Vornado Realty Trust VNO is scheduled to report first-quarter 2023 results on May 1, after market close. While the quarterly results are likely to exhibit marginal revenue growth, funds from operations (FFO) per share might reflect a decline.
In the last reported quarter, this New York-based real estate investment trust’s (REIT) FFO plus assumed conversions as adjusted per share surpassed the Zacks Consensus Estimate by 7.46%. The quarterly results reflected better-than-anticipated top-line growth on healthy leasing activity. Also, year-over-year improvement in same-store net operating income across the portfolio was noticed.
Over the trailing four quarters, Vornado’s FFO plus assumed conversions as adjusted per share surpassed the Zacks Consensus Estimate on all occasions, the average beat being 6.48%. This is depicted in the graph below:
Factors at Play
Per a Cushman & Wakefield CWK report, the U.S. office market demand continues to suffer as office-using employment growth has simmered down amid inflationary pressures, increased interest rates, tight labor markets and economic uncertainty. Net absorption in first-quarter 2023 was negative 32.2 million square feet (msf), marking the lowest quarter in two years.
The overall gross leasing activity for the four quarters ending first-quarter 2023 was 309 msf. Although the figure was 69 msf above the pandemic-era low in first-quarter 2021, it declined for three quarters straight. Further, leasing activity in first-quarter 2023 was slightly below the 20-year historical average of 320 msf.
With dampened absorption and increased sublease availabilities, vacancies are on the rise across the United States. The national vacancy rate climbed 60 basis points to 18.6% in the first quarter, reflecting the largest quarter-over-quarter increase since second-quarter 2021. The national asking rent came in at $37.03 for the quarter.
Nonetheless, per the Cushman & Wakefield report, the flight-to-quality trends have continued, with 25 U.S. markets reporting positive demand among Class A office buildings.
We believe that Vornado’s portfolio of premium assets in a few select high-rent, high-barrier-to-entry markets of New York, San Francisco and Chicago is likely to have experienced healthy leasing activity amid this preference for premium office spaces by office tenants. This makes us optimistic about its first-quarter results.
Also, the company’s long-term lease agreements with a diverse tenant base across industries having a solid credit profile are expected to have aided its cashflows during the to-be-reported quarter.
Speaking of the Vornado’s Manhattan street retail performance during the to-be-reported quarter, increased consumers’ preference for in-person shopping experience is likely to have been a boon.
VNO’s top line is expected to have improved on the back of these tailwinds. The Zacks Consensus Estimate for first-quarter revenues is pegged at $445.8 million, suggesting marginal growth from the year-ago quarter’s reported figure.
The company’s robust balance sheet position during the to-be-reported quarter is expected to have supported its acquisition and development-related activities.
In January 2023, Vornado and Rudin closed the earlier announced transactions related to their 350 Park Avenue and 40 East 52nd Street properties with Citadel Enterprise Americas LLC (“Citadel”) and with an affiliate of Kenneth C. Griffin, Citadel’s Founder and CEO (“KG”).
As previously announced, Vornado’s 350 Park Avenue office building, encompassing 585,000 square feet, will be master leased to Citadel on an “as is” basis for 10 years. The initial annual net rent for the property is $36 million, retroactive to Jun 15, 2022.
However, higher interest expenses are expected to have been a key headwind for the company during the quarter.
The Zacks Consensus Estimate for the quarterly FFO per share has been revised 1.6% downward to 62 cents over the past week. The same suggests a 21.5% fall from the prior-year period’s reported number.
Our proven model predicts a surprise in terms of FFO per share for VNO this season. The combination of a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — increases the odds of a beat. That’s just the case here.
Earnings ESP: Vornado has an Earnings ESP of +1.73%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Vornado currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Other Stocks That Warrant a Look
Here are some other stocks that are worth considering from the REIT sector, as our model shows that these have the right combination of elements to deliver a surprise this reporting cycle:
American Tower AMT is slated to report quarterly numbers on Apr 26. AMT has an Earnings ESP of +0.63% and carries a Zacks Rank #3 presently.
Welltower WELL is scheduled to report first-quarter earnings on May 2. WELL has an Earnings ESP of +0.35% and a Zacks Rank #3 currently.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
Note: Anything related to earnings presented in this write-up represents 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.