Vornado Realty: I'm Still Buying The Preferreds (NYSE:VNO)

Vornado Realty's (NYSE:VNO) 1-year rally has been incredible with the REIT now trading for 11.4x its annualized fiscal 2023 fourth quarter FFO. The Manhattan-focused office REIT generated fourth-quarter FFO of $0.63 per share, down 9 cents from its year-ago comp but outperforming consensus estimates by roughly 2 cents. The REIT's common shares staged a dramatic rally from record lows a year ago when investor sentiment towards office REITs cratered and CRE was the boogeyman of the stock market. This zeitgeist remains but VNO owns some of the best Class A office property assets in the US as measured by rent per square foot and has a strong development and leasing pipeline. Penn 1 and Penn 2, the REIT's currently in development Penn District office towers also both stand to materially drive rents and FFO growth over the next two years as pending Fed rate cuts and rising office occupancy look set to form tailwinds for VNO.

There is a 40% probability of the Fed cutting rates by at least 75 basis points to 4.50% to 4.75% exiting 2024 according to the CME FedWatch Tool. This should act as a broad reason for a further expansion of the common's FFO multiple and as a catalyst for the preferreds shares. I own the Series N preferreds (NYSE:VNO.PR.N), which are undervalued against VNO's current financials and upcoming high-probability catalysts. I've added to my position on what's still a 40% discount to their $25 per share liquidation value and an 8.71% yield on cost versus commons which won't have their dividend paid until the end of the year. The upside here comes from what is a close to $10 per share discount that should begin getting closed on the back of the slow reduction of a Fed funds rate currently at 22-year highs.

Leasing Momentum, Maturities, Lease Expirations, And Liquidity

Total occupancy at the end of the quarter stood at 89.4%, dipping by 50 basis points sequentially from 89.9% in the third quarter. New York office occupancy at 90.7% fell from 91.6% in the third quarter on the back of move-outs. VNO was clear during its fourth-quarter earnings call that this should start recovering in 2025 on the back of current leasing momentum, albeit with a slight dip through 2024. VNO's share of leasing activity during the fourth quarter saw 475,000 square feet of New York office space leased at an initial rent of $100.33 per square foot and at an 11.2-year weighted average lease term.

Retail saw 39,000 square feet of new leases at a remarkable initial rent of $131.01 per square foot at a weighted average lease term of 11.1 years. The MART also saw 161,000 square feet of new leases, pushing its occupancy to 79.2% from 76.8% in the third quarter. There are roughly 76 leases spread across 713,000 square feet expiring in 2024, around 5% of New York's office square feet. 2025 will see 67 New York office leases of 586,000 square feet expire. This comes as VNO faces a $530 million in debt maturing in 2024 with another $2.68 billion due from 2025 to 2027.

VNO held a total debt of $9.6 billion at the end of the fourth quarter, hence, it's positive that only 5.5% of this is coming due for repayment this year. This is set against a strong $3.2 billion liquidity position comprised of $1.3 billion in cash and restricted cash and $1.9 billion undrawn under its revolving credit facilities. VNO also owns 32.4% of the outstanding common stock of public REIT Alexander’s (ALX) which is currently worth $360 million. Critically, the REIT's main headwinds in the year came from higher interest expenses as a comparable FFO of $2.61 per share for its fiscal 2023 dropped by $0.54 from the prior year with VNO expecting FFO to dip by around $0.30 per share in 2024 on the back of this and on move outs in 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue. The commons might experience more volatility against this but the preferreds continue to offer a great choice ahead of pending rate cuts.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.