ALX - Alexander's

[thepupil]

Nooo not another one, another real estate stock that thepupil will obnoxiously bump again and again while it languishes as dead money. please stop.

 

those who wish to compound at high rates, just avert your eyes.

 

those who want to buy a cheap safe company and collect checks from mini mike bloomberg, read on.

 

ALX owns only a few properties: Bloomberg Tower, Rego Park I, Rego Park II, the Alexander are the main assets.

 

ALX has no corporate debt, just non-recourse mortgages. It trades for $1.6 billion

 

ALX has $425 million of cash on the balance sheet. This is not obvious, but they had ~$300mm as of 12/31/2019 and a line in the most recent 10-K reveals they received $145mm more through additional non-recourse borrowing on Rego Park II, less a dividend after 12/2019

 

Because the debt is non-recourse, shareholders own that cash, so about 26% of the market cap is covered in cash. There is deployment risk, but at least the stock is paying out $90mm in divvies (5.6% yield) so you have some of that coming back to you.

 

the most important asset is 731 Lexington office. This is 900K square feet of 2005 built space entirely leased to Bloomberg LP to 2029 with a 10 year option to extend and modest escalators. I found information from the single asset single borrower CMBS disclosure that reveals this is a NNN lease where Bloomberg LP reimburses VNO for all expenses. This is an extremely high quality asset. Bloomberg equity is worth $10's of billions and is a very profitable company; there is virtually no credit risk unless there's mass abandmont of bloomberg terminals.

 

NOI on the bloomberg lease is $65mm / year. this isn't disclosed in public financials, but is available on the CMBS docs...available on Bloomberg (see what I did there). We can go about this a couple of ways, we can value the remaining lease payments like an IG bond and then value the dark building at the end of the lease, or we can throw a cap on the $65mm and vlaue the building and lease together. I think the lease itself is worth $400-$450mm (low discount rate) but prefer to value the two together at $1.5 billion. Support for this would be the $500mm of CMBS issuance claimed a 34.5% LTV (500/0.345 = $1450) and its a freaking trophy trophy office building leased for term to an IG tenant. haircut it however you wish, tell me NYC office is shit, but this thing is not worth much less than that.

 

the bloomberg office has a $500mm of loan on it at the whopping rate of L+90. After interest the equity in the bloomberg office spits off $50mm or so of cash flow.

 

I think the equity in the office is worth $1 billion. $1.5 - $0.5 = $1 (great math skills there pupil).

 

$1 billion in the office + $425mm cash = $1.425 billion = 90% of the market cap of ALX.

 

What else do they own?

 

Between 731 Lexington Retail (Home Depot and Container Store) and Rego Park (Costco, Ikea, etc) and the small apartment building they have about $65 million of NYC (queens and manhattan) mostly retail non bloomberg NOI. you have to triangulate that NOI by getting ALX's NOI from VNO's financial supplements and subtracting the bloomberg office NOI. it's not perfect, but it all kind of makes sense in the context of $226mm of annual revenue. ALX doesn't report NOI or have a supplement but VNO does report its ALX derived NOI at share.

 

these buildings have $600mm of debt ($350 million at Lexington Ave retail, $250 million at Rego Park II) at very low rates.

 

I think there may be some problems here (container store is up in 2021 for example), but there's also a lot of good going on here like a lease to Costco out to 2039 and an Ikea just signed and not yet occupied / paying, old sears space in rego park.

 

I have not modelled out a building by building view of the retail, but I think the corporate cash and the 731 Lex office about cover the market cap and I think the retail net cash flow after interest will be somehting like $30-$50 million over the long term, likely toward the higher end, but you may get some bumps along the way. this plus office gets you to $90mm or so of cash flow being returned to you (close to 6% of the market cap)

 

I have started to buy.

 

I like that it has a pile of cash and that cash flow is being returned to shareholders via 5.7% yield.you make close to 6% carry and you aren't taking a ton of risk in my view and the pile of assets is worth more than the stock price...it is by no means exciting but anotherr 10-20% and you'd start to get there.

 

and i want to tell people i own the bloomberg building.

 

please feel free to use this thread as a sleep aid in the future.

