Why Some Are Calling Vornado Realty A 'Tale Of Two Cities'
On March 30, Argus Research Company issued a report "Strong NYC Market Continues," updating Vornado Realty Trust (NYSE: VNO) after its recent spin-out of its shopping centers and other non-core assets into Urban Edge Properties (NYSE: UE).
While $20.9 billion cap Vornado still owns other interests such as its Manhattan "street retail" assets, the main source of revenues for this office REIT are properties that it owns in NYC as well as its metro-Washington D.C. portfolio.
Argus views the Vornado moves to streamline its portfolio as being a long-term positive, which should improve earnings visibility.
Tale Of The Tape - Past Year
Vornado and closest office REIT peer $21.4 billion Boston Properties, Inc. (NYSE: BXP) are both members of the S&P 500 Index. Both office REITs have notably outperformed that index, which returned 12.4 percent over the same time period.
Boston Properties has significant office portfolios that directly compete with Vornado in New York and Washington D.C., as well as significant holdings in Boston and San Francisco.
Argus - Vornado Realty: Hold, VNO Fairly Valued Near $110
- Ratios Indicate Hold: Argus believes that Vornado shares, which previously closed at $110.94, are fairly valued at current levels, "as it trades near the top of its five-year range for price/FFO, price/book and price/sales."
- Prune & Simply: Vornado sold ~$1 billion of assets during 2014, and spun-out Urban Edge, comprised of 79 retail shopping center assets, 3 malls and an industrial park in January 2015.
- Occupancy Trends: Argus noted vacancies dropped slightly in Q4 Y/Y, "with occupancy of 96.9% (versus 96.7% in 4Q13) in the New York segment, 83.8% (versus 83.4%) in the Washington, D.C. segment, and 95.9% (versus 95.4%) in the retail segment."
- New Construction: Vornado is actively developing two properties in New York, one in Washington, D.C. and one retail property project for a total of 1.2 million square feet, at a cost, including land, of $1.1 billion.
Vornado - New York vs Washington D.C.
- Overall, Vornado leased 2.0 million SF in Q4 and 5.9 million SF during FY 2014, with leasing volume in New York at an all-time high.
- Lease Expirations: "In New York, leases expiring in 2015 (including month-to-month leases) represent 5.7% of office rents and 7.4% of retail rents, followed by expirations of 7.7% for office and 4.9% for retail in 2016. In 2017, 4.4% of office and 0.9% of retail leases are set to expire.
- In Washington, 18.3% of leases (including month-to-month leases) expire in 2015, followed by 11.4% in 2016 and 5.8% in 2017."
- Pricing Trends: Argus noted that mark-to-market gains were strong in New York office and retail, "with Q4 gains on a cash basis of 12.6% and 48.3%, respectively."
- In Washington, the company posted a negative mark-to-market change of 7.7 percent.
- Leasing Outlook: The company expects continued demand and rent increases in New York in 2015, with "expansions and new tenants as the growth drivers…"
- In Washington, management noted on the Q4 earnings call, "that while the property market had not fully recovered from sequestration, it is on the road to recovery, with unemployment in the region dropping 110 basis points during the year."
Argus would consider an upgrade of Vornado to its Buy list, if there were "signs of a clear bottom in the Washington, D.C. leasing market, more visibility on earnings, or a non-fundamental stock pullback that raised the dividend yield."
Image credit: Public Domain
Latest Ratings for VNO
|Nov 2016||JP Morgan||Maintains||Overweight|
|Nov 2016||Bank of America||Upgrades||Neutral||Buy|
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