The past five years have been good to publicly traded real estate firms. They've been even better to Vornado Realty Trust, the nation's fourth largest REIT with a $19.5 billion market capitalization.

Over the past six months, it has raised more than $1.5 billion in equity and poured $1.3 billion into new acquisitions during the first half of 2005.

What's the secret? In between buying and selling office and retail assets, Vornado Chairman Steve Roth plows money into distressed companies. And that, says Lehman Brothers REIT analyst David Harris, makes Vornado similar to “a public real estate opportunity fund.”

Like an opportunity fund, Vornado seeks outsized returns by investing in a fallen company and working with management to reposition the business. It also carries a higher risk/reward profile than most REITs, making it vulnerable to any downward shifts in those economies. (The average REIT's floating-rate debt was 8% at mid-year, Vornado carried 16%).

Notoriously secretive, the company has raised its profile considerably in the past year by buying into two troubled retailers, Sears and Toys “R” Us, which it purchased last March with KKR and Bain Capital. While the Sears investment had an immediate payoff — a paper profit of $114 million as Sears shares rose on news of the Lampert deal, the Toys “R” Us deal has yet to yield a payoff.

The ultimate $6.6 billion deal gave Vornado and its private equity partners the entire company, which has a much larger operating component. Even this deal, however, has a sensible side to it. “Vornado brought many partners to bear on this deal,” says John Kriz, senior managing director at Moody's Investors Service.

Now, Vornado may be poised to make more such bets. What will Vornado buy next? In mid-August, a Citigroup analyst speculated that Vornado might think about buying into Saks Fifth Avenue or Burlington Coat Factory, both of which were still for sale in late September.

“They are unique as a large REIT in that they get a free pass from their investors to do unconventional deals,” says Jim Sullivan, a senior real estate analyst at Green Street Advisors. “But what they do next is anyone's guess.”

The pattern for opportunity investors is to buy, reposition and dispose of assets in short order, usually within five to seven years. “They haven't sold much this year, and we consider this one of the best seller's markets in a long time,” Harris notes.

Meanwhile, Vornado continues to thrive in its conventional business with shares trading above $80 in late September, up from under $40 in early 2003. The company now owns 27 million sq. ft. of office space and has interests in 67 office buildings in Washington, D.C. as well as 7.6 million sq. ft. of strip centers and grocery space.

Vornado's solid performance in the core business and its forays into opportunity deals have made the REIT and Roth famous for their acumen in the past few years. External factors have also helped, as Lehman Brothers' David Harris notes: “Remember that this has been one buoyant real estate market, too.”

AT A GLANCE: VORNADO

Ticker: VNO

Assets owned/managed: $20 billion

Market capitalization: $19.5 billion

Debt to capital: 36.28%

Total portfolio of office/retail assets: 87 million sq. ft.

52 week high/low: *$85.15/$57.07

* Stock price as of Sept. 27, 2005.

Source: VNO