SPRING 2012 RESEARCH PUBLICATION Major NYC REIT Activity...
Transcript of SPRING 2012 RESEARCH PUBLICATION Major NYC REIT Activity...
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Introduction
More than 72 million sq. ft.
or approximately 18% of
Manhattan’s office space
is controlled by four public real estate
investment trusts (REITs) that perform
well in both the local office market and
the capital markets. They are Boston
Properties, Brookfield Office Properties,
SL Green Realty Corporation, Inc., and
Vornado Realty Trust. Combined, the
total Manhattan holdings of these four
REITs collateralize almost $18 billion in
mortgage debt. Their portfolios include
iconic skyscrapers, as well as a variety of
other commercial office space buildings,
retail space, and mixed-use structures.
While these REITs also control significant
Manhattan retail and suburban New
York properties, as well as non-New York
properties, the focus of this paper is on
the Manhattan commercial office holdings
of these REITs.
As institutional corporate owners and
public companies, the four REITs have
superb access to capital markets that
provide the companies with corporate-
level debt and equity, in addition to
mortgages. This gives the REITs a
significant “cost of capital” advantage
compared to all but the largest private
owners and operators when it comes
to competing for deals and providing
incentives to tenants. With REIT capital
funding obtained through low interest
rate bond and public equity issuances,
they have access to additional layers of
capital, unavailable to non-institutional
owners. The capital markets offer both
unsecured corporate debt and equity as a
source of funds to finance properties in need
of capital expenditure, thereby giving the
REITs a significant financial advantage over
less well-capitalized owners. The financing
can be used for tenant improvements (TIs),
leasing commissions, capital expenditures,
and competitive property maintenance.
Fueled in part by the competitive
advantages of their capital structure,
the REITs have exceeded the Manhattan
office market averages in occupancy and
achieve premium rents. They are active and
aggressive buyers in the current low cap rate
acquisitions market.
The sources used for this whitepaper
include annual reports prepared by the
REITs, which highlight portfolio and
property-level updates of New York office
SPRING 2012 RESEARCH PUBLICATION
Major NYC REITActivity & Holdings
A Comparative Analysis of the Notable REIT-owned Manhattan Office Properties & PortfoliosA research report prepared for the Steven L. Newman Real Estate Institute, Baruch College, CUNY by Benjamin Polen, MBA, Senior Research Associate at the Institute
holdings. Leasing, rents, and transaction
information are reported by the REITS and
presented for discussion in this report.
The goal of this whitepaper is to provide a
view inside leading real estate investors, as
afforded by timely operating information
on leasing, rents, and transactions.
A Shift from Families to REITs
The office sector within Manhattan’s real
estate sector was historically controlled
by family ownership. Throughout the
1990s, families such as the Dursts, Rudins,
Helmsleys, and Speyers, along with many
lesser known ones, owned large portfolios
of Class A and B office building stock.
While these families remain major players,
a shift has been underway over the past
two decades. Since 2006, 15 million sq.
ft. of New York office space has changed
hands to the control of public REITs, from
both families and other owners. There
has also been increased investment in
Manhattan office real estate by foreign
investors (notably, sovereign wealth funds)
and private, non-traded REITs.
This shift away from family owners is
attributable to a number of factors, most
significantly the availability of capital for
REITs. The access to ready capital allows
REITS to have liquidity and cash out families
and partnerships. When a new generation
inherits family real estate, estate taxes may
necessitate the sale of real estate, or the
new generation may not share the same
affinity for owning property. REITs have
served as ready buyers, with a combination
of market knowledge and the ability to
finance quick closings through multiple
capital sources.
One Penn Plaza
Photograph courtesy of Vornado
Figure 1:
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MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
The development process in New York,
especially for complicated large-scale
projects, requires a dedication of resources
and capital that only the best capitalized
families and REITs possess. This staying
power can provide an advantage in both
execution and perception. Public REITs,
unlike their private counterparts who usually
have three to seven year investment fund life
cycles, are typically associated with a longer
term investment horizon. They also may
have more flexibility with complicated, long
term development projects and can adjust
rents to meet softer markets without partner
approval or in violation of debt covenants.
