Vornado Earnings: Higher Interest Expenses and Muted Office Demand Impact FFO

No-moat-rated Vornado Realty VNO reported lackluster first-quarter results as the demand for office real estate remains muted due to macroeconomic factors and a slower recovery in physical office utilization rates. The firm reported funds from operations, or FFO, of $116.3 million, or $0.60 per share, in the first quarter, which was around 24% lower than the $152.3 million, or $0.79 per share, FFO reported in the first quarter of the previous year. We note that the FFO decreased by $36 million on a year-over-year basis and approximately $30 million of the decrease was on account of higher interest expenses. As we have highlighted earlier, the company will continue to feel a disproportionate impact of higher interest rates due to its significantly leveraged capital structure. The leveraged capital structure of the company also makes the equity valuation highly sensitive to movements in interest rates and cap rates. We are reducing our fair value estimate for Vornado Realty to $29 per share from $35.50 per share after moderating our long-term rent growth, occupancy, and Manhattan office sector recovery expectations.

Same-store cash net operating income for the overall portfolio and the New York portfolio was up 1.5% and 3.8%, respectively, compared with the first quarter of the previous year. The new office leases signed by the company in New York had 1.7% higher cash rents than the previous escalated rents in the first quarter. The occupancy rate for the New York portfolio was 89.4% in the first quarter, down 50 basis points on a sequential basis and 130 basis points on a year-over-year basis. The occupancy rate for the firm’s Merchandise Mart property in Chicago was down 130 basis points on a sequential basis and was recorded at 80.3% while the occupancy rate for 555 California Street was up 20 basis points sequentially and was recorded at 94.7% during the current quarter.