Yet Another Value Podcast - Warden Capital's Hawkins Entrekin on $VNO and debunking New York City commercial real estate market

Episode Date: July 13, 2023

Hawkins Entrekin, Founder and Managing Principal of Warden Capital, joins Yet Another Value Podcast today to discuss his thesis on Vornado Realty Trust (NYSE: 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. For more information about Warden Capital, please visit: https://www.wardencapital.com/ You can Follow Hawkins Entrekin on Twitter @,HawkinsEntrekin here: https://twitter.com/HawkinsEntrekin $VNO on Hawkins' substack: https://warcap.substack.com/p/on-vornado-nyc-office-market-part Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:31] What is Vornado $VNO and why are they interesting [2:32] Are the Commercial Real Estate headlines are wrong? [8:25] Oversupply of office buildings in New York City [19:18] New York City real estate "doom loop" [25:09] Why $VNO over other New York office-focused REITs [29:02] $VNO management team - thoughts on Steve Roth [33:01] $VNO real estate portfolio [41:02] Penn Station area[43:17] $VNO cap rates [48:17] Cap rates on Farley and Penn Station after amenities added [52:03] Citadel 350 Park deal [54:39] $VNO valuation [1:01:55] Sell-side coverage [1:06:09] $VNO final thoughts Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, would mean a lot. If you could follow, rate, subscribe, review it, wherever you're watching or listening to it. With me today, I'm happy to have on, my friend, Hawkins Entrykins. Hawkins, how's it going?

Good. How are you doing? Oh, 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. But before you started, let me just do, 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, consults financial advisor, whatever you need to do. Hawkins, Warden Capital is a real estate focus 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 Vernado. The ticker there is VNO. So I'll just toss it over to you. What is Vernado and why are they so interesting right now? Yeah.

So Vernado 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 complaint of the portfolio is New York high street retail, you know, really, really top in stuff like in Times Square and in Fifth Ave. And they own a building in Chicago and a couple of buildings in San Francisco. So that the majority of their value, right, is right here in New York and really in Manhattan. So it's a very, very kind of high-end class A, or typically historically regarded as before office has been, you know, in the toilet, But regardless, you know, one of the sort of the higher end, more premier reads in the world.

So, oh, and I should have mentioned at the start, I'll include a link to all the Vernado notes in the show, all your Vernado pieces in the show link so people can go and follow those. I guess the question is, like, everybody, every day, just high level, people wake up and they say commercial real estate to disaster, right? People's, in the past three months, there were the hotels in San Francisco. Some people turned the keys over to there. Brookfield walked away from a couple of office towers in downtown LA and obviously every place is different, but you'll see headlines all the time of work from home forever. I think that's started to end, but work from home, all these empty office towers, all of this sort of stuff. And I think when people hear Vernado or any of the office towers, people just like 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, like the headwinds are just so negative on these things. And I think that would just be the first question for anybody, because obviously your piece on Bernato was very bullish. I think that would just be the first question. Like when people hear all of this and see all this negativity, what are they missing? Why are they wrong? Well, I think that, you know, if you look at the actual details, right, it's really just not as bad as all the headlines would have you believe. I think the big thing, I mean, it's too much about this, right?

there's there's this sort of just a downturn in demand, which we're having it recently. You've had it from COVID as well. And then, you know, the bigger piece is obviously work from home as it relates to office. And that's sort of the new and unique thing. And I think that, you know, people are having a really hard time, you know, getting their hands around that or their arms around that, you know, I mean, the other part is commercially like generally in office is suffering from this as well, right, is the rise in interest rates. And I think that, you know, like, yeah, there are issues, you know, park get back to keys as hotels and SF.

I think SF is frankly a uniquely, a bit of uniquely challenged market. But, I mean, it's really not that bad. Realty, it's a very cyclical market. People always get very negative at the bottom. And it's just something, nothing that I'm seeing out there is any worse than we've seen before or anywhere else. I mean, I think SF, you could argue, is perhaps uniquely challenged. But most markets, most asset classes, even office, are really in terms of demand destruction and, you know, cap rate increases and such.

This has all been seen before, you know, it's nothing that's absolutely crazy. And prices have become, in my opinion, you know, way overblown. I think the market, saying like a little bit, is really pricing real estate in general like bonds, right? Just interest rates are up, prices goes down, right? It's all these, I guess, I think financial people who have never actually home. owned any real estate in their lives. I think they kind of forget that, you know, 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, right? And so, you know, the value equation is, you know, okay, you know, income and cap rates, you know, 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 you know in certain you know Detroit for example right there's markets and asset classes Midwest office for the last 25 years there's barely been demand to build new building so you know it's not it's not demand the whole thing kind of falls part but as long as there's sufficient demand right it's just simple math if you're if your

cap rate is higher your incomes have to go up and takes that can take a lot longer to adjust than then, you know, interest rates rising. I mean, admittedly, this is the fastest increase we ever had, right? So it's a bit of a unique experience, you know, but it plays out over several years. And you see it even like, for example, a multifamily, right? Like 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, you know, growth and income.

Multi-families are very cleanly because rates reset every year. It's had good demand growth. And so, you know, I think people overlook that. They kind of forget that that's the case. And so, you know, over a three to five year, you know, view, you know, if you're as an investor, if you're looking out over a little longer term, you know, 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. Because a lot of asset classes are trading below replacement costs.

And replacement costs, by the way, we had this, you know, lovely bout of inflation, call it, you know, what do you want to call it 20, 30 percent? So construction costs are up 20, 30 percent across asset classes. And in certain markets and asset classes, you know, it's up way more warehouse. Big warehouses are up like 100% since pre-COVID. It's absolutely crazy. So, you know, I don't see that changing that much. I think it might come back, come down a little bit. I mean, as a developer, I hope it does go down somewhat. We're still going to building some projects soon. But, you know, I'm not saying really that much weakness in these costs. And so that, that's the true anchor. And everyone I think kind of forgets that. So a lot of places I want to go

And right now we're just talking, I guess this is general office trends, not Vernado specific, right? 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 like there is kind of security specific selection that can be made. But let me just say 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 anchor in long term. And you gave one example where the demand fell off the cliff, right?

