Vornado Realty Sells Assets - Analyst Blog

Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), has recently announced the sale of two office buildings in Washington DC spanning 319,000 square feet of space for $127 million. The company expects to raise net proceeds of $107 million from the asset sale, and would record $44 million as profit from the transaction in first quarter 2011.

Vornado Realty sold the properties to Washington Real Estate Investment Trust (WRE), a premier REIT in the greater Washington metro region. The company sold 1140 Connecticut Avenue, a twelve story office building totaling 184,135 square feet, for $80.25 million. The property, strategically located in the heart of Washington's Central Business District area, is presently 99% leased. The building is leased to 25 office tenants and 4 retail tenants at rents well below the prevailing market rate. Washington Real Estate funded the acquisition by utilizing cash in hand and available credit facility. The company expects to achieve an unleveraged first year yield of 6.0% (cash basis) from the property.

Washington Real Estate also purchased 1227 25th Street, an eight story office building totaling 130,434 square feet, for $47.0 million. The property, projected to produce a stabilized cash yield of 8.7%, is located in close proximity to 2445 M Street office building that was acquired by Washington Real Estate in 2008. Consequently, the acquisition offers scope to generate operating synergies and provides expansion space to its tenants. The company funded the deal through available cash and capacity under its line of credit.

In a separate development, Vornado Realty increased its quarterly dividend from $0.65 per share to $0.69 or from $2.60 to $2.76 on an annualized basis. Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – the New York City and Washington DC. Vornado Realty also has a healthy balance sheet and adequate liquidity. We believe this puts the company well ahead of many competitors, who have assets in less desirable markets that are struggling with high vacancies and little pricing power.

We maintain our long-term ‘Neutral' rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold' recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.

 
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