Comparative Analysis of the Notable REIT owned

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					  SPRING 2012                                                                                                                                  RESEARCH PUBLICATION

                                                                                                                         Major NYC REIT
                                                                                                                      Activity & Holdings
A Comparative Analysis of the Notable REIT-owned Manhattan 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
                                                               One Penn Plaza
              or    approximately           18%     of                                                                        presented for discussion in this report.
              Manhattan’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 skyscrapers, 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 New York 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

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 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)

  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             New York City’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%
                                                                                                                           owned. SL Green’s totals do not include its Downtown
when spread across giant portfolios.                                levels and market occupancy is measureable,
                                                                                                                           Brooklyn properties.

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 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%
                                                        BPO                         Two World Financial Center                                     2,671,000                       100%
capturing higher rents.
                                                        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 Madison Avenue                                         1,089,000                       100%
These leases represent 25% of the total
                                                        BXP                                399 Park Avenue                                         1,707,476                       100%
30 million sq. ft. leased in Manhattan’s
                                                        BXP                              Times Square Tower                                        1,244,000                       100%
office market in 2011.2 Given the rent and
                                                        BXP                            601 Lexington Avenue                                        1,630,000                       100%
occupancy performance of the four REITs,
                                                        BXP                             125 West 55th Street                                             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 Third Avenue                                        1,454,000                       100%
higher rents. The REITs are doing exactly               SLG                     Graybar Building (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.
The new leases averaged 9.2 years and                   Table 1:
                                                         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.
                                                        Midtown South                                     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
                                                             on 30,096,753 sq. ft. of leasing activity as reported by Cushman & Wakefield,
                                                       2 Based
Societe Generale at 245 Park Avenue. Other             Q4 2011 Manhattan Office Snapshot.

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 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                Broadway 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
                                 (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 Fifth Avenue, 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
                                                              rent of $91.73 per sq. ft. With its portfolio       sold in 2011.
 SLG                                             2,020,146                                                        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
                                                              ability to command premium rents, BXP may           as a percentage.
 Total                                           7,443,811
                                                                                                                  5 Based on $20.2mm net income, $21.4mm interest
Leasing Activity                                              be able to meet this leasing goal.                  expense and $14.6mm depreciation.

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 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-
  In March 2011, Vornado acquired a 95%                a property condition, location, income, risk,       Manhattan properties.7
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
formed a joint venture with the Kushner                determine a property price.                         for its New York office holdings,8 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
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.9 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
of 250 West 55th Street, an approximately              be willing to accept a lower cap rate due to
                                                                                                           capital appreciation, as opposed to a return of par value.
                                                                                                           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.
midtown Manhattan.          The restart of this        term if they think they can quickly lease the
                                                                                                           8 VNO’s NYC income data includes a 132,000 sq. ft.
                                                                                                           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.”

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 MAJOR NYC REIT ACTIVITY & HOLDINGS                                                                                                                             SPRING 2012

                                                                                                                            billion transaction in 2008.
  Table 7:
                                                                                                                                 The REITs can also be compared side-by-
  Vornado’s New York Office 2011 NOI10                                                                                      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                         $281,841,000
Vornado’s New York Office 2011 and 2006 Financial Performance11 12
                                                                                                                                 The effect of mortgage debt is also
 Table 1:
  Table 9:                                                                                                                  measured in loan-to-value ratio. The values
                                                                                                                            in Table 15 show the implied leverage of
 Vornado’s New York Valuation per sq. ft. (2011)13
                                                                                                                            the REITs’ Manhattan portfolios, based on
      Cap Rate                4.0%              4.5%           5.0%           5.5%      6.0%         6.5%         7.0%      an estimated value per sq. ft.               Using the
 Value ($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-
Vornado’s New York Valuation per sq. ft. (2011)13
                                                                                                                            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                                125 West 55th Street, 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).
                                                                                                                            12 In this analysis, Vornado’s income from owned office
$846/sq. ft.         That is $132/sq. ft. more than                      to the peak of the boom in 2006, BXP
                                                                                                                            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
                                                                                                                            is not available.
reflecting BXP’s higher rents.                                           compared to $88.01 in 2011. A valuation
                                                                                                                            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–
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/Columbus Circle 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%
NOI                                   $158,050,000                   $20,910,000                     $12,978,000
                                                                                                                   concentrating on a renovation of the retail
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%    Hotel Pennsylvania 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 Empire State Building 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–
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
 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.
                                                                                                             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.                                                                                            
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–

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