Thursday, July 9, 2009

Vornado Realty Trust to Buy Assets Off Balance Sheet: What About the Shareholders?

I am a huge fan of the management team at VNO. These people are GOOD at what they do.

But I am disturbed by a report in yesteday's Wall Street Journal on how VNO is attempting to raise $1 billion to buy distressed real estate assets off its balance sheet. In other words, they want to run a hedge fund and collect fees instead of buying assets for the REIT.

Here is a story from Bloomberg that pretty much says the same thing.

As a long time VNO shareholder I have to ask---What about us?

Why should the management team of VNO pass on opportunities for current VNO shareholders and pass them on to outside investors, using the very same contacts, resources, time, and energy that should be exclusively devoted to the owners of VNO---namely people like me?

Yes, VNO will collect fees for such work.

Yes, other REITs like PLD do it. But PLD also develops these hedge fund property assets too, letting current shareholders wet their beak in these deals. (For the record, I also am a shareholder of PLD.)

I know the balance sheets of many REITs, including VNO, are weak and tired these days and in desperate need of some equity to do deals, especially at some rather amazing valuations in the commercial market. But off balance sheet financing has serious fiduciary dilemmas for companies attempting to have their equity cake and eat it too. Ask Warren Buffett and Charlie Munger who got burned in the 1970s attempting to have their fingers in too many pies.

The better course of action is to raise equity instead and reward the shareholders for all their faith and patience than let the vast majority of profits on these deals to slip away to outsiders for a small fee. Such corporate handiwork will inevitably lead to decreased earnings per share in the long run.

Where are the gains when they are being bled elsewhere?

Robert J. Abalos, Esq.