The pandemic has had a significant impact on New York City as the virus hit the city hard, causing substantial economic fallout. Many companies shifted to remote work, keeping people in their homes or out of the city. That, along with government-mandated travel bans and non-essential business closures, hurt restaurants, hotels, retail stores, and entertainment venues, causing many to close temporarily. This situation caused many residents to move out of the city to areas offering more space and better affordability. These headwinds have hammered the commercial real estate sector as occupancy levels and rental rates have tumbled.
However, New York City has a history of bouncing back. That leads Vornado Realty Trust (NYSE: VNO), a real estate investment trust (REIT) focused on the city, to believe it will recover from this devastating blow. Because of that, it thinks its stock price is "stupid cheap" these days.
Premier properties at irreplaceable prices
Vornado Realty Trust owns an extensive portfolio of commercial real estate in New York City, including office complexes, retail properties, apartment buildings, and other assets. The "portfolio is populated with the highest quality assets in all of REITland," according to comments by CEO Steven Roth in Vornado's recent annual shareholder letter. Roth pointed out that Vornado owns iconic locations such as its "Fifth Avenue and Times Square retail assets; 1290 Avenue of the Americas; 770 Broadway, etc., etc., to name a few." It also controls "the most exciting development opportunity in all of REITland, The Penn District; and the two best development sites in town, 350 Park Avenue and the Hotel Pennsylvania."
However, despite owning some of the country's highest quality commercial properties, Vornado's shares have lost about a third of their value since the start of 2020. While the pandemic has put some pressure on its financial results -- Vornado's funds from operations (FFO) per share fell 27.5% last year, forcing it to reduce its dividend by 20% -- the underlying value of trophy-office properties has held up quite well. That's because institutional buyers believe these assets will recover as the pandemic subsides, leading them to take advantage of low interest rates to go trophy hunting.
That's leading Roth to pound the table on his belief that Vornado's stock is cheap. He wrote in the shareholder letter: