Warden Capital's Hawkins Entrekin on $VNO and debunking New York City commercial real estate market (podcast #179)

Hawkins Entrekin, Founder and Managing Principal of Warden Capital, discusses his thesis on Vornado (VNO), a fully-integrated equity real estate investment trust. The conversation begins with an overview on the New York City real estate market in general and transitions to better understand, why, for Hawkins, he picked $VNO over other New York office-focused REITs.

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Transcript begins below

Andrew Walker: All right. Hello and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could follow, rate, subscribe, and review it wherever you're watching or listening to it. With me today, I'm happy to have my friend, Hawkins Entrekin. Hawkins, how's it going?

Hawkins Entrekin: Good. How are you doing?

Andrew: I should have said Hawkins is the founder of Warden Capital. I'm doing great, man. It's great to have you on. I didn't see you this weekend, which was disappointing.

Hawkins: Yeah, I know.

Andrew: But before you started, let me just start the show the way I do every podcast, and that's with a quick disclaimer. Remind everyone that nothing on this podcast is investing advice. Neither of us are financial advisors. Please do your own work. Consult a financial advisor, whatever you need to do. Hawkins, Warden Capital is a real estate-focused fund. I know you guys blend between private and public. So we're having you on because you did a rather long three-part series on Vornado. The ticker there is VNO. So I'll just toss it over to you. What is Vornado and why are they so interesting right now?

Hawkins: Yeah. So Vornado is a REIT that is focused primarily on New York office space, but they also own a bunch of different things. And the second largest component of the portfolio is New York high street retail, really top in stuff like Times Square and Fifth Ave. And they own a building in Chicago and a couple of buildings in San Francisco. So the majority of their value is right here in New York and really in Manhattan. So it's a very kind of high-end class A, or typically historically regarded as before office has been in the toilet, regards one of the sorts of the higher end, more premier REITs in the world.

Andrew: And I should have mentioned at the start, I'll include a link to all the Vornado notes in the show, all your Vornado pieces in the show link so people can go and follow those. I guess the question is, look, everybody, every day, just high level, people wake up and they say commercial real estate's a disaster, right? People in the past three months, there were hotels in San Francisco. Some people turned the keys over to their Brookfield and walked away from a couple of office hours in downtown LA. And obviously, every place is different, but you'll see headlines all the time of working from home forever. I think that's starting to end, but work from home, all these empty office towers, all this sort of stuff. When people hear Vornado or any of the office towers, people just vomit in their mouths a little bit and they say, hey, these things are dead and even if you don't believe people are going to work from home forever, the headwinds are just so negative on these things. I think that would just be the first question for anybody because obviously, your piece on Vornado was very bullish. I think that would just be the first question. When people hear all this and see all this negativity, what are they missing? Why are they wrong?

Hawkins: Well, I think that if you look at the actual details, it's really just not as bad as all the headlines would have you believe. I think the big thing, [inaudible] there's sort of just a downturn in demand, which we're having a bit recently, and you've had it from COVID as well. And then, the bigger piece is obviously work from home as it relates to the office. And that's sort of the new and unique thing. I think that people are having a really hard time getting their hands around that or their arms around that. I mean, the other part is commercial, but generally, and the office is suffering from this as well, is the rise in interest rates. And I think that, yeah, there are issues, Parkgate, [inaudible], and hotels, and SF. I think SF is frankly a bit of a uniquely challenged market. But I mean, it's really not that bad. Real estate is a very cyclical market. People always get very negative at the bottom. And it's just nothing that I'm seeing out there is any worse than we've seen before anywhere else. I mean, I think SF, you could argue, is perhaps uniquely challenged. But most markets, most asset classes, even offices, are really in terms of demand destruction, and cap rate increases, and such.

This has all been seen before. It's nothing that's absolutely crazy. And prices have become, in my opinion, way overblown. I think the market, a little bit, is really pricing real estate in general like bonds. Just interest rates are up, prices go down. It's all these, I guess, I think, financial people who have never actually owned any real estate in their lives, I think they kind of forget that real estate is a commodity that you can produce, right? And so, it's governed, ultimately, the long-term prices are governed by the forces of supply and demand. And so, the value equation is income and cap rates, you're multiple, you're paying. And so, yes, the multiple can and will change as interest rates vary. But people forget that really what your values are anchored to long-term is the cost to build a new building. So long as there's sufficient demand to build new buildings.

And in certain, Detroit, for example, there are markets and asset classes, Midwest office for the last 25 years, there's barely been demand to build new buildings. So, it's not demand, the whole thing kind of falls apart. But as long as there's sufficient demand, right? it's just simple math. If your cap rate is higher, your incomes have to go up and that can take a lot longer to adjust than interest rates rising. I mean, admittedly, this is the fastest increase we ever had, right? So, it's a bit of a unique experience, but it plays out over several years. And you see it even like, for example, multifamily, right? Cap rates are up from four to five and values are not down nearly as much in the private market because a lot of that, at least in the stronger markets has been offset by growth in income. Multifamily is a very clean one because rates reset every year. It's had good demand growth. And so, I think people
overlook that. They kind of forget that that's the case. And so, over a three to five-year view, if you're as an investor, if you're looking out over a little longer term, you're going to see if rates stay as high as they are, you're going to see really strong income growth across commercial real estate as a whole to close these gaps. A lot of asset classes are trading below replacement costs. And replacement costs, by the way, we had this lovely bout of inflation, call it, what do you want to call it? 20%-30%. So, congestion costs are up 20%-30% across asset classes. And in certain markets and asset classes, it's up way more. Big warehouses are up like 100% since pre-COVID. It's absolutely crazy. I don't see that changing that much. I think it might come down a little bit. I mean, as a developer, I hope it does go down somewhat. I'm building some projects soon. But I'm not seeing really that much weakness in these costs. And so, that's the true anchor. And everyone, I think, kind of forgets that.

Andrew: A lot of places I want to go to. And right now, we're just talking, I guess, this is general office trends, not Vornado specific, right?

Hawkins: Yeah.

Andrew: But I do think it is kind of a case where, hey, if you get the, you need to get the directional bet correct. And then, there is a kind of security-specific selection that can be made. But let me just stay on that. So, you made the point, hey, as long as the demand kind of doesn't fall off a cliff, your replacement cost is going to be anchored in the long term. And you gave one example where the demand fell off a cliff, right? Detroit and kind of the 90s to the 2010s, where just every company is fleeing. And it's just a disaster. I guess people might be looking at New York right now. And the reason New York's been such a great market is, hey, if you want to have a New York office building, there's only, what is it? How big is the island? Like, I don't know, 20 square miles or whatever. I have no idea.

Hawkins: More than the DFW airport [inaudible].