 

 

 

 

[Guest cherzeca]

the older I get the more I like liquidity. but yes this is interesting. I see that its market valuation is covered by asset value and its yield is covered by cash flow, and its yield is Ts+400bps.  so I get all of that.  but this thing trades by appointment.  nice work btw going to the cmbs pros

 

edit:  as an aside, I think I recall when this was trading in 40s and alexanders was closing down retail and trump was interested in the site on lex.  life is funny...

[Castanza]

Thanks for sharing, I have been looking for some real estate options like this. Certainly looks interesting.

[Gregmal]

This falls into the category of buy a comfortable amount on margin and just forget about it.

 

Although, there so much "cheap" real estate everywhere that Ive had to force myself to be a little more selective and/or mindful of liquidity. As much cheap real estate as there is, theres even more cheap illiquid real estate stuff. Eventually, you'll probably make money on most/all of it, but if you have to wait an eternity to get there it might not be worth tying up the funds.

[Spekulatius]

The Problem with ALX is that VNO controls this - they own 33% and I think Roth (VNO’s CEO) owns more indirectly. If they buy this, it’s very likely and opportunistic take under.

[thepupil]

agree with most of the feedback/commentary. it's sleepy, illiquid, etc.

 

Spek, I don't think VNO would do an egregious take under. Is there any reason to believe so other than general suspicion?

 

I'm not aware of VNO doing anything like that with its affiliates (transactions that favored on entity vs another). But all I'm using for that basis is the spins of Urban Edge and JBGS. I've never looked at those in great detail, but never saw anything unfair when i did look at them.

 

also, I wouldn't necessarily mind too much, as a VNO shareholder.

[Spekulatius]

agree with most of the feedback/commentary. it's sleepy, illiquid, etc.

 

Spek, I don't think VNO would do an egregious take under. Is there any reason to believe so other than general suspicion?

 

I'm not aware of VNO doing anything like that with its affiliates (transactions that favored on entity vs another). But all I'm using for that basis is the spins of Urban Edge and JBGS. I've never looked at those in great detail, but never saw anything unfair when i did look at them.

 

also, I wouldn't necessarily mind too much, as a VNO shareholder.

 

I saw a VIC report from 2002 that mentions the possibility of a takeover by VNO. You can wait a long time. VNO is very value conscious, and while I am not aware of anything egregious I think they may just pounce when an opportunity represents itself to buy a discounted asset at an opportune time for them. Why not just own VNO, which trades at a discount to NAV as well and align yourself with management?

 

That would be my inclination.

[thepupil]

Roth owns 18% of ALX per the proxy and 5% of VNO per the proxy. While his VNO ownership (about $600mm) is worth more than his ALX ownership ($284mm), a $1 of misallocated value is worth more to Roth in ALX than in VNO.

 

I see the likelihood of a VNO takeunder as remote given Roth's personal asset allocation and tax sensitivity; if anything a deal overly favorable to ALX would be more likely given that any excess value given to ALX would be a rounding error to VNO. I think ALX is more aligned than VNO with Roth, but perhaps not with the next generation of VNO management.

 

I agree with you that a transformative acquisitoin is not likley. Instead, I think very large special divvies are the likely use of excess capital. They paid a $122 dollar one in 2012, for example.

 

But what the hell do I know, VNO's down another 4.2% today, on its way to a 40% discount to management NAV with a significant chunk of assets in zero to low risk paper and not in NYC...

 

I would think well-located real estate leased for the long term would be a safe haven in a period of increasing fear and collapsing cost of financing/rates, but I am increasingly feeling dumb...

[bizaro86]

I agree a big asset purchase wouldn't be what I would expect out of ALX, but on the other hand they just raised ~$150 MM in equity. They previously had a big participating interest in one of their mortgage loans, and in the last 10-K they noted they sold a big chunk this month.

 

Given they already have a huge cash balance what do they need more mortgage debt for? It doesn't make any sense unless you think they are going to do something where they need the cash.

 

The only potential uses I see:

1) develop the third parcel of land - maybe another apartment building?

2) tender/go-private at the lowes

3) buy a discounted asset elsewhere in NYC

 

I think (1) isnt likely to be big enough to need that financing given their existing cash. (2) definitely would need the cash, and (3) their existing cash balance with the new cash and a mortgage loan could get them a huge asset.

