Real estate investment trust (“REIT”) Vornado Realty Trust VNO is expected to report first-quarter 2015 results on May 4.
The company posted a negative earnings surprise of 0.81% in the preceding quarter, despite recording a positive average surprise of 2.25% for the trailing four quarters.
Let’s see how things have shaped up for this announcement.
Factors to Consider This Quarter
For Vornado, the Washington D.C. market remains a concern, as its business in the region continues to be impacted by sluggish leasing environment. In fourth-quarter 2014, Washington business produced $81.1 million of comparable EBITDA, down 2.6% year over year.
For 2014, it produced $333.8 million of comparable EBITDA, down 2.2% from that of 2013. Both occupancy and EBITDA continue to be low and the company projects Washington’s 2015 full-year comparable EBITDA to be flat with 2014.
During the period (2010–2014), total operating expenses showed a rising trend. For fourth-quarter 2014, total operating expenses were $275.1 million, up 6.8% year over year. We believe that this rising trend will continue in first-quarter 2015 too.
On the other hand, on Jan 15, Vornado completed the spin-off of its shopping center business into a publicly traded REIT named Urban Edge Properties. This spin-off is an outcome of Vornado’s decision to separate two businesses, which have been together for legacy reasons but with no real operating synergies.
We believe the creation of two focused REITs would help the company in efficiently leveraging the improving fundamentals of each asset type. Vornado, which has been subject to criticism for venturing into too many sectors, would now be able to focus exclusively on office properties and retail shops in Washington and Manhattan.
Notably, Vornado’s activities during the quarter were inadequate to win analysts’ confidence. Consequently, the Zacks Consensus Estimate declined by a cent to $1.19 per share over the last 7 days.
Earnings Whispers
Our proven model does not conclusively show that Vornado will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Negative Zacks ESP: That is because the Most Accurate estimate stands at $1.17 while the Zacks Consensus Estimate is pegged at $1.19. This translates into an Earnings ESP of negative 1.68%.
Zacks Rank #3: Vornado’s Zacks Rank #3, when combined with a negative Earnings ESP, makes surprise prediction difficult.
Note that, we caution against stocks with Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
You could consider stocks in the REIT sector that have the combination of a positive Earnings ESP and a favorable Zacks Rank, and are hence poised for an earnings beat this quarter:
Strategic Hotels & Resorts, Inc. BEE has an Earnings ESP of +60.00% and a Zacks Rank #3. The company will report first-quarter results on May 4.
Cousins Properties Incorporated CUZ has an Earnings ESP of +5.00% and a Zacks Rank #3. The company will report first-quarter results on May 6.
Essex Property Trust Inc. ESS has an Earnings ESP of +0.45% and a Zacks Rank #3. The company will report first-quarter results on May 6.
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.
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
Be the first to comment