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VNO - Vornado Realty Trust


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Rates are going up, foreign buyers are becoming sellers, new supply is a coming, market volatility has returned...obviously now is not the most "strategic" time to be buying trophy NYC office buildings / high street retail.




I think VNO is becoming attractive. After the spin-off of its DC area assets, VNO's EBITDA is 90% Manhattan (roughly 70% office, 30% Upper 5th/Times Square Retail & signage). The other 10% is theMART (Chicago Merchandise Mart) and 555 California (trophy San Fran office building). There are some odds and ends as well, most notably $1.2B of cash and an estimated $800mm in after tax/debt repayment proceeds from the sale of 220 CPS, and a 36% stake in ALX which owns the Bloomberg building (731 Lex, yours truly's personal favorite) and some queens real estate.


In its 4Q 2016 supplemental, VNO provides a rough NAV which should be subject to additional scrutiny. It's about $105 / Share, using 4.5% cap rates on NYC office, a steamy 3.75% on NYC retail, 3.5% on NYC resi, 5.0% on theMART and $1.2B for 555 California. Let's call that the bull market/Norges takeout value. So at $67, VNO is at a 37% discount to its bull market value.


A more recent sell side note is less optimistic, placing NAV at $85 / share. Green Street and others also note that high G&A, a development pipeline that is hard to quantify in terms of value, and a negative outlook for supply / demand may warrant a discount. Another sell side note I read said that VNO was trading at an all-in cap rate of about 5.2% when it was in the mid-70's. At $67, VNO is at a 22% discount to its "not quite bearish, not quite bulled up, reasonably rigorous professional sell side appraisal" value.


VNO's 3Q 2017 supplemental backed into a ~6% cap rate for its core assets when the stock was in the mid-70s, but that included some aggressive assumptions for the non-NYC assets to get there (5% cap rate on theMART, some of the public securities have fallen since then).


Before we get too precise about it, let's just assume that mid 70's is at least a 5% cap rate and that mid $60s is getting into the mid 5's, possibly 6 handle if they monetize any of the bigger non-core assets at steamy prices/ sell 220 CPS as expected.


So you're rolling back the clock a few years in terms of cap-rate compression (or perhaps adjusting to new reality) with the stock at $67.


The balance sheet is in great shape. They've got about as much cash as corporate-level liabilities, and the rest is single-asset non-recourse financing that's decently termed out, as well as some perpetual pref's that have decently low coupons on account of the asset quality / IG rating. I need to quantify the rate risk better before I make any statements with respect to the impact on cash flow that rates will have. there's a lot of unencumbered or low leverage assets as well. A conference call notes that the NYC High Street Retail has about 20-30% of LTV of single property debt on it. $488mm of the $1.2B of EBITDA is unencumbered. At a 10% debt yield, that's $5B of incremental borrowing capacity (not that I'd expect them to lever the company to the gills, just pointing out the balance sheet flexibility).


Additionally, you've got plenty of development optionality given that if Penn Station was a color on the monopoly board, Vornado would be the player that owns it. You can go on their website and look at the pretty pictures of their ownership position as well as the Farley Post Office / Moynihan Train Hall development.


220 CPS sales, should they close as expected will be about $4 / share in dividends to shareholders in about a year and doesn't generate any income.


Also, Mr. Roth ain't getting any younger.


So there you have it, perhaps it's fairly valued in the new rate environment or perhaps this will look like an opportunity in retrospect. I need to do more work on sensitizing the thing and parsing out the debt, but at first glance, you've got a bunch of trophy properties, with a decently structured balance sheet, long term development optionality/strategic position around Penn Station, at what I would call a "decent not nosebleed anymore" price. At about 18x FFO, you get a high 3's divvy yield with the rest being used to de-lever, maintain/build NAV.


Let's just assume that over the next 10 years they build NAV/share price to what 1 year ago the company said it was worth ($105). You'd make 4.5% / year +3.6% divvy's = 8.1% / year = a fair equity return. I don't think that's a heroic assumption, even if there's a downturn that starts tomorrow, 10 years is a long time to recover. The key would be avoiding issuance at the bottom which they had to do last time round. It was also a much more complex company then. My point is that absent a major decline in the office market, I think you're getting paid a decent return here to own assets that are part investment / part vanity asset / store of value for SWF's and oil sheiks.


