What happened
Shares of Vornado Realty Trust (VNO 2.33%) were heading lower last month as the macroeconomic environment continued to weaken for the office real estate investment trust (REIT).
An analyst downgrade weighed on the stock, and investors also learned at the end of December that Vornado would be removed from the S&P 500, and instead added to the S&P Midcap 400.
According to data from S&P Global Market Intelligence, the stock finished the month down 18%.
So what
Vornado stock fell sharply to begin December as macroeconomic fears seemed to drive the broad market lower, though there was no company-specific news out on the stock. As tech layoffs sweep the market, investors seem to fear that Vornado will be increasingly affected by the real estate reductions. Meta Platforms, for example, is one of its major tenants.
The stock was downgraded from neutral to sell on Dec. 14 by Citigroup analyst Nicholas Joseph, who said sentiment remains negative in the office sector. The analyst also noted a lack of transparency around issues like succession planning, future real estate opportunities, an expected dividend reduction, and upcoming debt maturities. Joseph also said upcoming lease expirations could be hard to replace and lowered the stock's price target from $24 to $19.
Vornado stock fell 2% on Dec. 28 after S&P Dow Jones Indices said it would remove Vornado from the S&P 500 index and replace it with GE Healthcare. Being part of the well-known broad-market index isn't just a matter of prestige, it also means that index funds hold your stock, and more than 60 million shares traded hands on Jan. 4 when Vornado was officially removed from the S&P 500 index, as index funds dumped the real estate company.
Every year, the S&P 500 rotates out some of its holdings, depending on criteria like market cap and profitability. In that sense, the removal from the index is also a reflection of the challenges Vornado is facing.
Now what
Office REITs got more bad news to start the year after Salesforce said it would lay off 8,000 employees and close a number of offices as it seeks to cut $3 billion to $5 billion in annual costs.
Pulling back on office spending is likely to be a trend this year, at least in the tech sector. Vornado is also set to cut its dividend, which currently yields 9.8%, but is unsustainable at the current level. Management said it needs to "rightsize" it.
While the stock may look like an appealing income play, the risk of a recession and rising interest rates are likely to weigh on the stock this year.
