Business Context and Reporting Period
Alexander's, Inc. (NYSE: ALX) is a Real Estate Investment Trust (REIT) incorporated in Delaware, engaged in leasing, managing, developing, and redeveloping properties in the greater New York City metropolitan area. The company is managed by Vornado Realty Trust. This summary covers the fiscal year ended December 31, 2008.
The portfolio consists of seven properties, including the 731 Lexington Avenue multi-use building in Manhattan, Kings Plaza Regional Shopping Center in Brooklyn, and the Rego Park properties in Queens. A significant portion of the portfolio is under development, specifically the Rego Park II shopping center.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $211,097,000 | $207,980,000 |
| Net Income | $76,288,000 | $114,341,000 |
| Funds from Operations (FFO) | $99,916,000 | $136,284,000 |
| Diluted EPS | $14.96 | $22.44 |
| Total Debt | $1,221,255,000 | $1,110,197,000 |
| Cash and Cash Equivalents | $515,940,000 | $560,231,000 |
| Stockholders' Equity | $179,096,000 | $135,103,000 |
Debt Profile: Total debt to total enterprise value was 61.3% at year-end. The company holds a $350,000,000 construction loan for Rego Park II, of which $181,695,000 was drawn as of December 31, 2008.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by approximately 33% from 2007 to 2008. This decline was primarily driven by a reduction in the reversal of Stock Appreciation Rights (SARs) compensation expense ($20.3 million in 2008 vs. $43.5 million in 2007) and increased operating expenses.
- Operating Expenses: Operating expenses increased by $6.6 million to $77.1 million. This included a $3.7 million write-off of receivables related to the bankruptcy of tenant Circuit City, higher real estate taxes, and increased bad debt expense.
- Revenue Growth: Total revenues increased slightly by 1.5% ($1.4 million), driven by the commencement of the Lowe's ground lease at Kings Plaza and higher expense reimbursements.
- Dividends: The company paid a special dividend of $7.00 per share ($35.6 million aggregate) in October 2008, attributable to the liquidation of a taxable REIT subsidiary. No regular dividends were paid due to Net Operating Loss (NOL) carryovers.
Outlook, Risks, and Contingencies
- Development Project: The Rego Park II shopping center (600,000 sq. ft.) is under development with an estimated total cost of $410 million. Construction is expected to be completed in 2009. The apartment tower component has been deferred indefinitely.
- Tenant Concentration: Bloomberg L.P. accounted for 31% of consolidated revenues in 2008. Citibank N.A. notified the company of its intent to assign its lease to Bloomberg L.P., which would result in Bloomberg occupying 99% of the office space at 731 Lexington Avenue.
- Tenant Bankruptcy: Circuit City, a tenant at Rego Park I, liquidated assets, resulting in a $4.9 million write-off of unamortized costs and receivables.
- Environmental Matters: An oil spill discovered in 2006 at Kings Plaza requires remediation. Estimated costs are $2.5 million; $500,000 has been paid, with the remainder covered by insurance.
- Market Risks: Management cites the "credit crisis" and economic recession as significant risks, noting diminished real estate transactions, rising capitalization rates, and potential difficulties in refinancing debt.
- Liquidity: The company has $516 million in cash and cash equivalents. However, it faces significant debt maturities, including $93.3 million due in 2009 and $197.5 million in 2010.
Investor Verification Checklist
- Debt Refinancing: Verify the company's ability to refinance the $78.4 million Rego Park I mortgage maturing in June 2009 and the $181.7 million construction loan maturing in December 2010 given current credit market conditions.
- Bloomberg Concentration: Assess the risk associated with Bloomberg L.P. potentially occupying 99% of the office space at the flagship 731 Lexington Avenue property.
- Rego Park II Completion: Monitor the completion status and budget adherence of the Rego Park II development, which has $118 million remaining to be funded.
- SARs Liability: Confirm the cash impact of the 300,000 outstanding Stock Appreciation Rights (SARs) exercisable in March 2009, which could require a cash payout of approximately $57.5 million.
- Dividend Policy: Review the utilization of Net Operating Loss (NOL) carryovers ($29.2 million) and the likelihood of future regular dividend payments.