Letters

Skyscrapers vs. Working From Home

July 2020

Skyscraper

 

Skyscrapers vs. working from home


Somar has built short positions in owners of large skyscrapers in New York City and San Francisco. We developed our thesis based on direct observation of the market conditions. While we like to avoid discussing our short positions, this investment provides a good illustration of the importance we place on field work and primary research in our investment process.

As the world moves forward and adapts to life amidst a pandemic, a positive surprise has been the productivity and seamless ability to work from home for most white-collar workers. At Somar, the team didn’t skip a beat when we were working from home. As the team manager, I feel good about the operations if for some reason we are forced to go back to work from home.

Upon returning to the office in Midtown Manhattan, I was surprised to find it empty. Of the more than 20 firms around us, only Somar and one other are working regularly in the office. Our building is not an isolated case. Brokers and analysts have reported that only 8% to 10% of workers have returned to the office in Manhattan.

From our office, looking at the skyscrapers around us, we can’t see anybody working. In fact, the only people we see are construction workers dismantling and remodeling entire floors, presumably for landlords in the hope that new tenants will rent the vacant space. Please check out this video https://youtu.be/YDI8qUpPzyY.

Given the protracted nature of the pandemic, we still see people not renewing their leases once they come up for renewal. Brokers tell us that almost no one is currently on the market to rent new space.

It is unclear how many people will return to office work after the pandemic. We are paying close attention to the next important data points: what happens in September with back to school and what happens once the Covid-19 threat abates either through a therapy or through a vaccine.

There are strong arguments pointing to a scenario of several years until the previous level of occupancy and rates are recovered:

  • Working from home is going well. No significant drop in productivity has been felt by most companies. This has changed most managers perception on the benefits of more flexible working arrangements;
  • It is now acceptable to have offices outside of the main cities and come to the big cities just for major meetings;
  • Supply of new offices is still growing with several buildings coming online in the next few months1
  • A hybrid work policy with some days in the office and some at home would materially reduce the area needed for most tenants with more desk sharing;

Some landlords are already adapting to the new reality: at Somar we have been offered deals where we would pay almost half of our current rent for comparable spaces.

This scenario is not a foregone conclusion. There was no shortage of analysts predicting the downfall of travel in the wake of the 9/11 attacks only to see it rebound quickly. The pandemic will not change several benefits of getting your team together in an office:

  • Build a strong company culture;
  • Foment higher teamwork – with teams in the same space, teambuilding and informal talks are easier;
  • Close meaningful deals – hard to do high stakes negotiating without some face to face meetings.
  • Mentor younger employees and onboard new hires;
  • Hire senior executives – needs to be done face to face as chemistry and non-verbal cues are extremely important to determine culture fit. That said, you don’t need an office for that.

Therefore, our field work needs to continue to identify any inflection in trends from what we currently see.

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We have traded our short positions opportunistically taking advantage of market volatility. We build our positions on major market rallies while harvesting profits when the valuation falls materially.

Most of the REITs that own these businesses have very high levels of debt. While debt is used to boost the returns on equity, it gives these companies limited margin of safety if the pandemic becomes protracted with tenants not renewing or renewing at significantly lower rent levels.

Banks and bondholders have so far been very flexible with covenant waivers. But if fundamentals continue to deteriorate, they will have no choice but to force REITs to raise more equity capital and / or to reduce their dividend payouts.

We will continue to leverage our field work to inform our views and act accordingly.

 

Team

Our internship program concluded this week. I was extremely impressed with Justin and Andrew’s quality of work. There is a lot of talent out there. For the past few years we have asked our current interns to write a greeting letter to our future summer interns. Here are a few quotes taken directly from the letters from Justin and Andrew who illustrate their perception of Somar’s culture and process.

“I can assure you that you’ll be more prepared than many of your competitors, simply because of the actual hands-on work that you’ll be doing the entire summer.”

“You’ll learn a lot about the technical aspects of financial modeling, but the more interesting part is doing the qualitative research that helps back up your stock pitches”

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We are honored every day to be stewards of your trust. We don’t take it for granted and strive to earn it in everything we do. We work on your behalf to connect your wealth prospects to some of the best business builders in the world today. Should you require any additional information, please reach me at either pedro.ramos@somarcap.com or +1.646.581.6842.

 

All the best,

 

Pedro Ramos

 

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[1] We have a new skyscraper coming online two blocks away from our current office. It has been in construction for the past 4 years, as a smaller building was torn down to build one with almost twice the number of floors. In the past 12 months, there have been a lot of companies moving to the recently constructed Hudson Yards project in NYC as well.

 

Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice.Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees. 

 

Image by MichaelGaida from Pixabay

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