VNO - Vornado Realty Trust

[fareastwarriors]

After coronavirus: The office of the future is the office of the past

 

https://www.cnbc.com/2020/04/27/after-coronavirus-the-office-of-the-future-is-the-office-of-the-past.html

[BG2008]

ThePupil,

 

Let's speculate on whether VNO keeps or cuts dividend. 

[thepupil]

they already declared it. it's being paid.

https://investors.vno.com/press-releases/news-details/2020/Vornado-Declares-Quarterly-66-Dividend-on-Common-Shares-486ecd2cd/default.aspx

 

this may be ridiculous, but I would prefer they cut to zero, shake out some more shares and build just pile up the cash until we get some big refi's done.

 

but they are making too much money from 220CPS sales to not have a dividend and maintain REIT compliance.

 

since the dividend cut isn't coming this Q, the next potential terrible news is Facebook / Farley. If FB backs out, I'm sure the stock will go down a lot, despite it not really pricing in the positive outcome happening in my opinion.

[BG2008]

At this point and this price, it seems like the market is already pricing in FB backing out of Farley.  Well, there is a saying that "it is never fully priced in"

[winjitsu]

Amazon is extending optional WFH until October. Those who do decide to go in will be subject to social distancing (6 ft). Tech companies like FB/GOOG/AMZN etc. all use high-density seating in their offices so I would expect similar policies from they.

 

Seems like a positive, as AMZN is still paying rent and expects things to "return to normal" by Fall.

 

https://www.geekwire.com/2020/amazon-will-let-employees-work-home-least-early-october-new-guidelines/

 

 

[thepupil]

Some thoughts on earnings. Overall, I'd say that VNO is priced for a shitty outcome and that this quarter, in my opinion was a shitty outcome.

 

There's nothing in the earnings or supplemental to indicate that we are at anything close to a trough in fundamentals or "out of the woods". No asset monetizations, no big leases to de-risk the development, retail collections were shitty. I didn't really expect any major good news but I would say this is worse than expected.

 

I see nothing that is incrementally positive or not known and some stuff that was negative and not known.

 

- No news on Farley. I can't decide whether no news is good news or bad news.

 

- New risk to 220CPS. They are closing a lot of units, but I fear that if they can't get the construction complete/CofO in time that that could be a condition for refunding of deposits, which increases the risk profile of the 220CPS closings. they've de-risked this nicely with another $150 million of closings in April, but it's still a big swing in what you are paying for the core properties and having that cash on hand really helps.

 

- wrote down some fund investments. never really paid attention to these and don't think it's material, but I'm sure it'll make for some nice and awful headlines.

 

-Hotel Pennsylvania has gone from an asset that doesn't really earn much and just holds the land to a sucker of cash

 

- of concern was the drastic decline in unencumbered EBITDA (from annualized $330 million in Q42019 to $230 million). this won't be a focus of the street, but I need to have a better understanding of that. I have done a lot of work on VNO, but haven't delineated which assets precisely comprise this and that is showing.

 

- collected 90% of office rents 53% of retail, I'd say that's about in line on the office and below expectations on the retail.

 

- in my opinion, telegraphing a dividend cut, which I believe is warranted and prudent given the development pipeline and some chunky mortgages coming due over the next few years. I'll take 24 months with a scrip dividend (though I think they’ll have too

Much income to cut the divvy and I don’t think scrip counts) over a dilutive equity raise any day of the week.

 

The impact on us includes lower rental income and potentially lower occupancy levels at our properties which will result in less cash flow available for operating costs, to pay our indebtedness and for distribution to our shareholders. In addition, the value of our real estate assets may decline, which may result in non-cash impairment charges in future periods and that impact could be material.

 

- the leasing was good and at good rates

 

EDIT: to continue with the cheery news L Brands is not getting the Sycamore investment adding risk to the Victoria's Secret store rent.

 

 

 

[thepupil]

While VNO remained positive about what I think are a couple of the most important elements (the leasing pipeline on development and 220CPS closings), I thought the call was slightly negative overall.

 

I've re-calibrated my downside estimates a little lower and incrementally lightened up on VNO (swapping into PGRE and ALX) and some other non-real estate securities. I didn't really think about trade shows and parking and the inability to deliver 220 CPS units on time; incremental dings to income and incremental potential delays on the cash coming in that present some amount of risk that I had not foreseen.

