SPRING 2012 RESEARCH PUBLICATION Major NYC REIT Activity & Holdings

A Comparative Analysis of the Notable REIT-owned Office Properties & Portfolios A research report prepared for the Steven L. Newman Real Estate Institute, Baruch College, CUNY by Benjamin Polen, MBA, Senior Research Associate at the Institute

Introduction holdings. Leasing, rents, and transaction Figure 1: ore than 72 million sq. ft. information are reported by the REITS and or approximately 18% of presented for discussion in this report. MManhattan’s office space The goal of this whitepaper is to provide a is controlled by four public real estate view inside leading real estate investors, as investment trusts (REITs) that perform afforded by timely operating information well in both the local office market and on leasing, rents, and transactions. the capital markets. They are Boston A Shift from Families to REITs Properties, Brookfield Office Properties, The office sector within Manhattan’s real SL Green Realty Corporation, Inc., and estate sector was historically controlled Vornado Realty Trust. Combined, the by family ownership. Throughout the total Manhattan holdings of these four 1990s, families such as the Dursts, Rudins, REITs collateralize almost $18 billion in Helmsleys, and Speyers, along with many mortgage debt. Their portfolios include lesser known ones, owned large portfolios iconic , as well as a variety of of Class A and B office building stock. other commercial office space buildings, While these families remain major players, retail space, and mixed-use structures. a shift has been underway over the past While these REITs also control significant two decades. Since 2006, 15 million sq. Manhattan retail and suburban New ft. of office space has changed York properties, as well as non-New York hands to the control of public REITs, from properties, the focus of this paper is on both families and other owners. There the Manhattan commercial office holdings Photograph courtesy of Vornado has also been increased investment in of these REITs. source of funds to finance properties in need Manhattan office real estate by foreign As institutional corporate owners and of capital expenditure, thereby giving the investors (notably, sovereign wealth funds) public companies, the four REITs have REITs a significant financial advantage over and private, non-traded REITs. superb access to capital markets that less well-capitalized owners. The financing This shift away from family owners is provide the companies with corporate- can be used for tenant improvements (TIs), attributable to a number of factors, most level debt and equity, in addition to leasing commissions, capital expenditures, significantly the availability of capital for mortgages. This gives the REITs a and competitive property maintenance. REITs. The access to ready capital allows significant “cost of capital” advantage Fueled in part by the competitive REITS to have liquidity and cash out families compared to all but the largest private advantages of their capital structure, and partnerships. When a new generation owners and operators when it comes the REITs have exceeded the Manhattan inherits family real estate, estate taxes may to competing for deals and providing office market averages in occupancy and necessitate the sale of real estate, or the incentives to tenants. With REIT capital achieve premium rents. They are active and new generation may not share the same funding obtained through low interest aggressive buyers in the current low cap rate affinity for owning property. REITs have rate bond and public equity issuances, acquisitions market. served as ready buyers, with a combination they have access to additional layers of The sources used for this whitepaper of market knowledge and the ability to capital, unavailable to non-institutional include annual reports prepared by the finance quick closings through multiple owners. The capital markets offer both REITs, which highlight portfolio and capital sources. unsecured corporate debt and equity as a property-level updates of New York office

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012

Table 1:

Manhattan Office Market - RBT Overview Manhattan

Owned & Proportional Total Debt / Proportional REIT Occupancy Managed Ownership Property Debt Proportional Debt sq. ft. Debt / sq. ft. (sq. ft.) (sq. ft.) Brookfield Office (BPO) 93.2% 18,301,000 15,724,000 $4,193,000,000 $3,440,000,000 $229 $219 Boston Properties (BXP) 97.8% 8,310,065 7,237,535 $3,852,381,000 $2,631,428,800 $464 $364 S.L. Green (SLG) 92.5% 24,621,618 20,847,097 $5,158,566,000 $3,682,671,162 $210 $177 Vornado (VNO) 95.3% 21,134,000 17,156,756 $4,792,877,000 $2,700,159,700 $227 $157 Total/Average 94.1% 72,366,683 60,965,388 $17,996,824,000 $12,454,259,662 $249 $224

