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Vornado Surpasses Estimates

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Vornado Realty Trust (VNO - Free Report) , a leading real estate investment trust (REIT), reported second quarter 2011 FFO (funds from operations) of $243.4 million or $1.27 per share, versus $204.8 million or $1.11 in the year-earlier quarter. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

After adjusting items for comparability, FFO during the second quarter of 2011 was $235.2 million or $1.23 per share, compared with $214.8 million or $1.16 in the prior-year quarter. The recurring FFO per share during second quarter 2011 surpassed the Zacks Consensus Estimate by 5 cents.

Total revenues during the reported quarter were $730.2 million compared with $684.0 million in the year-ago period. Total revenues during the quarter were well ahead of the Zacks Consensus Estimate of $683 million.

Same-store occupancy in the company’s New York City and Washington, DC office portfolio was 94.8% and 93.1%, respectively, at quarter-end. Same-store EBITDA (earnings before interest, tax, depreciation and amortization) on GAAP basis decreased 1.3% and increased 0.3% during the quarter in the New York City and DC office portfolios, respectively, compared with the year-earlier quarter.

The company’s retail portfolio is continuing its improved performance; same-store occupancy was 92.3% at quarter-end, while same-store EBITDA (GAAP) increased 4.6% versus the year-ago quarter. In the Merchandise Mart segment, same-store occupancy was 92.1%, while same-store EBITDA (GAAP) decreased 2.0% year-over-year.

During the reported quarter, rents increased 14.3% (cash basis) and 14.8% (GAAP) compared with the previous rents in New York City office segment. In Washington DC, rents increased 1.6% (cash) and 4.0% (GAAP) versus expiring rents. Retail rents increased 0.8% (cash) and 9.7% (GAAP) over in-place rents.

During second quarter 2011, Vornado and SL Green Realty Corp. (SLG - Free Report) merged their mezzanine debt positions with equity partners Broadway Partners and Investcorp to form a new ownership structure for 280 Park Avenue – a class A office property in Manhattan, along with a funding of $150.0 million to reposition the property and find new tenants for the same. Vornado and SL Green formed a 50/50 joint venture for the project, combining their debt positions which stood at $400.0 million. 

Vornado has a healthy balance sheet with very manageable near-term debt maturities and plenty of cash. At quarter-end, the company had $591.5 million of cash and cash equivalents and total debt of $13.8 billion. The FFO payout ratio (based on FFO as adjusted for comparability) during the reported quarter was 56.2% compared to 55.8% in second quarter 2010.

During the reported quarter, Vornado Realty L.P., the operating partnership through which the company operates, renewed one of its two unsecured revolving credit facilities, and extended its borrowing capacity from $1 billion to $1.25 billion. The renewed credit facility is scheduled to mature in 2015 and has a one-year extension option. This follows the latest industry buzz that the company is likely to tap the commercial mortgage-backed securities (CMBS) market to raise $600 million to $700 million to repay debt.

Vornado is the largest publicly traded office REIT in the New York region. The core properties of the company are performing at a high level and it is maintaining strong occupancies in its New York City office and retail portfolios. We believe this puts the company well ahead of many of its competitors, who have assets in weak markets struggling with high vacancies and little pricing power.

We maintain our ‘Neutral’ recommendation on Vornado, which presently has a Zacks #3 Rank that translates into a short-term 'Hold' recommendation.

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