2023-11-02 15:45:31 ET
Summary
- Vornado Realty Trust has had a disruptive fiscal year, with suspended dividends and flagging funds from operations as interest expenses bite.
- The REIT's preferred shares offer compelling yields and a strong potential for high total returns.
- Vornado reported a decline in revenue for its fiscal 2023 third quarter, but its liquidity position is strong against macro headwinds.
Vornado Realty Trust ( VNO ) has had one of the most disruptive fiscal years as a publicly traded REIT; the dividend was suspended, the commons are down 8%, and higher interest expenses have led to funds from operations weakness versus year-ago figures. While the Fed funds rate has been left unchanged at two consecutive Federal Open Market Committee meetings, there's still yet to be a full dovish pivot and investors are still unsure about the extent of higher for longer rhetoric. The market is currently pricing in an 80% chance of yet another pause at 2023's final FOMC meeting in December to keep rates frozen at their 22-year highs of 5.25% to 5.50%. Vornado is set to restart its quarterly distributions against this backdrop with uncertainty around whether the REIT will reinstate the dividends at the prior $0.38 per share level.
Are the commons a buy with the REIT currently trading hands at 7.61x its price to its full-year 2023 FFO guidance of $2.55 per share ? I have a sizable position in the Series N preferred shares and still think that the preferreds remain the most potent way to play a future rate cut and normalization of a currently turbulent macroeconomic backdrop. Vornado has four outstanding preferreds series: Vornado Realty Trust PFD SER L 5.40% ( VNO.PR.L ), Vornado Realty Trust 5.25% CUM PFD M ( VNO.PR.M ), Vornado Realty Trust 5.25 PFD SR N ( VNO.PR.N ), and Vornado Realty Trust 4.45% CUM PFD O ( VNO.PR.O ). All are trading at a roughly 40% discount to their $25 par value and currently offer compelling yields against a commons distribution still defined by uncertainty. When I last covered Vornado the REIT's preferreds had traded flat in the months following a broad recovery from the banking crisis selloff. A follow-up is needed due to the third quarter earnings and volatility seen since then.
For example, the Series N is currently trading hands for $14.50 a share and also offers a fixed $1.3125 per share annual coupon for what works out to be a 9.3% yield on cost. These are coming up for redemption on 24 November 2025 for a yield to redemption of 33%. So not only do preferred shareholders get more certainty with their dividend from the cumulative security, but total returns stand to be juiced from a gradual return to par once the Fed starts to cut base rates. It's important to note that preferreds essentially trade like bonds in that their value moves inversely to the Fed funds rate. I've been stocking up on these as interest rates almost certainly look to have hit a crescendo with the market pricing in at a 27.7% chance of rates being 75 basis points lower in a year.
Revenue, FFO, And Cash
Vornado reported fiscal 2023 third-quarter revenue of $451 million , a 1.4% decline over its year-ago comp and a miss by around $470,000 on analyst consensus. Net income came in at $52.85 million, around $0.28 per share and up from the year-ago period on the back of a $56 million gain on the disposal of property during the period. Vornado sold four Manhattan properties for $124 million during the period in a deal that saw its end of third-quarter cash and equivalents balance come in at $1 billion . The REIT also has $2.58 billion of investments in debt and equity securities. This has created an extremely strong short-term liquidity position against possible headwinds posed by the trajectory of the return to office trend.
FFO came in at $0.66 per share , a 13 cents dip from $0.79 per share in the year-ago period as same-store net operating income fell 4.7%. It was also down 7% versus the second quarter. I like that interest and debt expense at $88.13 million was only up by 14.8% over its year-ago comp despite the Fed fund's rate rising to a 22-year high over the 1 year. New York office occupancy came in at 91.6%, down roughly 30 basis points over the year-ago period. Critically, whilst the NOI weakness was disappointing, Vornado's New York office same-store cash NOI for the quarter was up a healthy 3%. Chicago's Merchandise Mart formed part of Vornado's headwinds with its occupancy at 76.8% at the end of the quarter as broader New York retail occupancy came in at 74.3%.
Vornado's Near-Term Performance
The November pause of the Fed's funds rate has provided some relief from what has been unrelenting bearish sentiment for the last few weeks. How sticky this relief will be is dependent on the next CPI print and job figures. The pending Chapter 11 bankruptcy filing of WeWork Inc. ( WE ) could also weigh down on sentiment across office property-focused REITs. I intend to double my position in the Series N over the next few months to lock in the 9.3% dividend yield for what's effectively 58 cents on the dollar and a 33% potential annual return profile over the next two years. The commons are likely to get swept up with positive investor euphoria as the end of rising interest rates becomes clearer over the next few months.
For further details see:
Vornado Realty Trust: Potential Upside With Commons And 9.3% Yielding Preferreds