Is ALX's Dividend a Trap? Assessing the Risks of Earnings Decline and Financial Sustainability

Alexander's Inc. (ALX) has long been a magnet for income-focused investors, luring them with a 8.23% dividend yield—one of the highest in the REIT sector. Yet, beneath the surface of its $4.50-per-share payout lies a complex web of financial pressures that demand scrutiny. For value investors, the question is not merely whether ALX's dividend is sustainable, but whether it is a trap—a high-yield illusion masking deteriorating fundamentals.

A Dividend Built on Fragile Foundations

ALX's dividend appears resilient on paper, but the numbers tell a different story. In Q2 2025, the company's net income plummeted 27% to $6.1 million, while funds from operations (FFO)—a critical metric for REITs—dropped 13% to $2.88 per share. The payout ratio for Q2 reached 126% of earnings and 65% of FFO, meaning the dividend now exceeds the cash flow generated by core operations. This is not a sign of strength; it is a warning flag.

The company's liquidity position—$390 million in cash and restricted cash—offers a temporary buffer, but it cannot offset structural weaknesses. Rental revenue fell 7.2% year-to-date, driven by the expiry of Home Depot's lease at 731 Lexington and the prior loss of IKEA at Rego Park I. These vacancies are not one-time events; they reflect a broader trend of tenant turnover and declining rents in a competitive Manhattan real estate market.

Debt and Refinancing Risks: A Looming Storm

ALX's balance sheet is a double-edged sword. While its cash reserves are robust, the company faces $500 million in variable-rate debt maturing within 15 months, including a $300 million SOFR-based loan for the retail space at 731 Lexington. With interest rates near multi-decade highs, refinancing these loans could prove costly. The weighted average interest cost after hedges is already 5.17%, and the cap on Rego Park II's SOFR exposure expires in December 2025. If rates rise further, ALX's interest expenses could spiral, further straining cash flow.

Compounding these risks is the company's heavy reliance on a single tenant. Bloomberg L.P. accounts for 61% of ALX's rental revenue. A lease renegotiation or departure would be catastrophic, reducing revenue by over half. This concentration of risk is rarely discussed in earnings calls but is a critical vulnerability for a REIT that prides itself on stability.

Management's Commitment: A Test of Willpower

Despite these challenges, ALX's board has reaffirmed its commitment to the $4.50 dividend, declaring it again on July 30, 2025. This decision aligns with REIT obligations to distribute at least 90% of taxable income, but it also reflects a strategic choice to prioritize shareholder returns over financial prudence. Management's confidence is understandable—ALX's commercial and residential occupancy rates (94.8% and 98.7%, respectively) remain strong—but it overlooks the fragility of its cash flow.

The company is exploring development or sale options for Rego Park I, which will become vacant after 2025. While this could unlock value, it also introduces uncertainty. Will ALX find a tenant willing to pay premium rents for a large retail space in a competitive market? Or will it be forced to accept lower rates to fill the property? These questions remain unanswered.

Value Investing Under Pressure: Is This a Trap?

For value investors, ALX presents a paradox. On one hand, its high yield and consistent dividend history are attractive. On the other, its financial metrics—declining earnings, rising debt costs, and overreliance on a single tenant—suggest a company teetering on the edge. The key to assessing this stock lies in evaluating whether ALX's management can navigate these challenges without compromising its dividend.

Three scenarios emerge:
1. Optimistic: ALX secures new tenants for 731 Lexington and Rego Park I at or above current rents, refinances debt at favorable rates, and maintains occupancy above 90%. The dividend remains intact.
2. Neutral: Rents decline modestly, refinancing costs rise, and the company cuts the dividend by 10–20% to align payouts with cash flow. Shareholders face a yield drop but avoid a catastrophic loss.
3. Pessimistic: Vacancies persist, refinancing fails, and Bloomberg exits. The dividend is slashed or eliminated, triggering a sharp sell-off in the stock.

Investment Advice: Proceed with Caution

ALX's dividend is not a trap in the traditional sense—it is not a Ponzi scheme or a fraud. However, it is a high-risk proposition for value investors. The company's ability to sustain its payout hinges on its capacity to adapt to a changing real estate landscape. Investors should monitor three key metrics:
- Occupancy rates at 731 Lexington and Rego Park I.
- Refinancing costs for the $500 million in maturing debt.
- Bloomberg's lease stability and willingness to renew.

For those willing to take the risk, ALX could offer a compelling entry point if its stock price corrects further. But for most investors, the risks outweigh the rewards. In a market where “safe” high-yield stocks are scarce, ALX's dividend is a siren song—one that demands careful navigation.

In the end, the answer to whether ALX's dividend is a trap depends on your risk tolerance. If you're prepared to bet on management's ability to outmaneuver its challenges, the 8.23% yield is tempting. But if you value sustainability over yield, it may be time to reconsider. The market will ultimately decide, but history shows that dividends not backed by earnings rarely survive the long term.