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Is it Wise to Hold on to Vornado Realty (VNO) Stock Now?

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Vornado Realty Trust’s (VNO - Free Report) portfolio of high-quality assets in a few select high-rent, high barrier-to-entry regional markets in the United States is well-poised to benefit from the improving office leasing market. Also, its capital-recycling efforts and a robust balance-sheet position play well to its advantage.

Vornado focuses on expanding its market share in New York City office and Manhattan street retail. In addition, it has a controlling interest in 555 California Street and owns theMART in Chicago's River North District, which are iconic office assets in signature cities. Further, it has a diversified tenant base that includes several industry bellwethers. This aids the company in generating a steady cash flow and fuels its growth over the long term.

After a dismal environment in the office real estate market, office real estate investment trusts (REITs), including Vornado, SL Green (SLG - Free Report) and Boston Properties (BXP - Free Report) , are now likely to benefit from a combination of office-using job growth, higher space utilization and expansion of technology, financial and media companies. This is expected to support rental revenue growth of Vornado, SL Green and Boston Properties in the forthcoming quarters.

Moreover, office occupiers are keen on growing their office footprint in New York City, where rents in the newly constructed or best-in-class redeveloped assets have risen. Vornado is well-placed to benefit from the emerging trend, given its ability to offer top-quality office spaces in this market.

Vornado undertakes capital-recycling efforts to improve its core business. This gives it ample dry powder to reinvest in opportunistic developments and redevelopments. In June 2022, Vornado disposed of Center Building for $172.75 million. The sale of the eight-story 498,000 square foot office building located at 33 00 Northern Boulevard in Long Island City, NY, generated net proceeds of $58.95 million. Timely portfolio-repositioning initiatives will support the company’s long-term growth.

Additionally, Vornado enjoys a strong balance-sheet position and has ample liquidity. As of Jun 30, 2022, VNO had $3.5 billion of liquidity, consisting of $1.1 billion cash and cash equivalents and restricted cash, $494 million of investments in U.S. Treasury bills and $1.9-billion available under its $2.5-billion revolving credit facilities. This will support its investment opportunities and help it to fund its development projects.

However, the rising supply of office properties remains a major concern for VNO. It faces intense competition from developers, owners and operators of office properties and other commercial real estates, including sublease space available from its tenants. This affects Vornado’s ability to attract and retain tenants at relatively higher rents than its competitors.

Also, a hike in interest rates might raise borrowing costs for the company, which would affect its ability to purchase or develop real estate. Its pro rata share of total debt as of Jun 30, 2022, was approximately $10.5 billion. Moreover, the dividend payout might become less attractive than the yields on fixed income and money market accounts.


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