8.3.22 - Vornado bets on Penn District project to hold it steady amid possible recession
' Vornado Realty Trust, the city’s second-largest office landlord, beat performance estimates for the second quarter of the year. However, it is prepared for its business to be lower than forecast during the second half of 2022 given a higher-interest-rate environment, company CEO Steven Roth said during a Tuesday earnings call.
The company expects and is prepared for “choppy conditions,” though it is protected by 1,500 long-term leases with various tenants, Roth said. Its profits grew to $50.4 million last quarter from $48 million one year ago.
He then touted the revitalization of the Penn District, where Vornado controls five development sites, as one of the most important projects in the city. He thanked “neighbors” Hudson Yards and Manhattan West, both developed by The Related Cos., for putting the area around Penn Station “on the map.”
He was referring to a trend called the “flight to quality” that describes companies leaving older spaces for brand-new, high-end offices in Hudson Yards. Roth’s new projects around Penn Station will have the same results, he predicted.
“There is an enormous amount of demand for the district,” Roth said. “I mean, we get incomings all the time.”
Analysts questioned whether investors would realize the value of the project in the near term. Share prices have fallen nearly 36% during the second quarter.
“You've been talking about Penn for 25 years,” said Piper Sandler analyst Alexander Goldfarb. “Hard to believe that in the next five or even 10 years that you'll get four or five buildings up online, not because of you, but just how long it takes to build offices to stabilize and lease.”
The entire project, where Vornado has committed more than $2 billion, will comprise 10 new buildings; the last one is expected to be completed by 2044.
“It takes almost no imagination to begin to model what 1 Penn, 2 Penn, [the Farley post office building] can be worth,” Roth responded.
Evercore ISI analyst Steve Sakwa said that despite potential economic headwinds in the near future, “we recognize that Vornado possesses some unique development opportunities around Penn Station which could be a major source of value creation over the next 10 to 15 years.”
He also predicts rate cuts next year to reduce the risk of a recession.
Roth said he supports separating the Penn District project into separate tradable securities rather than having it trade as part of its existing shares.
“We expect the Penn District to be a grower, and we think that our shareholders should have the ability to [participate] in that as an isolated pure-play investment,” he said on the call, though he added that he’s not sure about when that could happen.
Vornado also has a group of assets it’s been selling off at prices that are “not as good as [they] would have been a year or two ago but good enough to execute,” Roth said. Those will generate between $500 billion and $750 billion for the company.
In January the company sold off two retail properties, at 478-482 Broadway and 155 Spring St., for $84.5 million as well as a 500,000-square-foot office building in Long Island City for nearly $173 million in June. '
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