8.1.23 - Vornado has some good news—and some bad
' More office space is leased up in Vornado Realty Trust’s buildings. But that encouraging development was countered by rising borrowing costs, and the landlord said occupancy rates could decline again in the months ahead.
“The principal difference in our numbers this year to last year is the rise in interest rates,” Chief Executive Steven Roth said on a conference call Tuesday.
The good news was occupancy rates in Vornado’s New York portfolio ticked up in the second quarter, to 90.1% from 89.9% in the prior quarter. The bad news was that in the coming year large tenants are poised to leave buildings such as 280 Park Ave. and 650 Madison Ave. and officials said occupancy rates could erode further. Additionally, borrowing costs rose by $25 million last quarter and figure to continue rising until the Federal Reserve cuts interest rates.
In the meantime, Vornado is forced to offer elevated discounts to potential tenants.
“Concessions remain stubbornly high,” Michael Franco, president and chief financial officer, said on the call.
Vornado controls 20 million square feet of office and retail space in New York, making it the city’s second-largest commercial landlord.
Funds from operations fell last quarter to $140 million, or 74 cents a share, from $160 million, or 80 cents a share, in the year-earlier period. More than a fifth of Vornado’s $10 billion in consolidated debt is floating rate and the landlord faces continued financial pressure unless interest rates start to fall or occupancy rates improve. Arrangements that Vornado made with banks to temporarily cap interest-rate exposure will burn off this year and next.
“Vornado’s earnings will face some headwinds,” said analyst Steve Sakwa of Evercore ISI in a client note.
Last week Vornado sold four Midtown retail spaces for $100 million and last month it restructured a $421 million mortgage for retail space in the St. Regis Hotel that was in default. Bigger sales may be next, with officials indicating they could either sell part of or borrow against the Farley Building, which Vornado leased from the state in 2017 and whose 730,000 square feet of office space is occupied by Facebook owner Meta Platforms.
“It’s a great asset and could be an important source of liquidity,” Roth said of Farley. '
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