REIT Real Estate Market PerformanceA fundamental comparison of the REITs’
current performance compared to the height
of the boom in 2006 reveals interesting
differences. Occupancy was higher, and
vacancy lower, at the end of 2006. At that
time, the REITs had an average occupancy
of 98.1%, compared to 94.1% in 2011, a
sign of a stronger office tenancy market in
2006. Since 2006, in-place rents for REITs
have grown to $54.16 per sq. ft., compared
to average REIT portfolio rents of $46.84 at
the end of 2006. The lower numbers from
2006 likely reflect older leases at significantly
below-market rents, while the current figures
may reflect above-market leases signed in a
stronger market. These figures illustrate the
muted effects of headline-grabbing numbers
when spread across giant portfolios.
By analyzing the REITs’ office property
data, it is possible to bring together real
estate and capital markets, with the access
to public data shedding light on the mostly
private world of real estate holdings. This
analysis takes into account U.S. Securities &
Exchange Commission (SEC) filings, public
website information, and industry press
reports.
The vast holdings and associated debt of
New York City’s largest REIT owners of office
space are quantified in Table 1, with some
of the most notable buildings listed in Table
2. Even when joint venture (JV) partnerships
are subtracted, the proportional ownership
to REIT shareholders is nearly 61 million sq.
ft. The mortgage debt used to support this
ownership is significant, almost $18 billion
total, while the relative use of mortgage debt
is in line with capital market underwriting
standards, averaging $249 per sq. ft.
Applying a required loan-to-value ratio of
65%, this mortgage debt would require an
average appraised value of at least $383 per
sq. ft., a more than reasonable assumption
given both in-place income and comparable
recent transaction prices.
Occupancy & RentsThe four REITs analyzed all had average
occupancy levels of 94.1% on December 31,
2011, outperforming the overall Manhattan
office market occupancy rate of 90.9% (Table
3). The differential between REIT occupancy
levels and market occupancy is measureable,
1 BXP’s total debt includes partner loans of $450 million made to GM Building, not counted in proportional debt. The office space totals only include Manhattan office space. Vornado’s office space total does not include a 132,000 sq. ft. building in Paramus, NJ that is 100% owned. SL Green’s totals do not include its Downtown Brooklyn properties.
with average REIT occupancy levels 380
basis points higher than the market (Table
4). Boston Properties’ occupancy levels are
690 basis points greater than the overall
Manhattan market and represent the best
occupancy performance of the group. SLG’s
out performance of 160 basis points is likely
attributable to its high stock of Class B
assets, mainly older buildings with smaller
floor plates and more interior columns that
can be less desirable to tenants.
The portfolio rents of the REITs average
$54.16/sq. ft. across their Manhattan office
holdings (Table 5). While this is slightly less
than average market asking rents of $57.23/
sq. ft. , the portfolio rents reflect historical
below market leases. One positive aspect
of this is the opportunity to release space
at greater rents upon lease expiration. The
differentials among the REIT portfolio rents
reflect the nature of their holdings.
Brookfield’s lower rents reflect its older,
below-market leases and its large Downtown
holdings, a submarket with lower rents
than the overall Manhattan office market.
Boston Properties’ higher rents show the
horsepower of the General Motors Building,
which obtains some of the highest rents in
Manhattan. Vornado and SL Green’s rents
REIT OccupancyOwned & Managed
(sq. ft.)
Proportional Ownership
(sq. ft.)Property Debt Proportional Debt
Total Debt / sq. ft.
Proportional Debt / sq. ft.
Brookfield Office (BPO) 93.2% 18,301,000 15,724,000 $4,193,000,000 $3,440,000,000 $229 $219
Boston Properties (BXP) 97.8% 8,310,065 7,237,535 $3,852,381,000 $2,631,428,800 $464 $364
S.L. Green (SLG) 92.5% 24,621,618 20,847,097 $5,158,566,000 $3,682,671,162 $210 $177
Vornado (VNO) 95.3% 21,134,000 17,156,756 $4,792,877,000 $2,700,159,700 $227 $157
Total/Average 94.1% 72,366,683 60,965,388 $17,996,824,000 $12,454,259,662 $249 $224
Table 1:
Manhattan Office Market - RBT Overview Manhattan
Manhattan Office REITs ownership, debt & occupancy (2011)1
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hover around the current average asking
rents. Though these two REITs are below
the average Class A rents, this provides the
opportunity to obtain higher rents upon
issuing new leases. Indeed, the REITs are
capitalizing on today’s leasing market and
capturing higher rents.
In 2011, these REITs leased a total of
7.4 million sq. ft. of office space (Table 6).
