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Factors Setting the Tone for Vornado's (VNO) Q2 Earnings

Vornado Realty Trust VNO is scheduled to report second-quarter 2020 results on Aug 3, after the closing bell. Results are projected to display year-over-year declines in revenues and funds from operations (FFO) per share.

In the last reported quarter, this New York-based real estate investment trust (REIT) missed the Zacks Consensus Estimate by 5.26% in terms of FFO per share. Total same-store net operating income (NOI) in the New York portfolio and theMART impacted the company’s performance during the quarter.

Over the preceding four quarters, Vornado surpassed estimates on two occasions and missed in the other two, the average surprise being 0.27%. This is depicted in the graph below:

Vornado Realty Trust Price and EPS Surprise

 

Vornado Realty Trust Price and EPS Surprise

Vornado Realty Trust price-eps-surprise | Vornado Realty Trust Quote

Let’s see how things have shaped up for this announcement.

The office real estate market felt the full effect of the coronavirus pandemic in the second quarter, with the demand for such properties decreasing amid a blow to the labor markets and higher adoption of remote working.

According to a Cushman & Wakefield CWK report, net absorption for the quarter was -22.8 million square feet, declining steeply from the prior quarter’s 5.2 million square feet. Moreover, the national office vacancy rate increased 50 basis points (bps) sequentially to 13.7%.

Nonetheless, the supply of office space remained in check during the quarter likely due to the coronavirus outbreak-led construction interruptions. In fact, completed office space during the second quarter was 9.9 million square feet of space, down from 13 million square feet completed in the March-end quarter. Additionally, similar to trends observed during the Great Recession, asking rents for the quarter continued to increase despite an increase in vacancies. In fact, asking rents sequentially increased 1.5% to $34.03 per square foot during the June-end quarter.

As for Vornado’s office portfolio that consists of properties in New York City, San Francisco and Chicago are expected to have witnessed lower demand due to the temporary work-from-home lifestyle. Specifically, the company is expected to report low new leasing volume in the dense New York City market. This is expected to have weighed on its office occupancy and rents for the second quarter. Notably, the Zacks Consensus Estimate for rentals for the company’s New York properties was pinned at $278 million. This indicates a year-over-year decline of 4.5%.

Moreover, the company quantified straight-line rent write-offs mainly for its leases with JC Penney at Manhattan Mall and New York & Company Inc. at 330 West 34th Street, amounting to $36.3 million. This is expected to impact FFO, as adjusted, per share by 18 cents. Moreover, reserves for uncollectible tenant receivables of $8.8 million will likely impact FFO, as adjusted, per share by 4 cents.

These are likely to have hindered FFO growth for the quarter. In fact, the consensus estimate for second-quarter FFO per share of 87 cents indicates a year-over-year decline of 4.4%. Moreover, the Zacks Consensus Estimate for second-quarter revenues is pinned at $365.2 million, suggesting a decline of 21.1% year over year.

Nonetheless, the company anticipates a $70.1-million non-cash gain on handing over 608 Fifth Avenue to the ground lessor. Moreover, it will register an after-tax net gain on sale amounting to $49 million for sale of condominium units at the company’s residential construction project — 220 Central Park South (CPS). Vornado estimates these to increase FFO plus assumed conversions by 58 cents.

Also, prior to its quarterly earnings release, the company has been witnessing upward estimate revisions. As such, the Zacks Consensus Estimate for second-quarter FFO per share has been revised 2.3% upward to 87 cents over the past week, reflecting analysts’ bullish sentiments.

Earnings Whispers

Our proven model cannot conclusively predict a beat in terms of FFO per share for Vornado this time around. The combination of a positive Earnings ESP and Zacks Rank #3 (Hold) or better increases the odds of a FFO beat. But that’s not the case here.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Vornado has an Earnings ESP of -17%.

Zacks Rank: The company currently carries a Zacks Rank of 3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthcare Trust of America, Inc. HTA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +1.21% and a Zacks Rank of 3.

Digital Realty Trust DLR, slated to release second-quarter earnings on Jul 30, has an Earnings ESP of +1.55% and a Zacks Rank of 3 at present.

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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