On Sep 12, 2013, we reiterated our long-term Neutral
Vornado Realty Trust
), a N.Y.-based real estate investment trust (REIT). Though we
commend the company's strong second-quarter results, ongoing
successful portfolio repositioning measures and its financial
flexibility, we believe that the continued volatility in the
office sector, rising interest rates and stiff competition from
commercial property developers will remain overhangs.
Driven by the successful execution of strategic initiatives,
Vornado's second-quarter 2013 adjusted funds from operations
(FFO) per share of $1.30 exceeded the year-ago figure by 22.6%.
Moreover, including the non-recurring items, FFO came in at $1.25
per share, substantially higher than 89 cents recorded in the
year-ago quarter. Aided by leasing and occupancy gains, the
results also exceeded the Zacks Consensus Estimate of 24
Vornado's Class A office properties are concentrated in select
high-rent, high barrier-to-entry geographic markets that usually
fare better in challenging economic conditions. Moreover, the
company is focused on improving its core business and is making
strategic acquisitions and divestitures. The recent deal to buy a
retail and office property on 655 Fifth Avenue Manhattan was
noteworthy in this respect.
Moreover, Vornado has a strong balance sheet and adequate
liquidity, which help it to take advantage of distressed selling.
Furthermore, with the FFO payout ratio (based on FFO as adjusted
for comparability) of 56.2% in second-quarter 2013, Vornado has
considerable scope to increase shareholders' return.
However, the demand for office space remains moderate with
unemployment levels still high. New supply as well as increased
utilization of office space continue to be headwinds for the
demand of Vornado's properties. Moreover, the rise in interest
rates increases the company's investment-related expenses, and
thus poses a threat to its profitability.
Over the last 30 days, the Zacks Consensus Estimate for 2013
FFO per share moved down a cent to $4.74 while for 2014, it moved
up a cent to $4.96 per share. The stock currently has a Zacks
Rank #3 (Hold).
Other REITs to Consider
Some better-performing REITs that are worth a look include
Highwoods Properties Inc.
Sovran Self Storage Inc.
SL Green Realty Corp.
). All these stocks carry a Zacks Rank #2 (Buy).
Note: Funds from operations, a widely used metric to gauge
the performance of REITs, are obtained after adding
depreciation and amortization and other non-cash expenses to
HIGHWOODS PPTYS (HIW): Free Stock Analysis
SL GREEN REALTY (SLG): Free Stock Analysis
SOVRAN SLF STOR (SSS): Free Stock Analysis
VORNADO RLTY TR (VNO): Free Stock Analysis
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