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Should You Retain Vornado Realty Trust in Your Portfolio Now?
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Vornado Realty Trust’s (VNO - Free Report) ability to cater to the rising demand for premier office spaces with class-apart amenities is likely to drive leasing activity. Its portfolio-repositioning efforts and healthy balance sheet position also augur well. However, the geographic concentration of assets, competition from developers and high interest rates raise concerns.
Last August, this office real estate investment trust (REIT) reported its second-quarter 2024 funds from operations (FFO) plus assumed conversions as adjusted per share of 57 cents, which surpassed the Zacks Consensus Estimate of 55 cents. Results displayed better-than-anticipated top-line growth. Vornado experienced decent leasing activity, higher initial rent and lower leasing commissions in the quarter.
Shares of VNO have rallied 36.1% over the past three months, outperforming the industry's upside of 17.2%. Analysts also seem bullish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2024 FFO per share revised upward marginally over the past month.
Image Source: Zacks Investment Research
What’s Aiding Vornado Realty Trust?
Vornado owns a portfolio of top-quality office properties in a few select high-rent, high-barrier-to-entry markets of New York, Chicago and San Francisco. It boasts a concentration of high-quality assets and a strategic focus on expanding its market share in the New York City office market.
VNO’s focus on having assets in a few select high-rent, high barrier-to-entry geographic markets, as well as a diversified tenant base that includes several industry bellwethers, is expected to drive steady cash flows and fuel its growth over the long term. While amid the ongoing choppiness in the office real estate market, we estimate a year-over-year decrease in total revenues in 2024, the metric is expected to rise 0.9% and 4.1% in 2025 and 2026, respectively.
Vornado is well-positioned to benefit from the rising rents for the best-in-class redeveloped assets offering abundant amenities at transit-centric locations. Given its ability to offer top-quality office spaces, backed by its redevelopment efforts, it can capitalize on this emerging trend of office-using job growth.
Vornado is focused on improving its core business by making opportunistic developments and divestitures in addition to business spin-offs. Strategic sell-outs provide the company with the dry powder to reinvest in opportunistic developments and redevelopments. The timely portfolio-repositioning initiatives are likely to drive growth over the long term.
Vornado has a healthy balance sheet and ample liquidity. As of June 30, 2024, the company had $2.7 billion of liquidity, consisting of $1.1 billion of cash and cash equivalents and restricted cash and $1.6 billion available under its $2.2 billion revolving credit facilities. A flexible financial position will enable it to take advantage of future investment opportunities and fund its development projects.
What’s Hurting Vornado Realty Trust?
Vornado has high office market exposure in New York City, along with significant street retail there [86.4% of its net operating income (NOI) at share for the second quarter of 2024]. This concentrated portfolio makes the company’s cash flows vulnerable to the macroeconomic situation prevailing in that region.
Vornado faces competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants. This affects the company’s ability to attract and retain tenants at relatively higher rents than its competitors, adversely affecting its long-term profitability.
A high interest rate environment is a concern for Vornado. The company has a substantial debt burden, and its pro rata share of total debt as of June 30, 2024 was approximately $10.1 billion. Management expects 2024 comparable FFO to be down from 2023 due to higher projected net interest expenses of about 30 cents per share and the impact of known vacancies at certain of its properties.
Solid dividend payouts remain the biggest attractions for REIT investors. However, in April 2023, Vornado postponed the dividend payment until the end of 2023, projecting reduced taxable income for the year due to higher interest expenses. Although in December 2023, Vornado announced a dividend of 30 cents per share for the fourth quarter of 2023, it marked a reduction of 20% from the prior payout. The company anticipates paying a single common share dividend in the fourth quarter of 2024 as part of its common share dividend policy for the year. We estimate a year-over-year decline of 18.1% in FFO as adjusted in 2024. Any significant turnaround in the dividend payment is likely to remain elusive in the near term.
The Zacks Consensus Estimate for Cousins Properties’ current-year FFO per share has been raised marginally over the past two months to $2.66.
The Zacks Consensus Estimate for Essex Property Trust’s current-year FFO per share has moved northward marginally over the past month to $15.53.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.
