Alexander’s, Inc. 2017 Q2 Form 10-Q Summary
Business context and reporting period
Alexander’s, Inc. is a REIT that leases, manages, develops and redevelops seven properties in the greater New York City metropolitan area. Vornado Realty Trust manages the Company and provides leasing and development services; Vornado owned 32.4% of outstanding common stock as of June 30, 2017. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance and key metrics
| 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 | $57.2 million | $57.0 million | $114.4 million | $112.6 million |
| Operating income | $26.6 million | $26.5 million | $53.7 million | $52.8 million |
| Net income | $20.7 million | $21.8 million | $42.3 million | $43.8 million |
| Net income per diluted share | $4.04 | $4.26 | $8.28 | $8.56 |
| FFO | $28.7 million | $31.0 million | $58.2 million | $61.2 million |
| FFO per diluted share | $5.60 | $6.06 | $11.39 | $11.98 |
Operating margin was approximately 46.5% in the quarter and 47.0% for the six-month period. Net margin was approximately 36.1% and 37.0%, respectively. The filing does not present EBITDA or adjusted EBITDA.
- Six-month property rentals increased to $76.5 million from $75.5 million, while expense reimbursements increased to $37.9 million from $37.0 million.
- Six-month operating expenses increased to $41.7 million from $39.0 million, primarily due to higher real estate taxes.
- Interest and debt expense increased to $13.4 million from $10.9 million for the six months, primarily due to higher average LIBOR and the June 2017 refinancing.
- Cash flow from operations was $35.8 million versus $32.7 million in the prior-year period. Investing cash outflow was $2.2 million versus $11.1 million.
- Cash and cash equivalents were $466.5 million at June 30, 2017; restricted cash was $84.6 million, for total cash and restricted cash of $551.0 million, compared with $374.7 million at December 31, 2016.
- Mortgages payable, net of deferred debt issuance costs, were $1.240 billion at June 30, 2017, compared with $1.052 billion at December 31, 2016. The estimated fair value of mortgages was $1.245 billion.
- Dividends were $4.25 per common share for the quarter and $8.50 per share for the six months, compared with $4.00 and $8.00, respectively, in 2016.
- The portfolio comprised approximately 2.437 million square feet and was 99.4% occupied at June 30, 2017.
Material changes versus the prior comparable period
- Quarterly net income declined 5.1% and diluted earnings per share declined 5.2%; six-month net income declined 3.3% and diluted earnings per share declined 3.3%.
- Quarterly FFO declined 7.5% and six-month FFO declined 4.9%. The 2016 comparison benefited from $2.3 million of rental income from a Rego Park II lease termination and $1.1 million of related additional depreciation and amortization.
- Quarterly revenue was broadly stable, as higher expense reimbursements and increased rental income from The Alexander apartment tower largely offset the absence of the prior-year lease-termination income.
- The Company completed a $500.0 million refinancing of the 731 Lexington Avenue office portion in June 2017. The new interest-only loan bears interest at LIBOR plus 0.90%, matures in June 2020 and includes four one-year extension options. The prior $300.0 million loan was repaid.
- Financing activities generated $142.7 million of cash in the first six months, reflecting $500.0 million of new borrowings, $301.8 million of debt repayments, $12.0 million of debt issuance costs and $43.5 million of dividends paid.
- Marketable securities declined to $31.1 million from $37.9 million, reflecting a decrease in the fair value of the Company’s Macerich shares. The $6.8 million unrealized loss was recorded in other comprehensive income.
Guidance, outlook, risks and unusual items
Management states that cash flows from continuing operations over the next twelve months, together with existing cash balances, are expected to fund operations, cash dividends, debt amortization and capital expenditures. No specific earnings, revenue or FFO guidance is provided.
- Bloomberg accounted for approximately 46% of total revenue in each six-month period. Loss of Bloomberg or failure to perform under its lease would materially affect results and financial condition.
- Sears closed its 195,000-square-foot Rego Park I store in April 2017. The lease generates approximately $10.3 million of annual revenue, expires in March 2021, and includes approximately $4.5 million of straight-line rent receivable and $0.5 million of unamortized deferred leasing costs that remain subject to recoverability assessment.
- The Company faces a Sears lawsuit relating to Rego Park I. The remaining property-damage claim is estimated at approximately $0.7 million, and reasonably possible losses are not expected to exceed that amount.
- The New York City Department of Finance has assessed approximately $22.1 million of additional transfer taxes related to the 2012 Kings Plaza sale. Management believes the claim is without merit, considers a loss not probable and does not expect a material adverse effect.
- Approximately $2.1 million of standby letters of credit were outstanding at June 30, 2017.
- Variable-rate debt totaled approximately $1.108 billion. A 1% increase in base rates would increase annual interest expense by approximately $11.1 million and reduce diluted earnings per share by approximately $2.17, based on the filing’s sensitivity analysis. A $500.0 million interest-rate cap limits LIBOR to 6.0% on the refinanced 731 Lexington office loan.
- On July 28, 2017, after quarter-end, the Company invested $200.0 million as a participant in the Rego Park II loan, earning LIBOR plus 1.60%; the loan matures in November 2018.
- The Company adopted new restricted-cash and certain cash-flow classification guidance early in 2017 without a material impact. It expects future lease and revenue standards to affect presentation and potentially the timing of certain real-estate-sale gains, but the overall impact remains under evaluation.
Important facts for investors to verify
- Bloomberg’s creditworthiness, lease terms and concentration of approximately 46% of revenue.
- Occupancy, rent collections and replacement or recovery plans for the vacated Sears space.
- Refinancing and maturity plans for the $1.254 billion of gross mortgage debt, including 2018 maturities.
- Exposure to LIBOR and the effectiveness and terms of the interest-rate cap.
- Recoverability of Sears-related straight-line rent and deferred leasing costs.
- Status and potential exposure from the Sears litigation and the $22.1 million transfer-tax assessment.
- Terms and investment risk associated with the post-quarter-end $200.0 million Rego Park II loan participation.
- Future effects of ASC 606 and ASC 842 on revenue presentation, lease accounting and reported gains.