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Vornado Realty Trust (VNO - Analyst Report), a leading real estate investment trust (REIT), reported fourth quarter 2011 FFO (funds from operations) of $280.4 million or $1.46 per share, versus $432.9 million or $2.27 per share 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.

The reported FFO per share during fourth quarter 2011 surpassed the Zacks Consensus Estimate by 24 cents. After adjusting items for comparability, FFO during the fourth quarter of 2011 was $220.1 million or $1.15 per share, compared with $218.3 million or $1.15 in the prior-year quarter.

For full year 2011, Vornado reported FFO of $1.23 billion or $6.42 per share, versus $1.25 billion or $6.59 in the previous year. Reported FFO per share for fiscal 2011 exceeded the Zacks Consensus Estimate by 28 cents. Adjusted FFO during the reported fiscal was $1.01 billion or $5.27 per share, compared with $1.00 billion or $5.27 in 2010.

Total revenues during the reported quarter were $741.8 million compared with $702.8 million in the year-ago period. Total revenues during the quarter were well ahead of the Zacks Consensus Estimate of $664 million. For full year 2011, total revenues were $2.9 billion compared with $2.7 billion in the prior year.

Same-store occupancy in the company’s New York City and Washington, DC office portfolio was 95.6% and 90.0%, respectively, at quarter-end. Same-store EBITDA (earnings before interest, tax, depreciation and amortization) on GAAP basis increased 3.3% and decreased 3.0% 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 also doing well: same-store occupancy was 93.0% at quarter-end, while same-store EBITDA (GAAP) increased 2.4% versus the year-ago quarter. In the Merchandise Mart segment, same-store occupancy was 85.2%, while same-store EBITDA (GAAP) increased 8.9% year-over-year.

During the reported quarter, rents increased 9.5% (cash basis) and 15.4% (GAAP) compared with the previous rents in New York City office segment. In Washington DC, rents increased 7.7% (cash) and 8.7% (GAAP) versus expiring rents. Retail rents increased 5.6% (cash) and 14.9% (GAAP) over in-place rents.

During the quarter, Vornado formed a joint venture with Kushner Companies – a diversified real estate firm, to refinance a mortgage loan collateralized by ‘666 Fifth Avenue’ – a 39-story office complex spanning 1.45 million square feet in New York City. In concurrence with the agreement, Vornado acquired a minority stake (49.5% ownership interest) in the building from its current owner Kushner. At the same time, the company converted the existing $1.215 billion mortgage loan into a $1.1 billion A-Note and a $115 million B-Note, thereby extending the maturity date to February 2019.

Moving forward, both Vornado and Kushner have committed to lend the joint venture $110 million for tenant improvements and working capital requirements for the property. While Vornado has decided to inject $80 million of equity in the building, Kushner will contribute the remaining $30 million. The equity contributions are expected to cover the leasing costs of about 30% of the building remaining vacant and renovating the space to suit tenant needs.

Also during the reported quarter, 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 ‘555 California Street’, 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 year-end 2011, the company had $606.6 million of cash and cash equivalents and total outstanding debt of $14.5 billion. The adjusted FFO payout ratio during the reported quarter was 60.0% compared to 56.5% in fourth 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 it is maintaining strong occupancies in its New York City office and retail portfolios. We believe this puts the company well 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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