Alexander’s: A Lot Of Risks For A Small Discount (NYSE:ALX)

Alexander’s, Inc. (NYSE:ALX), founded in 1928 and headquartered in Paramus, NJ, is a REIT that owns, (re)develops, leases, and manages 5 retail properties in New York City through its manager, Vornado Realty Trust (VNO).

The REIT’s operating performance is concerning and there are many risks here, with a potential dividend cut being the most important one for those interested in the yield. At the same time, it’s not trading as low as I’d expect which makes it a no-go for value investors.

Portfolio & Performance

As of September 30, 2023, Alexander’s owned 5 retail (and to a lesser degree office and residential) properties, aggregating 2,455,000 sqft, located in the greater New York City metropolitan area. More specifically, the properties are:

• a 1,079,000 sqft multi-use building on 731 Lexington Avenue (939,000 sqft of retail and 140,000 sqft of office)
• Rego Park I, a 338,000 sqft shopping center in Queens
• Rego Park II, a 615,000 sqft shopping center in Queens
• The Alexander apartment tower, consisting of 312 units and aggregating 255,000 sqft (located above the Rego Park II shopping center)
• Flushing, a 167,000 sqft building in Queens used by New World Mall

All of the office space on 731 Lexington Avenue is occupied by Bloomberg, which, based on its contributing to more than half of Alexander’s rental revenue in the last 3 years, is a highly significant tenant.

Moving on to results, in the third quarter of 2023, the retail and office properties were 87.3% occupied, while the residential space had a 93.6% occupancy rate. These rates are both low for the respective averages you can observe when it comes to commercial and residential REITs these days.

The long-term historical performance also appears to signify an issue, with revenue and FFO oscillating up and down, only to depict no significant growth in the last 10 years:

More recent results signify the issue even more clearly as rental revenue depicts minimal improvement and forward FFO seems to continue its trend. Below, I compare the average annual figures from the last 3 fiscal years with the latest reported quarterly figures annualized:

Click to enlarge

Not surprisingly, the market seems to have responded to the deteriorating performance with an ever-decreasing stock price:

Leverage & Liquidity

However, the solvency profile doesn’t seem to be problematic. While the REIT has been operating at a high leverage level for a long time, all of its mortgages are non-recourse and its liquidity is very strong. Its debt/assets ratio last sat at 77.41%, but its debt/EBITDA ratio and interest coverage were at 5.9x and 4.5x, respectively.

However, even though the debt has a weighted average interest rate of 4.48%, this could increase in the short term. A $500 million mortgage (about 45% of the long-term debt) is coming due on June 11, 2024 and there is no extension option remaining. While the interest rate on it has been reported at 6%, I don’t believe it’s unlikely for the company to refinance at a higher rate.

Moreover, another mortgage of $300 million is coming due on December 12, 2025, which has a 1.76% interest rate; it is highly unlikely that the REIT is going to refinance at such a low rate unless they get access to a swap. On December 12, 2025, there is another ~$200 million mortgage maturing, currently at a 5.6% interest rate. So, about $500 million matures in 2025 as well, with the rest ~$100 million coming due on November 1, 2027.

Dividend & Valuation

Right now, Alexander’s pays a quarterly dividend of $4.5 per share which suggests a 7.83% forward yield. While this may be attractive, I am not convinced it’s sustainable.

On the one hand, the REIT hasn’t cut or suspended it once for a long time:

On the other, the payout ratio based on FFO is 123.41%. And as you saw, operating cash flow has been drying up.

Valuation doesn’t help its case either. With an implied cap rate of 6.64%, only a little above the average of 6.26% for retail properties forecast for this year, the discount to NAV is not large enough (8.44%) with all the risks present.

Risks

First, there is a concentration risk here. With only 5 properties in one city, this REIT simply can’t compare to the hedging qualities of other retail REITs that own assets in multiple states and are, therefore, better equipped to handle risks arising from market-specific changes in population growth and unemployment rates, as well as supply/demand dynamics that affect rent price volatility.

There is also a risk related to Bloomberg being such a significant tenant. If that company were to stop doing business with Alexander’s, the REIT’s revenue generation would be decreased by almost half.

The maturities present yet another risk to its profitability as they are not that well-laddered and refinancing could result in a higher cost of debt that can further pressure cash flow.

As for the dividend, though the payment record inspires confidence, the high payout ratio and decreasing FFO don’t. Therefore, a dividend cut or even suspension might be on the table.

Verdict

All in all, I think it would take a much steeper discount to NAV to make me rethink my hold rating here. I prefer REITs that are better diversified, have exhibited growth in the recent past, carry fewer risks, and are offered at a greater margin of safety based on conservative assumptions. ALX is not a good candidate for a dividend or a value portfolio in my view.

What are your thoughts? Feel free to let me know below and I’ll get back to you soon. Thank you for reading.