May 28, 2020 - 6:49pm EST by
Rulon Gardner
2020 2021
Price: 262.00 EPS 0 0
Shares Out. (in M): 5 P/E 0 0
Market Cap (in $M): 1,336 P/FCF 0 0
Net Debt (in $M): 679 EBIT 0 0
TEV ($): 2,015 TEV/EBIT 0 0

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Commercial Real Estate Is Officially Dead and New York City Is Toast!!

If you want to take the other side of this trade, I may have just the thing for you.  And you can also tell people that former NYC mayor Michael Bloomberg pays you rent.  Even better, you can tell people that you have somehow outsmarted Donald Trump and own the actual REIT that he tried to buy in the late 80s/early 90s and failed.  If you hate the orange man, then this is great flex for you as you tell your friends over cocktail how the Donald was forced to sell his stake in the company.  Due to your genius, you are now the part owner of these trophy assets.    

Alexander’s is a New York City Centric REIT that owns the Bloomberg office tower and the retail condo beneath it.   In addition, they own 2 shopping centers in Rego Park, Queens and a luxury multi-family sandwiched between Rego Center I and Rego Center II.   Your initial reaction maybe “bro, you really want to own NYC office and retail when people are scared to take the subways?” 

Okay, let’s just chalk it up to that I am a little bit biased.  I think New Yorkers are tough and resourceful.  Take that Boston and your pretty boy Tom Brady.  He may have 6 Superbowl rings, but he can’t beat our home boy Eli Manning and his rag tag team that barely squeezed into the 2007/2008 Superbowl.  New Yorkers have seen this movie play out before.  We had 9/11 and then we had the mortgage debacle where the greedy investment banks almost broke the world’s financial system.  The normal reaction would be “run the f*%* away bro.”  But NYC keeps coming back.   

Is there a scientific way to explain why this is?  My theory boils loosely down into something non-scientific like this.  Imagine you are the bright eyed and super talented young men/women about to graduate from college, what are you thinking?  Are you thinking “let me move back to Oklahoma and marry that nice Christian girl/guy and have a few kids?” Or are you thinking, I want to move to NYC and work for Goldman Sachs, Morgan Stanley, Facebook, Google, Amazon, some top notch hedge fund?  Along the way, you want to really utilize Tinder, Bumble, Coffee Meets Bagel or whatever other tool you have at disposal. 

“While you can work from home, you can’t get physical via the internet.”  So if you are 22-35 and your hormones are raging, your best bet is to move to places like Manhattan, Queens, Brooklyn and hope that you randomly run into or match with someone who is within a 45 minute Uber ride away from you.  In the grand scheme of things, I think the desire for 20 year olds to pass down their genetic information triumphs over their desire to save money.  Now imagine, if you look more like Harold and Kumar rather than Thor, which makes up 30-40% of the entry level tech, investment banking, law, and medicine jobs, what would you prefer?  As someone who looks like Harold, I can tell you that my odds are a lot better in NYC than Atlanta or Nashville.  There are maybe 5-6 cities in the US that offers that type of “deep liquidity” in a market place for dating for guys who look like Harold and Kumar.  If you happen to be LGBTQ, the liquidity in the market place for dating is likely even steeper between NYC and Nashville.  Long story short, you have to believe that NYC offers something very unique to want to own Alexander’s.  Because NYC attracts the best talents in the world, companies have to set up shop in NYC.  It was not that long ago when insurance companies were uprooting from Toledo and Hartford and moving to NYC because they simply could not find talent in those sleepy locations.  I recently asked my former intern would he still want to live and work in Manhattan and he said “yes, if I get infected with Covid 19, I’ll just deal with it.  I am more worried about passing it to my mom and dad.”  I think that this deep liquidity pool of talent is what will force companies to continue to have a presence in NYC.  I do think that over time, companies will make it easier for 35 and older who want to settle down and no longer want to pay that expensive “tinder premium” to work permanently or partially from home in the future.  This has been happening for sometime as working moms at big 4 accounting firms can now largely work from home.  The digital tools that are available are also making it possible.      

