Alexander’s, Inc. 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a real estate investment trust engaged in leasing, managing, developing and redeveloping six properties in the greater New York City metropolitan area. Vornado Realty Trust manages the company and provides leasing and development services; Vornado owned 32.4% of Alexander’s outstanding common stock as of June 30, 2015. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
The portfolio totaled approximately 2.178 million square feet and was 99.7% occupied at June 30, 2015 and December 31, 2014.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $50.6 million | $50.0 million | $102.7 million | $99.5 million |
| Operating income | $23.9 million | $24.0 million | $48.2 million | $48.5 million |
| Operating margin | 47.1% | 48.0% | 47.0% | 48.8% |
| Net income | $17.3 million | $16.8 million | $35.2 million | $32.1 million |
| Net margin | 34.2% | 33.7% | 34.2% | 32.2% |
| Net income per diluted share | $3.39 | $3.29 | $6.88 | $6.28 |
| FFO | $24.6 million | $24.1 million | $49.8 million | $46.5 million |
| FFO per diluted share | $4.82 | $4.71 | $9.74 | $9.11 |
- Cash and cash equivalents were $211.2 million at June 30, 2015, down from $227.8 million at December 31, 2014. Short-term investments of $25.0 million matured during the first half.
- Net cash provided by operating activities was $25.0 million, compared with $22.3 million in the prior-year period.
- Net cash used in investing activities was $4.2 million, including $29.4 million of construction and real estate additions, primarily for the Rego Park II apartment tower.
- Net cash used in financing activities was $37.4 million, primarily reflecting $35.8 million of dividends paid.
- Mortgages payable totaled $1.031 billion, compared with $1.033 billion at December 31, 2014. Estimated fair value of debt was $1.020 billion.
- Dividends were $3.50 per share in the second quarter and $7.00 per share for the first six months, versus $3.25 and $6.50, respectively, in the comparable 2014 periods.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 1.3%, while six-month revenue increased 3.2%, driven primarily by higher property rentals and expense reimbursements.
- Second-quarter net income increased 3.0%; six-month net income increased 9.6%. Per-share earnings increased 3.0% and 9.6%, respectively.
- FFO increased 2.4% in the second quarter and 6.9% for the first six months.
- Operating expenses increased 2.3% in the quarter and 8.8% year to date, mainly from higher reimbursable real estate taxes, the burn-off of certain 731 Lexington Avenue tax benefits and higher reimbursable operating expenses.
- General and administrative expense increased 22.0% in the quarter and 15.5% year to date, primarily due to deferred stock unit compensation and higher professional fees.
- Interest and debt expense declined $0.7 million in the quarter and $3.4 million year to date, primarily due to the refinancing of the 731 Lexington Avenue office loan in February 2014 and increased capitalization of interest for the Rego Park II development.
- Comprehensive income declined to $12.1 million from $19.0 million in the quarter and to $30.4 million from $36.1 million year to date, primarily because of unrealized losses on available-for-sale securities.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating cash flows and existing cash balances were expected to fund operations, dividends, debt amortization, recurring capital expenditures and Rego Park II development expenditures over the next twelve months.
- The $320.0 million, 4.93% mortgage on the retail portion of 731 Lexington Avenue was scheduled to mature in August 2015. Management expected to complete refinancing in August 2015; the filing does not provide the eventual refinancing terms.
- Rego Park II includes a 312-unit, 255,000-square-foot apartment tower with an estimated total cost of approximately $125.0 million. Costs incurred were $103.3 million at June 30, 2015. Temporary certificates of occupancy were received for certain floors in July 2015, with remaining construction expected to be substantially completed by year-end 2015.
- Bloomberg accounted for approximately 45% of six-month revenue, or $46.6 million, creating significant tenant concentration risk. Bloomberg exercised a five-year extension option covering 188,608 square feet, but rental rates for the extension period were still under negotiation.
- Sears litigation concerning water intrusions, fires and alleged accessibility violations at Rego Park I seeks at least $4 million plus estimated future damages of at least $25 million, as well as injunctive relief. The company stated that the reasonably possible loss could not be estimated.
- Insurance, terrorism exposure, construction costs, refinancing availability, interest-rate changes, tenant creditworthiness and local economic conditions were identified as material risks. Approximately $2.1 million of standby letters of credit were outstanding.
- The company disclosed no material changes to the risk factors in its 2014 Form 10-K. Management concluded that disclosure controls and procedures were effective, and the independent accountant’s review identified no material modifications required to the interim financial statements.
Important Facts for Investors to Verify
- Completion and terms of the August 2015 refinancing of the $320.0 million 731 Lexington Avenue retail mortgage.
- Progress, final cost, leasing and operating performance of the Rego Park II apartment tower.
- Final rental rate and lease economics for Bloomberg’s five-year extension.
- Potential financial and operational effects of the Sears litigation and the amount, if any, of future loss exposure.
- Interest-rate sensitivity: the filing estimates that a 1% increase in base rates would affect annualized earnings by approximately $5.65 million, or $1.11 per diluted share, based on variable-rate balances.
- Reliance on Vornado, including related-party management, development, leasing and property-service fees; fees to Vornado totaled $5.2 million during the first six months of 2015.
- FFO is a non-GAAP measure and should not be treated as cash flow available for dividends or as a substitute for net income.