Vornado Realty: Expect 2Q Earnings to Dip

Includes: KKR, TOYS, VNO
by: Zacks Investment Research

Vornado Realty Trust (NYSE:VNO), a leading real estate investment trust (REIT), has recently announced that it will record a net loss of $21 million or 10 cents per share in fiscal 2010 second quarter, given the loss generated by Toys ‘R’ Us for its first quarter ended May 1, 2010.

Toys ‘R’ Us (TOYS), a leading global retailer of dedicated toys and baby products, reported net loss of $55 million in the fiscal first quarter compared with $35 million in the year-earlier period. The lackluster performance was primarily due to weak demand for entertainment products like video game hardware and software in its International segment. In addition, its business is highly seasonal with fiscal fourth quarter accounting for over 80% of total annual sales.

Toys ‘R’ Us was acquired in 2005 by KKR Financial Holdings LLC (KFN), Bain Capital, and Vornado Realty for $6.6 billion. Vornado Realty currently owns about 32.7% of Toys ‘R’ Us. Consequently, it would record a proportionate share of the total net loss incurred by the toy company, and its second quarter FFO (fund from operations) would decrease by $9.5 million or 5 cents per share. 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.

New York-based Vornado Realty is engaged in acquiring, owning and leasing office properties, retail space, and temperature-controlled logistics and refrigerated warehouses. Beside its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us.

Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S. – the New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The company also has a healthy balance sheet and adequate liquidity. Consequently, Vornado Realty is better placed than most of its peers to withstand the economic challenges.

Our long-term recommendation for Vornado Realty is Neutral as we anticipate it to perform in line with the broader market. We also maintain a Zacks #3 Rank on the stock, which translates to a short-term ‘Hold’ recommendation.