Andrew: Yeah. On this Manhattan Island, there is a limited supply where you can build these buildings. And then, there are all sorts of zoning regulations. It's really hard to build a new building. But I guess the question people are wondering is, I remember back in November, Facebook leased an entire building in downtown Austin. And they just said, hey, we'll pay the lease. Like, we're a grade-A creditor. We'll pay this lease, but we're not going to move a single person in there, right? I do think people are worried a little bit about the scenario you laid out where, hey, New York is just all these office buildings that were built in the 2000s, the 2010s, and even before. Right now, New York is just massively oversupplied. And we can get into lease rules and everything, but basically, over the next five years, as all the leases that were signed in the 2010s kind of start to roll off, you're just going to see hundreds of empty floors of office buildings. And yeah, over a 50-year timeframe, those floors will probably get filled. But for the next 10 or 15 years, you're just in a massively oversupplied market. People are desperate for anyone to fill these things. And earnings are going way down, and you're going to have 10 years of oversupply. And eventually, someone will make money on it, but it's not going to be today's equity holders. It's going to be tomorrow's creditors if all that makes sense.

Hawkins: Yeah. No. I mean, sort of the fundamental piece to all this. I think just as a quick aside, I think at current prices, you can still make money even in these real downside scenarios. But I think for my NAV, to be correct, which is almost 3x the stock price, I think what you described, I need to be broadly correct about New York not being Detroit. Now, I still think there's a decent amount of upside in the current price, even in some of these worst-case scenarios, because the reality is Detroit, the value of real estate did not go to zero. There are still assets that have value. There are still investors. So I mean, even in these absolute worst-case historical precedence's, like things do not go to absolute zero. And Vernado is so cheap right now, I think it's hard to see it, even in a worst-case scenario, getting much cheaper. But to talk about this sort of broadly, right? This is why what you describe is actually why I like the New York office streets the best. Because New York, as you said, has these, historically, has been very high demand, hard to build buildings, all these kinds of things. And so, New York has a few different things going in its favor that almost no other market has. The first is that sort of the trend of, in terms of, I think, jobs that are vulnerable to work from home, and we haven't gotten to this yet, but I'm going to go there, is in my view, the jobs that are most vulnerable to work from home long term are things like big insurance companies or something, right? Sort of more, maybe more mechanical jobs, jobs that are less in-person interaction, less of the absolutely really high-skilled jobs.

And those jobs have been leaving Manhattan for 25 years, right? New York's expensive as hell a place to have real estate already. And so, those sorts of lower-value jobs have already, in large part, been removed, already, right? So what you have left are the kind of jobs that are, in my view, the least vulnerable to work from home because they're very relationship-driven, they're very high-value jobs, and their jobs are in-person interaction, I think, is more important than someone who's at a call center or is doing one sort of mechanical task. And we can go to more of them later because there's a really good study that came out earlier this year on this subject. But so, I think Manhattan has the job base that's probably going to be the most resistant to working from home in the first place. And then, the cost structure and the supply structure, right? So, the demand for other real estate in Manhattan is really good still, right? I think people who don't live here, who don't come here may have this idea as sort of New York being [inaudible] residential rents are, as I can [inaudible], painfully-

Andrew: I'm laughing because Alisha and I are looking for a new apartment, our lease is up at the end of August. And I can assure you, I was like, oh, maybe we're going to have a mini-recession, I can assure you the demand for residential real estate places has not gone down recently.

Hawkins: I'm looking too, and it's gone up so much. It's like up way now, up from pre-COVID. And demand is really good [inaudible] in reality, the vast majority of the space on this island is consumed by residential uses, right? And so, I think that you have two additional sorts of mitigants, aside from working from home just going to be the worst thing in the world, which we should discuss in more depth. But there are two additional mitigants that are unique to New York that other markets don't really have. The biggest one is conversions. I did a whole article on this, which I'd recommend people read. But New York has essentially, most markets have one or two old buildings that have been converted. But New York has by far and away the most historic conversions of office, residential, if any market, also hotels a little bit. And that is because I guess there's- I don't have to go too far into weeds here, but you can basically, as of right, convert a lot of buildings. Not you'd wish there were more, but a lot of buildings in most of the city, you basically can convert. And that's not true of most markets in the country. So the regulatory regime conversions is it could be a lot better, but it's still probably the best in the country.

Andrew: Not only is it not true in most of the country, but most of the country, you wouldn't even want to, right?

Hawkins: Yeah. [inaudible]

Andrew: I think of New Orleans, I'm like, hey, if you have a 20 or 30-story office tower in New York would have a lot of issues with the conversion. You detailed the floor plate issues, but if you have like a 30-story office tower in New Orleans, be like, we don't even need apartment buildings like this. Everybody lives in the suburbs.

Hawkins: Exactly. And the cost to convert to make a conversion work, you need really high land values because the cost of conversion is huge and you're not saving really that much. I mean, you save some, but really a lot of the cost of apartment buildings is putting in the individual, like, plumbing and fixtures in each unit that, sub-wiring in each floor. I mean, so it's a lot of stuff that you don't save on the conversion. What you save on is like land. And so, you know, land values in New York are driven by residential demand and that's just how it is, right? And that provides a floor for these values that you don't have in almost any other market because, and again, not every building can be converted, but a lot can and enough and there's a lot of issues, there's got to be vacant, you need tenants to leave, and there's a whole host of issues with conversions. But I'm not by any means saying that the whole market is going to convert, but if you get two or 3% of supply to convert, which has happened already in the past from in FIDI, this has already occurred right after the 90s recession in 9-11, and you literally a couple percent of supply convert already. So it's already happened in the past once. And if public market pricing proves to be anywhere close to correct in private, which I don't think it will, but if it did, you know, you'll see a whole host of conversions. And the city actually just passed a new incentive for conversions. I believe it's 8 million square feet, which is roughly 2% of the supply. So I think that incentive will get taken up. And I think you have a very clear path of 2% of supply being removed, which is an 18%, you know, availability market, in 12% of strong landlords market, I mean, that's a huge way going to a huge fraction of the path back to sort of a strong market. The other piece is this one's harder to underwrite and the conversions you saw historical precedents, there are programs, whatever. The other piece of this is harder to sort of ascribe value to, but induced demand. I mean, people, I think, underestimate this as a factor, but right, I mean, like, New York is so expensive. It's the most expensive office market in the country by a long shot. SF used to be, frankly, extremely expensive. But that was a sort of a quick up and maybe a quick down.

New York has historically been the most expensive place, but it's still really expensive. And most users of real estate in Manhattan are constrained in terms of what they would probably ideally consume and what they can afford to consume. And so as prices go down, people consume more space. And so that's going to offset. It's really hard to say, what is that worth? Right? And so, I wouldn't describe too much value to it but the reality is that that's going to be a decent piece of additional demand where if I mean, if prices and again, prices for sale, prices are 30%, which is sort of my base case, by the way, in the market's pricing in almost 60%, do you just consume the same amount of real estate and pay half the price? Or if you're a buyer, do you just buy maybe one and a half times as much real estate? And for the home, think about your home budget, right? In New York, if you could buy a house magically for half off, do you buy more houses or do you save the money, right? I think most people probably go somewhere in the middle. They save some money and they buy some more house. That's hard to underwrite. We've never really been there before. It may not even happen because your buyer prices fall a lot. But that's another sort of outlet of sort of, for the market that almost no other market really has.

