Vornado Realty Trust 2016 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2016, covering Vornado Realty Trust and Vornado Realty L.P. The company is a fully integrated REIT operating primarily through its 93.7%-owned Operating Partnership. Its portfolio is concentrated in New York City and Washington, DC, with additional investments in theMART in Chicago, 555 California Street in San Francisco, Alexander’s, Vornado Capital Partners and other real estate-related investments.
- At December 31, 2016, the portfolio included approximately 50.2 million square feet, with 41.7 million square feet attributable to Vornado’s ownership interests.
- Occupancy was 96.5% in New York, 90.5% in Washington, DC, 98.9% at theMART and 92.4% at 555 California Street.
- Vornado owned 189.1 million common shares outstanding and approximately 12.2 million Class A Operating Partnership units were held by third parties.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenues | $2.506 billion | $2.502 billion | Up $3.9 million |
| Operating income | $550.8 million | $760.2 million | Down $209.5 million |
| Net income | $981.9 million | $859.4 million | Up $122.5 million |
| Net income attributable to common shareholders | $823.6 million | $679.9 million | Up $143.8 million |
| Diluted earnings per common share | $4.34 | $3.59 | Up $0.75 |
| FFO, including assumed conversions | $1.458 billion, or $7.66 per diluted share | $1.039 billion, or $5.48 | Up 40.3% |
| Net cash from operating activities | $1.001 billion | $672.2 million | Up $328.5 million |
| Cash and cash equivalents | $1.501 billion | $1.836 billion | Down $334.7 million |
| Consolidated debt, net | $10.612 billion | $11.091 billion | Down $479.3 million |
| Total equity | $7.618 billion | $7.476 billion | Up $142.4 million |
Operating margin declined to approximately 22.0% from 30.4%, primarily because 2016 expenses included a $160.7 million Skyline properties impairment loss. Interest and debt expense increased to $402.7 million from $378.0 million. The common dividend was $0.63 per share each quarter, or $2.52 for the year.
Material changes versus the prior comparable period
- Revenue was broadly stable because stronger same-store property performance offset lower revenue from dispositions, lower Hotel Pennsylvania results and reduced fee income. New York same-store EBITDA increased 6.3%, or 7.7% excluding Hotel Pennsylvania; Washington, DC same-store EBITDA increased 2.8%.
- New York occupancy was 96.5% versus 96.4% in 2015. Washington, DC occupancy declined to 90.5% from 91.6%, primarily reflecting office vacancy and properties being removed from service for redevelopment.
- Net income and FFO benefited materially from unusual items, including a $487.9 million gain from extinguishment of Skyline properties debt and $160.8 million of income from repayment of investments in 85 Tenth Avenue. These benefits were partly offset by the $160.7 million Skyline impairment.
- The company sold a 47% interest in 7 West 34th Street for net proceeds of $127.4 million and recognized a $159.5 million gain. It also sold its 20% interest in Fairfax Square for $15.5 million and recognized a $15.3 million gain.
- There were no significant acquisitions during 2016. The company invested heavily in development and redevelopment, including $606.6 million of development costs and construction in progress.
- Vornado redeemed all outstanding 6.875% Series J preferred shares for approximately $246.3 million and recorded $7.4 million of issuance-cost expense.
- Debt declined despite substantial refinancing activity. One $1.25 billion revolving facility was extended to February 2021, with the spread reduced from LIBOR plus 1.15% to LIBOR plus 1.00%.
Guidance, outlook, risks and unusual items
- Management expected cash flow from continuing operations over the next twelve months to fund operations, dividends, Operating Partnership distributions, debt amortization and recurring capital expenditures. Acquisitions and major development may require additional borrowings, equity issuance or asset-sale proceeds.
- Vornado expected to pay approximately $537 million of common dividends, $65 million of preferred dividends and $35 million of Operating Partnership distributions during 2017, based on the then-declared $0.71 quarterly common dividend.
- The company projected approximately $327.9 million of 2017 capital expenditures and leasing commissions, excluding development and redevelopment spending.
- The planned tax-free spin-off of the Washington, DC segment and its combination with JBG was expected in the second quarter of 2017. Completion remained subject to SEC effectiveness, listing approval, regulatory approvals, third-party consents and other conditions. There was no assurance the transaction would close.
- Following the proposed spin-off, Vornado would be more concentrated in New York City. Management estimated that 89% of adjusted EBITDA would have come from the New York metropolitan area if the spin-off had occurred on January 1, 2016.
- Development commitments were significant: approximately $1.3 billion of incremental cost for 220 Central Park South, $170 million for 1700 M Street, and additional commitments for 512 West 22nd Street, 61 Ninth Avenue, 606 Broadway and the Farley Post Office redevelopment.
- At year-end, contractual cash obligations totaled approximately $15.267 billion, including $10.830 billion of notes and mortgages payable, $1.791 billion of operating leases and $771.9 million of purchase obligations. Additional commitments included $173.3 million of capital commitments to partially owned entities and $653.9 million of construction commitments.
- Debt maturities included approximately $118.6 million in 2017 and $209.2 million in 2018. Approximately 35.1% of consolidated debt was variable-rate debt; management estimated that a 1% increase in base rates would reduce annual Operating Partnership net income by approximately $59.0 million, before related effects.
- Key risks include refinancing and interest-rate exposure, tenant defaults and lease expirations, concentrated geographic exposure, development cost overruns or delays, real estate valuation declines, capital-market volatility, insurance limitations, environmental liabilities, cybersecurity incidents and potential loss of REIT qualification.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Separate recurring operating performance from the $487.9 million Skyline debt-extinguishment gain, the $160.7 million impairment, the $160.8 million 85 Tenth Avenue gain and other disposition-related items.
- Confirm the completion, consideration and post-transaction financial profile of the Washington, DC spin-off and JBG combination.
- Review debt maturities, covenant compliance, variable-rate exposure, refinancing assumptions and the availability of revolving credit capacity.
- Assess New York and Washington leasing trends, including occupancy, rent spreads, tenant-improvement costs and upcoming lease expirations.
- Evaluate funding requirements and execution risk for 220 Central Park South and other development and redevelopment projects.
- Reconcile GAAP net income with FFO and cash flow, recognizing that FFO is a non-GAAP measure and is not a substitute for cash flow from operations.
- Review related-party relationships involving Alexander’s, Interstate Properties, Urban Edge Properties and senior management.