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Tickers in this Article: VNO, BXP
Vornado Realty Trust (VNO), a leading real estate investment trust (REIT), has recently announced its share of first quarter 2012 financial results of Toys 'R' Us - a leading global retailer of dedicated toys and baby products. Vornado Realty currently owns about 32.6% of Toys 'R' Us. Vornado Realty will record its share when it reports its second quarter results for the quarter ending June 30, 2012.

Vornado Realty's second quarter 2012 will include a loss of $19.2 million or 10 cents per share on account of Toys 'R' Us compared to a loss of $22.8 million or 11 cents in the year-earlier quarter.

In accordance with the first quarter results of Toys 'R' Us, Vornado Realty will also record a negative FFO (funds from operations) before income taxes of $15.4 million or 8 cents per share, compared to negative FFO before income taxes of $30.1 million or 15 cents in the year-ago quarter. Funds from operations, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

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 28, 2012, Toys 'R' Us reported net sales of $2.61 billion compared to $2.64 billion in the year-ago quarter. The year-over-year decline in net sales was primarily due to a decrease in comparable store net sales, which dipped 0.8% in the Domestic segment and 5.0% in the International segment.

By product categories, the Learning and Core Toy division generated strong performance, with net sales rising 6.7% and 4.7%, respectively, while that of the Entertainment division that includes videogame hardware and software slid 14.0%. Gross margin for the reported quarter increased marginally to 38.2% from 37.1% in the year-ago period.

New York-based Vornado Realty acquires, owns and leases 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. We also have a Neutral recommendation and a Zacks #2 Rank (short-term Buy rating) for Boston Properties Inc. (BXP), a competitor of Vornado Realty.

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