Diversified real estate investment trusts (REITs) are working hard to overcome the downturn in commercial real estate. Vornado Real Estate Trust (VNO) stands as among the best positioned, thanks to its shrewd property selection.
Vornado’s attractive portfolio of properties has helped it produce an annualized total return of 17.51 percent over the past three years. That puts it above MFA Financial (MFA), with a return of 16.95 percent and Annaly Capital Management (NLY) with a return of 14.88 percent.
Vornado owns more than 100 million square feet of commercial real estate. The holdings are concentrated in arguably the top two commercial real estate markets in the country: New York City and Washington, D.C. Vornado also owns one of Chicago’s trophy buildings, The Merchandise Mart.
MFA Financial and Annaly Capital, meanwhile, invest in mortgage securities rather than buildings. Mortgage securities carry a risk that buildings don’t — market risk. A downturn in the mortgage securities market as a whole can affect individual securities whose fundamentals are sound.
Vornado says its core properties in New York and Washington have never experienced a year-over-year decline in cash flow. That shows the trust’s ability to select solid properties.
Vornado’s funds from operations, a measure of REIT cash flow, dropped 22 percent in the third quarter from a year earlier. The problem is that in addition to its property holdings, Vornado invests in companies with real estate connections. In this case, its investment in J.C. Penney cost the firm $37.5 million.
But Vornado’s property portfolio remains solid. Standard & Poor’s analyst Royal Shepard has a hold rating on Vornado shares. “We think VNO has the financial resources to expand a strong portfolio of office and retail assets in supply-limited markets,” he writes.
“The trust has begun to put excess cash balances to work buying select assets from distressed sellers.”
Vornado Realty Trust will report next on Feb. 22.
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