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So that you may diversify your ways to lose money in New York real estate, why not own a company which "lives and breathes excellence in everything it does"?

 

https://www.paramount-group.com/about/

We live and breathe excellence in everything we do. We demonstrate integrity in every transaction and relationship. These values are our lifeblood, and permeate our entire organization from the top down. This is what sets us apart and allows us to maintain our dominant position in a highly competitive and dynamic industry. This is what makes us Paramount.

 

Longtime president CEO and Chairman Albert Behler PM'd me from his $33.5 million unit at Vornado-developed 220 Central Park South and said, what the hell bro? Threads on VNO/ALX/SLG but not Paramount? 

 

So here goes.

 

VIC writeup circa Sept 2019 https://valueinvestorsclub.com/idea/PARAMOUNT_GROUP_INC/9311052967

 

$2 billion equity market cap and $8.7 / share.

 

My spitball analysis gets to value between: $5.8 / share (-33%) and $24/share (+176% upside) $18.25 (+109%), changing upside target to 100% of Green Street NAV because anything more than that is dumb

 

Assuming nothing crazy happens or if I don't discover anything weird in my post-spitball analysis, I will initiate a small position in PGRE, using sales proceeds of high costs VNO lots (once it's been 30 days since the last time I bought VNO, which I need to check on), just adding a name to the real estate bucket and creating tax losses, while preserving the punchiness and discount-iness of the portfolio.

 

Cash and pending sales proceeds

 

As of year end they had $250 million of cash (I'm removing cash held at encumbered JV's and assuming some share rpeo's)

 

On April 1st (post-covid) they announced they were selling a 10% interest in 1633 Broadway. 1633 Broadway is a 2.4 million square feet trophy building where PGRE is HQ'd. They recently re-fi'd out to 2029 to the tune of $1.25 billion. They sold the 10% equity interest at a valuation implying $2.4 billion ($960 / foot) for the building.

 

Assuming this closes (given that it was announced after the market lows, I think it will, the buyer knew of the crazy), PGRE will have another $114 million of cash, bringing projects total cash to about $350 million (18% of market cap)

 

On March 1st, Paramount announced it would sell its last remaining building in DC, 1899 Pennsylvania Avenue for $115 million. I regard this as pre-covid and potentially unlikely to close, but if it does that's another $115 million of cash.

 

So cash is about $1.5 - $2.0 / share

 

6.8 million square feet (at share) of New York Office

 

1633 Broadway, 2.5mm sq feet, 100% owned, 98% occupied, $76 / foot, $1.25 billion mortgage 2.99% 2029 ($500 debt / foot)

1301 Avenue of the Americas, 1.7mm sq feet, 100% owned, 99% occupied, $79 / foot, $850 million, 3.5%, 2021 ($500 debt/foot)

1325 Avenue of the Americas, 0.8mm sq feet, 100% owned, 87% occupied, $67 / foot, no mortgage

31 W 52nd Street, 0.7mm sq feet, 100% owned, $500 million 3.8% 2026, $93/foot, ($700 debt / foot)

900 Third Ave, 0.6mm sq feet, 100% owned, 77% occupied, $70 / foot,  no mortgage

712 Fifth Ave, 0.4mm sq feet,  50% owned, 74% occupied after Henri Bendel left, $114 / foot, $300mm at 3.4%. ($750 debt / foot).

 

I ignore the 5% of 60 Wall they own. who cares.

 

Let's be super draconian and say that every single square foot is worth $500, you'd lose every mortgaged property, and own 1.4 million sq feet (900 3rd and 1325), which would be worth $700 million.

 

This super simplistic analysis is really dumb because if the better properties were worth $500 then 900 third would be worth less. 900 3rd was rumored to be sold for $400 million pre-covid ($666 / foot), given some pending vacancy and that it's just not that great a building.

https://www.dailybeatny.com/2020/02/26/rfr-realty-900-third-avenue/

 

the $500 / foot is just a way to spitball a really low value. At $1000 / foot, the NYC office portfolio is worth $6.3 billion, less $2.6 billion of debt would get you to $3.7 billion or 180% of the market cap. you don't have to worry about upside.

 

So my extremely precise valuation of the equity in the NYC office portfolio is $700 million to $3.7 billion.

