Vornado Realty Trust 10-Q Summary
Reporting period: Three months ended March 31, 2015. Vornado is an integrated REIT focused primarily on office, retail, residential and other real estate investments in New York City, Washington, D.C. and selected markets. The financial statements are unaudited.
Business Context and Major Portfolio Change
On January 15, 2015, Vornado completed the spin-off of substantially all of its retail segment to Urban Edge Properties, including 79 strip shopping centers, three malls, a warehouse park and $225 million of cash. Urban Edge results are presented as discontinued operations for all periods. Vornado retained a 5.4% Urban Edge operating partnership interest and provides transition services for up to two years.
During the quarter, Vornado acquired the Center Building in Long Island City for $142 million, including assumed mortgage debt, increased its interest in the Crowne Plaza Times Square Hotel to 33%, transferred Springfield Town Center to PREIT for $485.3 million of cash and PREIT operating partnership units, and sold other retail and real estate interests.
Financial Performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $606.8 million | $562.4 million | +7.9% |
| Operating income | $167.7 million | $145.2 million | +15.5% |
| Income from continuing operations | $109.4 million | $89.7 million | +22.0% |
| Net income attributable to Vornado | $104.1 million | $82.7 million | +25.8% |
| Net income attributable to common shareholders | $84.6 million | $62.3 million | +35.7% |
| Diluted earnings per common share | $0.45 | $0.33 | +$0.12 |
| FFO per diluted share | $1.16 | $1.31 | -11.5% |
| Operating cash flow | $194.5 million | $309.1 million | -37.1% |
| Common dividend per share | $0.63 | $0.73 | -13.7% |
Operating margin was approximately 27.6% of revenue, compared with approximately 25.8% in the prior-year quarter. The increase in reported GAAP earnings included gains on dispositions, lower impairment losses and the absence of the prior-year non-cash Toys “R” Us impairment effect. FFO declined because of the Urban Edge spin-off, reduced Toys “R” Us contribution and other discontinued or nonrecurring items.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $1.07 billion at March 31, 2015, down from $1.20 billion at December 31, 2014.
- Consolidated debt was $9.56 billion, consisting of $8.32 billion of mortgages, $847.3 million of senior unsecured notes and $400 million drawn on revolving credit facilities.
- Debt carried a weighted-average interest rate of approximately 3.91%. A 1% increase in applicable rates was estimated to reduce annual income by approximately $31.8 million, or $0.17 per diluted share.
- Operating cash flow was $194.5 million; investing activities provided $149.9 million, primarily from property and investment sales; financing activities used $475.3 million.
- Management stated that expected cash flow from continuing operations over the next twelve months should fund operations, distributions, debt amortization and recurring capital expenditures. Acquisitions and development may require additional borrowing or equity financing.
- Debt maturities disclosed for 2015 totaled approximately $1.41 billion. The filing states that debt may be refinanced or repaid as it matures.
Material Changes Versus the Prior Comparable Period
- Revenue increased $44.4 million, driven primarily by same-store operations, properties placed into service, acquisitions, trade shows and higher cleaning fees.
- New York same-store EBITDA increased 3.2%, or 5.5% on a cash basis. Washington, D.C. same-store EBITDA decreased 0.2%, or 5.5% on a cash basis.
- Income from partially owned entities declined to a $2.4 million loss from $2.0 million of income, primarily reflecting losses from partially owned office buildings.
- Income from real estate fund investments increased to $24.1 million from $18.1 million, including realized gains from the sale of 520 Broadway.
- Interest and debt expense decreased to $91.7 million from $96.3 million, principally due to debt redemptions, partly offset by higher financing cost amortization and other expense.
- General and administrative expense increased to $58.5 million from $47.5 million, including accelerated compensation expense related to out-performance plan modifications.
- Operating cash flow decreased substantially, partly because the prior-year period benefited from different working-capital movements and the current period included a $95.0 million investment in real estate fund investments.
Guidance, Outlook and Management Commentary
- Management expects 2015 Washington, D.C. EBITDA from continuing operations to be flat compared with 2014.
- Vornado reported occupancy of 97.3% in New York and 84.2% in Washington, D.C. at March 31, 2015. Washington, D.C. results remain affected by BRAC-related vacancies and redevelopment, including 742,000 square feet of unresolved space.
- Major development and redevelopment projects include 220 Central Park South, Marriott Marquis Times Square retail, The Bartlett, 2221 South Clark Street and 280 Park Avenue. Reported project costs and completion dates remain estimates and may change.
- Vornado expects to fund growth through internally generated cash, asset sales, debt financing and potentially equity or operating partnership unit issuances.
Risks, Contingencies and Unusual Items
- Reported GAAP earnings benefited from disposition gains, including a $21.4 million gain on the Geary Street lease position and gains related to Springfield Town Center and other properties.
- Q1 2015 included $22.6 million of Urban Edge spin-off-related transaction costs, $256,000 of impairment losses and a $10.9 million net gain on real estate sales.
- The real estate fund had $554.4 million of investments at fair value and $102.3 million of remaining unfunded commitments, of which Vornado’s share was $25.6 million. These valuations rely substantially on Level 3 assumptions.
- Vornado expects to fund approximately $78 million of additional capital to certain partially owned entities.
- Guarantees and master leases totaled approximately $349 million, and letters of credit outstanding totaled $39.6 million.
- Risks include interest-rate changes, refinancing requirements, tenant and occupancy conditions, development cost overruns, market-based real estate valuations, environmental matters, insurance availability and covenant compliance. Management reported no material changes to the risk factors in the 2014 Form 10-K.
- Legal proceedings are described as arising in the ordinary course, with no expected material adverse effect according to management.
Important Facts for Investors to Verify
- Reconcile GAAP earnings growth with the decline in FFO and the effects of the Urban Edge spin-off, disposition gains and other nonrecurring items.
- Review 2015 debt maturities, available borrowing capacity, refinancing plans and compliance with revolving-credit covenants.
- Assess Washington, D.C. leasing progress and the remaining BRAC-related vacancy exposure.
- Evaluate funding needs, budgets, timing and projected returns for 220 Central Park South and other development projects.
- Review the assumptions supporting Level 3 real estate fund valuations and the $25.6 million share of unfunded commitments.
- Monitor exposure to partially owned entities, including Toys “R” Us, Alexander’s, PREIT and Urban Edge, and confirm the treatment of related earnings and losses.