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Should You Retain Vornado Realty Trust in Your Portfolio Now?
Vornado Realty Trust’s (VNO - Free Report) ability to cater to the rising demand for premier office spaces with class-apart amenities is likely to drive leasing activity. Its portfolio-repositioning efforts and healthy balance sheet position also augur well. However, the geographic concentration of assets, competition from developers and high interest rates raise concerns.
Last August, this office real estate investment trust (REIT) reported its second-quarter 2024 funds from operations (FFO) plus assumed conversions as adjusted per share of 57 cents, which surpassed the Zacks Consensus Estimate of 55 cents. Results displayed better-than-anticipated top-line growth. Vornado experienced decent leasing activity, higher initial rent and lower leasing commissions in the quarter.
Shares of VNO have rallied 36.1% over the past three months, outperforming the industry's upside of 17.2%. Analysts also seem bullish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2024 FFO per share revised upward marginally over the past month.
Image Source: Zacks Investment Research
What’s Aiding Vornado Realty Trust?
Vornado owns a portfolio of top-quality office properties in a few select high-rent, high-barrier-to-entry markets of New York, Chicago and San Francisco. It boasts a concentration of high-quality assets and a strategic focus on expanding its market share in the New York City office market.
VNO’s focus on having assets in a few select high-rent, high barrier-to-entry geographic markets, as well as a diversified tenant base that includes several industry bellwethers, is expected to drive steady cash flows and fuel its growth over the long term. While amid the ongoing choppiness in the office real estate market, we estimate a year-over-year decrease in total revenues in 2024, the metric is expected to rise 0.9% and 4.1% in 2025 and 2026, respectively.
Vornado is well-positioned to benefit from the rising rents for the best-in-class redeveloped assets offering abundant amenities at transit-centric locations. Given its ability to offer top-quality office spaces, backed by its redevelopment efforts, it can capitalize on this emerging trend of office-using job growth.
Vornado is focused on improving its core business by making opportunistic developments and divestitures in addition to business spin-offs. Strategic sell-outs provide the company with the dry powder to reinvest in opportunistic developments and redevelopments. The timely portfolio-repositioning initiatives are likely to drive growth over the long term.
Vornado has a healthy balance sheet and ample liquidity. As of June 30, 2024, the company had $2.7 billion of liquidity, consisting of $1.1 billion of cash and cash equivalents and restricted cash and $1.6 billion available under its $2.2 billion revolving credit facilities. A flexible financial position will enable it to take advantage of future investment opportunities and fund its development projects.
What’s Hurting Vornado Realty Trust?
Vornado has high office market exposure in New York City, along with significant street retail there [86.4% of its net operating income (NOI) at share for the second quarter of 2024]. This concentrated portfolio makes the company’s cash flows vulnerable to the macroeconomic situation prevailing in that region.
Vornado faces competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants. This affects the company’s ability to attract and retain tenants at relatively higher rents than its competitors, adversely affecting its long-term profitability.
A high interest rate environment is a concern for Vornado. The company has a substantial debt burden, and its pro rata share of total debt as of June 30, 2024 was approximately $10.1 billion. Management expects 2024 comparable FFO to be down from 2023 due to higher projected net interest expenses of about 30 cents per share and the impact of known vacancies at certain of its properties.
Solid dividend payouts remain the biggest attractions for REIT investors. However, in April 2023, Vornado postponed the dividend payment until the end of 2023, projecting reduced taxable income for the year due to higher interest expenses. Although in December 2023, Vornado announced a dividend of 30 cents per share for the fourth quarter of 2023, it marked a reduction of 20% from the prior payout. The company anticipates paying a single common share dividend in the fourth quarter of 2024 as part of its common share dividend policy for the year. We estimate a year-over-year decline of 18.1% in FFO as adjusted in 2024. Any significant turnaround in the dividend payment is likely to remain elusive in the near term.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Cousins Properties (CUZ - Free Report) and Essex Property Trust, Inc. (ESS - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Cousins Properties’ current-year FFO per share has been raised marginally over the past two months to $2.66.
The Zacks Consensus Estimate for Essex Property Trust’s current-year FFO per share has moved northward marginally over the past month to $15.53.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.