Vornado’s Results Continue to Be Hampered by J.C. Penney Stake

Earlier this week Vornado Realty Trust reported its first quarter results, with funds from operations, a key metric for judging the performance of real estate investment trusts, falling to $201.8 million, or $1.08 per share, from $348.5 million, or $1.82 per share, over the same period last year.

The decline of over 42 percent is attributable in part to the REIT’s investment in J.C. Penney Co.  but does not necessarily represent the REIT’s real estate assets, according to analysts.

vornado logo Vornado’s Results Continue to Be Hampered by J.C. Penney StakeVornado reported close to $100 million in quarterly losses from its investment in the struggling retailer, nearly $40 million of which came directly from the sale of shares in the company.

In March, Vornado offloaded 10 million shares, or 43 percent of its position, in J.C. Penney.

Excluding its investment in J.C. Penney, Vornado reported a comparable FFO for the quarter of $213.3 million, or $1.14 per share, up from $186.9 million, or $0.98 per share, for the same quarter in 2012.

The REIT’s performance relative to its J.C. Penney investment should not be surprising, according to John Bejjani, research associate at Green Street Advisors. “However, it seems that consensus estimates did not fully factor in the impairments for J.C. Penney and [Vornado’s Toys ‘R Us investment], so optically it looks like they had a huge FFO miss,” he noted.

Vornado still maintains an excellent real estate portfolio, noted Dan Fasulo, managing director at Real Capital Analytics and a Vornado shareholder.

“They have one of the premier portfolios that is available to invest in the public market, especially their office at retail assets,” Mr. Fasulo said.

Certain elements of the Vornado portfolio, Mr. Fasulo added, have yet to reach their full value. “They have a real opportunity there to increase funds coming from those assets,” he said.

Mr. Fasulo takes more notice of the REIT’s net asset value, which indicates what Vornado’s assets are worth relative to the how the market has priced them. At this point in time, Vornado trades at a discount to NAV, which for office REITS is fairly uncommon, Mr. Bejjani noted.

After earnings results were announced, Vornado shares dropped below $85 at the market open on Tuesday before climbing back to $87.43 at Wednesday’s close.

“The decline yesterday was overdone,” Mr. Bejjani said. “At its current valuation, the market is being overly punitive, for Vornado to trade below NAV while most office REIT peers trade at a premium to NAV does not make a lot of sense.” Bejjani further noted that, as currently priced, Vornado shares represent an attractive investment.

Both Vornado and J.C. Penney have gone through leadership changes in recent months. In February, Mike Fascitelli, Vornado’s chief executive officer, announced his resignation just one day after the REIT reported approximately $225 million in losses on its stake in J.C. Penney. Then, last month, J.C. Penney ousted Ron Johnson from his role as chief executive officer and replaced him with Mike Ullman, who had previously held the role through November 2011.

Mr. Fascitelli has been replaced by Steven Roth, who last month filed a letter with the Securities and Exchange Commission which indicated 2013 would include more selling than buying from the REIT, a plan which was reiterated during the first quarter earnings call. To that end, Vornado announced on April 23 it had entered into an agreement to sell Harlem Park, a development site, for $65 million plus conditional brownfield credits.

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