Alexander’s, Inc. 2019 Form 10-K Summary
Business context and reporting period
Alexander’s, Inc. is a Delaware REIT engaged in owning, leasing, managing, developing and redeveloping seven properties in the greater New York City metropolitan area. Vornado Realty Trust manages, leases and develops the properties and owned 32.4% of Alexander’s outstanding common stock at December 31, 2019. This filing covers the fiscal year ended December 31, 2019, including the quarter ended December 31, 2019.
- The portfolio totaled 2.449 million square feet, including 2.230 million square feet in service and 219,000 square feet out of service primarily for Rego Park I redevelopment.
- In-service occupancy was 96.5% at December 31, 2019.
- 731 Lexington Avenue generated approximately 68% of total revenue, while Bloomberg generated approximately 48%.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Rental revenues | $226.350 million | $232.825 million | Down $6.475 million |
| Net income | $60.075 million | $32.844 million | Up $27.231 million |
| Net income per diluted share | $11.74 | $6.42 | Up $5.32 |
| FFO, non-GAAP | $99.670 million | $77.429 million | Up $22.241 million |
| FFO per diluted share, non-GAAP | $19.47 | $15.13 | Up $4.34 |
| Operating expenses | $89.738 million | $93.775 million | Down $4.037 million |
| Interest and debt expense | $38.901 million | $44.533 million | Down $5.632 million |
| Dividends per share | $18.00 | $18.00 | Unchanged |
2019 net income benefited from the absence of the $23.797 million discontinued-operations charge recorded in 2018 for potential additional New York City real property transfer taxes related to the 2012 Kings Plaza sale. Results also benefited from lower operating expenses, depreciation and interest expense, partly offset by lower rental revenue and an $8.757 million decline in the fair value of Macerich marketable securities.
For the fourth quarter of 2019, revenue was $55.880 million, net income was $14.434 million, or $2.82 per diluted share, and FFO was $24.626 million, or $4.81 per diluted share. Fourth-quarter 2018 net income was $9.971 million, or $1.95 per diluted share, and FFO was $24.158 million, or $4.72 per diluted share.
Cash flow, liquidity and capitalization
- Net cash provided by operating activities was $126.070 million, compared with $73.538 million in 2018.
- Cash and cash equivalents plus restricted cash totaled $313.977 million at year-end, compared with $289.495 million at year-end 2018.
- Investing cash uses were $9.449 million, primarily for construction in progress and real estate additions.
- Financing cash uses were $92.139 million, primarily reflecting $92.124 million of dividends paid.
- Total mortgage debt was $974.836 million, or $970.961 million net of deferred debt issuance costs. Debt represented 41.2% of total enterprise value.
- Approximately $906.836 million of debt carried variable rates. Management estimated that a 1% increase in base rates would increase annual interest expense by approximately $9.068 million, or diluted earnings per share by approximately $1.77.
- The company had a $500 million interest-rate cap covering LIBOR at a 6.0% ceiling.
- Management stated that operating cash flow and existing cash balances were expected to fund operations, dividends and capital expenditures over the following 12 months.
Material changes versus the prior comparable period
- Revenue decreased 2.8%, primarily because of the Sears vacancy at Rego Park I following Sears’ lease rejection.
- Operating expenses declined primarily because 2018 included $4.459 million of bad-debt expense related largely to the Sears bankruptcy.
- Interest expense decreased following the Rego Park II refinancing, partially offset by higher average interest rates.
- FFO increased 28.7%, substantially reflecting the 2018 Kings Plaza tax charge and lower operating and interest expenses.
- On September 23, 2019, Alexander’s signed a 10-year lease with IKEA for 113,000 square feet at Rego Park I, replacing a significant portion of the former Sears space. IKEA may terminate after year five subject to a payment capped at the lesser of $10 million or remaining rent.
- Kohl’s closed its 133,000-square-foot Rego Park II store on April 13, 2019. On January 24, 2020, Kohl’s subleased the space to At Home while remaining liable under its lease through January 2031.
- The company adopted ASC 842, recording a $4.529 million right-of-use asset at December 31, 2019 related primarily to the Flushing ground lease.
- The 2018 balance sheet was restated to present the $195.708 million Rego Park II loan participation as a reduction of mortgage debt rather than as an asset; the restatement did not materially affect 2018 income, equity or cash flows.
Guidance, outlook, risks and unusual items
- On January 15, 2020, the quarterly dividend was set at $4.50 per share, an indicated annual rate of $18.00 per share. If maintained throughout 2020, dividends would total approximately $92.1 million.
- Alexander’s has no formal earnings guidance in the filing. Management expects cash flows and existing liquidity to fund near-term requirements.
- Paramus has a $75 million IKEA purchase option in 2021. If exercised, the company expects net cash proceeds of approximately $7 million and a gain of approximately $60 million; the filing does not state whether the option will be exercised.
- Debt maturities are concentrated, including $68 million in 2021, $350 million in 2022, $500 million in 2024 and $56.836 million thereafter based on the filing’s extended maturity schedule. The company remains exposed to refinancing conditions and variable interest rates.
- Key concentration risks include the New York metropolitan area, 731 Lexington Avenue, Bloomberg and major retail anchors. Bloomberg’s lease expires in 2029, with extension options reported through 2039.
- The company is exposed to retail disruption, tenant bankruptcies, online competition, economic and real estate cycles, terrorism, natural disasters, climate-related events, insurance availability, cyber incidents, environmental liabilities, LIBOR transition risk and changes in REIT or state and local tax laws.
- The Sears Rego Park I litigation remained stayed following Sears’ bankruptcy. The company estimated reasonably possible losses at no more than approximately $650,000.
- The company owns 535,265 Macerich shares with a year-end fair value of $14.409 million and recorded an $8.757 million fair-value loss in 2019.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter involved impairment testing of real estate and capitalization-rate assumptions.
Most important facts for investors to verify
- Renewal, refinancing or repayment plans for the concentrated mortgage maturities and the effect of LIBOR replacement on borrowing costs.
- Bloomberg’s credit quality, lease commitments and long-term occupancy at 731 Lexington Avenue.
- Rego Park I redevelopment progress, IKEA lease economics and remaining vacant space.
- Rego Park II occupancy and the continuing lease obligation of Kohl’s following its sublease to At Home.
- Whether the Paramus purchase option is exercised in 2021 and the resulting cash proceeds and gain.
- The sustainability of the $18.00 per-share annual dividend relative to taxable income, FFO, operating cash flow and debt obligations.
- Potential volatility from the Macerich investment and other fair-value measurements.
- Related-party fees, governance and conflicts arising from Vornado’s management role, ownership interest and overlapping directors and officers.