Maybe it’s the time of year, but there was something almost biblical in Vornado chairman and CEO Steve Roth’s depiction of the horrors of what he calld “the Great Recession” in his April 2 letter to shareholders. Rather than conjuring images of “detention” and “hell,” he might as well have, for the sake of seasonsality, mentioned plagues of locusts and the slaying of the male first-born:
2009 is about the Great Recession, declining asset values and stock prices, deleveraging and balance sheet strength. No one anticipated the speed and severity of the economic collapse. Currently, New York Office and Retail are experiencing declining rents and reduced tenant demand. Notwithstanding, we expect mark-to-market of new leases to be better than flat, and we don’t anticipate more than about a two percent loss of occupancy. Merchandise Mart will be weaker than that. The Hotel Pennsylvania will struggle to do half as well as last year. Washington, the beneficiary of an ambitious, new administration, is a more positive story (and perhaps now the strongest real estate market in the country), where we anticipate level occupancies and higher rents. We will struggle to achieve flattish same store in New York Office and in Retail. We are fighting very challenging capital markets, but are able to execute some financings. We have chosen to not yet pursue acquisitions and, for other than a few select assets, will not try to sell into this market. [emphasis ours]
In his disarmingly frank and, dare we say, self-flagellating letter, Mr. Roth describes 2008 as “the one-timer year from hell.” “This year we abandoned the MSG move project, delayed and substantially wrote down the Downtown Crossing project in Boston, and the Harlem Park project, and wrote-down/impaired eight others,” he writes.
A footnote at the end of the above graf leads the reader to this mea culpa, of sorts:
This is performance that we cannot be proud of. But ours is a large business and we pursue money making through multiple acquisitions, transactions, developments, etc., predictably, some of which will be unsuccessful. As my 92-year old father taught me forty years ago, when he was working and I was just starting ‘…if you don’t have any bad debts, you are not doing enough business…’ Most of these write-downs were the result of the current economic crisis, but several were simply mistakes.
Overall, Vornado’s funds from operations for 2008 were up slightly over 2007, though net income applicable to common shares was down. Leasing numbers were also down. Share prices, for their part, “declined 28.4 in 2008 and a further 40.0% in 2009 to date.”
Again with the low self-esteem:
Mike [Fascitelli, Vornado's president] and I consider our share price over time to be an important report card on our performance and, this year, if we were still school age, we’d be off to detention (along with every other REIT manager). Commercial real estate is a cyclical business, and our stock price fluctuates. With our stock price now at $35.91 a share, the market has reversed almost ten years of shareholder gains.
In contrast to our fluctuating stock price, our income stream, which comes from some 300 buildings and 5,600 tenants, is quite stable. Over the years, our comparable income stream has constantly marched upward and, in fact, has never declined either in total or on a same-store basis.”
On the acquisition front, “Mike recently observed that over the past 10 years we completed $14.9 billion of acquisitions but sold only $1.2 billion. This is a numerical mismatch, for better or worse, a product of a buy-and-hold strategy. With 20/20 hindsight, we should have sold everything non-core, but we hesitated as the knife started dropping, and now it’s too late.”
Fortunately, it’s not all fire and brimstone:
…Vornado has a portfolio of great assets, principally in two great cities. Vornado is one of the largest owners in Manhattan and the largest owner by far in Washington. This diversification benefits us enormously. We benefit from Washington’s stability and measured growth, and the fact that investors always value assets in our nation’s capital at a premium. In most years we benefit from the increasing rents and real estate values in New York, our nation’s financial capital. And, let’s not forget our Manhattan street retail.
…It sounds trite, but buy low still works. A good friend of mine and Mike’s, who runs a large real estate opportunity fund, years ago made an observation which I still remember. He said they analyzed every deal in every cycle and concluded that everything bought in the first half of a business cycle was profitable to super-profitable, while everything bought in the second half was a struggle or worse. Well, the buying half of the cycle is now on the horizon. But first, we must batten down the hatches and make sure our house is in order and is strong – we’ve already done that. Then, we must determine when systemic risk has passed – not quite yet.
…The Great Recession has momentum and has taken an enormous financial toll on our economy and all of us. An enormous adjustment of values has already occurred. The price of everything has been rolled back ten years and price does matter – a lot. I recently was quoted for a remark that I made at an industry conference… “a bottom will not be made until asset values are stupid, stupid, stupid cheap.” This is a necessary, but not a sufficient condition, and I think we are now on the third and last stupid. For example, New York is on sale – commercial rents, residential rents and co-ops are at bargain prices. For example, builders around the country can now deliver for, say, $200,000 a home that would have cost double two years ago, and, with a 4.9% Fannie Mae conforming mortgage, new home construction around America will shortly begin again(7). It sounds like a stretch, but even General Motors when reorganized, will be able to offer lower-cost automobiles, and they will sell. And, for another example, (and pardon the self-serving nature of this comment) blue chip REIT stocks are now on sale. [emphasis ours]
Read the whole letter here.