Manhattan Office REITs ownership, debt & occupancy (2011)1

The development process in New York, By analyzing the REITs’ office property with average REIT occupancy levels 380 especially for complicated large-scale data, it is possible to bring together real basis points higher than the market (Table projects, requires a dedication of resources estate and capital markets, with the access 4). Boston Properties’ occupancy levels are and capital that only the best capitalized to public data shedding light on the mostly 690 basis points greater than the overall families and REITs possess. This staying private world of real estate holdings. This Manhattan market and represent the best power can provide an advantage in both analysis takes into account U.S. Securities & occupancy performance of the group. SLG’s execution and perception. Public REITs, Exchange Commission (SEC) filings, public out performance of 160 basis points is likely unlike their private counterparts who usually website information, and industry press attributable to its high stock of Class B have three to seven year investment fund life reports. assets, mainly older buildings with smaller cycles, are typically associated with a longer The vast holdings and associated debt of floor plates and more interior columns that term investment horizon. They also may ’s largest REIT owners of office can be less desirable to tenants. have more flexibility with complicated, long space are quantified in Table 1, with some The portfolio rents of the REITs average term development projects and can adjust of the most notable buildings listed in Table $54.16/sq. ft. across their Manhattan office rents to meet softer markets without partner 2. Even when joint venture (JV) partnerships holdings (Table 5). While this is slightly less approval or in violation of debt covenants. are subtracted, the proportional ownership than average market asking rents of $57.23/ REIT Real Estate Market Performance to REIT shareholders is nearly 61 million sq. sq. ft. , the portfolio rents reflect historical A fundamental comparison of the REITs’ ft. The mortgage debt used to support this below market leases. One positive aspect current performance compared to the height ownership is significant, almost $18 billion of this is the opportunity to release space of the boom in 2006 reveals interesting total, while the relative use of mortgage debt at greater rents upon lease expiration. The differences. Occupancy was higher, and is in line with capital market underwriting differentials among the REIT portfolio rents vacancy lower, at the end of 2006. At that standards, averaging $249 per sq. ft. reflect the nature of their holdings. time, the REITs had an average occupancy Applying a required loan-to-value ratio of Brookfield’s lower rents reflect its older, of 98.1%, compared to 94.1% in 2011, a 65%, this mortgage debt would require an below-market leases and its large Downtown sign of a stronger office tenancy market in average appraised value of at least $383 per holdings, a submarket with lower rents 2006. Since 2006, in-place rents for REITs sq. ft., a more than reasonable assumption than the overall Manhattan office market. have grown to $54.16 per sq. ft., compared given both in-place income and comparable Boston Properties’ higher rents show the to average REIT portfolio rents of $46.84 at recent transaction prices. horsepower of the General Motors Building, the end of 2006. The lower numbers from Occupancy & Rents which obtains some of the highest rents in 2006 likely reflect older leases at significantly The four REITs analyzed all had average Manhattan. Vornado and SL Green’s rents below-market rents, while the current figures occupancy levels of 94.1% on December 31, 1 BXP’s total debt includes partner loans of $450 million may reflect above-market leases signed in a 2011, outperforming the overall Manhattan made to GM Building, not counted in proportional stronger market. These figures illustrate the office market occupancy rate of 90.9% (Table debt. The office space totals only include Manhattan office space. Vornado’s office space total does not include muted effects of headline-grabbing numbers 3). The differential between REIT occupancy a 132,000 sq. ft. building in Paramus, NJ that is 100% when spread across giant portfolios. levels and market occupancy is measureable, owned. SL Green’s totals do not include its Downtown Brooklyn properties.