Buffet talks a lot about moats.  Manhattan is literally an island surrounded by the East River and the Hudson River.  If you own real estate in Manhattan, you are literally surrounded by a very real and physical moat.  For all the advances in technologies, they have not really figured out how to build sky scrapers above water.  The NIMBYism will also never allow this.  If you want examples of this, just look at the uproar over Howard Hughes attempt to build on the parking lot they bought.  Howard Hughes also wanted to build a luxury tower on their pier.  That was a no go.  What is also very real is that replacement cost is a very real factor in the NYC market.  Back in 2006, I purchased my first investment property for about $250/sqft in the Corona neighborhood of Queens (I kid you not, it’s a real neighborhood that is experiencing very high infection rates due to dense population of immigrants from Mexico).   Back then, a developer paid for the land, build the 4 unit building, and earned an attractive return on the project.  Today, the cost to reproduce the building will likely cost close to $250/sqft.  The building is now valued at about $450/sqft despite 11 years of depreciation after construction ended in 2008.  If there is one thing that you can count on in NYC, it is that it will always be incredibly difficult to bring new supply to the market (think 4-5 years) and that construction cost goes up 3-5% a year.  If you own an existing building, you do not have to deal with all the risk of your project taking longer, your neighbors suing you, or the government finding a way to delay or shut down your operation.  God forbid if you had some sort of construction material that falls from the 40th floor and hit a pedestrian on the ground.  What about developable lots?  There simply aren’t many.  Hudson yards is the largest project in recent times and it is literally built on top of a railroad yard.  They have to put in specialized platforms to create a foundation to put skyscrapers on top.  These projects take years and lots of lobbying.  At the moment, I cannot think of another large development site in Manhattan.  

  Now that I have sufficiently bore you to death with this arrogant post about New York City, what is the opportunity?  Alexander’s owns the following:

1)      Bloomberg Office Tower – Leased to Bloomberg LP to 2029 $68.7mm of NOI @ 4.5% cap rate $1.53bn less $500mm of debt equals $1.03bn of equity

2)      Bloomberg Retail Condo - $472mm value @ 11x rent multiple less $350mm debt equal $122mm equity value

3)      Rego Center I - $200mm value @11x rent multiple less $0mm of debt equal $200mm of equity.  Leased to Ikea (replaces old Sears lease), Burlinton, Marshalls, Old Navy

4)      Rego Center II - $436mm @12x rent multiple less $202.5mm of debt equals $235mm of equity

5)      Rego Center III – A development parcel that will likely be developed for multi-family with no debt on it so $50mm of equity

6)      The Alexander - $7.8mm of NOI @ 4.25% cap rate $184mm of value with no debt so $184mm of equity

7)      Paramus - $75mm of value less $68mm of debt equal $7mm of equity

8)      New World Mall LLC - $30mm of NPV

9)      Plus $454mm of cash at the HoldCo level.  Note that this is roughly 34% of the market cap.  I can't imagine how ALX experiencing any sorts of liquidity event.  

What is important to understand here is that these are distinct buckets of equity value.  The consolidated gross debt is $1.12bn and the consolidated net debt is $679mm.  But there really are 9 distinct buckets of value that add up to about $2.31bn of fair market equity value.   But you are only paying 1.341bn for the market cap.  This implies 72% upside based on a $262 share price.  You will also receive a $18 per share in dividend.  Which is basically 6.9% for an ultra safe REIT.

Let’s do a qualitative assessment of all the various properties.

