Vornado Earnings: Higher Interest Expenses and Muted Office Demand Impact FFO

No-moat-rated Vornado Realty reported lackluster first-quarter results as the demand for office real estate remains muted due to macroeconomic factors and a slower recovery in physical office utilization rates. The firm reported funds from operations, or FFO, of $116.3 million, or $0.60 per share, in the first quarter, which was around 24% lower than the $152.3 million, or $0.79 per share, FFO reported in the first quarter of the previous year. We note that the FFO decreased by $36 million on a year-over-year basis and approximately $30 million of the decrease was on account 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. The leveraged capital structure of the company also makes the equity valuation highly sensitive to movements in interest rates and cap rates. We are reducing our fair value estimate for Vornado Realty to $29 per share from $35.50 per share after moderating our long-term rent growth, occupancy, and Manhattan office sector recovery expectations.