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 2 – www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012 hover around the current average asking Table 2: rents. Though these two REITs are below the average Class A rents, this provides the REITs - Selection of Manhattan Office Buildings opportunity to obtain higher rents upon Size REIT Building Ownership issuing new leases. Indeed, the REITs are (sq. ft.) capitalizing on today’s leasing market and BPO One World Financial Center 1,603,000 100% capturing higher rents. BPO Two World Financial Center 2,671,000 100% BPO Three World Financial Center 1,254,000 99% In 2011, these REITs leased a total of BPO Four World Financial Center 1,861,000 51% 7.4 million sq. ft. of office space (Table 6). BPO 300 1,089,000 100% These leases represent 25% of the total BXP 399 1,707,476 100% 30 million sq. ft. leased in Manhattan’s BXP Tower 1,244,000 100% office market in 2011.2 Given the rent and BXP 601 1,630,000 100% occupancy performance of the four REITs, BXP 125 West 570,000 60% near-term lease expirations and the ability BXP General Motors Building 1,803,465 60% to compete with TIs allow REITs to capture SLG 919 1,454,000 100% higher rents. The REITs are doing exactly SLG (420 Lexington) 1,188,000 100% that. When leasing or renewing leases, REITs SLG 1185 Avenue of the Americas 1,062,000 100% have an advantage in offering TIs and other SLG 388 & 390 Greenwich Street 2,635,000 51% concessions. This is due to their lower cost SLG 600 Lexington Avenue 303,515 55% of capital, as discussed earlier. VNO One Penn Plaza 2,461,000 100% In 2011, Vornado leased 3,211,000 sq. ft. VNO Two Penn Plaza 1,588,000 100% of New York office space, the most of the VNO Eleven Penn Plaza 1,068,000 100% four REITs, representing 15% of its portfolio. VNO 909 Third Avenue 1,327,000 100% The leases generated new rents of $55.37 VNO 1290 Avenue of the Americas 2,061,000 70% per sq. ft., and rents in released space were Some of the buildings (but not all) owned by the subject REITs (2011) 18% higher than previous in-place rents. Table 1: The new leases averaged 9.2 years and Table 3: included tenant improvement and leasing Manhattan Office Market commissions of $5.25 per sq. ft. per year. Market Occupancy Asking Rent Inventory (sq. ft.) In 2012, VNO has 999,000 sq. ft. of space Midtown 90.4% $65.42 241,245,327 expiring at average rents of $61.59 per sq. ft. 93.6% $45.90 65,248,004 In 2011, Brookfield leased a total of Downtown 90.5% $39.88 86,372,509 2,052,000 sq. ft. - 335,000 sq. ft. in Midtown Total 90.9% $57.23 392,865,840 at average rents of $55.89 per sq. ft. and Source: Cushman & Wakefield, Q4 2011 1,717,000 sq. ft. in Downtown at average rents of $32.84 per sq. ft. The Midtown leasing highlights included an 11-year expansion with Royal Bank of Canada for 112,000 rents were nearly double - 96% higher - square feet at Three World Financial Center and a 12-year lease with law firm Kilpatrick than the expiring rents, while the downtown Townsend & Stockton for 45,000 square feet at the Grace Building. rents were just 2.3% higher. During 2011, In 2012, Brookfield will have 79,000 sq. ft. of space expiring in Midtown and 220,000 Brookfield scored a big win when Bank of sq. ft. in Lower Manhattan, at average rents of $19.00 and $18.00 per sq. ft., respectively. America/Merrill Lynch renewed 767,000 sq. These below market, relatively small spaces should be easy for the company to re-lease. ft. at the World Financial Center, made up However, Brookfield will lose a large tenant in 2013, since Nomura Holdings indicated it will of 524,000 sq. ft. at Four World Financial be vacating its 800,000 sq. ft. space at the World Financial Center when its lease expires. Center and 243,000 sq. ft. at One World Nomura signed a 900,000 sq. ft. lease in Midtown at Worldwide Plaza (owned by George Financial Center. Brookfield also inked a 10- Comfort & Sons, a private firm). Re-tenanting that space is a major priority for Brookfield. year lease expansion for 72,000 sq. ft. with 2 Based on 30,096,753 sq. ft. of leasing activity as reported by Cushman & Wakefield, Societe Generale at . Other Q4 2011 Manhattan Office Snapshot.

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 3 – www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012

SL Green reported leasing 2,020,146 sq. ft. Manhattan Office Transactions Figure 3: of space in 2011, nearly 10% of its Manhattan The REITs were very active buyers in 2011, The General Motors Building portfolio, at average rents of $54.42. If SLG acquiring commercial office (along with retail is able to continue obtaining rents at this and residential) real estate in Manhattan and level, it could provide a boost to the 725,000 restarting large office development projects. sq. ft., representing 4.1% of its older stock of With their sizable corporate equity and debt consolidated Manhattan holdings, expiring cushions, the REITs were among the most in 2012 at average rents of $54.05 per sq. aggressive buyers in 2011, helping to drive ft. In SLG’s newer stock of consolidated cap rates on some transactions to below holdings, it will have 396,873 sq. ft., or 7.0%, 5%.4 of its leases expire in 2012, at average rents During the second quarter, Brookfield of $71.13 per sq. ft. While this may present acquired a 75% interest in 450 West a challenge, premier properties, such as 280 33rd Street through a joint venture with Park Avenue and 600 Lexington Avenue Partners, valued at approximately (which command above market rents of $83 $520 million. The 1.8-million-square- and $70 per sq. ft. respectively), should be foot office building is directly adjacent Photograph courtesy of Boston Properties able to contribute to rent growth for SLG’s to BPO’s 5.4-million sq. ft. Manhattan Table 4: portfolio. West development site on Ninth Avenue.

