Vornado Realty Trust (VNO - Analyst Report), a leading real estate investment trust (REIT), last Friday announced its share of the third quarter 2012 financial results of Toys ‘R’ Us – a global retailer of dedicated toys and baby products. Vornado Realty currently owns about 32.5% of Toys ‘R’ Us. It will record its share when it reports its fourth quarter results for the quarter ending December 31, 2012.
Vornado Realty’s fourth quarter 2012 results will include a loss of $33.8 million or 17 cents per share on account of Toys ‘R’ Us, comparatively wider than the loss of $32.3 million or 16 cents per share reported in the year-ago quarter.
Based on the third quarter results of Toys ‘R’ Us, Vornado Realty will also record negative FFO (funds from operations) before income tax of $49.2 million or 25 cents per share, compared with negative FFO before income tax of $45.3 million or 22 cents per share in the year-ago quarter.
We note that the business of Toys ‘R’ Us is extremely seasonal. Based on its previous performance, it has been found that the company’s fourth quarter accounts for over 80% of its fiscal net income owing to the strong holiday sales. Notably, for the quarter ended October 27, 2012, Toys ‘R’ Us reported net sales of $2.61 billion compared with $2.70 billion in the year-ago quarter.
New York-based Vornado Realty, acquires, owns and leases office properties, retail space and temperature-controlled logistics and refrigerated warehouses. In addition to its properties, the company has investments in other REITs, industrial buildings and Toys ‘R’ Us.
Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – New York City and Washington DC. This provides the company with a competitive advantage to continually increase rents. Alongside, it has a healthy balance sheet and adequate liquidity.
Therefore, the negative FFO in Vornado Realty's fourth quarter results from its share in Toys ‘R’ Us notwithstanding, we believe the ample portfolio diversification would help it mitigate such an impact on the whole.
Also, with the fourth quarter being a historically strong one for Toys ‘R’ Us, we remain optimistic regarding Vornado’s performance in the forthcoming quarter, when the impact would be recorded.
We maintain our long-term Neutral rating on Vornado Realty, which currently has a Zacks #2 Rank that translates into a short-term Buy recommendation. However, one of its competitors, Boston Properties Inc. (BXP - Analyst Report) has a Zacks #3 Rank.
Note: FFO, 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.