 

NYC Office: $3 - $16 / share

 

San Francisco Office

PGRE owns 2.4 million sq feet (at share) of San Francisco office. Their ownership ranges from 31% to 67%. Weighted average rent per foot is in line with their NYC portfolio at $78 / foot.

 

One Market Plaza, 49% owned, 1.5mm square feet, $975mm mortgage, $650 debt/foot, this bad boy is doing $128mm of rent (maybe $75mm of NOI? it's $100 million), I'm just going to say the building is worth between $975 million and $1.8 billion.

 

EDIT: I found the 2017 CMBS S&P document on this.

https://www.spratings.com/documents/20184/769219/One+Market+Plaza+Trust+2017-1MKT/eb8beafe-a423-44e1-97a1-275f1796993a

 

Blackstone bought the 51% in 2014 at implied $1.2 billion.

 

One Market: $0-$1.75 / share

 

One Front Street:

One Front is 0.6mm square feet, no mortgage is 100% owned, 98% occupied, $77 / foot, $50mm of annualized rent. Spitball 50% NOI margin $25mm-$30mm of NOI, $300-$600mm. Google this thing, it's a pretty cool looking building.

 

One Front: $1.3 - $2.6 / share

 

bunch of recently bough JV's I'm just going to assume that the max is what they paid and the minimum value is zero for the 2019 purchases

 

Market Center:

67% of Market Center was purchased in December 2019. The transaction valued the buildings at $722 million, they slapped on a $400 million mortgage, so the equity in this is about $320mm of which they own 67% or $214 million.

Market Center = $0-$1 / share

111 Sutter Street

49% owned JV, bought in February 2019, $227 million, $138 million mortgage, $89 million equity of which they own half.

$0 - $0.2 / share

55 Second Street: $401mm/$187mm mortgage/$213mm equity/44%= $93mm

$0 - $0.5 / share:

 

2019 Purchased San Fran Office JV's = $0 - $1.7 / share

 

 

 

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I appreciate your efforts.  Funny intro.  If he writes you again, tell him you know a guy with a plan to convert Manhattan real estate to rural Florida trailer parks to capitalize on the valuation gap.  Sorry, I can't type anymore right now, I got sick when I read the word Paramount, being long $VIAC.

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https://sec.report/Document/0001539497-20-000059/

 

Using my proprietary search algorithm (otherwise known as Google.com), I have located the detailed CMBS underwriting for the most recent loan taken out against 1633 Broadway.

 

Starting on page 25 of the above link is a gloriously detailed glance underneath the hood of this excellent edifice, this monument to money, this colossus of capitalism, this beacon of banking, this obelisk of ostentation, this tower of power. okay I'll stop.

 

If you want to know which tenants are on which floor, have a look!

 

2016 NOI: $93mm

2017 NOI: $94mm

2018 NOI: $109mm

Underwritten NOI: $119mm

 

That's right, this beautiful building of which PGRE owns a 90%-100% (if the deal doesn't close) spits out a cool 120 bucks a year. In old school bond trader speak: "an 1/8 of a fucking yard"

 

How might that change in this time of covid you ask? Might the leases expire soon? or might the tenants go bankrupt?

 

Largest Tenant by UW Base Rent:  Allianz Asset Mgmt of America (“Allianz”; AA-/Aa3/AA by Fitch/Moody’s/S&P; 320,911 square feet; 12.5% of net rentable area; 15.7% of underwritten base rent; 1/31/2031 lease expiration) – Allianz occupies six suites with leases expiring in January 2031. Allianz is an asset manager with over 800 investment professionals in 25 offices worldwide and manages assets for individuals, families and institutions. The 1633 Broadway Property serves as the United States headquarters for Allianz.

 

2nd Largest Tenant by UW Base Rent:  Morgan Stanley & Co (“Morgan Stanley”; A/A3/BBB+ by Fitch/Moody’s/S&P; 260,829 square feet; 10.2% of net rentable area; 11.1% of underwritten base rent; 3/31/2032 lease expiration) – Morgan Stanley occupies five suites with leases expiring in March 2032. Morgan Stanley, a financial holding company, provides various financial products and services to corporations, governments, financial institutions and individuals in the Americas, Europe, the Middle East, Africa and Asia. The company operates through three segments: Institutional Securities, Wealth Management and Investment Management.

