VNO - Vornado Realty Trust

[Spekulatius]

hahaha

 

i mean there's not anything more to say. i sold my excess hedges today and am at my maximum loss amount as my remaining puts are in the money and cover the bulk of my position.

 

all in 400-500 bp loss to net worth thus far, definitely up there with my biggest, if not biggest ever (absolutely #1 on a dollar basis)

 

$96 / share management NAV.

$47 price

203.5 shares out

 

96-47 = 49, about a $10 billion gap between management NAV and market value. there are $31 billion in assets ($27 billion which i would define as risk assets, cash/prefs i don't count as risky). 10/27 = 37% on an asset basis discount.

 

either fundamentals will deteriorate or the price will go up.

 

there is no other option. one does not languish at a 50% NAV multiple. this ain't no hong kong propco or Mitsubishi Estates. this is the US where shareholders matter and public and private markets converge....eventually.

 

Bought a few shares too - first lot at $52.5 and second at $48. Nothing to do but sit back and wait. I kind of think it’s good thwt they didn’t buy back shares. Who knows how the liquidity situation for real estate will look like.

 

I was looking around for some high yield bonds of energy related issuers and it seemed like they started to crack. HYG (which is really equity in disguise ) is down 4.3%.

[thepupil]

Almost as if Manhattan real estate is worth something...

• Amazon.com (NASDAQ:AMZN) is paying $1.15B cash to buy the former Lord & Taylor flagship store in Manhattan, the New York Post reports.

• That 660,000-square-foot building was set to be headquarters for WeWork (WE) before that company's scandal-plagued fall.

• Now, Amazon will pick up $750M in construction loans that had been taken out for remodeling, with some $350M in equity left for building owners. WeWork waives economic interest in the building in exchange for getting out of its lease.

• It will become Amazon's NYC headquarters, housing about 4,000 employees who will move in in about 18 months, according to the report.

[BG2008]

Despite whatever people say about Detroit being the cheaper and better value, the smartest 22 years just want to live in NYC and SF

[thepupil]

well now I really just don't get it...under performing the more levered and smaller SL Green?

 

Izzy would have fired me at least 10x...

 

am I just not getting the memo here...what specific to VNO is happening? I understand we're going into a recession and the hate for NYC office/retail, but the underperformance to peers is really odd to me (it's just a days noise, but it's times like these i thought everyone would be focused on balance sheet)

 

approaching a 9 cap....what is NOI going to do? halve?

 

year to date this is down almost 2x SPY 3x the S&P real estate and 1.2x SLG, which I see as riskier (but obviously same stuff). by the way, that is after under performing all of those things significantly in 2018 (again including SLG).

 

I would also note that VNO is drastically underperforming its cousin JBG Smith. JBGS announced a $500mm buyback so perhaps that's why.

 

So the constant in underperformance is VNO is not buying back , JBGS and SLG are....but a buyback is an increase in risk profile.

 

An empirical evidence of delta in credit risk is VNO's unsecureds of '25 trade 90 bps over the treasury and SLG's unsecureds of 2022 are at 150 over; that's to say nothing of the state of the balance sheet I've repeated ad nauseum.

 

no more posts until 3 handle  ;D

 

 

 

 

 

 

 

 

 

[Spekulatius]

Yeah, makes no sense to me. The lack of buybacks is a positive in a way, since last buybacks would have occurred at higher prices.

[CorpRaider]

I've been buying a little SLG, but I doubt my odd lots are moving the stock.  haha

 

Is VNO getting sued by creditors of the bankrupt Toys R Us?  They aren't involved in the Forever 21 stuff, right?

[thepupil]

yes to Toys R US. don't see it as material, do you?

 

they are involved in that Forever 21 went bankrupt while they were ~1% of leasing revenue, but not sure what you're referring to. perhaps that brookfield bought them....speaking of riskier landlords not being punished as much as VNO...

 

some Toys background. 

