Vornado Cuts Dividend on Higher Interest Rates, Challenging Office Outlook

No-moat-rated Vornado Realty VNO reported underwhelming fourth-quarter results and reduced its quarterly dividend by 29%, to $0.375 per share from $0.53. The stock is currently trading at a forward dividend yield of 6.4%. The firm reported adjusted funds from operations of $0.72 per share, 11% lower than the $0.81 in adjusted FFO during the fourth quarter of 2021. The year-over-year decrease in adjusted FFO was mainly on the back of higher interest expenses and was partially offset by rent commencement and other tenant-related items. The company will continue to feel a disproportionate impact of higher interest rates due to its significantly leveraged capital structure. Its leveraged capital structure also makes the equity valuation highly sensitive to movements in interest rates and cap rates. We are maintaining our $35.50 fair value estimate after incorporating the fourth-quarter results.

Same-store cash net operating income for the New York portfolio was up 5.9% compared with the previous year’s fourth quarter. The new office leases signed by the company in New York had 9.8% higher cash rents than the previous escalated rents in the current quarter. The occupancy rate for the New York portfolio was 90.4% in the fourth quarter, up 10 basis points on a sequential basis and down 90 basis points on a year-over-year basis. The occupancy rate for the firm’s Merchandise Mart property in Chicago was down 570 basis points on a sequential basis and was recorded at 81.6%, while the occupancy rate for 555 California Street was flat sequentially and was recorded at 94.7% during the current quarter.

For investors considering office REITs, we continue to believe that Kilroy Realty offers a better risk-return profile than Vornado, given its high-quality portfolio, low leverage, and appealing valuations.