth. Michael will discuss our operating results shortly. We had a strong quarter, and we feel positive about future trends. Various companies in the economy are experiencing notable post-COVID activity increases, and so are we. Glenn and his team are busier than ever with deals across all our assets. Citywide, leasing volume in the third quarter reached its highest point since 2019. Our leasing activity and the number of proposals we're working on, especially larger ones, are strong as companies look to expand. This surge in activity highlights the importance of office spaces for businesses. New York continues to have a dramatic competitive edge due to its infrastructure, size, and skilled, diverse workforce. The tech sector, in particular, is aggressively seeking space in our submarkets, confirming New York's status as the second largest and most significant tech hub in the nation. In the Penn district, our initiatives are progressing rapidly. We're aiming to open the Pruvale and the 9th Avenue entrance by year-end. Facebook's tenant work is advancing, with employee occupancy scheduled for the second quarter of 2022. At the Moynihan Train Hall, we've finalized 22 retail leases, and Starbucks has indicated that its new Moynihan store is performing the best out of its 190 Manhattan locations. In Penn Station, the construction of the Long Island Railroad Concord is about one-third complete, and we will own both sides of this busy concourse, which will be a significant advantage for us. The first part of the Penn 1 lobby is now open and looks fantastic. Our unique three-level premium amenity space will open soon, and the other section of the Penn 1 lobby will be finished by the end of the first quarter of 2022. The full renovation of Penn 2 is progressing on schedule and within budget. The demolition of Hotel Penn will begin this month, setting up a prime development site. There is strong interest from both office and retail tenants in the Penn district, with various large office users now focusing on Penn 2. Regarding the financing for the Penn District, we need about a billion dollars to complete Farley Penn 1 and Penn 2, which will be entirely covered by our cash reserves. Notably, both projects are free of any mortgage debt, and as these valuable assets come online, we anticipate around $200 million in additional annual earnings. The Manhattan retail market has reached its lowest point, and although it will take time for rents to climb back, leasing activity and tenant interest are rising as residents, office workers, and tourists return. New York remains a preferred location for leading retailers. A notable recent deal is with Wegmans, a top grocer in the region, at 770 Broadway, taking over from K-Mart, which signifies a substantial improvement. Additionally, we secured retail deals this quarter with luxury brands and food retailers, completing the retail re-tenanting of 595 Madison Avenue with luxury tenants Fendi and Berluti, both of which are part of LVMH, along with Kristoff and Stefano Ricci. We sold three retail assets on Madison Avenue this quarter and have contracts to sell two more in early 2022. We maintain our faith in high street retail, believing that demand and activity have bottomed out. I can provide further details during the Q&A. We reaffirm our updated retail guidance from our last earnings call. For 2021, we expect cash net operating income of slightly over $135 million; for 2022, the estimate is $160 million; and for 2023, we're anticipating at least $175 million. Regarding rent collections, we reached nearly 100% for some time now. Collections on the minimal rent deferrals granted during the crisis are also around 100%. Currently, the main topic is the rate of tenant employee occupancy, which is at 43% company-wide and has been increasing steadily since the summer. We are gathering substantial data on usage as employees badge in, and many of our buildings have occupancies in the 70s. Furthermore, Wednesday has become the busiest workday of the week, and in October, 61% of unique employees came to work. Lastly, I want to highlight our commitment to sustainability, where we continue to lead. Vornado was recognized as a global sector leader for all office diversified real estate companies in the 2020 Global Real Estate Sustainability Benchmark survey, achieving our highest GRESB score of 94. We also ranked second among 94 publicly listed real estate companies in the Americas that responded to GRESB, surpassing most of our local competitors. Thanks to Dan Egan and his team for their outstanding leadership. Now, over to Michael.