I think New York has a lot of unique characteristics. And that's why I like the New York office rates the best. I think they have the least work-from-home risk. I think they have the best path toward removing additional supply and sort of a worst-case downturn scenario. I think conversions are going to be sort of could be the lifeline of the market. I don't think it gets that bad, but if it does, right, you have a very clear safety valve to blow off a ton of additional supply. [inaudible].

Andrew: I am just laughing and I'm going to go back because the joke went in my head and now, I just have to say it. When you said to get 50% more, if you're looking at the house, get 50% more, you probably go like somewhere in the middle. And I'm laughing because I live in a one-bedroom, one-bath in New York. And if I could get 50% more, but then cut it in the middle, what would 25% more of a one bedroom, one bath? Would it be like one bedroom, one bath with an extra sink or something? I'm not 100% sure. Let me ask one more thing on the New York specific thing. And this is something you and I've talked about offline before. I still have this nagging worry in the back of my head. And I'm sure a lot of people are going to have this. So I'll just have. We a lot of people left New York when COVID hit, right? And a lot of them have come back. A lot of new people have moved here as we talked about rental demand is through the roof and all this. But I still worry a little bit about the doom loop, right? And the doom loop for a city is, hey, especially a high services city like New York, our tax revenue goes down a little bit. So we have to cut services a little bit because of that. Because of that, our services go down a little bit. So it's a little bit less of an attractive place to go. Or maybe instead of cutting services, we raise taxes a little bit more. But basically, either service goes down or taxes go up. So more people move away. So services go down or taxes go up. So more people move away. And you have this little bit of a doom loop.

And I do hear that it's not as bad as people thought it was going to be in 2020, or 2021, right? That is unquestionable. But it's also when you hear and even Vornado has said, hey, nobody goes into the office on Fridays anymore, right? Well, that's one day out of the work week, right? That's 20% of the work week. If nobody's going into the office, that means nobody's using a lot of the services. Nobody's hitting the restaurants around the town to get lunches. It just means a lot lower business activity, which means a lot lower retail tax rolls, things for new businesses come in, and new restaurants come in. It means less tax. All this is just general stuff. And I worry that we haven't hit the bottom of the doom loop. We're just kind of starting it. And four years from now, you and I have this conversation. Say, oh, the subway is running 50% less. There are fewer restaurants. Oh, yeah, the city really starts to crumble because we have seen cities hit that type of doom loop before.

Hawkins: You have, right? I mean, you could argue most-

Andrew: New York in the 70s had it, right?

Hawkins: Most of America in the 70s, right? And New York had it worse than many cities, but I mean, really, yeah, suburbanization was a huge problem, right? So I would just say on the doom loop, there have been very few examples of cities that have doom looped outside of just the whole country from suburbanization in the 70s, right? I think Detroit, Cleveland. So it's not very common. And it's really not that I can see any actual significant concrete evidence of this occurring. I think you're looking at a bit of a decline in taxes.
And so, but it's not that much really from office property taxes. And New York has sort of uniquely versus many other cities this built-in sort of runway of property tax increases from the residential space because they have these rules where you can't increase the value of a tax more than a certain amount of time. And so, values have gone up so much in this city over the past 30 years, that like huge swaths of the city are taxed way below their value. And so, they increase the max percent every year. So you have like this really long kind of up ramp of increases that just sort of baked into the market. And look, I mean, I do think taxes, you could see them go up a little bit more, but there's just, people, New York is a unique place. There's no one else like it.
There's clearly a lot of demand to live here. And on the retail side from like we're from home and could you see a do move emerge on that front? You're not seeing it, right? I mean, retail is the best it's been in years because we had this big, we can go and sell some more too, but there was this big retail bust. And this is one of the reasons Vornado, I think, traded a big NAV discount pre-COVID in his huge retail portfolio. And this is a falling ninth and it's like, where the hell is this thing land? The ninth's fallen. Rents are now going up in most sub-markets. And leasing in retail, so much better than it was. I mean, just personally, I think you probably see this too, walking around. The retail street front life is way better today than it was pre-COVID. I mean, hell, I think there was a story in Bloomberg yesterday about Raising Cane's opened like an 8,000-square-foot, Times Square store. And he's saying, man, it's hard to find restaurant space in New York City. And it's like it's hard. There's a lot of competition for good restaurant space in New York City.

Andrews: I'm laughing because Hawkins, the next time we meet up for lunch or dinner, you know where we're going.

Hawkins: Raising Cane's. I love Raising Cane's. And so, it's like there's really good demand from retailers in the city. And I think in like Midtown, the Midtown lunch game, I mean, might there be a down leg in street retail rents, like in Midtown and in Fidei, where you're purely business and you have very little resi-demand? Yeah, maybe, right? Because those restaurants seem to be able to make the math work on basically four days a week now, as opposed to five. That's a big downturn in income. But there's a market mechanism there if that's a work. It's not only that big a deal, I think. I mean, it'll take a little while, but I think, landlords don't want their storefronts to be vacant. Most big retail office landlords, or most retail rather in Midtown are owned, by the guy who owns the office building on top. It's a very small portion of the value. And they view it almost as much as a community for the tenants, right? And so, they don't want to think of vacant. They'll strike deals to keep these people in there because you want to have good restaurants and good lunch options for your tenancy. So I think, maybe rents might not be done falling for Midtown first floor office, lunch oriented spaces. Maybe that declines a bit. But even then, I don't know. Do you know what I mean? It's like, you see there's still residential buildings in those neighborhoods. There are still people who are now, right? Going to these locations more on different dates. So it's not clear to me even still how down, how truly bad it is in those locations. But yeah, I don't have like financials for sweet greens like the Midtown location.

Andrew: Let's start transitioning. So I think we've covered a lot. And again, it's New York office space. There are endless amounts of every side to discuss, hundreds of thousands of podcast papers. Let's start transitioning more to why, Vornado specifically. So just to start, there are multiple New York-focused office buildings, right? So there's Vornado, SL Green. I think those are the two people would probably think about, but there are a few others, Empire State, ESRT, and a few others. Why Vornado over kind all the other ones, if you're bullish on the New York office?

Hawkins: Yeah, so I think Vornado and SL Green have the two highest-quality portfolios, right? I think if you are worried about work from home impacting the lower quality buildings more, which the data is a little mixed here, but it's sort of, I think it's something that's where does people, where do people draw the line? I'm talking about what's a class-A building. I think a lot of people include too many buildings in that category, but I do think that the highest quality building is going to do the best, I mean, the best example of this is Vanderbilt opens up in the middle of COVID, leases up at record high rents in like, just like that. It's right next to rent central, for those who don't know, SL Green's trophy assets. So I think clearly there are very good examples of demand at these ultra high end of the market.

