As that table shows, Vornado's diversification in New York City helped cushion the pandemic's blow. For example, it would have reported much weaker results if it focused solely on retail properties or hotels. Instead, its office and residential portfolio helped mute the pandemic's impact on its retail and hotel properties in New York City.
Meanwhile, some of its diversification outside of New York City also benefited it in 2020. For example, NOI at its San Francisco property increased last year. However, its holdings in Chicago weighed it down, primarily because theMart canceled all trade shows from late March through the end of the year.
It's also worth noting that some of its other investments also weighed it down last year. Though that's partially due to the sale of its remaining stakes in retail REITs PREIT (NYSE: PEI) and Urban Edge Properties (NYSE: UE), which it sold in early 2020 and 2019, respectively.
How Vornado's expansion strategy impacts its risk profile
Aside from its diversification across the New York City real estate market, the other defining characteristic about Vornado is its Penn District developments. The company is investing more than $2.3 billion to build Farley, PENN 1, and PENN 2. It expects to complete these projects over the next few years.
That's a sizable financial commitment for the company. Because of that, credit rating agency Fitch has a negative outlook on the REIT since it already has an elevated leverage ratio. Fitch noted that while Vornado is selling condos in 220 Central Park South to raise some cash, its investments in its Penn District projects will outpace the proceeds from those asset sales in the near term.
Add that to the pandemic-related pressure on its retail and office buildings, and the company's leverage will be at the upper end of Fitch's comfort zone for its current rating level this year. Of note, Vornado has a mid-BBB credit rating; while solid, that's not as strong as some REITs with A-rated credit.
Now, Vornado can ease some of this pressure by selling more assets. For example, it recently agreed to sell five retail properties in Manhattan for $184.5 million. However, the company also recently acquired the remaining 45% stake that it didn't already own in One Park Avenue for $158 million and assumed its partner's share of the property's existing debt.
Because of this, it might need to sell additional assets in the future to fund its Penn District investments and keep the pressure off its balance sheet.
A moderately risky REIT
Vornado's overall diversification helps mute risk compared to REITs that are a pure play on more volatile industries like retail and hospitality. However, its development strategy increases risk, especially since it has three large-scale, high-cost projects currently underway and a weaker balance sheet than some REIT rivals. Because of that, Vornado skews towards the middle of the risk spectrum in the REIT sector.