Thank you, Steve, and good morning, everyone. I will start with our third quarter financial results and then provide some comments on the leasing and capital markets. As Steve mentioned in his opening remarks, our business and financial results are recovering alongside New York City's recovery. For the third quarter, our comparable funds from operations, as adjusted, was 71 cents per share, up from 61 cents in the same quarter last year, marking a 10 cent or 16% increase. This increase would have been 26% without the once-every-three-years real estate tax hike, which will largely be reimbursed by tenants next year, reflecting a timing issue. We have detailed a quarter-over-quarter comparison in our earnings release on Page 5 and our financial supplement on page 7. The increase was driven by several factors: $0.10 from tenant-related activities, which includes $0.06 from new lease commencements and $0.04 from the non-recurrence of straight-line rent and tenant receivable write-offs from the previous period, $0.04 from ongoing improvements in our variable businesses, $0.02 from acquiring our partner's 45% interest in One Park Avenue in August, and another $0.02 from reduced general and administrative expenses due to our overhead reduction program last December. However, these gains were partially offset by $0.06 in real estate tax expense related to an increase in the triennial tax assessed value of The MART, which will mainly be billed back to tenants starting January 2022. Additionally, there was a $0.02 rise in miscellaneous expenses primarily linked to our new preferred issuance, albeit partially mitigated by savings on interest expenses. Our third quarter comparable results surpassed the 2020 fourth quarter run rate discussed at the beginning of the year and on our last earnings call, and we expect this trend to continue into the fourth quarter. There were also several non-comparable items in the quarter, totaling about $0.11 per share of income. Regarding our variable businesses, we continue to experience a recovery as the city rebounds. Signage is seeing healthy bookings into the fourth quarter, and BMS is performing near pre-pandemic levels. Our garages should be fully operational by 2022. Several trade shows have successfully occurred, though attendance was lower due to travel restrictions. Aside from Hotel Penn's income, we anticipate recovering most of the income from our variable businesses next year, with a complete return expected by 2023. Company-wide same-store cash NOI for the third quarter rose by 2.8% compared to the same quarter last year, and it would have been 8.1% without the aforementioned additional real estate tax expense at The MART. Our core New York office business increased by 7.6%, while our retail same-store cash NOI climbed by 14.2%, chiefly driven by new lease commencements at 595 Madison Avenue and 4 Union Square South alongside lower real estate taxes. Office occupancy at the end of the quarter was 91.6%, reflecting an increase from the second quarter, which we believe was the low point for office occupancy. We expect this figure to continue rising based on upcoming leases for signature and ongoing negotiations. Retail occupancy held steady at 77.2% compared to the second quarter. Looking at leasing markets, New York leasing volume reached its highest level since the start of the pandemic, with over 7 million square feet leased during the quarter. Employment growth is on the rise. Asking rents and concessions have stabilized for high-quality buildings, with some sub-markets even seeing improvements. Sublease space is being absorbed or removed. The trend of seeking quality has persisted, with tenants prioritizing asset quality, landlord strength, and transportation access as they emerge from the pandemic. We are well-positioned to benefit from this trend given the quality of our portfolio and the capital we've invested in redeveloping our assets over the past decade. Notably, 65% of the total transaction volume in the city consisted of new and expansion leases, including 15 deals exceeding 50,000 square feet. The tech and financial service sectors drove the majority of leasing activity, contributing to 60% of all transactions. We had a strong third quarter, signing 27 office leases totaling 757,000 square feet with an average starting rent of $77 per square foot, reflecting positive GAAP and cash mark-to-market rates of 4.21% and 1.4%, respectively. A notable highlight of the quarter was an early lease renewal within our public group for 514,000 square feet at 100 West 33rd Street, reaffirming IPG's commitment to the Penn district and addressing what was our largest expiration in 2023. We also executed a full floor expansion with Google at 85, 10th Avenue, increasing their total footprint in the building to nearly 300,000 square feet. Our buildings catering to financial service users continue to excel, with completed deals during the quarter including 52,000 square feet at 280 Park Avenue, 37,000 square feet at 88, 7th Avenue, and 19,000 square feet at 650 Madison Avenue. We have a busy portfolio with more activity on the horizon. Our leasing pipeline remains robust, with 1 million square feet of leases currently in negotiation and an additional 1.5 million square feet in advanced discussions. Our office expirations for the remainder of 2021 and 2022 are quite modest, with only 936,000 square feet expiring, which is just 5% of our portfolio, and 189,000 square feet coming from Penn 1 and Penn 2. Upcoming office expirations in 2023 total 1.5 million square feet, with 350,000 square feet in Penn 1 and Penn 2, a significant decrease since last quarter due to the Interpublic Group lease renewal. In retail leasing during the third quarter, we executed 10 leases totaling 111,000 square feet with an average starting rent of $110 per square foot, recording positive GAAP and cash mark-to-market rates of 45.3% and 19.6%, respectively. The largest transaction for the quarter was the previously disclosed 82,500 square foot lease with Wegmans at 770 Broadway. Furthermore, we successfully leased the retail space at the Fuller Building to Stefano Ricci, achieving four long-term deals with luxury retailers and reflecting a recovering market for prime locations. We also finalized agreements with Citibank at One Park and Capital One at 731 Lexington, signaling the return of banks to the market. Lastly, regarding capital markets, the investment sales market is gaining momentum, evidenced by several recent strong office sales and additional assets currently on the market. Investor interest in New York is clearly rebounding as they recognize the city has stabilized and find the relative value appealing. On the debt side, financing market pricing is tighter than ever, and we remain active in refinancing our debt to take advantage of low rates. In September, we took the opportunity presented by the tighter preferred market to refinance our 300 million, 5.7% perpetual preferred shares at a 4.45% issuance of the same amount, which is a very attractive rate for the time. Currently, our liquidity stands at a strong $4.443 billion, including $2.268 billion in cash and restricted cash, along with $2.175 billion undrawn under our $2.75 billion revolving credit facilities. With that, I will turn it over to the Operator for Q&A.

