Alexander’s: Hold On To This 8.8% Yield From New York City (NYSE:ALX)

Alexander’s (NYSE:ALX) has maintained its dividend through the chaos of the last few years, recently declaring a quarterly cash dividend of $4.50 per share for an 8.8% dividend yield. This yield sits significantly above ALX’s 5-year average yield of 4.83% with the New York City-focused REIT currently trading hands for 13.22x its fiscal 2023 FFO of $81.1 million, around $15.89 per share. This is above its peer group median by roughly 9% with ALX returning a remarkable 23% on a total return basis over the last 1 year. The REIT, externally managed by Vornado Realty Trust (VNO), is highly concentrated with just five mixed office and retail properties. The significant dividend yield is the prize for investors here. ALX has kept its distributions stable through the chaotic years of the pandemic and the subsequent disruption wrought by the Fed’s ongoing fight with inflation that remains sticky.

ALX currently does not cover its dividend with coverage at 88% against its full-year 2023 FFO of $15.80 per share. However, the fourth quarter FFO of $25.6 million, around $4.99 per share covered the recent dividend by 111% while growing by 96 cents from ALX’s year-ago comp. The REIT’s balance sheet has incredible depth with cash and cash equivalents of $532 million at the end of its recent fourth quarter. This was up $24 million sequentially with another $21.12 million in restricted cash available. ALX at its $1.08 billion market cap holds 51% of this as cash, limiting the risk of a dividend cut. This is not an acquisitory REIT and its annual dividend payment of $92.3 million is 5.8x covered by its cash position.

Maturing Debt, Lease Expirations, And FFO

ALX’s most important asset is the 731 Lexington Avenue office in Midtown Manhattan. The building is 100% leased to Bloomberg as their global headquarters with its 939,000 square feet in service leased at a weighted average escalated rent of $135.44 per square foot. It also forms 38.2% of ALX’s total portfolio square feet of 2,455,000 and is not set for expiration until 2029. ALX pays VNO an annual management fee of $2.8 million plus 2% of gross revenue from its Rego Park II shopping center and $0.50 per square foot of the occupied office and retail space at 731 Lexington Avenue. There is another $365,000 fee paid for VNO to manage the common area of 731 Lexington Avenue that comes with a 3% per year escalator. The REIT paid $8.92 million in total operating and management fees to VNO during its fiscal 2023, roughly 3.96% of total revenue of $225 million for the year.

ALX has $500 million in debt tied to its 731 Lexington office property coming up for repayment in less than two months on June 11, 2024. This currently bears interest at a rate of 6.00% per year. There is another $502 million in debt coming due in 2025 with ALX now faced with a material increase in interest expense. Its 731 Lexington retail condominium debt bears interest at a rate swapped to a fixed rate of 1.76% through May 2025. Hence, ALX is set to see its FFO materially pressured with the current dividend coverage against its full-year 2023 FFO likely set to worsen. The REIT’s cash from operations has remained stable over the last few years due to the REIT using interest rate swaps and caps to manage its interest exposure. Cash from operations during the fourth quarter at $44.7 million was high and in line with pre-pandemic figures with occupancy remaining strong.

Fighting The Fed

The ball is in the court of the Fed for ALX’s next catalyst with sticky inflation figures since the start of the year tempering expectations for at least three base rate cuts of 75 basis points through 2024. The CME FedWatch Tool is now pricing in just one rate cut as the most likely probability through 2024. The chances of rates staying the same at 15.8% is up from 0.5% just 1 month ago.

Do I think ALX is a buy at its current price? No, with uncertainty around the terms of the REIT’s refinancing or extension of the $500 million 731 Lexington Avenue office debt. However, the property’s 100% occupancy rate and long-term lease to Bloomberg as their global headquarters in addition to ALX’s material cash position has significantly derisked the overall picture. REIT investors are currently deploying capital against some of the worst conditions for investing since the 2008 financial crisis. ALX is a highly concentrated play with its dependence on just a few properties for its FFO rendering it a fundamentally higher-risk investment. I’m keeping my rating on the REIT as a hold.