It's very possible the public market is leading the private market lower and that there's more price declines to come, but at this price, I start to get interested and intend to average down, assuming no major negative inflection in fundamentals. 


BG2008, I'm ready and waiting for you to shit on this idea and point out how sensitive to cap rates / cost of financing this is.


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Yes, spot lease rates are highly cyclical. I am still working on quantifying the downside; it's important to note that there are varying degrees of cyclicality given varying lease length and tenant strength. 731 Lexington's office (36% owned, separately traded as ALX) is leased to bloomberg until like 2030. I'd say that's as solid as it gets. Harry Winston's lease (example of retail, owned by Swatch) goes to 2031. There will be other ones at the opposite extreme (rolling into a weakening market). NYC is less finance dependent than in the past, but certainly affected by the industry.


No two crises are alike, of course. According, to VNO's Annual Report (Page 5), RemainCo's (the post spin company) FFO per share fell from $2.31 in 2007 to $1.33 in 2009 (37% peak to trough). In 2013, it was $2.68. I think that 2008/2009 was probably a weak test given that rates collapsed, but also point out they had to issue shares. Occupancy in NYC fell from 97 - 95% and is now 96%. Once again, I don't think that's what a real downturn will look like because there may be more supply in the next downturn.



The top 30 tenants can be found on page 29 of the most recent supplemental. You'll see that the chunkiest leases are in advertising (IPG), tech (Facebook and Google), financial service/data providers (bloomberg, McGraw hill) and 5th avenue/times square flagship retail stores (swatch, victoria's secret).


There's an insurance company, a big hedge fund (a believe Ziff Brothers is now a family office actually) and not a single bank. Part of the sell-off is fears about the flagship retail.


VNO will have another important insurance company when they deliver Aetna's headquarters, Aetna took down the majority of the building w/ a 13-year lease. They've signed a lease but may not move in, because of CVS merger, so that's an interesting wrinkle. It looks like CVS/Aetna will owe VNO $21mm / year and will probably pay some big break fee.






All that is to say "yes, it's cyclical, but it's not as simple as VNO is  renting to a bunch of banks and hedge funds and shitty retailers on month to month leases". They own the flagship retail stores (part advertising, part store) of shitty and good retailers, they own headquarters of long established financial co's with long term leases. They own space leased to Facebook and Google (google just paid $1,600 / foot for its Chelsea Market HQ, VNO leases to Google nearby, the Aetna HQ that won't be Aetna's HQ is across the street).


EDIT: this isn't correct.

I've attached VNO's leasing stats, which show that the weighted average lease term for office is 9.9 years @ $84 / foot. The weighted average term on the retail is 6.1 years, the rent / foot is more complex and I'm still in the process of understanding that. Note that the office leases expiring over the next 9 or so years are all decently below the weighted average rent / foot; this provides some buffer to declines in spot rates.


This dynamic helped out SLG in the crisis.


See this bearish write-up written at the bottom of the cycle https://www.valueinvestorsclub.com/idea/SL_GREEN_REALTY_CORP/8598. the author thought rents were going to collapse. A commenter pointed out that SLG was getting $45 / foot and market was at $80-$85, in one example. This was a disastrous short (6 bagger to today). Once again, I'm not saying it's all going to go down like it did in the past, just that the devil is in the details. 

I gave this a 2 because I think several of your key analysis is flawed....


2) you ignore the fact that most of the rents SLG is receiving now is signed YEARS ago and is way below-market market rents.  For example, SLG just renewed its lease with Viacom Inc at Times Square in November 08, terms were not disclosed.  The old lease was less than $50/sf.  Current market rents at Times Square is around $80 - 85.  It would be safe to assume that SLG got more than $50/sf in the new deal.


Currently, SLG gets $45/sf in rents on its portfolio.  So your assumption of a decline of 20% in revenue seems quite impossible.  In fact, I will place my $$ that SLG could increase their top line because of this below-market rent issue.


Real estate, big picture is a combination of fixed income (leases = general unsecured claims against the borrower) and equity (you bear the residual risk/own the LT growth). Some of VNO's "bonds" are AAA (long term leases to bloomberg / google / facebook / Amazon), some are junk (Hollister), many are in between.



