EUR 850.00 For Business Accounts Only

Morningstar | Vornado Finishes 2018 Strong, and We Are Maintaining Our $76 Fair Value Estimate

Vornado’s fourth-quarter and full-year 2018 results were largely in line with our expectations, and we will maintain our no-moat rating and $76 per share fair value estimate for the company. Vornado’s funds from operations grew at a reasonable rate, 1.9%, to $3.82 during the full year. Vornado seems to be executing on the pure-play New York strategy better than some of the other REITs in our coverage, though we recognize that Vornado has a more diversified portfolio with investments in many non-office segments than other New York-focused office REITs. Year-over-year New York occupancy declined 20 basis points to 97%, but this is still a best-in-class number. The double-digit cash releasing spreads in every major category except New York retail, which shrank 1%, gives us continued confidence in the quality of Vornado’s portfolio. We were particularly impressed with the 22.7% cash releasing spreads for New York offices, though we understand that this metric is somewhat inflated because the prior escalated rent was substantially below market. In light of the softer retail results, we would like to reaffirm that our decreased confidence in this segment is the major reason why we have a high uncertainty rating on the company. Overall, the softness in the retail segment did not materially detract from a good year, which we think is best reflected by the 3.9% same-store cash net operating income growth.

One thing that is weighing on investor’s minds is the politics surrounding Amazon’s decision to locate half of its second headquarters in New York City. From a valuation perspective, we think that Amazon’s move to New York is largely immaterial for Vornado’s business. Vornado owns a single, city government occupied building in the Long Island City neighborhood where Amazon plans to locate, and a single tenant will not dramatically change New York's office supply and demand relationship. That said, we see Amazon’s decision to locate in central business district New York as further confirmation of our long-term thesis that New York remains one of the best places to locate a business. This thesis justifies our forecast double-digit releasing spreads as other large companies such as Google, Pfizer, and Disney are planning substantial New York expansions. As Amazon’s move to New York City is largely immaterial, the backlash against it should also be immaterial. We think that the larger risk from the protests is that New York City is showing that it is less open for business than it was before, which may scare away other potential expanding tenants.