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Alexander's: a lot of property in stock.

Alexander's Inc. is attempting to work out its financial difficulties with lenders and suppliers, however, experts agree that its main resource is the real estate owned by the company.

Sources close to the negotiations said that if Alexander's cannot come up with a viable solution to its problems, it will likely close after the end of the year and the holiday shopping season. The stores, it seems, will be cheaper to keep vacant than to continue to operate.

While the entire Alexander's chain is currently for sale, the company is now reportedly willing to break up the parcel into individual properties.

Of the 4.9 million shares outstanding, majority shareholders include Interstate Properties of New Jersey, a financially strong real estate development company holding a 29 percent interest; Mutual Shares, a mutual fund company which holds a 12 percent stake; and a 27 percent stake turned over to Citibank under the terms of a loan agreement with Donald J. Trump. Citibank is already placing people on Alexander's board of directors.

Alexander's Inc. owns six locations including the flagship store on 59th Street and one in Rego Park while five are rented, including the retail location at the World Trade Center where the lease was reported to be for sale for $10 million.

While the stock is currently trading in the $11 per share range, one analyst, who asked not to be quoted, said if the divestment of assets is made in an orderly fashion, there are people who think that even in the depressed market, the company is worth $30 to $40 a share, after all debt is paid. Other analysts discounted the price to a $28 to $30 range.

Abraham Wallach, senior vice president of First Capital Advisors, disagrees even with that assessment. On paper, he said, technically there is value, however, the hard realities of the current real estate market, the credit crunch and the fact that Alexander's must pay off a minority shareholder at the 59th Street store for $35 million, suggests a number which is 50 percent of that.

"The numbers I've been able to come up with include $50 million in debt owed to creditors, while the minority shareholder needs to get an additional $35 million," he said. "You will not get full value of what any of these locations will be worth, and who will give them financing without 40 to 50 percent equity in the current credit crunch?"

Thomas J.A. Lavin, managing director and head of real estate at Smith Barney Harris Upham, said Alexander's has some wonderful assets.

"They all require work," he said, "and they are all development-type assets which are difficult to deal with in the current market," he said.

Lavin said if an investor had the time to wait, the 59th Street parcel is a "fabulous" site. "Everyone has always talked about a large, mixed-use project for that location," he added. "They may be able to get a bonus for improving the subway."

Discussing only the 59th Street flagship store, Warren M. Heller, director of the investment division of Jones Lang Wootton, said any sale that would be made, would be on the land's speculative value. "It's difficult to justify new construction anywhere in the city," he noted.

Since the greatest price for land sales has been on the West Side -- ranging from $60 to $120 per buildable foot -- Heller predicts a price in the $80 per square foot range.

Wallach said it would make sense for ownership to be consolidated and suggested Interstate Properties as the most likely prospect for a purchaser. He believes Interstate should buy Citibank's stock, since Citibank is not in the business of redevelopment.

"It would be logical for them to buy out and take control until those properties can be developed," he said. "They are a strong company and have the finances to hold onto the properties until the market turns."

The redevelopment of the 59th Street location in Manhattan has several problems, Wallach explained. One crimp in the situation is that Alexander's made a legally binding commitment to buy out a minority ground partner for $35 million. The partner owns a 14 percent stake in the 59th Street site which was given as a trade for the Woolworth portion of the block instead of an actual sale. This "put" actually places the Gruss family in a position similar to that of a mortgage holder and gives them a priority position that must be paid off before anyone else can buy the land.

"This further dilutes the residual value to stockholders and creditors," Wallach added.

One real estate investment expert, who asked not to be identified, said the $35 million number for the land trade was based on late 80's top-of-the-line prices.

"The site is worth less today," he said. "It will be a number of years before it can be developed and no one's buying large chunks of land in Manhattan for cash."

