Vornado Realty Trust VNO is a diversified office, retail, apartment and advertising real estate investment trust (REIT) with a large presence in New York City, as well as Chicago and San Francisco. A member of the S&P Midcap 400, Vornado Realty was founded in 1959 and has been listed on the NYSE since 1962. Vornado Realty owns and operates over 26 million square feet of LEED-certified buildings.
Vornado Realty has nearly 20 million square feet of office space in its New York City portfolio. Its tenants are well-known companies, including Meta, IPG and Affiliates, Google, Bloomberg, Verizon, Neuberger Berman and Amazon. Almost 90% of its net operating income is derived from its New York City properties.
Vornado Realty also has several properties in other cities, such as Chicago and San Francisco. Some of its Chicago tenants include Yelp, Conagra, PayPal, Motorola and All State. In San Francisco, the 30,000 of rentable square feet in the 52-floor building at 555 California Street is occupied by companies such as Microsoft, Morgan Stanley, UBS, Bank of America and Starbucks.
In addition to office space, Vornado Realty owns over 2.4 million square feet of New York City retail space on some of the city’s busiest thoroughfares, such as Fifth and Madison Avenues, Times Square, Herald Square, Union Square and SoHo.
Vornado Realty also has several properties in outlying areas, such as the Rego Center in Queens, New York and Wayne Towne Center in Wayne, New Jersey. These properties are leased to large retail names such as Dick’s Sporting Goods, DSW, JCPenney, Old Navy, Nordstrom Rack, Aldi, Burlington, Bed Bath & Beyond, Costco, Marshalls and T.J. Maxx. In addition, Vornado Realty’s properties include several casual dining establishments, such as Chick-fil-A, Chipotle, Olive Garden, Panera, Shake Shack, Subway and TGI Fridays.
Vornado Realty owns six residential buildings with nearly 2,000 apartments in New York City and has a 24-story, 314-unit building above the Rego Park Center in Queens. It also has two other apartment buildings that are under development in New York City.
As if that wasn’t enough, 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 4K LED sign on Broadway. Vornado Realty says it’s the largest 4K LED sign in the world.
And finally, Vornado Realty owns several other mixed-use buildings in New York City that contain offices, restaurants, fitness centers, outdoor gardens and lounges.
In addition to its own properties, Vornado Realty also has a 32.4% interest in Alexander’s Inc. ALX, a REIT that owns six properties in the New York City metropolitan area.
While its portfolio is certainly noteworthy, since the beginning of February, Vornado Realty has lost almost half its value. One major reason for this was the 29.2% quarterly dividend reduction from $0.53 to $0.375 that was announced on January 19.
This was the first time Vornado Realty had cut its quarterly dividend since August 2020 when the dividend was reduced from $0.66 to $0.53 per share. With the recent price decline, the present annual yield of $1.50 per share is 10.07%, but the payout ratio has now been reduced to a manageable 56%.
Another factor that has negatively impacted its share price is the decision to halt construction on an 18-million-square-foot project in midtown Manhattan. It was supposed to be part of a $22 billion redevelopment of Penn Station to include 10 new skyscrapers with office space and 1,800 apartments. However, a lack of demand for office space, higher interest rates and other factors led Vornado Realty to postpone the construction for at least two or three years.
Vornado Realty’s CEO, Steven Roth, said that new construction was “almost impossible,” given tight lending in 2023 and that the work-from-home movement has also hurt the general office market.
Vornado Realty’s management made it clear on its November Q3 conference call that since taxable income is expected to be lower in 2023, the Board of Trustees will determine the best size of the dividend commensurate with that net income. Some investors are still wary that in addition to the February cut, another dividend reduction could be forthcoming.
One reason for declining income could be Meta pulling back on leasing more space as it laid off 11,000 employees or 13% of its workforce in November. Following that announcement, Vornado Realty tried to minimize the impact, saying it wouldn’t make that much of a difference to its occupancy levels.
But with Meta being one of Vornado’s largest office tenants, investors disagreed. And just a few weeks ago, Meta announced it was cutting another 10,000 jobs globally while leaving 5,000 jobs unfilled. CEO Mark Zuckerberg called these decisions part of Meta’s “Year of Efficiency,” and said it was possible this new economic reality will continue for years to come.
In December, Vornado Realty was also hit hard by its removal from the S&P 500 index, as well as a downgrade by Citigroup analyst Nicholas Joseph, from Neutral to Sell. On March 3, BMO Capital analyst John Kim also downgraded Vornado Realty from Market Perform to Underperform, while considerably reducing his price target from $26 to $18.
Despite all these negatives, in early February, BlackRock increased its position in Vornado Realty to 20.41 million shares, representing about 10.6% ownership of the company stock. But shares are down more than 30% since that purchase.
Q4 operating results were mixed. Vornado Realty announced funds from operations (FFO) of $0.72, which beat the consensus estimates of $0.67 but was a penny below Q4 2021. Revenue of $446.94 was below the street’s expectations by $5.94 million but was 6.14% better than revenue of $421.08 million in Q4 2021.
This week, analyst Alexander Goldfarb of Piper Sandler upgraded Vornado Realty from Underweight to Neutral, commenting that the valuation of this stock implies that no one will ever lease offices again. His belief that the selling is overdone was shared by investors, who sent the stock up 3.55% on the day.
On March 21, Goldman Sachs analyst Caitlin Burrows resumed coverage of Vornado Realty, along with 12 other office, retail and industrial REITs. Burrows feels that office occupancy rates will take a while to improve, but that “weak or uncertain macro conditions could shift the balance of power more in favor of employers versus employees.” As employers gain more leverage, they will insist that employees return to working from offices.
However, despite resuming coverage, Burrows rates Vornado Realty a Sell, so that’s hardly a ringing endorsement.
Vornado Realty owns and operates some of the most attractive commercial real estate in the United States. New York City is the center of commerce, and Chicago and San Francisco are also strong markets. It’s been in business for 64 years and has grown substantially with each passing decade.
But despite its diversity of strong retail tenants, about 17% of its office tenants are in technology companies, and with many of these companies tightening their belts by laying off workers, Vornado Realty’s road ahead could be quite difficult. Even CEO Roth has admitted as much. As of November 2022, its total office occupancy in New York City had fallen from a pre-pandemic rate of 97% to just 90.8%.
Investors presently considering a purchase of Vornado Realty should be willing to ride the bumpy road of higher interest rates, which could lead to a possible recession with deleterious effects on office and retail occupancy.
On the other hand, shares are inexpensive right now with a Price/FFO (P/F) multiple of only 5.59 and an enticing dividend yield. But short interest as a percentage of float at the end of February was approaching 11%, so the downward pressure on the stock will be in effect for a while.
Looking ahead, the most salient questions of 2023 for Vornado Realty are how much Vornado Realty’s income might be affected by declining office occupancies from tenant workforce layoffs and if the 10% dividend yield could be cut for the third time since 2020. Potential investors should weigh these questions before making purchases of Vornado Realty stock.
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