Business Context and Reporting Period
Alexander's, Inc. filed a Form 10-Q for the quarterly period ended June 30, 2002. The Company is a real estate investment trust (REIT) managed by Vornado Realty Trust, which owns 33.1% of the Company's common stock. The primary business activity involves the ownership and development of commercial and retail properties, with a significant focus on the ongoing construction of the 1.3 million square foot Lexington Avenue multi-use development in New York City.
Key Financial Metrics
Amounts in thousands, except per share data.
| Metric | Three Months Ended June 30, 2002 |
Six Months Ended June 30, 2002 |
Six Months Ended June 30, 2001 |
|---|---|---|---|
| Total Revenues | $18,603 | $37,325 | $33,001 |
| Operating Income | $4,378 | $13,753 | $13,760 |
| Net (Loss) Income | $(1,133) | $2,398 | $27,677 |
| Net Income Per Share (Basic/Diluted) | $(0.23) | $0.48 | $5.53 |
| Cash and Cash Equivalents | $99,443 (as of June 30, 2002) | ||
| Total Debt | $514,570 (as of June 30, 2002) | ||
| Stockholders' Equity | $47,479 (as of June 30, 2002) |
Liquidity and Cash Flow: Net cash provided by operating activities for the six months ended June 30, 2002, was $681,000. Net cash used in investing activities was $35,149,000, primarily due to capital expenditures for the Lexington Avenue development. Net cash used in financing activities was $1,347,000.
Material Changes vs. Prior Period
- Net Income Decline: Net income for the six months ended June 30, 2002, was $2.4 million, a significant decrease from $27.7 million in the prior year. The prior year figure included a $19.0 million gain on the sale of the Fordham Road property and a $3.5 million extraordinary gain from debt extinguishment, both classified as discontinued operations.
- Quarterly Loss: The Company reported a net loss of $1.1 million for the quarter ended June 30, 2002, compared to net income of $2.1 million in the same period of 2001.
- Expense Increases: General and administrative expenses increased by $4.3 million for the six-month period, primarily driven by $4.2 million in non-cash stock appreciation rights compensation expense.
- Revenue Growth: Property rentals increased by $3.9 million for the six-month period compared to the prior year, driven by the commencement of the IKEA ground lease at the Paramus property and increased occupancy at Kings Plaza.
- Interest Expense: Interest and debt expense increased by $3.5 million for the six-month period due to higher average borrowings, partially offset by a decrease in average interest rates.
Outlook, Risks, and Contingencies
- Lexington Avenue Development: Construction is expected to be completed in 2004. On July 3, 2002, the Company finalized a $490 million construction loan with HVB Real Estate Capital. The Company estimates an additional $140 million in construction costs will be required beyond the loan amount. Vornado Realty Trust has provided a "Completion Guarantee" for the project.
- Asset Sales: The Company entered into agreements to sell its Third Avenue property (Bronx) for $15 million and its Flushing property subsidiary for $18.8 million. Both sales are expected to close in the third quarter of 2002, subject to consummation.
- Terrorism Risk: Following the September 11, 2001 attacks, standard insurance policies largely exclude terrorist acts. The Company has obtained $200 million in separate coverage and $428 million for the Lexington Avenue project. Lenders may view exclusions as a breach of debt covenants, potentially triggering defaults.
- Environmental Contingency: The Kings Plaza property has soil and groundwater contamination. The Company has accrued $2.7 million for remediation, with $2.0 million paid as of June 30, 2002. Additional costs may be incurred if regulators require more extensive remediation.
- Liquidity: Operating properties currently do not generate sufficient cash flow to cover all expenses. The Company relies on the eventual rental income from the Lexington Avenue project and potential asset sales to fund operations.
Investor Verification Checklist
- Lexington Avenue Financing: Verify the status of the $490 million construction loan and the Company's ability to fund the remaining $140 million budget gap.
- Asset Sale Closings: Confirm the consummation of the Third Avenue and Flushing property sales in Q3 2002 to realize the projected gains of $10.8 million and $15.8 million.
- Insurance Covenants: Assess the risk of debt acceleration due to lender concerns regarding terrorism insurance exclusions.
- Environmental Costs: Monitor the Kings Plaza remediation progress and potential for additional accruals beyond the current $2.7 million estimate.
- Non-Cash Expenses: Note the impact of the $4.2 million stock appreciation rights expense on reported net income versus cash flow.