ALX - Alexander's

[BG2008]

so I know I'm a landlord in an anarchist state and all, but at $243, this is is definitely the safest of the anarchist state landlords.

 

Let us assume that all retail is worth zero. Let us assume that the unencumbered multifamily property is worth zero. Let us assume that ALX must use all its cash to pay down the debt on the 731 Lexington to the extent possible.

 

In this case, we would be buying 731 Lexington office for the market cap + $100mm or so of remaining debt. We'd be investing in a single building real estate PE deal. We would be paying $1.34 billion for the property w/ 93% equity

 

What would our (almost) unlevered IRR / MOIC be under various scenarios?

 

One would receive about 47% ($638mm) of the the $1.34 billion from rent from bloomberg until 4/2029 at which point Bloomberg will renew or not and at which point the building would be worth some terminal value. Spinning up the old XIRR function, i get the following: 

 

Bull:    10.1%      2.0x    Bloomberg renews in 2029 and 731 is worth a 4 cap on the then $95/foot net rent.

Base:  6.2%,      1.5x    Bloomberg renews in 2029 and 731 is worth a 6 cap on the then $95/foot net rent

Bear:  -1.7%%  0.9x    Bloomberg does not renew. New tenant pays $50 / foot net (35% haircut to today, 48% haircut to what rent

                                    Bloomberg will be paying in 2029). Building trades at an 8.0% cap rate.

 

The point is not that making a -2% to 10% IRR (0.9-2.0x) over the next 9 years is that attractive. It isn't! But we started by assuming that all retail was worthless, assuming that ALX would do nothing better with its cash than pay down debt that currently costs 1.14%, and we also assumed a decent 312 unit apartment building above the subway in queens was completely worthless. To the extent those assumptions are too bearish: retail is not completely worthless, cash is returned to you earlier/leverage maintained on 731 office, the apartment building is actually worth 7-14% of the market cap, then that shifts the payoff profile and it becomes far more attractive.

 

this is just a convoluted way of saying if everything but the office is worth zero and the office is worth a 7.5% cap rate today*, then there's only 35% more downside to go.

 

See you all at $160 / share.

 

*at a 7.5 cap, one would receive 70% of the basis in the property ($640/916mm) over the lease term.

 

I sold a few shares after the Century 21 news.  I guess, I'll have to buy it back at a cheaper price.  If you follow BG and Pupil's office picks, it's guaranteed to be dead money for 2020.  Not a bearish sentiment at all.  Just felt like there was a bit of downside on that news. 

 

 

[thepupil]

I considered selling some too.

 

I think they’ll cut the dividend and it will go down a lot, but am not selling ahead of that, mainly because I don’t like money.

[bizaro86]

I added to this today. If they cut the dividend and it drops another 10-20% it would be time to back up the truck.

 

[Gregmal]

The upside on some of these is huge, but it is definitely not happening, barring a buyout, anytime soon. As such, I am just buying often, in very small size, over and over. There is no urgency, especially as many flirt with dividend cuts. Expect dead money is right.

[bizaro86]

The upside on some of these is huge, but it is definitely not happening, barring a buyout, anytime soon. As such, I am just buying often, in very small size, over and over. There is no urgency, especially as many flirt with dividend cuts. Expect dead money is right.

 

This makes sense, imo. I like ALX the best of the NYC names because it's the simplest. But I've been trading around a core position because I doubt a big move back to fair value is happening soon.

[BG2008]

In 2012, Alexander paid out a special dividend of $122 per share  when the stock was in the $200 range ahead of an Obama tax regulation

 

That would be about 50% of the current share price

[thepupil]

In 2012, Alexander paid out a special dividend of $122 per share  when the stock was in the $200 range ahead of an Obama tax regulation

 

That would be about 50% of the current share price

 

$122 / share would be difficult given they only have $78/share of cash. they could lever up The Alexander to get close to $95/share. Using VIC writeup Alexander value of $180mm / 2 = $90mm of debt = $17.5 share of 50% LT(PC)V of debt capacity at The Alexander ($78+$17 = $95)

 

LT(PC)V=Loan to Pre-Covid Value

 

My crazy idea for the cash is for VNO to give to ALX a free ATM put on VNO's stock that expires in 2025 (when the retail debt comes due). ALX could then buy 5.8% of VNO at the current price, that way ALX wouldn't be taking too much risk (it would have the cash to deal with the retail debt maturities if things are still bad 5 years from now) but could put its cash to better use. Given its $4 billion of liquidity, VNO has the  balance sheet to take on the risk that it may have to buy $400mm of stock at this price 5 years from now.

