|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||1,100||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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This property is a 1,307,000 square foot mixed-use building with roughly 885,000 square feet of net rentable office space and 174,000 square feet of net rentable retail space. The office space is 100% rented primarily to two tenants: Bloomberg LP and Citibank N.A. at an average of $77/foot. The retail space is 100% rented primarily to The Home Depot, The Container Store, and Hennes & Mauritz (H&M clothing) at roughly $142/foot. The remainder of the space in the building is occupied by 105 condominium units which Alexander’s has already sold.
The property has mortgages of roughly $376,224,000 on the office space (Feb 2014 maturity) and $320,000,000 on the retail space (July 2015).
King’s Plaza is a regional shopping center (two-level mall) with two anchor tenants, Macy’s and Sears. ALX owns and leases roughly 750,000 square feet, leased to Sears (289,000 sq feet) and roughly 120 different mall tenants. Alexander’s also leases 5.8 acres of adjacent land to Lowe’s Home Improvement Warehouse (20-year term). Macy’s owns the real estate for their own store.
Within the mall, 12 tenants have month-to-month leases (12.8% of gross annual rental revenues for this property), 11 leases will expire in 2009 (8.3% of revenues), 13 leases will expire in 2010 (7.5% of revenues), and 14 leases will expire in 2011 (10.5% of revenues). This means that, at a minimum, over 20% of gross annual rental revenue could expire or be renegotiated to lower rates during 2009. The 2010 lease expirations are at an average of $88.21/foot, by far the highest rental rates of any lease year. These leases will almost certainly be renegotiated lower toward the average rate of $38.83 for the entire property.
Rego Park I is a 351,000 sq foot retail building that is 100% leased to Sears, Circuit City, Bed, Bath & Beyond, and Marshalls. All of these retailers (with the possible exception of Marshalls) have publicly discussed their troubles, and Circuit City recently filed for bankruptcy and announced the closure of 155 stores. Althouhg the Rego park location is not on the initial schedule of stores to be closed, Circuit City is closing many locations in New York and may add mor elocations as it works through the bankruptcy process. Circuit City represents roughly 14% of the building’s leased square footage.
Rego Park II consists of 6.6 acres of land adjacent to the Rego Park I property in Queens. The company is currently developing the property to include a 600,000 square foot shopping center on four levels and a parking deck with roughly 1,400 spaces. Construction is expected to be completed in 2009 at an estimated cost of $410,000,000, and the company has expended $263 million as of September 30, 2008. ALX obtained a $350,000,000 construction loan to finance the shopping center development which expires on December 20, 2010, with a one-year extension. As of September 30, 2008, $144 million had been drawn on this loan.
Alexander’s is controlled by Vornado, which owns 32.8% of Alexander’s outstanding common stock. Steven Roth is the Chief Executive Officer and the Chairman of the Board for both Alexander’s and Vornado. In addition, Interstate Properties, a NJ general partnership controlled by Roth, owns another 27.2% of Alexander’s common stock.
In September and October 2008, Roth exercised over $60 million worth of SARs. In March 2007, Michael Fascitelli, the company’s president, exercised over $50 million worth of SARs. The company also has an additional 895,000 shares available for future grant under their stock plan.
The outlook for REITs is quite negative with general risk aversion increasing capitalization rates, forced selling of properties from other developers seeking liquidity, and significant refinancing risks. Alexander’s is likely to be impacted more seriously than the general industry due to their concentrated exposure to the worst areas of real estate – retail and financial services in the greater metropolitan NYC area.
The real driver of REIT valuations are capitalization rates, which have increased fairly dramatically over the past several months. The cap rate is simply the value of a property’s net operating income divided by its purchase price. Higher cap rates indicate higher perceived risk and a higher required return on investment. Even small changes to cap rates can have dramatic effects on property valuations.
Historically, implied cap rates have tracked corporate borrowing rates. Current Baa rates are roughly 9%, and REIT cap rates have generally been 500 – 900 bps above these Baa rates. This would suggest current cap rates of at least 9.5%, and most REITS are priced with implied cap rates of 9.8% per Green Street Advisors.
ALX stock currently trades at $220 per share, and the company has an Enterprise Value of $1.65 billion. This equates to 8.3x price/book, and 13x EV/EBITDA. The stock also trades at over 18x trailing earnings.
To provide a base case estimate of the total value of ALX, we can take 2008 estimated revenues of $210 million and apply a 9.5% cap rate ($2.2 billion). Then, we add back the company’s cash and receivables (approx. $580 million) and deduct the outstanding mortgage debt and various liabilities (including dividends payable, the SARs liability, and amounts owed to Vornado), and you have an enterprise value estimate of $1.3 billion. This implies a stock price of $152, roughly 30% lower than current values.
Things get even more interesting if we assume some negative revenue impact going forward. There is certainly a risk of revenue decline from lower rents and higher vacancy rates. As discussed above, Alexander’s two most important properties (731 Lexington and King’s Plaza) could experience significant leasing trouble due to financial services and retail exposure. It is reasonable to expect lease renegotiations and possible insolvency of Circuit City to negatively impact 2009 and 2010 revenues.
Risks to thesis:
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