Vornado sees “tragic abyss” now, better times ahead
Giant REIT losing $9 million a month to coronavirus, missing 17% of rent
The coronavirus crisis is costing Vornado Realty Trust $9 million a month, CEO Steven Roth said on Tuesday morning’s earnings call.
That loss comes from the closing of the Hotel Pennsylvania in Manhattan’s Penn District, the postponement of trade shows at theMART in Chicago, and reduced revenues from cleaning services, garages and signage rentals.
Beyond that, the real estate investment trust is also short $24 million in April rent from tenants — though the company professes confidence it will be able to collect that sum eventually.
“This next year or so will be very challenging — a lost year, a tragic abyss. But we must look to the other side,” Roth said. “Covid-19 will have an end date. When we get there, I am actually quite optimistic. Farley will be generating income and Penn 1 and Penn 2 will be coming to life.”
Farley is the post office across Eighth Avenue from Penn Station that Vornado is renovating into a train hall, offices and retail.
Vornado has collected 90 percent of office rents and 53 percent of retail rents for April, or 83 percent overall. About two-thirds of rent is due from credit-worthy tenants, Roth said, adding that the REIT has $302 million of tenant security deposits on hand, of which $51 million is from tenants that have yet to pay April’s rent.
Meanwhile, rent collection in early May has outpaced that of the same period in April.
Overall, the firm reported adjusted funds from operations of $138 million, or $0.72 per share for the first quarter, down from $0.79 per share for the same period a year prior.
“We have built Vornado to weather the storm, and importantly to flourish as it passes,” Roth said.
The company has about $3.4 billion in liquidity — half in cash and half undrawn from its revolving credit facility — and is expecting another $750 million from closings at its cash-cow condo tower, 220 Central Park South, from May through December.
The firm expects sales at the hyper-luxury spire to continue to close on schedule, although “future closings may be temporarily delayed to the extent we cannot complete the buildout and obtain temporary certificates of occupancy on time” because of government restrictions, Vornado’s earnings press release notes.
Vornado has furloughed 1,803 employees, including 1,293 cleaning staff, 414 Hotel Pennsylvania employees and 96 corporate staff. The REIT’s executives have also taken pay cuts.
The Hotel Pennsylvania is essentially “a parking lot for a development site,” Roth noted. “We have thought internally about using this [opportunity] and just never reopening it,” though he said that appears unlikely.
For Vornado, a silver lining to the present disruption may be new investment opportunities. “As cycles go, all of a sudden it is now surely a better time to buy than to sell,” Roth said. “The next few years should be great vintages for investors, so you might say I am ringing the bell.”
“We’re going to look for value that is right down the middle of the road for our skill set,” he added later in the call. “We’re not going to invest in Argentina, and we’re not going to invest in a steel company. We’re going to do what we know how to do, and it doesn’t necessarily have to be in the four corners of Manhattan.”
Roth noted that New York remains the firm’s “No. 1, 2, and 3 priority.”
The coronavirus might also accelerate a correction in retail that Vornado has long expected. “We made the early call on the secular decline of retail five or six years ago, and everybody laughed at us. And here we are,” Roth said, noting that he thinks the U.S. has far more retail space than necessary.
“In a perverse way it may be that this pandemic is going to get us into alignment much more quickly,” the CEO said. “I don’t think that the physical retail store is dead, but I do think it’s certainly injured.”
There’s one sector that Roth is hoping will simply return to business as usual when the pandemic passes.
“Please don’t get too comfortable working from home,” Roth told listeners at the conclusion of the call. “We need you back in the office and paying rent in our buildings.”