[thepupil]

hot off the presses, with more detail than thepupil's spitball analysis.

 

This Safety in Value fella does more detailed work than I and has incremental positive news on the direction of NOI in his article.

 

https://seekingalpha.com/article/4327062-alexanders-discounted-new-york-real-estate-upcoming-rent-raise

 

Alexanders - Discounted New York Real Estate With An Upcoming Rent Raise

Feb. 25, 2020 4:16 PM ET | About: Alexander's, Inc. (ALX), Includes: VNO

Safety In Value

Safety In Value

Microcap Review

Analysis of underfollowed microcaps worldwide, plus arbitrage and net-nets

Summary

Super high quality NYC real estate with creditworthy tenants.

 

Trading at a 6% cap rate, which will be closer to 7% after a number of 2020 catalysts are reported.

 

Has been beaten down on concerns around retail, but Bloomberg's office space lease is the largest tenant by far.

 

Many retail tenants (Costco, Home Depot, Burlington, Ikea) still have great businesses, and large format space in NYC will continue to be in demand.

 

This idea was discussed in more depth with members of my private investing community, Microcap Review. Get started today »

 

Alexanders (ALX) was formerly a chain of discount department stores in the New York City area. They company converted from that business into a REIT, and they are controlled by Vornado (VNO) and that firm's management. The company has a number of irreplaceable assets (they own Bloomberg's headquarters and 2 of the 5 Ikea stores in the NYC area) and trades at a discounted valuation. There are also a number of catalysts that should make the 2020 results considerably better than the 2019 results, which should push up the shares.

 

Portfolio Background

By far their most important asset is the full square block in Midtown where the Bloomberg headquarters is located. This is a mixed use building, and they own both the office and retail portions.

 

Bloomberg Headquarters

 

The entire office space is leased to Bloomberg, while the retail has a variety of tenants, the largest of which are Home Depot, The Container Store, and H&M. I believe this asset would easily be worth a 5% cap rate. This is also where one of the major catalysts comes in to play, and the primary reason I decided to write this up. I was reading Bloomberg's original lease on the building, and noticed the escalation clause has 11% raises every 4 years on the base rent. So the rent will be static for 4 years and then it has a significant increase. The next one of those increases takes effect in January 2020 (so it has already occurred, but results with the escalation have not yet been reported).

 

"Blended Comparison Amount" shall mean the product obtained bymultiplying (X) the number of square feet of Rentable Area of the Applicable Option Space that constitutes Lower Option Space, by (Y) (I) Fifty-Two and 39/100 Dollars ($52.39), with respect to 1st Rental Period, (II) Fifty-Eight and 15/100 Dollars ($58.15), with respect to the 2nd Rental Period, (III) Sixty-Four and 55/100 Dollars ($64.55), with respect to the 3rd Rental Period, (IV) Seventy-One and 65/100 Dollars ($71.65), with respect to the 4th Rental Period, (V) Seventy-Nine and 53/100 Dollars ($79.53), with respect to the 5th Rental Period, (VI) Eighty-Eight and 28/100 Dollars ($88.28), with respect to the 6th Rental Period, and (VII) Ninety-Seven and 99/100 Dollars ($97.99), with respect to the 7th Rental Period.

 

The above quote is from the lease linked above, and while it is written in a way that only a lawyer could love, I believe the base rent is going to $79.53 from $71.65 this year. The 10-K indicates Bloomberg has 889,000 square feet, which works out to an estimate for the increased rent of $7.0 MM. The lease is structured that Bloomberg pays rent and also expenses. So while it is only the rent portion that escalates, any increase in expenses will also be borne by them. That means ALX's net income should increase by the full $7 MM. At a 5% capitalization rate (cap rate) that is an increase in the building's perceived value of $140 MM.

 

The other assets the company has are all in the outer boroughs or New Jersey. They have a large parcel of land in Queens where they own two shopping centers, an apartment building, and a development site. The development site is another potential catalyst, as they will likely eventually increase their income by building another building there. The apartment building on the site is new construction with average rents of over $3000 per unit. It would almost certainly be worth a sub 5% cap rate as well.