Alexander's still appears to own the whole block, full ownership comes at a $35 million additional cost to pay off the Gruss family. While the store presently does have 120 feet of frontage on Lexington Avenue, it is missing an 80-foot piece today. On Third Avenue, the store currently has only 50 feet of frontage.

"Frontage is what you need for major retailers," Wallach explained.

With an FAR of 15, this would round off the buildable square footage to around 1 million square feet with a value of $100 per square foot, without consideration of air rights or the addition of the other buildings on the block. Wallach thus assessed the property a land value of $93 million to $94 million. "This is a conservative number that would have easily been paid for the site in the mid-80's," he said. "However, this number might be substantially higher if the 22,000 square feet of the remaining block were added to the parcel."

If the purchasers have to get financing, Wallach said they can be written off as prospects, because no one will now finance land acquisition. "So you are left with an all cash basis buyer those groups are buying at severe discounts," he noted.

In that case, Wallach said, the purchaser would offer 40 percent to 50 percent of value, so Wallach calculated a redevelopment sale of $37 million to $40 million. "Its a reflection of the credit crunch," he explained. The purchasers would probably have to carry the building for five years at a total cost of between $60 million and $70 million which Wallach calculated including interest, taxes and demolition costs. The demolition costs would be double what one would expect, he said, because of the high probability of asbestos being present. Some might suggest a lease out of the store to cover taxes, interest and other carry costs until the market recovers. But what retailer would rent for five years, Wallach wondered?

A second scenario Wallach developed would be for Alexander's to rent out the flagship store for 15 to 20 years and sources said discussions are being held with several retailers.

But where is there a department store opening up?, Wallach asked. "The last thing a department store is doing is opening a new store. They can't get money and it's not warranted. Logic then would dictate a series of retail functions." The investor must then work out a retail value to find a reasonable purchase price.

The only retail function that is working today, he said, would be a factory outlet mall operation, however, historically department store have not allowed such operation within 50 miles of their stores. Will Bloomingdales allow Polo and Calvin Klein to sell at a discount the same merchandise they are selling at full retail 200 yards away?

Wallach calculated a potential income stream of $10.5 million without consideration of the 22,000 square feet on the remaining block. Capping it at 9 percent, he said, brings a value of $117 million for the building, while a 10 percent cap would bring it to $105 million.

"Today most investors want 10 percent or better on a redevelopment," Wallach noted, "so it is worth less than $105 million because the income isn't there today. Working with a 12 percent cap, that brings the value to $88 million."

Then, he explained, a potential purchaser must deduct $30 million to $40 million in renovation costs to get the building in shape. "Then you are back down to the $30 million to $40 million under the redevelopment approach," he noted.

"In either scenario -- a purchase to redevelop or to lease out -- you are talking about a rock bottom $35 million to $45 million bucks," Wallach said. "If that sounds astronomically low it's a reflection of the credit market; the present condition of the retailing market and the monumental effort for rehabilitating it for retail; the limitations on the site with limited frontages on Lexington and Third; the $35 million for the minority partner; and the non-existence of the market for redevelopment to take advantage of its full FAR.

"It's going to be very tough," Wallach said. "Nobody can get financing."
Alexander's Inc. Properties
Location Expires Options
Valley Stream, LI 1/31/2008 2 of 40 years each
Roosevelt Ave. & 1/31/97 3 of 10 years each
Main Street, Queens
Central Park Ave., Yonkers 5/31/97 1 of 12 years plus
 1 of 25 years
World Trade Center 9/30/2010 1 for 20 years
Bruckner Blvd. in Bronx 12/31/2003 6 renewals of 5 years

OWNED STORES 59th Street 3rd Ave & 152nd in Bronx Fordham Road & Grand Concourse, Bronx Rego Park Rts 4 and 17 in Paramus, New Jersey Kings Plaza in Brooklyn
COPYRIGHT 1992 Hagedorn Publication
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Alexander's Inc. financial difficulties
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Apr 29, 1992
Previous Article:Diagnosing a sick building.
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