Detroit and kind of the 90s through 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, you know, 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.

It's not more than the DFW airport. Yeah, so Manhattan Island, like, there is a limited supply where you can build these buildings, and then there's 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 think people are worried. I do think people are worried a little bit about your scenario you laid out where, hey, New York is just all these office buildings that were built in the 2000s, the 2010s, even before. Right now, New York is just massively oversupplied. And as all, and we can get into lease rolls and everything, but, But basically, over the next five years, is all the leases that were signed in the 2010s kind of start to roll off. You're just going to see, you know, hundreds of empty floors of office buildings.

And yeah, over a 50-year time frame, 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 kind of, you know, 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 like tomorrow's, tomorrow's creditors, if all that makes sense. Yeah, yeah, no, no. I mean, I agree.

This is sort of the fundamental piece to all this. I think just as a quick aside, I think at current prices, you could still make money even in these really, really downside scenarios. So I think, you know, but for my NAV to be correct, which is like, you know, almost 3x, the stock price, you know, I think what you describe, right, I need to be broadly correct about, you know, New York not being Detroit. Now, I still think there's a decent amount upside in the current price. even in sort of some of these worst-case scenarios, because the reality is, right, Detroit, the value of real estate did not go to zero, right? There's still assets that have value. They're still investors.

So, I mean, even in these sort of absolute worst-case historical precedences, like, things do not go to absolute zero. And Vervino's so cheap right now that 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 you why I like the New York office streets the best because New York, as you said, has these, you know, historically has been very, very, you know, high demand, hard to build buildings, you know, all these kind of things. And so New York has a few different things going in its favor

that almost no other market has, right? The first is that sort of the trend of, you know, in terms of, I think, you know, jobs that are vulnerable to work. from home and we haven't got into this yet about i'm going to go there is uh like in my view that the jobs that are most vulnerable to work from home long term are you know things like like a big insurance company or something right they sort of more maybe wrote more mechanical jobs jobs jobs are less um there's less in person interaction you know less of the absolutely really high skilled jobs and you know those jobs have been leaving manhattan for 25 years right like that new york's expensive as hell place to have real estate already and so

So, you know, those sort of lower value jobs have already, in large part, been removed, right? Already. 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, you know, jobs and their jobs, or interpersonal interaction, I think, is more important than, you know, someone who's at a call center or, you know, is doing, they had sort of one sort of rope mechanical task. And we can go to more and a firm later because there's a really good study that came out earlier

this year on this subject. But so, you know, I think Manhattan has the job base. It's probably going to be the most resistant to tour from home in the first place. And then, you know, 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, is being dead. You know, residential rents are, as I can miss, painfully.

I'm laughing because Alicia and I are. looking for a new apartment or leases up at the end of August. And I can assure you, I was like, oh, maybe we're going to have a mini recession. Maybe I can assure you the demand for residential places has not gone down recently. I'm looking too. And like it's like it's, it's, it's gone up so much. It's like up way now up from pre-COVID. And and you know, it's demand is really, really good in the residential side. And the reality is is the vast majority of the space in this island is consumed by residential uses. Right. And so I think. that you have two additional sort of mitigants to, aside from, you know, is work from home

just going to be the worst thing in the real, which we should discuss more depth. But there's two additional mitigants that are unique to New York. Other markets don't really have. The biggest one is conversions. I did a whole article on this, Judge Regman people reading, but, you know, New York has essentially, you know, most markets have one or two old buildings that they convert. But New York has by far in a way the most historic, you know, conversions of office, residential. of any market, also hotel a little bit. And, you know, that is, because I guess there's not to go too far under weeds here, but you can basically, as of right, convert a lot of buildings, not you wish there was 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 by. Not only is it, it's not true in the most of the country, but most of the country, you wouldn't even want to, right? Like I think of New Orleans and I'm like, hey, if you have a 20-story office tower and a 20 or 30 story office tower in New York would have a lot of issues with

the conversion. You detailed the floor paid issues, but if you had like a 30 story office tower in New Orleans, be like, what the, like we don't even need apartment buildings like this. Everybody lives in the suburbs. 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, you know, plumbing and fixtures in each unit that, you know, 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 so, 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, but a lot can. And enough, and there's a lot of issues where you go, there's got to be vacant, need tenants to leave. And there's a whole host of issues with conversions, but I'm not, you know, by any means saying that the whole market is going convert but you know if you get two or three percent of supply to convert which has happened already in the past from in fidei 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 it's already happened in the past

once and if public market pricing you know proves to be anywhere close or correct in private which i don't think it will but if it did uh you know you'll see a whole host of conversions the city actually just passed a new incentive for conversions i believe it's eight million square feet, which is like roughly 2% of supply. So, you know, I think that would get taken up. And I think you have a very clear path of two percent of supply being removed, which in an 18 percent, you know, availability market, you know, and 12 percent is a strong landlord's market. I mean, that's a huge, you know, way going to a huge fraction of the path back to sort of a strong market. The other piece is, this one's harder under, right? And the conversions,

there's a lot of historical precedents, there's programs, you know, whatever. The other piece of this is, and 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 a much expensive market in the country by, you know, by a long shot. SF used to be, frankly, similarly expensive. But, you know, that was a sort of a quick up and maybe a quick down. New York has historically been a much expensive place. It's still a really expensive. And, you know, most users of real estate of Manhattan are constrained in terms of what they would probably ideally consume and, you know, 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 of eye to it, right? But the reality is, and that that's going to be a decent piece of additional demand where, you know, if, if, I mean, if prices, and again, you know, price is, and again, you know, price. for sale prices are down, you know, 30% of my base case, by the way. And the market's pricing in almost 60%. You know, do you just consume the same amount of real estate and pay, you know, half the price? Or if you're a buyer, do you just buy maybe one and a half times as much real estate, right? And for the home, thinking about your home budget, right, in New York,

if you could buy a house, right, magically for half off, do you buy more house or do you save the money, right? I think people, most people probably go somewhere in the middle. They save some money they buy some more house. So that's hard to underwrite this. We've never really been there before. It may not even happen because there are buyer prices to fall a lot. But that's another sort of outlet of sort of, you know, for the market that almost no other market really has. So I think New York has a lot of unique characteristics. And that's why I like the New York Office Street's the best. I think they have the least work from home risk. And I think they have the best path towards removing additional supply. In sort of a worst case, downturn scenario,

I think conversions are going to be, so it 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. The northern market is. 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, get 50% more, if you're looking at house, get 50% more, you probably go like somewhere in the middle.

