Recent Vornado Moves Perplexing, But This is Clear: Fat Dividend Yield, Great Properties
How do you get rich? Well, many of us try to invest in things that look a little expensive now but that we believe will be far more valuable someday. Like shares of Facebook (FB) or Tesla Motors (TSLA).
Here are two other ways: You can buy things that you know are already valuable now but that are suddenly unpopular and therefore available at a discount, like Vornado Realty Trust (VNO). Or you can put your money with investors who are smarter than you are, like Vornado’s chairman, Steven Roth.
Vornado is arguably the best performing real estate investment trust ever. Roth started the company as a modest collection of shopping centers near New York City in 1980. Now Vornado now owns $30 billion or so in real estate, including a passel of trophy skyscrapers in Manhattan and the Merchandise Mart in Chicago. In 1981, you could buy Vornado shares for less than $1 (adjusting for splits). The stock sailed past $7 in early 1990.
For two more decades, Roth kept it going. Here’s a stock chart showing the total return (including dividends) of Vornado’s stock versus the total return of the S&P 500 since 1990…
… and since 2000.
A lot of Vornado’s success is owed to Roth himself, who is a whirling dervish of smarts, passion and business acumen. He knows how to attract and inspire talented people like Joseph Macnow, Vorndao’s long-time chief financial officer, and Michael Fascitelli, a former Goldman Sachs partner who joined Vornado in 1996 and now is the REIT’s chief executive.
Alas, almost three years into this decade, Vornado’s total returns have fallen behind not only the broader market but behind the average REIT, as measured by the MSCI REIT Index.
In his search for growth, Roth has always had a fondness for opportunistic—sometimes oddball—deals that can seem inscrutable to outsiders. He purchased department-store chain Alexander’s and built a trophy skyscraper on valuable land where its Manhattan store had stood. He invested in a slew of cold-storage vaults in the late 1990s—then sold them a decade later for a $110 million gain.
But even by Roth’s standards, the pitches he and Fascitelli have thrown in recent years have been awfully curvy. In 2007 they made a high-priced second-place bid for a rival office REIT, Sam Zell’s Equity Office Properties Trust, yet declined in 2009 to bid for Chicago shopping-mall giant General Growth Properties (GGP) when it declared bankruptcy. Along the way, though, they purchased stakes in Toys “R” Us, J. C. Penney (JCP) and a Miami Beach mortgage servicer, LNR Property Corporation—none of the deals have put high-value properties into Vornado’s hands.
It’s not so easy for we outsiders to value some of these moves. Is there misunderstood genius in them? Maybe. What investors clearly do understand is Vornado’s dividend, which used to growth dependably but which the company slashed during the economic meltdown. It hasn’t come back to par.
Analyst and occasional Vornado critic Alexander Goldfarb has taken a hard look at Vornado’s shopping centers and skyscrapers. He figures that there’s $86 a share in net asset value underlying Vornado’s stock. That’s not a figure based on future cash flows. That’s not what the properties could be worth someday. That’s a now number. That’s what Goldfarb thinks investors would receive if Vornado carefully liquidated its holdings and paid out the profits to shareholders today.
So Vornado’s stock is trading at a 7 percent discount to Goldfarb’s estimate of its NAV. If you pay $79 for its shares, you get $86 worth of real estate equity.
It’s true that a 7 percent discount to NAV is not unusual for REITs these days—Goldfarb notes that Boston Properties (BXP), whose chairman Mortimer Zuckerman is no slouch is trading at a 20% discount to its NAV. Yet Roth and Fascitelli are clearly concerned by this discount. Roth acknowledged a letter to shareholders in his 2011 annual report that his company had “lost some luster.” He vowed the company would make an effort to get it back: “Everything is on the table.”
So far, so good. Last week, Vornado reported third-quarter funds from operations of $1.34 a share, crushing Goldfarb’s estimate of $1.18 a share. Goldfarb thinks the company will report around $3.20 a share in FFO for 2012 and $3.08 a share in 2013. As the economy continues to recover, rising rents in New York, Chicago and Washington, D.C., should lift Vornado’s profits.
Meanwhile, investors who are fond of dividends have lost sight of the fact that Vornado’s dividend yields is way higher than that paid by 10-year Treasury debt.
Given Roth’s history, I’d bet Vornado will produce more earning surprises in the next year or two—and find a way to boost the company’s dividend. But who cares? The dividend yield is reasonable now. And its properties are valuable now. If you’re fond of paying a discounted price for things that are valuable now, Vornado shares appear attractive.
Stephane Fitch is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis