Morningstar | New York Rental Market Remains Strong as We Maintain Our FVE for Vornado
Quarterly evidence continues to support our thesis that no-moat Vornado's strategy of focusing on New York central business district multi-asset properties will continue to drive growth, and we will reaffirm our $76 per share fair value estimate for the firm. Although Vornado's unadjusted funds from operations of $1.10 beat our expectations of $0.97 per share, after adjusting for non-core activities such as increases in the fair value of marketable securities, Vornado reported a still-strong quarterly FFO of $0.98 and same-store cash net operating income growth of 7% from second quarter 2017. The remaining penny of the FFO beat is attributable to revenue growing about 2.25% faster than our quarterly expectations because of somewhat higher-than-anticipated leasing spreads on office leases. The excess revenue was partially offset by slightly higher-than-expected operating expenses. We continue to believe that the New York downtown office and retail market will remain a strong growth area, and that Vornado is poised to benefit from this market due to its 88% NOI exposure to downtown New York.We appreciate Vornado's ability to maintain the quality of their class A properties. The company is creating an "Art on the Mart" program to use a property as a canvas for a nighttime public art installation and is renovating one of their largest offices, One Penn Plaza, both of which we anticipate will increase tenant interest and the property desirability. Vornado also brokered a large lease expansion with the well-funded New York University, which we believe shows property quality because colleges use their campuses to differentiate themselves. Finally, Vornado is capitalizing on the quality of their portfolio, which is demonstrated by the company maintaining above 96% occupancy while raising cash rents in their New York market office market for the past year. Looking forward, we anticipate that Vornado will continue to invest in its class A properties, so we will watch leasing spreads, tenant quality, and occupancy to see if Vornado can maintain its growth in the highly competitive New York rental market.
Vornado Realty Trust is a real estate investment trust and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P. (the Operating Partnership). The company is the sole general partner of the Operating Partnership. The company owns and operates office and retail properties with a concentration in the New York City metropolitan area. In addition, the company has interest in Alexander's, Inc., which owns properties in the New York metropolitan area, as well as interests in other real estate and related investments.
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