Alexander’s, Inc. 2018 Form 10-K Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan-area REIT engaged in leasing, managing, developing and redeveloping primarily office, retail, residential and land properties. Vornado Realty Trust manages, leases and develops the portfolio and owned 32.4% of Alexander’s common stock at December 31, 2018. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results.
The portfolio comprised seven properties totaling approximately 2.437 million square feet, with 91.4% occupancy at year-end. The largest asset is 731 Lexington Avenue in Manhattan. Bloomberg occupied all company-owned office space at that property and represented approximately 46% of total revenue.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $232.825 million | $230.574 million | +$2.251 million |
| Operating income | $100.622 million | $105.270 million | -$4.648 million |
| Income from continuing operations | $56.641 million | $80.509 million | -$23.868 million |
| Net income | $32.844 million | $80.509 million | -$47.665 million |
| Diluted net income per share | $6.42 | $15.74 | -$9.32 |
| FFO, non-GAAP | $77.429 million | $114.908 million | -$37.479 million |
| FFO per diluted share | $15.13 | $22.46 | -$7.33 |
| Dividends per share | $18.00 | $17.00 | +$1.00 |
Property rentals were essentially flat at $152.795 million versus $152.857 million. Expense reimbursements increased to $80.030 million from $77.717 million. Operating expenses increased 10.2% to $93.775 million, primarily due to higher bad-debt expense, real estate taxes and property operating costs. Interest and debt expense increased to $44.533 million from $31.474 million, driven principally by higher LIBOR, the larger 731 Lexington office loan and higher amortization of debt issuance costs.
Reported results included an $11.990 million reduction in the fair value of Macerich shares following a 2018 accounting change that required marketable-security changes to be recognized in earnings. Net income also included a $23.797 million loss from discontinued operations related to contested New York City real property transfer taxes from the 2012 Kings Plaza sale.
For the fourth quarter, revenue was $57.567 million, net income was $9.971 million, or $1.95 per diluted share, and FFO was $24.158 million, or $4.72 per diluted share. Fourth-quarter net income included a $6.429 million marketable-securities fair-value loss.
Net cash provided by operating activities was $73.538 million, compared with $123.426 million in 2017. Cash and restricted cash declined to $289.495 million from $393.279 million. Financing activities used $176.185 million, including $92.100 million of dividends and $81.896 million of net debt repayments. Investing activities used $1.137 million.
Total debt was $1.171 billion at year-end, or 47.9% of enterprise value, with a weighted-average interest rate of 3.67%. Approximately $1.103 billion was variable-rate debt; management estimated that a 1% increase in base rates would increase annual interest expense by approximately $11.025 million, or $2.15 per diluted share. Net mortgages payable were $1.162 billion after deferred debt issuance costs. Total equity was $285.092 million and total assets were $1.481 billion.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but operating income declined because expense growth exceeded revenue growth.
- Net income and FFO declined substantially, primarily because of the contested $23.797 million Kings Plaza transfer-tax charge, the $11.990 million Macerich fair-value loss, higher interest expense and tenant-related charges.
- Sears rejected its 195,000-square-foot Rego Park I lease following its bankruptcy. Alexander’s wrote off $2.973 million of straight-line rent receivables and accelerated $312,000 of deferred leasing costs.
- Toys “R” Us rejected its 47,000-square-foot Rego Park II lease. The company wrote off $500,000 of straight-line rent receivables and accelerated $803,000 of tenant-improvement and leasing-cost amortization.
- The company refinanced Rego Park II for $252.544 million at LIBOR plus 1.35%, maturing in December 2025, and extended the $68.0 million Paramus mortgage at a fixed 4.72% rate through October 2021.
- On January 10, 2019, Kohl’s announced plans to close and sublease its 133,000-square-foot Rego Park II store. Kohl’s remains obligated under its lease through January 2031.
- The regular quarterly dividend was set at $4.50 per share, implying an indicated annual rate of $18.00 per share and approximately $92.1 million of 2019 dividend payments if declared for the full year.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash flows from continuing operations over the next twelve months, together with existing cash balances, are expected to fund operations, dividends, debt amortization and capital expenditures. No formal revenue or earnings guidance was provided.
- Revenue and asset concentration are significant: 731 Lexington Avenue generated approximately 65% of 2018 revenue, while Bloomberg generated approximately 46% of total revenue.
- The portfolio is concentrated in the greater New York City metropolitan area, exposing results to local economic conditions, retail weakness, competition, terrorism, natural disasters, climate-related events and changes in real estate demand.
- Retail tenant bankruptcies, vacancies and anchor-tenant departures could reduce rent, occupancy and cash flow. Sears and Toys vacancies were material, and Kohl’s announced a planned closure.
- Most debt bears variable interest rates and is secured by mortgages. Refinancing, interest-rate and covenant risks remain material, particularly as debt matures in 2021, 2022 and thereafter.
- The Kings Plaza transfer-tax matter remains contested. Alexander’s paid and expensed $23.797 million to stop interest accrual while its case remains on hold pending an appeal involving a Vornado joint venture.
- The Sears litigation concerning alleged property damage and ADA-related issues remains stayed following Sears’ bankruptcy; the company estimated possible losses at no more than approximately $650,000.
- Alexander’s depends on Vornado for management, leasing and development and has significant related-party relationships and potential conflicts of interest. Vornado-related fees totaled $7.039 million in 2018.
- The company expects to remain qualified as a REIT and distributes 100% of taxable income, but failure to maintain REIT qualification could result in corporate-level taxation and reduced distributions.
- Insurance coverage includes up to $1.7 billion for property and rental value risks, but uninsured losses, deductibles and coverage availability remain potential exposures.
Most Important Facts for Investors to Verify
- Bloomberg’s lease terms, credit quality, occupancy and exposure to 731 Lexington Avenue.
- Re-leasing progress and expected cash-flow impact from the Sears and Toys vacancies and the announced Kohl’s closure.
- Debt maturities, extension rights, variable-rate exposure, interest-rate-cap terms and refinancing capacity.
- Status and potential recovery of the $23.797 million Kings Plaza transfer-tax payment and litigation.
- Sustainability of the $18.00 per-share annualized dividend relative to operating cash flow and FFO, particularly given 2018 operating cash flow of $73.538 million.
- Terms and economics of the Vornado management, leasing and development agreements, including related-party fees.
- Potential value and timing of the IKEA Paramus purchase option in 2021, which could generate approximately $7 million of net cash proceeds and an estimated $60 million gain if exercised.
- Market value and volatility of the Macerich investment, carried at $23.166 million at December 31, 2018.