NYU Transaction And PENN District Projects Will Worsen Valuation Risks

Key Takeaways

• Strategic leasing and development efforts, particularly at PENN 2, are boosting rental income, driving net operating income growth and enhancing future earnings.
  
• Effective debt management and substantial liquidity measures are expected to reduce interest expenses, improving profitability and net margins.
  
• Strategic transactions and asset monetization bolster liquidity, reduce debt, and position Vornado favorably in prime real estate, enhancing revenue, margins, and growth potential.

Catalysts

A fully - integrated equity real estate investment trust.

• Vornado Realty Trust projects strong incremental rental income from the lease-up of vacant spaces, particularly at PENN 2 and retail vacancies, anticipating significant net operating income (NOI) growth to enhance future revenue and earnings.
  
• The NYU transaction at 770 Broadway, resulting in a GAAP financial statement gain of approximately $800 million in the second quarter, is expected to be accretive by $25 million annually which will improve net margins and earnings.
  
• The successful leasing of high-demand properties such as PENN 2, with Universal Music Group as a major tenant, suggests strong future rental revenue and occupancy growth, enhancing NOI and overall earnings.
  
• Vornado's focus on substantial liquidity and prudent debt management through transactions such as paying down $915 million of debt anticipates reducing interest expenses in the future, improving profitability and net margins.
  
• The strategic vision for the PENN District as a growth engine, with expectations of significant rent increases and transformative mixed-use projects, is projected to augment long-term revenue and financial performance.

Vornado Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vornado Realty Trust's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.4% today to 3.0% in 3 years time.
• Analysts expect earnings to reach $61.5 million (and earnings per share of $0.46) by about May 2028, down from $104.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $137.5 million in earnings, and the most bearish expecting $-24.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 162.1x on those 2028 earnings, up from 70.7x today. This future PE is greater than the current PE for the US Office REITs industry at 46.8x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Vornado Realty Trust Future Earnings Per Share Growth

Risks

• Vornado Realty Trust has managed to secure large transactions such as the NYU 770 Broadway master lease deal, which includes a $935 million prepaid rent payment, thus providing significant liquidity and a boost to GAAP earnings. This positions the company favorably by strengthening its cash reserves and reducing debt, potentially improving net margins.
  
• The company’s successful sale of the UNIQLO retail space at a high price point, along with refinancing initiatives, demonstrates its ability to monetize assets effectively and maintain robust liquidity. This can positively impact both earnings and margins by enhancing financial stability and flexibility.
  
• The PENN District’s strong performance, with rising rents and ongoing leasing activity, including high-profile deals like Universal Music Group, indicates a robust demand environment. The anticipated gross rent increase and improved occupancy rates are likely to increase revenue and net operating income over the next few years.
  
• Vornado Realty Trust’s strategic focus on prime real estate markets like Manhattan, coupled with limited new supply due to high building costs and interest rates, creates a favorable supply-demand dynamic. This landlord’s market scenario is likely to bolster rental income and asset value, positively impacting revenue and profit margins.
  
• The company's efforts in debt reduction and cash accumulation, alongside potential development projects in high-demand areas like the PENN District, suggest a solid platform for future growth. Such strategic financial management could lead to enhanced earnings stability and reduced risk exposure.

Valuation

• The analysts have a consensus price target of $38.714 for Vornado Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $48.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $61.5 million, and it would be trading on a PE ratio of 162.1x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $38.36, the analyst price target of $38.71 is 0.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.