The Real Deal New York

Vornado leads New York-focused REITs in Q4

But SL Green dominated total returns in 2013

January 07, 2014 04:15PM
By Hiten Samtani

From left: Steven Roth, Sam Zell and Marc Holliday

From left: Steven Roth, Sam Zell and Marc Holliday

New York-focused real estate investment trusts are still reeling from the Federal Reserve’s “taper talk,” but Vornado Realty Trust’s continued push to streamline its business ensured it led the pack in the fourth quarter of 2013, according to investor returns data from the investment banking firm Sandler O’Neill + Partners.

Vornado, led by CEO Steven Roth, had total returns of 6.5 percent in the fourth quarter, the Sandler O’ Neill data show, compared to third-quarter returns of 2.33 percent. Runner-up SL Green Realty pulled in returns of 4.55 percent in the fourth quarter, compared to third-quarter returns of 1.11 percent. Both REITs outperformed the negative 0.68 percent total returns brought in by the MCSI US REIT Index, which tracks most of the country’s major REITs. But they also both lagged behind the Standard & Poor 500 Stock Index, which brought in total returns of 10.51 percent.

REIT returns for the fourth quarter (Credit: Sandler O'Neill + Partners)

REIT returns for the fourth quarter (Credit: Sandler O’Neill + Partners)

The fundamentals of the real estate market remain robust, according to Sandler O’Neill analyst Alexander Goldfarb. “But the stocks bore the brunt of people’s concern about rising [interest] rates,” Goldfarb said, set off by Fed Chairman Ben Bernanke’s announcement in May that the agency would look to scale back its bond-buying stimulus program, which has kept interest rates at record lows.

Investors were comfortable with Roth – who took over from Michael Fascitelli in April  – at the helm of Vornado, Goldfarb said, and expected even stronger performance if Vornado were to split its business into two separate entities: one for its core office and street-level retail assets and another for its department stores and shopping centers. The splitting strategy, Goldfarb said, is something that Sandler O’Neill has been advocating for the REIT.

SL Green, led by CEO Marc Holliday, continues to benefit from its presence in the hot Midtown South and Downtown markets, Goldfarb said. Indeed, the REIT scored a major leasing coup in December when Citigroup signed a $1 billion-plus deal to renew its 2.7 million-square-foot lease at 388 and 390 Greenwich Street and move its headquarters there from 399 Park Avenue in Midtown East. Citi had been mulling a move to other locations including Hudson Yards and the World Trade Center site.

Boston Properties, which like Vornado saw a change at the top in 2013 with Owen Thomas taking over for Mortimer Zuckerman, saw fourth-quarter returns of negative 3.4 percent, compared to third-quarter returns of 1.97 percent. But Goldfarb said the low returns were due to the fact that Boston’s 2014 guidance – an estimate of future earnings that was released in the fourth quarter of 2013 – fell below analysts’ expectations, and that once the market adjusted for the partial sale of Times Square Tower for $684 million, investors would see stronger returns. In reality, Boston Properties had a strong quarter, Goldfarb said, and made much-needed headway with leasing efforts at 250 West 55th Street when it struck a deal with billionaire George Soros’ investment firm to take just under 100,000 square feet at the tower.

Meanwhile, shareholders of Sam Zell’s Equity Residential took another loss in the fourth quarter, with the REIT seeing total returns of negative 1.95 percent, after third-quarter returns of negative 7.08 percent. AvalonBay investors suffered a similar fate, with fourth-quarter returns of negative 6.13 percent after third-quarter returns of negative 5.02 percent. Goldfarb attributed their performance to the general slowdown in the growth of the apartment sector.

“Rents are still going up but they’re not going up at the same clip,” he said.

Sandler O’Neill does not track Brookfield Office Properties.

For 2013 overall, however, SL Green led the pack by a fair distance, with total returns of 22.55 percent, compared to Vornado’s 14.69 percent, and both beat the REIT index’s total returns of 2.47 percent. The S&P 500, however, outperformed the REITS with a 32.39 percent total return.

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