Vornado Realty Trust (VNO) reported funds from operations (FFO) per share of $1.15 in third-quarter 2014, which came in line with the Zacks Consensus Estimate and 3 cents higher than the year-ago quarter figure of $1.12.
The results were aided by improving strategic portfolio repositioning and leasing activities. Also, on an adjusted basis, Vornado’s FFO per share came in at $1.31, higher than the year-ago figure of $1.23.
Total revenue rose 0.3% year over year to $670.9 million in third-quarter 2014 and exceeded the Zacks Consensus Estimate of $662 million.
Quarter in Detail
In the New York City portfolio, Vornado leased 556,000 square feet of office and 33,000 square feet of retail spaces. At quarter-end, same-store occupancy in the portfolio was 96.7%, reflecting an increase of 60 basis points (bps) year over year. Same-store earnings before interest, tax, depreciation and amortization (EBITDA) on a GAAP basis rose 4.6% year over year in this portfolio.
In the Washington, D.C. portfolio, Vornado leased 450,000 square feet of office space. At quarter-end, same-store occupancy in the portfolio came in at 83.4%, down 20 bps year over year. Same-store EBITDA on a GAAP basis declined 2.7% year over year in the portfolio.
In the Retail portfolio, Vornado leased 243,000 square feet of Strips and 25,000 square feet of Malls spaces. At quarter-end, same-store occupancy in the total portfolio was 94.6%, reflecting a decrease of 30 basis points (bps) year over year. However, same-store EBITDA on a GAAP basis increased 1.1% year over year in the total portfolio.
During the third quarter, Vornado bought a land parcel under its 715 Lexington Avenue retail property in Manhattan for $63 million. On the other hand, the company sold Beverly Connection power shopping center in Los Angeles, CA, for $260 million and recognized a net gain of $44.2 million.
Subsequent to the third quarter, in October, Vornado closed the buyout of the retail condominium of the St. Regis Hotel and the nearby retail townhouse for about $700 million. Also, the company disclosed that it has inked a deal to vend an office building, 1740 Broadway, in Manhattan for around $605 million.
As of Sep 30, 2014, Vornado had $1.7 billion of cash and cash equivalents, up from $1.4 billion as of Jun 30, 2014. Moreover, at the end of the quarter, total outstanding debt was $14.8 billion, up from $14.5 billion at the end of Jun 2014.
The FFO payout ratio (based on FFO as adjusted for comparability) in the quarter was 55.7% as against 59.4% in the year-ago quarter.
Shopping Centers Spin-Off Update
Vornado named the to be spun off U.S. shopping center business as Urban Edge Properties (‘UE’), which will be a new publicly traded REIT. Notably, in the second quarter, the company had disclosed its plan to spin off 80 strip shopping centers, four malls and a warehouse park. The transaction is targeted to be accomplished by the end of this year.
Additionally, the company planned to keep hold of 20 small retail assets (that didn’t fit UE’s strategy) and divest them in the near future. As per which, in the third quarter, Vornado sold two of these 20 assets for $15 million and reaped a gain of $13.6 million.
Our Viewpoint
Vornado came up with decent results in third quarter 2014 on the back of improving operating portfolio performance. Going forward, the shopping center spin off decision is in line with its streamlining measures and will help Vornado focus exclusively on the office assets in the New York City and Washington, DC region as well as the Manhattan street retail properties. However, we anticipate slow recovery of the office sector to remain a concern for this Zacks Rank #3 (Hold) stock.
Investors interested in REITs may consider stocks like Cousins Properties Incorporated (CUZ), Host Hotels & Resorts, Inc. (HST) and Public Storage (PSA). 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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