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New York City-based Vornado Realty Trust is at risk of defaulting $2.6 billion of debt, according to reports.
The real estate investment trust has an extensive portfolio of multimillion and multibillion-dollar developments in the nation’s largest cities, including San Francisco and Chicago and NYC. Vornado’s footprint is strongest in the Big Apple, where it has more than 20 million square feet of office space and 2.4 million square feet of retail space on Fifth and Madison Avenues, Times Square, Herald Square, Union Square and SoHo.
However, the REIT giant’s contract to assist in the $6.7 billion state-led redevelopment of Penn Station has turned out to be a nightmare in the making as quickly rising interest rates and several other market headwinds whittled its debt coverage by 70 basis points, according to a Real Deal article published last week..
“Coverage has declined significantly over the past year,” TRD‘s article read. “The REIT’s weighted average rate went from 2.45 percent to 4.23 percent after the Federal Reserve began hiking rates last spring.”
“That leaves a buffer of just 79 basis points before the company hits the limit on those coverage ratios,” it continued. “Goldman’s analysts calculate that those buffers could narrow to a mere 10 and 20 basis points, respectively, if things continue the way they’re headed.”
Michael J. Franco | Credit: Bloomberg
Vornado President and Chief Financial Officer Michael Franco announced in February the company was pausing its plans for Penn Station until the market “settled down.”
“I think the good news is, we don’t have to do it today, because it would be very, very difficult and very expensive to line up construction financing,” Franco told Engineering News-Record New York in February.
According to ENR-NY, Vornado is still scheduled to complete its first three Penn District projects by the end of 2023, including the headline-making 1 Penn property. As of Dec. 31, 2022, Vornado had spent $1.9 billion on the three projects and estimated it would cost nearly half a billion dollars more to complete them.
In addition to slowdowns with its Penn Station project, TRD explained the company is contending with the loss of two office tenants that are worth $68 million in annual revenue, and expiring interest rate swaps and rate caps that could add $73 million in interest rate expenses.
From April to May, Vornado Realty Trust CEO Steve Roth made several public statements about the REIT’s future and said the company would “be going on the offense” with a $200 million share repurchase program and the postponement of common share dividends.
The CEO stoked panic with his April 7 statement, saying Vornado was “approaching the eye of the economic storm, and I expect it will get even worse.” Roth walked the statement back a week later, as the company’s stock rating began to slide.
“I inadvertently created a whirlwind when I made what I thought was an obvious comment on our third quarter 2022 conference call that, ‘the headwinds in the current environment are not at all conducive to ground-up development,’ which was interpreted as our abandoning the grand plan,” he wrote in a letter to shareholders, according to TRD. “Nothing could be further from the truth. A pause necessitated by economic conditions is not abandoning.”
As of May 16, Vornado’s (VNO) stock rating is a hold, with one analyst rating it a ‘buy’ and the remaining ten evenly split between ‘hold’ and ‘sell.’ Goldman Sachs analyst Caitlin Burrows gave the REIT a sell rating with a target price of $12 per share.
Vornado opened Tuesday at $12.89 per share, which is down from Monday’s closing price of $12.96 per share. Its market cap currently stands at $2.86 billion.
A Vornado spokesperson told TRD said the company disagreed with Goldman Sachs’ analysis.
