Earnings Scorecard: Vornado Realty

Nov.11.10 | About: Vornado Realty (VNO)

Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), reported recurring funds from operations (FFO) of $1.22 per share for fiscal 2010 third quarter, which exceeded the Zacks Consensus Estimate by 2 cents. 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.

Below, we cover the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Review
Total revenues during the reported quarter were $707.0 million compared with $671.2 million in the year-ago period. Total revenues during the quarter were well ahead of the Zacks Consensus Estimate of $662 million.

Same-store occupancy in the company’s New York City and Washington, DC office portfolio was 96.0% and 94.7%, respectively, at quarter-end. Same-store EBITDA (earnings before interest, tax, depreciation and amortization) on GAAP basis increased 3.3% and 4.7% during the quarter in the New York City and DC office portfolios, respectively, compared with the year-earlier quarter.

Earnings Estimate Revision: Overview
Fiscal 2010 earnings estimates have climbed for Vornado since the earnings release, meaning that analysts are bullish about the long-term performance of the company. Lets dig into the earnings estimate details.

Agreement of Estimate Revisions
In the last 7 days, fiscal 2010 earnings estimates were raised by 5 analysts out of 13 covering the stock, while none has lowered the same. This indicates a clear positive directional movement for fiscal 2010 earnings. For fiscal 2011, 3 out of 12 analysts covering the stock revised their estimates upward, while 2 revised their estimates downward in the last 7 days. This indicates a lack of consensus among analysts for fiscal 2011 earnings estimates.

Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 have increased by 4 cents in the last 7 days to $5.34. This is encouraging news for the company. Management further observed that the core properties of the company are performing at a high level with strong occupancies in its New York City office and retail portfolios. However, for fiscal 2011, earnings estimates have decreased by a penny to $5.37 in the last 7 days.

Moving Forward
The long-term earnings estimate picture for Vornado is positive. Vornado Realty is the largest publicly traded office REIT in the New York region concentrating on Class A office properties. We believe this puts the company well ahead of many competitors, who have assets in less desirable markets still struggling with high vacancies and little pricing power.

However, we expect continued volatility in the office sector with increasing job cuts. The continued troubles in the residential sector are also weighing on commercial property operations. The credit crunch has widened the bid-ask spread between buyers and sellers of commercial real estate, which has caused deal volumes to fall dramatically. This has affected the top-line growth of the company.

We maintain our long-term Neutral rating on Vornado, which presently has a Zacks #3 Rank translating into a short-term 'Hold' recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.