National property owner Vornado Realty Trust warned hikes to interest rates could hurt its future performance.
While the New York-based real estate investment trust reported better-than-expected second-quarter results Tuesday in its office leasing and other businesses, expenses due to higher interest rates offset some of those gains.
Michael Franco, Vornado’s president and chief financial officer, said on a call with Wall Street analysts that the REIT now sees slower growth in its fresh funds from operations for both the second half of 2022 and all of 2023. Franco pointed to the Federal Reserve raising rates faster than the REIT foresaw to fight inflation, and those higher borrowing costs are set to affect its floating-rate debt.
Vornado has about $4.5 billion in fixed-rate debt and nearly $4 billion in floating-rate debt, or about 47% of the debt total, according to a financial presentation it released alongside its second-quarter results. The REIT, which has said it has more floating-rate debt than most commercial real estate landlords, recently completed four refinancing deals totaling $3.2 billion, including one for the redevelopment of 770 Broadway, a Manhattan landmark tower.
As tech giants including Facebook parent Meta and e-commerce behemoth Amazon are reportedly pulling back on leasing additional Manhattan space — including at Vornado’s 770 Broadway — Franco said sector leasing in the city, its top market, has slowed. Still, he said financial tenants have “picked up the slack” in activity. On the retail front, Vornado is set to lose a major tenant as Swatch has exercised its termination option at the St. Regis New York hotel for next year.
“Prepare for choppy conditions,” Vornado CEO Steven Roth said on the call. “There are signs of slowdown all around. … We are on the foothills of a recession.”
Roth said Vornado is “rigorously focused on the important things,” including “protecting” its balance sheet, “preserving liquidity” and cutting nonessential spending.
“We’ve been through this five to six times in the last 40 years,” he said. “There’s always an end. ... We expect rates to come down quite substantially.”
While the REIT’s stock is “stupid cheap,” Roth said, repeating remarks of an analyst on the call, he said Vornado has stayed away from buying back stock for many quarters, even as it’s tempted to do so. “You have to balance the return” of the buyback versus spending on other things. “We don’t have a hankering for small potatoes” when it comes to a stock repurchase, he said, adding the REIT would make a “significant” repurchase in that scenario.
Vornado’s stock has lost about a third of its value this year.
Vornado’s second-quarter fresh funds from operations, excluding certain items, rose to $160.1 million, beating Wall Street analysts’ estimates, from $133.2 million a year earlier. Interest and debt expense rose to $62.6 million from about $51.9 million a year ago.
The firm leased a total of 301,000 square feet of New York office space last quarter at an initial rent of $85.27 per square foot and a weighted average lease term of 11.5 years. That was up from 272,000 square feet in the first quarter at an initial rent of $81.07 per square foot and a weighted average lease term of 8.8 years.
Total rental revenue rose 19% to $405.2 million a year earlier.
New York occupancy rates rose to 90.8% from 90% a year earlier but declined from 91.2% in the first quarter. Same-store cash net operating income rose 8.4%, including a 7.7% jump in New York and double-digit increases from both theMart in Chicago and 555 California St. in San Francisco.
It was a “better-than-feared quarter,” Morgan Stanley analyst Ronald Kamdem said in a report Tuesday. But quarter-over-quarter “occupancy declines and elevated interest expense remain headwinds.”