 

ALX basically holds excess cash because they don't have scale/big unencumbered pool / credit facility to deal with things like a real company would and because they have tax sensitive owners that are rich; if you do a cash out refi at ALX (which is where ALX's cash comes from) that doesn't generate income so why dividend it out to yourself and give yourself a tax bill if you own/control the cash at the ALX level. Mr. Roth would lose ~32% of any ALX divvy to taxes given an NYC top rate of 12.6% and a federal rate of 20% on divvies.

 

Since 2010, they've held $230mm - $530mm of cash (lazily using bloomberg which could be wrong). I propose that VNO be ALX's banker. this would make sense for Roth and crew because ALX buying $400mm of VNO would increase their ownership in VNO to a greater degree than VNO buying back stock (since they own a greater percent of ALX than VNO).

 

It would avoid the incidence of tax (in contrast to a special dividend). Shares in REITs are REIT qualified assets. ALX's cash flow would improve while we bridge the retail vacancies given VNO's dividend. It would make sense for VNO minorities (regular shareholders w.o an interest in ALX) in that it'd be a shadow buyback of ~2% of the company (by having a 32% owned and controlled affiliate buy  5.8% of the stock and taking on a 4 year out liability to buy back $400mm of stock would not materially impact the balance sheet. 

 

Of course, none of that will happen; it is a transaction that only a bagholder of both stocks can love.

[BG2008]

In 2012, Alexander paid out a special dividend of $122 per share  when the stock was in the $200 range ahead of an Obama tax regulation

 

That would be about 50% of the current share price

 

$122 / share would be difficult given they only have $78/share of cash. they could lever up The Alexander to get close to $95/share. Using VIC writeup Alexander value of $180mm / 2 = $90mm of debt = $17.5 share of 50% LT(PC)V of debt capacity at The Alexander ($78+$17 = $95)

 

LT(PC)V=Loan to Pre-Covid Value

 

My crazy idea for the cash is for VNO to give to ALX a free ATM put on VNO's stock that expires in 2025 (when the retail debt comes due). ALX could then buy 5.8% of VNO at the current price, that way ALX wouldn't be taking too much risk (it would have the cash to deal with the retail debt maturities if things are still bad 5 years from now) but could put its cash to better use. Given its $4 billion of liquidity, VNO has the  balance sheet to take on the risk that it may have to buy $400mm of stock at this price 5 years from now.

 

ALX basically holds excess cash because they don't have scale/big unencumbered pool / credit facility to deal with things like a real company would and because they have tax sensitive owners that are rich; if you do a cash out refi at ALX (which is where ALX's cash comes from) that doesn't generate income so why dividend it out to yourself and give yourself a tax bill if you own/control the cash at the ALX level. Mr. Roth would lose ~32% of any ALX divvy to taxes given an NYC top rate of 12.6% and a federal rate of 20% on divvies.

 

Since 2010, they've held $230mm - $530mm of cash (lazily using bloomberg which could be wrong). I propose that VNO be ALX's banker. this would make sense for Roth and crew because ALX buying $400mm of VNO would increase their ownership in VNO to a greater degree than VNO buying back stock (since they own a greater percent of ALX than VNO).

 

It would avoid the incidence of tax (in contrast to a special dividend). Shares in REITs are REIT qualified assets. ALX's cash flow would improve while we bridge the retail vacancies given VNO's dividend. It would make sense for VNO minorities (regular shareholders w.o an interest in ALX) in that it'd be a shadow buyback of ~2% of the company (by having a 32% owned and controlled affiliate buy  5.8% of the stock and taking on a 4 year out liability to buy back $400mm of stock would not materially impact the balance sheet. 

 

Of course, none of that will happen; it is a transaction that only a bagholder of both stocks can love.

 

With office REITs trading this way, bagholders need to form an union. 

[realassetsvalue]

Pupil, that's definitely an interesting thought on what they could do with their cash.

 

While i think my operating assumption is their primary use of cash is to continue to hold on to the cash and it sits on the balance sheet to be used for CAPEX, refinancing, etc., anyone else have any strong views on alternative capital allocation choices?

 

To me it feels like the primary options are that (1) have said they are in the process of working up entitlements for Rego Park III, which they could develop, (2) they could acquire additional properties or (3) dividend out the cash.

 

BG / other NYC RE experts - any thoughts on what they could get permission for and develop at the Rego Park III site?

[BG2008]

Pupil, that's definitely an interesting thought on what they could do with their cash.

 

While i think my operating assumption is their primary use of cash is to continue to hold on to the cash and it sits on the balance sheet to be used for CAPEX, refinancing, etc., anyone else have any strong views on alternative capital allocation choices?