And I'm laughing because, you know, 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, like, what would 25% more of a one-bedroom, one-bath fee? Would it be like one-bedroom, one bath with an extra sink or something? I'm not 100% sure. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide

competitive rates on expert call services, and you can even have an experienced byside analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. Let me ask one more thing on the New York specific thing. And this is something you and I've talked about offline before. It's just worry I have and like 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 do worry, there's like, 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 tax a little bit more. But basically either services go

down or taxes go up. So more people move away. So services go down and tax go up. So more people move away. And you have this little bit of a doom. loop. And I do hear, like, it's not as bad as people thought it was going to be in 2020, 2021, right? Like, that is unquestionable. But it's also when you hear, and even Vernetto has said, hey, Friday, like, 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. Like, it just means a lot lower business activity, which means a lot lower retail tax

roles, things for, you know, new businesses come in, new restaurants come in. It means less taxes. All this just general stuff. And I worry that we haven't hit this bottom of the doom loop. We're just kind of starting it. And four years from now, you and I have this conversation to say, oh, like the train runs, you know, 50% less. The subway's running 50% less. There's fewer restaurants. Oh, yeah. The city's like, it really starts to crumble because we have seen cities hit that type of doom loop before. You have, right? I mean, and I mean, you could argue. New York and the 70s had it, right? New York in the 70s. Most of America in the 70s, right? In New York, you know, had it worse than many cities. But I mean, really, yes, suburbanization was a huge

problem, right? So, you know, I would just say in the doom loop, there have been very few examples of cities that have doomed looped, you know, outside of just the whole country from suburbanization in the 70s, right? I think, you know, Detroit, you know, Cleveland. So it's not very common. And there's really not that I can see any actual significant concrete evidence of this occurring, I think, you know, you're looking at a bit of a decline in taxes. And so, you know, but it's not that much really from, from office, property taxes. And, you know, New York has sort of uniquely versus many other cities has this built-in sort of runway of property tax increase, increases from the residential space because they have these rules where you can't increase

the value of tax more than a certain amount, a certain amount of time. And so values have gone up so much in this city over the past 30 years, like huge swaths the city are, you know, taxed away below their value. And so they increase the max percent every year. So you have like this, this really long kind of up ramp of increases that just sort of baked in to the market. And, you know, look, I mean, I do think taxes, you could seem to go up a little more, but there's just, you know, people, New York is a unique place. There's nowhere else like it. There's clearly a lot of demand to live here. And, you know, on the retail side from like we're from home and, you know, could you see DUMOOP emerge on that front? You're not seeing it, right?

I mean, retail is is the best it's been in, in years because, you know, we had this big, we can go and it's also more too, but, you know, there was this big retail bust. And this is one the reasons Bernato, I think, you know, traded a big NAB discount, you know, pre-COVID. It has a huge retail portfolio. And this is a falling knife. And it's like, where the hell is, you know, where does this thing land? The knife's fallen. Rins are now going up in most submarkets. in leasing in retail so much better than was. I mean, just personally, I think you probably see this too, walking around. The retail streetfront life is way better today than it was pre-COVID.

I mean, and like, hell, I think there's a story in Bloomberg yesterday about raising canes open 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, you know, it's hard to, good, there's a lot of competition for good restaurant space in New York City. I'm laughing because Hawkins, the next time we need. up for lunch or dinner, you know, where we're going. I love raising can. I love raising cans.

And so it's like there's really good demand from retailers in the city. And I think in like Midtown, the Midtown lunch, you know, game, you know, yeah, I mean, might there be a downleg in retail, street retail rents, like in Midtown and in a Phi Dye 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 to work. It's not really that big a deal. I think it'll take a little while. But I think, you know, landlords don't want their storefronts to be vacant. Most big retail office landlords, or most retail, rather, in Midtown's owned, right, 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? So they don't want to think of a vacant. They'll strike deals to keep these people in there because you want to have good restaurants good lunch options to your tenancy. So I think, you know, 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. You know, I mean, it's like, you see, there's, there is still residential, there's still residential demand buildings in those neighborhoods. There's still people who are now, right, going to these locations more on different dates. So it's not clear to me even still how, you know, down, how truly bad. is in those locations, but yeah, I don't have like financials for, you know, sweet green is like

mid-town location. Let me, let's start transition. So I think we've covered a lot. And again, it's New York office space. Like there's endless amounts of every side to discuss hundreds of thousands of podcast papers, every, ever, let's start transitioning more to why Vernado specifically. So just to start, there are multiple New York focused office buildings, right? So there's Vernado, S.

S.L. Green, I think those are the two people would probably think about. but there are a few others, you know, Empire State Breed, ESRT, a few others. Why Vernado over kind of all the other ones if you're bullish on New York office? Yeah. So I think Vernado and it's also granted to do highest quality portfolios, right? I think if you are worried about, you know, work from home impacting, you know, the lower quality buildings more, which I, you know, the data is a little mixed here. But it's sort of, I think it's something that's, you know, where do people draw the line and type of what's a Class A building or not? I think a lot of people include too many buildings in that category.

But, you know, I do think that the highest quality building is going to do the best. You know, I mean, the best example of this is when Vanderbilt opens up in the middle of COVID, leases up at record high rents in like just like that. It's right on the screen central those who don't know. Sle Grane's trophy assets. So I think, you know, clearly there's very good examples of, you know, demand at these, you know, ultra high end of the market. So, you know, if you're worried about work from home, which I think, you know, there is some risk there. So my view is, all right, I want to be in the highest end area of the market. And, you know, and frankly, they're trading it, you know, also really big discounts to values.

