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Tickers in this Article: VNO, ALX, ICF, DG, RUE, VSI
If you follow the REIT market, you're sure to know that the past three years haven't been good for real estate companies. The iShares Cohen & Steers Realty Majors ETF (NYSE: ICF) has averaged an annual decline of 17.3% in its share price over this period compared to a drop of 5.9% for the S&P 500. One of the top holdings in the ETF is Vornado Realty Trust (NYSE:VNO). Vornado is one of the largest real estate owners in the country, and despite suffering a similar fate to the other 29 companies in the ETF over the last three years, it managed a gain of 75.7% over the past year. VNO's stock is no longer cheap like it was back in March, but long-term I can think of five reasons why you might want to consider it. (Learn more about REITs, What Are REITs? and Basic Valuation Of A Real Estate Investment Trust (REIT)). IN PICTURES: 6 Tips On Selling Your Home In A Down Market

Not-So-Strange Bedfellows
The first thing you'll notice about Vornado is that it has some interesting side bets. Set aside from its four major operating divisions are assets that include a 32.8% interest in Alexander's (NYSE: ALX), now a REIT, but once a 16-store department store chain, and a 32.7% investment in Toys "R" Us, the world's largest toy retailer. Vornado's third-quarter results included a 186% increase in income in the first nine months from its Toys "R" Us investment, delivering a $22 million gain in Q3, $31 million better than in the same quarter last year. The result increased the value of its investment to $422 million. You can be sure an IPO is not too far off given recent successful public offerings by Dollar General (NYSE:DG), Rue21 (NYSE:RUE) and the Vitamin Shoppe (NYSE:VSI). As for Alexander's, it reported good results in the third quarter, generating $65.2 million in funds from operations, compared to -$25.9 million a year earlier.

FFO Still Healthy
For the first nine months of the year, comparable funds from operations increased slightly from $672.6 million in 2008 to $698.9 million in 2009. On a per-share basis, they actually dropped from $3.96 to $3.90 per diluted share. However, three out of four operating segments grew same-store EBITDA on a cash basis in the third quarter with its Washington office properties delivering the biggest increase of 8.7%. Only its Merchandise Mart division saw a decrease, and that was less than 1%. In terms of renting the properties, the Merchandise Mart division is the weak link with occupancy rates between 87% and 89%. In comparison, its New York City office properties have an occupancy rate of 96%. Fortunately, all four divisions are seeing substantial rent increases on space coming up for renewal.

Office Markets Stable
Vornado is one of the largest landlords in both New York City and Washington D.C. Vornado's New York City properties are primarily in midtown Manhattan with rents averaging $54 a square foot. As one of the largest landlords in the city, it gets an opportunity to bid on all prime properties that come up for sale. Buying high quality buildings, it's been able to deliver same-store net operating income growth every year for the last 12. In Washington, 29% of its properties are occupied by federal agencies, providing a very stable revenue stream. If that's not enough, Washington's unemployment rate is well below the national average. You couldn't ask for a better market.

Retail Opportunities
In New York City alone, Vornado owns 1.8 million square feet of prime retail with a presence in each of North America's top three retail locations in terms of rent per square foot. In the greater NYC-area and other parts of the east coast, it owns or manages approximately 10 million square feet of space in nine regional malls (they also own an additional two malls in Puerto Rico). Conveniently, the northeast happens to be the most underserved retail market on a per capita basis in America. I guess that's why companies like J.C. Penney are opening stores in Manhattan and other east coast cities. It definitely makes sense.

Bottom Line
Vornado management own 17.5% of its stock. While it's true that a great many of these shares are gotten through compensation that many consider excessive, it's important to note that in the first quarter of 2009, Vornado management surrendered $32.6 million in grants from 2007 and 2008. It might seem like a small gesture, but $32 million is a lot of money to anyone, even millionaires. It's a genuine concession to shareholders and something to keep in mind when assessing its stock.

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