Vornado CFO Says REIT Has Multiple Assets With 'Little To No Equity Value'

Vornado Realty Trust reported lower cash flow and a nearly $20M net loss in the third quarter, and while its executives were able to soothe investor concerns on its earnings call Tuesday, there are still problem spots in its portfolio.

“We do still have a handful of assets that are overleveraged,” President and Chief Financial Officer Michael Franco said. “Most of these assets do not contribute to our [funds from operations] right now and have little to no equity value.”

The REIT, one of New York's largest office owners, signaled it is prepared to lose those buildings, which it didn't identify, to its lenders. Foreclosure activity in New York is up significantly this year, with lenders expressing less patience for large, well-capitalized landlords seeking extensions and modifications on their loans. 

“Unless these loans are restructured on terms that allow us to put the assets on sound footing … we will not invest any more capital,” Franco said. “The nonrecourse nature of these loans provides us with this option.”

The New York office REIT’s third-quarter earnings revealed a net loss of $19.2M after posting net income of nearly $35M the previous quarter and $53M a year ago.

Its funds from operations, a key metric of REIT cash flow, were also down to $0.52 per diluted share, compared to $0.66 last year. 

The company attributed those declines to "known move-outs" at 770 Broadway, 1290 Sixth Ave. and 280 Park Ave., along with higher net interest expense.

In total, the REIT inked 454K SF of New York office leases in Q3 and 97K SF of retail. Its occupancy in the city is 86.7%, below last year’s 89.9%, according to the report. Vornado's portfolio spans 32M SF in NYC, Chicago and San Francisco.

Vornado CEO Steven Roth said that the company is largely focused on leasing vacant space but added that offloading poorly performing assets is also part of his strategy.

"We need to focus on calling out assets that we don't want and turning them into cash," Roth told analysts on the call.

Despite those challenges, Vornado beat expectations on its FFO and revenue. This is the third time in four quarters that the REIT has surpassed consensus estimates, according to earnings forecaster Zacks Investment Research.

Vornado's stock price rose 57.6% in the three months ending in September, outperforming the industry’s growth rate of 20.8%. The stock was relatively flat on Tuesday following the earnings report.

"I'm all about the stock price" Roth said.

During the call, Roth said the firm doesn't plan to raise additional capital, boasting that Vornado is “extremely liquid.” The company has $1B in cash and $2.6B of liquidity, a crucial factor that allows flexibility in the ever-evolving market.

“We really don't need any equity,” Roth said. “We are being pounded by bankers who want to write a ticket and sell stock for us, but it's really not something that we think is strategically important for the moment.”

However, Vornado’s net operating income at share on a cash basis, an indicator of a company’s cash flow for the quarter, did slightly decrease to $272M. The measurement stood at $278M a year ago and almost $280M last quarter.

The decrease is partly due to large transactions that occurred last quarter, including the sale of Fifth Avenue retail space to Uniqlo. Investor confidence was also previously boosted by the prior announcement of a 1M SF office lease at 770 Broadway to a mystery tenant, which Roth revealed to be New York University. 

Under that master lease, NYU will provide an upfront payment, along with annual net rent. That payment will be sufficient to pay off Vornado’s $700M loan on the property, Roth said. That deal is expected to close in January. 

This quarter, the company flaunted a nearly 79K SF lease with Primark, opening its first Manhattan store at 150 W. 34th St.

Vornado’s earnings call comes the same day as Election Day, with Vice President Kamala Harris and former President Donald Trump awaiting results.

Roth has been a long-term partner of Trump, co-owning 1290 Sixth Ave. in New York and 555 California St. in San Francisco with The Trump Organization. He was also spotted attending a fundraiser for Trump’s campaign earlier this year.

Roth addressed the election at the very beginning of the conference call but had little to say. 

“Today is election day in America,” Roth said. “And extra important, since this is a once-in-four-year presidential election.”