VORNADO REALTY TRUST quarterly report, Q2 FY2014

Vornado Realty Trust — Q2 2014 Form 10-Q Summary

Business context and reporting period

Vornado Realty Trust is a fully integrated REIT focused primarily on office, retail and residential properties in New York City and Washington, D.C., with additional investments, including the Vornado Capital Partners Real Estate Fund and a 32.6% interest in Toys “R” Us. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with comparative periods ended June 30, 2013.

Vornado announced a planned tax-free spin-off of its shopping-center business into a new publicly traded REIT, SpinCo, targeted for completion by the end of 2014, subject to regulatory, listing, third-party consent and board approvals.

Key financial metrics

Metric	Three months ended June 30, 2014	Three months ended June 30, 2013	Six months ended June 30, 2014	Six months ended June 30, 2013
Total revenues	$666.6 million	$671.2 million	$1.327 billion	$1.390 billion
Operating income	$227.5 million	$210.1 million	$393.1 million	$460.4 million
Income from continuing operations	$163.5 million	$113.0 million	$259.8 million	$195.2 million
Net income attributable to common shareholders	$76.6 million	$145.9 million	$139.0 million	$377.9 million
Diluted earnings per share	$0.41	$0.78	$0.74	$2.01
FFO per diluted share	$1.15	$1.25	$2.46	$2.33
Net cash provided by operating activities	Not separately provided	Not separately provided	$447.6 million	$444.8 million

Quarterly operating margin was approximately 34.1%, compared with 31.3% in the prior-year quarter. Six-month operating margin was approximately 29.6%, compared with 33.1% in the prior-year period. The filing does not present a consolidated net margin as a headline metric; net income attributable to common shareholders represented approximately 11.5% of quarterly revenue and 10.5% of six-month revenue.

Quarterly same-store EBITDA increased 5.2% in New York, declined 1.8% in Washington, D.C., and increased 1.8% in retail properties. Six-month changes were 5.6%, negative 2.2% and 1.6%, respectively.
Quarterly FFO declined 7.9% to $216.5 million, principally because of a larger Toys “R” Us loss and a $5.6 million defeasance cost. Six-month FFO increased 6.0% to $463.6 million.
Cash and cash equivalents were $1.371 billion at June 30, 2014, compared with $583.3 million at December 31, 2013.
Consolidated debt was $10.869 billion, compared with $9.979 billion at December 31, 2013. Debt comprised $8.989 billion of mortgages, $1.792 billion of senior unsecured notes and $88.1 million drawn on revolving facilities.
Debt had a weighted-average interest rate of approximately 4.25%; variable-rate consolidated debt was $1.454 billion. A 1% increase in base rates was estimated to reduce annual net income by approximately $26.1 million, or $0.14 per diluted share, including the pro rata effect of nonconsolidated debt.
Common dividends were $0.73 per share per quarter, or $1.46 per share for the first six months.
Property occupancy at June 30, 2014 was 97.3% in New York, 83.5% in Washington, D.C., and 94.0% across retail properties. Washington, D.C. office occupancy was 80.5%.

Material changes versus the prior comparable period

Quarterly common earnings declined substantially because the second quarter of 2013 included $65.7 million of real estate-sale gains and $8.1 million of income from preferred-unit redemptions. The second quarter of 2014 also included a $57.6 million loss from Toys “R” Us, versus a $36.9 million loss in the prior year.
Six-month common earnings fell primarily because the prior-year period included $268.5 million of net real estate-sale gains, including a $202.3 million gain on Green Acres Mall and gains from other dispositions.
Underlying property performance improved in New York, while Washington, D.C. remained pressured by BRAC-related move-outs and a sluggish leasing environment. Management expects 2014 Washington, D.C. continuing-operations EBITDA to be $10 million to $15 million below 2013.
Income from the Real Estate Fund increased to $100.1 million in the quarter and $118.3 million for six months, driven partly by a $75.1 million realized gain on the sale of its One Park Avenue interest and unrealized gains on held investments.
Toys “R” Us generated a $57.6 million quarterly loss to Vornado and a $55.7 million six-month loss, including a $75.2 million non-cash impairment loss for the six-month period.
Six-month operating cash flow was broadly stable year over year, while investing cash flow changed from $1.071 billion of inflow in 2013 to $66.5 million of outflow in 2014 due to lower disposition proceeds and increased development spending.

Guidance, outlook, risks and unusual items

Management expects cash flow from continuing operations over the next twelve months to fund operations, distributions, dividends, debt amortization and recurring capital expenditures. Acquisitions and development may require additional borrowing or equity financing.
Development and redevelopment spending was $214.6 million during the first six months. Major projects include 220 Central Park South, Marriott Marquis Times Square retail, Springfield Town Center, Metropolitan Park and Crystal City residential redevelopment.
Springfield Town Center is under an agreement to transfer to Pennsylvania Real Estate Investment Trust for $465 million, including $340 million of cash and $125 million of operating-partnership units. Completion is expected in the fourth quarter of 2014, with closing no later than March 31, 2015.
After quarter end, Vornado completed the sale of Beverly Connection for $260 million, including $21 million of seller financing; the approximately $44 million gain was expected to be recognized in the third quarter.
After quarter end, Vornado agreed to acquire the St. Regis retail condominium and adjacent townhouse for approximately $700 million and entered into additional financing and development transactions.
Debt maturities were $19.7 million during the remainder of 2014 and $745.8 million during 2015. Revolving facilities had $38.5 million of letters of credit outstanding and contain interest-coverage, debt-to-market-capitalization and other customary covenants.
Vornado expects to fund approximately $114 million of additional capital to certain partially owned entities. Guarantees and master leases totaled approximately $360 million.
Material uncertainties include interest-rate movements, refinancing and capital-market access, tenant credit and occupancy, BRAC-related vacancies, development execution and cost overruns, valuation of Level 3 Real Estate Fund investments, insurance availability and costs, environmental matters, and the completion or abandonment of the SpinCo transaction.
The filing reports no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. Management concluded that disclosure controls were effective as of June 30, 2014.

Important facts for investors to verify

Reconcile reported GAAP earnings with FFO and identify the effect of real estate-sale gains, impairments, Toys “R” Us losses and other nonrecurring items.
Assess leverage, 2014–2015 maturities, variable-rate exposure, covenant headroom and refinancing needs.
Track Washington, D.C. occupancy, BRAC-related vacant space and management’s $10 million to $15 million EBITDA outlook reduction.
Evaluate the financial condition and future impairment risk of Toys “R” Us, including the remaining investment carrying value.
Confirm the timing, structure, assets and tax treatment of the proposed SpinCo separation.
Monitor development budgets, completion schedules and expected proceeds for 220 Central Park South, Springfield Town Center and Marriott Marquis Times Square.
Review the valuation sensitivity of the Real Estate Fund’s $549.1 million of Level 3 investments to discount rates, capitalization rates and projected cash flows.
Distinguish consolidated debt from approximately $4.094 billion of pro rata debt at partially owned entities, which is non-recourse to Vornado according to the filing.