Yahoo Finance Bear of the Day: Vornado Realty Trust (VNO)
Vornado Realty Trust (VNO) reported first-quarter results that continued to underwhelm Wall Street analysts and propelled them to lower estimates yet again to consensus figures representing a 2% decline in the topline and a 19% annual drop in the bottom line.
Funds from operations (FFO), plus assumed conversions as adjusted per share, of 55 cents missed the Zacks Consensus Estimate of 58 cents. Moreover, the figure declined 8.3% year over year.
FFO measures cash generated by REITs from their core operations, excluding gains/losses on sales. It is used to assess the financial performance and value of real estate companies. FFO provides a more accurate depiction of a REIT's profitability than net income.
Results displayed lower-than-anticipated top-line growth despite decent leasing activity across the company’s portfolio. The year-over-year decline in total same-store net operating income (NOI) was also noticeable.
Total revenues came in at $436.4 million in the reported quarter, lagging the Zacks Consensus Estimate of $451.1 million. On a year-over-year basis, revenues declined nearly 2.1%.
Quarter in Detail
In the reported quarter, total same-store NOI (at share) came in at $255.1 million compared with the prior-year quarter’s $267.9 million. The metric for the New York, THE MART and 555 California Street portfolios decreased 4.6%, 10% and 2.4%, respectively, from the prior-year period.
Operating expenses decreased 1.1% to $226.2 million year over year.
During the quarter, in the New York office portfolio, 291,000 square feet of office space (250,000 square feet at share) was leased for an initial rent of $89.23 per square foot and a weighted average lease term of 11.1 years. The tenant improvements and leasing commissions were $12.98 per square foot per annum or 11.5% of the initial rent.
In the New York retail portfolio, 36,000 square feet were leased (33,000 square feet at share) at an initial rent of $253.83 per square foot and a weighted average lease term of 3.8 years. The tenant improvements and leasing commissions were $29.16 per square foot per annum or 11.5% of the initial rent.
Additionally, at THE MART, 51,000 square feet of space (all at share) was leased for an initial rent of $64.02 per square foot and a weighted average lease term of 4.5 years. The tenant improvements and leasing commissions were $8.37 per square foot per annum or 13.1% of the initial rent.
Vornado ended the quarter with occupancy in the New York portfolio at 88.2%, down 170 basis points (bps) year over year. Occupancy in THE MART declined to 77.6% from 80.3%. Further, occupancy in 555 California Street also declined 40 bps to 94.5%.
Default Risk Rises as CRE Needs to Refi
Since the start of 2022, Vornado Realty Trust has faced at least two significant loan defaults impacting its commercial real estate portfolio.
Fifth Avenue and Times Square Joint Venture: In December 2022, Vornado defaulted on a $450 million loan secured by retail properties along Fifth Avenue and Times Square. This includes assets like 697-703 Fifth Avenue, where tenants include luxury brands such as Harry Winston and Blancpain. The company has been negotiating with lenders to restructure the loan, but there's a possibility they might have to hand over the property if an agreement isn't reached, according to Moguldom and The Real Deal.
Lincoln Road Mall: Vornado defaulted on an $83 million loan for its Lincoln Road Mall property in Miami Beach. The loan, originally secured in 2017, matured in 2021. After defaulting, Vornado sold the property to BH Properties at a discount of at least $35 million, according to the Commercial Observer in a May 2022 article.
These defaults reflect the broader challenges facing the commercial real estate market, particularly in major metro areas, as remote work trends and high-interest rates continue to impact leasing activities and property values.
Bottom line for Vornado: While the CRE crisis we expected in 2023 after the failures of large regional banks never materialized, there is still pressure on the REITs with loans that need to be refinanced at steadily higher costs and an office environment that will never see pre-pandemic occupancy.
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