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Vornado Realty Trust (VNO - Analyst Report), a leading real estate investment trust (REIT), reported third quarter 2011 FFO (funds from operations) of $195.1 million or $1.05 per share, versus $249.0 million or $1.31 in the year-earlier quarter. Fund from operations, 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.

After adjusting items for comparability, FFO during the third quarter of 2011 was $222.9 million or $1.20 per share, compared with $221.5 million or $1.17 in the prior-year quarter. The recurring FFO per share during third quarter 2011 surpassed the Zacks Consensus Estimate by 9 cents.

Total revenue during the reported quarter were $727.3 million compared with $687.1 million in the year-ago period. Total revenue during the quarter were well ahead of the Zacks Consensus Estimate of $682 million.

Same-store occupancy in the company’s New York City and Washington, DC office portfolio was 95.4% and 90.4%, respectively, at quarter-end. Same-store EBITDA (earnings before interest, tax, depreciation and amortization) on GAAP basis decreased 1.1% and increased 0.4% during the quarter in the New York City and DC office portfolios, respectively, compared with the year-earlier quarter.

The company’s Retail portfolio is continuing its improved performance; same-store occupancy was 92.3% at quarter-end, while same-store EBITDA (GAAP) increased 0.9% versus the year-ago quarter. In the Merchandise Mart segment, same-store occupancy was 91.7%, while same-store EBITDA (GAAP) decreased 2.2% year-over-year.

Vornado leased 839,000 square feet during the quarter in New York City office segment and 392,000 square feet in Washington DC office segment. The company also leased 427,000 square feet in the Retail segment and about 293,000 square feet in the Merchandise Mart segment.

During the reported quarter, rents decreased 4.4% (cash basis) and 1.9% (GAAP) compared with the previous rents in New York City office segment. In Washington DC, rents increased 4.9% (cash) and 10.0% (GAAP) versus expiring rents. Retail rents increased 7.9% (cash) and 13.4% (GAAP) over in-place rents.

During third quarter 2011, Vornado refinanced a mortgage loan collateralized by 555 California Street – a three-building office complex spanning 1.8 million square feet in San Francisco. The company utilized the proceeds from the $600 million refinancing transaction and $45 million cash-in-hand to repay the existing mortgage loan. The new 10-year loan, which bears interest at 5.1%, amortizes based on a 30-year schedule beginning in the 4th year.

Vornado presently has a 70% ownership stake in the property, which is the second tallest building in San Francisco and the focal point of the city's Financial District. The former Bank of America Building stands 779 feet tall and boasts 52 stories. The building was designed to have numerous bay windows, which were not only attractive but also served to increase the rental values of the offices housed within.

Vornado has a healthy balance sheet with very manageable near-term debt maturities and plenty of cash. At quarter-end, the company had $585.2 million of cash and cash equivalents and total debt of $13.6 billion. The FFO payout ratio (based on FFO as adjusted for comparability) during the reported quarter was 57.5% compared to 55.6% in third quarter 2010.

Vornado is the largest publicly traded office REIT in the New York region. The core properties of the company are performing at a high level and maintain strong occupancies in its New York City office and retail portfolios. We believe this pushes the company way ahead of many of its competitors, who have assets in weak markets struggling with high vacancies and little pricing power.

We maintain our ‘Neutral’ recommendation on Vornado, which presently has a Zacks #3 Rank that translates into a short-term 'Hold' recommendation. We also have a Neutral recommendation and a Zacks #3 Rank for Brookfield Properties Corporation , a competitor of Vornado.

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