VORNADO REALTY TRUST quarterly report, Q2 FY2017

Vornado Realty Trust 10-Q Summary

Business Context and Reporting Period

Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P., which held substantially all assets and operations. Vornado owned approximately 93.6% of the Operating Partnership at June 30, 2017. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods.

The reported periods include the Washington, D.C. segment. On July 17, 2017, Vornado completed the tax-free spin-off of that segment to JBG SMITH Properties, including 37 office properties, five multifamily properties, other assets, future development assets and $275 million of cash. Beginning in the third quarter of 2017, the Washington, D.C. segment was expected to be presented as discontinued operations.

Financial Highlights

Metric	Three Months Ended June 30, 2017	Three Months Ended June 30, 2016	Six Months Ended June 30, 2017	Six Months Ended June 30, 2016
Total revenues	$626.0 million	$621.7 million	$1,246.9 million	$1,234.7 million
Operating income	$183.4 million	$186.8 million	$339.9 million	$186.5 million
Net income	$147.5 million	$268.4 million	$221.3 million	$176.8 million
Net income attributable to common shareholders	$116.0 million	$220.5 million	$163.7 million	$106.3 million
Diluted EPS	$0.61	$1.16	$0.86	$0.56
FFO per diluted share	$1.35	$1.21	$2.43	$2.28
Dividends per common share	$0.71	$0.63	$1.42	$1.26

Operating margin was approximately 29.3% for the second quarter and 27.3% for the first six months, based on operating income divided by total revenues. Net income and EPS were affected by gains and other unusual items, while FFO increased year over year.

Second-quarter revenue increased 0.7%; first-half revenue increased 1.0%.
Second-quarter net income attributable to common shareholders declined 47.4%, primarily because the 2016 quarter included a $159.5 million gain on the sale of a 47% interest in 7 West 34th Street.
First-half net income attributable to common shareholders increased 54.1%, primarily because 2016 included a $160.7 million Skyline properties impairment loss and the 2016 gain on 7 West 34th Street.
FFO attributable to common shareholders plus assumed conversions increased 12.3% in the second quarter and 7.0% in the first six months.
Same-store EBITDA decreased 0.5% in New York, 2.7% in Washington, D.C., 4.5% at theMART and 2.9% at 555 California Street in the second quarter. Same-store NOI increased 10.6%, 0.5%, decreased 2.8%, and increased 33.7%, respectively.

Cash Flow, Balance Sheet, Debt and Liquidity

Net cash provided by operating activities was $316.2 million for the six months ended June 30, 2017, compared with $318.8 million in the prior-year period.
Net cash used in investing activities was $251.5 million, including $191.1 million of development and construction costs, $139.6 million of real estate additions and $27.7 million of investments in partially owned entities.
Net cash used in financing activities was $106.3 million, including $268.8 million of common dividends, $32.3 million of preferred dividends, $14.0 million of debt repayments and $226.9 million of borrowing proceeds.
Cash and restricted cash totaled $1.558 billion at June 30, 2017, down $41.6 million from year-end 2016. Cash and cash equivalents alone were $1.471 billion.
Consolidated debt, net, was $10.838 billion, up $225.9 million from December 31, 2016. Gross debt carrying value was approximately $10.928 billion, with an estimated fair value of $11.004 billion.
Mortgages payable, net, totaled $9.503 billion; senior unsecured notes, $846.3 million; unsecured term loan, $373.0 million; and revolving credit facilities, $115.6 million.
Approximately $118 million of debt matured during the remainder of 2017 and approximately $208 million during 2018. Management stated that cash flow from continuing operations was expected to fund operations, distributions, debt amortization and recurring capital expenditures for the next twelve months; acquisitions and development may require additional borrowing or equity capital.
Variable-rate consolidated debt was approximately $3.993 billion. Management estimated that a 1% increase in base rates would reduce annual income attributable to Vornado by approximately $59.8 million, after considering noncontrolling interests.

