Vornado Realty Trust — 2012 Q1 Form 10-Q Summary
Business Context and Reporting Period
Vornado Realty Trust is an integrated real estate investment trust operating primarily through Vornado Realty L.P. The company owns and manages office, retail and other real estate, principally in New York City and Washington, D.C., and holds interests in Toys “R” Us, Alexander’s, LNR and other partially owned entities. This unaudited filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $727.5 million | $726.9 million | 0.1% |
| Operating income | $201.9 million | $195.2 million | 3.4% |
| Income from continuing operations | $223.5 million | $308.2 million | (27.5%) |
| Net income | $280.3 million | $445.8 million | (37.1%) |
| Net income attributable to common shareholders | $233.7 million | $399.2 million | (41.5%) |
| Diluted EPS | $1.25 | $2.12 | (41.0%) |
| FFO per diluted share | $1.82 | $2.64 | (31.1%) |
| Operating margin | 27.7% | 26.9% | Improved |
| Net cash provided by operating activities | $307.1 million | $196.1 million | 55.6% |
| Common dividend per share | $0.69 | $0.69 | Unchanged |
At March 31, 2012, total assets were $20.27 billion, cash and cash equivalents were $614.4 million, restricted cash was $117.4 million and marketable securities were $754.5 million. Consolidated debt was $10.30 billion, with a reported fair value of approximately $10.46 billion. The company had no revolving credit borrowings and reported $2.5 billion of unused revolving credit capacity, producing stated liquidity of approximately $3.11 billion including cash.
Real estate, net, was $14.47 billion. Vornado’s shareholders’ equity was $6.84 billion, and total equity including noncontrolling interests was $7.51 billion. The company owned approximately 93.5% of the Operating Partnership at quarter-end and had 185.6 million common shares outstanding.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat, but expenses declined by $6.1 million, increasing operating income by $6.7 million.
- Net income and EPS declined primarily because Q1 2011 included substantially larger nonrecurring items, including an $83.9 million debt-extinguishment gain, an $82.7 million mezzanine-loan reversal and disposition gain, and higher J.C. Penney derivative gains.
- Interest and other investment income fell to $15.7 million from $117.1 million. The prior year included $82.7 million of mezzanine-loan gains and $17.2 million of J.C. Penney derivative gains, compared with $1.0 million of derivative gains in Q1 2012.
- Income from discontinued operations declined to $56.7 million from $137.6 million. Q1 2012 included a $54.9 million gain on the sale of 350 West Mart Center and $0.9 million of gains on seven retail-property sales; Q1 2011 included larger disposal and debt-extinguishment gains.
- FFO attributable to common shareholders plus assumed conversions declined to $348.5 million from $505.9 million, or $1.82 versus $2.64 per diluted share.
- Washington, D.C. occupancy declined to 87.5% from 90.3% at December 31, 2011 and 93.7% at March 31, 2011. Same-store Washington, D.C. EBITDA declined 7.1% on a GAAP basis and 8.2% on a cash basis year over year.
- New York same-store EBITDA increased 3.5% on a GAAP basis and 1.8% on a cash basis. Retail Properties same-store EBITDA was essentially flat, while Merchandise Mart same-store EBITDA increased 5.4% on a GAAP basis.
- Debt declined by $259.4 million from December 31, 2011. The company refinanced 350 Park Avenue with a $300 million five-year loan at 3.75% and 100 West 33rd Street with a $325 million loan at LIBOR plus 2.50%.
Guidance, Outlook, Commentary and Risks
- Management stated that cash flow from continuing operations is expected to fund operations, distributions, dividends, debt amortization and recurring capital expenditures over the following twelve months. Acquisitions and development may require additional borrowings or equity financing.
- Debt maturities were reported at $580.7 million for the remainder of 2012 and $1.69 billion for 2013. Management expected to refinance maturities or use available liquidity.
- The Washington, D.C. portfolio is exposed to lease expirations and vacancies associated with the federal Base Realignment and Closure program. Management previously estimated 2012 occupancy of 82% to 84% and a $55 million to $65 million decline in 2012 EBITDA before discontinued operations. The filing does not provide a revised full-year estimate.
- Skyline Place had a 26% vacancy rate, expected to increase because of scheduled expirations. At the company’s request, the mortgage loan was transferred to the special servicer because of projected vacancy and substantial re-tenanting requirements.
- The company expected to fund approximately $288.3 million of additional capital to certain partially owned entities. The Real Estate Fund had $445.7 million of unfunded commitments, including $111.4 million attributable to Vornado.
- Estimated costs to complete listed development projects were approximately $27.5 million. A planned redevelopment of 1851 South Bell Street into a new 700,000-square-foot office building was estimated at approximately $300 million; the filing cautions that projects may not begin or may not be completed on time or within budget.
- Vornado had approximately $269.4 million of guarantees and master-lease obligations, $22.1 million of outstanding letters of credit, and exposure to interest-rate fluctuations. A 1% increase in base rates was estimated to reduce annual net income by approximately $27.3 million, or $0.14 per diluted share, after considering nonconsolidated debt and noncontrolling interests.
- A Stop & Shop judgment was entered in Vornado’s favor, but the judgment is under appeal. Vornado reported a $43.4 million receivable and stated that the maximum reasonably possible loss could be up to that amount.
- In April 2012, after quarter-end, Vornado redeemed all outstanding exchangeable and convertible senior debentures for approximately $510.2 million in cash.
- The company adopted new fair-value measurement disclosure guidance effective January 1, 2012; management reported no material impact on the financial statements.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most Important Facts for Investors to Verify
- Reconcile the sharp year-over-year decline in net income and FFO to the nonrecurring gains and losses included in each period.
- Monitor Washington, D.C. occupancy, BRAC-related expirations, Skyline Place’s special-servicer status and the potential $55 million to $65 million 2012 EBITDA impact.
- Review debt maturities, refinancing activity, covenant compliance and the effect of the April 2012 debenture redemption on liquidity.
- Assess the sustainability of the $0.69 common dividend against recurring FFO, operating cash flow and capital requirements.
- Evaluate the company’s exposure to the J.C. Penney investment and derivative position, including mark-to-market volatility and the October 2012 settlement deadline.
- Verify funding requirements for the Real Estate Fund, partially owned entities, Cleveland Medical Mart and planned redevelopment projects.
- Track the Stop & Shop appeal and collectability of the $43.4 million receivable.
- Distinguish consolidated debt from the company’s pro rata share of partially owned-entity debt, particularly the non-recourse LNR CMBS and CDO liabilities.