So if you're worried about working from home, I think there is some risk there. So my view is, all right, I want to be in the highest-end area of the market. And frankly, they're trading it, also really big discounts to value. So I'm not sure you're really getting paid that much more for a lower-quality portfolio. So it's like, give me the good portfolio, right? I just don't see the appeal of it, I don't think the pricing differential is sufficient to go into the lower-quality deals. So I said, okay, so Vornado versus SL Green. Vornado's trading at more of a discount than SL Green. And Vornado has a bit more of an absolute apocalypse scenario, work from home, the safety valve in their retail portfolio is larger. So I think that gives you more downside protection. And then, the implied cap rate is a good bit higher on Vornado versus SL Green. Now, you could argue that's fair because I mean, a huge chunk of SL Green's EV is one that Vanderbilt and that's a pretty primo asset, but it's like, what is the value on that, right? I think it's a little hard to say. And so, I think I feel more comfortable being in Vornado for those reasons. Also, I think Vornado has, I do think the Penn district upside is real. And I like having exposure to that, which is sort of a secular trend,

X work from home, X New York in general, is sort of just a shift of demand amongst sub-markets within the city, right? That sort of can happen sort of regardless of the other things we've discussed. I think there are real legs to that as we've seen, it could have more legs, frankly, in the future. And so, I like having exposure to that upside of the long-term that is not necessarily at risk from some of these bigger macro questions, right? So I think it's got a couple of unique elements to it that to me make it the most attractive sort of cocktail amongst the options.

Andrew: I want to talk more, let me just manage real quick, because I do think it's worth mentioning. So is it Vernado or Vernado? I never know, I can't pronounce it.

Hawkins: No, I don't know either, I say it's Vornado.

Andrew: Do you know how it got the name?

Hawkins: I don't, because it's like a Vornado fan company, but the day [inaudible]

Andrew: Yes, that is it. Steve Roth and this will transition well into my next question if I remember correctly, and somebody can correct me if I'm wrong, but Vornado or Vernado, whatever it is, was a bankrupt shell company. And I believe he took it over after the fan company went bankrupt. And I believe he took it over for the tax assets. And that's how it...if I remember correctly.

Hawkins: Yeah, Vornado did go public, they took over a shell company, but I didn't realize it was the fan company, because it's like still around, right?

Andrew: I think I would put my confidence interval at like 95 to 98% that's all [inaudible].

Hawkins: [inaudible]

Andrew: But great transition. So I just do want to briefly touch on it. Steve Roth, he's a [inaudible] New York real estate, has a fantastic track record. And we might even touch on this in a bit. I remember back in like 2016, 2017, Vornado was at like, I don't know, 40-50, whatever. And people would be like, hey, we do this NAV math and we think you're worth a hundred. Why aren't you buying back shares? And you say, no, now's not the time. I think I can make more developing Penn Station, all this sort of stuff. And SL Green was actually buying back shares, hand over fist on the same math. And COVID happened, which might've changed everything, but Roth can't put it right. But I do just want to briefly touch on Steve Roth, how much credit or how much are you thinking about him when you're making this investment in Vornado? Or you can give some more background on him if you want.

Hawkins: No, I think as far as real estate management teams go, I think he and Vornado are definitely regarded sort of as being some of the higher quality and better ones. So I think it's a positive in general. I think you could argue that SL Green's approach of selling assets more and trying to close the NAV gap more actively, is the better strategy. I think, I sort of frankly lean towards preferring that a little bit, but it worked out okay for Vornado because things kept going down. COVID happened, which no one could have predicted, right? But they had a little more flexibility, I think, because of the strategy. So, I think people overstate and overestimate the value of management teams and the real estate business. I think if you're buying a company at NAV, it's hugely important. That's going to be the driver and the sector, right? It's the sector and the management team. Show me important driving your value going forward. But we're talking about buying these assets just so massively below the private market values, I think, of what they're worth and what they'll trade in a couple of years, that it's sort of like, it doesn't unless the guy's actively lighting money on fire. I don't think it makes a huge difference to the management team at this level of pricing.

I think, again, if we were talking about a higher price, I would ascribe more importance and weight to it because the vast majority of the returns of this investment are going to come from this gap narrowing and not on how much additional value Roth can create. Now, I think it's a nice bonus to have that I do think they have a good track record. I would trust them to do a relatively good job in terms of capital allocation. The one sort of thing I think I would critique is I would say they should look into doing maybe more third-party capital, JVs like what SL Green did for 245 Park. I think that's good, and, but in fairness, right, you could say they are doing that because their Park Avenue asset sale was Citadel means basically that, right? They're sort of bringing in Citadel as an LP and also an acre tenant. So I hope they're hearing that a little bit and they're moving. I think that's an argument they're moving towards this model, which is a good model of, raising third-party capital and having a bit more of a fee business and all this kind of stuff. But those are sort of very on the margin in terms of the returns, this investment,
but in general, my view of positive, they've got a great history. I mean, 220 CPS is like the best development deal of all time in New York's history, almost. I mean, it's probably not true, but it's, I mean, the returns were just ridiculous. And it's inspired a whole luxury super tower boom just on its own
because the math was so good. Everyone's like, holy shit, I can do it, what kind of unleveraged returns on this stuff? And of course, the demand pool was a little thinner than I think your average developer [inaudible] what's the population people able to pay, $15 million for an apartment? But anyways, they've done a lot of interesting things and that's not all been perfect, obviously, the Toys R Us investment, is not so hot, but by and large, you know, they've done a pretty good job, I think. And I view it as a positive more than a negative.

Andrew: We're going to start running short on time. I don't want to spend crazy amounts of time diving into this, but I do think one thing people look at is when I've talked to people about Vornado, and actually, a friend went on and was talking about this and I called him up to yell at him, are people just pull up the Bloomberg and they say, oh, Vornado, four billion of equity, nine billion of debt. So call it 13, 14, 15 billion, whatever of enterprise value. They say this is just a massively levered play on New York City real estate. And in some sense, yes, it is a levered play on New York City real estate, but a lot of this debt is non-recourse, right? The vast majority of this debt is not recourse on the specific buildings. People can go into your write-up to see a little bit more about that. But I want to dive into just one or two of the highest-value assets Vornado has. So people can just kind of start getting a frame of reference for, you know, I think people forget, hey, if the stock's 10 and it's got $100 of non-recourse debt with $105 of assets there, and then $15 of unencumbered assets, like, hey, you're downside, you don't have to worry like you've got plenty of options. So I want to go into some of the unencumbered assets that are the real needle movers here. And I think just to start the Penn District and the Farley building across the street from that,
I think that's where we have to start if you want to go there.

Hawkins: Yeah, definitely. I mean, I think, let me pull up some of my numbers here. So yeah, like, look, I mean, Farley is probably the easiest place to start. And that is, I think [inaudible] pulled up here.

