Business Context and Reporting Period
Alexander's, Inc. (NYSE: ALX) is a real estate investment trust (REIT) incorporated in Delaware, engaged in leasing, managing, developing, and redeveloping properties in the greater New York City metropolitan area. The company is managed by Vornado Realty Trust, which also owns approximately 32.8% of the outstanding common stock. This filing covers the quarterly period ended March 31, 2008.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenues | $51,766,000 | $52,196,000 |
| Net Income | $15,152,000 | $32,176,000 |
| Diluted EPS | $2.98 | $6.32 |
| Funds from Operations (FFO) | $20,353,000 ($4.00/share) | $37,667,000 ($7.39/share) |
| Operating Cash Flow | $24,738,000 | ($24,560,000) |
| Total Debt | $1,132,387,000 | $1,110,197,000 |
| Cash and Equivalents | $576,530,000 | $557,926,000 |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by approximately 53% to $15.2 million. This decline is primarily attributable to a non-cash reversal of $14.3 million in Stock Appreciation Rights (SARs) expense recorded in Q1 2007, compared to a $0.6 million accrual of SARs expense in Q1 2008.
- Revenue Stability: Total revenues remained relatively flat, decreasing slightly by $0.4 million. Property rentals increased by $1.2 million due to the commencement of a Lowe's ground lease at Kings Plaza, while expense reimbursements decreased by $1.6 million due to lower operating costs at the Kings Plaza energy plant.
- Interest Income: Interest and other income, net, decreased by $2.6 million, driven by lower average yields on investments (dropping from 4.9% to 3.3%).
- Debt Levels: Total debt increased by $22.2 million, primarily due to draws on a construction loan for the Rego Park II project.
Outlook, Risks, and Contingencies
- Development Project: The Rego Park II project (a 600,000 sq. ft. shopping center) is under construction with an estimated total cost of $410 million. As of March 31, 2008, $189.2 million has been expended. Completion is expected in 2009. There is no assurance the project will be completed on time or within budget.
- Market Risks: Management notes that the "credit crisis" and stress in commercial credit markets may negatively impact real estate transactions, cap rates, and stock price performance. A slowing economy could lead to lower occupancy and effective rents.
- Legal and Environmental:
- Environmental: An oil spill at Kings Plaza is being remediated with estimated costs of $2.5 million; a claim has been made under insurance subject to a $500,000 deductible.
- Legal: The company is defending a lawsuit regarding a non-refundable deposit from a failed property sale (Flushing Property). Management does not believe the plaintiff is entitled to the deposit.
- Stock Appreciation Rights (SARs): The company has a significant liability for SARs ($142.1 million). If exercised at the March 31, 2008 stock price, the company would be required to pay this amount in cash.
Investor Verification Checklist
- SARs Volatility: Verify the impact of stock price fluctuations on the company's net income and cash flow, given the significant liability for cash-settled Stock Appreciation Rights.
- Rego Park II Funding: Confirm the status of the $350 million construction loan and the company's ability to fund the remaining $220 million+ required to complete the project.
- Tenant Concentration: Note that Bloomberg L.P. accounts for approximately 32% of consolidated revenues; monitor the stability of this key lease.
- Interest Rate Exposure: Review the variable-rate portion of the debt ($81.7 million) and the potential impact of rising LIBOR rates on interest expense.
- Insurance Coverage: Assess the adequacy of insurance coverage limits ($965 million for Lexington Ave, $500 million for others) relative to potential catastrophic losses.