Thank you. We will now begin the question-and-answer session. Each caller will be allowed to ask a question and a follow-up question before we move to the next caller. 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 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. In terms of 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're seeing 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 is frankly not 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. 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 is still down.

And then, can you just -

Michael, hang on.

Yes, Steven.

Let me add to what Michael Franco mentioned. There's a necessary increase in value for everything we consider purchasing. Currently, the perception is that our stock struggles in the market, likely around an 8% cap rate. Meanwhile, properties in Manhattan that we would contemplate tend to sell below 5%, making the math unfavorable for us. Investing in an asset with a 5% yield doesn’t make sense, especially given the capital required to maintain them year after year, which might return only about 4% cash-on-cash, while our stock trades at a significantly lower value. Any acquisition we would make could dilute shareholder value, and obviously, we're not inclined to do that. If we come across a vacant building that we believe could yield substantial value, we might consider it. Overall, it’s challenging for us to engage in transactions and expand right now. On the positive side, we maintain liquidity, have a strong balance sheet, and see excellent opportunities to effectively deploy our capital in the Penn district. So, our primary focus is currently on the Penn district. I'm reiterating what Michael stated.

Well, that's helpful, and 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 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've remained committed to the tracker. And let's understand what I remain committed to; I remain committed to allowing our investors to invest in either our stable core business or 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 strong believers that we will create enormous value in the Penn district, we will create a district that will command premium pricing, and we couldn't be more excited about it. I remain committed to it, number one. Number two, 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 are seeing a complete turnover in government officials, and we have pending matters with them. And so obviously we're going to maybe slide a little bit as that all plays out. We are very optimistic that the new government leaders will be constructive, will be business-friendly, and recognize that the Penn district demands their attention, and we believe we will get their positive attention. The next thing is I read among the items some skepticism about the idea of separating the Penn district. I'm very surprised at that. I'm as enthusiastic about this as I've ever been about any project in my career, so I'm having trouble understanding it. We have had conversations with multiple real estate investors as opposed to stock investors who share our judgment about the potential of the Penn district. But from the point of view of the analyst community, I'm almost starting to believe that we are in a show-me mode. What that means is that we have to knock off some more leasing to be able to surface the values. That's basically what's going on. We have no counter party in the tracker, we have no timetable. It's going to slide a little, but not too much. And we think it's going to be smashing and really successful.

