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Vornado Realty Trust (VNO - Analyst Report) came up with first-quarter 2014 adjusted funds from operations (FFO) per share of $1.20, which surpassed the year-ago quarter figure by 7 cents but missed the Zacks Consensus Estimate by a dime.

Including the impact of its Toys "R" Us stake, Vornado reported FFO per share of $1.31, compared to $1.08 reported in prior-year quarter.

While total revenue declined 8.1% year over year to $660.6 million in first-quarter 2014, it exceeded the Zacks Consensus Estimate of $650 million.

Quarter in Detail

In the New York City portfolio, Vornado leased 947,000 square feet of office and 11,000 square feet of retail spaces. At quarter-end, same-store occupancy in the portfolio was 97.0%, reflecting an increase of 90 basis points (bps) year over year. Same-store earnings before interest, tax, depreciation and amortization (EBITDA) on a GAAP basis rose 6.2% year over year in this portfolio.

In the Washington, DC portfolio, Vornado leased 357,000 square feet of office space. At quarter-end, same-store occupancy in the portfolio came in at 83.3%, down 50 bps year over year. Same-store EBITDA on a GAAP basis declined 2.5% year over year in the portfolio.

In the Retail portfolio, Vornado leased 233,000 square feet of Strips and 25,000 square feet of Malls spaces. At quarter-end, same-store occupancy in the portfolio was 94.2%, reflecting a decrease of 10 basis points (bps) year over year. Same-store EBITDA on a GAAP basis increased 2.2% year over year in the portfolio.

In the first quarter, Vornado divested Broadway Mall in Hicksville, Long Island, New York and generated proceeds of $92.2 million (after closing costs). Also, the company penned a deal to exchange the redeveloped Springfield Town Center in Virginia with Pennsylvania Real Estate Investment Trust (PEI - Snapshot Report) for $465 million and signed a deal to sell Beverly Connection for $260 million in Los Angeles.

Liquidity

As of Mar 31, 2014, Vornado had $1.2 billion of cash and cash equivalents, up from $583.3 million as of Dec 31, 2013. Moreover, at the end of the quarter, total outstanding debt was $13.8 billion, up from $13.7 billion at the end of 2013.

The FFO payout ratio (based on FFO as adjusted for comparability) in the quarter was 60.8% as against 64.6% in the year-ago quarter.

Shopping Centers Spin-Off

On Apr 11, Vornado disclosed that it will spin off its U.S. shopping center business into a new publicly traded REIT. Specifically, the company will spin off 81 strip shopping centers and 4 malls while it will retain its premium portfolio of Manhattan street retail assets. The transaction is targeted to be accomplished by the end of this year.

Our Take

Although an FFO miss at Vornado is definitely discouraging, the company sees better results in the quarters ahead. This is because of its strategic portfolio repositioning activities and leasing efforts. Further, the shopping center spin off decision is line with its streamlining measures and will help Vornado focus exclusively on the office assets in the New York City and Washington, DC region and the Manhattan street retail properties. However, we anticipate slow recovery of the office sector to remain a concern for this Zacks Rank #3 (Hold) stock.

Investors interested in REITs may consider stocks like Cousins Properties Inc. (CUZ - Analyst Report) and Duke Realty Corp. (DRE - Analyst Report). Both stocks hold a Zacks Rank #2 (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.

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