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Vornado Realty Trust Message Board

  • mojobeta mojobeta Apr 13, 2009 1:32 PM Flag

    Terrible Outlook for Vornado/REITs

    I am concerned that many investors in Vornado simply do not realize that the REITs are in all sorts of unprecedented trouble. REITs depend on leverage and to the extent that it can be had at all, its become more expensive and tougher on terms. Consequently, the weighted average cost of capital (debt and equity combined) for REITs will increase by around 100-200 basis points as the year goes forward to say, 8-9%. with the cost of capital going up, cap rates must also increase and consequently commercial real estate values will inevitably drop further. This will inevitably affect the ability of REITs to refinance their debt. Moreover, commercial real estate values are likely to drop 30-40% further by the end of this year. Is this a business you would want to be in or invest in? Naturally, in these circumstances, the REITs will pay the majority of their dividends in stock but that is only a temporary band-aid. What is puzzling is why Vornado which is touted as the stongest large US REIT would choose to pay the majority of its latest dividend in stock inevitably alarming many shareholders. The answer must be that Vornado is anticipating a long period in which cities are filled with "see-through" buildings and the financial strength of even Vornado is tested. Optimists call for Vornado to make major acquisitions in this environment but that seems like a highly risky path at this time.

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