 

3rd Largest Tenant by UW Base Rent:  WMG Acquisition Corp (“Warner Music Group”; 293,888 square feet; 11.5% of net rentable area; 10.4% of underwritten base rent; 7/31/2029 lease expiration) – Warner Music Group is an American multinational entertainment and record label conglomerate. It is one of the “Big Three” recording companies and the third largest in the global music industry, next to Universal Music Group and Sony Music Entertainment. Warner Music Group is headquartered at the 1633 Broadway Property.

 

Allianz is 15% of rent at $82 / foot. their lease ends in 2031. (that's 11 years from now for those who weren't math majors)

 

Morgan Stanley is 11% of rent at $71 / foot. their lease ends in 2032, but they have the right to leave any time after 2027 (with 18 months notice and a termination fee)

 

WMG Acquisition Corp (Warner Music Group)

Showtime Networks 10%, 2026

Kasowitz Benson 2037

 

New Mountain Capital (PE firm) $86 / foot, 2035. New Mountain signed recently (2019), this lease brought them to full occupancy and it's a beauty for its price and duration. For those who think PE is dead and that this is risky, perhaps their 2% fee on $5 billion of committed capital of their most recent fund should give you some comfort that they'll be okay.

 

Charter Communications: what aspiring hedgie hasn't owned Charter at some point? if you'll own the equity, why not own a lease contract that extends out to 2025

 

MongoDB $76 2029. MongoDB is one of the sexiest companies out there. I don't know what it does, but people in Silicon Valley tell me its worth a lot. Cloud DBSaaS! 2029 expiry. Considering that it trades for 20x sales and has a $9 billion market cap, I think they’ll make their rent.

 

Travel Leaders Group is 4%, that just sounds like a bankruptcy to me. Assured Guaranty isn't wonderful either.

 

To sum it up, 0.0% of rent expires in 2020, and less than 15% does before 2026.

 

The biggest expiry in the near term is at $24 / foot and its the theatre which hosts Wicked. I think that rent per square foot will defyyyy gravittyyyyy once it expires.

 

The reason that some schmuck was willing to buy an equity slice of this building at a $2.4 billion valuation on April 1st 2020 is this building is leased for term to high quality tenants.

 

$120 million NOI - $37.5 million interest (2.99% * $1.25 billion loan) = $80 million bucks a year of cash flow to keep the building fresh, pay healthy g&a to paramount and occasionally build value for shareholders.

 

This building alone will generate a large percentage of PGRE's equity value in cash over the next 10 years (which makes sense given its about a 1/4 of their owned footage)

 

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I think going through an individual building like this in detail is super helpful. It illustrates the sensitivities.

 

For example, in addition to general employment/rent trends/tenant quality, I think the biggest risk to commercial office property is an increase in property tax rates, particularly in NYC.

 

This building pays $45 million of property taxes, 23% of its effective gross income.

 

ceteris paribus, an increase in property taxes would have the following effect on NOI

 

+30%: -11%

+50%: -18%

+100%: -38%

 

And a tax increase of this magnitude likely would not occur in isolation, it would make NYC a less attractive place to be and cause a potential death spiral of declining tax base as folks leave to greener (or should a I say red-er) pastures to the south. CUZ would lay in wait.

 

I don't mean to present these things as without risk, but I think it's important to look under the hood and understand what PGRE having a building that has 10x debt to EBITDA ($120/$1.2 billion) actually means. you are levering a portfolio of [mostly] long-term investment grade lease obligations with 2.99% interest only debt over the next 9.5 years. that's a lot less scary than "holy shit 10x EBITDA".

 

you are also combining levered buildings with completely free and clear buildings and some cash which I think make most of these REITs far less binary than the market is pricing them to be.

 

there are covenants of course,  but I also think its illustrative that some crazy banks out there are willing to give PGRE a $1 billion credit facitliy (which is effectively subordinated to the mortgages on the buildings) which is  almost completely unused. PGRE could pretty much buy out itself with its own revolver and cash on hand. 

