Office REITs like Vornado maintain a relatively stable dividend stream
Given that real estate investment trusts (or REIT) are required to distribute 90% of their earnings to shareholders through dividends, they tend to have somewhat more volatile dividend streams than more traditional companies. Most CEOs and boards of directors don’t want to cut their dividends. As a result, they have much lower payout ratios—the payout ratio is the percent of net income that’s paid out to shareholders through a dividend. In order to maintain their preferential tax treatment—no federal taxes at the corporate level—REITs will experience more fluctuations in their dividends.
Vornado has maintained a $0.73 dividend since early 2013. Late in 2012, it paid a $1 long-term capital gain along with its then-recurring dividend of $0.69 a share. Office REITs like Vornado (VNO), Boston Properties (BXP), and Kilroy (KRC) tend to have much more stable dividend streams than the retail REITs like Simon Property Group (SPG) or even the mortgage REITs like Annaly (NLY).
The retail spin off
In mid-April, Vornado announced plans to spin off the retail portfolio into a new publicly traded REIT that currently has the common name “Spinco,” which is the second-favorite name of investment bankers—”NewCo” is the most popular.
Spinco will contain Vornado’s realty properties, consisting of 81 strip shopping centers and malls primarily located in the Northeast. The malls consist of two large New Jersey malls—the Bergen Town Center in Bergen, New Jersey, and the Monmouth Mall in Eatontown, New Jersey. The 85 total properties have 16.1 million square feet of retail space and are expected to generate ~$200 million in net operating income for 2014. Vornado will retain ~20 properties that don’t fit Spinco’s strategic business plan and will dispose of them separately. The distribution is intended to be tax-free to Vornado shareholders and is expected to be completed in the fourth quarter.
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