These leases represent 25% of the total
30 million sq. ft. leased in Manhattan’s
office market in 2011.2 Given the rent and
occupancy performance of the four REITs,
near-term lease expirations and the ability
to compete with TIs allow REITs to capture
higher rents. The REITs are doing exactly
that. When leasing or renewing leases, REITs
have an advantage in offering TIs and other
concessions. This is due to their lower cost
of capital, as discussed earlier.
In 2011, Vornado leased 3,211,000 sq. ft.
of New York office space, the most of the
four REITs, representing 15% of its portfolio.
The leases generated new rents of $55.37
per sq. ft., and rents in released space were
18% higher than previous in-place rents.
The new leases averaged 9.2 years and
included tenant improvement and leasing
commissions of $5.25 per sq. ft. per year.
In 2012, VNO has 999,000 sq. ft. of space
expiring at average rents of $61.59 per sq. ft.
In 2011, Brookfield leased a total of
2,052,000 sq. ft. - 335,000 sq. ft. in Midtown
at average rents of $55.89 per sq. ft. and
1,717,000 sq. ft. in Downtown at average
rents of $32.84 per sq. ft. The Midtown
rents were nearly double - 96% higher -
than the expiring rents, while the downtown
rents were just 2.3% higher. During 2011,
Brookfield scored a big win when Bank of
America/Merrill Lynch renewed 767,000 sq.
ft. at the World Financial Center, made up
of 524,000 sq. ft. at Four World Financial
Center and 243,000 sq. ft. at One World
Financial Center. Brookfield also inked a 10-
year lease expansion for 72,000 sq. ft. with
Societe Generale at 245 Park Avenue. Other
MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
Market Occupancy Asking Rent Inventory (sq. ft.)
Midtown 90.4% $65.42 241,245,327
Midtown South 93.6% $45.90 65,248,004
Downtown 90.5% $39.88 86,372,509
Total 90.9% $57.23 392,865,840
Table 1: Table 3:
Manhattan Office Market
Source: Cushman & Wakefield, Q4 2011
REIT BuildingSize
(sq. ft.) Ownership
BPO One World Financial Center 1,603,000 100%
BPO Two World Financial Center 2,671,000 100%
BPO Three World Financial Center 1,254,000 99%
BPO Four World Financial Center 1,861,000 51%
BPO 300 Madison Avenue 1,089,000 100%
BXP 399 Park Avenue 1,707,476 100%
BXP Times Square Tower 1,244,000 100%
BXP 601 Lexington Avenue 1,630,000 100%
BXP 125 West 55th Street 570,000 60%
BXP General Motors Building 1,803,465 60%
SLG 919 Third Avenue 1,454,000 100%
SLG Graybar Building (420 Lexington) 1,188,000 100%
SLG 1185 Avenue of the Americas 1,062,000 100%
SLG 388 & 390 Greenwich Street 2,635,000 51%
SLG 600 Lexington Avenue 303,515 55%
VNO One Penn Plaza 2,461,000 100%
VNO Two Penn Plaza 1,588,000 100%
VNO Eleven Penn Plaza 1,068,000 100%
VNO 909 Third Avenue 1,327,000 100%
VNO 1290 Avenue of the Americas 2,061,000 70%
Table 2:
REITs - Selection of Manhattan Office Buildings
Some of the buildings (but not all) owned by the subject REITs (2011)
2 Based on 30,096,753 sq. ft. of leasing activity as reported by Cushman & Wakefield, Q4 2011 Manhattan Office Snapshot.
leasing highlights included an 11-year expansion with Royal Bank of Canada for 112,000
square feet at Three World Financial Center and a 12-year lease with law firm Kilpatrick
Townsend & Stockton for 45,000 square feet at the Grace Building.
In 2012, Brookfield will have 79,000 sq. ft. of space expiring in Midtown and 220,000
sq. ft. in Lower Manhattan, at average rents of $19.00 and $18.00 per sq. ft., respectively.
These below market, relatively small spaces should be easy for the company to re-lease.
However, Brookfield will lose a large tenant in 2013, since Nomura Holdings indicated it will
be vacating its 800,000 sq. ft. space at the World Financial Center when its lease expires.
Nomura signed a 900,000 sq. ft. lease in Midtown at Worldwide Plaza (owned by George
Comfort & Sons, a private firm). Re-tenanting that space is a major priority for Brookfield.
