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Vornado Realty Trust (VNO - Analyst Report), a leading real estate investment trust (REIT), reported second quarter 2012 FFO (funds from operations) of $166.7 million or $0.89 per share, versus $243.4 million or $1.27 in the year-earlier quarter.

After adjusting items for comparability, FFO during the second quarter of 2012 was $211.6 million or $1.13 per share, compared with $220.3 million or $1.15 in the prior-year quarter. The recurring FFO per share during second quarter 2012 surpassed the Zacks Consensus Estimate of $0.96.

Total revenues during the reported quarter were $700.6 million compared with $696.0 million in the year-ago period. Total revenues during the quarter were well ahead of the Zacks Consensus Estimate of $685 million.

Same-store occupancy in the company’s New York City and Washington, DC portfolios were 95.4% and 85.9%, respectively, at quarter-end. Same-store EBITDA (earnings before interest, tax, depreciation and amortization) on GAAP basis increased 2.9% and decreased 8.1% during the quarter in the New York City and DC portfolios, respectively, compared with the year-earlier quarter.

Same-store occupancy in the retail portfolio was 93.5% at quarter-end, while same-store EBITDA (GAAP) increased 0.7% versus the year-ago quarter. In the Merchandise Mart segment, same-store occupancy was 82.6%, while same-store EBITDA (GAAP) increased 10.5% year over year.

During the reported quarter, Vornado leased 614 square feet and 526 square feet in New York City and Washington, DC portfolios respectively. Rents increased 4.5% (cash basis) and 7.4% (GAAP) compared with the previous rents in New York City office segment. In Washington DC, rents decreased 4.2% (cash) and increased 0.7% (GAAP) versus expiring rents. Retail rents (strip mall) increased 23.1% (cash) and 29.2% (GAAP) over in-place rents.

Subsequent to the quarter-end, Vornado Capital Partners, L.P. – a 25% owned real estate fund, acquired 1100 Lincoln Road retail property for $132 million. The property, spanning 167,000 square feet, was 97% leased at the point of purchase and is one of the prime attractions of the Lincoln Road shopping district in Miami Beach, Florida.  

The transaction was financed partially by a $66 million new mortgage loan on the property. The loan bearing an interest rate at LIBOR plus 2.75% is scheduled to mature in July 2015 with two one-year extension options.

Additionally, Vornado also entered into an agreement to acquire a retail condominium located at 666 Fifth Avenue on 53rd Street in New York City for approximately $707 million. The property encompasses 114,000 square feet with a frontage of 126 feet on Fifth Avenue. The transaction will be funded with property level debt and proceeds from asset sales and is expected to close in the fourth quarter of 2012.

Subsequent to the quarter-end, Vornado entered into a lease with Host Hotels & Resorts, Inc. (HST - Analyst Report), to redevelop the retail and signage components of the Marriott Marquis Times Square Hotel in Manhattan. The lease contains options based on cash flow which, if exercised, would lead to an ownership by Vornado in the asset.

During the reported quarter, Vornado completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California, for $53.0 million. Subsequent to the end of the quarter, the company entered into agreements to sell the Washington Design Center, the Boston Design Center and the Canadian Trade Shows, for a total of $175.0 million in cash.

In addition, Vornado completed the sale of 409 Third Street S.W., a 409,000 square foot office building in Washington, DC, for $200.0 million in cash, resulting in a net gain of approximately $124.7 million that will be recognized in the third quarter.

Vornado has a healthy balance sheet with very manageable near-term debt maturities and adequate cash. At quarter-end, the company had $471.4 million of cash and cash equivalents and total outstanding consolidated debt of $13.9 billion. The FFO payout ratio (based on FFO as adjusted for comparability) during the reported quarter was 60.8% compared to 60.0% in second quarter 2011.

We maintain our Neutral recommendation on Vornado, which presently has a Zacks #3 Rank that translates into a short-term Hold recommendation.

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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