Vornado Realty Trust and Vornado Realty L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is the three months ended March 31, 2017. The filing combines Vornado Realty Trust and its operating partnership, Vornado Realty L.P. Vornado owned approximately 93.4% of the Operating Partnership and conducts substantially all business through it. The interim financial statements are unaudited.
Business Context
Vornado is an integrated REIT focused primarily on New York real estate, with additional holdings including theMART in Chicago, 555 California Street in San Francisco, investments in partially owned entities, Hotel Pennsylvania and real estate fund investments. Approximately 88% of NOI was generated in the New York City metropolitan area.
At March 31, 2018, the portfolio included 36.3 million square feet in service, with 28.5 million square feet attributable to Vornado, and overall occupancy was approximately 96.9% for the New York portfolio and 97.8% for 555 California Street.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $536.4 million | $508.1 million | +5.6% |
| Operating income | $133.8 million | $131.8 million | +1.5% |
| Net income | $0.3 million | $73.8 million | Down materially |
| Net income attributable to Vornado | $9.7 million | $63.9 million | Down materially |
| Net income attributable to common shareholders | $(17.8) million | $47.8 million | Turned to loss |
| Diluted earnings per common share | $(0.09) | $0.25 | Down $0.34 |
| NOI at share | $349.0 million | $337.2 million | +3.5% |
| NOI at share, cash basis | $331.1 million | $316.7 million | +4.6% |
| FFO attributable to common shareholders plus assumed conversions | $102.5 million; $0.54 per diluted share | $205.7 million; $1.08 per diluted share | Down 50.2% |
| Cash flow from operating activities | $265.4 million | $301.3 million | Down $35.9 million |
Revenue growth was driven principally by higher same-store property rentals, Hotel Pennsylvania, trade shows, BMS cleaning fees and other income. Same-store NOI increased 4.0% in New York, 3.4% at theMART and 12.3% at 555 California Street. Excluding Hotel Pennsylvania, New York same-store NOI increased 3.7%.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $16.86 billion | $17.40 billion |
| Real estate, net | $11.96 billion | $11.87 billion |
| Cash and cash equivalents | $1.33 billion | $1.82 billion |
| Cash, cash equivalents and restricted cash | $1.42 billion | $1.91 billion |
| Total debt, net | $9.77 billion | $9.73 billion |
| Total equity | $5.02 billion | $5.01 billion |
| Revolving credit facilities outstanding | $80.0 million | None |
Consolidated debt before deferred financing costs was $9.84 billion, consisting primarily of $8.16 billion of mortgages, $850.0 million of senior unsecured notes, a $750.0 million unsecured term loan and $80.0 million drawn on revolving credit facilities. Variable-rate debt was $3.98 billion; management estimated that a 1% increase in base rates would increase annual net income attributable to Vornado by approximately $59.4 million after stated adjustments.
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 requirements may require additional borrowings, equity offerings or asset-sale proceeds. No consolidated debt maturities were scheduled for the remainder of 2018; approximately $210.0 million matures in 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased $28.4 million, but operating expenses increased $26.4 million, limiting operating-income growth.
- Net income declined primarily because of a $33.0 million decrease in the fair value of marketable securities, $23.5 million of Vornado’s share of potential New York City transfer taxes, $14.5 million of preferred-share issuance-cost write-offs and weaker results from partially owned entities.
- Interest and debt expense increased to $88.2 million from $82.7 million, principally because of higher interest on variable-rate loans, the fully drawn term loan and the 33-00 Northern Boulevard refinancing.
- FFO declined to $0.54 per diluted share from $1.08, reflecting the same unusual items and the absence of prior-year benefits from discontinued operations and asset-sale-related items.
- Operating cash flow decreased to $265.4 million from $301.3 million, while investing cash use increased to $190.6 million from $156.7 million.
- Cash declined by $496.7 million, primarily due to the $470.0 million redemption of Series G and Series I preferred shares or units, dividends and distributions, and investment and development spending.
Transactions and Unusual Items
- Acquired 537 West 26th Street and 55,000 square feet of zoning air rights for $44.0 million.
- Completed the $82.0 million sale of a retail condominium at 11 East 68th Street through the real estate fund; the fund recognized a cumulative net gain of $46.3 million on the investment.
- Redeemed all outstanding 6.625% Series G and Series I preferred shares or units for $470.0 million, plus accrued dividends or distributions, and expensed $14.5 million of related issuance costs.
- Adopted accounting guidance requiring changes in marketable-securities fair value to be recognized in earnings. The adoption produced a $111.2 million reduction to beginning accumulated deficit, and Q1 2018 included a $33.0 million fair-value loss.
- Recorded $15.6 million of potential additional transfer-tax expense related to One Park Avenue and additional transfer-tax-related expenses involving Alexander’s and Independence Plaza. The Company paid the amounts in April 2018 to preserve appeal and litigation rights and is appealing the relevant tax decision.
- Adopted ASC 606 using the modified retrospective method, recording a $14.5 million cumulative-effect adjustment to beginning accumulated deficit; management stated the adoption did not materially affect the financial statements.
Development, Commitments and Risks
Development and redevelopment expenditures were $86.8 million during Q1 2018. Major projects included 220 Central Park South, 512 West 22nd Street, 61 Ninth Avenue, 606 Broadway, the Moynihan Train Hall redevelopment, 345 Montgomery Street and 825 Seventh Avenue. The estimated cost of 220 Central Park South, excluding $515.4 million of land cost, was approximately $1.4 billion, with $970.0 million expended as of March 31, 2018.
- Construction commitments totaled approximately $389.0 million.
- Expected additional capital contributions to partially owned entities totaled approximately $52.0 million.
- Guarantees and master-lease obligations totaled approximately $647.0 million.
- Letters of credit outstanding under a revolving credit facility totaled $8.9 million.
- Insurance coverage may not remain available on commercially reasonable terms; the Company is exposed to deductibles, uninsured losses and losses exceeding policy limits.
- The Company is exposed to real estate market conditions, tenant credit, occupancy and rent trends, interest-rate movements, construction costs, regulatory changes, environmental liabilities and competition.
- Toys “R” Us filed for Chapter 11 and sought to wind down U.S. operations. Vornado carried its 32.5% investment at zero and stated it did not guarantee Toys’ obligations.
Management provided no quantitative full-year earnings or FFO guidance in the filing. The Company cautioned that quarterly results are not necessarily indicative of full-year performance and that development projects may not commence or may not be completed on schedule or within budget.
Investor Verification Checklist
- Verify the sustainability of same-store NOI growth, particularly New York office and retail performance and the impact of Hotel Pennsylvania.
- Separate recurring operating performance from the $33.0 million marketable-securities loss, transfer-tax charges and $14.5 million preferred issuance-cost write-off.
- Assess FFO and dividend coverage after the 50% year-over-year decline in adjusted FFO per diluted share to $0.54.
- Review debt maturities, variable-rate exposure, revolving-credit availability and compliance with interest-coverage and debt-to-market-capitalization covenants.
- Monitor funding needs for the $389.0 million of construction commitments, $52.0 million of expected investments in partially owned entities and major development projects.
- Follow appeals and potential future obligations related to New York City transfer-tax assessments.
- Evaluate the sensitivity of Level 3 real estate fund valuations to discount rates, capitalization rates, projected rents and exit assumptions.