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SL Green reported leasing 2,020,146 sq. ft.
of space in 2011, nearly 10% of its Manhattan
portfolio, at average rents of $54.42. If SLG
is able to continue obtaining rents at this
level, it could provide a boost to the 725,000
sq. ft., representing 4.1% of its older stock of
consolidated Manhattan holdings, expiring
in 2012 at average rents of $54.05 per sq.
ft. In SLG’s newer stock of consolidated
holdings, it will have 396,873 sq. ft., or 7.0%,
of its leases expire in 2012, at average rents
of $71.13 per sq. ft. While this may present
a challenge, premier properties, such as 280
Park Avenue and 600 Lexington Avenue
(which command above market rents of $83
and $70 per sq. ft. respectively), should be
able to contribute to rent growth for SLG’s
portfolio.
Boston Properties scored a significant
leasing win in May 2011 when 180,000 sq.
ft., representing 19%, of its 989,000 sq. ft.
development at 250 West 55th Street was
leased to law firm Morrison & Foerster. This
lease enabled BXP to restart the project.
The building will be 40 stories, for a height of
550 feet. Of course, this lease will not take
effect until the project is completed. For
its existing portfolio, BXP appears to have
leased 160,665 sq. ft. of its Manhattan office
space in 2011. Since BXP does not provide
this figure directly, it can be derived through
other figures provided by the company.
BXP began 2011 with 189,317 sq. ft. of
scheduled lease expirations in Manhattan
and 156,180 sq. ft. of vacant space. It ended
2011 with 184,820 sq. ft. of vacant space.3
By subtracting that change in vacant space
from 2011 scheduled lease expirations,
the 160,665 leased sq. ft. figure is derived.
However, BXP did not report the new rents
it received for the space. In 2012, Boston
Properties has Manhattan leases expirations
of 332,757 sq. ft. in 2012, at an average
rent of $91.73 per sq. ft. With its portfolio
of trophy buildings and its demonstrated
ability to command premium rents, BXP may
be able to meet this leasing goal.
Manhattan Office TransactionsThe REITs were very active buyers in 2011,
acquiring commercial office (along with retail
and residential) real estate in Manhattan and
restarting large office development projects.
With their sizable corporate equity and debt
cushions, the REITs were among the most
aggressive buyers in 2011, helping to drive
cap rates on some transactions to below
5%.4
During the second quarter, Brookfield
acquired a 75% interest in 450 West
33rd Street through a joint venture with
Broadway Partners, valued at approximately
$520 million. The 1.8-million-square-
foot office building is directly adjacent
to BPO’s 5.4-million sq. ft. Manhattan
West development site on Ninth Avenue.
Brookfield also acquired the remaining
49% interest in Four World Financial Center
for $264 million after the end of the third
quarter.
In January 2011, SL Green bought out a
JV partner in 521 Fifth Avenue, a transaction
that valued the building at $492 million, or
$502 per sq. ft. During the second quarter,
SLG bought out its JV partner and tenant,
media company Viacom, at 1515 Broadway
in a deal that valued the building at $691
per sq. ft., or $1.21 billion, a price in line
with the Times Square sub-market, given
the building’s retail base. Based on 2010
reported financials, the building generated
$56.2 million in NOI.5 Applying that NOI, the
transaction would have a cap rate of 4.6%.
In November, SLG formed a joint venture
with the Moinian Group to recapitalize 180
Maiden Lane. The share in the 1.1 million sq.
ft. property was acquired for $72.7 million,
paid through a mix of stock and cash. Also
in November, SL Green purchased 51 East
MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
REIT Leased (sq. ft.)
BPO 2,052,000
BXP 160,665
SLG 2,020,146
VNO 3,211,000
Total 7,443,811
Table 6:
Manhattan Office Market REIT Leasing Activity
Leasing Activity
REIT Average Rents / sq. ft.
BPO $32.05
BXP $88.01
SLG $54.42
VNO $59.68
Total $54.16
Table 5:
Portfolio Rent Performance
REIT Portfolio Rents
The General Motors Building
Photograph courtesy of Boston Properties
Figure 3:
3 Not including Two Grand Central Tower, which was sold in 2011.4 Capitalization, or cap rate, is a property’s net operating income divided by sales price at the closing. It is reflected as a percentage.5 Based on $20.2mm net income, $21.4mm interest expense and $14.6mm depreciation.
