Alexander’s, Inc. 2018 First-Quarter 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan-area REIT with seven properties totaling approximately 2.437 million square feet. Vornado Realty Trust manages the company and leases and develops its properties; Vornado owned 32.4% of outstanding common stock as of March 31, 2018. The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Portfolio occupancy was 99.1% at quarter-end.
Financial Highlights
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $57.880 million | $57.229 million | +1.1% |
| Operating income | $26.059 million | $27.107 million | -3.9% |
| Operating margin | 45.0% | 47.4% | Down 2.4 percentage points |
| Income from continuing operations | $14.097 million | $21.667 million | -34.9% |
| Net income (loss) | $(9.700) million | $21.667 million | Declined $31.367 million |
| Net margin | (16.8%) | 37.9% | Down 54.7 percentage points |
| FFO, non-GAAP | $(1.549) million, or $(0.30) per share | $29.581 million, or $5.78 per share | Declined $31.130 million |
| Dividends per share | $4.50 | $4.25 | +5.9% |
Property rentals were essentially unchanged at $38.241 million, while expense reimbursements increased 3.6% to $19.639 million. Operating expenses increased 6.5% to $22.277 million, primarily because of higher real estate taxes, reimbursable operating expenses and bad debt expense. Interest and other income increased to $3.038 million, aided by the Rego Park II loan participation and higher rates. Interest and debt expense rose 59.6% to $9.829 million, reflecting higher LIBOR, the 2017 refinancing of 731 Lexington Avenue and increased debt issuance-cost amortization.
Cash and cash equivalents were $319.026 million at March 31, 2018; cash and restricted cash totaled $406.216 million, up from $393.279 million at December 31, 2017. Operating activities generated $36.805 million of cash, investing activities generated $0.125 million, and financing activities used $23.993 million, including $23.022 million of dividends. Operating cash flow included substantial non-cash additions, including the $23.797 million discontinued-operations accrual and the $5.170 million marketable-securities valuation loss.
Mortgages payable, net of deferred issuance costs, totaled $1.241 billion. Gross mortgage balances were $1.251 billion, with $1.105 billion at variable rates and $146.246 million at fixed rates. A 1% increase in base rates was estimated to increase annual interest expense by approximately $11.052 million, or $2.16 per diluted share. The company had a $500 million interest-rate cap limiting LIBOR to 6.0%.
Material Changes Versus the Prior Comparable Period
- Net results shifted from $21.667 million of income to a $9.700 million loss, principally because of a $23.797 million accrual related to contested New York City transfer taxes and a $5.170 million unrealized loss on Macerich shares.
- Beginning January 1, 2018, changes in the fair value of marketable securities were recorded in earnings rather than other comprehensive income. The Macerich share-price decline reduced the carrying value of the investment to $29.986 million from $35.156 million at year-end.
- Operating income declined despite slightly higher revenue because operating, depreciation and general and administrative expenses increased.
- Dividends increased to $4.50 per share, while cash dividends paid rose to $23.022 million from $21.737 million.
- Debt remained broadly stable, but interest expense increased substantially because of higher variable rates and the 2017 731 Lexington refinancing.
- The company adopted ASC 606, ASU 2016-01 and other accounting updates; management reported no material impact from the revenue-recognition adoption.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash flows from continuing operations over the next 12 months, together with existing cash balances, are expected to fund operations, dividends, debt amortization and capital expenditures. The company may refinance maturing debt or repay it. The filing provides no formal earnings or FFO guidance.
- Kings Plaza tax dispute: The company accrued and subsequently paid $23.797 million for potentially additional New York City transfer taxes and interest related to the 2012 sale of Kings Plaza. The company is contesting the assessment; its case is on hold pending an appeal involving a Vornado joint venture. Recovery of the payment is uncertain.
- Near-term debt maturities: Rego Park I debt of $78.246 million matures in May 2018; Paramus debt of $68.0 million matures in October 2018; and Rego Park II debt of $255.223 million matures in November 2018. The Rego Park II loan participation of approximately $197.8 million also matures in November 2018.
- Tenant concentration: Bloomberg accounted for approximately 45% of total revenue, or $26.324 million, in the quarter. Loss of Bloomberg or deterioration in its ability to perform could materially affect results.
- Toys “R” Us: The tenant is in bankruptcy and plans to close its 47,000-square-foot Rego Park II store by June 30, 2018. The company reserved the $0.5 million straight-line rent receivable and planned to accelerate amortization of related tenant improvements and leasing costs in the second quarter.
- Sears: Sears closed its 195,000-square-foot Rego Park I store in April 2017. The company continues to assess recoverability of $3.568 million of straight-line rent receivables and $0.374 million of deferred leasing costs. Remaining litigation exposure was estimated at no more than approximately $0.650 million.
- Other risks: The company is exposed to interest-rate increases, refinancing risk, tenant credit risk, insurance availability and costs, terrorism-related losses, property competition and construction or redevelopment costs. Management reported no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Track the outcome and potential recovery of the $23.797 million Kings Plaza transfer-tax payment.
- Verify refinancing, repayment or extension plans for the May, October and November 2018 mortgage maturities.
- Assess the effect of Toys “R” Us’s departure and Sears’s financial condition on occupancy, rent collections and leasing costs.
- Monitor Bloomberg’s lease, credit metrics and concentration of approximately 45% of revenue.
- Separate recurring property-level performance from the nonrecurring tax accrual and Macerich mark-to-market loss when evaluating FFO and cash-generation capacity.
- Evaluate sensitivity to LIBOR and other base-rate changes given the $1.105 billion variable-rate debt balance.