Andrew: Can you just describe what that building is real quick for people who [inaudible]

Hawkins: Farley is a building right across the street. It is part of Penn Station, it's above Penn Station. It's a little hard to describe if you haven't been to it before, but it's adjacent to Madison Square Garden. It sits on top of Penn Station, a portion of Penn Station. Penn Station kind of stretches long under multiple buildings, really under MSG and under Farley. So it's right on top of Penn Station, which is, for those who don't know, one of the biggest, if not the biggest transit hub in the country. And they just renovated, and really, I mean, this is sort of a whole other can of worms is the Penn District history of that in general. But anyways, it sits on top of Penn Station and it's leased, they did a huge renovation of it, and they leased it to Facebook, I believe in 21, for a 15-year term, which they had a bunch of free rent on that. The rent just started to hit late last year, and there's still 20% that's about to hit, come later here. But they spent $1.1 billion on this. It's completely unlevered. They're getting a 6-2 yield on costs in this thing, and that's 15 years of a credit tenant. And Facebook, my understanding, this is like one of the buildings they actually want to occupy in New York. It's this one in the Instagram building over by Astor, which [inaudible] also owns.

And so, it's a huge amount of money, and it's credit tenancy, and you can argue what's that trade for, but I mean, it's hard to deny there's a ton of value there, and there's no debt on that. And then, the other two big...

Andrew: Let's just pause there, and I'm using your numbers from your write-up, but again, as you said, there's no debt on this, right? So it's all going to flow through to V&O Equity. V&O Equity does have some unsecured debt, but it's not crazy amounts when you compare it to their non-recourse debt. You've got a 5.25% cap rate on that. You say, hey, that would be worth about a billion dollars if I'm looking at that, which it would come out to like $5 per share in value. I think I'm kind of doing all that, just glancing at your write-up there. So again, the stock today is 18 per share, and you've kind of got, hey, $5 per share. And again, there is some unsecured debt at the Vernado holding level we'd have to deal with, but about $5 per share is just the Farley building, which has no recourse debt against it.

Hawkins: Yeah.

Andrew: Right.

Hawkins: Exactly. Yeah. I mean, at cost, it's 5.4 billion. I think it's definitely worth the cost at a minimum. I'd argue it's worth more than cost, but if you wanna be conservative, you can just use cost, right? It's 550 a share in cost.

Andrew: Yeah.

Hawkins: Yeah. That's a big boy. And then the other two really big dogs here are Penn 2 and Penn 1. So Penn 2 is, it was an existing building, but it's essentially a fully redeveloped building. They took it down to the shell, they're re-skinning it, building this huge podium, look at the pictures on my [inaudible] website, it looks really nice. It's getting close to being done, I think it'll finish up later this year. And this is a 1.8 million square foot building, which is just enormous. They're putting 750 into it, and a brand new building right on Penn Station, by my math, if you use the kind of 575 cap, it's probably on the incremental NOI, it's worth 1.7 billion, which I believe is actually a low sixes cap on the overall whole building, which I think is, historically a really good number for New York office cap rates. I mean, even pre-GFC, they were sub-five, which is maybe you could argue a little insane, but New York cap rates have been sub-5 % for like 20 years for prime office space, even when rates were much higher. Again, you could argue that the mid-2000s was a little frothy, but so I think that this building also, and they don't share details on how leased this is, unfortunately, so I don't have exact specifics on the leasing, but it's a brand new building right on top of Penn Station as well. And looking at one Vanderbilt, which is right up at Grand Central, which is a nicer transit hub admittedly, I mean, that leased up just so quickly after opening. So I think this is going to be a really nice asset when it completes, which is happening literally later this year. And so, this is easily like, I think 1.7 billion in value by itself. And again, there's no debt on this thing. We should mention there is a ground lease on Farley, but it's a flat rate for 100 years. So it's with the city. So I don't think it's [inaudible]

Andrew: They run that model out and discount it back after [inaudible].

Hawkins: Yeah, I don't think it changes that much. And in Penn 2, really nice asset. And then, its sister building is maybe the trickiest of the three to value. Penn 1, is even bigger, 2.5 million square feet here. They just did a redevelopment of this, but they didn't do any re-skinning. It's more of a lobby, lower level podium, amenity package rehab. But they didn't do any full building re-skin. They did it in Penn 2. And they're apparently seemingly directing most of their leasing activity here. And it's getting really good traction. Rents are $100 a foot now, apparently. Leases up from like $60 a foot before their renovations. They've massively increased rents here. But the tricky thing here is it's on a ground lease. And the ground lease resets every 25 years based on the fair market value of the asset. And they are right now in the middle of negotiations for what this new ground lease rent is going to be. Initially, they were predicting it was going to go up a lot. Now they're kind of saying, maybe it should go down. It's hard to say. I mean, so who knows where that's going to shake out? So I use a much higher cap rate on this to try and bake in a lot of conservatism because of the unknown element of that ground lease. But it's they're projecting a 13.2% incremental yield on cost, which is just really good. And even a really high cap rate, I use seven and a half caps here. It's a billion eight in value. Again, no debt. And this also sits directly on top of Penn Station.

So these three buildings which literally surround Penn Station or sit on top of in the case of Farley, this one also is on top of it. There's a direct entrance from Penn Station to all three of these buildings.

Andrew: Quickly on Penn Station, I mean, you and I both live in New York. I don't think the Penn Station area is our personal favorite, though. You go a block or two over, you and I both love K-Town. But, I do think people think Penn Station and they think, hey, it's not a great area. And I think it's true. It's probably not the best area in the world. But there is a lot, I would say, on kind of on the come for the Penn Station area. First, you've got these buildings as they fully lease off. That should kind of improve the neighborhood. But then if I remember correctly, in 26, there's going to be a connection from Grand Central to Penn Station that gets made or is it Grand...

Hawkins: The Metro North. So Penn right now serves the Jersey lines and LIR. LIR used to only go into Penn and recently got the Grand Central. They both have two of the three big suburbs, right? Penn only has Jersey as sort of a unique advantage. Grand Central only has northern Connecticut and Westchester. But in 3-4 years, they're going to extend the Metro North line, which is the northern New York, Connecticut line to Penn Station. So Penn will be the only place that has all three burbs as an access point. So it'll be superior. You could argue they're both maybe the same if you value Jersey and Connecticut the same, which I'm not going to go into that right now.

Andrew: You want to talk about people coming after the podcast. [inaudible].

Hawkins: Yeah. Exactly. Penn will have all three, right? And that's going to be if the best transit in the city, is the nicest area, historically no, it's gotten a lot better. The new Moynihan Hall train hall is really nice. And the new retailer doing it's really got a lot better. And there's a clear path [inaudible] improvement. You're going to have the additional train line coming. And there is money apparently appropriated for sort of phase two of this redevelopment, which is that there are two halves. The Moynihan is done. And it's probably arguably you could say this is good enough. And I'm not underwriting any upside from this, but I think it probably does happen. They're talking about doing sort of phase two of this, which is the eastern part of Penn Station or MSG. A bunch of our ideas are under consideration right now. But I think if something gets done, that could be 5-8 years that occurs. So sort of distant in the future. And it's not really worth, I think, dwelling on.

Andrew: [inaudible] want to talk upside. The Knicks have Jalen Brunson. We're looking at multiple years of playoffs coming. Let me go to something else you made. So Farley and Penn 1 and Penn 2, when we're talking about it and we came out to a lot of unencumbered value from these guys, right? Enough to cover all of Vornado's debt, all of Vornado's preferred, and start covering a decent chunk of the equity as well. I think people might just listen and they would hear. And you address part of this. You said, hey, New York office buildings have had five to six-ish caps for a really long time. But I think people would...

