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Vornado reports a 13% increase in adjusted funds from operations

Brent Nyitray, CFA, MBA

Overview: Vornado Realty Trust's 2Q14 earnings (Part 2 of 4)

(Continued from Part 1)

Funds from operations metric

Funds from operations (or FFO) is a common operating metric of real estate investment trusts (or REITs). It’s defined by the National Association of Real Estate Investment Trusts (or NAREIT) as “GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets, extraordinary items, and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. “  Many REITs use funds from operations, including office REITs like Vornado (VNO), S.L. Green (SLG), and Boston Properties (BXP) as well as retail REITs like Simon Property (SPG) and General Growth Properties (GGP).

The genesis of FFO comes from the fact that generally accepted accounting principles (or GAAP) accounting assumes real estate depreciates predictably over time. However, history has shown that real estate values increase and decrease with the market. The GAAP depreciation may or may not reflect reality. FFO is intended to give a better description of operating cash flow than simple net income.

Vornado Realty Trust’s funds from operations increase

Even though FFO is meant to exclude extraordinary items, in practice there are still adjustments. The FFO from one quarter may not be comparable to the FFO from another quarter. For the 1Q14, Vornado reported FFO of $1.15 per share versus FFO of $1.25 in the 1Q13. However, when you make certain adjustments—mainly excluding  Toys “R” Us losses—FFO increased from $1.27 to $1.44.

Vornado Realty Trust held a partial ownership position in the Toys “R” Us store chain at the end of 2013. Losses attributed to Toys “R” Us have had large effects on net income. Second, as a retailer, Toys “R” Us is highly seasonal. This makes it difficult to do quarter-over-quarter comparisons for Vornado. Some analysts prefer to use earnings before interest, taxes, depreciation, and amortization (or EBITDA) instead of FFO.

Continue to Part 3

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