REIT vs Market Performance Boston Properties scored a significant Brookfield also acquired the remaining Occupancy vs Market leasing win in May 2011 when 180,000 sq. 49% interest in Four World Financial Center REIT (basis points) ft., representing 19%, of its 989,000 sq. ft. for $264 million after the end of the third BPO 230 development at 250 West 55th Street was quarter. BXP 690 leased to law firm Morrison & Foerster. This In January 2011, SL Green bought out a SLG 160 lease enabled BXP to restart the project. JV partner in 521 , a transaction VNO 440 The building will be 40 stories, for a height of that valued the building at $492 million, or Average 380 550 feet. Of course, this lease will not take $502 per sq. ft. During the second quarter, REIT Performance Compared to Market effect until the project is completed. For SLG bought out its JV partner and tenant, its existing portfolio, BXP appears to have media company Viacom, at 1515 Broadway Table 5: leased 160,665 sq. ft. of its Manhattan office in a deal that valued the building at $691 Portfolio Rent Performance space in 2011. Since BXP does not provide per sq. ft., or $1.21 billion, a price in line REIT Average Rents / sq. ft. this figure directly, it can be derived through with the Times Square sub-market, given BPO $32.05 other figures provided by the company. the building’s retail base. Based on 2010 BXP $88.01 BXP began 2011 with 189,317 sq. ft. of reported financials, the building generated SLG $54.42 scheduled lease expirations in Manhattan $56.2 million in NOI.5 Applying that NOI, the VNO $59.68 and 156,180 sq. ft. of vacant space. It ended transaction would have a cap rate of 4.6%. Total $54.16 2011 with 184,820 sq. ft. of vacant space.3 In November, SLG formed a joint venture REIT Portfolio Rents By subtracting that change in vacant space with the Moinian Group to recapitalize 180 from 2011 scheduled lease expirations, Maiden Lane. The share in the 1.1 million sq. Table 6: the 160,665 leased sq. ft. figure is derived. ft. property was acquired for $72.7 million, Manhattan Office Market REIT Leasing Activity However, BXP did not report the new rents paid through a mix of stock and cash. Also

REIT Leased (sq. ft.) it received for the space. In 2012, Boston in November, SL Green purchased 51 East BPO 2,052,000 Properties has Manhattan leases expirations

BXP 160,665 of 332,757 sq. ft. in 2012, at an average 3 Not including Two Grand Central Tower, which was sold in 2011. SLG 2,020,146 rent of $91.73 per sq. ft. With its portfolio 4 Capitalization, or cap rate, is a property’s net operating VNO 3,211,000 of trophy buildings and its demonstrated income divided by sales price at the closing. It is reflected as a percentage. Total 7,443,811 ability to command premium rents, BXP may 5 Based on $20.2mm net income, $21.4mm interest Leasing Activity be able to meet this leasing goal. expense and $14.6mm depreciation.

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 4 – www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012