1. Interpublic                          2.2%

2. Facebook                            1.5%

3. Swatch                              1.5%

4. Macy's                                1.4%

5. Victoria's Secret                  1.4%

6. Bloomberg                          1.3%

7. Equitable Insurance            1.2%

8. Google                                1.2%

9. Ziff Brothers (hedge fund)    1.1%

10. McGraw Hill                      1.1%

11. Oath (AOL)                      1.1%

12. City of NY                        0.9%

13. AMC                              0.9%

14. Topshop                        0.9%

15. Amazon / Whole Foods    0.9%


16-30: Uniqlo, MSG, Forever 21, Neuberger Berman, J Crew, JC Penney, Hollister, Bank of America, PWC, H&M, New York & Co, Sears, Alston and Bird, NYU, US Government


On interest rate risk:

VNO corporate level obligations:

$450mm 3.5% of 1/2025. These were just issued and yield 3.9%, trade for $97 1/4

$400mm 5.0% of 1/2022. These were issued in 2011 as 10 yr bonds @ 300 over. They trade for ~$106, 3.3% yield


It is fair to say their unsecured corporate obligations are more or less at market, even after the rise in rates.


$921mm pref's

5.7% trading at    $97

5.25% trading at  $93

5.4% trading at    $94


So the pref's are below market terms (discount to par). But that's fine since they don't ever mature. They are all callable, leaving VNO with optionality if rates go back down.


The mortgages are another story. There are far more line items and that's where the real risk is.





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Thank you for the work on VNO. I followed VNO loosely and was not aware of some of the recent changes. if VNO indeed trades at a 6% carp rate, if they can build value with their development pipeline. It looks lik it trades at a moderate discount to AV, wth above average mangement. This is great if you are bullish on the underlying assets, but I don’t. I am quite afraid of headwinds from higher interest rates, oversupply in the NYC market or a recession that were are going to get at some point almost 10 years intonthr recovery.

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You should look at Vornado's submarket in NYC.  Prior to the crisis, Midtown was the hot area for HF and PE shops.  Rent used to be in the $150 range.  After 2009, tech, media, advertising, became a much bigger deal in NYC.  The building that Google just bought would be considered meh 10 years ago.  So, you need to look at VNO's footprint and see if it still resonates today.  The trend is towards newer, Hudson Yards, etc and Cooworking spaces like WeWork. 


For 5th Ave retail, look at the rent/sqft that they are charging.  At $1,000 a year, it's likely under market.  At $5,000, it's way above market. Since 30% is retail, you have to pay attention to it.  If you walk around, there are a lot of empty store fronts and each retail corridor can no longer command the kind of rent that they use to. 


Do a $/SQFT analysis.  You can layer in land cost and construction cost and see where you come out.   

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  • 8 months later...
A nearly 1,000-foot-tall tower rising on the southern edge of New York’s Central Park is widely considered the city’s most exclusive and expensive new development. It may also be the most secretive: The developer has refused to release images of unit interiors, and its chief executive refuses to be interviewed about it.


But as construction nears completion on 220 Central Park South—where sale prices range from about $12 million to $250 million, according to an offering plan filed with the Attorney General’s office—identities of some of its high-profile buyers are beginning to emerge.




Billionaire Daniel Och, chairman of Och-Ziff Capital Management , the largest U.S. publicly traded hedge fund, is a buyer, as are Andrew Zaro, chairman of financial services and investment company Cavalry Portfolio Services, and his wife, actress Lois Robbins, according to people familiar with the building. Ofer Yardeni, chief executive of Stonehenge Management, a Manhattan-based real-estate company that boasts a portfolio in excess of $2 billion, also purchased a unit, those people said.




Billionaire Daniel Och, chairman of Och-Ziff Capital Management, is one of the buyers in the building, where prices range from about $12 million to $250 million.

Billionaire Daniel Och, chairman of Och-Ziff Capital Management, is one of the buyers in the building, where prices range from about $12 million to $250 million.  Photo:  Kimberly White/Getty Images 




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As has been reported in other publications, musician Sting and his wife Trudie Styler are buyers, confirm people familiar with that deal. Hedge-fund manager Ken Griffin signed on to spend more than $200 million on several apartments there, The Wall Street Journal previously reported. If he were to combine the units into one mega-home, the resulting unit could become the most expensive home ever sold in the United States.


It couldn’t be determined what any the buyers paid for their units; all declined to comment on their purchases or couldn't be reached. A spokesman at publicly traded Vornado Realty Trust , the company building the tower, declined to comment on the identities of any of the buyers at the building, as did a spokeswoman for Corcoran Sunshine Marketing Group, the company selling the units.


