According to the latest industry buzz, Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), is likely to tap the commercial mortgage-backed securities (CMBS) market to raise capital to repay debt. This further reinforces investor sentiment about stabilization of market fundamentals in the CMBS sector after it reported strong results in first quarter 2011.
The CMBS market had been a trusted vehicle to provide low-cost mortgage financing during the U.S. commercial real estate boom from 2004 through 2007, and was used to pledge financial support for bonds carrying various amounts of risk to buyers. However, the credit crunch during recession dealt a body blow and almost exterminated the market in 2008 and 2009. With a gradual revival in the overall economy, CMBS lending has made a recovery of sorts in 2010 and is expected to reach about $40 billion in 2011.
Vornado is expected to raise $600 million to $700 million as loan from the CMBS market. The company intends to utilize the fund to refinance one of its existing properties, which it refused to identify. The strategic move is aimed at strengthening its balance sheet, as the company has historically maintained manageable near-term debt maturities and plenty of cash.
New York-based Vornado is one of the largest REIT in the U.S., engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us. Vornado Realty currently owns about 32.7% of Toys ‘R’ Us.
Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The core properties of the company are also performing at a high level and it is maintaining strong occupancies in its New York City office and retail portfolios. We believe this puts the company well ahead of many of its competitors, who have assets in weak markets struggling with high vacancies and little pricing power.
We maintain our long-term ‘Neutral’ rating on Vornado, 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. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for Brookfield Properties Corporation (BPO), a competitor of Vornado.