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, I don't think the pricing differential is sufficient to go into the lower quality deals. So I say, okay, so Vernado versus Essel Green, you know, Vernado is trading at a more of a discount than SLE Green. and Vernado has a bit more of an absolute, you know, apocalypse scenario where from home safety valve and their retail portfolio is larger, so I think that gives you more downside protection. And then, you know, the implied cap rate is a good bit higher on Vernado versus Essela Green.

Now, you know, you could argue that's fair because, I mean, a huge chunk of Essela RV is one Vanderbilt, and that's a pretty primo asset. But it's like, you know, what is the value on that, right? And 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 Vernado has, you know, I do think the Penn district upside is real. And I like having exposure to that with sort of a secular trend, X work from home, X, you know, New York in general is sort of just a shift of demand amongst submarkets within the city, right? That sort of can happen regardless of other things we discussed.

And I think there's real legs to that as we've seen. I think it could have more legs, frankly, in the future. And so I like having exposure to that upside of the long term that, you know, 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. I want to talk more. Let me just management real quick because I do think it's worth mentioning.

So is it Vernado or Vernado? I never know. I can't pronounce anything. No, I just don't know either. I say Vorado. Do you know how it got the name? Uh, you know, I, I don't because there's like a Vernato fan company, but the day, that is it. If I remember correctly, 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, uh, Vernado, Renato, Renato, 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, uh, if I remember correctly. Yeah, no, Vernando did go publicly. They took over a shell company, but I was, I didn't realize it was the fan company because He's still around, right? I think I would put my confidence interval at like 95 to 98% that it's all going to happen. I'm not good.

Great transition. So I just do want to briefly touch on him. Steve Roth, he's a tight in New York real estate, has a fantastic track record. I've been, I remember, and this, we might even touch on this in a bit. I remember back in like 2016, 2017, Vernado 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 100. Why aren't you buying back shares?

And you say, no, now it's not the time. I think I can make more developing Penn Station, all this sort of stuff. And S.L. Green was actually buying back shares hand over fists on the same math. And, you know, COVID happened, which might have changed everything. But Roth can't put it right. But I just want to briefly touch on Steve Roth, like, how much credit or how much are you thinking about him when you're making this investment in Bernato? Or you can give some more background on him if you want.

No. I mean, so I think as far as, you know, real estate management teams go, I think he's, you know, he and Bernado are definitely regarded sort of as being some of the higher quality. and better ones. I think it's a positive in general. You know, I think you could argue that S.L. Green's approach of selling assets more trying to close the NAD gap more actively. Is that, is that, you know, the better strategy? And I think, you know, I sort of frankly lean towards preferring that a little bit. But, I mean, you know, it worked out okay for Renato because things kept going down and COVID happened, which no one could have predicted, right? But like, you know, they had a little more flexibility, I think, because of the strategy. So, you know, but like I think people over, you know, state and overestimate the value of, of, you know, 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, your value going forward. But we're talking about buying, you know, these assets just so massively below the private market values, I think, of, you know, what they're worth and we'll trade a couple years. that it's sort of like, it doesn't, unless the guys actually letting money on fire, you know, I don't think it makes a huge difference on the management team at this level of pricing. I think, again, you know, if we were talking about a higher price, I would describe more importance and weight to it because, you know, the vast majority of your returns

this investment are going to come from like this gap narrowing and not on how much additional value Roth can create. Now, I think for it's nice, it's a nice bonus to have that I do think, you know, they have a good track record. I would trust in them to do a relatively good job to the capital allocation. You know, the one, the one sort of thing I think I would critique is, yeah, I think I would say they should look into doing, you know, even more third party capital, you know, JVs, like what SL Green did for 245 Park. I think that's a good, and you know, but in fairness, right, you could say they are doing that

because they're, because they're Park Avenue asset sale with Citadel is basically that, right? They're sort of bringing in Citadel as an LP and also an anchor tenant. So I think, I hope they're hearing, you know, that a little bit and they're moving, I think that's an argument they're moving towards this model, which I think is a good model of, of, you know, raising their pretty capital and having their more of a fee business and all this kind of stuff. But those are sort of vary on the margin, I think, in terms of the returns, this investment. But, but in general, my view, a positive, you know, they've got a great history. I mean, 220 CPS is like the best development deal of all time in New York history almost.

I mean, it's probably not true. But it's like, it's, the returns were just ridiculous. us. And it inspired a whole like luxury super tower boom just on its own because the math was so good. Everyone's like, holy shit, I can do what kind of unleavened returns on this stuff? And it's, of course, the demand pool was a little thinner. And I think that your average developer took time to think about, you know, like what's the population people who will pay $50 million for an apartment. But anyways, you know, they've done a lot of ranching things. And that's not all been perfect. Obviously, Tours are us investment, 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 I it is. Let's, so, you know, I do, I don't want to spend, we're going to start running short in 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 Vernado and actually a friend, a friend went on and was talking about it this and I called him up to yell at him, is people just pull up the Bloomberg and they say, oh, Vernato, four billion, four billion of equity, nine billion of debt. So call it 13, 14, 15 billion, whatever of enterprise value. They say, oh, this is just a massively, 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 the 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 Fernando 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, you know, $100 of non-recourse debt with $105 of assets there, and then $15 of unincumbrance.

assets like hey you're downside you don't have to worry like you've got plenty of so i want to go into some of the unencumbered assets that are the real needle movies movers here and i think just to start the pen district and the the farley building across the street from that i think that's where we have to start if you want to go there yeah yeah no uh definitely i mean i think let me pull up some of my numbers here um so yeah i like look i mean farley is probably the the you know the easiest place to start and That is, I think that the old file pulled up here. Can you just describe what that building is real quick for people?