And I appreciate those comments and well, 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 it's always been that opportunity. I couldn't go through the list of what I think you've called the big kahuna; a lot of other things. I think it is similar. It's in 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 from the parent company and has other comps or other things in terms to highlight that value, your comments about the private markets are much more akin to where I think investors want to be able to highlight. But to your point, you don't want to give up a part of that project to private investors 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 like I think 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.

And 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 some kind of a split on new versus renewals would be helpful, thanks.

I'm going to let Glenn take it, Steve, but the answer is yes. Glenn, why don't you give some color on all 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 players. Things have picked up really well since the reopening, as we 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 do the densities look like particularly on carrying the new deals and how do they compare from a space per employee perspective to maybe deals from two years ago?

Sorry, I said this in 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, versus cubical office. But generally, no change. People are planning for the future. They are back at it. A lot of them were acting as if it's pre-pandemic times. Growth, a new fresh start. All about talent recruitment and moving forward.

In response to your question and many others from analysts, there is still some skepticism about New York's recovery and the demand for office space. Building on Steve's earlier point, we are in a 'show-me' phase where tangible results will help change perceptions. However, I can tell you that there is ongoing activity at every property across a variety of users. The tech sector's strong demand is even greater now than it was before COVID, and the financial sector is experiencing significant activity as well. Companies are thriving and in growth mode, which is evident in our pipeline. The leasing market is giving a clear signal that New York will thrive. Companies are eager to set up here, and I predict that positive statistics will continue to emerge in the coming quarters. This quarter has shown good progress, but we have much more lined up across our portfolio.

Great. And then I guess

Steve, good morning. The stock market has seen a significant decrease in the value of our stock and those of similar companies in the industry, which are now far from where they were before COVID. This reflects a sentiment of confusion, uncertainty, and concern about remote work and its impact on the commercial office market. We recognize this situation and believe in two key points. Firstly, in New York, we observe that companies are dedicated to remaining and expanding in the area. This is particularly true for sectors such as financial services, media, entertainment, and especially technology, as the scale of New York is unmatched elsewhere. For instance, major tech firms have signed leases recently that require thousands of engineers, a talent pool that cannot be found in cities like Austin or Nashville. Secondly, business leaders we interact with daily are currently navigating their policies regarding remote work and hybrid solutions while still believing in the necessity of office space, especially high-quality space, to attract and retain talent. There is strong demand for office space among major companies despite the uncertainties surrounding remote work. We are confident that our tenants are making informed decisions, and we believe that the traditional office will prevail, albeit with some adaptations for hybrid work. Our discussions indicate a strong desire from companies to have their employees return to the office, as this is essential for their growth. We are optimistic about the demand for office space despite the current market uncertainties.

Great. Just as a quick second question, Michael, I know trade shows were somewhat back in the third quarter, and last quarter you mentioned that NeoCon was moving to the fourth quarter. Do you have any insight at this point regarding the potential size of trade shows in the fourth quarter? Also, what events are already scheduled for next year, and how do their sizes compare to pre-pandemic levels?

Since July, we organized eight trade shows, including our two larger ones and the Armory show in New York. There were travel restrictions, especially international ones, which affected attendance. I would estimate attendance levels are about half of what they used to be historically. However, the shows were successful, and we managed to get things back on track. Year-over-year performance was positive. We expect to host a full set of trade shows next year and anticipate a significant recovery. Realistically, we don't expect trade shows to fully return in 2022; it will likely be 2023 before everything stabilizes. In 2021, we project that trade shows won't significantly contribute to our variable businesses. However, next year, we believe the numbers could increase by several million dollars. I don't want to provide a specific figure at this moment, as we need to consult with our team to refine that estimate. The trend indicates that now that everything is functioning well, and with international travel resuming, we should see a solid recovery next year.