42nd Street, a 142,000 sq. ft. building that is quarter when, in May, 16% of the 347,000 significantly affect the value. For example, across the street from Grand Central, for $80 sq. ft. building Class A building was placed 1450 Broadway sold in June for $204 million, million, or $563 per sq. ft. This acquisition is into service. at a 5.5% cap rate and for $510 per sq. ft., part of a larger assemblage plan SL Green Value of Manhattan Office Holdings according to reports. The 400,000 sq. ft. has for that block. It is adjacent to 317 Applying market information from building was approximately 15% vacant, and Madison Avenue, which is next door to 331 comparative sales to an income capitalization the buyer saw an upside in leasing the vacant Madison Avenue, also owned by SLG. analysis is a powerful way to estimate the space. Depending on market conditions, With regard to sales, in May 2011 SLG value of the REITs’ Manhattan office holdings. vacant space can present an opportunity, as sold a 359,000 sq. ft. building at 28 West Comparative sales report information about in this example, or a risk if it’s perceived as 44th Street for $161 million, or $448 per recent market transactions can be used to difficult to lease. sq. ft. – an impressive number for a Class determine the value of other properties. While more property-specific, the income B building without avenue frontage. In Typically private information, such as a capitalization approach faces several hurdles. addition, in October 2011, SLG entered into capitalization rate (cap rate) or the current For the most part, the REITs do not provide an agreement to sell its leased fee interest yield on a property, is occasionally divulged property-level income numbers. Even (the land underneath) 292 Madison Ave for in market sales. Since property sales are when companies provide their aggregated $85 million, and the sale is pending lender’s often reported (or easy to compute) on a New York office funds from operation approval. per sq. ft. basis, that price mark represents (FFO) figures, these numbers include non- 7 In March 2011, Vornado acquired a 95% a property condition, location, income, risk, Manhattan properties. interest in One Park Avenue, a 922,000 sq. and upside. Vornado provides financial information ft. building between 32nd and 33rd Streets, The comparative sales approach, when for its New York office portfolio that makes for $374 million, a valuation of $422 per sq. combined with income capitalization can it possible to determine the NOI of those ft. Also in March, Vornado and SL Green provide an accurate depiction of property holdings (Table 7). It is also possible to entered into a 50/50 JV to acquire 280 Park and portfolio value. Cap rates are the compare VNO’s 2011 New York office Avenue, a 1960s era, 1.2 million sq. ft. office current yield on a property, determined by performance to the top of the real estate building between 48th and 49th Streets. The dividing net operating income (NOI) by the market performance in 2006 (Table 8). This JV involved VNO’s contribution of $73.75 market price or value. Backing into a market comparison shows a 61% growth in portfolio million in mezzanine debt and a $111.25 value, the income capitalization method NOI. million cash payment. In December, VNO divides NOI by an appropriate cap rate to Applied to financials Vornado provides 8 formed a joint venture with the Kushner determine a property price. for its New York office holdings, a 5.0% cap Companies to recapitalize the office portion Cap rates differ among property types and rate results in a valuation of $12.3 billion or of 666 Fifth Avenue, a 1.4 million sq. ft. Class markets, but as of mid-year 2011, cap rates $714/sq. ft. (Table 9). A more aggressive A building between 52nd and 53rd Streets. for Class A Manhattan office space were in 4.0% cap rate results in a portfolio value of 9 VNO acquired 49.5% of the building, in the 4.0% to 5.0% range, while Class B space $15.3 billion, or $893/sq. ft. With recent connection with a modification of the first were in the 5.0% to 7.0% range. Just as a investment sales in the $700+ per sq. ft. mortgage into A and B Notes. The new JV junk bond carries a high yield, higher cap range, this may be a fair assessment, even plans to spend $150 million re-tenanting, rates can signify higher risk, while lower with the low cap rate. and repositioning the property, which was cap rates are typically associated with core, only 81.1% occupied at year end. stabilized properties.6 New York, as usual, 6 Of course, as an asset class, real estate differs from In May 2011, BXP resumed development offers an exception, as office investors may bonds significantly, since real estate can provide long-term capital appreciation, as opposed to a return of par value. of 250 West 55th Street, an approximately be willing to accept a lower cap rate due to 7 FFO = Net Income + Amortization & Depreciation – 989,000 sq. ft. Class A office building in high vacancy or other factors in the short Gains from Sale of Real Estate. . The restart of this 8 VNO’s NYC income data includes a 132,000 sq. ft. term if they think they can quickly lease the Paramus, NJ office building with gross rents of $2.3 development was catalyzed by a lease with property or increase rents on near-term lease million (based on annualized rents of $20.28 per sq. ft. @ law firm Morrison & Foerster for 19% of 87.1% occupancy) in its calculations. expirations. 9 Based on proportionate owned sq. ft., as Vornado’s the building’s space, or 184,000 sq. ft. A When reviewing comparative sales, 10-K, Note 2, p 173: “Interest and debt expense, portion of BXP’s 510 Madison Avenue office depreciation and amortization and income tax expense in differences between the properties can the reconciliation of net income to EBITDA includes our development came online during the second share of these items from partially owned entities.”

