Better Buy: Alexandria Real Estate Equities vs. Vornado Realty Trust
This was not a good year for many commercial properties, including office space. Pandemic shutdowns have not only hampered growth, but also created real concerns about the future as businesses find they simply don’t take up as much space as people successfully work from home.
This new reality is reflected in the market for Real Estate Investment Trusts (REITs), which are focused on office space. By the way: Nareit lists 21 stocks in its office REIT segment. Their total return at the end of October averaged -35.97% with a dividend yield of 4.89%.
But there is a lot of variety in this segment.
For example, Alexandria Real Estate Equities (NYSE: ARE) is a focus on life sciences and technology and could do well in the future with all those companies that focus on dealing with COVID-19 and all other bio-horrors. It also has some large technology firms as tenants.
And then there’s the Vornado Realty Trust (NYSE: VNO), whose focus on prime office and retail space in New York City has made it particularly vulnerable to the effects of the pandemic and its near future, depending on how fast a vaccine can get Big Apple can help recover economically.
At the moment, the choice between the two seems clear. Alexandria has a one-year total return of 8.32% as of December 8th, while Vornado is closer to the segment with a total annual return of -33.35% also as of December 8th.
But let’s dive a little deeper.
Here’s a look at Vornado Realty Trust
Vornado is a diversified REIT – with exposure to the office, retail and residential sectors – which, by its own description, “has a collection of world-class assets and a focused strategy to develop its dominant position in New York office and Manhattan retail.” It also has assets in Chicago and San Francisco, most notably the Mart in Chicago and 555 California Street in San Francisco.
Vornado’s collection of prominent properties in expensive markets brings high rents and income in good times. It wasn’t this year. Rent payments collapsed, a hotel had to close, and money was lost.
After Vornado resolved a special dividend of $ 1.95 per share based on asset sales in late 2019, it paid out $ 0.66 per share for the first two quarterly payouts of that year, just as it did four times in 2019. Then became This cut that dividend is $ 0.53 per share for the second and third quarters, ending 2020 with a total payout of $ 2.38 per share, compared to $ 4.59 in 2019 including that special dividend.
For the nine months ended September 30, Vornado recorded a net loss of $ 139.6 million, or $ 0.73 per diluted share, compared to net income of $ 2.9 billion, or $ 15.20 per diluted share, for the same Period of the year 2019.
Funds from Operations (FFO) also fell, if not as dramatically, from $ 691.5 million, or $ 3.62 per diluted share, to $ 612.1 million, or $ 3.20, in the first nine months of 2019 per share.
And then, on Dec. 1, Vornado announced, without giving any details, that it was “implementing a program to reduce overhead costs by over $ 35 million a year, including a reduction in compensation and a reduction in strength of 70 people.”
Hopefully this cost reduction will enable the REIT to capitalize on a recovering market and use its substantial liquidity and attractive portfolio to forge a rally.
Here’s a look at Alexandria Real Estate Equities
This is how Alexandria describes itself: “The best-in-class, mission-driven urban office REIT in its class has focused on making a positive and meaningful impact on the world.” And his performance for investors since the IPO in 1997 only got him a few weeks ago as a “millionaire REIT” on Millionacres.
This is because this office REIT has achieved an average annual return of 13.3% since going public, significantly outperforming the S&P 500 with a total return of 8.2% over the same 23 years.
The question here is can Alexandria go on like this. The real estate portfolio is optimistic here. The company is focused on clusters – office parks and campuses that house life science and high-tech tenants who work with the leading academic and medical institutions in and around them. The result, as the company says, is “providing our tenants with a dynamic ecosystem to accelerate discovery and marketing”.
These clusters are located in some of the hottest urban markets for this type of work in the country: Boston, New York City, Maryland, North Carolina’s Research Triangle, Seattle, San Francisco, and Seattle.
Joint research and development at these locations pays off for tenants whose work is not suitable for working from home. The tenants are also corporations and other organizations that receive grants and other research funding and attract a lot of attention to solve the world’s problems. This type of investment is likely to continue, if not grow.
The company also had a profitable year. Net income for the first nine months of 2020 was $ 324.2 million ($ 2.61 per share), more than double the same period in 2019 ($ 150.4 million; $ 1.35) USD per share), while FFO of USD 677.1 million was significantly higher than the value of USD 579.6 million for the same period last year.
Alexandria also has a long history of paying dividends to REIT investors. The most recent payout of $ 1.09 per share, payable on December 30th, continues a steady growth in this key move, down from the $ 0.13 first paid in July 1997.
The bottom line of Millionacres
Vornado shares hit an all-time high of $ 135.75 on February 7, 2007, and closed at $ 40.03 on December 8, 2020. The 52-week high is at $ 68.67 and the low is at $ 27.64. The annualized return as of December 8th was 5.9%.
Alexandria’s stock hit an all-time high of $ 177.55 this year on July 31, and closed at $ 170.79 on December 8, well above the 52-week low of $ 109.22. The annualized return as of December 8th was 2.48%.
Those are some pretty big differences in returns and the scope for the stock price. If you are looking for ROI and have confidence in the management of Vornado and the future of the more traditional properties they own, you’ve come to the right place. But personally, I would wait and see what the next quarter or two reports bring and how the New York market develops and how the REIT’s moves themselves affect.
If you think life science and innovation clusters are the way of the future, go for Alexandria, especially a long-term stop. While the yield is lower, the prospect for growth appears higher.