 

 

 

 

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https://www.spratings.com/documents/20184/769219/One+Market+Plaza+Trust+2017-1MKT/eb8beafe-a423-44e1-97a1-275f1796993a

 

One Market Plaza CMBS Ratings Document from 2017

 

Takeaways:

 

- TTM November 2016, this was doing $100mm income / $70mm NOI, it looks like it's now doing $140mm / $100mm of NOI, very understandable why Blackstone bought a 50% stake in this for $1.2 billion valuation in 2014. they bought it at a 4 cap ($48/$1200), but NOI doubled in 4 years). https://irei.com/news/blackstone-acquires-san-francisco-office-property-valued-at-1-2b/

 

- there's some concentration risk with Google, and a lot of rollover risk in general it seems, the quality of tenants is high (Google, Visa's "innovation center", Autodesk, Citadel, law firms, etc.

- Blackstone is PGRE's partner in this one

- this is a super profitable trophy asset overlooking the Bay, let to high quality blue chip tenants, there's some rollover risk here and the leases aren't as long, PGRE's San Francisco portfolio in general has shorter term leases (likely on purpose as mark to markets lease renewals pre-covid have been awesome).

-the "ratings LTV" was 94%, the market/appraisal valuation was $1.75 billion

 

• The trust loan balance has moderately high leverage relative to other single-borrower transactions that we've analyzed, with a 94.6% LTV ratio based on our valuation. However, the LTV ratio based on the appraiser's valuation is lower at 55.7%. Our long-term sustainable value is 41.7% lower than the appraisal valuation

 

The property is a large development, primarily consisting of two class A office towers with a subterranean parking garage located at the eastern terminus of the Market Street thoroughfare. The property is close to the famous San Francisco Embarcadero waterfront roadway that runs along the eastern edge of the city and along the San Francisco Bay. The two towers, Spear Tower (42-story) and Steuart Tower (27-story), are attached by a six-story office and retail building with a subterranean parking garage, all of which are part of the collateral. The property has an attractive location near the bay, and tenants with east-facing offices have waterfront views. Located steps away from the Embarcadero municipal transit station, the property has easy transit access throughout the city and the greater East Bay Area.

 

he property has demonstrated a history of attracting quality tenants, many of whom have carried investment-grade ratings by S&P Global Ratings. Current notable tenants include Google (20.3%), whose parent company is Alphabet Inc. ('AA/Stable'), Autodesk (9.1%, 'BBB/Stable'), and Visa (7.2%, 'A+/Stable'). Overall, 39.4% of the collateral's net rentable area (NRA) is rented to investment-grade tenan

 

he mortgage loan is interest-only (IO) for its entire seven-year term, meaning there will be no scheduled amortization during the loan term.

 

The property has considerable rollover exposure midway through the mortgage loan term when 45.0% of the NRA,

or six of the top 10 tenants' leases, expires during years 2020-2022. Additionally, the building's largest tenant, Google (20.3% NRA), will expire in 2025. However, all these tenants have renewal options remaining on their leases that would allow them to extend beyond their current loan terms. Google has recently expanded to two additional floors (2.7% NRA) and has invested $7.0 million ($88.0 per sq. ft.) into its 80,000 sq. ft. of expanded space in 2015. The loan structure does not have a cash sweep trigger in place for the rollover of any of these tenants; however, the building has historically attracted quality tenants and maintained occupancy levels above the submarket.

 

The appraiser estimated the subject's market rent (including the retail spaces) to be about $82.13 per sq. ft. compared with

the overall property's contract rent of $66.80 per sq. ft. Therefore, the appraiser considers the building's in-place leases to be about 18.7% below market levels.

 

oogle is the largest tenant, based on S&P Global Ratings' underwritten in-place rents, occupying 321,680 sq. ft. and generating 21.4% of the gross in-place rent as calculated by S&P Global Ratings. The tenant has recently executed an expansion for two additional floors, which it intends to occupy on May 1, 2017; however, all of its leases' current terms will expire in April 2025. The tenant currently pays an average of $72.45 per sq. ft. base rent and has two consecutive five-year renewal options remaining on its lease.

The second-largest tenant is the law firm Morgan, Lewis, Bockius LLP, occupying 155,543 sq. ft. and generating 7.4% of the gross in-place rent as calculated by S&P Global Ratings. The tenant's current lease term expires at the end of February 2021; however, there is a one-time early surrender option for up to three floors (the tenant currently occupies seven floors), subject to early termination charges. The tenant currently pays an average of $52.62 per sq. ft. base rent and has two, five-year renewal options.