 

The retail portion would be less valuable per dollar of income due to the 'retail apocalypse' but it does have a number of significant advantages. One is the large format sizes. There aren't many places in New York City where retail boxes of 100,000+ square feet with parking are available, and this is one of them. Tenants like Costco (COST) and Burlington (BURL) are almost certainly retail survivors. Other tenants in the complex like Bed, Bath and Beyond (BBBY) are weaker, but large format space in the area appears to be very re-rentable.

 

That brings me to my next catalyst - the re-rental of the former Sears. Sears vacated a 195,000 square foot store as part of its bankruptcy proceedings, and ALX has re-rented most of the space to Ikea. The Ikea store will open next summer, which provides another catalyst. The Sears has been closed for a year, so it provided no income during the trailing twelve month period. Assuming the Ikea lease pays a similar rate to the other tenants (which seems likely) that adds another $5.8 MM in revenue to the firm. There is a small amount of additional vacant space in the Sears box, but I suspect once Ikea is in the huge increase in traffic will make that very rentable. This retail asset would be worth the least money per dollar of net operating income (highest cap rate), but I still think something in the 6% range would be appropriate. There aren't many places Costco can go and service New York City, and I think that is something they are likely to want to continue doing. That gives large format NYC space a scarcity factor that most other retail real estate does not have, and should improve the cap rates.

 

Their final two assets are not significant in size, but I'll cover them for completeness. One is a property they lease to the operator of an Asian mall in Queens, and the other is ground-leased to Ikea in New Jersey. Both are great (if small) assets. Ikea has an option to buy the ground lease in 2021 for $75 MM. Based on the current amount they are paying, that would be roughly a 5.2% cap rate. Given that is more expensive than the average cap rate for the whole firm and this is one of the lesser locations, that seems value accretive to me. On the other hand, if Ikea chooses to not exercise their option their rent will go up in 2021 rather materially. I expect they will exercise the option, but if they don't the increase in rent (my estimate is an extra $1.3 MM) will be a nice little bonus.

 

Valuation

From a valuation point of view it is hard to value the assets separately, because the company doesn't break out their expenses by property, only the revenues. So the first thing I'm going to do is value the assets as a whole. The most recent CBRE report on cap rates has Class AA office at 5.21%, Class A high street retail at 4.78%, Class A infill multi-family at 4.64% and Class A power retail at 7.21%. In basically all cases their assets are better quality than the national average in their categories, and the office is by far the biggest category. So I think a 5.5% cap rate is a reasonable average to use here. Especially since I'm going to reduce the value of the real estate assets by encumbering them with the corporate G&A costs, which don't normally appear in cap rate valuations.

 

To calculate a cash operating earnings, I started with $226.4 MM in revenue. Then, I deducted their operating expenses from their real estate (-$89.7 MM) and also their corporate G&A (-$5.8 MM). I also added back the straight line rent adjustment (+$2.4 MM) to make this a cash figure. Essentially, because their leases paid less in the beginning of the lease than the end, GAAP requires them to average the lease payments over the lease for reporting their revenue. So they are collecting more actual cash than their GAAP revenues now, while they collected less than GAAP revenues in the past. Given this is spendable cash in the present, I'm counting it (and any buyer of an asset certainly would). While the value of the real estate is generally independent of the corporate G&A, ALX is controlled and so the G&A isn't going away, as I doubt the control group will sell the firm. Therefore, I'll deduct it as well. My calculation is shown below.

 

The enterprise value is calculated in the top left table below. It is just market cap plus debt less cash/securities. The securities are shares of Macerich they received when they sold a mall to them in 2012.

 

 

 

Source: ALX disclosures, authors calculations

 

The trailing twelve month cap rate is 6.0%, which I think is too high for assets of this quality, and I'll use 5.5% for my valuation. However, my calculation of forward cap rate is well over 6.58%, which is much too high.

 

That would require the equity to appreciate to $393 per share from its current price of $309 per share. I believe 27% appreciation potential is quite attractive considering the 5.7% yield and low downside. The 52 week high here is $394, so this is far from a stretch valuation. In fact, the shares traded at $430 two and a half years ago prior to a couple of temporary issues.