Great, thanks.

Hi, Steve, the overriding fact 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 are really important. So we can't predict what's going to happen in 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.

We have our next question from Nick Yulico with Scotiabank.

Thanks. Good morning, everyone. Regarding leasing activity, the pipeline appears strong with not much in expirations next year. Can you provide any insights on how to assess occupancy trends, particularly for the New York City office portfolio?

Glenn.

Michael mentioned that we believe our office occupancy has reached its lowest point, currently at 91.6%. We expect it to continue improving each quarter based on our actions. Previously, we were at 96% to 97%, so our current level is largely due to COVID. We feel that conditions are getting better and that we have reached a turning point and are on the path to recovery.

Thank you. My second question is about the Penn district, specifically regarding Hotel Penn as the key development site in the city. Referring to your previous disclosures, you estimated the NAV for that project at around $500 million, which translates to about $250 per square foot for zoning. Is that still your assessment of its value? Additionally, I'd like to know how we should approach the upcoming ground lease reset for Penn 1 in 2023. Should we consider the $250 per square foot figure for Hotel Penn as a useful indicator for 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 am 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. Yeah, the reason I ask 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.

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 you could be bottoming here? Your thoughts on why? And what we should expect going forward.

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 few people on the streets, vacancy was high and not much was going on. 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 the snap-back, the 60 million people, immediately. But that's the term line from the city being opening, and the attendance at sporting events and Broadway shows, and other things, is quite good and quite indicative of what we think is going to happen. Retailers want to know there's 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 seeing more interest from retailers. By the way, that's all sub-markets. The tourist oriented sub-markets of 5th Avenue and Times Square, obviously, you would expect to be the ones to come back to last because that's so dependent on tourism, and with that now opening up, retailers want to see it happen. But again, even there, we're seeing inquiry from tenants in both those sub-markets, rents are obviously down that's inducing demand. So there's discussions that are underway and action that's occurring. 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. I wouldn't expect rents to rise near-term, but once we start getting some pace of transactions, I think that'll be a shot in the arm for the market.

But to be clear, this is going to be a multi-year recovery. This is not going to be a rapid V-shape rebound. It's going to take years for this market to recover. And it may never recover to the peaks that we had 5 or 7 years ago.

Okay. Thank you. And then I -

But I do think there will be volume and it will recover. And think about it this way. The shutdown from COVID was probably the most dramatic 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, etc. The suffering was monumental. The first reaction from the retailers was to go into a shell, stop everything, and shed liability. 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 thriving 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. We're bottomed, we're in a recovery, and we are budgeting and underwriting that the recovery will be slow-paced.

Okay. Thank you. If you think about the situation, the market went completely quiet for nearly two years. Now, people are realizing there is a future beyond this. Many are finding success, and the stronger retailers are benefiting from the pent-up demand. We’re observing a significant rise in interest and demand, but we’re not seeing a sharp increase in the prices people are willing to accept. We have hit the lowest point, we are in recovery, and we expect that this recovery will be gradual.

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

Do you see yourself selling more, or do you see yourself actually buying going forward?

