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On Jul 4, 2013, we reiterated our long-term recommendation on Vornado Realty Trust (VNO - Analyst Report), a N.Y.-based real estate investment trust (REIT), at Neutral. The decision reflects the company’s portfolio repositioning measures and its financial flexibility, though continued volatility in the office sector with job cuts and stiff competition from commercial properties developers remain our concerns.

Why Neutral?

Vornado came up with mixed first-quarter 2013 results. The company reported first-quarter 2013 adjusted FFO per share of $1.14, missing the Zacks Consensus Estimate of $1.85 by 38.4%. However, the FFO exceeded the year-ago figure of $0.98 by 16.3%.The year-over-year increase was attributable to the successful execution of the company’s strategic initiatives.

Going forward, the ongoing portfolio repositioning activities position it favorably on the growth trajectory and add to its financial flexibility. Moreover, with a healthy balance sheet and decent liquidity position, the company is well poised to take advantage of distressed asset selling as office and retail asset value continue to fall in the aftermath of the recession.

However, continued volatility in the office sector with job cuts and a decline in market fundamentals may limit the company’s growth prospects. Moreover, stiff competition from commercial properties developers remains a headwind. Thus, our neutral stance on the stock remains in place.

Moreover, recently Vornado 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.

In its second-quarter 2013 results, Vornado will record negative FFO after income taxes of 13 cents per share, compared with negative FFO after income tax of 4 cents per share in the year-ago quarter. Notably, the Toys 'R' Us business is extremely seasonal and historically the company's fourth quarter accounts for over 80% of its fiscal net income owing to the strong holiday sales.

However, the Zacks Consensus Estimates for 2013 FFO per share moved south 2.6% to $4.92 while for 2014, it went down 0.8% to $5.11, over the last 30 days. Therefore, the stock currently carries a Zacks Rank #4 (Sell).

Other REITs to Consider

Some better-performing REITs that are worth considering include CommonWealth REIT (CWH - Snapshot Report), Sunstone Hotel Investors Inc. (SHO - Snapshot Report) and Winthrop Realty Trust (FUR - Snapshot Report). All these stocks carry a Zacks Rank # 1(Strong Buy).

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

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