Many of the signed contracts date to the heady days of 2015, when the Manhattan real-estate market was booming; they are closing now as the building nears completion. With the market currently on a downward slide amid a glut of high-end Manhattan inventory, some real-estate agents hope the record-breaking closings will be a boon to market sentiment. Frances Katzen, a luxury real-estate agent, said she hopes it might take the edge off some of the “doom and gloom” in the market and facilitate the beginning of a “pendulum swing.”





Musician Sting and his wife Trudie Styler are also buyers in 220 Central Park South.

Musician Sting and his wife Trudie Styler are also buyers in 220 Central Park South.  Photo:  Vittorio Zunino Celotto/Getty Images 


Others argue 220 Central Park South is too unusual to inform any other part of the market. Real-estate agents predict that the building, which has an 18-story “chalet” fronting the street and a 79-story tower rising behind, will set a record for the highest price-per-square-foot ever obtained for a New York City apartment. The current record is the $13,000-a-foot recorded at nearby condominium 15 Central Park West in 2012, when financier Sanford I. Weill sold his penthouse for $88 million to a company tied to Russian billionaire Dmitry Rybolovlev.


“This building cannot be considered a proxy for the market. It’s its own country,” cautioned Donna Olshan of Olshan Realty, adding that the closed sales at 220 Central Park South could artificially skew quarterly market statistics going into 2019.


Steven Roth, Vornado’s chairman, announced in a third quarter filing and subsequent earnings call that the building is 83% sold, with 26 of the 27 full-floor apartments, all of which were priced at $50 million or above, under contract. More than half of those deals were done within a year of sales launching in 2015. The company is set to make roughly $1 billion from sales at the building. “220 Central Park South has exceeded all expectations, and is well into a record-setting territory,” Mr. Roth said on the call.


While the vast majority of developers attempt to generate sales by trumpeting the finishes and amenities of their homes, Vornado has taken the opposite approach and has kept the details of the units under wraps.




Real-estate agents predict that the building will set a record for the highest price-per-square-foot ever obtained for a New York City apartment.

Real-estate agents predict that the building will set a record for the highest price-per-square-foot ever obtained for a New York City apartment.  Photo:  Allison Scott/The Wall Street Journal 




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The secrecy strategy is one that worked well amid a rising market, but likely wouldn’t be as effective today, Ms. Olshan said. “What used to work in those markets does not work now,” she said.


The skyscraper was designed by Robert A.M. Stern, the same architect behind 15 Central Park West, and the interiors were done by French designer Thierry W. Despont. The exterior is clad in Alabama Silver Shadow limestone and the amenities include private dining rooms, an athletic club, a juice bar, a library, a basketball court, a golf simulator and a children’s play area, according to people familiar with the building.


Real-estate agents frequently compare 220 Central Park South to 15 Central Park West, describing it as a taller and more elaborate version of the ultrasuccessful project, which dates back to the mid-2000s and attracted billionaire buyers and celebrities. Sting sold his unit at the building to Karen Lo, a Hong Kong heiress whose family started the Vitasoy beverage empire, for about $50 million earlier this year. Records show Mr. Och also owns a unit in the building.


EDIT: I realize there's not much new info from first post here, just that it seems to be tracking as expected


While certainly well known to the market, I believe closings at 220 CPS is a nice de-risking event for VNO as it will fill VNO's coffers and more or less bring it to debt free at the corporate level. That's meaningful in the context of $11 billion + of unencumbered assets and a $13 billion market cap. They intend to use it to pay off their credit facilities and will use their massive liquidity to develop Farley/assets around Penn, so I wouldn't expect anything beyond the REIT required return of capital, but nevertheless, selling a $3B+ building ($1.7B of debt paydown $1B of profits minus some taxes) is a big deal in the context of a $25B EV.


Re all the discussions on NYRT, I sold my NYRT a while back to buy this because I think it trades at a significantly wider cap rate (you have to do some gymnastics to get there*), with overall higher quality, lower leverage, better liquidity etc. And while there's massive uncertainty as to the economics of the development pipeline (as the sell side loves to point out) I think looking out over an NYRT time horizon, you will be creating this at a higher cap rate as so of those projects come on line.