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 5 – www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012

billion transaction in 2008. Table 7: The REITs can also be compared side-by- 10 Vornado’s New York Office 2011 NOI side by applying a per sq. ft. valuation based New York Office 2011 on the total size of their office holdings (Table Revenue $1,117,317,000 13). By applying per sq. ft. values, varying Operating Expenses $504,546,000 total portfolio values can be extrapolated. NOI $612,771,000 This approach would be useful for applying a sales comparison approach to valuation. In Table 8: the case of VNO and BXP, the corresponding per sq. ft. values can be linked to the income Vornado’s New York Office Reported Financials method approach values provided in Tables Description 2011 Annual 2006 Annual 9 and 11. Net Income $264,190,000 $187,880,000 It is also possible to measure the impact + Depreciation & Amortization $201,122,000 $101,976,000 of mortgage debt on portfolio values. By - Gain from sale $ - $ - taking the portfolio values from Table 13 and Funds From Operations (FFO) $465,312,000 $289,856,000 subtracting mortgage debt (Table 1) provides a net asset value (NAV) for the Manhattan + Rent Increases $25,720,000 $4,431,000 office holdings of the REITs (Table 14). This - Capital Expenditures $13,733,000 $ - net asset value is the equity that a portfolio - Maintenance $21,503,000 $12,446,000 level investor would have in the aggregated Adjusted FFO $455,796,000 $281,841,000 14 Vornado’s New York Office 2011 and 2006 Financial Performance11 12 properties. The effect of mortgage debt is also Table Table 1: 9: measured in loan-to-value ratio. The values in Table 15 show the implied leverage of Vornado’s New York Valuation per sq. ft. (2011)13 the REITs’ Manhattan portfolios, based on Cap Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% an estimated value per sq. ft. Using the Value ($B) $15.3 $13.6 $12.3 $11.1 $10.2 $9.4 $8.8 valuation in the top left cell as an example, if NOI Multiple 25.0 22.2 20.0 18.2 16.7 15.4 14.3 BPO’s Manhattan office portfolio is valued at FFO Multiple 32.9 29.3 26.3 23.9 21.9 20.3 18.8 $400 per sq. ft., it would have a total value of AFFO Multiple 33.6 29.9 26.9 24.4 22.4 20.7 19.2 $6.3 billion (Table 13), a Net Asset Value (i.e., Value/sq.ft. $893 $794 $714 $649 $595 $549 $510 equity) of $2.8 billion (Table 14), and a loan- 13 Vornado’s New York Valuation per sq. ft. (2011) to-value ratio (leverage) of 55% (Table 15). Interestingly, despite all the negative While Boston Properties does not provide and are presented in this paper based on press and industry sentiment on financial the same level of detailed information as a 5.0% cap rate. With that 5.0% cap rate Vornado, BXP does break out NOI for its applied to the annualized NOI across three

Manhattan office portfolio (Table 10). With very different properties, a range of values 10 NOI based on reported New York Office Revenues this information, different cap rates can be appear on a sq. ft. basis. This analysis shows minus New York Office Operating Expenses minus General and Administrative expenses. Does not include applied to obtain portfolio valuations (Table values ranging from $1,176 per sq. ft. for depreciation and amortization or interest and debt 11). For example, a 5.0% cap rate applied , and $2,913 per sq. ft. expense. 11 Net Income = NOI – (Depreciation & Amortization) – to BXP generates a value of $6.1 billion, or for the GM Building. By way of comparison (Interest and Debt Expense). $846/sq. ft. That is $132/sq. ft. more than to the peak of the boom in 2006, BXP 12 In this analysis, Vornado’s income from owned office space in New Jersey is included in their New York office the same cap rate on Vornado’s portfolio, collected average rents of $77.88 per sq. ft., financial reporting, since information to separate this out reflecting BXP’s higher rents. compared to $88.01 in 2011. A valuation is not available. 13 Based on proportionate owned sq. ft., as Vornado’s Note BXP separately reports FFO and NOI based on a 5.0% cap rate would value the 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation for its JVs (Table 12). Using the NOI GM Building at $5.268 billion, compared to of net income to EBITDA includes our share of these information, valuations can also be obtained when BXP acquired the property in a $3.95 items from partially owned entities.” 14 Excluding any unsecured, corporate level REIT debt.

