Vornado (VNO) Surges 61% in 6 Months: Will the Trend Last?
Shares of Vornado Realty Trust VNO have soared 60.7% in the past six months against the industry’s decline of 0.2%.
Although the overall demand for office real estate seems to be under pressure due to macroeconomic uncertainty and a high interest rate environment, select markets are bucking the negative trend.
Net absorption in the United States office market showed signs of improvement in the third quarter of 2023 compared with the first and second quarters. The growing preference for premier office spaces with class-apart amenities by tenants has played a key role in aiding absorption rates.
Vornado’s ability to offer such properties in a few select high-rent, high-barrier-to-entry regional markets in the United States is likely to have helped it benefit from this positive trend, driving the increased optimism in its stock price.
Image Source: Zacks Investment Research
Apart from its significant presence in New York City office and Manhattan street retail, the company has a controlling interest in 555 California Street, in the heart of San Francisco's Financial District and owns theMART in Chicago's River North District, which are iconic office assets in signature cities.
With the resumption of economic activity in full swing, employees are returning to offices or announcing plans to come back. This is supporting the office real estate market fundamentals.
In the third quarter, Vornado noted that leasing velocity remained steady, concentrated mainly in small to medium-sized leases. In the New York office portfolio, the company leased 236,000 square feet of office space (190,000 square feet at share) for an initial rent of $93.33 per square foot and a weighted average lease term of 7.9 years in the quarter.
More so, the next cycle of office-space demand will likely be driven by the combination of office-using job growth, higher space utilization and expansion of technology, financial and media companies. Office occupiers are keen on growing their office footprint in New York City. Rents in the newly constructed or best-in-class redeveloped assets, which offer abundant amenities at transit-centric locations, have risen.
Given Vornado’s ability to offer top-quality office spaces in this market and a healthy leasing pipeline of 1.8 million square feet as of the end of the third quarter, it is well-placed to benefit from the emerging trend.
Vornado, carrying a Zacks Rank #3 (Hold), enjoys a diversified tenant base, which includes several industry bellwethers. This enables the company to generate stable cash flows and fuels long-term growth.
Vornado’s portfolio-repositioning efforts aimed at improving its core business are likely to pay off well. Strategic sell-outs provide the company with the dry powder to reinvest in opportunistic developments and redevelopments and enhance overall portfolio quality.
As part of such efforts, in August 2023, it closed the sale of four Manhattan retail properties — 510 Fifth Avenue, 148–150 Spring Street, 443 Broadway and 692 Broadway — for $100 million and realized net proceeds of $95.5 million. In July 2023, it disposed of The Armory Show in New York for $24.4 million.
Vornado enjoys solid balance sheet strength. As of Sep 30, 2023, the company had $3.2 billion of liquidity, consisting of $1.3 billion of cash and cash equivalents and restricted cash and $1.9 billion available under its $2.5 billion revolving credit facilities.
The REIT has secured loan refinancing in recent times, enabling it to reduce interest rates on borrowings and extend debt maturities. A flexible financial position will allow it to take advantage of future investment opportunities and fund its development projects.
Additionally, VNO’s current cash flow growth is projected at 21.03% compared with 8.02% growth estimated for the industry.
Nonetheless, Vornado faces competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants. This may limit VNO’s ability to increase rents and/or backfill tenant move-outs and vacancies, slowing down its growth tempo.
The continuation of work-from-home, flexible or hybrid work setups is likely to affect the demand for office spaces and hurt Vornado’s business prospects.
Further, given the prevailing macroeconomic uncertainty and high interest rate environment, the company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side.
Stocks to Consider
Some better-ranked stocks from the REIT sector are EastGroup Properties EGP, Stag Industrial STAG and Park Hotels & Resorts PK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past month to $7.71.
The Zacks Consensus Estimate for Stag Industrial’s ongoing year’s FFO per share has been raised marginally over the past month to $2.28.
The Zacks Consensus Estimate for Park Hotels & Resorts’ current-year FFO per share has moved 3.1% northward over the past month to $1.98.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Vornado Realty Trust (VNO) : Free Stock Analysis Report
Stag Industrial, Inc. (STAG) : Free Stock Analysis Report
EastGroup Properties, Inc. (EGP) : Free Stock Analysis Report
Park Hotels & Resorts Inc. (PK) : Free Stock Analysis Report