 

To me it feels like the primary options are that (1) have said they are in the process of working up entitlements for Rego Park III, which they could develop, (2) they could acquire additional properties or (3) dividend out the cash.

 

BG / other NYC RE experts - any thoughts on what they could get permission for and develop at the Rego Park III site?

 

Pretty sure it's going to be a multi-family.  But that's our secret.  An apartment building makes the  most sense and will bring the parcel up to highest and best use.

[bizaro86]

In 2012, Alexander paid out a special dividend of $122 per share  when the stock was in the $200 range ahead of an Obama tax regulation

 

That would be about 50% of the current share price

 

$122 / share would be difficult given they only have $78/share of cash. they could lever up The Alexander to get close to $95/share. Using VIC writeup Alexander value of $180mm / 2 = $90mm of debt = $17.5 share of 50% LT(PC)V of debt capacity at The Alexander ($78+$17 = $95)

 

LT(PC)V=Loan to Pre-Covid Value

 

My crazy idea for the cash is for VNO to give to ALX a free ATM put on VNO's stock that expires in 2025 (when the retail debt comes due). ALX could then buy 5.8% of VNO at the current price, that way ALX wouldn't be taking too much risk (it would have the cash to deal with the retail debt maturities if things are still bad 5 years from now) but could put its cash to better use. Given its $4 billion of liquidity, VNO has the  balance sheet to take on the risk that it may have to buy $400mm of stock at this price 5 years from now.

 

ALX basically holds excess cash because they don't have scale/big unencumbered pool / credit facility to deal with things like a real company would and because they have tax sensitive owners that are rich; if you do a cash out refi at ALX (which is where ALX's cash comes from) that doesn't generate income so why dividend it out to yourself and give yourself a tax bill if you own/control the cash at the ALX level. Mr. Roth would lose ~32% of any ALX divvy to taxes given an NYC top rate of 12.6% and a federal rate of 20% on divvies.

 

Since 2010, they've held $230mm - $530mm of cash (lazily using bloomberg which could be wrong). I propose that VNO be ALX's banker. this would make sense for Roth and crew because ALX buying $400mm of VNO would increase their ownership in VNO to a greater degree than VNO buying back stock (since they own a greater percent of ALX than VNO).

 

It would avoid the incidence of tax (in contrast to a special dividend). Shares in REITs are REIT qualified assets. ALX's cash flow would improve while we bridge the retail vacancies given VNO's dividend. It would make sense for VNO minorities (regular shareholders w.o an interest in ALX) in that it'd be a shadow buyback of ~2% of the company (by having a 32% owned and controlled affiliate buy  5.8% of the stock and taking on a 4 year out liability to buy back $400mm of stock would not materially impact the balance sheet. 

 

Of course, none of that will happen; it is a transaction that only a bagholder of both stocks can love.

 

Interesting. As a bagholder only at the ALX level, I'd prefer a similar transaction using the ALX stock that VNO owns. IE ALX buys back a bunch of ALX shares from VNO, and pays them a fee to have an equity line or put option available for when the refi comes up. Given the current market in NYC it would be nice to see them use that cash for something...

[thepupil]

Given the precedent, I think it would only be rational to conclude they’ll do nothing too interesting with it for some time.

[thepupil]

731 potentially losing Home Depot too. Article also mentions Target possibly replacing Home Depot at 731.

 

The HD lease goes to 2025 so not a near term concern. The article seems to assume/imply that HD would immediately vacate 731 If they take the old bed bath and beyond space. It definitely seems that the two stores would be way too close to make sense but it’s odd to me that we’re seeing this now and not in 3-4 years.

 

https://www.google.com/amp/s/therealdeal.com/2020/09/24/home-depot-eyes-former-bed-bath-beyond-space-on-first-ave/amp/

[thepupil]

$122 / share would be difficult given they only have $78/share of cash. they could lever up The Alexander to get close to $95/share. Using VIC writeup Alexander value of $180mm / 2 = $90mm of debt = $17.5 share of 50% LT(PC)V of debt capacity at The Alexander ($78+$17 = $95)

 

Actually ~$18 / share

 

Alexander’s Completes $94 Million Financing of a Residential Building

PARAMUS, N.J., Oct. 26, 2020 (GLOBE NEWSWIRE) -- ALEXANDER’S, INC. (New York Stock Exchange: ALX) announced today that it has completed a $94 million financing of The Alexander, a 312-unit residential building that is part of the Company’s residential and retail complex located in Rego Park, Queens, New York. The seven-year interest only loan matures in November 2027 and has a fixed rate of 2.63%.

Alexander’s, Inc. is a real estate investment trust that has seven properties in the greater New York City metropolitan area.

 

 

[thepupil]

Maintaining the divvy.