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 6 – www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012

leveraging and aggressive use of debt Table 10: usage, on average, the REITs’ portfolios BXP’s Manhattan Office Net Operating Income (2011) appear to be more highly leveraged in 2011 Manhattan Office 2011 than they were in 2006 (Tables 15 and 16). Revenue $458,791,000 This may be attributed to New York City’s Expenses $152,649,000 resurgence from the recession and the NOI $306,142,000 strong performance of New York’s market, which has attracted buyers and lenders alike. Table 11: Future Growth BXP’s Manhattan Office Valuation (2011) The West Side, Park Avenue, and Penn

Cap Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% Station are all favored development areas, Value ($B) $7.7 $6.8 $6.1 $5.6 $5.1 $4.7 $4.4 as indicated by investment activity by the NOI Multiple 25.0 22.2 20.0 18.2 16.7 15.4 14.3 four REITs. Value/sq.ft. $1,057 $949 $846 $769 $705 $651 $604 Boston Properties’ restart of its 1 million sq. ft. development at 250 West 55th Street is a strong vote of confidence in the Midtown Table 12: West/ market. BXP is also BXP’s JV Performance (2011) putting the finishing touches on a 347,000 Description GM Building 125 West 55th St. 540 Madison Ave sq. ft. tower at 310 Madison Avenue. Property Financials Vornado has publicly argued for the Revenue $345,483,000 $47,789,000 $32,252,000 upzoning of Park Avenue to allow for bigger NOI $263,416,000 $34,303,000 $20,839,000 buildings. Additionally, both Vornado and Interest $105,227,000 $12,562,000 $7,683,000 Brookfield have substantial development Interest: Partner Loans $63,131,000 $ - $ - plans for the Penn Station area. Brookfield Depreciation & Amortization $117,583,000 $16,866,000 $9,728,000 owns a parcel suitable for 5.4 million sq. ft. Mortgage Principal $ - $1,562,000 $240,000 between West 31st and 33rd Streets and Total Debt Payments $168,358,000 $14,124,000 $7,923,000 across from the Farley Post Office (Penn FFO $158,188,333 $22,288,333 $13,948,333 Station’s planned relocation). However, BXP’s Share at this time, Brookfield appears to be Ownership% 60% 60% 60% concentrating on a renovation of the retail NOI $158,050,000 $20,910,000 $12,978,000 FFO $94,913,000 $13,373,000 $8,369,000 space at the World Financial Center, and Valuation Metrics re-leasing the soon to be vacant Nomura Value @ 5.0% Cap Rate (NOI) $5,268,320,000 $686,060,000 $416,780,000 space there, rather than building new Implied Value per sq ft $2,913 $1,176 $1,441 development. Implied FFO multiple 8.3 7.7 7.5 Vornado has considered replacing the Implied Loan to Value Ratio 39% 30% 28% with a 2.8 million sq. Debt Service Coverage Ratio 1.6 2.4 2.6 ft. office tower. This plan has had a long history of opposition from the owners of Table 13: the and local activists.

NYC REIT Portfolio Value Using per sq. ft. Comparable In December 2011, however, Vornado reported that the hotel will be renovated, REIT $400 $500 $600 $700 $800 $900 $1,000 $1,100 not demolished. BPO $6.3 $7.9 $9.4 $11.0 $12.6 $14.2 $15.7 $17.3 SL Green has partnered with Joe Moinian BXP $2.9 $3.6 $4.3 $5.1 $5.8 $6.5 $7.2 $8.0 in his redevelopment of Three Columbus SLG $8.3 $10.4 $12.5 $14.6 $16.7 $18.8 $20.8 $22.9 Circle (1775 Broadway) by recapitalizing VNO $6.9 $8.6 $10.3 $12.0 $13.7 $15.4 $17.2 $18.9 that venture. SL Green has also been a Total $24.4 $30.5 $36.6 $42.7 $48.8 $54.9 $61.0 $67.1