 

https://pitchbook.com/news/articles/toys-r-us-creditors-sue-former-bain-capital-kkr-execs

 

https://www.prnewswire.com/news-releases/dovel--luner-toys-r-us-bankruptcy-creditor-trust-files-lawsuit-against-former-ceo-david-brandon-directors-from-private-equity-firms-kkr-bain-capital-and-vornado-realty-trust-and-others-301022708.html

 

https://www.bizjournals.com/boston/news/2018/11/20/bain-puts-10m-into-severance-fund-for-toys-r-us.html

 

https://www.ft.com/content/3d6ba4dc-ec6d-11e8-8180-9cf212677a57

 

seems like the headlines should be "toys r us creditors sue owners for being private equity firms...private equity owners break the corporate veil because Elizabeth Warren and her scary kill PE bill becoming more popular...Steve Roth DGAF" I'll never understand why toys r us is different than anything else divi recap'd and advisory fee'd into oblivion by PE.

[CorpRaider]

Nah, not material maybe just taken by market as more headlines/distractions.  Probably just fits with my narrative of management. 

[thepupil]

so...about those $9 billion of unencumbered assets....lol

 

 

 

[BG2008]

Is there some sort of news that I am missing out on this name?  I know that most NYC employers are asking their employees to work from home.  But this is pretty wild. 

[ratiman]

Sorry that this is a dumb question but I get an approximate $12-$13B EV and ~$1.2B ebitda. That's a 10% cap rate. Is that really that out of line considering we're going into a recession like we've never seen before? 

[thepupil]

It's not a dumb question.

 

A couple thoughts:

 

1. a lot of the debt is non-recourse secured mortgages, roughly $800 / $1.1 billino of EBITDA is encumbered, so if you think that the world will end, VNO will have to hand back a lot of its buildings, but this nevertheless means you have $9 billion of unencumbered assets (using VNO math, so like $3 billion using mr market math lol.

 

2. Tons of cash and liquidity on hand.

 

3. I think VNO is much better positioned than virtually any private operator or more levered public operator (SLG and Brookfield, I'm looking at you). Even if shit really gets bad and they have to raise say, 40mm shares at $30 (this would be terrible and destroy a lot of value, selling 20% of your company for 1/3 to 1/2 of value is no bueno), the scale and access to capital markets over the years will be maintained. Recall that VNO diluted by about 10% during the GFC. That's not good, but its different than losing the company

 

4. a fundamental assumption to my "VNO has no net corporate debt" is the idea that 220 CPS units will close as expected. If you are someone who bout a $50mm apartment in 2015 at 2015 prices, you are having an interesting conundrum...you can forfeit your $12.5mm deposit and not close on your unit, or you can go through with the deal and own a ballin' apartment. I think the majority will close. Why? Many of these types of owners $50mm is not a lot of money and tey want a 220 CPS unit for the vanity factor. Did Ken GRiffin need that $200mm apartment? no. Many just sold their unit at 15 CEntral Park West to buy the new best building. I don't think if you're worth a few hundred or a billion plus you're going to not close. I could be wrong, in which case a stress case may be, VNO gets $200mm of deposits back and sells the remaining units at a 60% discount to expected, that would still be something like $500-$600mm of cash coming VNO's way. if you think the market for 220 CPS will completely completely dry up, then that's an assumption yours truly will have gotten wrong. units like these are like fine art, not even a place to live. the market for fine art may decline, maybe even to a crazy extent, but I not go  away completely

 

5. Many of the individual buildings, even if encumbered are underlevered (theMart and 555 California come to mind). other than 666 5th (which is already gone, sold to Brookfield), I am not aware of any individual buildings that give me pause, the disclosure for each individual building though isn't as great for the non NYC (since they break down the NOI of the non-NYC buildings). See ALX thread for the leverage characteristics of 731 Lexington as another example.

 

6. EBITDA will come down, rent per foor will fall, we are in  a recession. all a question of degree.

 

 

7. I think NYC office (the last I looked for good data on this) got to about an 8 cap in the GFC (I doubt much transacted though, so who knows). We've entered (perhaps for a while) a very low rate environment. Tokyo cap rates have printed below 3% for the best of the best, got up to 5 in GFC. I don't worry about exit cap rate as a I think we are absolutely at very safe valuations. I worry about how much occupancy/NOI will fall. there are lots of long term leases with good corporates such that this will take years to fully take effect. I have generally been surprised by the degree to which office has not gotten credit for its high quality long term leases with good tenants. I think this is a short term phenomenon, but again, I could be wrong. a few pages back on my VNO rents, I pointed out a VIC short writeup on SLG. the short was very wrong because SLG had a lto of below market leases so rents barely budged during the GFC when the short expected them to fall. not saying future will be like the past, but take a look at 555 California's last 100% mark to market lease. rents may come down, but at $85 / foot, 555's leases are well below where they are printing, so to some degree this same dynamic will insulate a recession.

