Vornado Realty Trust — 2012 Second-Quarter Form 10-Q
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT focused primarily on office and retail properties in New York City and Washington, D.C., with additional investments in operating companies, partially owned entities and a real estate fund. This unaudited quarterly report covers the three and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods.
Financial performance and key metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenues | $700.6 million | $696.0 million | $1.403 billion | $1.397 billion |
| Operating income | $212.8 million | $231.4 million | $407.3 million | $420.6 million |
| Net income attributable to common shareholders | $20.5 million | $91.9 million | $254.2 million | $491.1 million |
| Diluted earnings per share | $0.11 | $0.49 | $1.36 | $2.63 |
| FFO per diluted share | $0.89 | $1.27 | $2.72 | $3.91 |
| Dividends per common share | $0.69 | $0.69 | $1.38 | $1.38 |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $263.9 million | $260.0 million |
Operating margin was approximately 30.4% for the quarter and 29.0% for the six months, compared with approximately 33.2% and 30.1%, respectively, in the prior-year periods. The margin comparison reflects higher depreciation and development-related expenses and lower operating income.
At June 30, 2012, total assets were $20.004 billion, including $14.091 billion of net real estate, $471.4 million of cash and cash equivalents, $112.7 million of restricted cash and $466.6 million of marketable securities. Consolidated debt was $10.218 billion, consisting principally of notes and mortgages payable, senior unsecured notes and revolving credit facility debt. Revolving debt was $500.0 million, compared with $138.0 million at December 31, 2011.
Cash and cash equivalents decreased by $135.2 million during the first six months to $471.4 million. Operating activities provided $263.9 million, investing activities provided $170.9 million and financing activities used $569.9 million. Cash financing uses included $256.1 million of common dividends, $35.6 million of preferred dividends and $1.507 billion of debt repayments, partly offset by $1.225 billion of new borrowings.
Material changes versus the prior comparable period
- Quarterly revenue increased 0.7%, but operating income declined 8.0%, and net income attributable to common shareholders declined 77.7%.
- Six-month revenue increased 0.4%, while net income attributable to common shareholders declined 48.2% and FFO per diluted share declined 30.4%.
- Results were adversely affected by a $58.7 million quarterly and $57.7 million year-to-date mark-to-market loss on the J.C. Penney derivative position, compared with a $6.8 million loss and $10.4 million gain, respectively, in 2011.
- The company recognized $14.9 million of real estate impairment losses in the quarter and $23.8 million year to date. Discontinued operations also included $72.7 million of net real estate gains year to date, partially offset by $13.5 million of impairment losses.
- Interest and debt expense declined to $128.4 million in the quarter and $262.7 million year to date, primarily because of debenture redemptions and the lower-rate refinancing of 350 Park Avenue.
- Washington, D.C. occupancy fell to 85.9% from 90.0% at December 31, 2011 and 93.2% at June 30, 2011. Same-store cash-basis EBITDA declined 9.9% in the quarter and 9.1% year to date.
- New York same-store cash-basis EBITDA increased 1.5% in the quarter and 1.9% year to date; retail properties declined 1.3% and 0.3%, respectively, while Merchandise Mart increased 7.2% and 1.0%.
Guidance, outlook, risks and unusual items
- Management expects cash flow from continuing operations over the next 12 months to fund operations, distributions, dividends, debt amortization and recurring capital expenditures. Acquisitions and development may require additional borrowing or equity.
- Management estimates 2012 Washington, D.C. EBITDA from continuing operations will be $50 million to $60 million below 2011, compared with the prior estimate of $55 million to $65 million, primarily due to lease expirations associated with the BRAC statute.
- The Skyline properties were transferred to a special servicer because of rising vacancy and insufficient property cash flow. A forbearance agreement defers interest shortfalls through the earlier of repayment of $4.0 million of funded tenant improvements and leasing commissions or December 1, 2012. Deferred interest was $6.6 million at June 30, 2012, and restructuring discussions continued.
- Debt maturities were $70.2 million for the remainder of 2012 and $1.685 billion in 2013. Management identified $2.471 billion of available liquidity, comprising cash and revolving facility availability, subject to facility conditions and covenants.
- Subsequent to quarter end, Vornado agreed to acquire the 666 Fifth Avenue retail condominium for $707 million, expected to close in the fourth quarter subject to customary conditions, and planned to spend up to $140 million redeveloping retail and signage at the Marriott Marquis Times Square.
- Subsequent to quarter end, Vornado issued $300 million of 5.70% Series K preferred shares, announced redemption of $75 million of Series E preferred shares and redeemed $180 million face amount of Series D-10 and D-14 preferred units for $168.3 million plus accrued distributions.
- The Real Estate Fund had $330.8 million of remaining unfunded commitments, including $82.7 million attributable to Vornado. Vornado also expected to fund approximately $259.6 million of additional capital to certain partially owned entities.
- Vornado held 23.4 million J.C. Penney common shares, representing approximately 11.0% of J.C. Penney, and had an aggregate economic net loss of $43.2 million on the investment after dividends at June 30, 2012. Further market-price changes could materially affect earnings and comprehensive income.
- The company had approximately $266.1 million of guarantees and master-lease obligations, $22.2 million of outstanding letters of credit and an appealed Stop & Shop receivable of $44.9 million. Management stated that the maximum reasonably possible loss on the receivable could be its full amount.
- Management stated that no material changes had occurred in the risk factors disclosed in the 2011 Form 10-K. Principal risks include leasing and occupancy declines, refinancing and interest-rate exposure, property valuations, development execution, insurance availability, tenant credit, environmental matters and capital-market access.
Important facts for investors to verify
- Reconcile GAAP earnings and FFO, particularly the effects of the J.C. Penney derivative loss, impairments, asset-sale gains and discontinued operations.
- Review Washington, D.C. lease expirations, BRAC-related vacancy, Skyline loan negotiations and the potential for additional deferred interest or restructuring.
- Assess debt maturities, revolving-facility availability, covenant compliance and the effect of subsequent preferred-equity issuances and redemptions.
- Evaluate liquidity needs for the 666 Fifth Avenue acquisition, Marriott Marquis redevelopment, Cleveland Medical Mart obligations, partially owned entities and Real Estate Fund commitments.
- Monitor J.C. Penney market exposure, marketable-securities valuation changes and derivative collateral requirements.
- Confirm the status and collectibility of the Stop & Shop receivable and the outcome of the appeal.
- Consider that the interim financial statements were reviewed, not audited, and that reported results for the six months are not necessarily indicative of full-year performance.