So Farley, Farley is, it's 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. Pintzation kind of stretches long under multiple buildings, really under MSG and under Farley. So it's right on top of Penn Station, which is, those who don't know, you know, one of the biggest

not the biggest transit hub in the country. And they just, they just renovated. And really, I mean, this is sort of a whole other can of worms, the appendage history of that in general. But anyways, it doesn't have Penn Station. And it's, it's the lease. 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 in that. So 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 cost in this thing.

And that's 15 years of credit tenant. And Facebook, by my understanding, this is like one of the buildings they actually want to occupy in New York. It's this one on the Instagram building over by Astor, which Furnito also owns. And so, you know, it's a huge amount of money. And it's credit, you know, credit tenancy. And you can argue what's that trade for. But, I mean, it's hard to deny this.

ton of value there and there's no debt on that. And then the other two big, which is 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 for when you compare it to their non-recourse set. 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 would come out to like, $5 per share in value. I think I'm kind of doing all that just glancing at your just glancing at your right up there. So again, the stock today is 18 per share and you've kind of got a $5 per share. And again, there is some 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 set against

it. Yeah. Yeah. Right. Exactly. Yeah. I mean, at cost, it's 5.4 billion. I think it's definitely worth cost at a minimum, you know, I'd argue it's worth more than cost, but if you want to be conservative, you can just use cost, right? It's 550 a share and cost. Yep. Yeah. So, yeah, so that's, that's a big boy. And then the other two, you know, 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-skinning it, building this huge podium.

Look at the pictures of my write-up. A girl at their website, it looks really nice. It's getting close to being done. I think it'll finish up later this year. And, you know, this is at 1.8 million square foot building, which is just enormous. They're putting, you know, $750 into it. And, you know, a brand new building right on Penn Station.

You know, by my math, if you use kind of a 575 cap, you know, it's probably, on the incremental in a Y, you know, it's worth $1.7 billion, which I believe is actually a low six's cap on the overall whole building, which I think is, you know, 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, you know, sub-5% for like 20 years for prime, prime office space. even when, you know, rates were much higher. Again, you could argue that the mid-2000s was a little frothy.

But so, you know, I think that this building also, and this is, we don't have, they don't share details on how leased this is, unfortunately. So I don't have exact system leasing, but, you know, it's a brand new building right on top of Penn Station as well. And, you know, looking at one Vanderbilt, right, which is right on the type of Grand Central, which is a nicer transit hub admittedly, you know, 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, you know, this is easily like, I think, you know, $1.7 billion in value by itself.

And again, you know, there's no debt on this thing. On Farley, we should mention there is a groundless in Farley, but it's a flat rate for like 100 years. So it's, you know, it's with the city. So run that model out and discount it back after. Yeah, it's, I think it changes that much. And, you know, in Penn 2, so pin 2, that's pin 2. you know, really nice asset. And then

its sister building is maybe the trickiest, the three to value pin one, even bigger, 2.5 million square feet here. They just did a redevelopment of this, but they didn't do any re-skinned. It's more of a lobby, you know, lower level

podium, amenity package, rehab. But they didn't do any full holding rescounted it in a pin two. And, you know, they're they're apparently seemingly directing most. They're leasing, you know, activity here. And it's getting really good traction.

Rents are 100 bucks a foot now. Apparently, you know, leases up from like $60 a foot before their renovations. They've, you know, massively increased rents here. But the tricky thing is here is it's on a ground lease. And the ground lease resets every 25 years based on fair market value of the asset. And they are right now in the middle of negotiations for, you know, what this, new ground lease rent is going to be. You know, initially they're predicting it's going to go up a lot.

Now they're kind of saying, oh, maybe I should go down. You know, it's hard to say, I mean, sort of who knows where that's going to shake out. So I use a much higher cap rate on this to try and, you know, bake in a lot of conservatism because of the unknown element of that ground lease. But, you know, it's, it's they're projecting 13.2% incremental yield on cost, which is just really, really good. And even a really high cap rate, I use seven and a half cap here. you know it's a billion eight in value again you know no debt and this also sits directly on top of

Penn Station so you know these three buildings which literally surround Penn Station or sit on top of in the case of Farley and this one also is on top of it there's literally a direct entrance from Penn Station to all three of these buildings so I just I 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, you know, I do think people think Penn Station and they think, hey, that it's not a great area. And it's true. It's probably not the best area in the world. But there is a lot, I would say, 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 great? It's the Metro North. So Penn right now serves the Jersey lines in L-I-R. L-I-R used to only go into Penn and recently got the Grand Central. So they both have two of the three big suburbs, right? Penn only has Jersey as sort of its unique advantage. Grand Central only has, you know, the Northern Connecticut and Westchester. But in like four years, three years, the, they're going to extend the Metro North line, which is the Northern New York, Connecticut line to Penn Station.

So Penn will have, will be the only place that has all three burbs as an access point, right? So it'll be superior, right? you argue they're both maybe the same if you if you value jersey and kind of get the same which you know i'm not going to go into that right now but you know you want to talk about people coming after the podcast exactly so but you know pin will have all all three right and that's going to be a it's it's the best transit in the city you know is the nicest area historically no it's gone a lot better um the new morning hand hall train hall is really really nice um and and and the new retailer doing it's really got a lot better and i and there's a clear path for continued improvement

you're in a hand of the additional train line coming and you know there is money apparently appropriated for sort of phase two of this redevelopment which is the there's sort of two halves of the development molyhan is done and it's probably you know arguably you could say ah this is good enough but you know and i'm not under upside from this but you know 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 around msg a bunch of different ideas are under consideration right now but i think you know something gets done that could be five six seven a year for that actually occurs. So, you know, sort of distant in the future. And it's not really worth, I think, dwelling on too much. And you want to talk upside. The Knicks have Jalen Bronson. 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 were talking about it and, you know, we came out to a lot of unencumbered value from these guys, right? Enough to cover all of Vernado's debt, all of Vernado'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 really long times, right? But I think people were, yeah, now we're saying maybe six-cap assets. 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, right? And treasuries just last week broke four percent, ten-year treasuries, right, broke four percent. 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, you know, office buildings had a much more stable. There were none of these 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 here around that level, all that sort of stuff? So how would you respond to that? Yeah.

