VORNADO REALTY TRUST quarterly report, Q3 FY2012

Vornado Realty Trust — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. The filing is unaudited and covers Vornado Realty Trust, primarily through Vornado Realty L.P. Vornado owned approximately 93.8% of the Operating Partnership at quarter-end and had 186.1 million common shares outstanding.

Financial performance and position

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Total revenues	$711.0 million	$687.9 million	$2.078 billion	$2.051 billion
Operating income	$201.9 million	$216.3 million	$594.9 million	$625.7 million
Income from continuing operations	$106.8 million	$57.8 million	$361.6 million	$477.3 million
Net income attributable to common shareholders	$232.4 million	$41.1 million	$486.6 million	$532.3 million
Diluted EPS	$1.24	$0.22	$2.61	$2.86
FFO per diluted share	$1.34	$1.05	$4.07	$4.96
Common dividend per share	$0.69	$0.69	$2.07	$2.07

Q3 operating margin was approximately 28.4%, compared with 31.4% in the prior-year quarter. Nine-month operating margin was approximately 28.6%, compared with 30.5% in the prior-year period.

Q3 revenue increased $23.1 million, principally from higher Cleveland Medical Mart development revenue and fee income, partly offset by lower property rentals and tenant reimbursements.
Q3 net income benefited substantially from $131.1 million of net real estate gains and a $19.7 million after-tax gain on the Canadian Trade Shows sale. Discontinued operations contributed $157.3 million, compared with $8.4 million in Q3 2011.
Nine-month net income attributable to common shareholders declined despite higher discontinued-operation gains, reflecting lower continuing-operations income, a $53.3 million J.C. Penney derivative loss, and the absence of significant 2011 gains from debt extinguishment and mezzanine-loan transactions.
Continuing-operations EBITDA was $429.9 million in Q3, compared with $415.1 million in Q3 2011, and $1.422 billion for the nine months, compared with $1.567 billion.

Cash flow, debt and liquidity

Cash provided by operating activities was $510.6 million for the first nine months, compared with $566.7 million in 2011.
Investing activities provided $34.0 million, including $408.9 million of real estate and related investment-sale proceeds, partially offset by real estate additions, development spending and investments in partially owned entities.
Financing activities used $685.3 million. The company repaid $2.070 billion of borrowings and received $1.773 billion of new borrowings.
Cash and cash equivalents were $465.9 million at September 30, down from $606.6 million at December 31, 2011. Restricted cash was $391.8 million.
Consolidated debt was $9.811 billion, down from $10.069 billion at year-end 2011. This included $7.853 billion of notes and mortgages, $1.358 billion of senior unsecured notes and $600.0 million drawn on revolving credit facilities.
Debt maturities were $19.4 million during the remainder of 2012 and $1.130 billion during 2013. Management identified approximately $2.366 billion of available liquidity, consisting of cash and revolving-credit availability.
Variable-rate consolidated debt was $2.221 billion. Management estimated that a 1% increase in base rates would reduce annual net income by approximately $30.3 million, or $0.16 per diluted share, after considering noncontrolling interests and related exposures.

Material changes versus the prior comparable periods

New York continuing-operations EBITDA increased to $206.7 million in Q3 from $203.0 million and to $610.7 million for nine months from $578.7 million.
Washington, DC continuing-operations EBITDA declined to $88.8 million in Q3 from $102.0 million and to $275.7 million for nine months from $314.7 million. Same-store EBITDA declined 6.9% on a GAAP basis and 9.2% on a cash basis in Q3.
Nine-month same-store EBITDA increased 2.3% in New York but declined 7.0% in Washington, DC, 0.6% in Retail Properties and 0.3% in Merchandise Mart on a cash basis.
Marketable securities declined to $485.0 million from $741.3 million at year-end. The J.C. Penney investment had a $120.4 million aggregate unrealized loss at September 30, 2012; the company owned 10.7% of J.C. Penney’s common shares and had a separate forward position.
Vornado issued $300 million of 5.70% Series K preferred shares, redeemed $75 million of Series E preferred shares, redeemed $168.3 million of Operating Partnership preferred units and redeemed its exchangeable and convertible senior debentures for approximately $510.2 million.
Development and construction in progress increased to $866.0 million from $119.5 million, primarily reflecting ongoing projects and a $240 million Marriott Marquis Times Square capital-lease asset.

Guidance, outlook, risks and unusual items

Management expects cash flow from continuing operations over the next twelve months to fund operations, distributions, dividends, debt amortization and recurring capital expenditures. Acquisitions and development may require additional borrowing or equity financing.
Management expects 2012 Washington, DC EBITDA from continuing operations to be approximately $50 million to $60 million below 2011, compared with the prior estimate of $55 million to $65 million below 2011. The decline is primarily related to BRAC-driven lease expirations and vacancies.
The Skyline properties had a 26% vacancy rate, were transferred to a special servicer and had $16.7 million of deferred interest at September 30. Vornado continued negotiating a loan restructuring; the forbearance protection was scheduled through the December 1, 2012 payment date.
Vornado agreed to acquire the 666 Fifth Avenue retail condominium for $707 million, subject to customary closing conditions, and planned to spend up to $140 million redeveloping Marriott Marquis Times Square retail and signage.
Development projects had estimated remaining costs of approximately $707 million at September 30, excluding an estimated $425 million 220 Central Park South residential redevelopment expected to be substantially funded with project financing.
Vornado and affiliates had entered into or completed significant dispositions, including the planned $500 million sale of Green Acres Mall and the planned $751 million sale of Alexander’s Kings Plaza. The filing expected substantial gains and, for Kings Plaza, a potential special capital-gain dividend; completion remained subject to conditions.
Other commitments included approximately $244.5 million of expected capital contributions to partially owned entities, $267.1 million of guarantees and master leases, and $11.5 million of Cleveland Medical Mart funding, of which $1.1 million had been funded.
Vornado reported a $46.4 million receivable from Stop & Shop. The judgment was under appeal, and management stated that the maximum reasonably possible loss was up to the receivable amount.
Insurance availability and cost, tenant credit and occupancy, refinancing risk, interest-rate changes, real estate valuations, development execution and market volatility in J.C. Penney securities were identified as important risks. The filing reported no material changes to the risk factors in the 2011 Form 10-K.

Investor verification points

Verify the sustainability of earnings and FFO excluding real estate-sale gains, discontinued operations, preferred-unit redemption discounts, derivative mark-to-market effects and other nonrecurring items.
Monitor Washington, DC occupancy, BRAC lease expirations, Skyline restructuring and the effect on 2012 and subsequent EBITDA.
Review the $1.130 billion of 2013 debt maturities, revolving-credit utilization and compliance with interest-coverage and debt-to-market-capitalization covenants.
Assess funding requirements and execution risk for the $707 million of estimated project costs, the Marriott Marquis redevelopment and the 220 Central Park South project.
Track the J.C. Penney equity and forward-contract exposure, collateral requirements and potential earnings volatility.
Confirm the closing and proceeds from announced dispositions and the timing and tax treatment of potential special dividends.
Consider that FFO, EBITDA and same-store EBITDA are non-GAAP measures and may not be comparable with similarly titled measures used by other REITs.