Alexander Stock: Trades ~69% of NAV, Yields 7.1%, Insiders Own >50% (ALX)

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Investment thesis

Alexander’s (NYSE:NYSE: ALX) is a $1.28 billion under-the-radar NYC REIT that trades below private market value and is comprised of high-quality real estate and cash. It is currently trading at around 69% of estimated net asset value and yielding 7.1%. If ALX trades in line with VNO and SLG yields around 4.7%, ALX’s price would be around $380 (implying around a 52% upside from the $250 d ‘today).

context

I wrote Alexander’s back in May 2021: High Quality REIT NYC Trading at 70% Net Asset Value. Since this writing, nothing has materially changed except that Covid is essentially over and NYC is back – both are huge tailwinds for ALX.

Alexander’s is a New York-focused REIT that owns six properties in the New York metropolitan area. Its properties are leased and developed by Vornado (NYSE: VNO) and Vornado owns 32.4% of the shares of ALX. Steve Roth, founder and chairman of Vornado, also owns 26% of ALX shares. In other words, since VNO and Roth own > 50% of the shares, ALX is a controlled company.

With 5.1 million weighted average shares outstanding and a current price of $250, the total market capitalization is $1.28 billion.

Properties

The six properties of ALX are:

  1. 731 Lexington Avenue: Multipurpose building of 1 m² (939,000 square feet of offices + 140,000 square feet of shops); office space is leased to Bloomberg LP until 2029 (with rent increases of approximately 11% every 4 years) and the main commercial tenant is Home Depot (83,000 square feet)
  2. Rego Park I: 338,000 square foot shopping center in Queens and anchored by IKEA (120,000 square feet), Burlington (50,000 square feet), Bed Bath & Beyond (46,000 square feet) and Marshalls (36,000 square feet)
  3. Rego Park II: 615,000 square foot mall adjacent to Rego Park I in Queens and anchored by Costco (145,000 square feet) and Kohl’s (133,000 square feet)
  4. Alexander’s Apartments: residential apartments built in 2015 located above Rego Park II comprising 312 units totaling 255,000 square feet
  5. Rinsing: 167,000 square foot building leased to New World Mall until January 2037
  6. Rego III Park (to be developed): 140,000 square foot parcel of land next to Rego Park II; currently used for paid public parking

He recently sold Paramus (30.3 acres of land leased from IKEA) for net proceeds of $4.58 million and sold a parcel of land in the Bronx for $10 million (net proceeds of $9.3 million). dollars).

NAV valuation

Now let’s move on to property valuations:

1A. 731 Lexington Ave (Office)

Unfortunately, ALX doesn’t break down the NOI by property, but digging around can find Bloomberg lease details on S&P Ratings. Based on the rent increase chart, Bloomberg is paying $76.66 PSF in base rent in 2021. Multiplying base rent by the occupied square foot of approximately 900,000 gives us approximately $69 million in NOI for ALX . According to the recent 10-K, Bloomberg accounted for $113m in revenue in 2021, so $69m NOI seems reasonable (operating expenses ~39% of rent).

Applying a conservative capitalization rate of 5% brings us to an asset value of $1.38 billion. By canceling $500 million of debt, we get an asset value of $880 million.

1B. 731 Lexington Ave (Retail)

Under the Properties table in the recent 10-K, we see that the commercial portion is 140,000 square feet with an annual PSF rent of $240, which brings us to $33.6 million in annual rent. Assuming a 10x rent multiple, we get a value of about $336. By canceling $300 million of debt, we get an asset value of $36 million.

2. Rego Park I (Retail)

Rego Park I has 338,000 square feet with an average rent of $48.88 PSF, which brings us to approximately $16.5 million in annual rent. Assuming a 10x rent multiple, we get a value of about $165. The property has no debt, so we get an asset value of $165 million.

3. Rego Park II (Retail)

Rego Park II has 615,000 square feet with an average rent of $63.60 PSF, earning us $39 million in annual rent. Assuming a 10x rent multiple, we get a value of around $390 million. By canceling $202.5 million of debt, we get an asset value of $187 million.

4. Alexander’s Apartments (Residential)

The Alexander Apartments are 255,000 square feet with an average rent of $46.06 PSF, which brings us to ~$12 million in annual rent (or we can use 312 units x $3,212/month x 12 months = ~ $12 million/year). Assuming operating expenses are about 35% of rent, we get an NOI of about $7.8 million. Assuming a conservative cap rate of 5%, we get an asset value of $156 million. By canceling $94 million of debt, we get an asset value of $62 million.

5. Rinse

Flushing has 167,000 square feet with an average rent of $31 PSF, giving us $5.2 million in annual rent. Assuming a multiple of 10 times the rent, we get a value of $52 million. Without debt, we get an asset value of $52 million.

6. Rego Park III

We’ll ignore Rego Park III for now.

Cash + Investments

ALX currently has $463 million in cash, of which $20 million is restricted cash.

(He sold his 564,612 shares of Macerich (MAC) for about $9.5 million in December 2021.)

NAV

NAV = $880 + 36 + 165 + 187 + 62 + 52 + 463 + 20 = $1,865M or $1.86B

P/NAV = 1.28/1.86 = 0.69x

Adding up the asset values, we get approximately $1.86 billion in net assets. With the current market capitalization of $1.28 billion, we are able to buy this dollar bill for 69 cents. Note that we used fairly conservative capitalization rates and rental multiples, so the actual asset values ​​are likely even higher. We also haven’t included Rego Park III, which will eventually be expanded, so you get a free call option on that.

But at the current price, we’re getting high-quality NYC assets at a discount, plus all the cap rate cuts and Rego Park III added for free.

Catalysts

  1. Back to the office: fears that New York’s office buildings will disappear forever are exaggerated; people are social creatures who still need face-to-face interaction and collaboration (Goldman Sachs wants workers back in the office 5 days a week).
  2. Completion of development projects: Completion of Rego Park III will help increase NOI and dividend payouts
  3. Insiders: Vornado and Roth own more than 50%
  4. Inflation/Stagflation: real estate performs well in times of inflation and can be used as an inflation hedge

Risks

  1. Bloomberg: As ALX’s largest tenant (~55% of revenue), Bloomberg is the elephant in the room; if anything were to happen to Bloomberg, it would be detrimental to ALX. However, as many people know, Bloomberg terminals are pretty much indispensable and there really aren’t any good alternatives. As a company and a product, they are both here to stay.

Carry

A bet on ALX here seems like a good asymmetrical play, as the downside is cushioned by a stack of money and high-quality real estate. With companies already bringing workers back to their New York offices, the “Death of NYC and the Office” stories will soon be dispelled. As someone based in New York, I can say the city is recovering quickly; tons of people are outside, Central Park is overflowing on the weekends, the subways are packed, and Times Square looks like a can of sardines.

Along with several long-term leases with prime tenants (Bloomberg, Costco, Home Depot, IKEA), it also has around 40% of its market capitalization in cash. The downside here seems quite limited as ALX is unlikely to experience liquidity issues anytime soon; on top of that, while you wait for the price to appreciate, you can munch on a 7.1% return.

Based on my analysis above, I recommend going long on ALX.

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