(VNO) Vornado Realty Trust Shares in Toys ‘R’ Us Loss

Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), has recently announced its share of first quarter 2011 financial results of Toys ‘R’ Us – a leading global retailer of dedicated toys and baby products. Vornado Realty, which currently owns about 32.7% of Toys ‘R’ Us, will record its share when it reports its second quarter results for the quarter ending June 30, 2011.

Earlier, Toys ‘R’ Us had reported fiscal 2011 first quarter loss of $67 million compared to a loss of $55 million in the year-earlier quarter. The increase in quarterly loss was primarily driven by higher operating expenses and lower same-store sales, partially offset by an increase in net sales driven by positive contributions from new locations and a foreign-currency benefit.

The business of Toys ‘R’ Us is highly seasonal with fourth quarter accounting for over 80% of the fiscal net income, primarily due to strong holiday sales. For the quarter ended April 30, 2011, Toys ‘R’ Us reported net sales of $2.64 billion – an increase of 1.1% on a year-over-year basis. However, same-store sales for the reported quarter dipped 2.1% in the U.S. and 1.9% internationally.

By product categories, the learning and core toy division generated strong performance with sales rising 7.9% and 5.4%, respectively, while that of the entertainment division that includes videogame hardware and software slid 6.6%. Gross margin for the reported quarter increased marginally to 37.1% from 36.2% in the year-ago period.

In accordance with the first quarter results of Toys ‘R’ Us, Vornado Realty will record a negative FFO (fund from operations) before income taxes of $30.1 million or 15 cents per share during second quarter 2011 compared to a negative FFO of $27.5 million or 13 cents in the year-ago quarter. Fund from operations, 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.

New York-based Vornado Realty is engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us.

Vornado Realty has a strong asset portfolio in two of the best long-term office markets in the U.S.– New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The company also has a healthy balance sheet and adequate liquidity.

We maintain our long-term ‘Neutral’ rating on Vornado Realty, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for Boston Properties Inc. (BXP), a competitor of Vornado Realty.

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