06/22/22 06:08 AM EDT

REITS DAILY BRIEF | 6.22.22 | (PGRE)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Lower Manhattan office conversion to apartments around the corner from 60 Wall Street

Hedgeye Cartoon of the Day: Earnings Belly Up

It is 6.22.22, and Active Short MPW is overvalued by approximately ~$14.66/share.

Tickers: PGRE

Subsector: Gateway Office

Headline: 55 Broad Street to be converted to apartments

The WSJ reported that a previously announced JV between Silverstein Properties and Metro Loft, which purchased 55 Broad Street in Lower Manhattan from Rudin Management for ~$180 million (~$425psf), will convert the asset into 571 market-rate apartments with a 3-4 year development timeline.
Cap rates might not be the best valuation metrics here given the redevelopment angle, however using ~$48psf average market rents we estimate a stabilized cap rate potentially as high as the ~7% range ($48psf x 425ksf x 90% occ. x 65% margin) nominally and in the 4.5-5% range including the impact of recurring office maintenance capex.
Given the proximity and building vintage, the deal is an interesting mark for PGRE's 60 Wall Street which is also an obvious redevelopment candidate once DB moves out, but more likely as office vs. residential given that the floorplate layouts might not be conducive to apartments. 60 Wall Street looks like a sad mausoleum housing Gordon Gekko's ashes, and fortunately PGRE mitigated its risk by limiting exposure to just a 5% equity interest. On the flip side, its another example of misaligned incentives - there likely is too much management + leasing + construction time devoted to an asset that barely moves the needle for public shareholders, accruing to the benefit of third-party JV partners (who, to be fair, do pay fees to PGRE) unlike a wholly-owned asset.
Separately, if we were PGRE shareholders, we would be screaming at management to take the Monarch offer, as (1) the thought that ~$17-20/share could be on the table even over the intermediate-term is a delusional fantasy, (2) in general the company should obviously not be public and (3) PGRE as currently structured will likely continue to bleed shareholder capital/value over the next ~5 years amidst a structurally impaired NYC/SF office market and misaligned incentive structure.

Prior Notes:

6.20.22 - REITS DAILY BRIEF | 6.20.22 | (POSITION MONITOR UPDATE)

6.17.22 - REITS DAILY BRIEF | 6.17.22 | (MPW - MORE BAD NEWS)

6.17.22 - REITS WEEKLY VALUATION HANDBOOK | 6.17.22

6.16.22 - REITS DAILY BRIEF | 6.16.22 | EXPLORING MPW'S PRIORY TRANSACTION (MPW)

6.12.22 - SUNDAY NIGHT REIT READ | 6.12.22 | (FR, PGRE, NXRT)

6.10.22 - REITS WEEKLY VALUATION HANDBOOK | 6.10.22

6.8.22 - REITS DAILY BRIEF | 6.8.22 | (NAREIT, POSITION MONITOR UPDATE)

6.6.22 - REITS DAILY BRIEF | 6.6.22 | (MPW)

6.5.22 - SUNDAY NIGHT REIT READ | 6.5.22 | (JUNE NAREIT PRESENTATIONS HITTING)

6.3.22 - REITS WEEKLY VALUATION HANDBOOK | 6.3.22

6.3.22 - REITS DAILY BRIEF | 6.3.22 | (ANOTHER ONE ON MPW)