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Vornado’s Handshake to Sell 666 Fifth Ave Holdings, and Six Other Insights from its Latest Investor Filing

Roth Expounds on Cyclical Performance and Upcoming Development Projects
April 9, 2018
The industry jumped on news Vornado had what it called a "handshake" agreement to sell part of its 666 Fifth Ave. holdings back to Kushner Companies, but a few other surprises lurk within the SEC filing dated April 6. CoStar News analyzes the document for its readers.

Kushner Co. Stands to Get Extra

As part of the expected, but not assured, 666 Fifth Ave. transaction, Vornado will retain its retail components, but says the deal would include a mezzanine-type return paid to Kushner. According to CoStar research, these include 114,000 square feet in a 2012 deal and a 78,353-square-foot portion of Vornado’s original 2011 deal with Kushner Company.

In 2012, Vornado acquired a 39,000-square-foot, fee interest and 75,000-square-foot, long-term lease from Kushner Co. for $707.8 million, or about $6,209 per square foot, according to CoStar research. This followed Vornado's 2011 acquisition of a 49.5% partial interest transfer on the 1.488-million-square-foot building, which amounted to $646,049,955 or $900.10 per square foot.

See CoStar COMPS #2614761 and #2225558.

Vornado says it has about $699 million in office debt on its 666th Fifth holdings as of December 31, 2017. In light of the approximately $1.4 billion in debt and interest coming due February 2019, Kushner Co. could use the capital.

Vornado Founder and CEO Stephen Roth writes:

I believe we now have a handshake to sell our interest to our partner at a price which will repay our investment plus a mezzanine type return. The existing loan will be repaid including payment to us of the portion of the debt that we hold. Since we deducted losses along the way there will be a special capital gain dividend requirement which will be offset by a portion of the Toys R Us loss.

While not the outcome we expected going in, it’s now the appropriate outcome for us and for our partner. This situation continues to be fluid - there can be no assurance that a final agreement will be reached or that a transaction will close.

Investors, Stack Your Cash

It’s a better time to sell than to buy New York City commercial real estate, Roth tells investors, citing assets at above 2007 peak pricing.

"I say again that the easy money has been made for this cycle; asset prices are high, well past the 2007 peak; it’s a better time to sell than to invest, and now is the time in the cycle when the smart guys build cash for opportunities that will undoubtedly present themselves in the future," Roth said.

A Penn Plaza Update

Vornado details big plans for "the promised land," its 9 million square feet of Penn Plaza property. The Farley Office / Moynihan Train Station redevelopment, in partnership with Related, is scheduled to come online in 2020, Vornado says. And with its One Penn Plaza redevelopment, Vornado will invest $200 million, hoping to garner a rent increase of $20 or more per square foot on the 2.5 million-square-foot asset.

Vornado is also looking into razing Two Penn Plaza, its 1.6 million-square-foot office tower. Doing so would unlock 5 million square feet of air rights held by Madison Square Garden. That would effectively give the site 6.6 million square feet, which Vornado said it "could sprinkle" into its adjacent properties.

"The old Two Penn has a 60,000-square-foot footprint, the new would have a 120,000-square-foot-plus footprint at the base, perfect for our creative class tenants. There would be towers above and a significant retail component below sandwiched between the train station and the office base," Roth says.

Also significant is Vornado’s plan for a total renovation of Hotel Penn that would see the property closed for more than two years. Alongside partners that Vornado labels as "a local operator and major hotel company Renovation of Hotel Penn (not presently in New York)," the end product would be a giant convention / entertainment hotel.

Vornado has obtained ULURP approval for a 2.8 million-square-foot financial services headquarters building addressed as 15 Penn Plaza. Because of its location between Penn Station and Herald Square, 15 Penn Plaza would become "the best available site in Manhattan," Roth proclaimed.

And that’s not all. Vornado is eyeing an additional three to five new projects in the area.

