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Risks of Leverage Revealed in Downturn - REITWorld Interview with Mike Fascitelli (REITs@50 Series)

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Uploaded on Nov 23, 2010

http://www.reit.com Vornado Realty Trust (NYSE: VNO) President and CEO Mike Fascitelli says the latest economic downturn has proven the risks posed to REITs that become over-reliant on leverage.

Even though the vast majority of REITs made it through the collapse of the global financial markets, Fascitelli points out that survival came at a price. Equity offerings to raise capital helped keep REITs afloat, but those "very painful" moves also resulted in shareholder dilution, according to Fascitelli.

Going forward, the end result will be less leverage in all corners of the commercial real estate market, speculates Fascitelli, quoting an old business school axiom: "Balance sheets don't matter until they matter, and then they matter a lot."

Fascitelli predicts that Vornado will do more buying than selling of assets in 2011. However, he acknowledges that competition for attractive properties in Vornado's key markets—New York and Washington, D.C.—has been fierce.

"Buying things has been competitive because capital flows are quicker now than they ever were before," Fascitelli says. "We're lucky that we have $30 billion of assets and they were working for us in those cities. We're unlucky in the sense that we're competing against capital from all over the place in trying to buy new assets in those cities."

To fund its acquisitions, Vornado has been venturing into an increasing number of alternative formats via the private market. For example, in July, the company announced that it had raised $550 million for a private equity fund expected to eventually receive $1 billion in commitments. In October, the company sold 45 percent of its interest in two properties in Washington, D.C., to the Canadian Pension Plan Investment Board. Under the terms of the joint venture, Vornado will continue to manage and lease the properties.

According to Fascitelli, Vornado has sought out the alternatives to hedge some of the concentration risk resulting from the massive deals being made in New York.

"We've been traditionally a company that has funded everything from the public market," he says. "We have plenty of capital, but we also thought it would be very prudent to expand ourselves into the private funding market for either individual assets or for the fund."

By Matt Bechard

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