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Can Vornado (VNO) Maintain its Earnings Beat Streak in Q2?

Zacks Equity Research
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Vornado Realty Trust VNO is scheduled to report second-quarter 2018 results on Jul 30, after the closing bell. Results are expected to display year-over-year decline in revenues and funds from operations (FFO) per share in the April-June quarter.

In the last reported quarter, this NY-based real estate investment trust (REIT) delivered a positive surprise of 3.4% in terms of FFO per share. Also, total revenues of $536.4 million surpassed the Zacks Consensus Estimate.

Over the trailing four quarters, Vornado surpassed the Zacks Consensus Estimate in all occasions, witnessing an average positive surprise of 4.5%. This is depicted in the graph below:

Vornado Realty Trust Price and EPS Surprise

Vornado Realty Trust Price and EPS Surprise | Vornado Realty Trust Quote

Shares of Vornado have underperformed the industry over the past three months. While the company’s shares have rallied 10.4%, the industry recorded growth of 9.3%.


Let’s see how things have shaped up for this announcement.

Factors to Consider

Vornado has been striving to reposition its portfolio in New York, of late. Consequently, with the spin-off of its Washington, D.C. assets, Vornado emerged as an office and retail REIT, with a concentration of high-quality assets in New York City.

In fact, the company is well poised to grow on the strengthening fundamentals in the office real estate space. The latest report from CBRE Group CBRE suggests that net absorption for the quarter under review in the U.S office market increased by more than double sequentially.

In fact, net absorption for the quarter stands at 15.5 million square feet of space — the highest aggregate registered since 4Q15. Additionally, vacancy rates shrunk 10 basis points (bps) to 13% for the first time in four quarters. Sequentially, downtown vacancy rates contracted 20 bps, while the sub-urban markets witnessed a decline of 10 bps.

Amid these encouraging numbers, occupancy at Vornado’s New York office portfolio is expected to have remained at a healthy level of 97%, unchanged from the prior-quarter reported tally.

Further, construction completions for the second quarter totaled 11.1 million square feet of space, exceeding the 10-million square-foot mark for the eighth consecutive quarter. Notably, the company’s management and leasing fees are expected to display a marginal drop, as compared to the prior quarter. The Zacks Consensus Estimate of $2.73 million indicates a 1% decline from the prior-quarter reported figure.

Importantly, the company announced that the second-quarter 2018 financial results will include certain items that will increase its FFO per share by 12 cents. However, this amount will be excluded in the adjusted FFO plus assumed conversions per share figure.

Vornado will be realizing profit of $16 million relating to changes in fair value of marketable securities. Furthermore, a net gain of $23.6 million from the sale of 27 Washington Square North, for $45 million, will be recorded, although it will not be included in Q2 FFO reporting.

In addition to the above, the company will record $5.5 million in income and FFO as profit participation from the sale of 701 Seventh Avenue. Lastly, Vornado's results will include a net loss of $0.4 million from other items.

It also stated that the aforementioned figures are preliminary estimates and are conditioned on the completion of the financial closing procedures.

Nonetheless, the retail real estate space continues to lack luster, with store closures and retailer bankruptcies making rounds in the market. Case to point, the national retail vacancy rate marginally increased to 10.2% in the second quarter, underlining store closures of bankrupt toy retailer, Toys “R” Us Inc., per data form Reis, while national average asking rents edged 0.2% higher.

The consensus estimates lease termination fees to be nearly $1 million, as compared to $0.35 million recorded in the previous quarter.  

Prior to the second-quarter earnings release, there is lack of any solid catalyst for raising optimism about the company’s business activities and prospects. As such, the Zacks Consensus Estimate for FFO per share remained unchanged at 96 cents over the past month. Also, this indicates a year-over-year decline of 28.9%.

Earnings Whispers

Here is what our quantitative model predicts:

Vornado has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Vornado is +1.93%.

Zacks Rank: The company currently carries a Zacks Rank #3.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Stocks That Warrant a Look

While the other players in this space are lined up to report financial results, below are two stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Extra Space Storage EXR, slated to release second-quarter results on Jul 31, has an Earnings ESP of +0.44% and a Zacks Rank of 3.

HCP, Inc. HCP, set to release April-June results on Aug 2, has an Earnings ESP of +0.66% and a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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