Alexander’s, Inc. Form 10-Q Summary
Business context and reporting period
Alexander’s, Inc. is a REIT that leases, manages, develops and redevelops seven properties totaling 2.449 million square feet in the greater New York City metropolitan area. Vornado Realty Trust manages the company and leases and develops its properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Rental revenues | $45.5 million | $55.9 million | $99.6 million | $112.7 million |
| Net income | $12.3 million | $11.3 million | $16.9 million | $29.1 million |
| Net income per diluted share | $2.41 | $2.20 | $3.30 | $5.70 |
| FFO, non-GAAP | $18.0 million | $24.3 million | $41.7 million | $49.8 million |
| FFO per diluted share | $3.51 | $4.75 | $8.15 | $9.74 |
| Cash flow from operations | Not separately provided | Not separately provided | $52.8 million | $50.8 million |
Q2 rental revenues declined 18.7% year over year, while six-month revenue declined 11.6%. Q2 net income increased 9.3%, primarily because lower interest expense and a favorable change in the fair value of marketable securities more than offset lower rental revenue. Six-month net income declined 42.0%, reflecting lower rental revenue and a $9.6 million marketable-securities valuation loss.
Q2 operating expenses were $19.8 million, depreciation and amortization was $7.6 million, general and administrative expense was $2.1 million, and interest and debt expense was $6.2 million. The filing does not present a consolidated operating or net margin; based on reported revenue and net income, net margin was approximately 27.1% in Q2 2020 versus 20.2% in Q2 2019, and approximately 17.0% for the first six months versus 25.9% in the prior-year period.
At June 30, 2020, cash and cash equivalents were $441.9 million, restricted cash was $11.4 million, and marketable securities were $5.1 million. Total liquidity, including marketable securities, was $458.3 million. Total assets were $1.384 billion and total equity was $225.0 million.
Mortgages payable, net of deferred issuance costs, were $1.119 billion at June 30, 2020, compared with $971.0 million at December 31, 2019. Gross mortgage debt was $1.121 billion, consisting of $1.053 billion of variable-rate debt and $68.0 million of fixed-rate debt. The company had a $500 million interest-rate cap with a 6.0% LIBOR cap rate.
Six-month cash flow from operations was $52.8 million. Investing activities used $13.0 million, primarily for construction in progress and real estate additions. Financing activities provided $99.5 million, primarily from $145.7 million received after reducing the company’s participation in the Rego Park II mortgage, partly offset by $46.1 million of dividends paid. The company paid $9.00 per share in dividends during the first six months.
Material changes versus the prior comparable period
- COVID-19 materially affected retail operations. Approximately 89% of Q2 rent billed was collected, or 92% including rent deferrals; retail collections were approximately 76%, or 83% including deferrals.
- Rental revenue decreased by $10.5 million in Q2. Principal drivers included a $4.2 million write-off of straight-line rent receivables, $3.0 million from retail vacancies at 731 Lexington Avenue, and $1.0 million of uncollectible retail rent.
- Six-month rental revenue decreased by $13.1 million, primarily due to $6.0 million of retail vacancies at 731 Lexington Avenue, $4.3 million of straight-line rent receivable write-offs, and $1.0 million of uncollectible rent.
- Interest expense declined by $4.0 million in Q2 and $5.6 million for the first six months, primarily because of lower LIBOR, partly offset by higher average debt balances.
- The company recorded a $1.8 million Q2 gain on Macerich marketable securities, compared with a $5.3 million loss in Q2 2019. For the first six months, the company recorded a $9.6 million loss, compared with a $5.2 million loss in 2019. The Macerich investment was valued at $5.1 million at June 30, 2020, down from $14.4 million at year-end 2019.
- In-service space was 97% occupied at June 30, 2020. The former 195,000-square-foot Sears space at Rego Park I remained out of service for redevelopment.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings or FFO guidance. Management stated that existing cash and expected operating cash flow over the next twelve months are anticipated to fund operations, dividends, debt amortization and capital expenditures, but cautioned that the COVID-19 impact remains uncertain and could be material.
The $350 million mortgage on the 731 Lexington Avenue retail condominiums matured on August 5, 2020; as of the filing date, the company was in discussions with the lender. The company may refinance maturing debt or repay it, and acknowledged that financing may not be available on acceptable terms.
Retail tenants largely closed in March and substantially reopened in late June, subject to occupancy and other restrictions. Certain redevelopment projects were paused in March and resumed in June. The company granted limited rent deferrals and abatements and will recognize future revenue for certain affected tenants based on actual collections.
Bloomberg represented approximately 53% of total revenue for the first six months of 2020. The loss of Bloomberg or its inability to meet lease obligations would materially affect results and financial condition.
Other contingencies include approximately $1.0 million of standby letters of credit, the Sears litigation with reasonably possible losses not expected to exceed approximately $650,000, and the company’s evaluation of options concerning $23.8 million of previously paid New York City transfer taxes. The company also remains exposed to uninsured losses, insurance availability and refinancing risks.
Important facts for investors to verify
- Whether the 731 Lexington Avenue retail mortgage was refinanced, extended or repaid after its August 5, 2020 maturity.
- Subsequent rent collections, deferrals, abatements, tenant receivable write-offs and retail occupancy trends as COVID-19 effects continued.
- Bloomberg’s lease status, creditworthiness and contribution to revenue.
- Whether Macerich securities produced further valuation changes or cash-flow effects.
- The status and cost of the Rego Park I redevelopment and the Sears litigation.
- Future refinancing terms, interest-rate exposure and compliance with mortgage covenants.
- Dividend sustainability relative to recurring FFO and operating cash flow.