ALX - Alexander's Inc.: Numerous Signs Of Distress
2024-07-16 09:10:00 ET
Summary
- Office REITs have gained modestly this year, but face challenges due to the WFH trend and mounting defaults in commercial real estate loans.
- Alexanders, Inc. is a small-cap REIT with a portfolio of office and retail properties in New York City, facing heavy indebtedness, shrinking revenues, and reliance on a single tenant.
- ALX faces liquidity issues, and may need to cut dividends or dilutively issue new shares, making it a risky investment for the longer term.
Thus far this year, Office REITs have gained modestly, returning an average of 5.23% (most of that coming last week), compared to the REIT average of 1.07%. This stands in sharp contrast to the +18.55% return posted by the S&P 500, and even sharper contrast to the +21.20% earned by the Nasdaq 100.
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The WFH (work from home) trend kickstarted by the pandemic has had, and will continue to have, lasting effects on commercial office owners, as demand has slackened, more or less permanently. Meanwhile, mounting defaults in commercial real estate loans, and office-related loans in particular, adds pressure to an already sketchy banking system . As Seeking Alpha Contributor Avi Gilburt wrote in April :
Alexander's Inc.: Numerous Signs Of Distress[according to] a study published by researchers from USC, Columbia, Stanford, and Northwestern, . . . 14% of all CRE loans and 44% of office-related loans appear to be in "negative equity." In other words, the current values of properties, which serve as collateral for these loans, are less than the outstanding loan balances. In addition, the paper said that around one third of all CRE loans and the majority of office-related loans may encounter substantial cash flow problems and refinancing challenges. The study concluded that U.S. banks are likely to face a 20% default ratio on their CRE loans.