 

Given the state of the retail, this means they’re dipping into their cash to pay the divvy. Assuming no non office cash flow, they could do this for a decade or so since that have $500mm of cash, so it’s hard to call it “unsustainable”, but it’s a sloooooow  return of capital.

 

I’d prefer something more dramatic, but I guess it’s better than cutting the dividend and sitting on the cash.

[thepupil]

income statement continues to deteriorate and will only get worse w/ Century21 still in there for some of Q3

https://www.bamsec.com/filing/349920000034?cik=3499

 

I can't figure out why they generated so little cash in the Q (comparing Q3 CFO w/ Q2).

 

there is a line item for changes in working capital that is simply "other assets" which swung from +1.6mm for 6m 2020 to -33.7mm 9m 2020.

 

what is this $35mm use of cash in Q3?

 

for the year, other assets has gone from $6mm-->$40mm. as of year end "other assets" was mostly a $5mm "right of use" asset related to Paramus which is not material. It's not some kind of tenant receivable (that's elsewhere).

 

 

[realassetsvalue]

Two pretty minor questions coming out of these earnings that I would add:

[*]The Bloomberg rent was scheduled to step up in February of this year but interesting to see that Bloomberg total revenue for YTD September 2020 is down on same period in 2019 at $80.9m and $81.3m respectively. This includes the operating cost reimbursements, etc. not just the NNN rent. Do we think that lower operating costs (because noone has been in the office) have offset the increase in NNN rent? Or something else at play?

[*]No mention of IKEA @ Rego Park, which is supposed to open this Fall after being pushed back from the Summer - anyone seen any indication IKEA will not take that space?

[bizaro86]

Two pretty minor questions coming out of these earnings that I would add:

[*]The Bloomberg rent was scheduled to step up in February of this year but interesting to see that Bloomberg total revenue for YTD September 2020 is down on same period in 2019 at $80.9m and $81.3m respectively. This includes the operating cost reimbursements, etc. not just the NNN rent. Do we think that lower operating costs (because noone has been in the office) have offset the increase in NNN rent? Or something else at play?

[*]No mention of IKEA @ Rego Park, which is supposed to open this Fall after being pushed back from the Summer - anyone seen any indication IKEA will not take that space?

 

The revenue doesn't change with escalations. GAAP requires straight lining, so the rent portion will always be the same. Cost pass throughs are probably down due to low physical occupancy.

 

The rent increase did happen though. Look at the cash flow statement. The adjustment for straight lining of rents (ie, the amount cash rents exceed GAAP) rents, was 18.3 MM vs 1.95 MM in the prior year period.

 

I haven't heard anything about IKEA at rego Park, it's probably just delayed.

 

And shareholders definitely want Ikea to take Rego Park and start paying rent. I agree that it would be good if Ikea didn't exercise their purchase option on the Jersey store, but that's a totally different location. The lease on Rego Park is for vacated Sears space. Having Ikea paying rent and drawing traffic there would be good.

[rb]

My bad guys. I got confused between Rego and the NJ IKEA deals. I'll delete my previous post.

[bizaro86]

My bad guys. I got confused between Rego and the NJ IKEA deals. I'll delete my previous post.

 

No worries - lots of Ikea going on here! Just wanted to correct for posterity.

[thepupil]

731 potentially losing Home Depot too. Article also mentions Target possibly replacing Home Depot at 731.

 

The HD lease goes to 2025 so not a near term concern. The article seems to assume/imply that HD would immediately vacate 731 If they take the old bed bath and beyond space. It definitely seems that the two stores would be way too close to make sense but it’s odd to me that we’re seeing this now and not in 3-4 years.

 

https://www.google.com/amp/s/therealdeal.com/2020/09/24/home-depot-eyes-former-bed-bath-beyond-space-on-first-ave/amp/

 

this is confirmed. HD is moving to the old bed bath and beyond.

 

VNO call notes that ALX is protected for 5 years...maybe ALX gets some sort of fee to let HD out if they can bring someone else in.

 

And Glen, could you share any potential updates or prospects for the home depot space this can be vacating --?

 

Well, the home depot leaves goes through 2025. And we have approached them multiple times about recapturing the space. And we had an interesting conversation a few short years ago about how much would you pay us to get to give us back the space and how much will they wanted to know how much we would pay them. So the answer is, is that we don't, that space is under lease to to 2025 and it is not something that we are concerned about today.

 

However, we have in comings on that space from several important retail tenants whom you would -- whom you would expect. So we can't tell how that will play out but we have -- we're financially protected for the next five years.

[BG2008]

Century 21 is coming back apparently.  I wonder if they are keeping the location in Queens.  This could be major.

 

https://c21stores.com/