Vornado to Record Toys 'R' Us Loss - Analyst Blog

Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), has recently announced its share of third quarter 2010 results of Toys ‘R' Us, a premier global retailer of dedicated toys and baby products. Vornado Realty's fourth quarter 2010 results will include a net loss of $30.7 million or $0.15 per share, compared to a net loss of $26.6 or $0.13 recorded in the year-earlier quarter. The company currently owns about 32.7% of Toys ‘R' Us.

The business of Toys ‘R' Us is highly seasonal with fourth quarter accounting for over 80% of the fiscal net income, primarily due to strong holiday sales. Vornado Realty's share of negative fund from operations (FFO) before income taxes for fourth quarter 2010 will be $57.3 million or $0.28 per share, compared to negative FFO of $31.6 million or $0.16 in the year-ago quarter. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and other non-cash expenses to net income.

In 2005, Toys 'R' Us was acquired by KKR Financial Holdings LLC (KFN), Bain Capital and Vornado Realty for $6.6 billion. New York-based Vornado Realty acquires, owns and leases office properties, retail space, and temperature-controlled logistics and refrigerated warehouses. Besides 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. Vornado Realty also has a healthy balance sheet and adequate liquidity. We believe this puts the company well ahead of many competitors, who have assets in less desirable markets that are struggling with high vacancies and little pricing power.

We maintain our long-term ‘Neutral' rating on Vornado Realty, which currently has a Zacks #3 Rank that translates 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.

 
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