What In The World Is Going On At Vornado Realty?

Throughout 2022 and much of 2023, one of the worst performers in the universe of real estate investment trusts (REITs) has been the office subsector. Office REITs were just returning to close to their pre-COVID-19 levels in 2021 when they were smacked with inflation, Federal Reserve interest rate hikes and major city workforces that decided it was better to work from home than commute to an office every day.

Vornado Realty Trust VNO is a New York-based diversified REIT that owns and operates approximately 38 million square feet of commercial office buildings and some street retail establishments in New York, Chicago and San Francisco. About 88% of its portfolio’s net operating income (NOI) is derived from properties in New York City. It’s been trading on the New York Stock Exchange for over 60 years and has a market cap of $3.73 billion.

Vornado Realty also owns and operates advertising signage in the Penn District and Times Square areas of New York City, including a six-story-high, 330-foot-wide high-resolution 4K LED sign on Broadway, the largest 4K LED sign in the world.

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Vornado Realty also owns several other mixed-use buildings in New York City that contain offices, restaurants, fitness centers, outdoor gardens and lounges.

Vornado Realty has a 32.4% interest in Alexander’s Inc. ALX, a REIT that owns six properties in the New York City metropolitan area.

Vornado Realty’s tenants are largely higher quality and include Bloomberg, Bank of America Corp., Fidelity Investments, Capital One, Amazon.com Inc. and Aetna Inc. Its retail clients include Whole Foods Market, T-Mobile, Harry Winston Inc., Nike Inc., The Walt Disney Co. and Forever 21.

Before the onset of COVID-19, Vornado Realty traded near $53. With the onset of the pandemic, shares plunged to $22, and since rebounding to $43 by June 2021, it has been on a downward spiral. Six weeks ago, it was trading at lows near $12, but as office REITs began to rebound, Vornado was able to slowly climb back up to about $15.

Over the past six trading days, Vornado has taken off, recently closing near $18 per share. Perhaps it’s time to ask: What in the world is going on at Vornado Realty with all of this volatility?

On June 30, various news wires reported that traders were circulating a rumor by Activist Insight that a large activist investor may be getting involved in Vornado Realty, either by trying to join the board of directors and calling for Vornado to explore a takeover or to take the company private.

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Vornado Realty, which closed on June 29 at $17.22, exploded on the news, climbing to $18.55 before settling the day at $18.14 — a gain of 5.34% to cap off a week in which it rose 24.85%.

Some Background

On April 27, Vornado Realty announced it was suspending its dividend payments on common shares until the end of 2023. That same day, Piper Sandler analyst Alexander Goldfarb downgraded Vornado Realty from Neutral to Underweight and lowered his price target from $16 to $11. But Vornado Realty also announced that its board was authorizing the repurchase of up to $200 million of Vornado common stock.

On May 1, the dividend suspension became clearer as Vornado Realty announced first-quarter operating results, which disappointed the Street. Funds from operations (FFO) of $0.60 per share was a 24% decline from the first quarter of 2022 and missed estimates by $0.02. First-quarter revenue of $445.92 was slightly higher than the first quarter of 2022 but missed the analyst estimates of $451.57.

Two days later, Piper Sandler maintained its Underweight position on Vornado Realty but lowered the price target for the second time in four days, from $11 to $10. At the end of May, Morgan Stanley also maintained an Underweight position on Vornado Realty and dropped the price target from $13 to $12.

But Vornado Realty has recently taken steps to improve its portfolio. It’s refurbishing two office buildings, Penn 1 and Penn 2, near Penn Station, hoping to increase workers’ travel frequency by improving the commuting and desirability of these offices. The renovations will allow commuters to walk from the train platforms into the buildings without having to go onto the street.

Chairman Steven Roth recently noted, “I don’t think anyone understands the ‘Wow’ we are about to unveil.” 

The project will cost Vornado Realty $1.2 billion, but it expects the end results to increase rents. One renovated building has already lifted rents to $100 per square foot. The two buildings offer amenities such as a restaurant, food market, giant TV screens showing sports and access to health, fitness and medical services.

The short interest on Vornado Realty is high at 12.52%, but the price jump this past week likely sent many of the short sellers scurrying to close their positions. Part of the reason for Vornado Realty’s big week is the sale of a 49.9% stake in 245 Park Ave. by SL Green Realty Corp. SLG because it impressed upon Wall Street that despite recent talk of work-from-home killing the office REITs, there is still considerable interest in owning office buildings in New York City.

Vornado Realty’s rally may be unsustainable, but it seems apparent that the worst could be behind it. The share price near $18 is still only one-third of what it was a few years ago. Investors may want to look for a near-term pullback after last week’s big run-up in price. 

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