Vornado’s Roth sees “choppy” market, chides Penn skeptics

CEO says it takes “almost no imagination” to envision success of planned towers

Vornado ceo Steven Roth and One Penn Plaza (Illustration by Kevin Cifuentes for The Real Deal with Getty Images, Vornado Realty Trust)
Vornado ceo Steven Roth and One Penn Plaza (Illustration by Kevin Cifuentes for The Real Deal with Getty Images, Vornado Realty Trust)

Vornado Realty Trust’s second-quarter earnings beat expectations, but the firm is facing “choppy conditions” and analyst anxiety over its massive Penn District development.

Its funds from operations per share, a key earnings metric used by real estate investment trusts, were $.83 on an as-adjusted basis, above the $.79 Wall Street consensus estimates. Revenue hit $453 million, up from the $379 million during the same quarter last year.

Vornado executives had originally projected double-digit growth in 2022 for funds from operations per share, or FFO, but blamed the unexpected “pace and magnitude” of federal interest rate increases for falling short.

During an earnings call Tuesday morning, CEO Steven Roth acknowledged that the U.S. is at the “foothills of a recession,” but said the company is prepared for “choppy conditions.”

“We’ve been through this five or six times,” he said, referring to down cycles. “There is always an end.”

He added that given market conditions, Vornado will refocus on what is most important: preserving liquidity and its balance sheet.

The REIT has been selling off what it considers non-core assets and refinancing others. It recently snagged a $700 million loan to replace debt on its office building at 770 Broadway. Certain perks of the refinancing, however, hinge on the REIT leasing the three floors that will be vacated by Verizon at the beginning of 2023. Facebook’s parent company reportedly bailed on leasing that space.

The impact of Vornado’s planned towers around Penn Station was a persistent theme of Tuesday’s call. Vornado controls five of the eight development sites, where 18 million square feet of new commercial space is expected.

In a July 31 note, Piper Sandler analysts Alexander Goldfarb and Conor Mitchell questioned whether the grand plan will “improve the company’s earnings profile.”

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“The Far West Side proved there is a market for modern office, but the trade-off is either a long lease-up time (as was the case with the World Trade Center) or a wet blanket on market rents (as happened when Hudson Yards opened),” they wrote.

The analysts also questioned whether shareholders want Vornado to take on more future funding commitments, given that half of the REIT’s balance sheet is floating and interest rates are rising. “Clearly construction loans and an elongated building timeline could well make this manageable,” they observed, “but it also means the earnings benefit gets pushed out that much further.”

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During Thursday’s call, Goldfarb questioned how the Penn Station area project fits into Roth’s focus on creating value over five- or 10-year cycles. The 10 towers are not expected to be complete until at least 2044.

Roth said it was shortsighted for investors not to realize the future profitability of the Penn District. He said it takes “almost no imagination” to envision the future value of Penn One and Penn Two.

He pointed to leasing at Penn One, where Vornado expects to make $100 per square foot on average after the departure of existing tenants, who are paying an average of $60 per square foot. That will set the stage for the district, he said. Piper Sandler noted that leases near Grand Central Terminal have commanded upwards of $300 per square foot, a reference to the uppermost floors of SL Green’s One Vanderbilt.

When asked about the recent drops in the firm’s share price, Roth said the stock market “does not begin to reflect the opportunities we have here.” The company’s stock received a bump after Vornado released its earnings Monday evening, but my mid afternoon Tuesday was down about 1.8 percent from Monday’s close.

“I do real estate; I don’t do stock market,” Roth said. “The stock market chooses to give companies with no sales and no earnings billions and billions of dollars in value.”

Still, Roth supports separating the Penn District from the rest of Vornado’s portfolio through a tracking stock, though the timing has not been established. Roth also indicated that the company is exploring other ways to separate the district from the rest of its business, but would not elaborate.