1)      Bloomberg Office Tower – This is a trophy Class A office tower built in 2006 that is leased to Bloombergy LP.  There is roughly 11% rent escalation every 4 years which just happened this year. So the 2019 figures will not incorporate the rent bumps this year.  I was at a Harvard conference once and the Great Seth Klarman once said “you can have 2 similar buildings in a market, but they can have very different value due to the lease maturities and the tenant profiles.”  If Seth said it, I think it is true.  That guy is kind of smart.  Anyway, I don’t think you can get more blue chip than Bloomberg and a 9 year lease in today’s environment.  As a shareholder, you are entitled to $580mm of NOI from the Bloomberg office tower alone plus whatever terminal value remains.

2)      Bloomberg Retail Condo – This is the retail space beneath the Bloomberg tower.  This is perhaps the asset that I am most bearish on.  The Home Depot tenant is okay.  But I don’t think they can get $277/sqft in rent in the future.  If you read the language in the 10-Q, the footnote says:

Interest at LIBOR plus 1.40%. Maturity is August 2020 plus two one-year renewal options subject to financial covenants which we will not satisfy.        

This is likely the reason why they are keeping $454mm of cash on the balance sheet as the $350mm of debt come due, they will likely have to pay down $100-200mm of the debt.  If you really want to be conservative, you can just say that there is zero equity value here and call it a day. 

3)      Rego Center 1 – This is the older shopping center.  But it is directly above the ground from 2 subway stations in Rego Center.  In the last 20 years, the Asian population has grown from 20-30%.  Many middle class urban Asian Americans have moved into this area.  This area is also surrounded by dense apartment buildings and affordable co-op apartments that sell for $300-500k for 1,000-1,200 sqft apartments.  This is a very attractive housing option.   Most importantly, Rego Center 1 had an old Sears box that sat empty and will be replaced by an Ikea.  I don’t know about you, but if Ikea wants to move into a spot, it is very telling of the attractiveness of that location.  Also, I think their rent is good for the next 20-30 years.  There is also a Marshalls and a Burlington which are retail concepts that actually work in today’s environment.  Sometimes when a politician says "this is a vibrant multi-cultural neighborhood", it is euphemism for something else.  This literally is the right kind of demographic that every real estate investor want.  

4)      Rego Center II – This anchored by a Costco in the basement that feels like hunger games at times.  If you get there after 12 on the weekends, you may as well enter into an UFC fight.  My wife and I shop here and have had our share of stare downs and shouting matches over parking spaces and people bumping into you etc.  We have since started to buy from Costco on Long Island.  But I mean all of this as it is incredibly busy and a great location from a landlord perspective.

There is also an Aldi that complements the Costco very well when you don’t need a gallon of mayo and just want $2 of cheese.  There is a TJ Maxx and a Century 21 department store. Those are the off price retailers that are actually making money in the post GFC world.  On the ground floor, there is a Chipotle, Panera Bread, etc.  In short, this is a very sustainable shopping center that should do well in the future. Both Rego I and II have close to 2,700 parking spots which is a very nice amenity to have in a very densely packed area in Queens. 

5)      Rego Center III – This is being used a surface parking lot and will likely be developed into a multi-family like the Alexander in the future.

6)      The Alexander – This is simply one of the nicest multi-family in central Queens.  It is farther from the city but offers 2 bedrooms in the high $3,000 range with views of the city.  It’s cheaper than Long Island City.  This is a very good asset.



Investors get to buy some high quality NYC assets at deep discounts to private market value and get a 6.9% dividend yield while they wait.  I doubt they cut the dividend as there are plenty of cash on the balance sheet.  In an ultra-low interest rate environment, this could trade to 4% yield which will imply a $450 share price.  Cash on the balance represents 34% of the market cap.  


Bloomberg tries to break lease which I think is very unlikely.  Retail somehow winds up becoming way worse.  Work from home trends winds up becoming much much worse and young people says "I am not interested in Tinder swipes, so I'll go live in Toledo."  




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Vaccine or any sorts of improvement in treatment of Covid 19 

Nice 6.9% yield in a ZIRP world is very attractive 

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