REITOccupancy vs Market
(basis points)
BPO 230
BXP 690
SLG 160
VNO 440
Average 380
Table 4:
REIT vs Market Performance
REIT Performance Compared to Market
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42nd Street, a 142,000 sq. ft. building that is
across the street from Grand Central, for $80
million, or $563 per sq. ft. This acquisition is
part of a larger assemblage plan SL Green
has for that block. It is adjacent to 317
Madison Avenue, which is next door to 331
Madison Avenue, also owned by SLG.
With regard to sales, in May 2011 SLG
sold a 359,000 sq. ft. building at 28 West
44th Street for $161 million, or $448 per
sq. ft. – an impressive number for a Class
B building without avenue frontage. In
addition, in October 2011, SLG entered into
an agreement to sell its leased fee interest
(the land underneath) 292 Madison Ave for
$85 million, and the sale is pending lender’s
approval.
In March 2011, Vornado acquired a 95%
interest in One Park Avenue, a 922,000 sq.
ft. building between 32nd and 33rd Streets,
for $374 million, a valuation of $422 per sq.
ft. Also in March, Vornado and SL Green
entered into a 50/50 JV to acquire 280 Park
Avenue, a 1960s era, 1.2 million sq. ft. office
building between 48th and 49th Streets. The
JV involved VNO’s contribution of $73.75
million in mezzanine debt and a $111.25
million cash payment. In December, VNO
formed a joint venture with the Kushner
Companies to recapitalize the office portion
of 666 Fifth Avenue, a 1.4 million sq. ft. Class
A building between 52nd and 53rd Streets.
VNO acquired 49.5% of the building, in
connection with a modification of the first
mortgage into A and B Notes. The new JV
plans to spend $150 million re-tenanting,
and repositioning the property, which was
only 81.1% occupied at year end.
In May 2011, BXP resumed development
of 250 West 55th Street, an approximately
989,000 sq. ft. Class A office building in
midtown Manhattan. The restart of this
development was catalyzed by a lease with
law firm Morrison & Foerster for 19% of
the building’s space, or 184,000 sq. ft. A
portion of BXP’s 510 Madison Avenue office
development came online during the second
MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
6 Of course, as an asset class, real estate differs from bonds significantly, since real estate can provide long-term capital appreciation, as opposed to a return of par value. 7 FFO = Net Income + Amortization & Depreciation – Gains from Sale of Real Estate.8 VNO’s NYC income data includes a 132,000 sq. ft. Paramus, NJ office building with gross rents of $2.3 million (based on annualized rents of $20.28 per sq. ft. @ 87.1% occupancy) in its calculations. 9 Based on proportionate owned sq. ft., as Vornado’s 10-K, Note 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities.”
quarter when, in May, 16% of the 347,000
sq. ft. building Class A building was placed
into service.
Value of Manhattan Office HoldingsApplying market information from
comparative sales to an income capitalization
analysis is a powerful way to estimate the
value of the REITs’ Manhattan office holdings.
Comparative sales report information about
recent market transactions can be used to
determine the value of other properties.
Typically private information, such as a
capitalization rate (cap rate) or the current
yield on a property, is occasionally divulged
in market sales. Since property sales are
often reported (or easy to compute) on a
per sq. ft. basis, that price mark represents
a property condition, location, income, risk,
and upside.
The comparative sales approach, when
combined with income capitalization can
provide an accurate depiction of property
and portfolio value. Cap rates are the
current yield on a property, determined by
dividing net operating income (NOI) by the
market price or value. Backing into a market
value, the income capitalization method
divides NOI by an appropriate cap rate to
determine a property price.
Cap rates differ among property types and
markets, but as of mid-year 2011, cap rates
for Class A Manhattan office space were in
the 4.0% to 5.0% range, while Class B space
were in the 5.0% to 7.0% range. Just as a
junk bond carries a high yield, higher cap
rates can signify higher risk, while lower
cap rates are typically associated with core,
stabilized properties.6 New York, as usual,
offers an exception, as office investors may
be willing to accept a lower cap rate due to
high vacancy or other factors in the short
term if they think they can quickly lease the
property or increase rents on near-term lease
expirations.