 

 

Our mortgage loans are non-recourse to us, except for the mortgage loans secured by 640 Fifth Avenue, 7 West 34th Street and 435 Seventh Avenue, which we guaranteed and therefore are part of our tax basis. In certain cases we have provided guarantees or master leased tenant space. These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans. In addition, we have guaranteed the rent and payments in lieu of real estate taxes due to ESD, an entity of New York State, for the Farley Office and Retail Building. As of December 31, 2019, the aggregate dollar amount of these guarantees and master leases is approximately $1,524,000,000.

 

As of December 31, 2019, we had $1,515,012,000 (note thgat some of this was dividended out) of cash and cash equivalents and $2,159,120,000 of borrowing capacity under our unsecured revolving credit facilities, net of letters of credit of $15,880,000. A summary of our consolidated debt as of December 31, 2019 and 2018 is presented below.

 

Streeteasy shows about $80mm of 220 CPS closings so far this year.

[thepupil]

also if a 10 cap is normal, I shudder to think what that means for residential...I bought my house for about a 2% cap rate last year  ;D

[Spekulatius]

also if a 10 cap is normal, I shudder to think what that means for residential...I bought my house for about a 2% cap rate last year  ;D

 

If real estate overall is going to 10% cap rate, every single bank and insurance company is going to be broke, FNME and FRE will have trillion Trillion $ holes and everyone with a mortgage currently will be deep underwater.

[BG2008]

also if a 10 cap is normal, I shudder to think what that means for residential...I bought my house for about a 2% cap rate last year  ;D

 

Was that a vanity purchase? JK

[BG2008]

Regarding the 10% cap rate, there are a few things to consider about owning real estate. 

 

First, are you a forced seller?  In 08, I got a lot of calls from RE developers and and lot developers who used 1 year bridge loans.  You can make the argument that you can buy something at a 4% cap rate and have the cap rate go to 10% and you will still do OKAY, not good, but OKAY.  Why?  Because if you have fixed 30 year mortgages at 3.15% and you fully amortize that down.  You can underwrite to a specific IRR (assuming your tenants still pays you).  I have sat in enough meetings with RE private equity guys, Brookfield, and other participants, etc.  Someone once told me that some of their best investments were NYC RE bought at the peak in 2006-2007, but they took out 10 year mortgages.  In 08/09, they were fine as long as their tenant kept paying rent. When interest rates wen lower coming out of the GFC, the cap rates went much lower and their 90% LTV (looking at you Bear Sterns and Lehman) mortgages gave them tremendous upside optionality.  So, paying attention to the loan structure and maturity is very important. 

 

It is always interesting to underwriting to a DCF with VNO.  Because you are receiving an 8% dividend, it does reduce your risk over time as you will get that capital back.  Isn't that the purpose of owning RE in the private market as well.  With fixed rate debt and enough time to allow for rent increases, you actually generate substantial cash flow over time.  Assessing VNO's ability to continue to pay that dividend is essential.  I remember doing a huge spreadsheet on SLG during the GFC and I was able to project out cash flow quite well 5-7 years out.  I also reduced rent by 20-30% and it still came out okay.   

 

I agree with Spek that if the cap rate for NYC office is 10%, we have really serious problems. 

 

The question is "is there existential risk like the malls" which I have refused to invest in.  Recessions are funny and interesting in that big powerful trends tend to emerge afterward.  Or maybe, there were already emerging and recessions tend to accelerate the pace.  I remember suburban offices being hot before GFC.  There was a public company that raised Australian capital that bought Tri State suburban office.  I believe they wind up going to zero after the GFC.  After the GFC, suburban office couldn't find tenants and cap rates went up significantly.  The real question is will Covid somehow force people to work from home more and leading to significant drop in value for NYC office buildings.  Does holding meetings over Zoom and other tech platforms enable people to work from a RV if needed.  I bought a beach house recently with a 30 year fixed rate mortgages that I intend to use as an office.  I think it is a good investment on its own and frankly will help with recruiting millennial interns and analysts.  I think the world is trending more towards a workforce like myself and the mom with 2 kids who mostly works remotely from home.  I know a gal who works for a big 4 accounting firm.  She's been in the office 4 times in the last few years.  The first 2-4 years after college is critical.  But what happens after that?  The RV industry was taking off because people can do their work on the road with their RV parked on the beach.  I think that the Blackstones and Goldman Sachs of the world will always need trophy office.  The demand growth and shrinks at the margin are critical though. 