I mean, and this is a subject that we should friendly to a podcast on just unto itself. But I'll try to address it really quickly. So first off, the best thing we're talking about right now probably is the 245 Park comp, which is the first really Class A building, I think, to trade. You could argue that they're able to trade as well, but that's... This is what's called giving you a softball, right? When you've got a comp that happened about two weeks ago, just loving you that softball. Yeah, yeah, yeah, I appreciate it.

Hopefully I could not have the park here. So 245 Park is an asset that S.L. Green owns. They basically foreclosed on a me as a position to take control of this thing. I don't to go too far in the details here, but a Japanese, you know, buyer, institutional buyer, just pick this thing up literally like, what, three weeks ago or something years, or now it was three weeks ago. And it was just a great comp, just any way you look at it. And it's, you know, I think some of the details in terms of the cap rates are a little unclear,

but the high level stuff, you can't, you can't miss, what is, you know, basically $1,100 a foot, 10% discount, the 17 price, right? I mean, this is a really, these are really good numbers in terms of, you know, I'm looking at, right. My base case, N.V has basically a 30% discount to pre-cote pricing, right? So, and this is above, this deal was above my NAB for the asset, Russell Green. So, I mean, it's a really nice comp. And, you know, there are a couple things about this deal, which are interesting. They get a little unique.

And you could argue reduce the price a bit. But I think it's at the margin, you know, it's very small. One, they're assuming in-place debt, which has below market, the lower market interest rate, or also what we could pay today. It's like a four to five, I think, interest rate. with, you know, I think maybe five years of term or not exactly. So that's worth a little bit, but it's not, you know, a ton. And then, you know, they also, and in this, I think some people would point as as being sort of a negative, to me, this is a huge positive.

They also bought a huge chunk, $500 million is the MES debt. This is the scuttle butt below, right, the equity they're buying. So they're not just, you know, putting in, you know, small, because the face deal was like, I think $200 million of, you know, because it was so levered, right? the actual cash outlay was $100 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, you know, maybe $30 million, $50 million is what I'm hearing. So it's not a huge, you know, change in the overall scheme, the value of the getting.

So, you know, they're putting in, you know, hundreds of millions of dollars in this asset, right? The real money, and they're going to invest more money into it to, to sort of rent to the building and then lease it up. And then, you know, the question is, right, what are they, you know, what are they getting to the cap rate? I mean, the going in is like low floors, just as it is. And then the stabilized cap rate, right, that they're trying to get to, there's different estimates out there. It depends ultimately what kind of market rents. You can get, I think they're underwriting to a six cap stabilized, right?

Which means they think it's worth five or below, is it or is it or is it or is it not? You know, who knows? But that's what they're accepting on a value at deal, right? Other people, I think, I've seen estimate it's more like a mid-fives, stabilized cap, you know, just depends how bullish you are in the runaway of assumptions. I don't think it really matters that much because, you know, if they really are underwriting to a five, five cap, it's actually more bullish, right? Because they're, they're, they're paying a lower cap rate, right, for 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, you know, either way, you know, if they're running into a six things they think they sell it 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, a great comment right, no matter how you slice it. And again, I'm sort of saying, all right, superclass A Manhattan, maybe you stabilize it a six, you sell it a five. I don't think it's a four or five. If that is, I mean, that's just great, but I'm not going to assume that. Two more questions in the meeting we can wrap this up. So the first question, I think the real, we've mentioned one Vanderbill, the really high-end stuff has really maintained its market. Hudson Yards is one everybody talks about,

you know, 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, right? 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, like, when you look at Penn and Farley, and then we'll use this transition to some of the rest stuff, like, do you see this after it's done? Is this like the Super Prime, the one Vandy, the Hudson Yards, like the stuff that gets really great cap rates?

Is this, you know, class A but not quite Class A plus? How do you kind of think about that? 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, they're like a, I think, you know, they're getting, you know, significant discount. Hudson Yarns is a huge premium right now. I think it's like 30% or higher in terms of the rents they're getting Hudson Yarin versus versus PIN. And I'm not underwriting that that gap closing. So, you know, my sort of basis is these are

really high quality assets that are not going to quite get the same lower rents. But ultimately in terms of tenant demand and the way the market views the, 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, you know, like, if that's not a trophy asset, I don't know, you know, what is, right? Because I mean, there's, it's, it's hard to define trophy. It's a bit of a maybe overused term. But, you know, these sort of ultra-prime new buildings right in the transit hubs are, they're irreplaceable, right?

There is only so many of them you can't make, you can't make new ones. I think there is a potential upside scenario where, you know, know, not today, not tomorrow, not even probably in three and four years, but in like seven, eight years, you know, I could see a world where people prefer Penn Station to Hudson Yards. Personally, I don't like Hudson Yards. I think, Hudson Yards sucks. And I think, sorry, Hudson Yards developers, but transit access is terrible. Penn Station is just Hudson Yards transit, you know, walk closer to the transit, right? And, you know, so it just Hudson Yards is a better transit, but it's grittier, right? And so if you can remove the grittiness, there's just

no world in which Hudson Yards is better than Penn Station, right? So if that goes away, Penn Station is a better version of Hudson Yards, right? And so, you know, is that going away tomorrow? Yeah, I don't think so. But in seven, eight years, I mean, I think it would not be crazy if people think, oh, of course, like Penn Station's superior to Hudson Yards. Why would you leave this building 20 minutes, you know, walks to the west? Like people, you know, hate on Third Avenue, which is like a little bit further east on the east side of Manhattan, right? Hudson Yards could be the third avenue of the west side in like 10 years. I'm not saying it's going to happen, but, you know, it's, it's not that close. All we have is the seven, which is not that,

you know, it's a single subway line. Look, I, I, and 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, like, the only arena in all of Manhattan. It's right there next to Penn, right? So, I do think there is a play thing. Let me, last two questions. So first, oh, actually, before I get there, we talked about, we don't have time to talk everybody, unfortunately. There is a lot of other buildings with value. I know you valued the mart at about 800 million. There's 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. Just real quick, is there anything

any specific asset or upside that you pointed out? Again, people can go read the posts on your substack, but that you think we should just mention real quick? Yeah, I think it's more thrilling you know, briefly on the the Citadel 350 Park deal, which didn't get nearly as much press as this 425,

you know, sale, but I mean, in my view, it was like equally as important. And this happened like six months ago. Now,

it was before the deal was struck, you know, before the last round of interest rate and before the banking crisis rights. You could argue it's a little out of date in terms of the timing. So maybe it's a little high.

