Vornado (VNO) to Report Q3 Earnings: What's in the Cards?
Vornado Realty Trust VNO is scheduled to report third-quarter 2023 results on Oct 30, after market close. While the quarterly results are likely to reflect a marginal year-over-year increase in revenues, funds from operations (FFO) per share may exhibit a decline.
In the last reported quarter, this New York-based real estate investment trust’s (REIT) FFO plus assumed conversions as adjusted per share surpassed the Zacks Consensus Estimate by 12.50%. The quarterly results reflected better-than-anticipated top-line growth aided by healthy leasing activity across the company’s portfolio.
Over the trailing four quarters, Vornado’s FFO plus assumed conversions as adjusted per share surpassed the Zacks Consensus Estimate on three occasions and missed once, the average beat being 6.55%. This is depicted in the graph below:
Vornado Realty Trust Price and EPS Surprise
Vornado Realty Trust price-eps-surprise | Vornado Realty Trust Quote
Factors at Play
U.S. Office Market in Q3
Per a Cushman & Wakefield CWK report, although overall office demand is under pressure due to macroeconomic uncertainty and a high interest rate environment, select markets are bucking the negative trend. Net absorption of negative 20.8 million square feet (msf) in the third quarter improved from the negative 22.0 and 22.9 msf recorded in the first and second quarters this year, respectively.
In addition, occupiers’ growing preference for the latest and best office properties has played a key role in leading to positive net absorption rates in these. Further, the occupancy in top-tier assets was more than 300 (basis points) bps higher than the overall market, excluding the buildings in lease-up. For the six gateway markets, top-tier asset occupancy was 700 bps higher.
The Cushman & Wakefield report also highlights the fact that even though vacant available sublease inventory increased in the third quarter, the pace has slowed down.
However, leasing activity slid for five quarters straight and slumped 24% year over year in the quarter. The overall gross leasing activity in the four quarters ended third-quarter 2023 was 281 msf. Also, the national vacancy rate reached an all-time high of 19.4%, increasing 220 bps year over year. The national asking rent came in at $37.48 in the quarter.
Nonetheless, 25 U.S. markets, including several gateway markets like Boston, Los Angeles non-CBD, Midtown South in Manhattan and San Francisco, experienced a sequential increase in leasing activity.
VNO’s Portfolio & Q3 Projections
Amid the high demand for top-tier assets with class-apart amenities, Vornado’s portfolio of premium office assets, strategically situated in sought-after markets like New York, Chicago and San Francisco, is likely to have witnessed healthy demand during the quarter, aiding leasing activity.
A diversified tenant base, which includes several industry bellwethers, is expected to have led to stable cash flow generation during the quarter.
Also, with a robust retail real estate environment in the third quarter, VNO’s Manhattan Street retail performance is likely to have been better.
The Zacks Consensus Estimate for quarterly revenues is pegged at $459.9 million, suggesting a marginal increase from the year-ago quarter’s reported figure.
The consensus mark for Vornado’s New York revenues stands at $354.39 million, indicating a decline from $360.03 million in the prior-year quarter. The consensus estimate for occupancy in the New York office portfolio is pegged at 92.3%, up from 91.8% reported a year ago. Our estimate stands at 92.3%.
The company’s robust balance sheet position is expected to have supported its acquisition and development-related activities.
However, competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants, might have partly limited VNO’s ability to increase rents and/or backfill tenant move-outs and vacancies during the quarter.
Further, higher interest expenses are expected to have been a spoilsport.
The Zacks Consensus Estimate for the quarterly FFO per share has been revised 1.5% northward to 66 cents over the past two months. The figure, however, suggests an 18.5% decline from the prior-year period’s reported number.
Q3 Developments
Vornado entered into Manhattan’s first public-private partnership venture with Hudson Pacific Properties HPP, Blackstone BX, the City of New York and New York City Economic Development Corporation to build a 266,000-square-foot purpose-built studio campus at Pier 94 with a joint investment of around $350 million.
Vornado, Hudson Pacific and Blackstone’s institutional Core+ Real Estate strategy will own a stake of 49.9%, 25.6% and 24.5%, respectively, in the studio campus. While Vornado will be in charge of the development, the design oversight and management of the facility’s leasing and operations will be taken care of by Hudson Pacific.
The construction of this first-of-its-kind space with state-of-the-art film and production technology began in the third quarter of 2023 using the $183 million in construction financing led by RBC. The project is expected to be completed by year-end 2025.
Earnings Whispers
Our proven model does not conclusively predict a surprise in terms of FFO per share for VNO this season. The combination of a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — increases the odds of a beat. However, that’s not the case here.
Earnings ESP: Vornado has an Earnings ESP of -1.41%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Vornado currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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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