Vornado Realty Trust 10-Q Summary
Business Context and Reporting Period
Vornado Realty Trust, a fully integrated REIT, conducts substantially all operations through Vornado Realty L.P., its operating partnership. Vornado owned approximately 93.6% of the Operating Partnership at March 31, 2017. The combined, unaudited Form 10-Q covers the three months ended March 31, 2017, with comparative results for the three months ended March 31, 2016.
The portfolio is concentrated in New York, Washington, D.C., and other major markets. At March 31, 2017, the portfolio included approximately 50.0 million square feet, with 41.5 million square feet representing Vornado's share. Portfolio occupancy was 96.6% in New York, 90.2% in Washington, D.C., and 93.1% at 555 California Street.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $620.8 million | $613.0 million | +1.3% |
| Operating income | $156.5 million | $(0.3) million | Improved |
| Net income attributable to common shareholders | $47.8 million | $(114.2) million | Improved |
| Diluted earnings per share | $0.25 | $(0.61) | Improved |
| FFO attributable to common shareholders plus assumed conversions | $205.7 million; $1.08 per diluted share | $203.1 million; $1.07 per diluted share | +1.3% per share |
| Net cash provided by operating activities | $301.3 million | $271.5 million | +$29.8 million |
| Cash and restricted cash at period end | $1.583 billion | $1.783 billion | Down $199.7 million year over year |
| Consolidated debt, net | $10.615 billion | $10.715 billion | Down $99.5 million year over year |
| Common dividend per share | $0.71 | $0.63 | +12.7% |
Operating income represented approximately 25.2% of revenue, while net income attributable to common shareholders represented approximately 7.7% of revenue. These are simple GAAP ratios and are not management-defined margins.
At March 31, 2017, total assets were $20.731 billion and total equity was $7.563 billion. Debt consisted primarily of $9.282 billion of net mortgages and $1.334 billion of net unsecured debt. Approximately $3.768 billion of consolidated debt was variable-rate debt; management estimated that a 1% increase in base rates would reduce annual income attributable to Vornado by approximately $54.9 million after the effects of noncontrolling interests.
Material Changes Versus the Prior Comparable Period
- Revenue increased $7.8 million, driven by higher New York revenue, fee and other income, tenant reimbursements, and trade-show activity, partly offset by the disposition of the Skyline properties and lower Washington, D.C. property rentals.
- Operating expenses declined $148.9 million primarily because Q1 2016 included a $160.7 million non-cash impairment loss on the Skyline properties. The Skyline properties were transferred to a receiver and disposed of in December 2016.
- Interest and debt expense declined $6.2 million, primarily due to Skyline-related savings and the refinancing of theMART, partly offset by additional borrowings and other refinancing activity.
- Income from partially owned entities improved to $1.4 million from a $4.2 million loss, while real estate fund investment income declined to $0.3 million from $11.3 million because of lower unrealized gains.
- New York same-store EBITDA increased 3.7%, or 4.0% excluding Hotel Pennsylvania. Washington, D.C. same-store EBITDA increased 0.7%.
- Cash flow from operations increased, but cash and restricted cash declined $16.3 million during the quarter because investing and financing outflows exceeded operating cash generation.
- Preferred share dividends declined $4.2 million following the September 2016 redemption of the 6.875% Series J preferred securities.
Outlook, Commentary, Risks and Unusual Items
- Management expects cash flow from continuing operations over the following twelve months to fund operations, distributions, debt amortization, and recurring capital expenditures. Development and acquisition needs may require additional borrowings, equity offerings, or asset sales.
- Management expected the tax-free spin-off of the Washington, D.C. segment and its combination with JBG's management business and certain assets to be completed by the end of the second quarter of 2017. Completion remained subject to SEC effectiveness of the registration statement, listing approval, regulatory approvals, third-party consents, and other conditions; there was no assurance the transaction would close.
- Management expected Washington, D.C. adjusted EBITDA for the first half of 2017 to be approximately even with the first half of 2016. Expected core-business growth of approximately $6 million to $8 million was expected to be offset by redevelopment-related reductions of approximately $6 million to $8 million.
- Major development projects included 220 Central Park South, with estimated incremental development costs of approximately $1.3 billion and $680.7 million spent through March 31, 2017. Total construction commitments were approximately $584 million, and expected additional capital contributions to partially owned entities were approximately $170 million.
- The Company had approximately $723 million of guarantees and master leases, $19.9 million of outstanding letters of credit, and approximately $117.9 million of remaining unfunded real estate fund commitments, of which its share was approximately $34.4 million.
- Debt maturities were approximately $118.3 million during the remainder of 2017 and $208.6 million during 2018. Revolving credit facilities had $115.6 million outstanding.
- Legal proceedings were described as ordinary-course matters not currently expected to have a material adverse effect. Management reported no material changes to the risk factors in the 2016 Form 10-K.
- The Company early adopted cash-flow guidance on distributions from equity-method investees and restricted cash, with retrospective presentation changes. Adoption of the employee share-based payment standard did not have a material impact.
- The filing identifies substantial valuation and execution risk in development projects, interest-rate exposure, leasing and occupancy risk, refinancing risk, insurance availability and cost, environmental matters, and the pending spin-off and merger.
Most Important Facts to Verify
- Whether the Washington, D.C. spin-off and JBG combination closed on schedule and the resulting pro forma portfolio, capital structure, and dividend implications.
- Actual leasing, occupancy, and same-store operating performance after redevelopment properties were taken out of service.
- Funding sources and returns for 220 Central Park South, the Farley Post Office redevelopment, and other construction commitments.
- Debt maturities, refinancing terms, covenant compliance, variable-rate exposure, and available borrowing capacity.
- The sustainability of the $0.71 quarterly common dividend relative to recurring FFO and operating cash flow.
- Changes in fair values of Level 3 real estate fund investments and the effect of market rents, capitalization rates, discount rates, and exit timing.
- The filing's unaudited status and the fact that Q1 results are not necessarily indicative of full-year performance.