New York City is home to close to 25,000 ultra-high-net-worth individuals.
GETTY IMAGESVornado Realty Trust plans to create a new tracking stock for its real estate assets around New York’s Penn Station and to demolish the Hotel Pennsylvania in Manhattan to create a large development site as the company seeks to highlight the value in its portfolio, CEO Steve Roth wrote in his annual shareholder letter released late Friday.
Roth, 79, has led Vornado (ticker:VNO), one of the top commercial landlords in Manhattan, for 40 years and is an influential leader in New York’s real estate community. He has close ties to former President Donald Trump. Vornado and the Trump Organization are 70%/30% partners in two valuable office buildings, one in Midtown Manhattan on 6th Ave. and another in San Francisco. Roth’s annual letter is a must-read for many in New York real-estate circles.
Shares of Vornado, a real estate investment trust, have rallied about 50% from lows last March to $45.60 Friday, but remain well below pre-pandemic levels in the high 60s amid investor concerns about the future demand for Manhattan office space. The stock has badly trailed office REITs and a key REIT index over the past 10 years.
In a wide-ranging shareholder letter, the outspoken Roth wrote that Vornado’s shares are undervalued. “Our stock is once again stupid cheap, although the first small leg off the bottom may be behind us,” he wrote.
Roth cited a net asset value calculation from Green Street Advisors of about $76 a share and analysis from Evercore/ISI REIT analyst Steve Sakwa, who says the company’s stock price effectively values the company’s office buildings in the $500s per square foot when replacement cost is in the $1,200 to $1,400 square foot range.
Roth wrote “that discount is a bell ringer. There’s more, COVID-inspired work from anywhere has driven apartment occupancies down to the 70%’s and apartment rents down by 25%...that’s never happened before… another bell ringer. So, Manhattan is now on sale and that’s a buy signal and one of the reasons I believe New York will grow from strength to strength.”
Some of Vornado’s most valuable assets are around Penn Station on Manhattan’s west side, including office buildings Penn 1 and 2 as well as an office development in the Farley Post Office across the street from Penn Station, where Facebook signed a large lease last year.
Vornado plans to create a tracking stock for those assets. “We intend to separate THE PENN DISTRICT through a tracking stock. It seems to me appropriate that we give investors the ability to choose between the higher growth but longer-term PENN DISTRICT or our other Class A, traditional core assets, or both,” Roth wrote. The area has been one of the hottest spots of real-estate development in Manhattan, particularly the Hudson Yards on the far west side.
In a client note after the letter was released, Sakwa, who has an In-Line rating on Vornado stock with a $49 price target, wrote: “While we understand VNO’s frustrations with the persistent NAV (net asset value) discount, we wonder about the complexity of a tracking stock and whether the market is just more skeptical about the future pace of leasing in NYC, which is hampering the current valuation. Time will tell how this new tracking stock performs but it will be an interesting experiment.”
Tracking stocks generally haven’t been popular by investors in part because existing ones don’t give investors direct control of the underlying assets. There aren’t a lot of trackers outstanding, with Liberty Media the leading issuer.
Liberty’s chairman and controlling shareholder John Malone has long used trackers and Liberty has three of them for its stakes in Sirius XM Holdings, the Formula One racing business, and the Atlanta Braves baseball team. Tracking stocks often track a single asset like the Braves rather than a portfolio like the proposed Vornado tracker, which could make it tricky to value.
Nor have concerns gone away about future demand for office space in Manhattan, where post-pandemic recovery has been slow, gone away. They were underscored by JPMorgan Chase CEO Jamie Dimon, who wrote in a recent shareholder letter that the firm’s real-estate footprint will shrink.
“As a result, for every 100 employees, we may need seats for only 60 on average. This will significantly reduce our need for real estate,” Dimon wrote.
The Hotel Pennsylvania site is large stretching for an entire block on 7th Ave. The hotel has been closed for a year. Roth wrote that “we will permanently close and raze the hotel to create the premier development site in town. The process from today to the fully demolished and ready-to-go site will take less than two years.” Roth said the company is working to design a building for the site.
The old prewar hotel had seen better days and has become a midtown eyesore. Vornado nearly had a deal with Merrill Lynch to build a world headquarters for the brokerage firm in 2007 on the site but it fell victim to the 2008-2009 financial crisis.
“This decision was inevitable… the Pennsylvania may have been a grande dame in its time, but it is decades past its glory and sell-by date,” Roth wrote, while noting the company will keep the Pennsylvania 6-5000 phone number for the hotel, which was popularized by a Glenn Miller song in the 1930s. That phone number has been in use continuously for longer than any other in New York.
Sakwa wrote that he values the Hotel Pennsylvania site at $513 million, “which is probably conservative especially if VNO can land a major tenant for this site over the next few years.”
Roth wrote that Vornado is in the process of refinancing a $534 million loan for the prime San Francisco building jointly owned with the Trump Organization and that refinancing of a $950 million loan backing the midtown property owned with Trump is “on deck.” Vornado unsuccessfully sought to sell those buildings last year with Trump’s ownership an apparent impediment, according to The Wall Street Journal.
A big New York booster, Roth was critical of the state’s high inheritance tax, which tops out at 16%. This discourages older wealthy people from staying in the state, he wrote. “Most of the folks I know are willing to pay higher income taxes for the privilege of living in New York, but hate the prospect of a 16% toll for the privilege of dying in New York.”
Write to Andrew Bary at andrew.bary@barrons.com
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