To be clear, we REALLY do not like the prospects for the NYC CBD office business model long-term. We are probably staring down the barrel of at least 5+ years of "hamster wheel" effect where the stocks trade "cheaply" at perpetual discounts to "NAV" absent a take-private, net effective rents decline from market face rate declines and/or rising concession levels, net demand for office space declines 15%+ post-Covid and earnings are flat-at-best to down. The space was too difficult to model with any degree of certainty pre-Covid (even for someone who worked at an office REIT!), and the pandemic introduced a massive number of additional variables into the mosaic making it even tougher.
With that said, the stocks tend to trade on the macro and should be viewed separately from the underlying businesses, and as such we are adding SL Green Realty (SLG) and Vornado (VNO) as Long Bench names as (1) they will most likely outperform in Quad 2 in Q4, (2) they are signaling Bullish Trade and Trend, and (3) have some of the more favorable factor exposures from a macro perspective (high leverage, cyclical growth/recovery, figurative "junk," etc.). That's it, it is that simple, and it would be criminal to ignore them after the stock performance delivered in Quad 2 earlier this year. Our Bearish Tail view is the only thing keeping them off the Best Ideas list, but they can be owned on the long side here over a shorter duration.
Finally on Paramount Group (PGRE), we are adding it to our Short Bench list based solely on Bearish Trade/Trend signals. PGRE is smaller, very highly leveraged, and has idiosyncratic structural issues such as very high portfolio concentration in a small number of assets, large "chunky" leases increasing volatility in the results, a large and entrenched family shareholder, and an abysmal track record of capital allocation over its short lifespan. The market reaction to leasing finally completed at 1301 AoA with existing tenants is a TERRIBLE sign, most likely owing to little to no indication from new outside tenants in the market. Realistically, if office is treated primarily as a macro vehicle, it is hard to find a reason to own PGRE over the larger players unless there is a very high conviction bet on a take out.
Figure 1: Updated REITs Position Monitor
Figure 2: REITs Sentiment Monitor
Figure 3: SLG GIP Quad Backtest
Figure 4: SLG Qtrly. Expected Value by Quad
Figure 5: VNO GIP Quad Backtest
Figure 6: VNO Qtrly. Expected Value by Quad
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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