VORNADO REALTY TRUST quarterly report, Q2 FY2023

Vornado Realty Trust 10-Q Summary

Business Context and Reporting Period

Vornado Realty Trust is a fully integrated real estate investment trust operating primarily through Vornado Realty L.P., in which it owned approximately 90.6% of the common limited partnership interest as of June 30, 2023. The portfolio is concentrated in New York and includes office, retail, residential and development properties, as well as THE MART and 555 California Street. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.

Key Financial Metrics

Metric	Three Months Ended June 30, 2023	Three Months Ended June 30, 2022	Six Months Ended June 30, 2023	Six Months Ended June 30, 2022
Total revenues	$472.4 million	$453.5 million	$918.3 million	$895.6 million
Net income	$62.7 million	$68.9 million	$73.9 million	$122.3 million
Net income attributable to common shareholders	$46.4 million	$50.4 million	$51.5 million	$76.9 million
Diluted earnings per share	$0.24	$0.26	$0.27	$0.40
FFO attributable to common shareholders plus assumed conversions	$144.1 million, or $0.74 per diluted share	$155.0 million, or $0.80	$263.1 million, or $1.35	$310.0 million, or $1.60
Net cash provided by operating activities	Not separately reported	Not separately reported	$374.7 million	$430.6 million

Second-quarter revenue increased 4.2% year over year, while net income attributable to common shareholders declined 8.0%. The reported net margin was approximately 13.3% and cash-basis NOI at share was $296.1 million, representing approximately 62.7% of total revenue. Six-month cash-basis NOI at share was $574.6 million, up 1.6% year over year.

Second-quarter rental revenue was $418.8 million, up from $405.2 million; fee and other income was $53.5 million, up from $48.3 million.
Second-quarter same-store NOI at share increased 6.7%; same-store cash-basis NOI at share increased 6.2%. New York same-store NOI at share increased 2.9%, while THE MART declined 17.5% and 555 California Street increased 87.4%, including a tenant settlement.
As of June 30, 2023, total assets were $16.4 billion, cash and cash equivalents were $1.134 billion, and restricted cash was $178.4 million.
Consolidated debt, before deferred financing costs and other adjustments, was approximately $8.337 billion, consisting primarily of $5.762 billion of mortgages, $1.200 billion of senior unsecured notes, an $800 million unsecured term loan and $575 million drawn on revolving credit facilities.
Debt fair value was estimated at $7.983 billion versus carrying debt of $8.337 billion, excluding deferred financing costs.
Management reported approximately $3.2 billion of liquidity as of June 30, 2023, including $1.3 billion of cash and restricted cash and $1.9 billion available under revolving credit facilities.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven primarily by same-store operations, including higher revenue at 555 California Street, and a $21.4 million tenant settlement included in rental revenue. Approximately $6.4 million of the settlement was attributable to noncontrolling interests.
Interest and debt expense increased 39.2% in the second quarter and 51.1% for the first six months, primarily because of higher average interest rates. Six-month interest expense increased by $71.3 million, partly offset by higher capitalized interest.
General and administrative expense increased, primarily due to non-cash expense related to the June 2023 equity award grant. Deferred compensation plan expense also shifted from a benefit in 2022 to an expense in 2023.
Income from partially owned entities increased in the second quarter due largely to Vornado’s $16.4 million share of Alexander’s gain on the sale of the Rego Park III land parcel. However, income from partially owned entities declined for the six-month period because of lower results from the Fifth Avenue and Times Square joint venture and partially owned office buildings.
Net gains on asset dispositions declined to $0.9 million in the second quarter and $8.5 million for the six-month period, compared with $28.8 million and $35.4 million, respectively, in 2022.
FFO declined 7.0% in the second quarter and 15.1% for the six-month period, reflecting higher interest costs and weaker contributions from certain investments.
Cash flow from operations declined $55.9 million to $374.7 million for the six months. Investing activities provided $152.4 million, compared with a $715.9 million use in 2022, primarily because 2023 included Treasury bill maturities and repayment of a $105 million mortgage-loan participation, while 2022 included substantial Treasury bill purchases.

Guidance, Outlook, Risks and Unusual Items

Management stated that cash flow from continuing operations over the next twelve months, together with cash on hand, is expected to fund operations, distributions, debt amortization and recurring capital expenditures. Development, redevelopment and acquisitions may require additional borrowings, equity issuance or asset sales.
Vornado postponed common-share dividends until the end of 2023. The 2023 dividend is expected to be paid in cash or a combination of cash and securities after taxable income, including asset-sale impacts, is finalized. Retained cash may be used for debt reduction or share repurchases.
The Board authorized a $200 million common-share repurchase program. Vornado repurchased 1.722 million shares for $23.2 million during the quarter and six months, at an average price of $13.48 per share.
The 697-703 Fifth Avenue joint venture restructured a matured $421 million mortgage into a $355 million loan consisting of a $325 million SOFR-based senior note and a $30 million fixed-rate junior note, maturing in June 2025 with extension options.
Development commitments remain significant. Estimated total costs were $450 million for PENN 1, $750 million for PENN 2 and $100 million for Hotel Pennsylvania site and district improvements. Approximately $261 million of construction commitments were outstanding at June 30, 2023.
Interest-rate exposure remains material. A 1% increase in base rates was estimated to increase annual net income attributable to Vornado by approximately $27.5 million after hedging and noncontrolling interests. Interest-rate caps and swaps cover portions of variable-rate debt.
The PENN 1 ground lease was extended through June 2073, but the June 2023 fair-market-value rent reset had not been determined and could be material.
Guarantees totaled approximately $1.044 billion, primarily for joint-venture mortgage loans, in addition to a $508 million guarantee related to rent and payments for the Farley Building. Construction, insurance, environmental, tax-credit, refinancing and tenant-credit risks remain relevant.
Subsequent events included the July 2023 sale of The Armory Show for $24.4 million, with an expected gain of approximately $20 million; a $54 million refinancing of 825 Seventh Avenue; and an agreement to sell four Manhattan retail properties for $100 million, with an expected loss of approximately $0.5 million.
Management identified higher interest rates, inflation, potential economic weakness, tenant financial condition, capital availability, construction costs, refinancing conditions and real estate market conditions as key risks. No material changes to previously disclosed risk factors were reported.

Important Facts for Investors to Verify

Verify the timing, form and amount of the postponed 2023 common dividend and the extent of any additional share repurchases.
Monitor debt maturities, refinancing progress, covenant compliance and the effect of variable rates after existing swaps and caps expire.
Assess leasing, occupancy and rent trends, particularly New York office and retail, THE MART and 555 California Street; portfolio occupancy was 91.9% for New York office, 74.0% for New York retail, 80.0% for THE MART and 94.5% for 555 California Street.
Track completion costs, leasing progress and funding requirements for PENN 1, PENN 2, the Hotel Pennsylvania site and the proposed 350 Park Avenue development.
Evaluate exposure under approximately $1.044 billion of joint-venture guarantees, the $508 million Farley Building guarantee and approximately $261 million of construction commitments.
Consider the nonrecurring impact of the $21.4 million tenant settlement, Alexander’s land-sale gain and expected third-quarter disposition gains and losses when assessing recurring earnings and FFO.
Review the fair-market-value reset for the PENN 1 ground lease and potential uninsured losses, deductibles or changes in property and terrorism insurance availability.