Vornado Earnings: Higher Interest Rates and a Challenging Manhattan Office Market Continue to Bite

No-moat-rated Vornado Realty’s third-quarter results were largely in line with our expectations as the firm reported funds from operations, or FFO, of $127.2 million or $0.66 per share, which was around 19% lower than the $157.4 million or $0.81 per share FFO reported in the third quarter of the previous year. The approximately $30 million decline in FFO on a year-over-year basis can be attributed to $11.9 million impact from accrual adjustments recorded in third-quarter 2022 related to changes in the tax assessed value of the Merchandise Mart, $7.3 million from higher interest rates, $6.1 million from higher stock compensation, and $4.9 million from the impact of properties sold. We note that the $11.9 million and $6.1 million impact from the Mart and stock compensation are largely nonrecurring in nature and should not impact year-over-year growth in the next year. The demand for Manhattan office real estate remains muted due to macroeconomic factors and a slower recovery in physical office utilization rates. We expect the firm 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 $29 per share fair value estimate for Vornado Realty after incorporating third-quarter results.