Business Context and Reporting Period
Alexander's, Inc. is a real estate investment trust (REIT) managed by Vornado Realty Trust. This Form 10-Q covers the quarterly period ended March 31, 2005. The Company is primarily engaged in leasing, managing, developing, and redeveloping properties, with a significant focus on the 731 Lexington Avenue mixed-use development project in New York City.
Key Financial Metrics
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Total Revenues | $43,676,000 | $33,765,000 |
| Net Income (Loss) | $31,218,000 | $(22,992,000) |
| Operating Income (Loss) | $1,565,000 | $(11,466,000) |
| Funds From Operations (FFO) | $35,849,000 | $(19,462,000) |
| Cash and Cash Equivalents | $201,065,000 | $119,485,000 |
| Total Debt | $971,287,000 | $952,528,000 |
| Stockholders' Equity | $50,016,000 | $18,368,000 |
Per Share Data: Basic EPS was $6.22 for Q1 2005 compared to a loss of $4.60 in Q1 2004. Diluted EPS was $6.15.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 29.4% to $43.7 million, driven by a 28.9% increase in property rentals and a 30.5% increase in expense reimbursements. This growth is primarily attributable to new tenants at the 731 Lexington Avenue property (including Home Depot, Hennes & Mauritz, and Citibank) coming into service.
- Profitability Turnaround: The Company reported a net income of $31.2 million, a reversal from a net loss of $23.0 million in the prior year. This swing was largely due to a $74.7 million gain on the sale of condominiums (after-tax gain of $39.975 million) recognized in Q1 2005.
- Expense Reduction: General and administrative expenses decreased 24.3% to $23.6 million, primarily due to a lower accrual of Stock Appreciation Rights (SARs) compensation expense ($22.5 million in 2005 vs. $30.0 million in 2004).
- Interest Expense: Interest and debt expense increased 26.5% to $11.3 million due to higher average debt balances ($960 million vs. $818 million) and reduced capitalization of interest as more space was placed in service.
- Liquidity: Cash and cash equivalents increased by $72.2 million to $201.1 million, bolstered by $63.0 million in proceeds from condominium sales.
Outlook, Risks, and Management Commentary
- 731 Lexington Avenue Project: The project is nearing completion, expected by the end of 2005. As of March 31, 2005, 72 condominium units were under contract and 18 had closed. The Company expects to recognize approximately $45.4 million of after-tax income from these sales in fiscal 2005. A construction loan modification allows the Company to retain condominium proceeds without paying down the loan immediately.
- Future Developments: The Company plans to construct a Lowe's Home Improvement Warehouse adjacent to Kings Plaza (commencing 2006) and is pursuing approvals for a mixed-use development at Rego Park II.
- Stock Appreciation Rights (SARs): The Company has a significant liability for SARs ($144.2 million). Any further appreciation in the stock price will increase the cash payout required upon exercise.
- Risks and Contingencies:
- Insurance/Terrorism: The Company relies on the Terrorism Risk Insurance Act of 2002. If the Act is not extended, lenders may declare an event of default if coverage cannot be obtained.
- Environmental: Ongoing remediation at Kings Plaza for petroleum and phthalate contamination. While $2.675 million has been accrued, additional costs could arise if regulators require more extensive cleanup.
- Legal: A dispute exists regarding a non-refundable deposit from a failed sale of the Flushing property; the Company believes it is not entitled to return the funds but litigation is possible.
Investor Verification Checklist
- Condominium Sales Progress: Verify the closing status of the 72 units under contract and the timeline for the remaining 18 units to confirm the realization of the projected $45.4 million after-tax income.
- Construction Budget Adherence: Monitor the 731 Lexington Avenue project for cost overruns or delays, as the remaining construction budget is tight and completion is expected by year-end 2005.
- Debt Maturity Profile: Review the $124 million debt due to Vornado Realty Trust, which matures in January 2006, and assess refinancing options or repayment plans.
- SARs Liability Exposure: Track the Company's stock price volatility, as the $144.2 million SARs liability is directly tied to market price increases.
- Environmental Remediation Costs: Confirm if the New York State Department of Environmental Conservation (NYDEC) approves the current remediation plan or demands more extensive (and costly) actions at Kings Plaza.