We are definitely interested in making acquisitions. We have significant expertise in retail, and we aim to purchase high-quality assets at attractive prices, though suitable opportunities have not yet arisen. To give you an overview of the five properties we've sold, these yielded a negative income of over $3 million this year. The occupancy rate was 30%, resulting in a vacancy rate of 70%, which is accurate. However, one of the tenants in those five properties is temporarily rebuilding their store. We anticipate this tenant will leave in a couple of years. Excluding this tenant, the occupancy drops to 11%. If we account for this, the negative earnings would exceed $3 million once the tenant vacates. Additionally, the capital required to lease these five properties fully is considerable, as we need to lease up 90% of them, essentially starting from scratch. Considering the timeframe and our assessment of how long it will take to achieve a reasonable return, we concluded it was best for our business to sell these assets. The proceeds from these unencumbered assets, which have no debt, are expected to generate about $184 million to $185 million in new cash that we believe could be utilized more effectively. We are selling the Madison Avenue properties to an offshore buyer known for making smart distressed purchases, and we have a friendly relationship with them. We foresee that the buyer will have a profitable investment over a 10-year period, which is why we chose to sell instead of hold those assets. We believe both the buyer and ourselves will benefit from this transaction. It's also worth mentioning that 25 years ago, Madison Avenue was the exclusive hub for luxury shopping in New York, with the Upper East Side being the only significant market for high-end brands. Over time, other neighborhoods like Chelsea, Tribeca, and the Upper West Side have developed and attracted customers for these brands. Luxury retailers have expanded from having just one store on Madison Avenue to multiple locations in various neighborhoods. This shift in demographics contributed to our decision to sell those assets, which stands in stark contrast to the continued popularity of areas like 5th Avenue and Times Square.

So as you think about putting capital to work, do you still think luxury is the way to go? Or no, you're thinking actually more in middle-of-the-road type brands?

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

Okay. And if I could just ask, you've had talked about no debt on any of the assets in Penn Station, or at least the development or 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 have a financing plan for the growth of the Penn district. We are currently comfortable with those assets being unencumbered. It is too early to discuss how we will permanently finance those assets if we choose to do so. Our balance sheet strength comes from a combination of secured debt, unsecured debt, lines of credit, and unencumbered assets, which are essential to our strategy. At this moment, we are very comfortable with the unencumbered status of those assets, which hold significant value, amounting to many billions of dollars. We are also at ease knowing these assets can serve as a source of credit if opportunities arise.

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. But having low debt on the tracker is an important part of that strategy.

Okay. All right, thank you.

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

Thank you. Good morning. I realize the tax estimate at the MART is backward looking, but are you surprised by the level of increase? Given you renovated the assets five years ago, over the last year and a half, almost two years, there's been a lot of disruption to the tradeshow and not enough occupancy of the asset. I was wondering if you were surprised by the amount of increase on taxes there?

I would say that anytime your taxes increase by 40%, it's surprising due to the extent of the rise. We anticipated an increase, but the scale of it took the entire market by surprise. We aren't alone in this; many articles highlight how large landlords have faced similar hikes. It's significant, and while we intend to appeal it, we can't guarantee the outcome. Nonetheless, a substantial part of that will be reimbursed by tenants starting in 2022. I believe our situation is similar to that of others in the market.

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

Yeah. I think like it's obviously dependent on the occupancy in the building which is down a little bit now, but I think in 75% to 80% is not an incorrect assumption. It'll be in that neighborhood.

Okay. My second question is on Facebook. Now it's called Meta, so I'm 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 nothing?

First of all, these are important clients, and these are pending transactions. 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 you looking elsewhere in your portfolio?

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

Okay. Thank you.

And thank you. We have our next question from Alexander Goldfarb with Piper Sandler.

Good morning, Steve. I want to revisit Michael's opening questions. I understand the skepticism regarding the original Penn Station, which lasted about 50 years. You've been discussing its redevelopment for 20 years, especially with developments on the Westside. For VNO shareholders, there's uncertainty about whether they can hold the tracking stock when it’s spun out due to their fund mandates. If we've been looking for the ideal connection between Midtown South and the far Westside, with Penn Station included, how does the tracking stock benefit shareholders if not all of them can own it? Additionally, much of the anticipated revenue growth will come from those leases. This raises concerns about how existing shareholders can actually obtain the tracker while they can currently model the potential upside you've outlined.

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

But not every firm can own the tracker due to mandates.

We are unhappy with the fact that as you say, some of our shareholders will have to sell the tracker. We've done the calculation, and we think that at the margin, it is about a significant transfer. And it's unfortunate that some investors have to sell it. But what we're looking at is the greater good is when investors that can keep it or buy it, we think will be enormously enhanced by the actions. Said another way, we think that the Penn district future in the larger company, where it's diluted is not as good an 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 a large number, we think it's handleable. But we believe the greater good will be enhanced by the idea.

