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Vornado's Q4 Share of Toys 'R' Us

Zacks Equity Research

Vornado Realty Trust (VNO), a leading real estate investment trust (:REIT), disclosed its share of the third-quarter 2013 financial results of Toys 'R' Us – a global retailer of dedicated toys and baby products. Vornado will record this in its fourth-quarter 2013 results. The company currently owns about 32.6% of Toys 'R' Us.

Vornado's fourth-quarter 2013 results will include a loss of $130.9 million or 66 cents per share on account of Toys 'R' Us, comparatively wider than the loss of $73.8 million or 37 cents per share reported in the year-ago quarter. As a result, Vornado will record negative FFO (funds from operations) after income taxes of $119.8 million or 60 cents per share, higher than the negative FFO after income tax of $61.4 million or 31 cent per share in the year-ago quarter.

Notably, the proportionate share of Toys 'R' Us results are recorded by Vornado under the purchase price accounting system that is different from historical accounting used by Toys’. Hence, Toys’ registered an extra $690 million of intangible assets and goodwill (Vornado’s share being $225 million), net of last quarter impairments which Vornado previously took into account. For possible impairment, Toys’ is evaluating these items and based on the outcome, Vornado’s share of Toys' third quarter net loss and negative FFO may rise further.

As a matter of fact, as of Sep 30, 2013, Vornado’s carrying amount of Toys 'R' Us investment was $378.6 million. After adjusting aforementioned net loss of $130.9 million, the company’s carrying amount will shrink to $247.8 million.

The Toys 'R' Us business is extremely seasonal by nature. Its previous performance revealed that the company's fourth quarter accounts for over 80% of its fiscal net income owing to the strong holiday sales.

Despite the impact of the negative FFO in Vornado Realty's fourth-quarter results from its share in Toys 'R' Us, we believe that its ample portfolio diversification would help reduce the impact on the whole. However, Vornado’s Washington DC portfolio is anticipated to remain stressed with lower pace of leasing activity. Moreover, the company faces stiff competition from commercial property developers.

Vornado currently has a Zacks Rank #4 (Sell). However, some better-ranked REIT Equity Trust – Other stocks include Ventas, Inc. (VTR), CubeSmart (CUBE) and SL Green Realty Corp. (SLG). All stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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