Roth adds:

Over time, our grand plan includes developing three to five new builds on sites we own in Penn Plaza. Imagine the NEW New York along the 34th Street corridor from VornadoLand (Macy’s, Penn Station, MSG) to Moynihan to Manhattan West and to Hudson Yards…The Penn Plaza District is the Promised Land.

Even now, we are always full in Penn Plaza and even now, rents are rising smartly. Starting rents in One Penn are $69 per square foot and in Two Penn $63 per square foot. Just imagine the future. We were the early movers in Penn Plaza when it was the low-rent district. Our basis here is $200 per square foot pick the current value number.

Another Office Project Bolstered by the Midtown East Rezoning

In a quick few lines of commentary, Roth gives kudos to Jamie Dimon and the JP Morgan Chase team for signing off on what will be a new, 2.5 million-square-foot office building at 270 Park Avenue. JPMorgan will raze its existing 1.5 million-square-foot building to do so.

Roth then abruptly signals investors Vornado may be interested in following suit with 350 Park Avenue.

"We, together with partner SLG, own the neighboring 280 Park Avenue. We own 350 Park Avenue, three blocks up, which we consider to be the best candidate on Park Avenue to next take advantage of the new zoning incentives."

Discounts to NAV Still a Peeve

As CoStar News earlier reported, REIT owners have been frustrated by their stocks trading at discount to NAV. Roth is no exception. Current REIT stock pricing trends had prompted Vornado to consider a buyback, Roth says, but overall the company would prefer to hold on to its cash. However, it has not completed ruled out the move.

He writes:

Buying back one’s discounted stock seems to be an attractive proposition... I must say we are tempted to do it now. Our hesitancy is that buybacks work best when financed out of recurring retained earnings. Since we dividend to shareholders all of our earnings, that is not us.

What’s more, we seem to be late in the cycle; real estate stocks are declining, signaling danger ahead; interest rates are rising, signaling danger ahead. This is exactly the point in the cycle where we want to maintain maximum liquidity. For us, the math is that a billion dollar buyback would increase our NAV by about $1.50 per share; for the moment, we’d rather have the billion dollars. Lastly, buybacks whose purpose is to prop up one’s stock price – sort of like putting your finger in the dike – never, ever work.

Not withstanding all of the above, buybacks are a recurring topic at our board meetings and we may execute using proceeds from the billion dollars of assets we now have on our for-sale list.

Vornado expects to make about $2 billion from apartment closings at its ultra-luxe 220 Central Park South and asset sales this year.

Repurposing Sears/Kmart Space?

At 770 Broadway, one of its two Kmart locations, Vornado structured a deal with Sears/ Kmart to move in Facebook, Roth tells investors. He adds that such a deal may not be a one-off, which makes sense considering the retailer’s financial struggles...and the real-estate panacea CEO Eddie Lampert appears too keen to continue prescribing.

"Vornado owns the only two Kmarts in Manhattan, both at the bottom of our office buildings – 82,000 square feet remaining at 770 Broadway, and 141,000 square feet at One Penn Plaza. Both have term and options for 18 years and under-market rents of $33.50 per square foot. In February, we made our first deal with Sears/Kmart, buying back a floor at 770 Broadway for Facebook. There should be more to come," Roth notes.

Are Joe Macnow and Steve Roth Considering Retirement?

Providing an intriguing update to Vornado’s CFO search, Roth seems to flirt with leaving the company. In August 2017, the 75-year-old founder reportedly underwent double-bypass heart surgery, according to Bloomberg.

"We saw quite a few qualified candidates (a number of whom I really liked), but we hit the pause button for three reasons. There were and continue to be other things going on that would preempt a new hire. We haven’t yet been able to find that transformational candidate; maybe Joe and I should go out at the same time, thereby giving my successor the right to choose Joe’s successor. All this will play out and have a happy ending in due time," he says.

Diana Bell, New York City Market Reporter  CoStar Group   

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