Vornado Realty Trust — Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P. Its portfolio includes New York and Washington, D.C. office properties, retail properties, Merchandise Mart assets, and investments in Toys “R” Us, Alexander’s and other partially owned entities. This Form 10-Q covers the three and nine months ended September 30, 2009; financial statements are unaudited. Vornado owned approximately 92.1% of the Operating Partnership and had 179.5 million common shares outstanding at period-end.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total revenues | $671.2 million | $676.1 million | $2.024 billion | $1.998 billion |
| Operating income | $223.1 million | $208.9 million | $629.8 million | $649.2 million |
| Operating margin | 33.2% | 30.9% | 31.1% | 32.5% |
| Net income attributable to common shareholders | $126.3 million | $22.7 million | $200.3 million | $529.2 million |
| Diluted earnings per common share | $0.69 | $0.14 | $1.16 | $3.22 |
| FFO attributable to common shareholders plus assumed conversions | $234.2 million; $1.25/share | $159.8 million; $0.97/share | $602.8 million; $3.37/share | $894.8 million; $5.27/share |
| Net cash from operating activities | Not separately reported | Not separately reported | $489.5 million | $647.6 million |
At September 30, 2009, cash and cash equivalents were $2.560 billion, restricted cash was $287.6 million, real estate net was $15.672 billion and total equity was $6.968 billion. Consolidated debt was $12.728 billion, including $8.895 billion of notes and mortgages, $1.990 billion of convertible debentures, $711.6 million of senior unsecured notes, $482.9 million of exchangeable debentures and $648.3 million drawn on revolving credit facilities. The carrying amount of debt exceeded estimated fair value by approximately $476.8 million.
Consolidated variable-rate debt was $2.487 billion, or approximately 19.5% of consolidated debt. Management estimated that a 1% increase in base rates would reduce annual net income by approximately $32.3 million, or $0.19 per diluted share, after considering noncontrolling interests.
Material changes versus prior comparable periods
- Third-quarter revenue declined 0.7%, while operating income increased 6.8% as expenses decreased 4.1%. New York office, Washington, D.C. office and retail same-store cash-basis EBITDA increased 6.4%, 8.7% and 5.2%, respectively; Merchandise Mart declined 0.8%.
- Third-quarter common earnings increased primarily because of a $41.2 million gain on the sale of 1999 K Street, improved results from Toys “R” Us and Alexander’s, lower prior-year impairment and derivative losses, and a $3.4 million debt-extinguishment gain.
- Nine-month common earnings and FFO declined substantially, primarily because 2008 included a $222.2 million deferred-tax benefit, a $112.7 million Americold gain, a $56.8 million Tysons Dulles Plaza gain and other favorable items. The 2009 period included a $122.7 million mezzanine-loan valuation allowance and a $32.6 million charge for surrendered executive equity awards.
- Nine-month revenue increased 1.3%, but operating income declined 3.0% and operating expenses increased 3.4%. Same-store cash-basis EBITDA increased in New York, Washington, D.C. and retail, but declined 6.4% at Merchandise Mart.
- Occupancy at September 30, 2009 was 96.0% for New York office, 94.8% for Washington, D.C. office, 91.6% for retail, 87.1% for Merchandise Mart office and 88.9% for Merchandise Mart showroom, generally below September 30, 2008 levels.
Liquidity, financing and capital allocation
- Cash increased by $1.033 billion during the first nine months, supported by $710.2 million of common-share issuance, $1.208 billion of borrowings and $489.5 million of operating cash flow.
- Investing cash outflows included $384.7 million of development and construction expenditures, $146.0 million of real-estate additions and $28.7 million invested in partially owned entities. Real-estate sale proceeds were $291.7 million.
- Cash capital expenditures and leasing commissions were $156.1 million, and development and redevelopment expenditures were $384.7 million for the nine months.
- Debt maturities were $84.8 million during the remainder of 2009 and $899.1 million during 2010. Management stated that debt may be refinanced or repaid using cash or revolving facilities.
- On September 30, 2009, Vornado issued $460 million of 7.875% senior unsecured notes due 2039 and retained approximately $446 million of proceeds. In October 2009, it repaid $400 million of revolving-credit borrowings.
- Management stated that expected operating cash flow over the following twelve months would be adequate for operations, distributions, debt amortization and recurring capital expenditures. Significant acquisitions and development may require additional borrowing or equity financing.
Outlook, commentary, risks and unusual items
- Management described continuing recessionary and credit-market conditions, reduced real-estate transaction activity, higher capitalization rates, potential declines in occupancy and rents, and possible further impairments of joint ventures, marketable securities and mezzanine loans.
- The filing provides no specific earnings or FFO guidance. Management’s liquidity outlook is based on anticipated operating cash flow and access to debt, equity and asset-sale proceeds.
- Vornado committed approximately $201.6 million of additional capital to partially owned entities, including $80.9 million pledged as collateral to the India Property Fund lender.
- Mezzanine loans receivable were reduced to $270.0 million from $472.5 million at year-end 2008, including a $122.7 million valuation allowance. Estimated fair value was $231.8 million.
- Alexander’s contributed $21.3 million of income in Q3, versus a $6.9 million loss in the prior-year quarter. Toys “R” Us contributed $22.1 million, versus an $8.1 million loss, although Toys’ results are seasonal and recorded on a one-quarter lag.
- Legal proceedings include the Stop & Shop rent dispute, indemnification obligations related to litigation involving the 1290 Avenue of the Americas and 555 California Street partnerships, and a Pentagon Row right-of-first-offer claim seeking damages exceeding $75 million. Management believes these matters are not expected to have a material adverse effect.
- Insurance availability and cost, environmental liabilities, debt covenant compliance, refinancing conditions and interest-rate changes remain material risks. The filing states that no material changes occurred to the risk factors disclosed in the 2008 Form 10-K.
- Subsequent events included the October 2009 revolving-debt repayment, additional convertible-debenture purchases, redemption of Series B convertible preferred units for Class A units, and a November 2, 2009 tender offer for convertible senior debentures.
Investor verification items
- Verify the sustainability of operating cash flow and FFO after excluding the 1999 K Street gain, debt-extinguishment gains, investment-company tax benefits and other unusual items.
- Review the $122.7 million mezzanine-loan allowance, the $19.1 million Lexington impairment share and the collectability and fair value of remaining investment assets.
- Assess refinancing needs for 2010 maturities, revolving-credit availability, covenant headroom and the effect of the October 2009 debt repayment.
- Monitor occupancy, leasing spreads and same-store performance, particularly declining Merchandise Mart results and occupancy across the portfolio.
- Evaluate development commitments, capital expenditures and the $201.6 million obligation to fund partially owned entities.
- Reconcile reported common dividends of $2.55 per share for the first nine months with FFO, cash flow and the portion paid in common shares.