 

Lots to think about.  But 8, 9, 10% cap for something that should be 4% is tough to pass up. 

[krazeenyc]

also if a 10 cap is normal, I shudder to think what that means for residential...I bought my house for about a 2% cap rate last year  ;D

 

If real estate overall is going to 10% cap rate, every single bank and insurance company is going to be broke, FNME and FRE will have trillion Trillion $ holes and everyone with a mortgage currently will be deep underwater.

 

Right... isn't that why these names are getting punished -- because of this possibility -- given the massive unknown here? (I'm a buyer at these levels and higher too) but why is it "impossible" NYC cap rates to reach 10% or even 12%! They've been there before... and can get there again.  It's certainly not the base case, but it's not unprecedented.

[johnny]

why is it "impossible" NYC cap rates to reach 10% or even 12%! They've been there before... and can get there again.  It's certainly not the base case, but it's not unprecedented.

 

I don't think the current price implies this is impossible or unprecedented:if you buy at a stable 10% and finance at 4%, the spread covers that cap rate expansion within 3 or 4 years. Not a great situation, but you're not homeless.

 

The real question is if this "natural experiment" ends up giving many firms religion about work-from-home. From the perspective of landlords, it is a worst case scenario: not only is everybody going to have to give it a shot, they'll be doing so in the most charmed-possible circumstances (the primary problem with work from home is that you can't really on your employees really giving it 100% unsupervised--its a much less serious problem when they are banned from going to the club and constantly getting signals from the White House that they may be fired at any moment).

 

So yeah, I'd say we would need to be thinking a little bit about how this may end up being the catalyst for a meatspace-to-cyberspace transition.

[johnny]

BG2008, your posts are great. For those of us with little on-the-ground experience, it's either very valuable or incredibly destructive because it gives us an undeserved sense that we have some clue. I'll let you know how it turns out; please PM me with a good service address so that I can sue you if I blow up.

[thepupil]

This is the first post-covid monetization of an asset by a public NYC office REIT of which I’m aware.

 

It’s small of course, but good to see some stuff transacting.

 

If the buyer thought that building was worth $2.4 Billion, then he could have just bought PGRE/SLG/VNO stock for cheaper but whatever. The cynic in me says it’s someone who owns a ton of NYC and is trying to print the whole market up, but that would be a special kind of ridiculousness.

 

 

NEW YORK -- April 1, 2020

 

Paramount Group, Inc. (NYSE: PGRE) (“Paramount” or the “Company”) announced today that it has entered into an agreement to sell a 10% interest in 1633 Broadway, a 2.5 million square foot trophy office building located on Broadway between 50th and 51st Streets in Manhattan. The transaction values the property at $2.4 billion, or approximately $960 per square foot. In November 2019, Paramount completed a $1.25 billion interest-only refinancing of the property at a fixed rate of 2.99%, realizing $179.0 million of net proceeds. Upon completion of the sale, Paramount will realize net proceeds of approximately $114.0 million, which will be used for general corporate purposes. The transaction, which is subject to customary closing conditions, is expected to close in the second quarter of 2020.

 

“With this pending sale of a joint venture interest in 1633 Broadway, we have successfully proven the value of this enormous trophy asset at levels well-above what is implied by our stock price,” said Albert Behler, Chairman, Chief Executive Officer and President of Paramount. “We have always said that we would not hesitate to harvest value when deemed appropriate. To execute on this transaction in the current environment speaks to the quality and desirability of our assets, as well as our team’s unparalleled ability to execute.”

 

Based on the expected timing of the closing of the transaction, the Company no longer expects to receive $0.02 per share of Core FFO that had previously been included in its full year 2020 Core FFO guidance. The impact of this transaction and the previously announced sale of 1899 Pennsylvania Avenue, which is expected to close in the fourth quarter of 2020, was not included in the Company’s most recent earnings guidance issued on February 12, 2020, and in the aggregate will reduce full year 2020 Core FFO by $0.03 per share.