Hawkins: [inaudible]. Now, we're seeing maybe six cap assets [inaudible]

Andrew: Yeah. Sorry. It was well below for a while but I think people might say, hey, Hawkins is using a five-and-a-half percent cap, and Treasuries just last week broke 4%. Ten-year Treasuries broke 4%, right? So people might look at that and say, hey, you guys are using five and a half percent cap. Yeah. Okay, cool. When Treasuries were four or five in 2008, office buildings traded for four or five. But office buildings had a much more stable. There was none of this work-from-home. None of these COVID. None of this. Nobody works on Friday trends back in 2006. Now, you've got that, so are you guys being too aggressive on the cap rates? Can you point me to recent deals that show cap rates are around that level or all that sort of stuff? So how would you respond to that?

Hawkins: Yeah. I mean, this is a subject that we should probably talk about just unto itself. But I'll try to address it really quickly. First off, the best thing I've heard right now probably is the 245 Park comp, which is the first really class A building, I think, to trade. You could argue that it'll be able to trade as well but that's [inaudible]

Andrew: This is what it's called giving you a softball, right? When you got a comp that happened about two weeks ago. Just [inaudible] you that softball.

Hawkins: Yeah. I appreciate it. Hopefully, I can knock out the Park here. So 245 Park is an asset that SL Green owns basically foreclosed on [inaudible] position to take control of this thing. Not to go too far in the details here, but a Japanese buyer, an institutional buyer just picked this thing up literally like what, three weeks ago or something. It was announced three weeks ago. And it was just it was a great comp. Just anyway you look at it. And I think some of the details in terms of the cap rates are a little unclear, but the high-level stuff you can't miss. What is basically 1100$ a foot, a 10% discount to 17 prices, right? I mean, this is a really good number in terms of I'm looking at my base case. And he has basically a 30% discount to pre-code prices, right? So and this is above this. This deal was above my NAV fee asset, SL Green. So, I mean, it really nice comp. And there are a couple of things about this deal that are interesting. They get a little unique and you could argue reduce the price a bit. But I think it's at the margin. It's very small.

One, they're assuming in-place debt, which has a lower market interest rate. Also, we could pay today. It's a four to five, I think, interest rate with I think maybe five years of the term. I don't know exactly. That's worth a little bit, but it's not a ton. And then, they also in this, I think some people would point out as being sort of a negative. To me, it's a huge positive that they also bought a huge chunk, $500 million of the MES debt. This is the scuttlebutt below, right the equity they're buying. So not just putting in a small because the face deal was like $200 million because it's so levered, right? The actual cash outlay was $200 million at their share. But no, they're buying the MES debt for some slight discount. Again, it's a little unclear, but it's maybe $30 million, $50 million is what I'm hearing. So it's not a huge change in the overall scheme, the value. They're putting in hundreds of millions of dollars in this asset, right? The real money and they're going to invest more money into it to sort of rent the building and then lease it up.

And then, the question is what are they getting from the cap rate? I mean, the going in is like low floors just as it is. And then the stabilized cap rate that they're trying to get to. There are different estimates out there. It depends ultimately on what kind of market rents they can get. I think they're underwriting to a six-cap stabilized which means they think it's worth five or below. Is there or not? Or is it or is it not? Who knows? But that's what they're accepting on a value add deal. Other people, I think I've seen estimated it's more like a mid-fives stabilized cap. It just depends on how bullish you are in the rental rate assumptions. That's like, I don't think it really matters that much because, if they really are underwriting to a five, it's actually more bullish because that means they're paying a lower cap rate right the deal. So I'm assuming it's a six cap, which I think is more conservative in terms of their underwriting, again, not what actually happens. But either way, if they're running to a six, they think they sell for a five or lower. If they're underwriting to a five and a half, that means they think it's worth a four and a half, right? So that's a great comp right there, no matter how you slice it. And again, I'm sort of saying, all right, super class A Manhattan, maybe you stabilize a six, you sell it a five. I don't think it's a four or five. If it is, I mean, that's just great. But I'm not going to assume that.

Andrew: Well, two more questions, and then we can wrap this up. But the first question, I think the real we've mentioned one Vanderbilt, the really high-end stuff has really maintained its market. Hudson Yards is one everybody talks about, and Hudson Yards, I think it had the quote was the live work play, right? You can live there. You can work there and they've got everything you need there. Penn, nothing that Penn's doing has the live part of live work play as long as far as I know. But Penn, all the Penn stuff specifically would have the work in play. You can work. They're going to have a lot of amenities as we talked about. And I think Steve Ross said, hey, once these open up, that really improves everything around Penn Station, right? The new fixes, the eyesore, I think, was the quote. So I just want to ask, when you look at Penn and Farley and then we'll use this transition to some of the rest of the like, do you see this after it's done? Is this the super prime, the one Vandy, the Hudson Yards, like the stuff that gets really great cap rates? Is this class A but not quite class A plus? How do you kind of think about that?

Hawkins: Yeah, I mean, so my sort of base is underwriting is that it's sort of a step below the ultimate sort of top tier in terms of right, the rents they can get. I mean, I think they're getting a significant discount. Hudson Yards is a huge premium right now. I think 30% or higher in terms of the rents they're getting at Hudson Yards versus Penn. And I'm not underwriting that gap closing. So my sort of basis is these are really high-quality assets that are not going to quite get some overrides. But ultimately, in terms of demand and the way the market views these, I think they are going to be sort of trophy-level assets just because you're literally right on top of the biggest transit hub in New York City and arguably in America. And I think, like if that's not a trophy asset, I don't know what is, right? I mean, it is it's hard to define a trophy. It's a bit of a maybe overused term. But these sorts of ultra-prime new buildings right in transit hubs are they're irreplaceable. There are [inaudible] you can't make new ones. I think there is a potential upside scenario where not today, not tomorrow, not even probably in 3-4 years, but in like 7-8 years, I could see a world where people prefer Penn Station to Hudson Yards.

Personally, I don't like Hudson Yards. Hudson Yards sucks. Sorry, Hudson Yards developers, but transit access is terrible. Penn Station is just Hudson Yards transit, just 10 minute or 15-minute walk closer to the transit, right? And so, it just it just Hudson Yards is better transit, but it's grittier. If you can remove the grittiness, there's just no world in which Hudson Yards is better than Penn Station. If that goes away, Penn Station is a better version of Hudson Yards. And so, is that going away tomorrow? Yeah, I think so. But in 7-8 years, I mean, I think it would not be crazy if people think, oh, of course, like Penn Station is superior to Hudson Yards. Why would you leave this building 20 minutes, you know, walk to the west? People hate on Third Avenue, which is a little bit further east on the east side of Manhattan. Hudson Yards could be the third avenue of the west side in like 10 years. And that seems to happen. But it's it's not that close to transit. All we have is a seven, which is not that, it's a single subway line.

