Vornado Realty Trust 2017 Q3 Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P., which held substantially all operating assets. Vornado owned approximately 93.5% of the Operating Partnership at September 30, 2017. The unaudited filing covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods.
The portfolio is concentrated in New York City, with additional properties including theMART in Chicago and 555 California Street in San Francisco. Effective July 1, 2017, the Washington, D.C. segment was classified as discontinued operations following the July 17, 2017 spin-off of JBG SMITH Properties.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Total revenues | $528.8 million | $502.8 million | Up $26.0 million |
| Operating income | $162.2 million | $148.5 million | Up $13.8 million |
| Operating margin | 30.7% | 29.5% | Improved |
| Income from continuing operations | $37.2 million | $75.5 million | Down $38.3 million |
| Net income attributable to common shareholders | $(29.0) million | $66.1 million | Declined $95.2 million |
| Diluted earnings per share | $(0.15) | $0.35 | Declined $0.50 |
| FFO attributable to common shareholders plus assumed conversions | $100.2 million | $225.5 million | Down $125.4 million |
| FFO per diluted share | $0.52 | $1.19 | Down $0.67 |
| Dividend per common share | $0.60 | $0.63 | Down $0.03 |
For the nine months ended September 30, 2017, revenues were $1.548 billion, operating income was $447.9 million, net income attributable to common shareholders was $134.7 million, diluted EPS was $0.71, and FFO per diluted share was $2.95. The comparable 2016 amounts were $1.490 billion, $427.5 million, $172.4 million, $0.91, and $3.47, respectively.
Third-quarter net loss included a $44.5 million non-cash impairment of the PREIT investment, a $53.6 million JBG SMITH spin-off transaction-cost charge, and losses from real estate fund investments. These items materially reduced GAAP earnings and FFO.
Cash flow, debt and liquidity
- Net cash provided by operating activities for the first nine months was $661.6 million, compared with $572.4 million in 2016.
- Net cash used in investing activities was $54.3 million, including $274.7 million of development and construction spending and $207.8 million of additions to real estate. These outflows were partly offset by $347.8 million of capital distributions from partially owned entities and a $115.6 million repayment of a JBG SMITH loan receivable.
- Net cash used in financing activities was $820.9 million, including $416.2 million of cash transferred in connection with the JBG SMITH spin-off, $382.6 million of common dividends, and $177.1 million of debt repayments.
- Cash and restricted cash totaled $1.386 billion at September 30, 2017, down $213.5 million from December 31, 2016. Cash and cash equivalents alone were $1.282 billion.
- Consolidated debt, net, totaled $9.352 billion, down $95.1 million from year-end 2016. Gross debt before deferred financing costs was $9.430 billion, consisting primarily of $8.205 billion of mortgages, $850.0 million of senior unsecured notes, and $375.0 million of unsecured term debt.
- No borrowings were outstanding under the revolving credit facilities at September 30, 2017; $10.5 million of letters of credit was outstanding. Management stated that cash flow from continuing operations was expected to fund operations, distributions, debt amortization and recurring capital expenditures over the next twelve months.
Material changes versus the prior comparable period
- Revenue increased 5.2% in the third quarter and 3.9% for the first nine months, supported by same-store operations, higher Hotel Pennsylvania and trade-show activity, and increased fee income.
- New York same-store EBITDA increased 5.0% in the quarter and 2.7% year to date; New York same-store NOI increased 13.8% and 13.2%, respectively. TheMART and 555 California Street also reported positive quarterly same-store growth.
- Operating expenses increased 5.3% in the quarter and 3.6% year to date, while interest and debt expense increased to $85.1 million in the quarter from $79.7 million and to $252.6 million year to date from $250.0 million.
- The Washington, D.C. spin-off removed a significant operating segment from the continuing portfolio and generated $67.0 million of transaction costs through September 30, 2017. Historical Washington, D.C. results were reclassified to discontinued operations.
- Partially owned entity results declined in the quarter to a $41.8 million loss, primarily because of the PREIT impairment, compared with $3.8 million of income in the prior-year quarter. Year-to-date results were $5.6 million of income versus $3.9 million in 2016.
- Real estate fund investments produced a $6.3 million loss in the quarter and a $1.6 million loss year to date, compared with income of $1.1 million and $28.8 million in the comparable periods.
- The company completed or participated in significant refinancings at 330 Madison Avenue and 280 Park Avenue, generating approximately $225 million of aggregate share-of-proceeds. It also reported development and redevelopment commitments, including the 220 Central Park South project.
Guidance, outlook, risks and unusual items
No quantitative earnings or FFO guidance was provided. Management expects continuing-operations cash flow to cover operating needs, distributions, debt amortization and recurring capital expenditures over the next twelve months, while acquisitions and development may require additional borrowing or equity financing.
- Development commitments included approximately $489 million of construction commitments and expected additional funding of approximately $45 million to partially owned entities.
- 220 Central Park South had estimated incremental development costs of approximately $1.3 billion, with $811.4 million expended as of September 30, 2017.
- Vornado and Related each guaranteed obligations of the Moynihan Train Hall joint venture. Project completion, timing and costs remain subject to development and construction risks.
- Variable-rate consolidated debt was $3.113 billion. The filing estimated that a 1% increase in base rates would reduce annual net income attributable to Vornado by approximately $52.5 million after applicable allocations.
- Guarantees and master leases totaled approximately $676 million. The company also had insurance, environmental, construction, legal and financing covenant exposures.
- Vornado owned 32.5% of Toys “R” Us, which filed for Chapter 11 bankruptcy in September 2017. The investment was carried at zero, and Vornado stated it did not hold Toys debt or guarantee its obligations.
- The company adopted accounting updates for cash-flow classification and restricted cash in 2017. It expected future adoption of revenue and lease standards to affect classifications and lease accounting, while not materially affecting total revenue based on its preliminary assessment.
Most important facts for investors to verify
- Assess recurring FFO and same-store NOI excluding the JBG SMITH spin-off, PREIT impairment, real estate fund valuation changes and other unusual items.
- Reconcile the post-spin-off portfolio, including the effect of losing Washington, D.C. assets and cash while retaining continuing development and guarantee obligations.
- Review debt maturities, variable-rate exposure, refinancing requirements and compliance with revolving-credit financial covenants.
- Evaluate funding requirements and execution risk for 220 Central Park South, Moynihan Train Hall and other development projects.
- Monitor PREIT, Toys “R” Us and other partially owned investments for additional impairment, liquidity or guarantee exposure.
- Confirm the sustainability of the $0.60 quarterly common dividend against recurring cash flow, capital expenditures and debt service.
- Review the filing’s non-GAAP reconciliations because FFO, EBITDA and NOI are not substitutes for GAAP net income or operating cash flow.