Vornado Realty Trust 10-Q Summary: Q3 2019
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT conducting substantially all operations through Vornado Realty L.P., which Vornado owned approximately 93.1% of as of September 30, 2019. The combined unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. The portfolio is concentrated in New York and includes office, retail, residential, hotel, development and other real estate assets.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $466.0 million | $542.0 million | $1.464 billion | $1.620 billion |
| Net income | $363.8 million | $219.2 million | $3.174 billion | $324.8 million |
| Net income attributable to common shareholders | $322.9 million | $190.6 million | $2.905 billion | $284.3 million |
| Diluted EPS | $1.69 | $1.00 | $15.20 | $1.49 |
| FFO per diluted share | $1.46 | $0.99 | $3.62 | $2.72 |
| NOI at share | $307.5 million | $349.6 million | $954.2 million | $1.053 billion |
| NOI at share, cash basis | $303.5 million | $340.9 million | $954.7 million | $1.014 billion |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $398.0 million | $488.0 million |
Q3 2019 NOI at share represented approximately 66.0% of reported revenue; this is a non-GAAP measure and is not comparable to net margin. Same-store NOI at share increased 0.9% year over year in the quarter and 0.6% for the nine-month period. Cash-basis same-store NOI increased 1.0% in the quarter and 2.7% for the nine-month period.
At September 30, 2019, total assets were $18.216 billion and total equity was $7.710 billion. Cash and restricted cash totaled $1.246 billion, including $1.132 billion of cash and cash equivalents. Consolidated debt had a carrying amount of approximately $7.529 billion, including $5.674 billion of mortgages and $1.846 billion of unsecured debt, with a weighted-average interest rate of approximately 3.53%. Estimated fair value of consolidated debt was $7.595 billion.
Material changes versus the prior comparable period
- Reported earnings increased substantially because of a $2.571 billion pretax gain from transferring a 48.5% common interest in the Fifth Avenue and Times Square JV to institutional investors. The transaction generated approximately $1.179 billion of net cash proceeds and moved the properties to equity-method accounting.
- Q3 revenue declined $76.1 million, or approximately 14%, primarily because properties transferred to the joint venture contributed $76.4 million less rental revenue. Nine-month revenue declined $156.6 million for similar reasons.
- Operating performance was comparatively stable on a same-store basis, although total NOI at share declined because of the joint-venture transfer, dispositions, development properties and lower contributions from certain other investments.
- Q3 net gains on asset dispositions were $309.7 million, including $159.3 million from the sale of the 25% interest in 330 Madison Avenue, $130.9 million from 220 Central Park South condominium sales and $19.5 million from the sale of 3040 M Street.
- For the nine months, 37 units at 220 Central Park South generated $1.039 billion of net proceeds and a $400.5 million financial-statement gain. Cumulative sales through September 30, 2019 totaled 48 units and $1.254 billion of proceeds.
- Interest and debt expense decreased to $61.4 million in Q3 and $226.9 million for nine months, versus $89.0 million and $264.8 million, respectively, in the prior-year periods. Reductions reflected debt paydowns, property deconsolidation and redemption of $400 million of senior unsecured notes.
- Consolidated debt declined from $9.896 billion at December 31, 2018 to approximately $7.529 billion at September 30, 2019, although revolver borrowings increased from $80 million to $655 million.
- Cash flow from operations declined by $90.1 million year over year, while investing cash flow increased by $2.881 billion, primarily from the joint-venture transaction, condominium sales and the redemption of 640 Fifth Avenue preferred equity. Financing activities used $2.098 billion.
- The company adopted ASC 842 for leases effective January 1, 2019, recording $526.9 million of right-of-use assets and lease liabilities. At September 30, 2019, right-of-use assets were $370.6 million and lease liabilities were $491.0 million.
Outlook, commentary, risks and unusual items
Management stated that cash flow from continuing operations is expected to fund operations, distributions, debt amortization and recurring capital expenditures over the next twelve months. Management also expects approximately $2 billion of net cash from selling 100% of the 220 Central Park South condominium units, including approximately $1 billion of after-tax net gain over the project’s life. The filing does not provide formal recurring earnings guidance.
- Development and redevelopment remain significant capital uses. Estimated projects include 220 Central Park South, PENN1, PENN2, 345 Montgomery Street, 825 Seventh Avenue and the Farley Office and Retail Building. Construction commitments totaled approximately $746 million, and the company expected to fund approximately $15.4 million of additional capital to partially owned entities.
- Moynihan Train Hall development expenditures totaled $791.7 million at September 30, 2019, with a corresponding obligation. Total expenditures are estimated at approximately $1.6 billion and are expected to be funded by governmental agencies.
- Vornado recorded a $93.9 million non-cash impairment related primarily to the 608 Fifth Avenue right-of-use asset after tenant Arcadia Group filed for bankruptcy and closed its U.S. stores. The company gave notice to terminate the ground lease in May 2020; a $72.1 million lease liability remained at quarter-end.
- Interest-rate exposure was material: a 1% change in base rates was estimated to change annual income by approximately $29.6 million attributable to Vornado, after relevant allocations. The company used swaps and caps on several loans.
- Guarantees and master leases totaled approximately $978 million, and letters of credit outstanding under a revolving facility totaled $15.9 million. Revolving facilities contain interest-coverage and debt-to-market-capitalization covenants and customary events of default.
- The company identified insurance availability, deductibles, terrorism and environmental risks, tenant credit, construction costs, leasing conditions, interest rates, refinancing and property values as relevant risks. Management reported no material changes to the risk factors in the 2018 Form 10-K and stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- Unusual items materially affected reported earnings and FFO, including the Fifth Avenue and Times Square JV gain, 220 Central Park South gains, asset-sale gains, the 608 Fifth Avenue impairment, stock-compensation charges and debt redemption costs. Reported net income and EPS therefore are not representative of recurring operating performance.
Most important facts for investors to verify
- Reconcile reported EPS and FFO to recurring operating results, excluding the $2.571 billion joint-venture gain and other disposition-related items.
- Evaluate the effect of transferring major New York properties to the joint venture on future rental revenue, NOI, ownership, preferred-equity income and control rights.
- Monitor 220 Central Park South sales velocity, pricing, remaining inventory, taxes and the company’s expected approximately $2 billion of net proceeds.
- Review debt maturities, floating-rate exposure, revolver utilization, covenant headroom and guarantees, particularly for 640 Fifth Avenue and development assets.
- Assess execution risk, remaining funding requirements and completion timing for Farley/Moynihan, PENN1, PENN2 and other redevelopment projects.
- Verify the recurring impact of the 608 Fifth Avenue lease termination and the treatment of its remaining lease liability.
- Consider occupancy and leasing trends: as of September 30, 2019, portfolio occupancy was 96.8% in New York office, 95.9% in New York retail, 95.0% at theMART and 100.0% at 555 California Street.