 

I have impaired a small amount of my capital in doing so* , in my opinion as I think the things I am buying ultimately have less long-term upside than VNO, but my underwriting was a little less thorough than it should have been and my sizing a little larger than it should have been.

 

some small underwriting mistakes on my part that I think are forgivable in the context of what has occurred and the predictability thereof and some portfolio management mistakes that I think are less forgivable, albeit saved by some timely hedges.

 

*my average cost was $57, I've realized about $10 / share of hedging gains + some divvies, and sold about 1/3 of shares today around $40.

 

 

[KJP]

While VNO remained positive about what I think are a couple of the most important elements (the leasing pipeline on development and 220CPS closings), I thought the call was slightly negative overall.

 

I've re-calibrated my downside estimates a little lower and incrementally lightened up on VNO (swapping into PGRE and ALX) and some other non-real estate securities. I didn't really think about trade shows and parking and the inability to deliver 220 CPS units on time; incremental dings to income and incremental potential delays on the cash coming in that present some amount of risk that I had not foreseen.

 

I have impaired a small amount of my capital in doing so* , in my opinion as I think the things I am buying ultimately have less long-term upside than VNO, but my underwriting was a little less thorough than it should have been and my sizing a little larger than it should have been.

 

some small underwriting mistakes on my part that I think are forgivable in the context of what has occurred and the predictability thereof and some portfolio management mistakes that I think are less forgivable, albeit saved by some timely hedges.

 

*my average cost was $57, I've realized about $10 / share of hedging gains + some divvies, and sold about 1/3 of shares today around $40.

 

If you were starting from scratch (so no tax loss issues, etc.), what would your weighting to the various office landlords (VNO, PGRE, etc.) look like?

[thepupil]

probably 50/50 VNO PGRE (swap in 10 or 20 points of ALX for VNO if you like) and short some negatively convex SLG pref's at $99.5 as a tail hedge if you're feeling real fancy

 

the below exposition will sound more favorable to PGRE than VNO, so feel free to accuse me of anchoring.

 

PGRE is simpler, but isn't as cheap (using some assumptions here) and is more eventy/catalyst-y (PE bid?) rather than "I'm going to own this huge office campus around Penn in 10 years for virtually nothing and make a 10 year 3x+ divvies if excess capital is recycled well". To use an overly generous (these are riskier) analogy, VNO is Rockwood and PGRE is the cocoa beans.

 

I like ESRT more than I did upon first glance, but am not a buyer at this time; lower margin/quality gets hurt more if costs go up. I may change my mind. SLG may have good management, but the worst balance sheet. Nothing would scare me more in this environment than corporate level leverage combined with a mezz debt/preferred book; 1 guy defaults, you foreclose and create a cheap property, 25 guys default, well that could be a problem. I commend them for getting the sales done that they are ($170mm Puma store, JV's on developments). 1 Vandy is the best building in the world.

 

If VNO closes 220CPS and announces completed/signed leases according to underwriting on Farley/2Penn, then my thinking changes in favor of VNO.

 

I thought VNO far superior to alternatives beforehand because of its scale, relative and absolute cheapness, and the state of the balance sheet using a few assumptions. It's still probably the "cheapest" but the balance sheet assumptions are getting some incremental hits, whereas digging into PGRE's debt-laden buildings made me more comfortable than I was.

 

The assumptions:

 

1) 220CPS closes without interruption. All empirical data suggests this IS occurring despite Covid-19, and I do think both the degree to which the buyers are extremely well capitalized centi-millionaires and billionaires and the 25% non-refundable security deposits will lead to most of these getting done. But to the extent the construction crews aren't allowed in and if a delay could cause the deposits to become refundable, I think that could potentially skew the outcome to the negative. It won't be a huge deal, but $1 billion of cash is a lot better than $1 billion of receivables backed by refundable deposits.

 

2) the retail preferred. Pre-covid (and maybe during the early head in the sand covid ramp), I have described the retail preferred as IG like (the word treasury may have even been used  :o  ). And that is how a piece of paper that attaches at 50% LTV would be described by market participants. There are cycles, but 50% declines in leased up high street retail would take...well...maybe an event that descends the globe into a recession and prevents people from going shopping. Do I think that paper is impaired? No, not even with all that has occurred. Do I think it is riskier than I thought it was in January February and March 2020? Yes. I have described the sale of the retail JV as "well they sold 50% but actually de-risked it by much more because of the rock-solid nature of the pref".

