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. The portfolio is concentrated in New York, with additional properties in Chicago and San Francisco, and is reported through the New York and Other segments. This unaudited combined filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Vornado owned approximately 93.1% of the Operating Partnership at quarter-end.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $463.1 million, versus $541.8 million | $997.8 million, versus $1,078.3 million |
| Net income attributable to common shareholders | $2,400.2 million, versus $111.5 million | $2,581.7 million, versus $93.7 million |
| Diluted earnings per common share | $12.56, versus $0.58 | $13.51, versus $0.49 |
| FFO attributable to common shareholders plus assumed conversions | $164.3 million, or $0.86 per diluted share | $412.0 million, or $2.16 per diluted share |
| NOI at share | $308.9 million, versus $354.4 million | $646.7 million, versus $703.5 million |
| NOI at share, cash basis | $318.7 million, versus $341.9 million | $651.2 million, versus $673.0 million |
- Cash flow from operating activities was $292.9 million for the six months, compared with $241.3 million in 2018.
- Investing activities provided $2.114 billion, principally from the Fifth Avenue and Times Square transaction, condominium sales and redemption of 640 Fifth Avenue preferred equity.
- Financing activities used $2.046 billion, including $1.943 billion of borrowing repayments, debt defeasance and dividends.
- Cash and restricted cash totaled $1.077 billion at June 30, 2019, including $922.6 million of cash and cash equivalents.
- Consolidated debt totaled approximately $7.572 billion before deferred financing costs, consisting principally of $6.292 billion of mortgages and $1.280 billion of unsecured debt. Estimated fair value of consolidated debt was $7.625 billion.
- Total assets were $17.914 billion and total equity was $7.496 billion at June 30, 2019.
- Portfolio occupancy was 96.5% in New York and 94.8% at theMART and 99.5% at 555 California Street.
Material Changes Versus the Prior Comparable Period
- Revenue declined 14.5% in the second quarter and 7.5% year to date, primarily because properties transferred to the Fifth Avenue and Times Square joint venture were no longer consolidated, together with lower New York rental revenue and tenant receivable write-offs.
- Reported earnings increased sharply because Vornado recognized a $2.571 billion gain on transferring a 48.5% common interest in the Fifth Avenue and Times Square JV. The transaction valued the contributed properties at $5.556 billion and generated approximately $1.186 billion of net cash proceeds.
- Reported earnings also included $269.6 million of six-month gains from 220 Central Park South condominium sales and a $62.4 million gain from selling the Urban Edge investment.
- FFO declined 15.6% in the second quarter to $0.86 per diluted share, but increased 24.9% for the six months to $2.16 per diluted share. The quarterly decline reflected non-cash write-offs, compensation expense and reduced operating income from transferred properties.
- Six-month cash-basis same-store NOI at share increased 3.7%; New York increased 2.6%, theMART increased 8.9% and 555 California Street increased 13.9%.
- Vornado adopted ASC 842 lease accounting on January 1, 2019, recording $526.9 million of right-of-use assets and lease liabilities. The adoption also changed the treatment of lease receivable collectability and internal leasing costs.
- Debt declined from $9.896 billion at December 31, 2018 to $7.572 billion at June 30, 2019. The company redeemed $400 million of senior unsecured notes, prepaid or defeased mortgages, refinanced several properties and expanded one revolving credit facility to $1.5 billion.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash flow from continuing operations is expected to fund operations, distributions, debt amortization and recurring capital expenditures over the next twelve months. Development and acquisition needs may require additional borrowings, equity offerings or asset sales.
- Management expects approximately $2 billion of net cash from selling all 220 Central Park South condominium units, including approximately $1 billion of after-tax net gain. Thirty-four units had been sold through June 30, 2019.
- The 608 Fifth Avenue property was impaired after tenant Arcadia Group, operator of Topshop, filed for bankruptcy protection and closed its U.S. stores. Vornado recorded a $93.9 million non-cash impairment, including a $75.2 million right-of-use asset impairment. A $72.6 million lease liability remains and may be recognized as income if the non-recourse lease is terminated.
- Development and construction commitments were approximately $730 million, with additional expected funding of approximately $15.4 million to partially owned entities. Major projects include 220 Central Park South, PENN1, PENN2, the Farley Office and Retail Building and Moynihan Train Hall.
- Moynihan Train Hall expenditures and the related obligation were each $665.2 million at quarter-end. The project’s estimated expenditures are approximately $1.6 billion and are expected to be funded by governmental agencies.
- Guarantees and master leases totaled approximately $1.031 billion. Letters of credit outstanding under a revolving credit facility totaled $15.9 million.
- Variable-rate consolidated debt was $1.763 billion. Management estimated that a 1% change in base rates would change annual net income attributable to Vornado by approximately $30.1 million after relevant allocations.
- Risks include interest-rate volatility, refinancing and covenant requirements, tenant credit and bankruptcy risk, development cost overruns or delays, real estate valuation changes, environmental liabilities, insurance availability and exposure to New York market conditions. Management reported no material changes to the risk factors in the 2018 Form 10-K.
- On July 11, 2019, after quarter-end, Vornado sold its 25% interest in 330 Madison Avenue for approximately $100 million of net proceeds and expected a third-quarter financial statement gain of approximately $159 million.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $2.571 billion Fifth Avenue and Times Square JV gain and other disposition gains.
- Reconcile GAAP earnings with FFO and NOI, including the effect of the 608 Fifth Avenue impairment, condominium gains, lease receivable write-offs and compensation expense.
- Assess the sustainability of same-store NOI growth against the revenue reduction caused by asset transfers and dispositions.
- Review debt maturities, variable-rate exposure, interest-rate swaps, covenant compliance and the effect of additional refinancing needs.
- Monitor 220 Central Park South sales velocity, remaining development costs, expected cash proceeds and related tax obligations.
- Evaluate construction commitments, guarantees and potential funding requirements for Farley, Moynihan Train Hall and the Penn District projects.
- Confirm the financial and operational consequences of adopting ASC 842, including lease liabilities, collectability adjustments and changes to internal leasing cost capitalization.
- Consider tenant concentration and credit risk, particularly following the Arcadia Group bankruptcy and the 608 Fifth Avenue impairment.