 

The first was the aforementioned closure of the Sears location. That cost them the revenue from the store, and I believe it also likely hurt the market's view of their asset quality. That said, the fact they were able to replace Sears rather quickly with a much higher quality tenant in Ikea suggests to me that while Sears was impaired the real estate here probably wasn't.

 

The second issue was a tax re-assessment. In 2018, the City of New York re-assessed the company for transfer tax on a mall property it sold in 2012. The company paid $23.8 MM in taxes and interest on the re-assessment, and appealed it. However, Vornado lost a similar case on a similar set of facts, so I think it's very unlikely ALX is getting that money back. That being said, they did expense the payment in 2018, which made their earnings for that year look much worse. Now that 2019 earnings have been reported I would expect the market to begin to forget that issue.

 

Conclusion

I think it is very likely the company will be able to re-scale its ~$400 per share heights in the next year or two, which adds a comfortable amount of price appreciation to its 5.7% dividend yield. I also think there is very little downside here. The biggest risk is probably that capitalization rates for quality real estate increase, but in that case ALX should be better off than its peers given the going-in discount and significant upcoming escalations in NOI. Bloomberg is about as credit worthy a tenant as one could hope for, and trophy Manhattan assets are likely to always be valuable. The firm has a number of catalysts baked in that provide strong visibility to increasing earnings in 2020, which should provide a justification for strong share price performance. I believe the risk-reward ratio here is compelling.

 

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[thepupil]

since purchase a couple weeks ago, this is flat and outperformed the S&P and REITs by 8-9% and its mother ship VNO by 17%. I sold my small starter position and deployed back into other stuff.

 

More broadly I've noticed the stocks in the sleepy off the run, overcapitalized bucket are drastically outperforming their liquid counterparts. If the sell-off deepens, I don't think this is sustainable and err on the side of selling the illiquids early if there is just as much upside and safety in the more liquid names. the liquid names are also hedge-able and margin-able.

 

i will probably look stupid now as the market may continue to flee to the safety of ALX's long duration leases and cash pile.

 

my flirtation with Alexander's was brief and mildly satisfying. you all can now accuse me of being a short-term oriented piker.

 

 

 

[thepupil]

ALX filed 10Q today, cash and restricted cash is now $450mm, about 30% of the market cap.

 

they lost $11 mm on their MAC stock, noooooo! future tax loss opportunity right their with their cost at $50 / share!

 

mortgage debt went up (the aforementioned cash-out refi), but interest expense went down because the vast majority of debt is floating rate. ALX has $1.1b of mtg debt, but $1.05B of that is paying 2.1% interest rate on a wgt average basis, the bloomberg office is paying 1.61%

 

obviously rates can go back up, it's just kind of crazy to think about

 

Bloomberg is paying ALX ~$65mm of NOI, the office condo debt CMBS is taking $8mm of that in interest with no amortization required so the equity is getting 80%+ of the cash flow. depending on your calc of the value of the bloomberg office ($800-$1.4 billion, 4-8% cap rate, nice and wide just for all you bears out there), the debt is 35-65% of the cap structure of 731 Lexington Office, but at the prevailing rates is taking only 10-15% of the cash flow. Of course the debt comes dues in 2024 so we only have 4 years of runway.

 

this is lower risk and lower return than some other NYC RE focused securities. the long leases with tenants like Home Depot, Costco, and Bloomberg and the extremely low cost debt should help mitigate the risks here, but that has perhaps been recognized by the market given that it's only down 10% YTD.

[thepupil]

 

I have started to buy.

 

I like that it has a pile of cash and that cash flow is being returned to shareholders via 5.7% yield.you make close to 6% carry and you aren't taking a ton of risk in my view and the pile of assets is worth more than the stock price...it is by no means exciting but anotherr 10-20% and you'd start to get there.

 

and i want to tell people i own the bloomberg building.

 

please feel free to use this thread as a sleep aid in the future.

 

since we are down about 25%, this is me saying that we are "starting to get there", 7.8% divvy yield, unencumbered cash 35% of market cap.

 

if there ever is a recovery to office (which is in doubt) I think a NNN leased building with high credit quality tenant is the first thing to recover.

 

 

 

 

 

 

 

 

[BG2008]

Pupil,

 

Can you post the link for the CMBS document for the 731 Lexington Ave building

[thepupil]

The CMBS shelf is: DBCG-2017 BBG

 

I got it off bloomberg and only have bloomberg anywhere right now and can't find the prospectus on my phone.