 

3) Farley: pre-covid: Facebook and Apple battling for Farley. Post-Covid: could REALLY use that Facebook announcement. If/when Facebook announces, then Farley becomes an extremely monetizable asset and greatly de-risks the sources/uses.

 

this may sound too "in the weeds" but all the above things could swing what you think you are paying for the existing core assets by like $3-$4 billion when combined. if they all go wrong, it's a material negative to the thesis. if they all go right, VNO is cheap and safe despite all the negative headlines. If I had to bet ten grand on an outcome, I'd say they all go right, more or less. I still think Farley gets leased by Facebook for over $100 / foot. I still think the billionaires buy their apartments at 220, and I think the retail lessees will pay enough rent / values won't fall enough to impair the pref. But I am less certain than I was.

 

 

[thepupil]

they're all just different deck chairs on the Titanic. take your pick.

[mjohn707]

they're all just different deck chairs on the Titanic. take your pick.

 

Which chairs are closer to the lifeboats, or at least the band is what we punters want to know

[matts]

 

BMO says 80% of its employees may switch to blended home-office work (long term)

 

https://business.financialpost.com/news/fp-street/bmo-says-80-of-employees-may-switch-to-blended-home-office-work

 

Canadian Bank with 36,000 employees, 13,500 in US

 

I don't think they will get to anywhere near 80% considering the nature of their industry, but I think this is just the start of a trend. Yes, they will still need space for meetings etc, but they will share desks.

 

 

[Gregmal]

I sold out the (small) position I lazily entered a couple weeks ago. I just really dont like the smugness of "no interest in buybacks" after touting $90 NAV and currently facing what could ultimately be a crisis of confidence. Even if you arent out of your mind about the idea, at these levels, I tend to think its either going to work out in a big way, or just kind of be a waste of time. I dont see anyone looking at VNO at $40 and saying, "mistake of a lifetime". Perhaps this is what happens when you have a million different debt instruments and preferred issues, but take a stand as a shareholder for Christs sake. The only other time Ive heard something this preposterous was from Schwartzman at BX at a least his rational made sense. IE, if I have 50% upside in my equity but can put up 1% and start a $30B fund collecting 2/20 annually, the ROI just doesnt make sense. I dont see VNO with anything like that going on and just think its silly to ignore repurchases in a world of levered 15-20% returns being the target after taking on massive development risk.

 

SPG to me at least offers a much more diverse approach to the development game. Say what you will about a "mall" but the dirt is located well and across the world rather than in just one market. Prime areas, IE the majority are next to major highways or transportation hubs in tier 1a/b cities. If, for whatever reason(and I dont think this will happen but who knows) NYC becomes out of favor, SPG can still do the same things redevelopment wise, maybe even more profitably as the implications would imply a shift in demand to elsewhere, whereas VNO is kind of fucked. I think looking at any of these companies its now just as, if not more important to look at what they "can do" with their properties rather than what they currently do. And then of course try to figure out how much "doing" all that is going to cost and on what terms to the current equity.

[johnny]

Yeah you get the sense that he cares much more about making sure his Penn Station Pyramid is grander than all preceding pharaohs' than squeezing out NAV/share penny by penny.

 

[thepupil]

A buyback increase tail risks of impairment if the refi market closes or if things generally deteriorate. Rich people don’t like to lose their money or their companies that make them rich. Simple as that.

 

All else equal, I would feel more confident with a divvy cut than a buyback. Wouldn’t the next 24 months look better with $500mm /year being retained? (Though that whole REIT tax thing prevents earnings retention)

 

If they do a couple of cash out refi’s on the likes of 555 California and continue to close 220CPS units, and lease up (and finance) Farley then we can talk buyback.

 

How can you all expect a buyback when we’ve got $5 billion of commitment coming due over the next few years?

 

now you can absolutely blame them for the aggressive development and having the maturity wall in the first place, but I don't think you can blame them for not buying back stock right now.