The third-largest tenant is the software designing company Autodesk ('BBB/Stable'), occupying 144,802 sq. ft. and generating 7.4% of the gross in-place rent as calculated by S&P Global Ratings. Four of its five spaces expire at the end of December 2020, with one space expiring at the end of December 2018; however, the tenant has two, five-year renewal options remaining on each of its leases. The tenant pays an average of $55.71 per sq. ft.

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nice, bought back 10mm shares @ 9 ish (~5% of market cap), collected 94% of rent, signed a little lease @ $90 / foot

 

can't ask for much more than that.

 

http://ir.paramount-group.com/Cache/IRCache/6f3525cc-9218-b651-426d-b3ea67842b27.PDF?O=PDF&T=&Y=&D=&FID=6f3525cc-9218-b651-426d-b3ea67842b27&iid=4323331

 

http://ir.paramount-group.com/file/Index?KeyFile=403793635

 

results out. Rent collections for April amounted to ~94% of total billings.

 

Opportunistically repurchased 10.9 million common shares in the first quarter for $100.0 million, or a weighted average price of $9.21 per share, a ~50.0% discount to NAV (1).

 

Over $1.2 billion of liquidity, with approximately $400.0 million of cash on balance sheet and additional $800.0 million of revolver capacity.

 

Additional ~$215.0 million of cash to be generated from asset sales that are currently under contract.

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I lose my access to bloomberg soon so actually listening to calls rather than reading transcripts.

 

Nothing too surprising. Liked that they extended leases (autodesk specifically) at One Market Plaza at $100+ rents, in talks for another.

 

it sounds ridiculous in this market, but the more you look under the hood, the more I think these big fully occupied, credit tenanted flagship buildings doing nine figures of NOI are worth closer to the mid-to-top end of my super wide range vs the low end. I think One Market Plaza is more likely to be worth $1.8/9 billion than $1.0-$1.2 billion.

 

Maybe I'm wrong, but, I'll be Autodesk's landlord at high levered cash on cash yield, rather than own the stock at 13x sales.

 

NOI on these trophy San Fran buildings is going up, regardless of this recent CV19 vol and the work from home narrative. Same for VNO's 555 California). NYC is less inspiring.

 

 

 

 

-Albert on the call:Such a strong and steady Germanic timbre, I want to give him more of my money and put on some wagner and invade poland all at the same time

-Just gave a big "F You" to all to the "opportunistic tenants trying to not pay their contractual obligations", basically said "you can and will pay"

- goal to re-lease Barclay's space by end of year "just got incredibly taller", this will have to be 2021 event

-renewal activity outpace new leasing, decreased capital outlays for new leases

- early March, selling 1899 Penn Ave for $115mm, exit DC, bi-coastal REIT in 2 of most resilient markets in world, expect close in 4Q

- late Feb "aggressively" repurchase @ $9.21, goal is to execute buyback in a leverage neutral manner, in this instance, pre-funded buyback from sale of 1899 using existing cash,

- On April 1, amidst huge vol, 10% of 1633, $960 / $2.4 billion, will close next month, largest asset in size and value, it should give comfort to shareholders, notwithstanding very positive feedback, why 10% and not more? Tax planning, largest asset, and longest owned, largest tax gain given its basis, needed to ensure ability to retain proceeds and maintaining liquidity in this environment

- we can't control economic fall out, work on what we can control.

- liquidity substantial and will support efforts to navigate

-$200mm drew down to bring cash to $400mm AFTER $100mm of buybacks, $1.2 billion including $800mm

-sever vol in stock markets has been subsiding of late, but the dislocation of NYC/SF office has not, that's frustrating but we recognize uncertainty, priority is liquidity and preservation of capital

- focused on controlling what we can, thoughtfully

-96% leased diverse high quality tenants WAL of 7 years

-office=95%, limited retail/incidental

- no near term debt maturities, 4Q 2021

- all debt is secured and non-recourse

- will overcome his adversity

- QE 96% leased, unch'd YE 2019

- 2020-2024 near term lease role, 7% / year

- continue to de-risk by proactively pre-leasing to CREDIT tenants

- limited lease roll in the near term and portfolio of best-in-class tenants

- virtual tours, filming available space

- midtown NYC performed pretty well pre-CV19, tenant demand collapsed after NYS on pause order,

