Vornado Earnings: Manhattan Office Market Still Challenging, but Recent Transactions Offer Respite

No-moat-rated Vornado Realty’s second-quarter results were largely in line with our expectations as the firm reported funds from operations, or FFO, of $140.7 million, or $0.72 per share, in the second quarter, which was around 12% lower than the $160.1 million, or $0.83 per share, reported in the second quarter of the previous year. The demand for Manhattan office real estate remains muted because of macroeconomic factors and a slower recovery in physical office utilization rates. The FFO decreased by about $20 million year over year, mostly because 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. This structure also makes the equity valuation highly sensitive to movements in interest rates and cap rates. We are maintaining our $29 per share fair value estimate for Vornado Realty after incorporating second-quarter results into our model.