Business Context and Reporting Period
Vornado Realty Trust, together with Vornado Realty L.P., filed a combined Form 10-K for the fiscal year ended December 31, 2017. Vornado is a fully integrated REIT that conducts substantially all business through the Operating Partnership, which it controlled with approximately 93.5% ownership.
The portfolio is concentrated in New York City and includes Manhattan office and retail properties, residential assets, Hotel Pennsylvania, a 32.4% interest in Alexander’s, theMART in Chicago, a 70% interest in 555 California Street in San Francisco, real estate fund investments and other interests. Approximately 89% of 2017 NOI came from the New York metropolitan area.
On July 17, 2017, Vornado completed the tax-free spin-off of its Washington, DC segment to JBG SMITH Properties. Historical Washington, DC results are presented as discontinued operations for all periods.
Financial Results and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $2.084 billion | $2.004 billion | +4.0% |
| Operating income | $607.4 million | $579.2 million | +4.9% |
| Net income | $264.1 million | $981.9 million | Down materially |
| Net income attributable to common shareholders | $162.0 million | $823.6 million | Down materially |
| Diluted earnings per common share | $0.85 | $4.34 | Down materially |
| FFO attributable to common shareholders plus assumed conversions | $717.8 million; $3.75 per diluted share | $1.458 billion; $7.66 per diluted share | Down 50.8% per share |
| NOI at share | $1.401 billion | $1.364 billion | +2.7% |
| NOI at share, cash basis | $1.315 billion | $1.194 billion | +10.1% |
| Net cash provided by operating activities | $860.1 million | $995.1 million | Down 13.6% |
| Common dividends per share | $2.62 | $2.52 | Increase reflects pre- and post-spin-off rates |
Fourth-quarter 2017 revenue was $536.2 million. Net income attributable to common shareholders was $27.3 million, or $0.14 per diluted share, compared with $651.2 million, or $3.43 per diluted share, in the fourth quarter of 2016. Fourth-quarter FFO was $153.2 million, or $0.80 per diluted share, compared with $797.7 million, or $4.20 per diluted share.
At December 31, 2017, New York occupancy was 97.2%, theMART occupancy was 98.6% and 555 California Street occupancy was 94.2%. Same-store NOI increased 2.7% in New York, 4.2% at theMART and 1.9% at 555 California Street. Same-store cash NOI increased 11.3%, 7.6% and 36.0%, respectively.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $1.818 billion; cash, cash equivalents and restricted cash totaled $1.915 billion.
- Consolidated debt was $9.804 billion before deferred financing costs, or $9.729 billion net, compared with $9.547 billion and $9.447 billion, respectively, at December 31, 2016.
- Debt carried a weighted average interest rate of 3.53%, consisting of $3.492 billion of variable-rate debt and $6.312 billion of fixed-rate debt.
- Borrowing capacity under unsecured revolving credit facilities was $2.491 billion, net of letters of credit; no amounts were drawn at year-end.
- Management stated that expected continuing-operations cash flow should fund operations, distributions, debt amortization and recurring capital expenditures over the next twelve months. Capital for development and acquisitions may require additional debt or equity financing.
- Approximately $139.8 million of debt matured in 2018 and $210.8 million in 2019. Contractual cash obligations totaled $13.139 billion, including principal and interest, operating leases and construction-related obligations.
- 2017 operating, investing and financing cash flows were $860.1 million provided, $206.3 million used and $338.3 million used, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from same-store operations, higher Hotel Pennsylvania results, increased cleaning fees and other fee income.
- Operating income improved, but net income and FFO declined sharply because 2016 benefited from unusually large gains, including the $487.9 million gain on extinguishment of Skyline properties debt, a $159.5 million gain on the sale of a 47% interest in 7 West 34th Street and $160.8 million of income from repayment of 85 Tenth Avenue investments.
- 2017 included $68.7 million of JBG SMITH spin-off transaction costs, a $44.5 million impairment of the PREIT investment, $34.8 million of tax expense from revaluing taxable REIT subsidiary deferred tax assets and $25.4 million of losses related to the 666 Fifth Avenue Office Condominium.
- The Washington, DC spin-off reduced consolidated assets from $20.815 billion to $17.398 billion and total equity from $7.618 billion to $5.008 billion year over year.
- Vornado acquired a 50.1% interest in the 99-year Farley Post Office leasehold through a $230.0 million upfront contribution and continued major development projects, including 220 Central Park South and the Moynihan Train Hall/Farley Building.
- Vornado issued $450.0 million of 3.50% senior notes due 2025 and redeemed $450.0 million of 2.50% notes due 2019. It also issued $320.0 million of Series M preferred shares in December 2017 and subsequently redeemed all Series G and Series I preferred shares for $470.0 million in January 2018.
Outlook, Risks, Contingencies and Unusual Items
- 2018 recurring capital expenditures and leasing commissions were estimated at $209.0 million, excluding expenditures by nonconsolidated subsidiaries. Development projects involve substantial remaining costs and may not be completed on schedule or within budget.
- 220 Central Park South has estimated development costs of approximately $1.4 billion, excluding $515 million of land cost; $890 million had been expended at year-end.
- Vornado and Related each guarantee obligations relating to construction of the Moynihan Train Hall. Vornado expected to fund approximately $42 million of additional capital to partially owned entities and had approximately $422 million of construction commitments.
- Vornado has approximately $668 million of guarantees and master-lease obligations, plus $8.9 million of outstanding letters of credit.
- Major risks include concentration in the New York metropolitan area, office and retail leasing conditions, tenant defaults or bankruptcies, interest-rate and refinancing risk, capital-market access, development execution, property valuation and impairment risk, natural disasters, terrorism, insurance availability, cyber incidents, environmental liabilities and potential changes affecting REIT taxation.
- Vornado’s 32.5% investment in Toys “R” Us was in Chapter 11 bankruptcy and carried at zero. The company stated that it does not guarantee Toys’ obligations.
- Vornado’s 8.0% PREIT investment was impaired by $44.5 million during 2017, although its year-end market value exceeded its carrying amount.
- The filing reports unqualified audit opinions and effective internal control over financial reporting for both Vornado and the Operating Partnership.
Most Important Facts for Investors to Verify
- Reconcile the substantial decline in reported earnings and FFO to the nonrecurring 2016 gains and the 2017 spin-off-related costs and impairments.
- Assess whether New York leasing, occupancy and same-store cash NOI trends can offset the loss of Washington, DC operations.
- Review the $9.8 billion debt structure, variable-rate exposure, maturity schedule and refinancing requirements, including the sensitivity of annual income to a 1% increase in base rates.
- Evaluate remaining funding needs, construction commitments and completion risks for 220 Central Park South, Moynihan Train Hall and other developments.
- Confirm the effect of the January 2018 redemption of Series G and Series I preferred shares and the ongoing cost of Series M preferred equity.
- Review related-party relationships involving Alexander’s, Interstate Properties, JBG SMITH Properties and overlapping leadership interests.
- Consider the valuation and liquidity of investments in partially owned entities, the real estate fund and marketable securities, including the $109.6 million unrealized gain in marketable securities at year-end.