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 7 – www.baruch.cuny.edu/realestate MAJOR NYC REIT ACTIVITY & HOLDINGS SPRING 2012

very active buyer of retail properties, so it is Table 14: seeking growth outside of the office sector. Manhattan Office Portfolio Net Asset Value SL Green purchased 3 Columbus Circle, with REIT $400 $500 $600 $700 $800 $900 $1,000 $1,100 20.1% occupancy in January 2011 and had BPO $2.8 $4.4 $6.0 $7.6 $9.1 $10.7 $12.3 $13.9 brought occupancy to 61%, as of January BXP $0.3 $1.0 $1.7 $2.4 $3.2 $3.9 $4.6 $5.3 2012. SLG $4.7 $6.7 $8.8 $10.9 $13.0 $15.1 $17.2 $19.2 Conclusion VNO $4.2 $5.9 $7.6 $9.3 $11.0 $12.7 $14.5 $16.2 Even in the face of economic uncertainty, Total $11.9 $18.0 $24.1 $30.2 $36.3 $42.4 $48.5 $54.6 the demand for New York office property by major REITs and other real estate investors Table 15: remains strong. REITs are aggressively Implied 2011 Portfolio Leverage (Loan to Value) Based on per sq. ft. value acquiring prime Manhattan office space

REIT $400 $500 $600 $700 $800 $900 $1,000 $1,100 through both outright purchases and by taking advantage of creative capital uses, BPO 55% 44% 36% 31% 27% 24% 22% 20% BXP 91% 73% 61% 52% 45% 40% 36% 33% as shown by Vornado’s use of mezzanine SLG 44% 35% 29% 25% 22% 20% 18% 16% debt to partner with SL Green at 280 Park VNO 39% 31% 26% 22% 20% 17% 16% 14% Avenue. Existing space is being re-leased Total 57% 46% 38% 33% 29% 25% 23% 21% at higher rates, and tenants are signing leases on development projects, both positive indicators. More than 11 million sq. Table 16: ft. of office space is under development or Implied 2006 Portfolio Leverage (Loan to Value) redevelopment by the REITs, demonstrating Implied Leverage $400 $500 $600 $700 $800 $900 $1,000 $1,100 their confidence in the long term strength of BPO 57% 45% 38% 32% 28% 25% 23% 21% New York’s office market. ■ BXP 45% 36% 30% 26% 23% 20% 18% 16% SLG 35% 28% 24% 20% 18% 16% 14% 13% VNO 35% 28% 23% 20% 18% 16% 14% 13% This research report is published by the Steven L. Newman Real Estate Institute, Baruch College, Total 43% 34% 29% 25% 21% 19% 17% 16% CUNY.

The Newman Real Estate Institute gratefully Bibliography acknowledges the support of the sponsors who make possible our efforts to promote critical Boston Properties, Form 10-K for the Period Ending 12/31/11. thinking on topical issues for the real estate industry. Boston Properties, Supplemental Operating and Financial Data for the Quarter Ended December 31, 2011. The views expressed in the research report are those of the authors and not necessarily those of Baruch Brookfield Office Properties, Form 40-F for the Period Ending 12/31/11. College, City University of New York, or any of its Brookfield Office Properties, Supplemental Information for the quarter ended December 31, affiliated organizations, foundations, and sponsors. 2011. Please address inquiries to Jack S. Nyman, Director, at: CoStar Research, “Fosterlane Returns to Buy 750 Seventh Ave. for $485 Million,” May 4, 2011. Crain’s New York Business, “SL Green buys out partner at 1515 B’way,” April 28, 2011. Crain’s New York Business, “More Towers get three-digit rents,” May 22, 2011. Cushman & Wakefiled, “Marketbeat Office Snapshot Manhatan” Q4 2011 Baruch College, CUNY 137 East 22nd Street National Association of Real Estate Investment Trusts, “White Paper on Funds from Operations,” Box C-0120 April 2002. New York, NY 10010 Real Estate Weekly Online, “The Zar Group finishes $204 million buy of 1450 Broadway,” June Tel: 646.660.6950 • Fax: 646.660.6951 1, 2011. www.baruch.cuny.edu/realestate Real Estate Weekly, “Nomura signs 900K s/f deal at Worldwide Plaza,” June 28, 2011. Mitchel B. Wallerstein, President, Baruch College SL Green Realty Corp, Form 10-K, for the Period Ending December 31, 2011. William Newman, Founding Chair SL Green Realty Corp, Fourth Quarter Supplemental Data, December 31, 2011. Richard Pergolis, Co-Chair Vornado Realty Trust, Form 10-K, for the period ending December 31, 2011. Jack S. Nyman, Director Vornado Realty Trust, Supplemental Operating and Financial Data for the Quarter and Year Emily Grace, Associate Director of Research Ended December 31, 2011.

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010 – 8 – www.baruch.cuny.edu/realestate