Vornado Quarterly FFO Falls 22% After Losses From J.C. Penney Investment

Vornado Realty Trust (VNO), the owner of more than 100 million square feet (9.3 million square meters) of U.S. properties, said third-quarter funds from operations fell 22 percent after losses on investments.

FFO, which gauges a property company’s ability to generate cash, was $195.1 million, or $1.05 a share, compared with $249 million, or $1.31, a year earlier, the New York-based real estate investment trust said today in a regulatory filing. Vornado was expected to have FFO of $1.13 a share, the average estimate of 14 analysts in a Bloomberg survey.

The results included a loss of $37.5 million related to Vornado’s stake in J.C. Penney Co. The REIT owns about 11 percent of the Plano, Texas-based department store chain, according to data compiled by Bloomberg. The retailer’s shares fell 22 percent in the third quarter.

“J.C. Penney is obviously going to increase their earnings volatility,” Alex Goldfarb, an analyst with Sandler O’Neill & Partners LP in New York, said in an interview before Vornado’s report. “Part of their earnings are subject to whatever the stock market does. That has a very different profile than contractual rent.”

Adjusted FFO

FFO after adjustments to remove items that aren’t comparable from quarter to quarter was $222.9 million, or $1.20 a share, up from $221.5 million, or $1.17, a year earlier. The adjusted figures don’t include the J.C. Penney loss.

Revenue rose 5.9 percent, to $727.3 million.

Vornado had a 5.8 percent decline in earnings before taxes and other items from its Washington office buildings, to $106.6 million. About 56 percent of the company’s third-quarter earnings before taxes came from its offices in the Washington area and New York City, where it has stakes in close to 40 million square feet of properties.

The company earned $155.9 million before taxes from its New York offices, up 4.4 percent from a year earlier.

“The challenge for Vornado is the D.C. portfolio because of, one, their exposure there, and two, they have some vacancy as well as some redevelopment plans,” Goldfarb said. “Whether it’s government leasing, or government contractors, or people tied to the government, that’s a challenge these days.”

Goldfarb has a “hold” rating on the stock.

Washington Vacancies

The office vacancy rate in the Washington market rose to 10.2 percent in the third quarter from 10.1 percent in the previous three months, according to a report by CBRE Group Inc., the world’s biggest commercial real estate brokerage. Rents there are expected to hold steady in the next six months “as economic and political uncertainties are keeping many tenants on the sidelines,” CBRE said.

Howrey LLP, a law firm that declared bankruptcy, leased about 300,000 square feet in one of Vornado’s Washington buildings, Chief Financial Officer Joseph Macnow said on June 8. Agreements on about 2 million feet occupied by the U.S. Department of Defense expire between now and 2015, Vornado Chairman Steven Roth wrote on April 15.

Vornado said yesterday that it agreed to sell 350 West Mart Center in Chicago for about $228 million. In a separate transaction, the REIT is selling four mixed-use properties in Manhattan for about $78 million. The deals are expected to close by March.

The 129-member Bloomberg REIT Index declined 15 percent in the three months through September as concern mounted that Europe’s debt crisis would spur a global recession and the U.S. economy was weakening, potentially reducing tenant demand for commercial space. Vornado fell 20 percent in the period, its worst performance since the first quarter of 2009.

The third-quarter results were announced after the close of regular U.S. trading. Vornado rose 2.1 percent to $82.48 today in New York.

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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