Vornado Realty Trust 2015 Form 10-K Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P. The filing covers the fiscal year ended December 31, 2015, with supplemental fourth-quarter results. Core operations are concentrated in New York and Washington, DC, with additional interests in theMart, 555 California Street, Alexander’s, Vornado Capital Partners, Toys “R” Us and other investments.
- At December 31, 2015, Vornado owned or controlled interests in approximately 54.4 million square feet of properties, including 29.3 million square feet in New York, 19.0 million square feet in Washington, DC and 6.2 million square feet in other markets.
- Portfolio occupancy was 96.4% in New York, 84.8% in Washington, DC, 98.5% at theMart and 93.3% at 555 California Street.
- Vornado completed the January 15, 2015 spin-off of substantially all of its retail segment to Urban Edge Properties, transferring 79 strip centers, three malls, a warehouse park and $225 million of cash. Historical Urban Edge results are presented as discontinued operations.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $2.502 billion | $2.313 billion | +8.2% |
| Operating income | $760.2 million | $689.9 million | +10.2% |
| Net income | $859.4 million | $1.009 billion | -14.8% |
| Net income attributable to common shareholders | $679.9 million | $783.4 million | -13.2% |
| Diluted earnings per common share | $3.59 | $4.15 | -13.5% |
| FFO attributable to common shareholders plus assumed conversions | $1.039 billion | $911.1 million | +14.0% |
| FFO per diluted share | $5.48 | $4.83 | +13.5% |
| Net cash provided by operating activities | $672.2 million | $1.135 billion | -40.8% |
Operating margin was approximately 30.4% in 2015, compared with 29.8% in 2014. Net income attributable to common shareholders represented approximately 27.2% of revenue. Net income was reduced by lower gains on real estate sales and lower discontinued-operation income, while FFO benefited from the underlying operating portfolio and adjustments for depreciation and gains on sale.
- Net gains on disposition of wholly owned and partially owned assets were $251.8 million, including approximately $142.7 million from 20 Broad Street and $102.4 million from 1750 Pennsylvania Avenue.
- Same-store EBITDA increased 1.5% in New York and declined 1.1% in Washington, DC. Excluding Hotel Pennsylvania, New York same-store EBITDA increased 2.4%.
- Hotel Pennsylvania performance weakened: average occupancy declined to 90.7% from 92.0%, average daily rate declined to $147.46 from $162.01, and revenue per available room declined to $133.69 from $149.04.
Balance sheet, debt and liquidity
| Metric | December 31, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $21.143 billion | $21.158 billion |
| Real estate, net | $14.672 billion | $13.661 billion |
| Total debt, net | $11.091 billion | $9.530 billion |
| Total equity | $7.476 billion | $7.489 billion |
| Cash and cash equivalents | $1.836 billion | $1.198 billion |
| Revolving credit borrowing capacity | $1.912 billion | Not clearly provided in comparable form |
- Consolidated debt before deferred financing costs was $11.202 billion, consisting of $3.996 billion of variable-rate debt and $7.207 billion of fixed-rate debt, with a weighted-average interest rate of 3.42%.
- Debt maturities include approximately $1.062 billion in 2016 and $365.5 million in 2017. The company stated that it may refinance maturities or repay them with cash or revolving facilities.
- At year-end, $550 million was outstanding under revolving credit facilities; the balance was repaid on January 5, 2016.
- Cash flow from operations of $672.2 million was below capital-intensive investing needs, including $490.8 million of development costs, $478.2 million of acquisitions, $301.4 million of real estate additions and $235.4 million invested in partially owned entities.
- 2015 cash capital expenditures and leasing commissions were $380.2 million. The company forecast approximately $373 million of 2016 capital expenditures and leasing commissions.
Material changes versus the prior comparable period
- Revenue increased primarily from acquisitions, development and redevelopment, and same-store growth, particularly in New York.
- FFO increased materially despite lower GAAP net income, reflecting the effect of lower real estate-sale gains and discontinued operations in the prior-year comparison.
- New York portfolio scale increased through acquisitions of 150 West 34th Street, the Center Building, 260 Eleventh Avenue and 265 West 34th Street, among other transactions.
- Vornado acquired assets aggregating approximately $845.8 million and sold assets aggregating approximately $1.044 billion, with approximately $980 million of net sale proceeds, since January 1, 2015.
- Debt increased substantially because of acquisitions, development financing and refinancing activity. Major financings included a $950 million 220 Central Park South loan, a $750 million delayed-draw term facility, a $580 million refinancing of 100 West 33rd Street and a $450 million St. Regis retail financing.
- Washington, DC occupancy improved modestly overall, but Skyline properties and the effects of the Base Realignment and Closure program remained significant headwinds.
- The company adopted ASU 2014-08 on discontinued operations and early adopted ASU 2015-03 and ASU 2015-15 concerning debt issuance costs.
Guidance, outlook, risks and unusual items
- Management expected 2016 Washington, DC comparable EBITDA to be approximately $7 million to $11 million below 2015, driven by further Skyline occupancy declines and taking 1726 M Street and 1150 17th Street out of service for redevelopment.
- Management expected 2016 core Washington, DC EBITDA to be flat to $4 million higher before those specific headwinds.
- 2016 planned projects included the 220 Central Park South condominium tower, The Bartlett residential project, 512 West 22nd Street, 61 Ninth Avenue and a future 1700 M Street office development.
- Incremental estimated development costs were approximately $1.3 billion for 220 Central Park South and $250 million for The Bartlett. The company had spent $293 million and $166 million, respectively, through December 31, 2015.
- Management stated that cash flow from continuing operations was expected to fund operations, distributions, debt amortization and recurring capital expenditures over the following twelve months; acquisitions and development may require borrowings or equity offerings.
- Key risks include substantial leverage, refinancing and interest-rate exposure, concentrated exposure to New York and Washington, DC, leasing and occupancy risk, tenant defaults, development cost and completion risk, market-value volatility, insurance limitations, environmental and regulatory liabilities, cybersecurity, REIT qualification and related-party conflicts.
- Unusual 2015 items included a $90.0 million reversal of valuation allowances on deferred tax assets, $15 million of capitalized termination costs related to the 220 Central Park South mezzanine financing commitment, and $7.8 million of accelerated stock-compensation expense.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. The filing noted that financial statements required under Rule 3-09 for Toys “R” Us were omitted and that an amendment would be filed when available.
Important facts for investors to verify
- Reconcile recurring operating cash flow and FFO to the common dividend requirement, including the stated 2016 common dividend requirement of approximately $476 million.
- Review 2016 and 2017 debt maturities, available revolver capacity and refinancing assumptions, especially after the January 2016 repayment of the $550 million revolver balance.
- Assess Washington, DC leasing, Skyline occupancy, BRAC-related vacant space and the expected EBITDA impact of taking properties out of service.
- Evaluate the funding, presales, estimated costs, completion timing and collateral structure of 220 Central Park South and other development projects.
- Separate recurring property performance from gains on asset sales, discontinued operations, tax benefits, fund valuation gains and other nonrecurring items.
- Review exposure to nonconsolidated entities, including approximately $4.432 billion of pro rata debt, Toys “R” Us, Alexander’s, PREIT, Urban Edge and the real estate fund.
- Confirm the status of the omitted Rule 3-09 Toys “R” Us financial statements and any subsequent amendment.