See page 9 of their most recent presentation:

$8.1B of secured debt

$1.7B of unsecured debt

$2.8B of non-consolidated

-$600mm non controlling

$12 billion of total debt



$1.7 billion of debt related to 220CPS

$1.0 billion of profit related to 220CPS

$1.0 billion of cash on the balance sheet.


$8.2 billion of total net debt. Now there are some ($1B) perpetual preferreds (which require about $50 mm of cash / year) not included, but note that secured debt = total net debt, meaning the balance of non-secured net debt is very low.


If you own the equity, you own $11 billion of unencumbered assets (plus the net value of the encumbered assets). For example as pointed out on the most recent call when they bought the other half of one of the US's largest billboards at a pre-arranged price equivalent to an 8% yield, that is a $1 billion asset that is completely debt free.


Now VNO will not be debt free for long as they will relever to develop the aforementioned properties, but I think it provides some perspective as to how levered VNO actually is (not that much). 


*And closings at 220CPS de-risk those gymnastics/adjustments.

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  • 2 months later...

I agree it looks attractive. I am not crazy about NYC commercial real estate at 4.5% cap rates, based on public market comps, but these guys are quite good at what they are doing, plus it should trade at a discount to fair value that is larger than 25%, if not higher at current prices around$60/share. Their development around Penn station should at a lot of value, this area is very lively and really needs it. I think it’s a good compounder. I am a bit sceptical on RE as an asset class right now, but I th8nk even with some headwinds, this should work out.

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  • 3 months later...




Vornado Announces Transfer of a 45.4% Common Equity Interest In Its Upper Fifth Avenue

and Times Square Retail Portfolio at a Valuation of $5.556 Billion

NEW YORK…..VORNADO REALTY TRUST (NYSE: VNO) announced today that it has transferred a 45.4% common equity interest in its portfolio of flagship high street retail assets on Upper Fifth Avenue and Times Square, which are among the scarcest and most valuable in the world, to a group of institutional investors advised by Crown Acquisitions Inc. The transaction values the portfolio at $5.556 billion, a 4.5% cap rate. Vornado is the general partner of the joint venture formed to own the assets. Vornado continues to own 51.0% of the common equity.

Net cash proceeds to Vornado from the transaction will be approximately $1.198 billion, after (i) deductions for the repayment of a $390 million mortgage loan on 666 Fifth Avenue and a $140 million mortgage loan on 655 Fifth Avenue, (ii) anticipated proceeds from a new $500 million mortgage loan on 640 Fifth Avenue, (iii) $26 million used to purchase minority investors' interests and (iv) $56 million of estimated transaction costs.

As a result of the transaction, Vornado will have a tax gain of approximately $735 million. There will be a financial statement gain of approximately $2.6 billion in the second quarter of 2019. The tax gain and the financial statement gain are estimates and are subject to change.

In conjunction with the transaction, Vornado retained preferred equity interests in certain of the properties in an aggregate amount of $1.828 billion. The preferred equity has an annual coupon of 4.25% for the first five years, increasing to 4.75% for the next five years and thereafter at a formulaic rate. It can be redeemed under certain conditions on a tax deferred basis.

The joint venture assumed a $450 million mortgage loan on 697-703 Fifth Avenue. The new $500 million mortgage loan on 640 Fifth Avenue is anticipated to be completed in the near future, is expected to be for five years at an interest rate of LIBOR plus 101 basis points and will be guaranteed by Vornado. Until the new mortgage closes, Vornado will retain $500 million of preferred equity interests in addition to the $1.828 billion referenced above. After completion of all these transactions, the joint venture's right-hand side of the balance sheet that equals its $5.556 billion market value assets will be comprised of $950 million of mortgage debt, $1.828 billion of preferred equity – 100% held by Vornado, and $2.778 billion of common equity – 51% held by Vornado.

The properties which are located at 640 Fifth Avenue, 655 Fifth Avenue, 666 Fifth Avenue, 689 Fifth Avenue, 697-703 Fifth Avenue, 1535 Broadway and 1540 Broadway, include approximately 489,000 square feet of retail, approximately 327,000 square feet of office, signage at 1540 Broadway and 1535 Broadway, the parking garage at 1540 Broadway and the theatre at 1535 Broadway.

Further discussion of this transaction is included in Steven Roth's amended 2018 letter to shareholders available at www.vno.com as well as on a Current Report on Form 8-K that was filed today with the Securities and Exchange Commission.

Vornado Realty Trust is a fully integrated equity real estate investment trust.