You know, but it's still, you know, Essentially, what this is, is Citadel, you know, has agreed to buy, you know, this site from, you know, Vornado and then Ruden, I'm going to the store, you know, for $1.2 billion, which is just significantly above my NAD, the asset, which is already, by the way, massively above the share price. There's a huge vote of confidence in these sort of Class A assets. And, you know, the slight different thing here is that their plan is to...

to build, and the deal is a little more complicated. You should get a bit about it's not worth going to exact statistics here. But essentially, right, they're buying it for this price. There's a couple of moving pieces there. But Varedo can put the option to, to congruent if they want to. So they can force a sale to me too. Anyways, so the different thing is this is a development site. The plan is to build a new building.

But like, this is great on two fronts. You know, I mean, you're selling this deal essentially for well above my NAV. You know, and it's a huge vote of confidence, not only in the, not only in the, the investment sale market, the value of these buildings, but also, you know, there's a leasing value to it too, right? It's an office user, Citadel, one of the largest hedge funds in the world, right, is saying, hey, we want to buy. We're willing to pay literally top dollar for a new office building in New York City.

You know, and they're paying 700 bucks a foot to the buildable on the new proposed tower they're looking at doing. Citadel is basically saying, you know, hey, we want to lease a ton of New York office space. we also want to buy a ton of york out of space you know which is just a great uh vote of confidence in the market at these at this absolute top of the market you know high end prices so i think that's really in my view to me that was hugely bullish and that happened and you know there was like basically nothing no one reacted at all to that sale but i i think that's just a great indicator so i think that one's worth you know people working at and 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, S.L. Green stock price was at like 80. And we kind of mentioned this earlier, but Sle Green stock price was at 80. And they would have slides in their deck that said, hey, you know, the market values, that said a 7% cap rate. We have all these private deals that point to a 4.25% 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. Vernado kind of developed Penn. Vernado'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 reet, 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 beating in doing that. And obviously, COVID changed things. But, you know, S.L. Green was pitching the same thing back in 2021. And the stocks 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. Yeah, no, it's totally fair. Right. And so I think there's a couple pieces of this. I mean, you know, first, just more focus on Meredo. They both traded discounts. Renato has always been a bit of a bigger discount. So the S.L. Green discount was not quite as much. But, I mean, I think it's very, to me, relatively easily explainable. And I think the issues are the causes, I think are now all sort of arguably going away. He argued one is one is not. But, I mean, basically, the reason I think that these companies are trading at these big discounts pre-COVID, you know, one is common to both of them, which is, you know, big development pipelines, right? These guys are very active developers.

Most REITs are not. These companies have huge portions of their value. I think probably almost the high, if not the highest and among the highest of any rate in development, spinning at work. And, you know, I have never understood this really. but, you know, Wall Street analysts historically and investors, you know, hate, read investors hate new development and they never give a credit while it's under construction. Once it opens, usually the NMI hits, they start giving it credit, right? And the reason for that is essentially, you know, new development is, you know,

adds to your debt and does not increase your income. In the case for an office building in New York, that could be, you know, a three-year period, right? It's a very long time before it hits. And, you know, Wall Street is so freaking impatient that, you know, the idea of having three years of FFO drag, you know, God forbid, it's actually an increase of investment long term, right? They hate it. And so I think these companies don't get credit for development, these developments while they're in process. And when they're done, that often changes and closes. So as it relates to Bornado, the development pipeline is, you know, it's.

it's almost done, right? I mean, and they're going to probably continue developing after this, right? So I don't want to sort of say that this is not going to happen. But, you know, it's going to be, I think, smaller moving forward and certainly, you know, probably not much office space until the market recovers, right? So, you know, there are three big development assets are Farley's done, you know, and Penn 1,2 are almost done. You know, so that's coming to an end, right?

Soon. The NOI is starting to hit, right? 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 the development a little bit with Penn and Bernado. It's a brando specific. Vernato has been talking about the Penn District for like 25 years, right? They bought their assets in the late 90s. They're about to hit their first rent reset on the assets, right?

And so it's easy to sort of, you know, in 2018, when you're literally 20 years into this, right? And nothing's fucking happened to be like, okay, you know, whatever. you've been saying this for 20 years. But, you know, progress was being made very slowly. And, you know, a lot of it was tied to the redevelopment penetration itself. And so the Moynihan train hall, you know, itself just took a 30 years to happen. And so, but it's finally done. I mean, literally 30 years from proposal to opening.

I mean, absolutely insane. But it happened, right? It's now, it's done. And so that sort of long-term pinnature vision, right? That's sort of, that's no longer in the distant future. the buildings are opening, you know, Fawley's open, their rest are opening very soon. Moynihan's done.

