Vornado Realty Trust (VNO - Free Report) has a portfolio of premium assets in high-rent, high barrier-to-entry markets as well as a diverse tenant base. Further, its strategic acquisitions and divestitures including spin-offs and strong New York business keep its growth momentum alive.
However, dilutive impact on earnings from divestitures of assets cannot be bypassed in the near term. Also, intense competition and hike in interest rates remain concerns.
Vornado reported fourth-quarter 2017 adjusted funds from operations (FFO) per share of 98 cents, beating the Zacks Consensus Estimate of 93 cents. However, the figure was lower than the prior-year quarter tally of $1.02. Total revenues were $536.2 million in the reported quarter, surpassing the Zacks Consensus Estimate of $524.1 million. Moreover, total revenues increased 4.3% year over year. The results reflected growth in occupancy and same-store NOI in the New York portfolio.
Vornado boasts a concentration of high-quality assets and a strategic focus on expanding its market share in New York City office and Manhattan street retail. In addition, the company owns 555 California Street, in the heart of San Francisco's Financial District, as well as theMART in Chicago's River North District, which are the iconic assets in signature cities. This focus on having assets in such a few select high-rent, high barrier-to-entry geographic markets as well as a diversified tenant base, which includes several industry bellwethers, are expected to drive steady cash flows and fuel its growth engine over the long term.
Furthermore, the company is focused on improving its core business and is making opportunistic acquisitions and divestitures in addition to business spin-offs. In fact, strategic sell-outs provide the company with dry powder to reinvest in opportunistic acquisitions. The spin-off of its Washington, D.C properties made Vornado a New York-based office and a retail REIT. Also, the previous spin-off of its shopping center business into a publicly-traded REIT named Urban Edge Properties was an outcome of Vornado’s decision to separate two businesses, which have been together for legacy reasons but with no real operating synergies. Such efforts to streamline its business are likely to help its long-term growth.
Nonetheless, Vornado faces intense competition from developers, owners and operators of office properties and other commercial real estates, including sublease space available from its tenants. This influences its ability to attract and retain tenants at relatively higher rents than its competitors, thereby, adversely affecting its long-term profitability. Also, persistent office space efficiency trends continue to limit any robust demand for office space. Additionally, the retail real estate market is crippled with issues like declining mall traffic, retailers’ store closures and bankruptcy filing amid growing preference for online retailing.
Further, as part of portfolio-repositioning efforts, Vornado has been aggressively disposing of its assets. The company has identified $1 billion of assets, which will be sold over the next several years by them. The streamlining efforts are a strategic fit and are anticipated to propel growth over the long term.
Shares of Vornado have underperformed its industry in the past three months, declining 11.9% versus the industry’s descend of 8.8%.
Currently, Vornado carries a Zacks Rank #3 (Hold).
Stocks Worth a Look
Investors interested in the real estate industry can consider better-ranked stocks like HFF, Inc. (HF - Free Report) , The RMR Group Inc. (RMR - Free Report) and CBRE Group, Inc. . While HFF and RMR sport a Zacks Rank of 1 (Strong Buy), CBRE Group carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
HFF’s earnings per share estimates for 2018 have been revised 22.6% upward to $2.88 over the past month. The stock has gained 9.7% during the past three months.
RMR Group’s earnings per share estimates for the current year have remained stable at $6.08 in a month’s time. Its shares have gained 20.4% over the past three months.
CBRE Group’s Zacks Consensus Estimate for 2018 earnings per share has been revised 4.1% upward to $3.04 over the past month. The company’s share price has risen 10.2% in three months’ time.
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.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>