Good news on a coronavirus vaccine has caused many out-of-favor stocks to rally. Investors have been covering shorts in mall real estate investment trusts, office REITs, and other retail REITs.
Vornado (NYSE:VNO), one of the big REITs with a large concentration in Manhattan office and retail space, has rallied almost 40% in the week and a half since Pfizer announced encouraging data on its coronavirus vaccine. While the company is hopeful that things will return to normal, the present state of Manhattan is rather challenging. Are things about to turn the corner?
Retailers take a bite out of Vornado's FFO
Vornado recently reported third-quarter adjusted funds from operations (FFO) of $0.59, which was a decrease of 33% from the prior-year's $0.89 per share. Funds from operations came in at $1.46 per share, but that number included a gain on sale of condo units.
Essentially, adjusted FFO fell by $0.30 from a year ago. Roughly $0.11 of that change came from variable income related to the Hotel Pennsylvania, trade shows, and signage. Another $0.11 came from the JC Penney and Topshop bankruptcies and other retailer write-offs, while the rest came from rental write-offs and other items.
New York City office occupancy was 95.8% and retail occupancy was 79.9%. While third-quarter cash basis same-store net operating income (NOI) fell about 9%, if you exclude retail and some of the variable businesses, core New York City office NOI was up 1.5%. The company emphasized that the core office business in New York City, Chicago, and San Francisco is performing well and protected by long-term leases. Current liquidity is $3.67 billion, with $1.49 billion of cash and $2.18 billion available on its revolving credit facilities.
Vornado believes that Manhattan will return to normal in months, not years
Management believes that despite all of the headwinds for the sector, a return to normalcy will be the order of the day in months, not years. Vornado's tenants are saying that Zoom fatigue is real, productivity is down, and CEOs want their employees back in the office.
There seems to be a bit of a disconnect between working at the office and working from home. Unsurprisingly, employees are bigger fans of working from home than their bosses. While the coronavirus pandemic may have made a modest increase in working from home, the office will still be the main place where people work.
Only about 4% of the company's New York office leases expire through the end of 2022. Vornado expects continued caution out of tenants who are focused primarily on getting their employees safely back to the office, as well as modest leasing activity through the end of the year, with the focus primarily on renewals.
While Vornado is in excellent financial health and has the ability to weather the current climate, a potential vaccine isn't necessarily a reason to purchase the stock. With COVID-19 cases spiking again, it's unlikely that we'll see a return to offices en masse any time soon.
If anything, plans to reopen offices in the new year are probably being put off. As President Steve Franco said on the earnings conference call, things are likely to get worse before they get better.