When reviewing comparative sales,
differences between the properties can
significantly affect the value. For example,
1450 Broadway sold in June for $204 million,
at a 5.5% cap rate and for $510 per sq. ft.,
according to reports. The 400,000 sq. ft.
building was approximately 15% vacant, and
the buyer saw an upside in leasing the vacant
space. Depending on market conditions,
vacant space can present an opportunity, as
in this example, or a risk if it’s perceived as
difficult to lease.
While more property-specific, the income
capitalization approach faces several hurdles.
For the most part, the REITs do not provide
property-level income numbers. Even
when companies provide their aggregated
New York office funds from operation
(FFO) figures, these numbers include non-
Manhattan properties.7
Vornado provides financial information
for its New York office portfolio that makes
it possible to determine the NOI of those
holdings (Table 7). It is also possible to
compare VNO’s 2011 New York office
performance to the top of the real estate
market performance in 2006 (Table 8). This
comparison shows a 61% growth in portfolio
NOI.
Applied to financials Vornado provides
for its New York office holdings,8 a 5.0% cap
rate results in a valuation of $12.3 billion or
$714/sq. ft. (Table 9). A more aggressive
4.0% cap rate results in a portfolio value of
$15.3 billion, or $893/sq. ft.9 With recent
investment sales in the $700+ per sq. ft.
range, this may be a fair assessment, even
with the low cap rate.
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billion transaction in 2008.
The REITs can also be compared side-by-
side by applying a per sq. ft. valuation based
on the total size of their office holdings (Table
13). By applying per sq. ft. values, varying
total portfolio values can be extrapolated.
This approach would be useful for applying
a sales comparison approach to valuation. In
the case of VNO and BXP, the corresponding
per sq. ft. values can be linked to the income
method approach values provided in Tables
9 and 11.
It is also possible to measure the impact
of mortgage debt on portfolio values. By
taking the portfolio values from Table 13 and
subtracting mortgage debt (Table 1) provides
a net asset value (NAV) for the Manhattan
office holdings of the REITs (Table 14). This
net asset value is the equity that a portfolio
level investor would have in the aggregated
properties.14
The effect of mortgage debt is also
measured in loan-to-value ratio. The values
in Table 15 show the implied leverage of
the REITs’ Manhattan portfolios, based on
an estimated value per sq. ft. Using the
valuation in the top left cell as an example, if
BPO’s Manhattan office portfolio is valued at
$400 per sq. ft., it would have a total value of
$6.3 billion (Table 13), a Net Asset Value (i.e.,
equity) of $2.8 billion (Table 14), and a loan-
to-value ratio (leverage) of 55% (Table 15).
Interestingly, despite all the negative
press and industry sentiment on financial While Boston Properties does not provide
the same level of detailed information as
Vornado, BXP does break out NOI for its
Manhattan office portfolio (Table 10). With
this information, different cap rates can be
applied to obtain portfolio valuations (Table
11). For example, a 5.0% cap rate applied
to BXP generates a value of $6.1 billion, or
$846/sq. ft. That is $132/sq. ft. more than
the same cap rate on Vornado’s portfolio,
reflecting BXP’s higher rents.