Andrew: Look, you want to talk about like we said, live, work, play. That's what everybody wants right now, right? Well, you want to talk play Madison Square Garden, the only concert and the only arena in all of Manhattan. It's right there next to Penn, right? So I do think there is a plaything. Last two questions. Actually, before I get there, we talked about we don't have time to talk about every building. Unfortunately, there are a lot of other buildings with value. I know you value the Mart at about 800 million. There are literally billions of dollars of New York City office and retail buildings that we didn't get to talk about that they have asked to. Again, people can go read the post on your sub stack, but just real quick, is there anything, any specific asset or upside that you pointed out you think we should just mention real quick?

Hawkins: Yeah, I think it's worth dwelling, you know, briefly on the Citadel 350 Park deal, which didn't get nearly as much press as this 425 sale, but I mean, in my view, is almost equally as important. This happened like six months ago. Now, it was before the deal was struck, before the last round of eventual increases, and before the banking crisis, right? So you could argue it's a little out of date in terms of the timing. So it's a little high but it's still essentially what this is Citadel has agreed to buy, you know, this site from Renato and Rudin [inaudible] for 1.2 billion, which is just significantly above my NAV fee asset, which is already, by the way, massively above the share price. There's a huge vote of confidence in these sorts of class-A assets.

And the slightly different thing here is that their plan is to build and the deal is a little more complicated. You should read about it. It's not worth going to exact specifics here, but essentially, right, they're buying it for this price. There are a couple of moving pieces there, but Vornado can put the option to congregate if they want to. So they can force a sale for you, too. Anyway, so the different thing is this is a development site. The plan is to build a new building. But this is great on two fronts. I mean, you're selling this deal essentially for well above my NAV. And it's a huge vote of confidence, not only in the investment sale market, the value of these buildings but also there's a leasing value to it, too, right? You have this office user, Citadel, one of the largest hedge funds in the world saying, hey, we want to buy. We're willing to pay literally top dollar for a new office building in New York City. And they're paying 700 bucks a foot to the buildable on the new proposed tower we're looking at doing. Citadel will take half of that building. Citadel is basically, hey, we want to lease a ton of New York office space. We also want to buy a ton of New York office space, which is just a great vote of confidence in the market at this absolute top-of-the-market, high-end price. So I think in my view, that's really was hugely bullish when that happened. And there was like basically nothing. No one reacted at all to that sale. But I think it's a great indicator. So that was worth people looking at [inaudible].

Andrew: Let's go to my last two questions. So the first is people who have followed this industry for a while. And I remember reading in 2018, SL Green's stock price was at like 80. And we kind of mentioned this earlier. And they would have slides in their deck that said, hey, the stock market values that is a 7% cap rate. We have all these private deals that point to a 4.5% cap rate that would value our stock at $150 per share. And we kind of talked about when we were saying and they bought back shares like crazy. Vornado kind of developed Penn. Vornado's kind of been proven right on that point. But I think people look at this and say for the past 15 years, if I've looked at an office read, I've been told private NAV is way above public NAV. And we're going to close the gap in some way, shape, or form here. And for the past 15 years, I've just gotten my head beaten in doing that. And obviously, COVID changed things. But SL Green was pitching the same thing back in 2021. And the stock's down like 66% since 2021. It's not like COVID was very well known in 2021. So what would you say to people who are just like, look, I've heard this pitch before, but it's just the market doesn't care. And I always seem to lose value here.

Hawkins: Yeah, no, totally fair. I think there are a couple of pieces of this. First, just more for some Renato, they both created discounts. Renato has always been a bit of a bigger discount. So the SL Green discount was not quite as much. But I think it's very, to me, relatively easily explainable. And I think the issues that caused this, I think, are now all sort of arguably going away. You argue one is not. But basically, the reason I think that these companies are trading at these big discounts pre-COVID, one is common to both of them, which is big development pipelines. These guys are very active developers. Most REITs are not. These companies have huge portions of their value. I think probably almost the highest, if not the highest, and among the highest of any REIT in development, spending, and work. And I have never understood this really, but Wall Street analysts historically, and REIT investors hate new development. And they never give it credit while it's under construction. Once it opens, usually the NOI hits, they start giving it credit, right? And the reason for that is essentially, new development adds to your debt and does not increase your income. In the case, for an office building in New York, that could be a three-year period. So it's a very long time before it hits. And Wall Street is so freaking impatient that the idea of having three years of FFO drag, God forbid, it's actually an increased investment long term. They hate it. And so, I think these companies don't get credit for these developments while they're in process. And when they're done, that often changes and closes. So as it relates to Vornado, the development pipeline is almost done. And they're going to probably continue developing after this. So I don't want to say that this is not going to happen, but it's going to be, I think, smaller moving forward. And certainly, probably not much office space until the market recovers. So there are three big development assets. Farley's done, and Penn 1 and 2 are almost done. So that's coming to an end soon. The NOI is starting to hit.

And you can't ignore that for too long, I think, once the NOI hits. And then the other piece, it would just sort of relates to development a little bit with Penn and Vornado, [inaudible]. Vornado has been talking about the Penn District for 25 years. They bought their assets in the late 90s. And-

Andrew: They are about to hit their first rent [inaudible] on the [inaudible]

Hawkins: Right. And so, it's easy to sort of, in 2018, when you're literally 20 years into this, and nothing's fucking happened, to be like, okay, whatever. You've been saying this for 20 years. But progress was being made very slowly. And a lot of it was tied to the redevelopment petition itself. And so, the Moynihan Train Hall itself just took like 30 years to happen. But it's finally done. I mean, literally 30 years from proposal to opening. I mean, absolutely insane, but it happened. It's done. And so that sort of long-term Penn District vision, that's no longer in the distant future. The buildings are opening, Farley's open, their rest are opening very soon. Moynihan's done. This redevelopment will basically be complete in 12 months. So that's all now here. And so that again, will hit your income today. I think again, the problem is where people back out these development numbers that don't produce any income, but they get basically no value. So the income will be coming very soon. The third piece, specific to Vornado, is their big New York retail portfolio. And this I think the market frankly was totally right in their skepticism of this. There was some NAV discount warranted because retail in 1819 was a falling knife. How is it going to go? It's difficult to underwrite that even for private market people. I think public market people are like, yeah, fuck it, I'm not going to think about that. I'm going to walk away. And so that was a very reasonable, I think, discount application by the market. But that's also done. That knife is done falling. Rents are starting to pick up in most markets. Now, Vornado has a couple of above market leases still in place that they're going to roll off. So there's still a little bit downward NOI [inaudible] there. But by and large, their retail NOI is not even going up. And by the way, the retail NOI is falling almost in half. So I mean, it went down a lot. So in fairness, it was reasonable to underwrite some level of discount there. But that's over. That's now going up. That income should be increasing by and large going forward. And so again, that issue is also essentially now in the process of being resolved.

So I think the three major things that [inaudible] this company in terms of NAV gap discount are all resolving right now. And that's sort of exogenous from this work from home stuff. And it's sort of almost it would be an interesting opportunity in general. We're talking about how Vornado probably would be trading NAV discount in a non-COVID world still today anyways, because the same shit that had been causing us to get a discount before COVID, it still hasn't hit quite yet. But we're 12 months away from all this stuff happening. And so, you have these nice catalysts in terms of all those issues being resolved.

