Vornado CEO Dismisses Issues With Trump Partnership As NYC Portfolio Suffers
Vornado Chairman and CEO Steve Roth, a longtime friend of former President Donald Trump, downplayed the negative impacts of his company’s partnership with the developer-turned-politician on its quarterly earnings call Wednesday, disputing reports that Trump’s 30% stake in two prime properties is preventing the company from selling or refinancing them.
The Trump controversy capped off an underwhelming year for the real estate investment trust, with a steep decline in cash flow and a major loss in Q4 as the retail and office markets in Manhattan continue to suffer from the effects of the coronavirus pandemic.
"This is a very interesting and controversial man, who has a lot of people who like him and a lot of people who don’t. As I remember the count was 74 million people who like him and 81 [million] who don’t," Roth said on the call Wednesday. "From our point of view, he is our partner. We bought these buildings in 2007, he was not a politician then, he was a business guy like us. His role in these buildings is totally passive, and he’s OK with that and I’m delighted with that."
"There are some people who his presence affect negatively, that’s true," Roth continued. "It’s not a sufficient issue to be of any trouble to us at all ... This is business, business is business. We will run the buildings without any issue, we will finance the buildings without any issue and everything will be fine.”
The Wall Street Journal reported last week that Vornado was attempting to cut ties with Trump's company after attempts to sell and refinance the property had reportedly not worked out.
“Much of [the article] was actually news to me,” Roth said on the call.
In its portfolio overall, Vornado saw a huge decrease in funds from operation, a real estate metric used to measure cash flow. The company reported $138.4M in funds from operation in Q4 2020, down $311.9M year-over-year, a nearly 56% decrease.
After turning a profit in Q3, buoyed by condominium sales at 220 Central Park South, Vornado posted a net loss of $209.1M in Q4.
Occupancy in Vornado's New York portfolio dropped from 94.3% to 92.1% between the third and fourth quarters as more tenants gave up space. While the majority of Vornado's portfolio is office and retail properties, it does own a share of nearly 2,000 New York City apartments. Occupancy for those units dropped from 97% to 83.9% from December 2019 to 2020.
Roth anticipates office workers and tourists will return in Q3 and Q4 of this year. He, like many office landlords, insisted that he doesn't believe the office market post-pandemic will be radically changed by the advent of widespread remote work.
"With all the talk about working from home, I believe that our natural human, social inclinations and the pent-up demand to interact, gather and experience all the city has to offer will carry the day," he said. "When life returns to normal the many positives of having employees working in the same space together with their colleagues will become self-evident. In the end, I believe that working at home in one’s kitchen alone, day after day, week after week, is not a long-term proposition.”
In contrast, in its annual report filed Wednesday evening Vornado acknowledged in its risk disclosures that the company could be “adversely affected” by the work-from-home movement prompted by the pandemic.
“Work from home, flexible work schedules, open workplaces, videoconferencing, and teleconferencing are becoming more common, particularly as a result of the COVID-19 pandemic,” the report states. “These practices may enable businesses to reduce their office space requirements ... There is also an increasing trend among some businesses to utilize shared office spaces and co-working spaces. A continuation of the movement towards these practices could, over time, erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.”
Vornado’s REIT peers that have released their earnings — such as SL Green and Paramount Group Inc. — looked to be in a relatively similar spot at the end of this quarter.
SL Green turned a profit of $200.3M, according to its earnings report, but that was largely bolstered by the many sales that the company closed at the end of this year — notably 410 10th Ave., which it sold for $952.5M, the single largest office sale transaction since the pandemic began. The company recorded a gain of $41.3M from the sale, according to its report.
SL Green’s cash flow was down significantly, according to its earnings report. FFO was at $119.2M in the fourth quarter, a 19.2% decrease year-over-year. Paramount saw a drop-off in FFO, its $52.5M Core FFO was down 9.9% from its total at the end of Q4 in 2019, $58.3M, according to its earnings report.
SL Green also saw declines in occupancy, similar to the rate of Vornado. Same-store occupancy in its office portfolio dipped from 94.2% at the end of Q3 to 93.4% at the end of the year, over a three-point decrease from its 96% occupancy at the end of 2019.
In an earnings call on Jan. 27, SL Green CEO Marc Holliday pointed to big leases inked recently, such as the 100K SF lease the REIT signed with Beam Suntory at 11 Madison, along with the vaccine rollout, the seemingly imminent stimulus package, and success of the financial and tech sectors as reasons to be hopeful about the company’s, and New York real estate’s, future.
“There are many more reasons for optimism as we begin to return to normalcy this year,” he said.
Vornado also revealed that the 220K SF that Apple agreed to take up in 11 Penn Plaza in November, which was originally a sublease with Macy’s, was converted to a direct lease.
CORRECTION, FEB. 18, 10:20 A.M. ET: Marc Holliday is the CEO of SL Green. A previous version of this story misspelled his first name