SPRING 2012 RESEARCH PUBLICATION Major NYC REIT Activity ...baruch.cuny.edu/realestate/pdf/reit-white-paper.pdf · New York City’s largest REIT owners of office space are quantified

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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:


– 2 –

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


– 3 –

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


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.


– 4 –

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


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


– 5 –

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


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.


– 6 –

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


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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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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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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Cushman & Wakefiled, “Marketbeat Office Snapshot Manhatan” Q4 2011

National Association of Real Estate Investment Trusts, “White Paper on Funds from Operations,” April 2002.

Real Estate Weekly Online, “The Zar Group finishes $204 million buy of 1450 Broadway,” June 1, 2011.

Real Estate Weekly, “Nomura signs 900K s/f deal at Worldwide Plaza,” June 28, 2011.

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SL Green Realty Corp, Fourth Quarter Supplemental Data, December 31, 2011.

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SPRING 2012 RESEARCH PUBLICATION Major NYC REIT Activity ...baruch.cuny.edu/realestate/pdf/reit-white-paper.pdf · New York City’s largest REIT owners of office space are quantified

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