Like, this redevelopment will basically complete within 12 months. So like, that's all now here. And so that, again, will hit hit your income today. I think, again, sort of, like, the problem is where people back out these development numbers that don't produce any income, but they give basically no value. So the income

will be coming very soon. The third piece, specific to Bernato, is their big, in New York retail portfolio. And this, I think, the market, it frankly was was totally right in their skepticism of this right that there was some in any of discount warranted because retail in 1890 was a falling knife you know how where how is it going to go it's it's difficult to underwrite that even for you know par market people i think public market goes like yeah fuck i'm not going to think about that we're going to walk away and so you know

that that was a very reasonable i think uh discount application by the market and but that's also done right that knife is done falling rents are finding to pick up most markets now verneto has a couple of market, you know, lease is still in place if they're going to roll off. So there's still a little bit downward in my pressure there. But by and large, right, their retail in line is not even going up. And it's like, by the way, the retail airline is like fall in like almost in half. So I mean, like it's, it's, it's, it's, in fairness, it was reasonable to, you know, to underwrite some level of discount there. But that's over, right? That's now going, going up. That income should be increasing by and large going forward. And so again, you know, that I think, uh, it,

that issue is also essentially now in the process of being resolved. So I think the three major things to dog this company in terms of NAB gap discount are all resolving, you know, 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, you know, in general, right? We just talk about how Vernado probably would trade an NAB discount in a non-COVID world still today anyways, because the same shit that been causing a discount before COVID, it still hasn't hit quite yet, right? But we're 12 months away from all this stuff happening. And so you have these nice catalysts in terms of all the,

those issues being resolved. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology.

Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Last question here. So I generally don't look at or read a lot of sell side research. But I just, I pull up Vernado, 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, six cells, five holds two buys, right? That's about as negative as a company with sell side coverage can get because cell side coverage famously hates to assign cell ratings to anything, because then you don't get into that business. So, you know, and it is one thing for a Snapchat to have a bunch of cells 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 cell ratings might literally

be writing their cell reports on from those assets. 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 you 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, like sell side sells on this, what is the thing that you think they, they're just kind of missing? Is it they're too short term and they're 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 assigned full some of the park credit? Like, what do you think is the one big thing that has people so negative on this? I mean, you know, no offense to our, you know, any Wall Street listeners up there. I generally don't. It's a ton of value to allow these saleside analysts, you know, commentaries. I think that just a lot of times, they just change their value to match whatever the hell the stock did. There's no doubt about 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. He ended a buy rating at 150. It went back to 200. He had to buy it at $250. And I just left. He just followed the stock price up and down the whole way. And it was like, dude, you're just positive.

I think there's a lot of that here. And I think, you know, I think there's a unique difficulty, right, the unknown of this word from home question, which we don't really get into that much here. I think I'm going to maybe do a separate post on that because that really warrants. 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 the word three and a half years. I think it's a little more of a known now than an unknown this point. I think two years ago is a lot more of an unknown where that would shake out. But I think that's a big part of it. I would say, you know, work from home and I think they're just moving their prices, a large part to match what the market's done. So and I just generally, right, like I think like the more I talk to people and talking, people who are working at some these hedge funds, they're like, you know, more pod shops. These people are so short term oriented.

It's like, it boggles my mind as a private real estate investor brings from my background. It's like, they're so focused on what the next quarter's earning is, next two quarters, next year's earnings, that, you know, it's like, are they going to beat or miss guidance, right, for next quarter? I'm sort of like, I don't really care, right? It's not that, I mean, it is irrelevant to some degree if you miss again and again and again, that adds up. But like, you know, I have a three to five year, you know, time frame. I look at these things. And so this, this, like, just maniacal level focus on these short term earnings, I think is very short. I think it's a problem, you know, in general with Wells Street. I think it's something that is especially a problem. of here because, yeah, we're not out of the woods. I don't think they're going to have a surge and, you know, beat earnings, you know, for the rest this year. I think you still have additional softness and tech layoffs, and no one's like hiring that much. I mean, there's some, like, some secular sort of demand issues that are here, so the general downturn and corporate demands, aside from her from home, right? There's a tech recession going right now. Tech's a lot of

native tendency. They're not hiring. They're not taking a new office space. And I think people reflecting, they're kind of reflecting that, right? They're like, they're kind of, they're almost saying, you know, are they going to beat or miss earnings guidance? And there's ignoring what NAD is, right? It's sort of, it's almost like a directional, you know, how is they're going to go with guidance and ignore the fact that, you know, that there's this huge gap to NADD. It's like, I think that's a lot of the problem there. I definitely hear you there. But I do think there is also something to, hey, they understand the NAB math, but like, I think the, it can be very focused on short term, but I think

there is also something where they're saying, hey, I understand you're running math and saying NAD is 50, right? But what they're saying is estimates are coming down. And, you know, I did this earlier. If you look at Vernado's 2019 10K, like only 30% of the leases from 2019 have expired up to today. Right. So like 70% of the leases that Bernato has currently, and this is ignoring like 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's deteriorate. But no, I get you.

Like the big difference to me is 18 months ago, you were assigning a lot of value to the non-pen, non-trophy buildings, right? Because that's how the math kind of work. 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. small. But these are big trophy assets that are very much where the world has headed. And they do have, like, a lot of other positive trends inside of them. And you're kind of only underwriting that and everything else is gravy. Exactly. I think, again, like, you know, 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, you know, how much does it decline? You know, I think if you assume if I did this in my first post, right, If we're 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, you know, what, what are you, what's going on, right? If someone's gone fuller, if company is fully remote, that space is on the sub-lease market and it is reflected in the vacancy and reflected in the current, you know, issues you're seeing, right? So, but if you assume we're only halfway there and somehow half of these users have not, you know, made a decision

with how they're going to do with their space, you know, you might see another like 8, 10% decline in a lie. That's not great. But, like, you're still getting a really good price, right? Even if you mark those values down, right? It's still just so cheap today that I think it's hard to sort of to sort of rationalize any sort of real downside from this, from current prices at, you know, even sort of these worst case work on a scenario. Okay. Perfect. Cool. Well, hey, I think we're running a little on. Hawkins. Really appreciate this. Looking forward to having you back on for, we'll talk S.L. Green. We'll talk, what is it? There's HPP out there. We'll do Empire State. We're just going to do a rolling New York office. Go ahead.

HPP, too. It's interesting. It's a whole different, like, canterarms are much more work from home exposed, but they're really cheap. So, you know, anyways. Well, hey, this was great. Again, people can see, I'll include a link to Hawkins substacks, so people can see the full write-ups on Renato and Lobin. Any questions they went there. But Hawkins, really appreciate you having on. Looking forward to next time. Thank you. Bye-bye. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.