From amended 2018 letter:

By my math, the deal is either spot on or at most $1 dilutive to our published NAV and about $7 accretive to our share price.


This transaction monetizes the flagship retail portfolio and generates about 10% of the market cap in cash. The NAV / share the letter refers to is $97.90 versus stock price of ~$67.

This is a good move in my view, very de-risking to the overall thesis. For some context, VNO has ~$320mm of retail NOI valued at $7.2 billion. This monetizes $240 of that at a 4.5% cap rate / $5.5 billion valuation. VNO did have to provide some lower cost long term preferred equity to get the deal done and if the best is worth 4.5% that means the other stuff is worth higher, but nevertheless it sends a massive amount of cash to VNO's coffers (as do continued closings at 220 CPS).


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I increased my position substantially today.


I think the market reaction is along the lines of what indirect's post is saying: that if VNO is aggressively selling and monetizing, then that says they're bearish or that they think the public market is right and private market is wrong.



I view it differently.




Page 8 of their presentation says that VNO's price of $67 implies a price per foot of $522 and a cap rate of 8.0% for their core office portfolio. How does VNO get there? Through a bunch of aggressive adjustments and marking the non-office at high value / low cap rates that exists in the private market. Every single transaction that comes in that justifies all those aggressive adjustments is one step closer to creating VNO Office core at an 8.0% cap rate / WELL below replacement cost. Now I can see plenty of arguments why one needs to throw in an S, G, &A discount or why you're actually creating it at 7.0% or 6.0%, but even then, creating VNO's portfolio at 6.0% is attractive to me.


VNO has roughtly $31 billion of assets, $19 billion of which is core office so $12 billion of non-NYC office. $7.2 billion is NYC retail (70% of which was just validated/de-risked), and $1.0 billion is the net value of 220CPS, so $8.2 billion of your $12 billion is those two things. The uncertainty on those two things keeps decreasing while the stock continues to languish.


I kind of feel like an idiot, because I'm just straight up drinking the management kool-aid on this one and buying levered NYC property 9 years into an upswing and like 40 years into an interest rate bull market, but with every sale of a condo at 220CPS or lease at Merchandise Mart or re-financing at a JV, the value of the non-core keeps getting validated. I don't think it's right to  ignore when material chunks of the market cap are crystallized at NAV if you at all trust the proceeds to be deployed well.



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when it comes to NYC retail and office, my assessment is private markets are overvalued. It’s basically two totally different buyer pools. One is Chinese capital that just wants to hide capital. The other is more rational investors looking for an actual return.


Its a good move for Roth because it'll help him fund his Penn Plaza development.


The real question is why didn't VNO JV all its street retail and how real is that 4.5% cap rate?

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when it comes to NYC retail and office, my assessment is private markets are overvalued. It’s basically two totally different buyer pools. One is Chinese capital that just wants to hide capital. The other is more rational investors looking for an actual return.


Its a good move for Roth because it'll help him fund his Penn Plaza development.


The real question is why didn't VNO JV all its street retail and how real is that 4.5% cap rate?


I would just point out that the Chinese are basically out of the market and have been for at least a year. The market is not cheap, but there is endless capital — domestic and foreign — that wants to be in NYC, and investors that can take a long view will likely do fine.


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when it comes to NYC retail and office, my assessment is private markets are overvalued. It’s basically two totally different buyer pools. One is Chinese capital that just wants to hide capital. The other is more rational investors looking for an actual return.


Its a good move for Roth because it'll help him fund his Penn Plaza development.


The real question is why didn't VNO JV all its street retail and how real is that 4.5% cap rate?


There is the complicating factor of the pref which is 17-50% LTV tranche priced at 4.25% / 4.75% / "Formulaic". That seems pretty fairly priced to me given the risk profile, but is obviously not super high returning capital. Do you see any other factors that could indicate the 4.5% cap rate is not "real"? If we say the pref should be 200 bps higher, then that would knock about $600 million off the headline sales price, which would make it about a 5.0% cap rate (I'm just treating the $81 million of interest as a perpetual and widening it by 200 bps), but  it's not likely that 6.5% is the "right" cost of debt for 17-50% tranche of high street retail debt...at least without a big move in rates/spreads.


If you mark the rest of the retail at a 12% cap rate (rather than 4.5%) you'd shave $5 / share off the NAV and it'd be trading at a 28% discount.


