This has not been a kind year for a lot of commercial real estate, office space included. Pandemic-induced shutdowns have not just hampered growth but sparked real concern about the future as companies find they simply don't need as much space as people successfully transition to working from home.
That new reality is reflected in the market for real estate investment trusts (REITs) that focus on office space. To wit: Nareit lists 21 equities in its office REITs segment. Their total return as of the end of October averaged -35.97%, with a dividend yield of 4.89%.
But there's a lot of variety in that segment.
For example, Alexandria Real Estate Equities (NYSE: ARE) is heavy on life sciences and technology and may do well going forward with all those companies focused on dealing with COVID-19 and whatever other bio horrors come down the pike. Plus, it has some major tech firms as tenants.
And then there's Vornado Realty Trust (NYSE: VNO), whose focus on prime office and retail space in New York City has made it particularly vulnerable to the effects of the pandemic and its near future dependent on how quickly a vaccine can help the Big Apple recover economically.
For now, the choice between the two seems clear. Alexandria has a one-year total return of 8.32% as of Dec. 8, while Vornado is more in line with the segment, at a total year return of -33.35%, also as of Dec. 8.
But let's dive a bit deeper.
Here's a look at Vornado Realty Trust
Vornado is a diversified REIT -- with office, retail, and residential exposure -- that by its own description "has a collection of premier assets and a focused strategy of growing its dominant positions in New York City office and Manhattan high street retail." It also has assets in Chicago and San Francisco, including, prominently, theMART in Chicago and 555 California Street in San Francisco.
Vornado's collection of prominent properties in pricey markets yields high rents and income during good times. That wasn't this year. Rent payments plummeted, it was forced to close a hotel, and it lost money.
After declaring a special dividend of $1.95 a share, based on asset sales, at the end of 2019, Vornado paid out $0.66 a share for the first two quarterly payouts of this year, the same as it did four times in 2019. Then it cut that dividend to $0.53 a share for the second and third quarters and is finishing 2020 with a total payout of $2.38 per share, compared with $4.59 in 2019 including that special dividend.
And for the nine months ending Sept. 30, Vornado reported a net loss of $139.6 million, or $0.73 per diluted share, compared with a net income of $2.9 billion, or $15.20 per diluted share, for the same period of 2019.
Funds from operations (FFO) also fell, though not as dramatically, to $612.1 million, or $3.20 per share, from $691.5 million, or $3.62 per diluted share, for the first nine months of 2019.
And then on Dec. 1, Vornado announced, without providing details, that it was "executing a program to reduce overhead costs by over $35 million annually, which involves compensation reductions and a 70-person reduction in force."
That cost-cutting hopefully will position the REIT to take advantage of a recovering market and use its substantial liquidity and attractive portfolio to forge a rally.
Here's a look at Alexandria Real Estate Equities
Here's how Alexandria describes itself: "Best-in-class, mission-driven urban office REIT focused on making a positive and meaningful impact on the world." And its performance for investors since its 1997 IPO earned it favorable notice just a few weeks ago as a "millionaire-maker REIT" on Millionacres.
That's because this office REIT has returned 13.3% in average annual return since it went public, well outpacing the S&P 500 at 8.2% total return during the same 23 years.
The question here is whether Alexandria can keep it up. Its portfolio of properties lend some optimism here. The company focuses on clusters -- office parks and campuses that host life science and high-tech tenants that collaborate with the prominent academic and medical institutions in and around them. This, as the company says, has the effect of "providing our tenants with a dynamic ecosystem to accelerate discovery and commercialization."
Those clusters are in some of the hottest urban markets for that kind of work in the country: Boston, New York City, Maryland, North Carolina's Research Triangle, Seattle, San Francisco, and Seattle.
The collaborative research and development going on at these locations is paying off for its tenants, whose work doesn't lend itself to work-from-home arrangements. Its tenants also are the kinds of companies and other organizations that get grants and other research funds and a lot of attention as they work to solve the world's problems. That kind of investment seems likely to continue if not grow.
The company also has had a profitable year. Net income in the first nine months of 2020 came in at $324.2 million ($2.61 per share), more than doubling the same period in 2019 ($150.4 million; $1.35 per share), while FFO was $677.1 million, sharply higher than the $579.6 million posted in the year-ago period.
Alexandria also has a long history of paying dividends to the REIT's investors. The most recent payout of $1.09 per share payable on Dec. 30 continues a steady growth in that key measure going back to the $0.13 it first paid in July 1997.
The Millionacres bottom line
Vornado stock hit an all-time high of $135.75 on Feb. 7, 2007, and closed on Dec. 8, 2020, at $40.03. Its 52-week high is $68.67 and its low is $27.64. The annualized yield as of Dec. 8 was 5.9%.
Alexandria's stock hit an all-time high of $177.55 on July 31 this year, and it closed Dec. 8 at $170.79, well above its 52-week low of $109.22. The annualized yield as of Dec. 8 was 2.48%.
Those are some pretty big differences in yields and room to roam for the stock price. If you're looking for yield and have confidence in both Vornado's management and the future of those more traditional properties it owns, this is your pick. But, personally, I'd wait to see what the next quarterly report or two bring and how the New York City market is doing, as well as the effect of the REIT's moves themselves.
Meanwhile, if you think life science and innovation clusters are the way of the future, choose Alexandria, especially for a long-term hold. While its yield is lower, its growth prospects seem higher.