 

Here are some links that may help:

 

https://asreport.americanbanker.com/news/next-single-asset-cmbs-backed-by-bloomberg-building

 

https://www.fitchratings.com/research/structured-finance/fitch-to-rate-dbcg-2017-bbg-mortgage-trust-commercial-mortgage-p-t-certificates-12-06-2017

 

https://www.fitchratings.com/research/structured-finance/fitch-affirms-dbcg-2017-bbg-21-04-2020

 

Here is an old 2014 CMBS ratings document that has the most important components.

https://www.spratings.com/documents/20184/86990/COMM_2014_BBG_3_10_14/91e14b29-a9c8-425a-94b1-a2d08a2e0cbd

 

Bloomberg pays for everything!

Bloomberg is responsible for 100% of the real estate taxes and operating expenses on its directly

leased space. For the assumed lease spaces, Bloomberg is responsible for its pro rata share of the real estate taxes and operating expenses above a base year.

 

Check out the rent steps. They just went up in February and will go up nicely again in 2024 and 2028 (but that last year really only matters if they extend the lease another 10 years)

 

Maybe Alexander's should call their bloomberg rent checks  100% margin "monthly recurring revenue" like a software company.

Bloomberg L.P. Rent Steps

Base rent ($)

Current    61.72

2/9/2016  68.80 

2/9/2020  76.66

2/2/2024  85.39

2/9/2028  95.08

 

 

Most recent commentary from Fitch

Stable Performance: The affirmations reflect the stable performance of the collateral, which consists of the fee interest in two office condominium units totaling 909,369 sf within a 1.3 million-sf, mixed-use tower located at 731 Lexington Avenue in New York, NY. The initial maturity for this interest-only loan is in June 2020; however, the loan has four, one-year extension options. According to the servicer, the borrower is planning to exercise the first of the extension options, but has not provided formal notice at this time. Occupancy as of the YE 2019 rent roll was 100%, compared with 97.8% at issuance. The servicer-reported YE 2019 net cash flow (NCF) debt service coverage ratio (DSCR) was 3.89x.

 

High-Quality Asset in Strong Location: The collateral for the loan consists of Class A office space within a larger mixed-use tower that has exceptional design and build quality and encompasses the entire city block along Lexington Avenue between 58th and 59th Streets in the Plaza submarket of Midtown Manhattan. Fitch assigned a property quality grade of 'A' at issuance.

 

Single Tenant Concentration: The property is 97.8% occupied by Bloomberg, which uses this location as its global headquarters. Bloomberg's lease runs through February 2029, more than eight years past the initial loan maturity date and two years beyond the loan's fully extended maturity date. The tenant has one, 10-year renewal option remaining and no early termination options.

 

Institutional Sponsorship: The property is 100% owned by Alexander's Inc. (NYSE: ALX), a publicly traded real estate investment trust that is controlled by Vornado Realty Trust (VNO; rated BBB).

 

Strong Fitch Coverage and Lower Leverage: The $500.0 million mortgage loan has a Fitch DSCR and loan-to-value ratio (LTV) of 1.47x and 59.8%, respectively, with debt of $550 per sf based on the collateral NRA.

 

Full Interest-Only: The loan requires interest-only payments for the entire three-year initial loan term, as well as the extension periods. Despite downside risk associated with the lack of amortization against potential future declines, the current loan basis of $550 per sf is well supported by Fitch's stressed value of $920 per sf, as well as Fitch's estimated dark value of $641 per sf.

 

Coronavirus Exposure: Fitch reviewed the sponsor and tenant profile of the subject property and viewed the collateral to have a limited impact from the coronavirus pandemic due to the long-term nature of the lease with the primary tenant, Bloomberg, which rolls in 2029, more than eight years past the initial loan maturity date and two years beyond the loan's fully extended maturity date.

[thepupil]

in summary, if I did my math right to take the rent steps into account, from 2/2020 to 2/2029, Bloomberg will pay Alexander's about $675 million of profit, an average of $75 million / year, that is protected from an increase in operating costs (at least for the 700K / 900K that Bloomberg "directly leases").

