Vornado Misses on FFO, Rev Up

Zacks

Vornado Realty Trust (VNO) – a leading real estate investment trust (:REIT) – reported first-quarter 2013 adjusted FFO (funds from operations) per share of $1.14, missing the Zacks Consensus Estimate of $1.85. However, the FFO exceeded the year-ago number of 98 cents by 16.3%. The year-over-year increase was attributable to the company’s successful execution of strategic initiatives.

Including the non-recurring items, FFO came in at $201.8 million or $1.08 per share, compared with $348.5 million or $1.82 in the year-earlier quarter.

Total revenue upped 7.7% to $721.0 million from $669.2 million in prior-year quarter. The figure also outpaced the Zacks Consensus Estimate of $631 million.

Behind the Headlines

Same-store EBITDA (earnings before interest, tax, depreciation and amortization) on GAAP basis nudged up 4.6% and decreased 7.4% year over year in the quarter in New York City and Washington, D.C. portfolios, respectively.  Same-store occupancy in the company’s New York City and Washington, D.C. portfolios were 96.1% and 83.8%, respectively, at the end of the first quarter.

In the reported quarter, Vornado leased 909 square feet and 297 square feet of office space in New York City and Washington, D.C. portfolios, respectively. Rents increased 0.8% (cash basis) and 15.1% (:GAAP) compared with the previous rents in New York City office segment. In Washington, D.C., rents escalated 3.5% (cash) and 5.5% (:GAAP) versus the expiring rents.

Notable Portfolio Activities

Vornado divested Green Acres Mall in Valley Stream, N.Y., for $500.0 million and generated a net gain of $202.3 million.

Subsequent to the end of the quarter, Vornado sold a power strip shopping center – The Plant – in San Jose for $203 million and realized a net gain of approximately $33 million.

Additionally, Vornado sold its 26.2% stake in LNR Property LLC to Starwood Property Trust Inc. (STWD) and Starwood Capital Group for $1.05 billion. Vornado reaped approximately $241 million as net proceeds from the sale.

Liquidity

Vornado has a healthy balance sheet with very manageable near-term debt maturities and adequate cash. As of Mar 31, 2013, the company had $585.8 million of cash and cash equivalents, compared with $960.3 million as of Dec 31, 2012. At the end of the quarter, total outstanding debt stood at $13.5 million.

The FFO payout ratio (based on FFO as adjusted for comparability) in the quarter was 64.0% compared with 70.4% in the first quarter of 2012.

During the quarter, Vornado closed on the $390 million worth financing of the retail condominium situated at 666 Fifth Avenue at 53rd Street. Moreover, the company completed $300 million financing of a N.J.-based shopping center – Outlets at Bergen Town Center.

Additionally, Vornado extended one of the 2 revolving credit facilities from Jun 2015 to Jun 2017, with two six-month extension options. This helped in reducing the interest expense of the facility.

Our Viewpoint

We are impressed with the decent first-quarter results at Vornado. We believe that Vornado’s portfolio repositioning through strategic sale-offs would position it well on the growth trajectory. This has further strengthened its foothold in 2 of the best long-term office markets in the U.S. –New York City and Washington, D.C. Moreover, the company’s healthy balance sheet and liquidity position facilitate it to take advantage of distressed selling as asset values of office and retail properties continue to drop in the aftermath of the recession. We expect all these factors to provide upside potential to the company going forward.

However, we anticipate continued volatility in the office sector with job cuts and a decline in market fundamentals, which in turn are likely to limit Vornado’s growth prospects.

Vornado currently has a Zacks Rank #3 (Hold). Other better performing REITs include Host Hotels & Resorts Inc. (HST) and LaSalle Hotel Properties (LHO). Both stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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