Business Context and Reporting Period
Alexander’s, Inc. is a real estate investment trust with seven properties totaling 2.437 million square feet in the greater New York City metropolitan area. Vornado Realty Trust owns 32.4% of the outstanding common stock and manages, leases and develops the properties. This Form 10-Q covers the three months ended March 31, 2019; financial statements are unaudited.
Of the portfolio, 2.242 million square feet was in service and 195,000 square feet was out of service for redevelopment. In-service occupancy was 97.3% at March 31, 2019.
Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Rental revenues | $56.778 million | $57.880 million | Down $1.102 million |
| Income from continuing operations | $17.865 million | $14.097 million | Up $3.768 million |
| Net income (loss) | $17.865 million | $(9.700) million | Improved $27.565 million |
| Net income (loss) per diluted share | $3.49 | $(1.90) | Improved $5.39 |
| FFO, non-GAAP | $25.531 million | $3.621 million | Up $21.910 million |
| FFO per diluted share | $4.99 | $0.71 | Up $4.28 |
| Net cash provided by operating activities | $48.083 million | $36.805 million | Up $11.278 million |
| Cash and restricted cash at period end | $312.734 million | $406.216 million | Down $93.482 million year over year |
Total expenses were $30.922 million, compared with $31.822 million in the prior-year quarter. Operating expenses declined to $21.849 million from $22.277 million, depreciation and amortization declined to $7.828 million from $8.283 million, and general and administrative expense declined slightly to $1.245 million from $1.262 million.
Interest and debt expense increased to $10.159 million from $9.829 million, while interest and other income declined to $2.130 million from $3.038 million. The change in fair value of marketable securities was a $38,000 gain in 2019, compared with a $5.170 million loss in 2018.
At March 31, 2019, total assets were $1.296 billion, total liabilities were $1.016 billion and total equity was $279.942 million. Mortgages payable, net of deferred debt issuance costs, were $967.112 million. Gross mortgage principal was $974.836 million, with maturities from October 2021 through December 2025. Approximately $906.836 million was variable-rate debt and $68.000 million was fixed-rate debt. A $500 million interest-rate cap limits LIBOR exposure at 6.0%.
Cash flow from operations funded $23.028 million of dividends and $1.816 million of construction and real estate additions. The quarterly dividend was $4.50 per common share. Management stated that operating cash flows over the next twelve months, together with existing cash, are expected to fund operations, dividends, debt amortization and capital expenditures.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of the Sears vacancy at Rego Park I and the Toys “R” Us vacancy at Rego Park II, partly offset by higher revenue from a new tenant at 731 Lexington Avenue.
- Operating expenses declined mainly because the prior-year period included a bad-debt write-off related to Toys “R” Us.
- Net income and FFO increased substantially because Q1 2018 included a $23.797 million accrual for potential New York City real property transfer taxes related to the 2012 sale of Kings Plaza.
- Q1 2018 also included a $5.170 million mark-to-market loss on Macerich shares; Q1 2019 included a $38,000 gain.
- The Company adopted ASC 842, Leases, on January 1, 2019. It recorded a $5.058 million right-of-use asset and a $5.428 million lease liability for the Flushing ground lease at adoption; the March 31, 2019 balances were $4.928 million and $5.284 million, respectively.
- The December 31, 2018 balance sheet was restated to reclassify a $195.708 million Rego Park II loan participation from an asset to a reduction of mortgage debt. The reclassification did not affect prior-period income, comprehensive income, equity or cash flows.
Guidance, Outlook, Risks, Contingencies and Unusual Items
No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results and that forward-looking statements are subject to economic, tenant, capital-market, regulatory and other uncertainties.
- Bloomberg L.P. represented approximately 48% of Q1 2019 revenue, up from approximately 45% in Q1 2018. Loss of Bloomberg or deterioration in its ability to pay could materially affect results and financial condition.
- The Company is exposed to interest-rate increases because most mortgage debt is variable rate. Management estimated that a 1% increase in base rates would affect annual interest expense by approximately $9.068 million, or diluted earnings by approximately $1.77 per share, before considering the interest-rate cap.
- Debt refinancing is a key risk, particularly for maturities beginning in 2021. Management may refinance maturing debt or repay it.
- On April 13, 2019, Kohl’s closed its 133,000-square-foot Rego Park II store. Kohl’s plans to sublease the space and remains obligated under its lease through January 2031.
- The Sears Rego Park I litigation remained subject to an automatic stay following Sears’ bankruptcy. The remaining claim was estimated at approximately $650,000, and reasonably possible losses were not expected to exceed that amount.
- The Company maintains substantial property and terrorism insurance but remains responsible for deductibles, uninsured losses and losses exceeding coverage. The Terrorism Risk Insurance Program Reauthorization Act coverage expires in December 2020.
- The Paramus property has a $75 million purchase option exercisable in 2021. If exercised, the Company expects approximately $7 million of net cash proceeds and an approximately $60 million gain; the filing does not state whether the option will be exercised.
- Approximately $1.030 million of standby letters of credit were outstanding at March 31, 2019.
Investor Verification Points
- Verify the sustainability of occupancy and rental revenue following the Sears and Toys “R” Us vacancies and the subsequent Kohl’s store closure.
- Assess Bloomberg’s concentration, creditworthiness and lease obligations given its 48% contribution to quarterly revenue.
- Review the maturity, refinancing requirements and variable-rate exposure of the $974.836 million mortgage portfolio.
- Distinguish recurring operating performance from the significant Q1 2018 Kings Plaza tax accrual and Macerich mark-to-market loss.
- Reconcile reported GAAP net income with non-GAAP FFO and evaluate FFO’s limitations as a measure of cash available for dividends.
- Monitor the Rego Park I litigation, Kings Plaza tax matter, insurance coverage and the potential Paramus purchase-option outcome.