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WIKI ANALYSIS
Vornado Realty Trust (NYSE:VNO) is one of the largest owners and managers of real estate in the United States with a portfolio of approximately 64 million square feet located in the Washington D.C. and New York areas.[1] The New York based real estate investment trust (REIT) primarily makes money by developing, renting, and selling real estate. [2] Unlike other REITs, which tend to focus on a particular property type, Vornado holds a diverse portfolio spanning a large range of mostly commercial property (office, retail, merchandise marts, warehouse/industrial, etc). Its commercial focus has an added advantage of shielding it from downturns in the residential housing market. Vornado's properties are also largely located in NYC and Washington DC, markets with high barriers to entry due to limited buildable land and tough building regulations. Having properties in such high profile cities does, however, leave the company particularly vulnerable to terrorism and a potential increase in the cost of terrorism insurance.
Company Overview
The company's four major platforms include:
- New York City Office - 28 New York office properties, primarily located in midtown Manhattan totaling 16.0 million square feet;
- Washington, DC Office - 83 Washington D.C. area office properties and one hotel property totaling 17.6 million square feet;
- Retail Properties - 173 retail properties with 21.1 million square feet located in the United States, the District of Columbia and Puerto Rico; and
- Merchandise Marts - 9.2 million square feet in 9 Mart buildings including a 3.4 million square foot Merchandise Mart in Chicago.
Vornado's other investments include a 32.8% interest in Alexander's (ALX); a 32.8% interest in Toy's "R" Us (TOY); New York's Hotel Pennsylvania; a 47.6% interest in Americold Realty Trust; mezzanine loans to real estate related companies; interests in other public companies that own and manage office, industrial, and retail properties leased to major corporations and student and military housing properties throughout the United States; and 7 dry warehouse/industrial properties in New Jersey containing approximately 1.5 million square feet.[3]
Vornado's total real estate owned or managed, including pro-rata share of partially-owned entities and joint ventures, is approximately 116 million square feet, including Vornado's 16 million square feet of Toys "R" Us real estate. [4]
Since 2002, although Vornado's revenues have been increasing fairly rapidly, its operating income has fallen due to increases in depreciation & amortization expense. [5]
As displayed in the following two charts, Vornado's EBITDA (earnings before interest, taxes, depreciation, and amortization) are concentrated in the New York City and Washington DC metro area markets as well as in office properties.
Vornado's properties are marked by very high occupancy rates. This is important as Vornado uses these rates to negotiate favorable lease terms on the basis of high demand relative to supply.
The following graph shows that Vornado's properties have considerably higher occupancy rates than average in the NYC office market:
Key Trends and Forces
- Economic Cycles Particularly in NYC/NJ/DC Areas: Since a large portion of Vornado's properties are in the New York City/New Jersey and Washington, DC metropolitan areas, Vornado is particularly affected by the economic cycles and risks inherent to those areas. During 2006, about 67% of Vornado's EBITDA came from such properties. Factors affecting economic conditions in these areas include industry slowdowns, business relocations, changing demographics, increased telecommuting, financial performance and productivity of the publishing, advertising, financial, technology, retail, insurance, and real estate industries, and ultimately occupancy rates.[11]
- Changing Interest Rates: REIT prices generally show an inverse relationship with interest rates. As interest rates rise, it becomes more difficult to sell real estate and likewise alternative investments such as bonds become more attractive relative to real estate, so real estate prices tend to stagnate.[12] Rising interest rates are occasionally associated with rising REIT prices however--that is, if the effect of the demand that led to the rising rates is stronger than the force of the credit crunch.
- Risk of Terrorism: As many of Vornado's properties are located in high-profile metropolitan areas, in the aftermath of a terrorist attack, tenants may relocate to less populated, lower-profile areas that are perceived to be less likely targets of future terrorist activity. This would cause a decrease in demand, so that Vornado would have to renew leases to remaining tenants on less favorable terms. Insurance coverage limits are also lower for terrorism losses than most other factors, so in the event of a terrorist attack significantly damaging one of Vornado's properties, Vornado would more likely have to absorb a direct loss.[13] Finally, if the Terrorism Risk Insurance Act is not renewed at its expiration at the end of 2007, terrorism could become much costlier to insure.
- Rising Rates of Inflation: Although inflation has not materially impacted Vornado's operations in the recent past, increased inflation could have a negative impact on earnings, as costs for mortgage and debt interest expense and general and administrative expenses could increase at a rate higher than rents. Inflation could also have a negative effect on consumer spending which could decrease market rents particularly on retail properties.[14]
Competition
Most of Vornado's direct competition comes from other United States based REITs, most of which are also publicly owned. Competing REITs within the US include:
- Equity Office Properties Trust (EOP) is a privately held REIT headed by real estate tycoon Sam Zell. EOP owns more than 125 office buildings in about 15 metropolitan areas. EOP was recently acquired by the Blackstone Group for almost $40 billion after a fierce bidding war with Vornado in one of the largest private equity transactions ever.[15]
- IStar Financial (SFI) is a commercial REIT that invests in the top tier of commercial real estate.
- Simon Property Group (SPG) focuses on regional malls, Premium Outlet Centers®, The Mills®, community/lifestyle centers, and international properties, and either owns or has an interest in 379 properties comprising 256 million square feet of gross leasable area.[16]
- Boston Properties (BXP) owns primarily first-class office space, a hotel, and retail properties[17] located mostly in Boston, Manhattan, San Francisco, and Washington DC.[18]
- Brookfield Properties (BPO) owns nearly 50 million square feet in commercial properties across the US and Canada.[19]
- EQUITY RESIDENTIAL (EQR)
- Apartment Investment and Management Company (AIV)
Market Share
Among diversified REITs (REITs with significant operations spanning two or more property types such as office, retail, residential, and specialty), Vornado's market share is about 35.1%.
- IStar Financial (SFI) focuses on the commercial real estate industry, offering custom financing to high-end U.S. private and corporate real estate owners.[20]
- Crescent Real Estate Equities Company (CEI) holds 71 office properties and invests in resort-residential properties predominately in Texas and the southwestern United States. [21]
- Colonial Properties Trust (CLP) operates and owns 39,104 apartment complexes, 17.6 million square feet of office space, and 12.1 million square feet of retail space in states spanning Virginia to Nevada.[22]
References
- ↑ VNO company website
- ↑ VNO 2006 10-K, Item:1A, page 10
- ↑ VNO company website
- ↑ VNO company website
- ↑ VNO 2006 10-K, Item:8, page 129
- ↑ VNO 2006 10-K, Item:6, page 56
- ↑ VNO Annual Report 2006
- ↑ VNO Annual Report 2006
- ↑ VNO 2006 10-K, Item:7, page 74
- ↑ Cushman Wakefield New York City MarketBeat 2Q07
- ↑ VNO 2006 10-K, Item:2, page 17
- ↑ PFM Article: "REIT Performance in a Rising Interest Rate Environment"
- ↑ VNO 2006 10-K, Item:2, page 17
- ↑ VNO 2006 10-K, Item:2, page 14
- ↑ Yahoo Finance: Equity Office Properties Trust company overview
- ↑ Simon Property Group company website
- ↑ Boston Properties company website
- ↑ Hoovers: Boston Properties company overview
- ↑ Hoovers: Brookfield Property company overview
- ↑ Yahoo Finance: iStar Financial company overview
- ↑ Crescent Real Estate Equities company website
- ↑ Colonial Properties Trust company website
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