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What's in the Offing for Vornado (VNO) This Earnings Season?

Vornado Realty Trust VNO is scheduled to report third-quarter 2017 results on Oct 30, after the closing bell.

In the prior quarter, this NY-based real estate investment trust (REIT) delivered a positive surprise of 7.14% in terms of funds from operations (FFO) per share. Results reflected robust same-store occupancy rate in the New York portfolio. However, this was offset by a decline in same-store occupancy and same-store earnings before interest, tax, depreciation and amortization (EBITDA) in the Washington D.C. portfolio.

Moreover, Vornado has a disappointing earnings surprise history. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in one occasion and missed in the other three, witnessing an average negative surprise of 5.8%. This is depicted in the graph below:

Vornado Realty Trust Price and EPS Surprise

Year to date, shares of Vornado have underperformed the industry. While the company’s shares have plunged 29.4%, the industry recorded growth of 2.3%.

Note: All EPS numbers presented here represent funds from operations (FFO) per share.

Let’s see how things have shaped up for this announcement.

Factors to Consider

Vornado has been actively repositioning its portfolio. In line with this, the company has been involved in opportunistic acquisitions and divestitures, along with business spin-offs. Though such efforts to streamline its business are commendable, the dilutive effects of these moves cannot be avoided either.

Subsequently, we anticipate a fall in the company’s total revenues in the to-be-reported quarter. The Zacks Consensus Estimate for total revenues for the third quarter is currently pegged at $528 million. This reflects a decline of 15.7% as compared with the previous quarter.

Further, the company’s management and leasing fees are expected to witness a decline. The Zacks Consensus Estimate of $3.09 million indicates a sharp drop of 36.8% from the prior quarter.  

In addition, over the past week, the Zacks Consensus Estimate for third-quarter 2017 FFO per share decreased 12.2%, reflecting analysts’ bearish sentiments.
Nonetheless, Vornado’s wholly owned subsidiary, Building Maintenance Services (BMS), is expected to realize higher cleaning fees for its cleaning, engineering and security services. The Zacks Consensus Estimate for BMS cleaning fees of $21.4 million reflects a 0.7% increase from the prior quarter.  

Earnings Whispers

Our proven model does not conclusively predicts a FFO beat for Vornado this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

(You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.)

Zacks ESP: The Earnings ESP for Vornado is -16.67%.

Zacks Rank: Vornado has a Zacks Rank #3. This increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

CoreSite Realty Corporation COR, slated to release third-quarter results on Oct 26, has an Earnings ESP of +1.01% and holds a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ventas, Inc VTR, scheduled to report quarterly numbers on Oct 27, has an Earnings ESP of +0.12% and has a Zacks Rank of 3.

Boston Properties, Inc BXP, slated to release third-quarter earnings on Nov 1, has an Earnings ESP of +0.39% and carries a Zacks Rank of 3.
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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