Excerpted from letter:
2009 and likely 2010 will be very difficult in the property markets. Asset values are deflating, which will cause disruption and losses to the holders of CMBS and whole loans. In the private markets, this is playing out in slow motion. But, it has already played out at warp speed in the public markets. Private market transaction activity, where there is an insurmountable spread between bid and ask, has ground to a complete halt; on the other hand, trading volumes in public real estate equities have tripled. It is likely that the adjustment in REIT stock prices is complete (or has even overshot) while the adjustment in private market prices has barely begun. Just for kicks, we ran a screen showing the share price for 120 or so REITs, where a full half of these companies trade at a single digit – call them hat sizes.******
We are in the income-producing property business. We invest for the long term. We invest in properties which will benefit from ever-rising income streams.So our mission is to generate a constantly rising same-store income stream. We do this by buying under market rents, occasional ground-up development,redevelopment and, importantly, continuously improving our assets. But most importantly, we do it by buying scarce assets which will perform at better than inflation rates. For example, they are not making more real estate on New York’s Park Avenue, Fifth Avenue, Sixth Avenue or Washington’s K Street(whereas more gold comes out of the mines everyday – and gold pays no dividends).Amusingly, his optimism is contradicted by the following paragraph, also presented in the letter:
Many shareholders applauded our action recognizing the benefit to our balance sheet. Some shareholders were critical, believing that a balance sheet “have” such as Vornado should continue to pay our dividend all in cash, come hell or high water. I disagree. This action was taken out of deep respect for the severity of the economic crisis, the frozen capital markets and the uncertainty of the future. Further, the simple fact is shareholders who wish, can sell their dividend shares and be in exactly the same place, by and large. Nor do I agree with those who say we are paying a pro-rata stock dividend where a constant enterprise value is merely represented by more pieces of paper. In our case, the enterprise value is greater by the $400 million retained.
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