McDonald's Beefs Up Vornado Profit

The REIT records a $68.8 million gain on its investment in the fast-food giant.
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Vornado Realty Trust's (VNO) - Get Report third-quarter funds from operations beat expectations, as results were boosted by a $68.8 million gain on its investment in McDonald's (MCD) - Get Report stock.

The real estate investment trust, which might better be described as a real estate hedge fund, said funds from operations totaled $204.5 million, or $1.31 a share, compared with $93.3 million, or 65 cents a share a year earlier. Analysts expected FFO of $1.25 a share, according to Thomson First Call.

Funds from operations, a common REIT performance metric, adds back depreciation charges to net income.

Adjusting for the McDonald's gain and other one-time quarterly issues, Vornado's comparable FFO rose 25%, helped by strong re-leasing rents on its office properties in New York City.

On a so-called cash basis, rents on re-leased office space rose 22% in Manhattan. In Washington, D.C., growth in office rents was less impressive, at 2.4% on a cash basis.

Besides the office properties it owns in these markets, Vornado's portfolio also includes retail real estate and an investment in

Toys R Us

.

The company also is known to place big bets on stocks with hidden real estate value. Earlier this year, the company closed out its derivative position in

Sears Holdings

(SHLD)

for a total profit of $142.9 million.

McDonald's stock enjoyed a nice run over the past quarter, rising 16%. Vornado owns 13.7 million options in the company, along with 858,000 common shares of the stock. At the end of the quarter, the adjusted weighted average strike price of the options was $32.70 per share, or an aggregate of $447.8 million.

Vornado's $68.8 million gain from its options position doesn't include the additional gain the company recorded under shareholder equity for its common stock position.

Shares of Vornado recently were up 73 cents to $118.88.