 

About $17mm of that has already been paid since its May 2020, so if we're being real precise about $660 million.

 

And for the next 4 years, you have a sweetheart $500mm interest only loan at L+90.

 

I don't think ALX would sell it (for tax reasons and because it's a crown jewel of a property), but think about what Mike or his company would or should rationally pay for this building.

 

It's a glorious asset that I have lusted after for nearly decade and I feel privileged to be able to purchase it at this price....unless Bloomberg tries to pull a Starbucks and say "we're not paying" lol.

 

the retail is harder to model out, but you can kind of triangulate it. I need to do that more thoroughly, but the bloomberg tower and the cash are the most important and easiest to get one's head around.

 

 

[BG2008]

Just want to confirm the math for Bloomberg's 731 building.  $76.66/sqft * 896,000 sqft equates to $68.7mm of NOI a year bumping up to $76.5mm in 4 more years

[thepupil]

Yes, I slightly miscalculated in my post yesterday and was using a little over 900K sq feet.896K is correct for an average of $74mm of NOI

 

I have NOI at (rent schedule * sq feet)

$68mm 2020-2024

$76mm 2024-2028

$85mm 2028-2029

 

At which point the lease ends but Bloomberg can choose to extend for another 10 years (I assume with similar general terms / escalations)

 

If Bloomberg wants to stay, I think the 2029 value of the building is about $1.9 billion (4.5 cap on $85mm) but it would be somewhat arrogant/ridiculous to opine on the 9 year out value of a building lol

 

NOI may be slightly lower; I don’t fully understand the language about expense reimbursement for the assumed Citi lease and am not sure if the 200K is on the exact same terms now as the 700K original.

 

The newer CMBS document said something like $65mm NOI but that was in 2017, so high $60’s millions today makes sense.

 

Using the most recent 10Q to corroborate; $27.115mm of revenue for 1Q 2020 and $27mm for 1Q 2019 = $30.26 / foot for the most recent quarter or $121 /foot per year = $108 million of gross rent, but last q only had 2 months of the new rent so we should see 2Q higher.

 

Since Bloomberg is paying $108mm+ of gross rent, high $60mm’s of NOI makes sense to me.

 

There is also a 500 page legal lease document that is publicly available via ALX filings. I like this stuff, have ramped up my work on it, and try to be thorough b it given that I wish to stay married, I have not read that.

 

If you are trying to really be a hero and dot your I’d and cross your t’s you can have at it:

 

https://www.alx-inc.com/file/b0f5e2e23bb9ce1df96ef4eda6ab2553b46d306a/0000950123_01_504992.pdf

 

 

[thepupil]

While I don't think it really makes sense for VNO to issue shares at this time, for obvious reasons, I could certainly think of worse things to do than something like this.

 

VNO offers $400 / ALX share for the 3.5mm shares it does not already own. This would be $1.4 billion of shares and would increase VNO's share count by 21% through the issuance of 40mm VNO shares. At the ridiculous assumption that ALX's assets are worthless, this would dilute VNO value per share by 21%. At the assumption that $400/ALX is fair (pre-covid bull market) value and VNO fair (pre-covid bull market) value is $90/share, this would dilute VNO value per share by about 10-11%, but would be a de-risking transaction for VNO and preferable to a straight cash equity raise as it would involve an asset they already know well and manage.

 

Pro-forma for this transaction, VNO would add $400mm+ to its war chest of cash pile (or they could decrease dilution by 1/3 by using ALX cash as part of the consideration), Bloomberg would go from being the #3 tenant to the #1 tenant (at share NOI from bloomberg would go from $21mm --> $68mm, increasing office NOI from about $1 billion to $1.04 billion, retail NOI would go up by 30% ($60mm) the average office lease length and quality would increase incrementally, retail would be further diversified to the big box guys like Home Depot, Ikea, Costco, etc. (if you kept the queens assets within VNO, which does not make sense in my view)

 

To only do that with no offsetting repurchase would be value destructive  to VNO. You can toggle it however you wish (lower takeover premium, more cash vs stock, keeping the Queens retail within ALX and only having VNO bid for 731, etc. There are many ways to spin it, but I walk through the hypothetical to demonstrate that VNO has a very easy way to increase its strength and office portfolio quality with a controlled company that owns its best asset (2nd best asset if Facebook signs at Farley).

