Take a Bite Out of a 'Big Apple' REIT

NEW YORK (TheStreet) -- Manhattan commercial real estate volumes increased in the second quarter as total transaction volume rose more than $2.1 billion to $9.1 billion from the first quarter.

Manhattan office property sales doubled in the second quarter to $5.2 billion, due to the sale of a 40% interest sale of the GM building for a whopping $1,870 per square foot. (Source: Eastern Consolidated).

That large deal, known as 767 Fifth Avenue, traded for $1.36 billion (40% interest) and the buyer was M. Safra & Company and the seller was Meraas Capital and Goldman Sachs. Other large office deals included Tenth Avenue (leasehold) for $750 million, 425 Lexington Avenue for $700 million, 125 West 55th Street for $470 million, and 499 Park Avenue for $386 million.

One of the most overwhelming differentiators for the New York City real estate market today is employment. Since 2009, New York City has added more jobs (112,600 since September 2009) and in 2013 the all-star city added 45,400 jobs. According to Barbara Byrne Denham, chief economist with Eastern Consolidated, "the outlook for New York City is very favorable given how popular New York is for investors, students, tourists, potential residents and young entrepreneurs.

In a commentary in The Commercial Real Estate Observer on July 23, Robert Knakal, chairman of Massey Knakal Realty Services explained, "The recovery in the property sales market continues to outpace the recovery in the broader economy and is, in fact, performing better than the recovery in commercial real estate's underlying fundamentals would dictate."

How Can the Average Investor Get a Bite Out of a Big Apple REIT?

There are many REITs that own property in or near the New York City area; however, there are just a few REITs that have a significant concentration of properties in the "big apple."

SL Green ( SLG) is the only fully integrated REIT that focuses on the New York City market. The company also owns more than 3 million square feet of prime office space in nearby Westchester County and Stamford, Conn.

As the FAST Graph illustrates below, SL Green began (IPO in 1997) to develop a strong track record for paying dividends. But in 2008 the company was forced to slash its dividend from a high payout of $3.15 per share (aqua blue-shaded area represents dividends paid) to a low of 40 cents in 2010 (and 2011).

The share price (the black line) fell from $146.58 in January 2007 to a low of $11.62 in 2009. SL Green has made steady progress with its share price (now $92.90), and the current dividend yield is 1.42%. I consider SL Green to be fairly valued today (with a price-to-funds from operations ratio of 18.5), and the dividend yield is modest compared with other office REIT peers.

Courtesy of F.A.S.T Graphs

Vornado Realty ( VNO) with a market cap of around $16.4 billion is one of the largest owners and managers of commercial real estate in the U.S. and has a portfolio of more than 100 million square feet, primarily located in New York and Washington, D.C. It also has retail properties in the Northeast, California and Puerto Rico.

As the F.A.S.T. Graph illustrates below, Vornado commenced as a REIT in 1993 and like SL Green, the company began building strong share price appreciation.

In February 2007 Vornado was trading at a high of $127.20 (the black line), and by February 2009 the share price fell to $32.73. Since that time, shares have recovered to more than $87.00. Like SL Green, Vornado's dividend also took a tumble, and in 2012 the dividends paid dropped to $2.36 (aqua blue-shaded area). Vornado, with a dividend yield of 3.34%, pays more than twice as much as SL Green. The shares are also trading at fair value, with a P/FFO ratio of 18.8.

Courtesy of F.A.S.T Graphs

Boston Properties ( BXP) owns and develops Class A office property. It concentrates on five markets: Boston, New York, Princeton, San Francisco and Washington, DC. About one-third of its portfolio is in New York.

Like the other two REITs, Boston Properties was also prospering as the company started as a REIT (IPO in 1997); however, like the others, Boston Properties was hit by the Great Recession. As the FAST graph illustrates below, Boston Properties hit a high of $126.09 in January 2007 and then fell to $37.09 in February 2009. However, since that time, the office REIT has clawed back a substantial part of its share price (closed at $109.75).

Boston Properties' dividend (shaded aqua-blue area) has not recovered to the $8.70 per share it paid out in 2008. The current dividend yield is 2.37%, and Boston Properties is deemed expensive with a current P/FFO ratio of 22.0.

Courtesy of F.A.S.T Graphs

Empire State Realty Trust Getting Closer to REIT-dom

It appears that the ownership group Empire State Realty Trust is moving closer to its IPO by securing the necessary 80% of investor votes needed to form a new publicly traded REIT made up of the iconic 102-story tower and 17 other properties. The managing partner and one the largest investors, Malkin Holdings, plan to use a forced provision to take full control of the new REIT. As upheld by a New York State Supreme Court judge, investors can now either sell their shares back for $100 or vote in support of the IPO.

It appears that timing could be good for the Malkin family and investors. A few offers have been generated for individual portfolio assets, and it appears that the value of the new REIT shares will be a crucial element for the upcoming listing. The Malkins are fiduciaries for their investors and, as such, they are responsible for ensuring that the value is realized, either in a public or private sale.

Given the success of New York City's impressive real estate recovery, I'm ready to sink my teeth into a "Big Apple" REIT. I hope to find a more attractive entry point than the three other REITs and better yet, a higher dividend yield, so that I can use the investment to fund my hotel and taxi fares (which are going through the roof). One thing's for sure, when I go to New York City I can spend those dividends in a "New York minute."

Remember, this article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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