- focused on 1301, releasing BarCap space, think will yield accretive result despite CV19 challenges, moving goal to '21, filming the floor

-SF: tenants "wait and see", uptick in vacancy, negative absorption, stabilization of asking rents

- believers in resiliency, market better positioned vs prior, mature large cap tech, financial services, and life science all critical

-97.4% leased at QE, down 10 bps

- 158K feet at 5 years with initial rents at $102 / foot, very well positioned with 7% expiring through 2024

- One Market Plaza: 109K extension with autodesk, set to roll in 2021, late stages of executing another extension at over $100 / foot, with this will the de-risked '21 roll by 70%, OMP is 98% full

- Market Center: 26K sq feet, 95% leased, sexy-ass building (he said "architecturally significant"), talking about views and floor plates, and transept access.

- robust mark to market leases 30%, mark to markets in Ny 3% 8% gap, mark to market in SF were 40% cash 50% Gap (woo hoo! shut up and take my money!)

- talking about guidance schmy-dance, who cares.

- 94% total monthly billings, in line w/ prior month, office centric, office collections 95%, retail/garage/theatre = 62%, great for now but ask us in a few months

 

Q&A

- deploy capital vs more repo's: open as to what we do, focused on liquidity/saving on balance sheet, once 1899/1633 close maybe more

- Barcap still going to 2-3 tenants? may split it up more, at this time confident still can lease at accretive levels, if wanted to do all of it now immediately, not so much

 

more ?'s, Tetragon call starting. over and out.

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  • 2 weeks later...

$7.7 px / $1.7 billion. $7.3 / $1.6 billion

 

Just as a reminder the equity in PGRE's largest building just traded at $1.15 billion in April 2020. Should that sale come to fruition it will generate $115 million in cash (6.7% 7% of the market cap, adding to their ~11% they have net of the revolver, 22% gross of the revolver) and implies the 90% is worth $1.035 billion. It is not actually worth that to PGRE's shareholders because of transfer taxes and capital gains taxes if you hold PGRE in a taxable account as the gains would be passed through to you.

 

they own 2mm square feet of unencumbered properties (One Front, 900 Third, 1325 Avenue of Americas) though as I've shared with a couple folks in PM's, these are their lower quality properties.

 

1325 has significant exposure to McGraw Hill, which will go BK.

 

900 Third was rumored to be sold for a low price pre-covid and has some pending vacancy.

 

One Front is nice and pretty and in SF, though it has significant exposure (a large portion of the building) to First Republic Bank a lot of which rolls in 2024. That's probably fine and the building did trade to PGRE for $580mm in 2016

 

 

 

 

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  • 2 weeks later...

Paramount Completes Sale of 10% Interest in 1633 Broadway

 

Business Wire

 

NEW YORK -- May 28, 2020

 

Paramount Group, Inc. (NYSE: PGRE) (“Paramount” or the “Company”) announced today that it has completed the sale of a 10% interest in 1633 Broadway, a 2.5 million square foot trophy office building located on Broadway between 50th and 51st Streets in Manhattan. The transaction valued the property at $2.4 billion, or approximately $960 per square foot.

 

About Paramount Group, Inc.

 

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

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haha, actually haven't started yet, just not spending my days looking for new ideas and posting about them / reading other threads on COBF. 

 

anyways PGRE says they'll buy more stock as asset sales close, so unless they're concerned about some upcoming maturities (1301 Ave of Americas is $850mm and is due in 2021 for example and Barclays (30% of building) is leaving), then I'd expect them to buy stock since they just got some cash. Barclays is paying "below market" rent but we don't know how rapidly market has changed. 

 

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Jon Litt is a bit of a clown from my private sources.

 

haha fair enough... I have no personal information about him but figured it would be worth sharing his thoughts...

 

I don't think he manages that much money and he appears to be higher profile than he actually is

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  • 1 month later...

SF and NYC are a mess - this is clear. The office rental market is going to be hit hard and vacancy and sub-lease numbers are already moving. However, I can't help but think that PGRE is still very undervalued here and I'm very tempted to add to add to the position.

 

Tell me why I am wrong please so I can be spared the pain as clearly the market doesn't agree with me so far.