 

[insert trope about finishing first and first finishing here]

 

[CorpRaider]

I would be fine with VNO not buying back stock here, if I held shares in this.  I was more dis-favorably impressed by the discussion of this issue in the last call prior to covid. 

 

[fareastwarriors]

‘Too early to write the epitaph’ for office real estate, UBS analyst says

 

https://www.cnbc.com/2020/05/14/coronavirus-too-early-to-write-the-epitaph-for-office-real-estate-ubs-analyst-says.html

[thepupil]

the idiosyncratic (>IYR/PGRE/SLG/ESRT) spike in VNO the day before 13-F day is giving this bag holder  a teensy bit of hope

[Spekulatius]

Some how, buying VNO feels like going into Ross store and buying a shirt that I don’t need, in an outdated style that I don’t like, just because the discount noted on the sticker is so great.

 

If I am lucky, I can sell it at a yard sale for a lesser discount (and a profit for me), but likely it will end up in a closet forgotten.

[bizaro86]

Some how, buying VNO feels like going into Ross store and buying a shirt that I don’t need, in an outdated style that I don’t like, just because the discount noted on the sticker is so great.

 

If I am lucky, I can sell it at a yard sale for a lesser discount (and a profit for me), but likely it will end up in a closet forgotten.

 

Pfft. Shopping at Ross is awesome. I get most of my clothes either there or Costco. It's like value investing in real life!

 

 

[Gregmal]

Some how, buying VNO feels like going into Ross store and buying a shirt that I don’t need, in an outdated style that I don’t like, just because the discount noted on the sticker is so great.

 

If I am lucky, I can sell it at a yard sale for a lesser discount (and a profit for me), but likely it will end up in a closet forgotten.

 

I came to the same conclusion. The things that need to work for Vornado will provide greater upside to other names. While at the same time, other names can win if Vornado doesnt. When you own so much, sometimes you're stuck with it. VNO will live and/or die with its NYC assets. Overall I'm definitely bullish on NYC RE. But, there's easier ways to win IMO.

 

If I own ESRT, one asset sale and I walk away with a big bag of cash. PGRE can pull off the same things. Honestly, I'd rather even go right to the source at bet on NYC restaurants via private investment. Or of course, The World's Most Famous Arena, for free via MSGE.

[thepupil]

Agreed and have been swapping /adding to PGRE and ALX.

 

I think ALX is the easiest thing to average down in, unless you think Bloomberg and Home Depot are going to try to weasel their way out of leases. There will be some bumps; expect Container Store to go away, don’t love the Kohl’s lease which is sublet to AtHome (who will go BK first?), etc.

 

Gregmal, it’s interesting to me that you like the Garden and Observatory; my intuition would be that there will be some time (potentially a long one) where people are going to work in offices but aren’t going to a concert/Knicks/Rangers game at the garden or being a tourist in NYC. Maybe that’s totally wrong of me though.

 

By the way, I want MSG to thrive; as they are VNO’s tenants for their corporate office and obviously MSG is important to Penn District.

[rb]

Quick question for the locals. I haven't been to NYC in about 5 years or so. Is Penn district the same shithole it was back then or did it improve?

[thepupil]

Penn Station is an addict and rat infested basement.

 

The area around it could potentially improve with the rise of Hudson Yards; redevelopment of Farley Post office, etc.

 

[Spekulatius]

Quick question for the locals. I haven't been to NYC in about 5 years or so. Is Penn district the same shithole it was back then or did it improve?

 

It was 2 years ago. Haven’t been back since. Bg2008 would know better. I do think it’s a great location and the redevelopment from VNO would change that.

 

 

My concern with VNO is you are paying for the last 2 decades mega trend, but what is the mega trend for the next two decades? Overall though I would rate PGRE higher than VNO and VNO higher than ESRT.

 

I don’t think the thread of having a competing observation platform can be easily discounted for ESRT. Most people just want a selfie with their stupid face and the NYC skyline behind it and it might even cooler if the Empire State Building is on the pic rather than you being on the Empire State Building. Then there is the whole issue with crowding and tourism coming back, which will happen, but who knows how long it takes.

 

 

Just for the real estate junkies that can’t pay for the real proprietary research. I signed up for Realtymogul free webinars and they have been pretty good in their selection of high caliber guests. It’s free and I got my money worth and then some.