Vornado Realty Trust — Q1 2019 Form 10-Q Summary
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 93.4% of at March 31, 2019. The filing covers the unaudited three months ended March 31, 2019, with comparison to the three months ended March 31, 2018. The portfolio is concentrated in New York, with additional properties in Chicago, San Francisco and other markets.
- Portfolio occupancy at March 31, 2019 was 97.0% in New York and 92.8% for other properties, including 35.7 million square feet in service.
- The filing was reviewed by Deloitte & Touche, which reported no material modifications were necessary.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $534.7 million | $536.4 million | Down $1.8 million |
| Rental revenues | $499.9 million | $500.4 million | Down $0.5 million |
| Income from continuing operations | $213.2 million | $0.6 million | Up $212.5 million |
| Net income attributable to Vornado | $194.0 million | $9.7 million | Up $184.3 million |
| Net income attributable to common shareholders | $181.5 million | $(17.8) million | Improved $199.3 million |
| Diluted EPS | $0.95 | $(0.09) | Improved $1.04 |
| FFO attributable to common shareholders plus assumed conversions | $247.7 million, or $1.30 per share | $135.0 million, or $0.71 per share | Up 83% |
| NOI at share | $337.8 million | $349.0 million | Down 3.2% |
| NOI at share, cash basis | $332.6 million | $331.1 million | Up 0.5% |
| Net cash provided by operating activities | $64.1 million | $265.4 million | Down $201.3 million |
Consolidated NOI was $287.8 million, representing approximately 53.8% of total revenue. Same-store NOI at share was essentially flat year over year, down 0.1%; same-store NOI at share on a cash basis increased 3.0%. New York represented 88% of NOI at share.
At March 31, 2019, total assets were $17.6 billion and total equity was $5.1 billion. Cash and cash equivalents were $307.0 million, while cash and restricted cash totaled $909.6 million. Consolidated debt, excluding deferred financing costs and other adjustments, was $8.69 billion, consisting of $6.56 billion of mortgages and $2.13 billion of unsecured debt. Approximately $2.48 billion of consolidated debt was variable rate; management estimated that a 1% increase in base rates would increase annual interest expense by approximately $24.8 million before offsets.
Material changes versus the prior comparable period
- Reported earnings benefited from $157.9 million of net gains on sales of 12 condominium units at 220 Central Park South and a $62.4 million gain on the sale of Urban Edge Properties units.
- Interest and debt expense increased to $102.5 million from $88.2 million, primarily because of a $22.5 million prepayment charge related to the redemption of $400 million of 5.00% senior unsecured notes.
- General and administrative expense increased by $15.5 million, including $16.2 million of non-cash accelerated vesting expense related to previously issued equity awards. Management indicated this increase will be offset by lower future non-cash compensation expense.
- Operating expenses increased by $9.3 million and depreciation and amortization increased by $8.0 million.
- Same-store cash NOI improved despite a 3.2% decline in NOI at share, reflecting non-same-store items, dispositions, development activity and changes in non-cash adjustments.
- Operating cash flow declined substantially because of timing of operating asset and liability changes, including an $82.9 million increase in prepaid assets.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $526.9 million of right-of-use assets and lease liabilities. It also began expensing internal leasing costs rather than capitalizing them.
Liquidity, financing and capital allocation
- Investing activities provided $403.3 million, including $425.5 million from 220 Central Park South condominium sales, $167.8 million from the sale of Lexington Realty Trust shares and $108.5 million from the sale of Urban Edge units.
- Financing activities used $274.7 million, including $686.6 million of debt repayments, $125.9 million of common dividends and $12.5 million of preferred dividends, partly offset by $456.7 million of new borrowings and a $123.5 million Moynihan Train Hall reimbursement.
- Refinancings included $95.7 million for 435 Seventh Avenue and $580 million for 100 West 33rd Street. The company also extended and increased one revolving credit facility to $1.5 billion through March 2024, with pricing reduced to LIBOR plus 0.90%.
- Capital expenditures and leasing commissions totaled $53.7 million in the quarter. Development and redevelopment expenditures totaled $143.3 million, including $54.6 million for 220 Central Park South and $51.5 million for the Farley Office and Retail Building.
- Management stated that cash flow from continuing operations over the next twelve months is expected to fund operations, distributions, debt amortization and recurring capital expenditures. Development and acquisition needs may require additional borrowings or equity offerings.
Outlook, management commentary, risks and unusual items
- Management expects approximately $1 billion of after-tax cash flow and net income from the eventual sale of all residential condominium units at 220 Central Park South.
- On April 18, 2019, after the reporting date, Vornado transferred a 48.5% common interest in the Fifth Avenue and Times Square joint venture to institutional investors. The transaction was expected to generate approximately $1.198 billion of net cash proceeds, value the properties at $5.556 billion and produce an approximately $2.6 billion financial statement gain in the second quarter of 2019. The properties were classified as held for sale at March 31, 2019.
- The Fifth Avenue and Times Square transaction is expected to reduce consolidated ownership while retaining management, control over major decisions and substantial preferred equity interests. Completion and financing assumptions, including a new $500 million mortgage, should be verified.
- Construction commitments were approximately $774 million, and additional funding commitments to partially owned entities were approximately $16 million. The company also had approximately $582 million of guarantees and master leases.
- Key risks include interest-rate volatility, refinancing and covenant compliance, construction cost and completion risk, tenant credit and occupancy, insurance availability and deductibles, environmental matters, legal and tax proceedings, and the concentration of assets in the New York market.
- The company was evaluating its options after the New York Appellate Division affirmed a disputed New York City transfer-tax decision on April 25, 2019. The filing does not provide a clear final cash exposure for this matter.
- The filing reports no material changes to the risk factors in the 2018 Form 10-K and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Separate recurring operating performance from the substantial one-time gains on 220 Central Park South and Urban Edge, the debt prepayment charge, securities mark-to-market changes and accelerated compensation expense.
- Confirm the closing, financing, cash proceeds, tax consequences and approximately $2.6 billion gain associated with the Fifth Avenue and Times Square joint venture transaction.
- Assess debt maturities, variable-rate exposure, revolver availability, interest coverage and compliance with maximum debt-to-market-capitalization covenants.
- Track remaining 220 Central Park South inventory, expected selling prices, development costs, tax payments and the stated approximately $1 billion after-tax cash-flow expectation.
- Evaluate the funding requirements and completion risk for the Farley Office and Retail Building, Moynihan Train Hall, PENN1, 512 West 22nd Street and other projects.
- Reconcile GAAP net income, FFO, NOI at share and cash NOI, noting that these non-GAAP measures are not substitutes for net income or operating cash flow.
- Review the impact of ASC 842, including $484.2 million of lease liabilities at March 31, 2019 and long-term ground-lease obligations.