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Why an Earnings Beat Is Unlikely for Vornado (VNO) in Q4

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Vornado Realty Trust (VNO - Free Report) is scheduled to report fourth-quarter and 2017 results on Feb 12, after the closing bell. Revenues and funds from operations (FFO) per share are expected to decline year over year.

In the prior quarter, this NY-based real estate investment trust (REIT) delivered a positive surprise of 1.96% in terms of funds from operations (FFO) per share. The results reflected growth in occupancy and same-store NOI in the New York portfolio.

Vornado has a disappointing earnings surprise history. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions and missed in the other two, witnessing an average negative surprise of 4.6%. This is depicted in the graph below:

Vornado Realty Trust Price and EPS Surprise

Shares of Vornado have underperformed the industry in the last six months. While the company’s shares have lost 13.6%, the industry has witnessed a decline of 6.3%.

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

Factors to Consider

Vornado has been actively repositioning its portfolio. In line with this, the company has been involved in opportunistic acquisitions and divestitures, along with business spin-offs. Though such efforts to streamline its business are commendable, the dilutive effects of these moves cannot be avoided either.

The company announced that its fourth-quarter 2017 financial results will include certain items that will have a negative impact of 18 cents on its FFO per share. However, this amount will be excluded in the adjusted FFO per share figure.

The non-recurring items will have a loss impact of 20 cents per share, after non-controlling interests, on its net income for the quarter. Similar to FFO, the adjusted net income will exclude the impact.

On account of a reduction in corporate tax rates under the Tax Cuts and Jobs Act, the company will recognize $34.8 million of tax expense. The tax expense pertains to a reduction in deferred tax assets — primarily 220 Central Park South — of Vornado’s taxable REIT subsidiaries.  

The company will also record expense of $4.8 million related to the prepayment of $450 million of aggregate principal on its senior unsecured notes. Specifically, on Dec 13, 2017, the company prepaid the principal amount on the 2.5% notes due in 2019.

Vornado will also report net loss from other items amounting to $1 million. This includes any losses from the real estate fund.

The company also stated that the aforementioned figures are preliminary estimates and are conditioned on the completion of the financial closing procedures. Hence, it does not assure any consistency between these estimates and the final results.

We also anticipate a fall in the company’s total revenues in the to-be-reported quarter. The Zacks Consensus Estimate for total revenues for the fourth quarter is pegged at $524 million. This reflects a decline of 17.9% as compared with the prior year quarter.

Further, the company’s management and leasing fees are expected to witness a decline. The Zacks Consensus Estimate of $2.32 million indicates a marginal decline from the prior quarter.  

In addition, over the past month, the Zacks Consensus Estimate for fourth-quarter 2017 FFO per share decreased 2.1%, reflecting analysts’ bearish sentiments.

Vornado’s wholly owned subsidiary, Building Maintenance Services (BMS), is expected to realize lower cleaning fees for its cleaning, engineering and security services. The Zacks Consensus Estimate for BMS cleaning fees of $24.2 million reflects an 8.6% decline from the prior quarter.

Earnings Whispers

Our proven model does not conclusively predict a FFO beat for Vornado this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

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

Zacks ESP: The Earnings ESP for Vornado is -4.76%.

Zacks Rank: Vornado has a Zacks Rank #4 (Sell).

This combination of a negative ESP and a Zacks Rank #4 makes it difficult to predict a beat this season.

Stocks That Warrant a Look

Here are a few stocks in the REIT space that you may want to consider, as our model shows that these have the right combination of elements to come up with a positive surprise this time around:

CubeSmart (CUBE - Free Report) is slated to release fourth-quarter results on Feb 15. The stock has an Earnings ESP of +1.10% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Diamondrock Hospitality Co. (DRH - Free Report) is scheduled to report quarterly numbers on Feb 26. The stock has an Earnings ESP of +4.76% and a Zacks Rank #3.

EPR Properties (EPR - Free Report) , slated to release quarterly numbers on Feb 28, has an Earnings ESP of +0.69% and a Zacks Rank #3.

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

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