If you do the above (mark retail at 12%) and then mark office at like 6%, then the discount more or less goes away. Naturally the cap rate on office is the key driver of value.


If you do the above and start to haircut high visibility sales at 220 CPS, then you are paying more than NAV.


Famous last words, but I think much of the bad news is priced in.




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  • 5 months later...

So this happened yesterday...Stifel downgraded SL Green (see reasons below) and the stock went down 4%.


On the same day, after the close, SL Green announced the sale of 220 East 42nd Street for $815 million. 220 East 42nd is a 90 year old building in a convenient but stodgy/unhip part of town.


Private-Public disconnect at work


Public market: We don't want to own this leveraged owner of trophy NYC office at a 6%+ cap, particularly that god awful brand new $3 billion building on top of grand central leased for term to private equity funds...


Private market: ya we'll take that 90 year old building leased to Tribune Media and a bunch of unglamorous tenants...how about a 4-4.5 cap.



SL Green Plunges Most Since 2017 After Stifel Downgrade

By Anisha Sircar

(Bloomberg) -- SL Green Realty fell as much as 4.6%, the REIT’s biggest intraday dip since October 2017, after it was downgraded at Stifel.

Analyst John Guinee downgraded the stock to hold from buy and lowered the PT to $82 from $90

Said multiple concerns will outweigh share repurchase-driven value creation “at least through their December 2019 Investor Day,” including “uninspiring” Manhattan office and retail fundamentals, high leverage metrics, and earnings uncertainty

“A confused prospect never buys, and there is confusion as SLG goes down a very unique and untested path,” Guinee wrote

Noted challenging local politics and SALT tax reform

SLG has 8 buys, 9 holds and 2 sells; avg. PT is $94: Bloomberg data

Shares have fallen 0.2% YTD vs the S&P 500 Real Estate Index +26%

NOTE: The company is scheduled to announce 3Q results Oct. 17

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Maynihan/Farley is an example of the type of asset that Vornado owns that the market dislikes. It is non-earning, long in duration, and of unknown return.


Vornado owns 95% of the project and has spent $438mm / $1 billion total projected cost. If I read the filings correctly, the government is spending about $1.6 billion on the project.


From the most recent Q: The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bear a full guaranty from Skanska AB. The development expenditures for the Moynihan Train Hall are estimated to be approximately $1.6 billion, which will be funded by governmental agencies.


In a few years, this will probably be 725K square feet of office space leased to a global tech giant for the long term. Vornado expects leases to be in the "triple digits" Let's say that means $110/foot. So in a few years, you could have $80mm of rental revenue from Facebook or Apple on a completely unlevered building (maybe $50mm-$60mmof NOI plus 100K sq feet of retail NOI. all in you could be creating extremely high quality real estate at a 6-7-8% cap. That's the type of thing that shows up at cost (or 110% of cost) in VNO's NAV that I think is very solid. I think it is highly likely to be worth 100 cents on the dollar or more in several years. This will obviously be good for VNO's other buildings around Penn Station.


The market will like a 100% leased building on top of Penn Station leased to Apple spitting out cash. The debt market will allow VNO to extract much of its cost. 


I realize I'm repetitive on this name. Just updating as news comes out.


From the most recen transcript: In addition, both at Farley and Penn 2, we are deep in negotiations with multiple large users for anchor spaces, all in the

triple digits



Facebook facing off with Apple over space in Vornado’s Farley Building conversion

Vornado chairman Steve Roth appears to be leaning toward Facebook


TRD New York /

October 16, 2019 10:32 AM


Facebook CEO Mark Zuckerberg and Apple CEO Tim Cook with a rendering of the Farley development (Credit: Getty Images, SOM iStock)

Facebook CEO Mark Zuckerberg and Apple CEO Tim Cook with a rendering of the Farley development (Credit: Getty Images, SOM iStock)


A pair of tech giants are battling it out over some prime office space in New York.


Facebook and Apple are both interested in leasing space at Vornado Realty Trust’s conversion of the massive James A. Farley Post Office, according to the New York Post.


Facebook has been in talks for 740,000 square feet of space in the project since at least September, but Apple has more recently decided it wants to lease all four floors of office space and a new floor being built on the roof.


The competition puts Vornado chairman Steven Roth in a tough spot. He is already Facebook’s landlord at 770 Broadway, where the company has a 758,000-square-foot lease, but Apple’s market capitalization of more than $1 trillion is more than double Facebook’s.


