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Where Will Vornado Realty Trust Be in 3 Years?

Feb 22, 2021 by Matthew DiLallo
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Vornado Realty Trust (NYSE: VNO) has undergone many changes over the years. The diversified real estate investment trust (REIT) has reduced its retail sector presence by selling its stakes in retail REITs PREIT (NYSE: PEI) and Urban Edge Properties (NYSE: UE). It initially acquired those shares in exchange for selling a mall to PREIT and spinning out most of its other retail assets to create Urban Edge. It also exited the Washington, D.C., market by spinning off and merging those properties with JBG SMITH Properties (NYSE: JBGS).

More change seems likely over the next few years, given the REIT's narrowing focus on the New York City market. Here's a look at what appears to be ahead over the next three years.

Where Vornado Realty Trust is right now

Vornado Realty Trust owns an extensive real estate portfolio concentrated in New York City. At the end of 2020, the REIT's portfolio consisted of the following assets:

New York City: 85% of 2020 net operating income (NOI)

  1. Office: 68% of NOI
  2. Retail: 16% of NOI
  3. Residential: 2% of NOI
  4. A 32.4% interest in diversified REIT Alexander's (NYSE: ALX): 4% of NOI
  5. Hotel Pennsylvania: -4% of NOI (closed since April 1, 2020, due to the pandemic).

Other: 15% of NOI

  1. theMART in Chicago: 7% of NOI
  2. 555 California Street in San Francisco: 6% of NOI.
  3. All other investments: 1% of NOI

The company experienced some significant headwinds last year due to the COVID-19 outbreak. It had to close its hotel in New York City, cancel trade shows at theMART, and write off uncollectible rent as two major retail tenants went bankrupt last year. On top of that, some of its other retail and office tenants haven't paid rent. Because of all these issues, the REIT had to reduce its dividend by 20% to conserve cash.

Where Vornado Realty Trust seems headed

While the pandemic hit New York City hard, Vornado plans to remain focused on that city in the future. The company put its 70% interest in 555 California Street on the market last year. It subsequently pulled that property back after it didn't find an offer to its liking. This was due to compressed office property values and the fact the Trump Organization owns the other 30% of that building.

Vornado will likely put that property -- and another one in New York it co-owns with the former president's company -- back on the market now that Trump is no longer in office, and vaccines should eventually enable workers to return to their high-rise offices in major cities. It could also sell other noncore assets, such as its stake in Alexander's.

The cash from selling those two properties (which Vornado hopes will fetch up to $5 billion) and other noncore assets would give it the funds to continue its redevelopment efforts in New York City. The REIT currently has three active mixed-use development projects in the Penn District of New York underway: Farley, PENN1, and PENN2.

It expects to invest more than $2.4 billion into these projects to transform a 1912 U.S. Postal Service building into offices, retail space, a new train center, and create a world-class office campus. Vornado is also putting the finishing touches on 220 Central Park South, a 950-foot luxury residential condo tower that costs nearly $1.5 billion. It has a few smaller projects currently underway and several other future opportunities. It also owns undeveloped land in New York and Chicago and could redevelop some existing properties, including turning the Hotel Pennsylvania into a class A office building.

Vornado's ever-evolving portfolio will likely also feature a few new additions it acquires in coming years. The company's current focus is on turning the Penn District into a new epicenter of New York City. Because of that, it could look to gobble up more real estate in that area to give it more control over future development.

Expect an even more New York City-focused REIT in three years

Vornado has been steadily reducing its exposure to other markets to concentrate more of its efforts on New York. While that strategy backfired as the pandemic hit the city hard, New York has always come back from adversity. Because of that, the REIT will likely be even more New York City-focused in three years as it looks to exit San Francisco and redeploy those proceeds to grow its diversified portfolio of Manhattan real estate. That strategy could pay big dividends in the coming years if New York bounces back again.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.