VORNADO REALTY TRUST Annual Report - Your Investor's Guide to This Year's Performance

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1. Business Overview

Vornado Realty Trust, a real estate investment trust (REIT), owns, manages, and develops high-quality office and retail properties. The company primarily focuses on prime New York City locations, with additional holdings in major markets like Chicago and San Francisco.

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2. Financial Performance

In 2023, Vornado navigated a dynamic real estate market, strategically optimizing its portfolio through asset sales and debt management. While revenue saw modest growth, the company's financial results reflected these strategic shifts.

• Total Revenue: Vornado generated $1.20 billion in 2023, a slight 0.8% increase from $1.19 billion in 2022. This continues a trend of modest top-line growth, up from $1.189 billion in 2021.
• Net Income: The company reported a net loss of $20 million for 2023, a significant shift from a net income of $100 million in 2022. Non-cash impairments and higher interest expenses primarily drove this loss.
• Funds From Operations (FFO): FFO, a key profitability metric for REITs, reached $350 million, or $1.80 per diluted share, in 2023. This is down from $380 million, or $2.00 per diluted share, in 2022, reflecting the impact of asset sales and increased costs.
• Adjusted Funds From Operations (AFFO): AFFO, another important metric, totaled $300 million, or $1.55 per diluted share, in 2023, compared to $330 million, or $1.70 per diluted share, in 2022.

Revenue Breakdown:

• Rental Revenue: As Vornado's core income stream, rental revenue contributed $1.061 billion in 2023, a slight increase from $1.055 billion in 2022.
• Fee and Other Income: This category, encompassing management fees and other services, demonstrated stronger growth, rising to $139 million in 2023. This is up from $135 million in 2022 and $130 million in 2021, indicating successful diversification of income sources.

Performance by Segment:

• New York Segment (Core Market): This segment's revenue rose slightly to $1.089 billion in 2023 from $1.081 billion in 2022, driven by both rental and fee income.
  • Occupancy: NYC Office occupancy stood at 88.0% at year-end 2023, a slight decrease from 90.0% in 2022, reflecting ongoing challenges in the office market. NYC Retail occupancy remained stable at 92.0%.
  • Same-Store Net Operating Income (NOI): For comparable properties, NYC Office Same-Store NOI decreased by 1.5% in 2023, while NYC Retail Same-Store NOI modestly increased by 0.5%.
• Other Segment (Chicago and San Francisco): This segment also grew slightly, generating $111 million in 2023, up from $109 million in 2022.

Specific Property Highlights:

• 770 Broadway: This property consistently performed strongly, generating $120 million in rental revenue annually for the past three years (2023, 2022, and 2021).
• Pier 94: Revenue from Pier 94 dropped to $0 in 2023, down from $1 million in both 2022 and 2021. Vornado took this property out of service for future redevelopment, ceasing its income generation for the period.

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3. Risk Factors

Investors should be aware of several risks:

• Interest Rate Risk: As a highly leveraged REIT, Vornado is sensitive to interest rate fluctuations. Rising rates can increase borrowing costs, impacting both profitability and property valuations.
• Economic Downturn: A significant economic slowdown, especially in New York City, could lead to higher office and retail vacancies, lower rental rates, and reduced property values.
• Office Market Challenges: The long-term impact of remote and hybrid work models on office demand remains a significant uncertainty, potentially affecting Vornado's largest segment.
• Tenant Concentration & Lease Rollover: Reliance on a few large tenants or a significant number of leases expiring in a short period could expose Vornado to re-leasing risk at potentially lower rates.
• Valuation Risk: The market's perception of real estate values, particularly in urban centers, can fluctuate, impacting Vornado's stock price relative to its underlying asset value (NAV).
• Competition: Vornado faces intense competition from other landlords and new developments for tenants, which can pressure rental rates and occupancy.

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4. Management Discussion and Analysis (MD&A) Highlights

Vornado's management strategically focused on strengthening its balance sheet and streamlining its portfolio through significant asset sales and debt refinancing.

Major Wins and Challenges in 2023:

Key Wins:

• Strategic Asset Sales: Vornado, often through its joint ventures, executed several major property sales, generating substantial cash:
  • The "Fifth Avenue and Times Square Joint Venture" sold an office building at 660 Fifth Avenue for $100 million and a retail space at 1535 Broadway for $120 million.
  • Other joint ventures sold 49 West 57th Street, 512 West 22nd Street, and 650 Madison Avenue, each for $100 million.
  • Alexanders Inc. (a company where Vornado holds a significant stake) sold its Rego Park 2 property for $105 million.
  • Total Cash Inflow from Sales: These sales collectively generated approximately $625 million in gross proceeds. Vornado primarily used these proceeds to reduce debt and enhance liquidity.
• Proactive Refinancing:
  • The Independence Plaza joint venture successfully refinanced a $300 million loan, extending its maturity to 2030 at a competitive interest rate and providing long-term stability.
  • Alexanders Inc. also refinanced a loan for its Rego Park 2 property before its sale and secured a new $105 million mortgage for another asset. These actions demonstrate proactive debt management in a rising interest rate environment.

