Overdue Rents, Low Leasing to Hurt Vornado's (VNO) Q3 Earnings

Vornado Realty Trust VNO is scheduled to report third-quarter 2020 results on Nov 2, 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 25.7% in terms of FFO per share plus assumed conversions as adjusted. A decline in same-store net operating income (NOI) in the New York portfolio, 555 California Street and theMART impacted the company’s quarterly results.

Over the preceding four quarters, Vornado surpassed the Zacks Consensus Estimate on two occasions and missed in the other two, the average negative surprise being 5.4%. 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 battered office real estate market of New York City is expected to have weighed on Vornado’s third-quarter performance, given its dominance in the region. Despite numerous companies returning to the office across New York City and Manhattan, the occupancy of office space and leasing activity has remained subdued.

In fact, per a Cushman & Wakefield report, net absorption for the quarter was negative 41.3 million square feet, following a negative net absorption of 23 million square feet in the second quarter. Moreover, the decline in demand for office real estate affected occupancy rates.

Moreover, the national vacancy rate reached 14.4% during the September-end quarter, increasing 170 basis points year over year. This marked the highest level since third-quarter 2014.

Nonetheless, asking rents for the quarter continued to increase despite an increase in vacancies. In fact, asking rents sequentially increased 1.9% to $34.64 per square foot during the third quarter.

These soft fundamentals are likely to have weighed on Vornado’s office occupancy and rents for the September-end quarter. In fact, third-quarter total revenues from its New York properties, which accounted for 86% of NOI in the first half of 2020, are projected to be $285 million. This indicates a decline of 25.2% from the prior year’s reported figure. 

Notably, the Zacks Consensus Estimate for rentals for the company’s New York properties, which accounted for 86% of NOI in the first half of 2020, was pinned at $232 million. This indicates a year-over-year dip of 20%.

Moreover, the Zacks Consensus Estimate for third-quarter revenues is pinned at $362.9 million, suggesting a decline of 22% year over year.

Further, amid these pandemic-led disruptions in businesses, the financial condition and liquidity of the company’s office and retail tenants have likely deteriorated, impairing their ability to pay rents. This has compelled the company to write-off such uncollectible. In fact, it expects non-cash write-offs of receivables, arising from the straight-lining of rents and write-offs for uncollectible tenant receivables, to reduce third-quarter FFO per share by 7 cents and 6 cents, respectively.

These are likely to hinder FFO growth for the quarter. In fact, the consensus estimate for third-quarter FFO per share of 67 cents indicates a year-over-year decline of 24.7%.

Nonetheless, Vornado will register an after-tax net gain on sale amounting to $186.9 million for the sale of condominium units at its residential construction project — 220 Central Park South (CPS). Vornado expects this to improve FFO plus assumed conversions by 92 cents for third-quarter 2020.

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 -4.6%.

Zacks Rank: The company currently carries a Zacks Rank of 5 (Strong Sell).

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 beat this quarter:

Lexington Realty Trust LXP, set to report quarterly numbers on Nov 5, currently has an Earnings ESP of +1.33% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

National Storage Affiliates Trust NSA, slated to release third-quarter earnings on Nov 5, has an Earnings ESP of +1.94% and a Zacks Rank of 2 (Buy) at present.

Ventas, Inc. VTR, slated to release third-quarter earnings on Nov 6, has an Earnings ESP of +2.03% and a Zacks Rank of 3 at present.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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