Material Changes, Transactions and Unusual Items

Income from partially owned entities was $46.3 million in the second quarter versus $0.6 million in 2016, including a $15.9 million gain from Urban Edge Properties operating partnership unit issuances and $26.7 million of gains related to the sale of Suffolk Downs and repayment of related debt investments.
The company recognized $4.7 million of income from real estate fund investments in the first half, compared with $27.7 million in 2016; 2017 included a $6.4 million net unrealized loss on held investments.
Interest and debt expense declined to $191.1 million in the first half from $206.1 million, primarily due to savings from the Skyline disposition and theMART refinancing, partly offset by higher expense from other refinancings and borrowings.
Vornado completed a $220 million financing of The Bartlett on June 20, 2017. The property, loan and $217 million of net proceeds were transferred to JBG SMITH in connection with the July spin-off.
A 50.1%-owned Farley Post Office joint venture made a $230 million contribution toward construction of the Moynihan Train Hall, funded in part through a $271 million loan facility. Vornado’s share of the contribution was $115.2 million, and Vornado and its partner guaranteed the joint venture’s development obligations.
Development and construction commitments totaled approximately $543 million. Additional expected capital contributions to partially owned entities totaled approximately $52 million.
The company incurred approximately $47 million of additional Washington, D.C. spin-off transaction costs after June 30, 2017, expected to be expensed in the third quarter of 2017.
On July 19, 2017, a 25%-owned joint venture refinanced 330 Madison Avenue. Vornado’s share of net proceeds was approximately $85 million.

Guidance, Outlook, Risks and Contingencies

Management reported that Washington, D.C. segment adjusted EBITDA of $140.9 million for the first half was slightly ahead of previously published guidance. The filing does not provide a full-year earnings or FFO outlook.

Development and redevelopment projects, including 220 Central Park South, 512 West 22nd Street, 61 Ninth Avenue, 606 Broadway, 1700 M Street and the Farley Post Office, involve completion, cost, leasing and timing risks. Management cautioned that projects may not commence or may not be completed on schedule or within budget.
Approximately $774 million of guarantees and master leases were outstanding at June 30, 2017.
Letters of credit totaling $20.8 million were outstanding under a revolving credit facility. Revolving facilities include interest coverage and debt-to-market-capitalization covenants, ratings-related pricing provisions and customary events of default.
Insurance coverage, particularly terrorism, earthquake and other catastrophic risks, may not remain available at comparable levels or reasonable cost. The company ultimately bears certain risks of its captive reinsurer.
Legal proceedings were described as ordinary-course matters not currently expected to have a material adverse effect. Environmental assessments had not identified material contamination, but future discoveries or regulatory changes could create significant costs.
The company adopted cash flow accounting updates for distributions received from equity-method investees and restricted cash retrospectively in 2017. It expected future adoption of revenue recognition, financial instruments and lease standards to affect presentation and potentially the timing of gains, while the overall impact remained under evaluation.
Management identified competition, tenant credit, occupancy and rental rates, capital availability and cost, interest rates, construction costs, economic conditions, regulation and market valuations as key business risks. No material changes to the risk factors in the 2016 Form 10-K were reported.

Investor Verification Checklist

Verify the pro forma effect of the July 2017 Washington, D.C. spin-off on revenue, EBITDA, NOI, debt, liquidity and future-period comparisons.
Separate recurring operating performance from gains on Suffolk Downs, the Urban Edge unit issuance, prior-year 7 West 34th Street gains and other nonrecurring items.
Review FFO reconciliations and confirm the effect of real estate depreciation, dispositions, impairments and partially owned entities.
Assess debt maturities, variable-rate exposure, covenant compliance and the availability of refinancing capacity.
Monitor construction commitments, Farley Post Office guarantees, expected capital contributions and the additional $47 million of spin-off costs.
Evaluate occupancy, leasing spreads and same-store NOI after the Washington, D.C. assets are reported as discontinued operations.
Confirm the impact of upcoming revenue recognition and lease accounting standards, including the ground-lease liabilities expected under ASC 842.