EUR 850.00 For Business Accounts Only

Morningstar | Vornado Meets Bottom-Line Expectations and Begins Large Penn Plaza Redevelopment

Vornado Realty Trust continues to benefit from strength in the New York economy. We believe that the city's central business district will remain appealing to deep-pocketed tenants, and we applaud Vornado for positioning its portfolio to take advantage of this. Vornado beat our estimates on revenue, reporting quarterly results that were 2% above what we anticipated, driven by 11.8% cash rent increases (30.8% year to date) in the New York office market that were above our estimates. We think that underlying business remains sound, and we are impressed by the 5.9% same-store cash net operating income growth for the first nine months of 2018, though this revenue beat was offset by higher nondepreciation operation expenses. The bottom-line result is that the company met our core quarterly funds from operations expectation of $0.97 per share, and we think that the company is on a reasonable run rate to hit our annual expectations. We do not plan to make major changes to our $76 per share fair value estimate or our no-moat rating for the company.

We appreciate Vornado’s ability to find strong external growth opportunities, given the generally low cap-rate environment. We place a 5.0% cap rate on Vornado and see the company’s acquisition of the second half of 1535 Broadway block at an 8.5% stabilized cash NOI yield as value-accretive. We think that the massive $200 million Penn Plaza renovation has substantial upside potential, but we generally prefer to see companies invest in numerous smaller developments to spread risk. Vornado has a few smaller properties that will be redeveloped while the company is working on redeveloping Penn Plaza, so we will be watching the lease-up of these developments closely to monitor the strength of demand for New York office and retail space.