VNO - Vornado Realty Trust

[Spekulatius]

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.

[thepupil]

http://www.vno.com/press-release/6w5j4b18ym/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

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).

[indirect]

The divergence between the public market valuation and private market valuation arbitrage is telling per Roth. By his actions he believes public markets are relatively right and intrinsic valuation may be lower still.

[thepupil]

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.

https://www.bamsec.com/filing/89968919000017?cik=899689

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.

[indirect]

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?

[michaelj]

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.

[thepupil]

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.

[Scunny Bunny]

Roth is 77 but seems to be putting in place the next generation. You just get the smell there's more simplification to before he exits. Given BX & KKR dry powder, must be a play with them at this discount.

[thepupil]

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

[thepupil]

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
Staff
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.