Vornado Realty Trust VNO recently announced that its third-quarter 2019 results will include certain items, resulting in an increase in net income attributable to common shareholders of $1.42 per share. These items will also increase its funds from operation (FFO) plus assumed conversions per share by 57 cents, per the company.
However, this amount will be excluded in the FFO, as adjusted figure and net income, as adjusted tally.
In fact, Vornado noted that in the third-quarter earnings, it will report net gain on sale of real estate asset related to the company divesting its 25% interest in 330 Madison Avenue. Per management, net gain of 88 cents per share will increase its net income for the September-end quarter, while the FFO per share tally will remain unaffected.
Specifically, in July, Vornado closed the stake sale in the Manhattan office building, pursuant to a buy/sell process initiated by its 75% partner for a $900-million valuation. The property spans 846,000 square feet of space. After deducting the existing $500-million mortgage loan, net proceeds to Vornado amounts to $100 million.
Moreover, the company will record an after-tax net gain of nearly $109 million, relating to the sale of condominium units at its residential tower development — 220 Central Park South. Per Vornado, this will increase both net income per share and FFO per share by 54 cents.
Notably, Vornado is constructing a residential tower with 397,000 salable square feet of space. Since inception to Jun 30, 2019, the company has completed sale of 34 units.
The company estimates development cost of this project to be roughly $1.4 billion. Of this, $1.3 billion has been spent as of the second-quarter end. It anticipates to generate net cash of around $2 billion from the sale of all units at the property. This will likely contribute to the company’s liquidity and cash flow.
Moreover, since inception to Jun 30, 2019, the company has completed sale of 34 units. Sale proceeds can be used to repay loans undertaken to fund the development. These paydowns will result in lower interest and debt expenses for the company.
Other unspecified items are also expected to improve FFO per share by 3 cents.
However, the office real estate space looks uninspiring. In fact, office landlords, including Vornado, have been battling with slow leasing velocity as supply growth remains at cycle highs. This might have resulted in overall negative net absorption and low occupancy growth in the third quarter.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have declined 6.5%, as against the industry’s rally of 8.8%.
Stocks to Consider
Investors can consider some better-ranked stocks from the same space like Extra Space Storage Inc. EXR, EastGroup Properties, Inc. EGP and Healthcare Realty Trust Incorporated HR, each carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Extra Space Storage's Zacks Consensus Estimate for the ongoing year’s FFO per share climbed marginally to $4.87 in a month’s time.
EastGroup Properties' FFO per share estimate for the current year moved north to $4.93 over the past month.
Healthcare Realty’s Zacks Consensus Estimate for 2019 FFO per share remained unchanged at $1.58 in the past month.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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