 

About Paramount Group, Inc.

 

Headquartered in New York City, Paramount Group, Inc. is a fully-integrated real estate investment trust that owns, operates, manages, acquires and redevelops high-quality, Class A office properties located in select central business district submarkets of New York City, San Francisco and Washington, D.C. Paramount is focused on maximizing the value of its portfolio by leveraging the sought-after locations of its assets and its proven property management capabilities to attract and retain high-quality tenants.

 

 

 

[thepupil]

http://s3.amazonaws.com/online.fliphtml5.com/twmd/kdms/kdms.pdf?AWSAccessKeyId=AKIAJHMQTBN5CJM6PDBQ&Expires=1585959943&Signature=NE0Q7mHb6YzuprAYOhR5Am62Z8M%3D

 

2019 letter out. I've attempted to gather some highlights below. But like an overeager schoolgirl, I've highlighted too much.

 

 

While most of this letter is business as usual…today nothing is usual. We are now in the eye of the COVID-19 storm – a black swan apocalypse. Life as we know it is upside down, people are hurting, businesses are hurting, the future is uncertain. As our first priority we are following all protocols and taking all measures to protect our employees, our tenants and our communities. We pray for the health and safety of all and we commend and admire the talent and courage of our healthcare providers. Vornado is in a strong position to weather the storm and we will continue to do our part to help mitigate the impact.

 

Over the ten-year period, our dispositions totaled $19.1 billion and we were a net seller of $12.3 billion. Our acquisition activity has ebbed in response to a rising market. We have pushed away from acquisitions that are off-the-fairway, non-strategic or over-priced.(9) From 2012 our disposition activity (including our two spin-offs) has increased as we have implemented our strategic simplification.

 

At year-end, we had $3.8 billion of immediate liquidity comprised of $1.6 billion of cash, restricted cash and marketable securities and $2.2 billion available on our $2.75 billion revolving credit facilities. Today, we have $3.3 billion of immediate liquidity.  We also have $9.0 billion of unencumbered assets.

 

 

Fixed-rate debt accounted for 69% of debt with a weighted average interest rate of 3.6% and a weighted average term of 3.6 years; floating-rate debt accounted for 31% of debt with a weighted average interest rate of 3.2% and a weighted average term of 4.5 years. (12)

 

82% of our debt is recourse solely to individual assets. The fair value of the assets pledged is $16.3 billion, resulting in a loan-to-value of 49.1%. We have approximately $9.0 billion of unencumbered assets.

 

While we enjoy access to both the unsecured and secured debt markets, it is well-known that our preference is for the latter. Unsecured debt bears the personal guarantee of the entire entity whereas secured debt has recourse only to a single property. Since pricing is about the same, I think the advantage is obvious.

 

Vornado remains committed to maintaining our investment grade rating.

 

THE PENN DISTRICT is different than our other office assets…it is a large multi-building district, it is long-term and it is development focused (development and long-term are two of the dirtiest words in REITland). But THE PENN DISTRICT is our moonshot, the highest growth opportunity in our portfolio. It seems to me appropriate that we give investors the ability to choose between higher growth or traditional stability, possibly through a tracking stock.

 

Our portfolio is populated with the highest quality assets in all of REITland: 555 California Street; theMART; our Fifth Avenue, Madison Avenue and Times Square retail assets; 1290 Avenue of the Americas; 770 Broadway, etc., etc. to name a few; AND, the most exciting development opportunity in all of REITland, THE PENN DISTRICT; AND the two best development sites in town, 350 Park Avenue and the Hotel Pennsylvania

 

With our stock in the $30s/40s, let’s talk about buybacks. My views on buybacks are well known and were outlined in my 2017 letter to shareholders (and are reprinted in the footnote below).(15) We had the discipline to push away when our stock price was in the $70s. Even at the current stock price our first priority is to protect the balance sheet. We will revisit this matter as normalcy return

 

There are lessons here. First, we must always be prepared for the out-of-the-blue, unexpected black swan event…and we are. We are hunkered down and we will get through all of this. When the crisis abates there will be opportunities. Interest rates are at historic lows and may go lower. That will give us the opportunity to refinance at favorable rates. And, over time as markets settle in, our secure, long-term income streams should become more valuable (cap rates should go down, building values should increase). For what it’s worth, my observation over multiple cycles is that when stock markets blow out, investors turn to the safety and stability of hard assets. We will see

 

In our industry there will be opportunity to either buy real assets (buildings) or real estate stocks. It is very clear that today there is more opportunity in the stock market than in the real estate market.