 

Pro forma for the completed sale of 10% of 1633 Broadway and if we assume that their DC office deal closes at current pricing (this doesn't really move the needle either way), at recent stock price of about $7.25 I get to an implied property value of $5.0 billion ($1.8 bn of market cap plus $3.8 billion of debt less $0.6 billion of cash and sales proceeds). About a 7.5% cap rate on PF Q1 2020 NOI (this will come down as NOI falls).

 

There have been few to no NYC office trade. There have been a couple of SF office trades I have seen.

 

San Francisco post-COVID trades:

 

This makes me think about PGRE in two ways:

[*]If 1633 Broadway is valued at the price that the 10% interest traded for post COVID (results in ~$2.2b for PGRE's 90% interest) and the 2.4m sq ft (PGRE share) SF portfolio is valued at the lowest of the post-COVID comps of $850 PSF (results in $2.0b), this implies a value for the rest of the NYC office of $800 million, which represents a 22% cap rate and ~180 PSF. That seems way too cheap and a fraction of replacement cost.

[*]If you think these assets are worth, say, a 5.0% cap rate after rents are reset to market, that $250m of NOI is a 35% decline compared to current cash NOI of ~$380m. If operating costs are held constant, this implies a 20% decline in rents from ~$75 PSF at Q1 2020 to ~$60 PSF across the portfolio. Rents would have to fall 30% to ~$53 PSF, resulting in an NOI decline of ~50% to get to FFO "breakeven". Its not that this is impossible - Manhattan office average asking rents fell 30% from $70s to about $50 PSF in the GFC - but it would seem that much of the rent / operating downside, which is definitely coming, is priced in. Keep in mind that the in-place lease term for PGRE is an average of 7 years so not all leases roll to market every year so it would take a while for in-place rent to mark to market (and market would have to stay at that level)

 

Vornado's recap / sales of their Avenue of the Americas asset and 555 California will provide important marks for the PGRE portfolio so I'm watching that process with great interest...

 

Please tell me why I should not be buying more US gateway city office now please so I can stick to digging around the multifamily, industrial and digital REITs instead like everyone else?

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I think you're on the money. Only additional thought is that basically this is the definition of a textbook recession/cycle swing. Unless you are of the belief that Covid will never go away and there won't be herd immunity either, which I dont know of anyone who believes that. So if you can accept that, then it is indisputably a temporary headwind. In which case its just a matter of time. Theres already more than enough evidence to debunk the "life will never be the same" argument. People lived the way they did because they liked it. When they are able to, they will happily go back to that. The hiccup with office, is that its not the "people" that choose, as they do when say, going to a restaurant or hotel. Its the powers that be whom control leases and office locations. But here you are talking NYC and SF, which will always be desirable locations.

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It’s my largest position.

 

Some bearish points:

 

-The unlevered buildings (except for One Front) are low quality and will soon have a spike in vacancy if the Barclays space isn’t re-leases.

 

-Midtown isn’t cool anymore

 

-the cash may be used to do a partial paydown on 1301 AoA as that is a 2021 maturity if the refi market isn’t great so we may not be able to “net the cash from the market cap”

 

-I haven’t seen any cases in office  yet (like Victoria’s Secret suing SL Green) but my biggest fear is someone successfully breaks a lease arguing the shutdowns render the contract void. I do not think this will happen but when you have 1/3 of your nut in office REITs you think of these things

 

- investment bank classes are starting remotely out of undergrad. I really want that to go terribly and I think it will. If it goes well. That could be a problem long term for NYC.

 

Not bearish but further work could be done

- I think the Otto’s and Albert are good owners and managersL and I haven’t talked a lot about that. They IPO’d at the peak and the stock never went higher; and are aggressively buying now. If Amazon wasn’t eating their lunch in Germany, I may speculate the Otto’s would buy PGRE out

 

Overall I agree with you; this thing is going to generate a very large portion of market cap in cash over the next 5-6 years and is super cheap and all the leverage is non recourse and 1633 and One Market are great assets

 

 

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re: "and are aggressively buying now."

 

I've only seen that one buy from Otto-Bernstein.  Are you referencing share repurchases with property sale proceeds or are there more insider purchases that I am missing?

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How do you or do you not factor in that some places in NYC may be de-gentrified (wo a crack down on criminal violence due to protests) & the lower appeal to older folks moving into these locations replacing young families moving out.  Part of the reason for the low cap rates is the assumption of safety.  TIA.

 

Packer

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