Key Challenges:

• Office Market Headwinds: The slight decline in NYC Office occupancy and Same-Store NOI reflects the ongoing impact of remote work trends and increased sublease availability, which pressured rental rates and leasing activity.
• Net Loss: The reported net loss for 2023, primarily due to non-cash impairments and higher interest expenses, highlights the challenging operating environment and the costs associated with portfolio adjustments.
• Pier 94 Redevelopment: While strategic, taking Pier 94 out of service temporarily removed an income-generating asset, impacting short-term revenue.

Leadership and Strategy:

The numerous asset sales and refinancing activities highlight a clear strategic shift under Vornado's current leadership. The company actively streamlines its portfolio by selling non-core or mature assets, particularly those in joint ventures, to unlock capital. This strategy aims to:

• Reduce Debt: Improve the balance sheet and lower financial risk.
• Enhance Liquidity: Provide financial flexibility for future opportunities or to weather market downturns.
• Focus on Core Assets: Concentrate resources on its most valuable, high-potential properties, primarily in Manhattan.
• Capital Allocation: Vornado strategically deploys the proceeds from sales to reduce debt and potentially fund future redevelopments or share repurchases, with a primary focus on debt reduction. There were no major changes in executive leadership during 2023.

Market Trends and Regulatory Landscape:

Several macro trends and potential regulatory shifts significantly impact Vornado:

• Hybrid Work & Office Demand: The ongoing evolution of office work stands as the most prominent trend. While Vornado's premium assets are better positioned, sustained hybrid work models could lead to long-term reductions in tenant space requirements, impacting future leasing.
• Interest Rate Environment: The "higher-for-longer" interest rate environment directly affects Vornado's borrowing costs and the valuation of real estate assets, making debt management and refinancing crucial.
• Inflation & Operating Costs: Rising inflation can increase property operating expenses (e.g., utilities, labor, property taxes). These increases may not always be fully offset by rent adjustments, impacting NOI.
• Urbanization & NYC Specifics: While NYC remains a global hub, specific local regulations, property tax policies, and the city's economic health directly influence Vornado's performance. Changes in zoning or environmental regulations could also affect development opportunities.
• Retail Evolution: The ongoing shift to e-commerce continues to reshape the retail landscape. However, Vornado's high-street retail properties in prime locations generally demonstrate greater resilience.

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5. Financial Health

Vornado's financial health is a critical aspect for investors, especially given the current market conditions.

• Total Debt: As of December 31, 2023, Vornado reported $8.5 billion in total debt.
• Cash and Equivalents: The company held $500 million in cash and cash equivalents, providing a buffer for operations and potential investments.
• Net Debt: This brings Vornado's net debt (total debt minus cash) to $8.0 billion.
• Liquidity: Asset sales significantly bolstered Vornado's liquidity, enabling the company to reduce higher-cost debt and manage upcoming maturities more effectively. Successful refinancing efforts also extended debt maturities, reducing near-term repayment pressures.
• Dividend: Vornado paid an annual dividend of $1.00 per share in 2023. While a reduction from prior years, this reflects its commitment to returning capital to shareholders and aligns with strategic portfolio adjustments.

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6. Future Outlook

Management's outlook for 2024 suggests a continued focus on operational efficiency and strategic capital management.

• FFO Guidance: Vornado anticipates FFO per diluted share in the range of $1.60 to $1.75 for 2024, reflecting the full-year impact of asset sales and ongoing market conditions.
• NOI Growth: Management expects Same-Store NOI for the NYC Office portfolio to remain flat to slightly negative, while NYC Retail projects modest positive growth.
• Capital Expenditures: Planned capital expenditures for 2024 are estimated at $250 million, primarily for tenant improvements and building upgrades to maintain competitiveness.
• Market Adaptation: Vornado actively adapts to evolving tenant demands, investing in amenities and flexible workspace solutions to attract and retain high-quality tenants in its core office portfolio. The company remains committed to its dividend, subject to market conditions and FFO performance.

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7. Competitive Position

Vornado maintains a strong competitive position, stemming from its portfolio of high-quality, irreplaceable assets in prime, difficult-to-enter markets, particularly New York City. Its properties often boast prestigious addresses, modern amenities, and strong tenant rosters. This focus on premium locations allows Vornado to command higher rents and maintain relatively stable occupancy compared to lower-tier properties, even in challenging markets. However, the sheer scale of its NYC office portfolio also makes it highly exposed to the specific dynamics of that market.