But it's still a synthetic, right? I mean, it's just making a paper claim to it. It's not like Alexander's, which actually owns those assets. It's only a paper claim. It's synthetic, not a direct investment, correct? The answer is yes. The tracker should perform in line with the underlying assets that it tracks as they perform.

I think your analogy to Alexander's is quite interesting. Alexander's is an externally advised entity where the public owns one-third. When you look at the stock since significant development began in that company, it has performed exceptionally well. The situation here is quite similar. We've been discussing this for a while, but the actual development started only in the past couple of years, and it's currently underway with Farley, Penn 1, Penn 2, and more projects to come. The public owns a portion of this, likely less than half. So, similarly to Alexander's, this public tracker functions as an externally advised entity managed by Vornado. The only shareholders likely to be forced to sell are some index funds, not all or most of them. Active investors who make informed decisions about specific companies can continue to invest in both areas and may even acquire more of the tracker. While we discuss there being sellers without buyers, we know there are investors who have strong confidence in the Penn District and prefer to invest directly in that area, seeking higher risk and potential reward. There will be some net selling when we distribute it, as you mentioned, but we also believe there are investors outside Vornado who will fulfill that demand. Our aim is for this to trade well. Your analogy to Alexander's captures the essence of the trajectory; it will be strong once development begins.

Okay. Steve, regarding the politics, the mayoral race offers us a chance for improvement. Both candidates are significantly more pro-business and have a better understanding of the city than the previous mayor. However, in the governor's race, Hochul seems to be leaning left as she distances herself from state attorney general James. Given the situation with eviction, we may likely see state-wide rent control. What gives you optimism that the state will be as beneficial and supportive of real estate and businesses in New York as the mayoral election, especially since the political climate appears to be moving in the opposite direction?

I can't answer that question, but we've met the governor. She's an experienced politician with a 25-year career who has consistently supported business. She is knowledgeable about New York and the Penn district, and we believe she will be a competent leader. Beyond that, I can't provide further details. I want to return to Michael's insightful response regarding the tracker. There are trade-offs involved. Creating a separate legal entity, like a spin-off, would require a completely independent management team and board, which is not feasible for us. We need our current leasing and development team to stay intact. Additionally, the increased overhead would be substantial. So the trade-off is that we can maintain the same team and governance while still allowing investors to choose which part of our company they want to invest in, or both. Many investors will likely continue to hold both securities, which is similar to not separating the tracker. However, there will be a new group of investors who are enthusiastic about the Westside of New York, the ongoing developments there, and our work in the Penn district. We believe this will be a very successful investment at the margin.

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

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

Two quick ones from me. One is just going back to 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 costs? Is it gross margin? Is foot traffic levels? Just what's making the marginal decision for retailers maybe today that may have been different pre-pandemic and so forth?

It's the same as it has always been. Retailers consider the sales volume of a specific store in relation to its cost structure and rent. The situation today is a bit different than in the past. Some stores in Manhattan used to serve as flagships and brand promoters, but that is no longer the case. Nowadays, retailers aim to generate profit from each individual store. The focus is on their anticipated sales volumes in comparison to the occupancy cost, which is a key factor.

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 their lease structure versus a typical structure? Any color would be helpful.

I don't think I have anything to add there. We're replacing 770 Broadway, which is the Facebook building, with Wegmans instead of Kmart, and that's a significant improvement. The rent is considerably higher, and it's a traditional long-term lease. We're very excited about it, and there may be other opportunities with Wegmans in our portfolio.

Great, that's it for me. Thank you.

Thank you. Before we conclude this call, I want to mention that this is Cathy Creswell's final earnings call before her retirement. I would like to express my gratitude for her many years of service and friendship. We wish her all the best, and I’m sure everyone on the call feels the same way. We look forward to seeing you at the next call. Thank you very much.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.