BXP separately reports FFO and NOI
for its JVs (Table 12). Using the NOI
information, valuations can also be obtained
MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
and are presented in this paper based on
a 5.0% cap rate. With that 5.0% cap rate
applied to the annualized NOI across three
very different properties, a range of values
appear on a sq. ft. basis. This analysis shows
values ranging from $1,176 per sq. ft. for
125 West 55th Street, and $2,913 per sq. ft.
for the GM Building. By way of comparison
to the peak of the boom in 2006, BXP
collected average rents of $77.88 per sq. ft.,
compared to $88.01 in 2011. A valuation
based on a 5.0% cap rate would value the
GM Building at $5.268 billion, compared to
when BXP acquired the property in a $3.95
New York Office 2011
Revenue $1,117,317,000
Operating Expenses $504,546,000
NOI $612,771,000
Table 7:
Vornado’s New York Office 2011 NOI10
Description 2011 Annual 2006 Annual
Net Income $264,190,000 $187,880,000
+ Depreciation & Amortization $201,122,000 $101,976,000
- Gain from sale $ - $ -
Funds From Operations (FFO) $465,312,000 $289,856,000
+ Rent Increases $25,720,000 $4,431,000
- Capital Expenditures $13,733,000 $ -
- Maintenance $21,503,000 $12,446,000
Adjusted FFO $455,796,000 $281,841,000
Table 8:
Vornado’s New York Office Reported Financials
Vornado’s New York Office 2011 and 2006 Financial Performance11 12
Cap Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
Value ($B) $15.3 $13.6 $12.3 $11.1 $10.2 $9.4 $8.8
NOI Multiple 25.0 22.2 20.0 18.2 16.7 15.4 14.3
FFO Multiple 32.9 29.3 26.3 23.9 21.9 20.3 18.8
AFFO Multiple 33.6 29.9 26.9 24.4 22.4 20.7 19.2
Value/sq.ft. $893 $794 $714 $649 $595 $549 $510
Table 1: Table 9:
Vornado’s New York Valuation per sq. ft. (2011)13
Vornado’s New York Valuation per sq. ft. (2011)13
10 NOI based on reported New York Office Revenues minus New York Office Operating Expenses minus General and Administrative expenses. Does not include depreciation and amortization or interest and debt expense.11 Net Income = NOI – (Depreciation & Amortization) – (Interest and Debt Expense).12 In this analysis, Vornado’s income from owned office space in New Jersey is included in their New York office financial reporting, since information to separate this out is not available.13 Based on proportionate owned sq. ft., as Vornado’s Note 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities.”14 Excluding any unsecured, corporate level REIT debt.
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MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
leveraging and aggressive use of debt
usage, on average, the REITs’ portfolios
appear to be more highly leveraged in 2011
than they were in 2006 (Tables 15 and 16).
This may be attributed to New York City’s
resurgence from the recession and the
strong performance of New York’s market,
which has attracted buyers and lenders alike.
Future GrowthThe West Side, Park Avenue, and Penn
Station are all favored development areas,
as indicated by investment activity by the
four REITs.
Boston Properties’ restart of its 1 million
sq. ft. development at 250 West 55th Street
is a strong vote of confidence in the Midtown
West/Columbus Circle market. BXP is also
putting the finishing touches on a 347,000
sq. ft. tower at 310 Madison Avenue.
Vornado has publicly argued for the
upzoning of Park Avenue to allow for bigger
buildings. Additionally, both Vornado and
Brookfield have substantial development
plans for the Penn Station area. Brookfield
owns a parcel suitable for 5.4 million sq. ft.
between West 31st and 33rd Streets and
across from the Farley Post Office (Penn
Station’s planned relocation). However,
at this time, Brookfield appears to be
concentrating on a renovation of the retail
space at the World Financial Center, and
re-leasing the soon to be vacant Nomura
space there, rather than building new
development.
Vornado has considered replacing the
Hotel Pennsylvania with a 2.8 million sq.
ft. office tower. This plan has had a long
history of opposition from the owners of
the Empire State Building and local activists.
In December 2011, however, Vornado
reported that the hotel will be renovated,
not demolished.
SL Green has partnered with Joe Moinian
in his redevelopment of Three Columbus
Circle (1775 Broadway) by recapitalizing
that venture. SL Green has also been a
Manhattan Office 2011
Revenue $458,791,000
Expenses $152,649,000
NOI $306,142,000
Table 10:
BXP’s Manhattan Office Net Operating Income (2011)
Cap Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
Value ($B) $7.7 $6.8 $6.1 $5.6 $5.1 $4.7 $4.4
NOI Multiple 25.0 22.2 20.0 18.2 16.7 15.4 14.3
Value/sq.ft. $1,057 $949 $846 $769 $705 $651 $604
Table 11:
BXP’s Manhattan Office Valuation (2011)
Description GM Building 125 West 55th St. 540 Madison Ave
Property Financials
Revenue $345,483,000 $47,789,000 $32,252,000
NOI $263,416,000 $34,303,000 $20,839,000
Interest $105,227,000 $12,562,000 $7,683,000
Interest: Partner Loans $63,131,000 $ - $ -
Depreciation & Amortization $117,583,000 $16,866,000 $9,728,000
Mortgage Principal $ - $1,562,000 $240,000
Total Debt Payments $168,358,000 $14,124,000 $7,923,000
FFO $158,188,333 $22,288,333 $13,948,333
BXP’s Share
Ownership% 60% 60% 60%
NOI $158,050,000 $20,910,000 $12,978,000
FFO $94,913,000 $13,373,000 $8,369,000
Valuation Metrics
Value @ 5.0% Cap Rate (NOI) $5,268,320,000 $686,060,000 $416,780,000
Implied Value per sq ft $2,913 $1,176 $1,441
Implied FFO multiple 8.3 7.7 7.5
Implied Loan to Value Ratio 39% 30% 28%
Debt Service Coverage Ratio 1.6 2.4 2.6
Table 12:
BXP’s JV Performance (2011)
REIT $400 $500 $600 $700 $800 $900 $1,000 $1,100
BPO $6.3 $7.9 $9.4 $11.0 $12.6 $14.2 $15.7 $17.3
BXP $2.9 $3.6 $4.3 $5.1 $5.8 $6.5 $7.2 $8.0
SLG $8.3 $10.4 $12.5 $14.6 $16.7 $18.8 $20.8 $22.9
VNO $6.9 $8.6 $10.3 $12.0 $13.7 $15.4 $17.2 $18.9
Total $24.4 $30.5 $36.6 $42.7 $48.8 $54.9 $61.0 $67.1
Table 13:
NYC REIT Portfolio Value Using per sq. ft. Comparable
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MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012
very active buyer of retail properties, so it is
seeking growth outside of the office sector.
