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What's in Store for Vornado (VNO) This Earnings Season?

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Vornado Realty Trust (VNO - Free Report) is scheduled to report second-quarter 2021 results on Aug 2, after the closing bell. Results are projected to display year-over-year growth in revenues and funds from operations (FFO) per share.

In the previous quarter, this New York-based real estate investment trust (REIT) surpassed the Zacks Consensus Estimate by 3.2% in terms of FFO per share plus assumed conversions as adjusted. Though the company benefited from lower interest expenses and G&A expenses, it felt the brunt of a declining net operating income (NOI).

Over the trailing four quarters, Vornado topped the Zacks Consensus Estimate twice for as many misses, the average negative beat being 6.80%.

Vornado Realty Trust Price and EPS Surprise

Vornado Realty Trust Price and EPS Surprise

Vornado Realty Trust price-eps-surprise | Vornado Realty Trust Quote

Let’s see how things have shaped up prior to this announcement.

In the wake of the COVID-19 pandemic, Vornado’s numerous retail tenants continue to be impacted by limitations on occupancy and other restrictions. As the company has high exposure in the New York City (86% of its NOI at share for first-quarter 2021), its second-quarter performance is expected to have been hurt.

Rent and vacancy changes for retail were minimal but still tended to be negative, per the preliminary trend announcement for the commercial real estate of Moody's Analytics REIS. Vacancy rate of 10.5% edged down from the prior quarter’s 10.6%, while average asking rent increased to $21.33 per square foot from $21.32 during first-quarter 2021.

In addition to that, the company is not immune to store closures and retailer bankruptcies. The tepid retail real estate environment is likely to have curbed its growth momentum in the to-be-reported quarter, as secular industry headwinds continue to dampen industry fundamentals.

The pandemic’s impact on the labor markets continued to overwhelm the U.S. office real estate market during the quarter to be reported, resulting in negative net absorption and an increase in vacancy levels. While the U.S. economy slashed nearly three million office-using jobs last year in March and April, the United States added back only 1.7 million in 2020, and another 389,000 office-using jobs during the first half of this year. The remote-working wave is still continuing and though the office-using employment is recovering, it remains below the pre-pandemic level.

Going by a Cushman & Wakefield (CWK - Free Report) report, the U.S. office sector witnessed negative net absorption of 38.5 million square feet, marking its fifth consecutive quarter of negative absorption. Also, the vacancy rate increased to 17.2% in the June-end quarter from the prior year’s 13.5%.

Such a lackluster environment is anticipated to have caused occupancy erosion at the company’s office properties during the quarter under review. In April, Vornado announced the permanent closure of Hotel Pennsylvania, which is expected to have resulted in a NOI decline in its New York City segment.

The Zacks Consensus Estimate for rentals for the company’s New York properties is pegged at $239 million. This indicates a marginal decline from the prior-year reported figure.

However, Vornado’s premium assets in a few select high-rent, high barrier-to-entry markets are likely to have aided cash flows and fueled revenue growth. The Zacks Consensus Estimate for second-quarter revenues is pegged at $384.8 million, suggesting year-over-year growth of 12.2%.

Prior to the second-quarter earnings release, the Zacks Consensus Estimate for FFO per share has seen positive revision, instilling adequate analyst confidence. The consensus mark has been revised 1.5% north over the past 30 days to 69 cents. It suggests a year-over-year increase of 25.5%.

Earnings Whispers

Per our quantitative model, Vornado Realty does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of a FFO beat this quarter.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Vornado has an Earnings ESP of -0.29%.

Zacks Rank: The company currently carries a Zacks Rank of 3 (Hold).

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a beat this quarter:

CubeSmart (CUBE - Free Report) , slated to release quarterly numbers on Jul 29, has an Earnings ESP of +3.89% and holds a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Digital Realty Trust, Inc. (DLR - Free Report) , scheduled to report quarterly numbers on Jul 29, currently has an Earnings ESP of +0.63% and carries a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.