Alexander’s, Inc. — 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a REIT that leases, manages, develops and redevelops seven properties in the greater New York City metropolitan area. Vornado Realty Trust manages the company and provides leasing and development services. This unaudited report covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Rental revenues | $54.1 million | $56.8 million | Down $2.7 million |
| Operating expenses | $21.8 million | $21.8 million | Down $0.1 million |
| Net income | $4.6 million | $17.9 million | Down $13.3 million |
| Basic and diluted EPS | $0.89 | $3.49 | Down $2.60 |
| FFO, non-GAAP | $23.7 million | $25.5 million | Down $1.8 million |
| FFO per diluted share, non-GAAP | $4.64 | $4.99 | Down $0.35 |
| Cash flow from operations | $25.0 million | $48.1 million | Down $23.0 million |
Rental revenue declined primarily because of a retail tenant vacancy at 731 Lexington Avenue. Operating expenses were broadly stable, while general and administrative expenses increased $0.2 million due primarily to higher professional fees. Interest and debt expense declined $1.6 million, principally because of lower LIBOR, partly offset by higher average debt.
Net income included an $11.4 million loss from the change in fair value of the company’s Macerich investment. The investment’s fair value declined to $3.0 million at March 31, 2020 from $14.4 million at December 31, 2019, based on Macerich’s $5.63 closing share price. The company’s economic cost for the shares was $30.0 million.
Rental revenue less operating expenses was approximately $32.4 million in Q1 2020, representing an approximate 59.9% margin, compared with approximately $34.9 million and 61.5% in Q1 2019. These are simple calculations based on reported rental revenue and operating expenses and are not presented by the company as a formal margin measure.
At March 31, 2020, real estate, net was $717.0 million, cash and cash equivalents were $438.3 million, restricted cash was $16.3 million, and marketable securities were $3.0 million. Total assets were $1.40 billion and total equity was $235.1 million.
Mortgages payable, net of deferred issuance costs, were $1.12 billion, compared with $971.0 million at December 31, 2019. Total mortgage principal was $1.12 billion, including $1.05 billion of variable-rate debt and $68.0 million of fixed-rate debt. The company held $457.7 million of liquidity, consisting of cash, restricted cash and marketable securities.
Operating cash flow was $25.0 million. Capital expenditures and construction-in-progress additions used $7.0 million. Financing activities provided $122.6 million, including $145.7 million from reducing the company’s participation in the Rego Park II mortgage, partially offset by $23.0 million of dividends. The quarterly dividend was $4.50 per common share.
Material Changes Versus the Prior Comparable Period
- Rental revenue decreased 4.7%, primarily due to a retail vacancy at 731 Lexington Avenue.
- Net income decreased 74.4%, principally because of the $11.4 million Macerich fair-value loss; Q1 2019 included an immaterial fair-value gain.
- FFO decreased 7.0%, a smaller decline than GAAP net income because FFO excludes the marketable-securities valuation effect.
- Cash flow from operations decreased 47.9%, reflecting lower net income and changes in working capital, including a $12.7 million increase in other assets.
- Debt increased by approximately $146.9 million after the company reduced its participation in the Rego Park II mortgage from $195.7 million to $50.0 million and received approximately $145.0 million of cash proceeds.
- Cash and restricted cash increased $140.7 million from December 31, 2019, primarily because of the Rego Park II financing transaction.
- Portfolio occupancy was 96.5% of 2.23 million in-service square feet at March 31, 2020. Total portfolio area was 2.449 million square feet, including 219,000 square feet out of service for redevelopment.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It stated that existing cash and expected operating cash flow were anticipated to fund operations, dividends, debt amortization and capital expenditures over the next twelve months, but emphasized that the COVID-19 pandemic could materially affect this assessment.
- Approximately 21% of retail tenants, measured by their percentage of monthly revenue, had closed stores, and tenants representing approximately 12% of monthly revenue had not paid April 2020 rent. The company was considering temporary rent relief on a case-by-case basis.
- Bloomberg continued to pay rent and accounted for approximately 50% of Q1 2020 revenue, creating significant tenant concentration risk. No other tenant represented more than 10% of revenue.
- Residential rent collections at The Alexander had not been significantly affected as of the filing. Certain non-essential redevelopment projects were temporarily paused under New York State executive orders.
- COVID-19 could reduce rents, occupancy, collections and cash flow; constrain access to capital; impair refinancing; reduce real estate values; and lead to material impairment charges. The filing states that the ultimate impact could not be estimated.
- A $350.0 million mortgage secured by the 731 Lexington Avenue retail condominium matures in August 2020. The company stated that it would not satisfy the conditions for its two one-year renewal options and may need to refinance or repay the debt.
- Approximately 94% of mortgage principal was variable rate at March 31, 2020. The filing estimates that a 1% increase in base rates would increase annual interest expense by approximately $10.5 million and reduce diluted earnings per share by approximately $2.06. An interest-rate cap covers $500.0 million of notional debt at a 6.0% LIBOR cap.
- The company paid $23.8 million in April 2018 for potential additional New York City transfer taxes and interest related to the prior Kings Plaza sale and was evaluating its options.
- The Sears litigation relating to Rego Park I remained stayed following Sears’ bankruptcy filing. The company estimated reasonably possible losses, if any, at no more than approximately $0.7 million.
- Standby letters of credit outstanding totaled approximately $1.0 million. Insurance coverage and future availability of terrorism and other property coverage could affect financing and expose the company to uninsured losses.
Important Facts for Investors to Verify
- Confirm the refinancing, repayment or other resolution of the $350.0 million August 2020 mortgage maturity and related covenant constraints.
- Monitor retail rent collections, concessions, tenant closures and the pace of redevelopment restarts following COVID-19 disruptions.
- Assess Bloomberg’s continuing creditworthiness and lease concentration, given its approximately 50% contribution to revenue.
- Reconcile reported FFO with GAAP net income and recognize that FFO is non-GAAP and does not represent operating cash flow.
- Track the Macerich investment’s valuation and any further marketable-securities losses.
- Evaluate refinancing availability, variable-rate exposure, interest-rate-cap coverage and debt-to-asset metrics.
- Review the Kings Plaza transfer-tax matter, Sears litigation, insurance coverage and other contingencies for potential cash requirements.