Andrew: Last question here. So I generally don't look at or read a lot of sell side research, but I just I pull up Vornado and I don't know if I've got access to all the analysts who cover them, but just on my Bloomberg, it's got 13 analysts cover them, 6 sells, 5 holds, 2 buys. That's about as negative as a company with sell side coverage can get because sell side coverage famously hates to assign sell ratings to anything because then you don't get a business. And it is one thing for a Snapchat to have a bunch of sales on it, right? Like people can look at that business model and that is a highly divisive business model, right? Like, hey, is Facebook going to kill them? Is TikTok going to kill them? But for a company like this, where there are a lot of hard assets, right? And it's not just hard assets, hard assets that many of the sell side who are giving them sell ratings might literally be writing their sell reports on from those assets, right? And there's these hard assets. And I've told you a lot of my friends or people who've looked at this, they'll say, oh, hey, there's a lot of debt on it. And they didn't do enough work to know that it's non-recourse, right? But the sell side at least knows it's non-recourse. They can see these arguments. So I just want to ask you, and you went through a lot of the reasons why Wall Street and people generally won't like it. But to you, when you see this many sell sides sells on this, what is the thing that you think they are just kind of missing? Is it they're too short term in their focus? Like, hey, yes, big surprise, 2023 leasing is probably going to suck. And they're kind of missing, hey, by 2025, things are going to look a lot better. Are they not willing to do this like really a sign for some of [inaudible] Like what do you think is the one big thing that has people so negative on this?

Hawkins: I mean, no offense to our Wall Street listeners out there, but I generally don't ascribe a ton of value to a lot of these sell side analysts commentaries. I think that just a lot of times they just change their value to match whatever the hell the stock did, right?

Andrew: There's no doubt about it. Facebook has gone from, to use nice numbers, 300 to 100 to 300 in the course of 18 months. And I just laugh because there's one analyst who I get his emails. And when the stock was 300, he had a buy rating with a 350. Then it went to 200 and he had a buy rating at 250. It went to 100 and he had a buy rating at 150. It went back to 200, he had a buy at 250. And he just followed the stock price up and down the whole way. It was like, dude, you're just [inaudible]

Hawkins: I think there's a lot of that here. And I think there's a unique difficulty, right? An unknown of this work from home question, which we didn't really get into that much here. And I think I'm going to maybe do a separate post on that because [inaudible] there's a lot of discussion there. But that's uniquely a bit of a question mark. I think people still don't fully understand it. I think they're a little overestimating that given that we're three and a half years into that. I think it's a little more of a known now than an unknown at this point. I think 2 years ago, it was a lot more of an unknown where that would shake out. But I think that's a big part of it. I would say work from home and I think they're just moving their prices a large part to match what the market's done. And just generally, I think the more I talk to people and talk to people who are working in some of these hedge funds, they're like more pod shops. These people are so short term oriented, it boggles my mind as a private real estate investor, because from my background, it's like they're so focused on what the next quarter's earning is, next quarter's, next year's earnings, that it's like, are they going to beat or miss guidance for next quarter?

And I'm sort of like, I don't care. It's not that, and it is relevant to some degree if you miss again and again and again, that adds up. But I have a three to five year time frame. I look at these things. And so this like, just maniacal level of focus on these short term earnings, I think is very short sighted. I think it's a problem in general with Wall Street. I think it's something that is especially problematic here because yeah, we're not out of the woods. I don't think they're going to have a surge and beat earnings for the rest of this year. I think you still have additional [inaudible] tech layoffs, no one's hiring that much. I mean, there's some secular sort of demand issues that are here [inaudible] downturn in corporate demand, aside from work from home, there's a tech recession going on right now. Tech's a lot of rate of tendency. They're not hiring, they're not taking in new office space. And I think people reflecting, they're kind of reflecting that, right? They're like, they're almost saying, are they going to beat or miss earnings guidance? And they're just ignoring what NAV is, right? It's almost like a directional, how's it going to go with guidance and ignore the fact that there's this huge gap to NAV. I think that's a lot of the problem there [inaudible]

Andrew: I definitely hear you there, but I do think there is also something that can be very focused on short-term. I think there is also something where they're saying, hey, I understand you're running math and saying NAV is 50, right? But what they're saying is estimates are coming down. And I did this earlier. If you look at Vornado's 2019 10K, only 30% of the leases from 2019 have expired up to today, right? So 70% of the leases that Vornado has currently, and this is ignoring some of the new buildings, but 70% of the leases are from things struck pre-COVID. So I think what they're saying is guidance is too high, everything comes down. And then when you run a cap rate on everything where everything's coming down and everything's deteriorating because the environment is deteriorating, but no, I get you. The big difference to me is 18 months ago, you were assigning a lot of value to the non-Penn, non-trophy buildings, right? Because that's how the math kind of works. Today at $18 per share, you're really just valuing, as you said, these big trophy assets that have very positive trajectories and they're not fully locked in, right? Because they do need to fully, especially the Penn buildings, they do need to fully lease them up. But these are big assets that are very much where the world has headed and they do have a lot of other positive trends inside of them. And you're kind of only underwriting that and everything else is gravy.

Hawkins: Exactly. I think, again, I think the income will probably go down a little bit. I mean, well, there's offsets to these buildings opening up, but just like same store income, right? Well, I think it probably will decline a bit. And how much does it decline? I think if you assume, I did this in my first post, right? If work from home is sort of, if we're halfway through the impact of that, which I think is conservative, if you're three and a half years in and you haven't figured out what you're doing, what's going on, right? If a company is fully remote, that space is on the sub-lease market and it is reflected in the vacancy and reflected in the current issues you're seeing, right? But if you assume we're only halfway there and somehow half of these users have not made a decision on what color to do with their space, you might see another like 8%-10% decline in NOI. That's not great. But you're still getting a really good price, right? Even if you mark those values down, it's still just so cheap today that I think it's hard to sort of rationalize any sort of real downside from current prices at, even sort of these worst case work from home scenarios.

Andrew: Perfect. Cool. Well, I think we're running a little long. Hawkins, I really appreciate this. [inaudible]...

Hawkins: Thank you for having me. Appreciate it.

Andrew: ...having you back on for, we'll talk SL Green. We'll talk, what is it? There's [inaudible] out there. We'll do Empire State. We're just going to do a rolling New York office.

Hawkins: [inaudible]

Andrew: Go ahead.

Hawkins: [inaudible] too. It's interesting. It's a whole different like [inaudible]. They're much more work from home [inaudible], but they're really cheap. Anyways.

Andrew: Well, this was great. Again, I'll include a link to Hawkins sub stack so people can see the full write-ups on Vornado and [inaudible] any questions they want there. But Hawkins, really appreciate you having on. Looking forward to next time.

Hawkins: [inaudible]. Appreciate it. Thanks. Bye-bye.

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