 

Many tenants are requesting rent relief as an antidote to their forced business closings. We and our industry will handle this on a case by case basis. We have instituted cash conservation measures across our business and we can rely on our significant liquidity (cash balance, lines of credit and unencumbered assets) to weather the storm

[thepupil]

The father of VNO’s head of the retail / 5th Ave JV just died from Covid 19

 

 

 

Real estate honcho Stanley Chera passed away on Saturday after nearly a month-long battle with coronavirus.

 

The 78-year-old developer, who introduced his pal President Trump at last fall’s Veterans Day Parade, had been rushed to New York Presbyterian Hospital in late-March from his summer home near Deal, New Jersey, as the coronavirus pandemic grew, as the Post first reported.

 

Trump had advised his longtime friend to decamp to Deal, where many Syrian Jewish families have large homes on the Atlantic Ocean, saying it would be “safer” than New York City, real estate sources said. But it was too late. Both his and his wife, Frieda — known as “Cookie” — came down with the illness, but she recovered.

 

“I have some friends that are unbelievably sick. We thought they were going in for a mild stay. And, in one case, he’s unconscious — in a coma. And you say, ‘How did that happen?’” Trump said of Chera at a recent White House briefing.

 

 

SEE ALSO

 

Developer and Trump pal Stanley Chera hospitalized

Born in Brooklyn, Chera went from working in his father Isaac’s small store to buying the building next door and growing a real estate dynasty worth billions. Later, he became a Republican donor backing another real estate scion, his friend Trump, in his presidential bid.

 

Chera is survived by his three sons, Richard and Isaac, who run their father’s Crown Acquisitions, and Chaim, who joined Vornado Realty Trust after Crown and the Qatar Investment Authority bought stakes, a retail portfolio valued at $5.6 billion. There are also numerous grandchildren.

 

MORE ON:

DEATHS

Nursing home deaths soar past 3,300 in alarming surge

 

Woman loses entire family to coronavirus as husband, son die within days

 

NYC coronavirus death toll climbs to nearly 7,000

 

De Blasio laments ‘wartime reality’ as NYC coronavirus death toll passes 5,000

Crown is now an investor in some World Trade Center buildings and the owner of numerous Brooklyn and Manhattan retail assets, including the Fulton Mall, stores in the base of Olympic Tower and the St. Regis Hotel. The Vornado stake includes stores Crown previously owned at the base of 666 Fifth Ave. when that building was owned and operated by the Kushner family, including Trump’s son-in-law, Jared Kushner.

 

Chera and his wife were also major donors to many health and humanitarian causes.

[winjitsu]

Note from Rhizome Partners, an RE fund I have a ton of respect for:

https://d2gr5kl7dt2z3t.cloudfront.net/blog/wp-content/uploads/securepdfs/2020/04/21100608/Rhizome_Partners_Q1_2020_Investor_Letter_Final.pdf

 

for example, we recently bought Vornado Realty Trust which owns New York City office buildings.  We are buying

at around $700 per square foot for the New York City office portfolio and we get some development and non‐

NYC assets for free.  The implied cap rate is in the high single digits while private market transactions are in

the 4‐5% cap rate.  Most importantly, the replacement cost for these assets are close to $2,000 a square foot. 

The company has historically published a NAV estimate in the $90s and we bought our shares for $34. 

 

[CorpRaider]

I am sure everyone saw that Roth issued himself some options last month, but it didn't seem too egregious to me. 

[johnny]

It's important to keep capable employees motivated and dedicated to the firm. Wouldn't want to wake up one morning and find out that SLG poached him now would you???

 

I'm really wrestling with the "work from home/irreversible disruption" thesis. I'm getting totally mixed signals from my friends who are now a month into this experiment. Has anybody's thoughts on this evolved meaningfully over the past few weeks? Or are we still dug in on our priors?