SL Green purchased 3 Columbus Circle, with
20.1% occupancy in January 2011 and had
brought occupancy to 61%, as of January
2012.
Conclusion Even in the face of economic uncertainty,
the demand for New York office property by
major REITs and other real estate investors
remains strong. REITs are aggressively
acquiring prime Manhattan office space
through both outright purchases and by
taking advantage of creative capital uses,
as shown by Vornado’s use of mezzanine
debt to partner with SL Green at 280 Park
Avenue. Existing space is being re-leased
at higher rates, and tenants are signing
leases on development projects, both
positive indicators. More than 11 million sq.
ft. of office space is under development or
redevelopment by the REITs, demonstrating
their confidence in the long term strength of
New York’s office market. ■
Implied Leverage $400 $500 $600 $700 $800 $900 $1,000 $1,100
BPO 57% 45% 38% 32% 28% 25% 23% 21%
BXP 45% 36% 30% 26% 23% 20% 18% 16%
SLG 35% 28% 24% 20% 18% 16% 14% 13%
VNO 35% 28% 23% 20% 18% 16% 14% 13%
Total 43% 34% 29% 25% 21% 19% 17% 16%
Table 16:
Implied 2006 Portfolio Leverage (Loan to Value)
REIT $400 $500 $600 $700 $800 $900 $1,000 $1,100
BPO $2.8 $4.4 $6.0 $7.6 $9.1 $10.7 $12.3 $13.9
BXP $0.3 $1.0 $1.7 $2.4 $3.2 $3.9 $4.6 $5.3
SLG $4.7 $6.7 $8.8 $10.9 $13.0 $15.1 $17.2 $19.2
VNO $4.2 $5.9 $7.6 $9.3 $11.0 $12.7 $14.5 $16.2
Total $11.9 $18.0 $24.1 $30.2 $36.3 $42.4 $48.5 $54.6
Table 14:
Manhattan Office Portfolio Net Asset Value
REIT $400 $500 $600 $700 $800 $900 $1,000 $1,100
BPO 55% 44% 36% 31% 27% 24% 22% 20%
BXP 91% 73% 61% 52% 45% 40% 36% 33%
SLG 44% 35% 29% 25% 22% 20% 18% 16%
VNO 39% 31% 26% 22% 20% 17% 16% 14%
Total 57% 46% 38% 33% 29% 25% 23% 21%
Table 15:
Implied 2011 Portfolio Leverage (Loan to Value) Based on per sq. ft. value
Baruch College, CUNY137 East 22nd StreetBox C-0120New York, NY 10010
Tel: 646.660.6950 • Fax: 646.660.6951www.baruch.cuny.edu/realestate
Mitchel B. Wallerstein, President, Baruch College
William Newman, Founding Chair
Richard Pergolis, Co-Chair
Jack S. Nyman, Director
Emily Grace, Associate Director of Research
This research report is published by the Steven L. Newman Real Estate Institute, Baruch College, CUNY. The Newman Real Estate Institute gratefully acknowledges the support of the sponsors who make possible our efforts to promote critical thinking on topical issues for the real estate industry. The views expressed in the research report are those of the authors and not necessarily those of Baruch College, City University of New York, or any of its affiliated organizations, foundations, and sponsors. Please address inquiries to Jack S. Nyman, Director, at:
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