Vornado Realty Trust’s (VNO) second-quarter 2013 adjusted funds from operations (FFO) per share of $1.30 exceeded the Zacks Consensus Estimate by 6 cents. Moreover, it came above the year-ago figure of $1.06 by 22.6%.
The better-than-expected result at this real estate investment trust (REIT) was attributable to the company’s successful execution of strategic initiatives. Including the non-recurring items, FFO came in at $1.25 per share, substantially higher than 89 cents recorded in the year-ago quarter.
Total revenue upped 1.2% year over year to $685.9 million and came above the Zacks Consensus Estimate of $676 million as well.
Behind the Headlines
In the quarter under review, Vornado leased 1,950 square feet and 2,111 square feet of office space in New York City and Washington, D.C. portfolios, respectively. On cash basis, rents rose 4.6% and 0.4% compared with the previous increased rents in New York City and Washington, D.C. office segments, respectively. On the other hand, on a GAAP basis, rents upped 4.9% and 3.4% versus the previous straight-line rent in the New York City and Washington, D.C. office segments, respectively.
At the quarter-end, same-store occupancy in the company’s New York City and Washington, D.C. portfolios were 96.1% and 83.6%, respectively. Same-store earnings before interest, tax, depreciation and amortization (EBITDA) on GAAP basis rose 4.4% but decreased 5.5% year over year in the New York City and Washington, D.C. portfolios, respectively.
Notable Portfolio Activities
Vornado sold a power strip shopping center – The Plant – in San Jose for $203 million and realized a net gain of approximately $32.2 million. Additionally, the company sold its 26.2% stake in LNR Property LLC to Starwood Property Trust Inc. (STWD) and Starwood Capital Group for $1.05 billion. Vornado reaped approximately $241 million as net proceeds from the sale.
Moreover, during the quarter, Vornado divested a Philadelphia-based retail asset for $60 million and realized a net gain of $33.1 million. The company also penned a deal to dispose a parcel of land – Harlem Park – in New York City for $65 million. The divestiture is expected to garner a net gain of around $22 million.
Liquidity
As of Jun 30, 2013, Vornado had $781.7 million of cash and cash equivalents, compared with $585.8 million as of Mar 31, 2013. At the end of the quarter, total outstanding debt was $13.4 million.
The FFO payout ratio (based on FFO as adjusted for comparability) in the quarter was 56.2% versus 65.1% in the second quarter of 2012.
During the quarter, Vornado closed on the $550 million worth refinancing of Independence Plaza – a residential complex – in the Tribeca submarket of Manhattan.
Our Take
We are impressed with the better-than-expected results at Vornado. The company’s portfolio repositioning activity through strategic sale-offs positions it well for growth. Moreover, Vornado’s strong leasing activity has strengthened its foothold in two of the most vibrant long-term office markets – New York City and Washington, D.C – in the U.S. Additionally, Vornado’s healthy balance sheet with manageable near-term debt maturities and adequate cash position is noteworthy. We expect all these factors to provide upside potential to the company, going forward.
However, intense competition causes Vornado to charge relatively high rents from its tenants as compared to competitors. This affects the company’s long-term profitability and thus remains a matter of plausible concern.
Vornado currently carries a Zacks Rank #4 (Sell). Some better performing REITs include Douglas Emmett Inc. (DEI) and Franklin Street Properties Corp. (FSP). Both of these stocks hold 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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