However, Roth appears to be leaning toward Facebook, and Apple has put feelers out for space in Tishman Speyer’s development project at the Morgan North Post Office as a backup, according to the Post.

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I like the Penn station development. I think office and retail space will do very well there because it’s very accessible for commuters and there is enormous foot traffic. This area really needs it too.


Disclosure: no position.


This might be ancilliary, but you may have some other tech firms like Google a couple blocks away in Hudson Yards when that is finished, plus additional office, retail and luxury condos. 

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Looking at their history, VNO blew up during the GFC it would appear.  I don't think their dividend is as high as it was back in 07.  I realize that was an extraordinary circumstance but it is worth keeping in mind if we are to consider this a compounder.


I looked at the crisis period a few months back. the stock fell a ton. they had to issue about 12% of then current shares outstanding at the bottom. operating metrics didn't move crazily. Occupancy on what is in the current portfolio fell a few points (during the crisis VNO was much more complex; recent annual reports have what the metrics did for the core NYC office portfolio). 


VNO used to own JCP, toys R Us, Urban Edge, JBGS, etc. so the portfolio is simpler now than it was then. They also went in with about $4 billion of unsecured debt (of $12 billion total) and now have $1.2 billion of unsecured debt (of $8 billion total). Just using Bloomberg simplified metrics on each of those figures. The point being that VNO went into the crisis with greater complexity, a lot more recourse debt (as a percent of total) and from what I could tell, a much less cash rich and unencumbered corporate balance sheet.


VNO leverage today is kind of an inkblot. One can take all their debt add the unconsolidated debt from JV's and get to about a total top down consolidated mark to market LTV of 45% (debt and preferred =$11  billion of $24 billion total consolidated cap structure) or total debt to EBITDA of 6-7x and conclude that VNO is pretty levered.


Or one could do the math of counting the retail JV preferreds as quasi investment grade bonds, add up balance sheet cash, add up high visibility 220CPS sales and compare those balances to corporate recourse liabilities and corporate guaranteed mortgages and conclude that VNO as a corporate entity is virtually unlevered. If there's no corporate recourse leverage, then the equity fully owns the $311mm of unencumbered (no secured debt) annualized EBITDA and fully owns the unlevered development projects like Farley Post Office (discussed above). this math will lead you to conclude that they could hand back the keys on some properties if SHTF and the equity won't be crazily impaired. It will help frame the low probability of leverage/distress becoming an issue ina severe downturn.


My overall takeaway is that VNO is highly unlikely to repeat the 63% peak to trough drawdown of the crisis. I'd also note that from '03 to '06 VNO went from $26 per share to $86 per share. It had a lot of room to fall in part because it was so hot in the years leading in. VNO of today is simpler and safer. The stock has done nothing for 5 years and is starting from here at a substantial discount to current NAV (it probably traded at a significant premium in the heady pre-crisis real estate /securitization/financials/euphoria).


All that said I don't think VNO is a compounder (unsure of what the definition of compounder is in this context, but I don't think it is whatever your definition is). Core office assets have low to moderate unlevered returns and NYC office fundamentals/economics of ownership aren't wonderful. I wouldn't expect VNO to compound NAV / share or NOI or any other kind of metric at a high rate.


I would expect the company to maintain and grow its current NAV of ~$95/share, pay a reasonable divvy, and monetize assets at at NAV via borrowings and potentially sales or JV's or spin-offs (as they have been doing). VNO will soon have something like $2-3 billion in cash and 4.5% yielding preferreds which is the defintion of low risk/low return, not compounding.


I think it should be clear that if one requires companies to be "compounders", an office REIT at a discount to NAV (no opporutnity to grow fast via issuance) is not going to fit one's criteria. this is a capital return/discount narrowing via asset conversion/paid to wait story. This is not likely to compound at a high rate. the stock could provide a high return if more dramatic action is taken to close the gap (sale of entire company, even more aggressive JV's/monetizations, etc.)

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Thank you for your detailed response.


I guess the term compounder was a bit subjective.  All I was really going for was that with a 4% dividend, I really need to see growth in the dividend over time (or I guess a sale) to achieve a reasonable investment return.  It just concerned me that over a longer trend (2007-2019), the dividend is flat.  However, as you say, this is not the same company as what went into the GFC.  Prior to the GFC it did have an excellent return.

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