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Analyst Blog

Vornado Realty Trust (VNO - Analyst Report), a leading real estate investment trust (REIT), disclosed its share of the first-quarter 2013 financial results of Toys 'R' Us - a global retailer of dedicated toys and baby products. Vornado currently owns about 32.6% of Toys 'R' Us.

Vornado's second-quarter 2013 results will include a loss of $36.9 million or 19 cents per share on account of Toys 'R' Us, comparatively wider than the loss of $19.2 million or 10 cents per share reported in the year-ago quarter.

As a result, Vornado will record negative FFO (funds from operations) after income taxes of $25.1 million or 13 cents per share, compared with negative FFO after income tax of $7.7 million or 4 cents per share in the year-ago quarter.

We note that the Toys 'R' Us business is extremely seasonal. Its previous performance has revealed that the company's fourth quarter accounts for over 80% of its fiscal net income owing to the strong holiday sales.

N.Y.-based Vornado Realty, acquires, owns and leases office properties, retail space and warehouses. In addition to its properties, the company has investments in other REITs, industrial buildings and Toys 'R' Us.

In May, Vornado reported first-quarter 2013 adjusted FFO per share of $1.14, missing the Zacks Consensus Estimate of $1.85. However, the FFO exceeded the year-ago number of 98 cents by 16.3%. The year-over-year increase was attributable to the successful execution of the company’s strategic initiatives.

Vornado has a strong asset portfolio and its repositioning moves have strengthened its foothold in 2 of the best long-term office markets in the U.S. Moreover, the company’s healthy balance sheet and liquidity position facilitate it to take advantage of distressed selling as asset values of office and retail properties continue to drop in the aftermath of the recession.

Despite the impact of the negative FFO in Vornado Realty's second-quarter results from its share in Toys 'R' Us, we believe that its ample portfolio diversification would help it mitigate such an impact on the whole.

However, we anticipate continued volatility in the office sector with job cuts and a decline in market fundamentals, which in turn are likely to limit Vornado’s growth prospects.

Vornado currently has a Zacks Rank #4 (Sell). However, other better performing REITs include CommonWealth REIT , Extra Space Storage Inc. (EXR - Snapshot Report) and Sunstone Hotel Investors Inc. (SHO - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.