 

Why would the transaction not happen:

1) VNO insiders have large percentages in ALX and may not want to dilute their stake in the crown jewel.

 

2) VNO may want to preserve cash and NOT issue shares because share issuance below NAV no matter the context after avoiding

buybacks for many years would cause the sell side and less understanding shareholders to blow their collective gasket

 

3) It hasn't happened for 20+ years, so why now?

 

Why an egregious take under will not happen?

 

1) As I relayed earlier, I think a "take under" where ALX does not get full value is EXTREMELY unlikely, because it is not in Steve Roth's or David Mandelbaum's or Russell Wight's interest to do so. A take under of ALX would be robbing themselves since they own larger percentages of ALX than VNO. If you are going to unfairly allocate $1, it's best to allocate it to the thing you (the three dudes) own 18%  If there's going to be someone that benefits too much from the transaction, I think it's probably overly ALX friendly

 

2) The most egregious take under would be to try to only buy non-insiders out at a low price leaving insiders with 26%, VNO with 74% and offering a too low consideration to ALX minorities. Tender for half the shares at the current price, throw in some VNO stock at a low premium to piss off the people who don't want to own VNO but like ALX just for good measure. If I were trying to extract the most value from ALX shareholders, that's what I would do. I'd probably deploy the $400mm in cash in some undesirable development project just to really get a low price and fatigue the hell out of ALX shareholders. I don't think this will happen, but it's probably a small tail risk.

 

[BG2008]

Pupil,

 

I need to brush up on this.  Given that ALX is a REIT, I assume that there is appraisal rights (need to look into this).  I am pretty confident that I can go to court and argue that private market value for ALX is much higher than what it is currently trading at.  We should band together like blood brothers and vow to go to appraisal court if such tail risk take under happens. 

[thepupil]

 

Yep, it also looks like a decent sized fund called "EMS Capital" would be able to help given they just bought ~5% of the company (10% of float)

 

I don't know them but it's interesting that they made this their 6th biggest holding given their other picks. I speculate that because their office is 0.3 miles away, they just want to own that cool building above Hutong.

 

I suggest an ALX shareholder diligence trip here if/when this is all over

https://www.hutong-nyc.com

 

https://whalewisdom.com/filer/ems-capital-lp#tabholdings_tab_link

Top 5:

Amazon

Netflix

Mastercard

Nike

Salesforce

 

Then:

Alexander's

 

[rb]

Looks like they've had it for a good while but they're really jacked up their stake in Q1.

[merkhet]

Pupil,

 

I need to brush up on this.  Given that ALX is a REIT, I assume that there is appraisal rights (need to look into this).  I am pretty confident that I can go to court and argue that private market value for ALX is much higher than what it is currently trading at.  We should band together like blood brothers and vow to go to appraisal court if such tail risk take under happens.

 

Appraisal rights have really gotten kicked in the teeth in Delaware recently. I think it was the Dell case, but the state of appraisal rights now, IIRC, is that if you don’t take the deal price, your appraisal price may come back as the price where it was before the deal.

 

https://corpgov.law.harvard.edu/2018/03/01/the-new-new-regime-in-delaware-appraisal-law/

[BG2008]

My sister pointed out this nice little footnote in Alexander's 10-Q regarding the retail condo at the 731 Lex Ave building.  The cash balance of $458mm actually makes more sense now if they have to use it to either pay off the entire $350mm of the mortgage or at least reduce it by $150 to $200mm. 

 

From footnote 8  in 10-Q of Q1 2020  (1) Interest at LIBOR plus 1.40%. Maturity is August 2020 plus two one-year renewal options subject to financial covenants which we will not satisfy.

 

NYC retail is a mess.  But the Queens assets are stronger in my opinion.  Pre-Covid 19, I shop at that Costco.  It is stressful and you need to elbow people in the face to get a parking spot or maneuver around the store. 

 

Anyone has any thought on why the shares actually trade lower now than they did during the March lows?  Kind of odd. 

 

[BG2008]

Is there a bear thesis for Alexander's? NYC office and retail.  Yes, I get it.  But is there something else at work?