ALEXANDERS INC annual report, FY2017

Business Context and Reporting Period

Alexander’s, Inc. is a Delaware REIT focused on leasing, managing, developing and redeveloping seven properties totaling approximately 2.437 million square feet in the greater New York City metropolitan area. Vornado Realty Trust manages, leases and develops the properties and owned 32.4% of Alexander’s outstanding common stock at December 31, 2017. This Form 10-K covers the fiscal year ended December 31, 2017, including fourth-quarter results.

Key assets include 731 Lexington Avenue in Manhattan, Rego Park I and II, The Alexander apartment tower, Paramus, Flushing and the Rego Park III development parcel.
Portfolio occupancy was 99.3% at December 31, 2017; The Alexander was 94.6% leased.
Bloomberg represented approximately 46% of total 2017 revenue, while 731 Lexington Avenue represented approximately 64%.

Financial Performance and Key Metrics

Metric	2017	2016	Change
Total revenue	$230.6 million	$226.9 million	+1.6%
Operating income	$105.3 million	$105.5 million	-0.2%
Net income	$80.5 million	$86.5 million	-6.9%
Diluted EPS	$15.74	$16.91	-6.9%
FFO, non-GAAP	$114.9 million	$119.8 million	-4.1%
FFO per diluted share	$22.46	$23.42	-4.1%
Net cash from operating activities	$123.4 million	$130.8 million	-5.7%
Cash, cash equivalents and restricted cash	$393.3 million	$374.7 million	+5.0%

2017 net margin was approximately 34.9% and operating margin was approximately 45.7%, compared with approximately 38.1% and 46.5%, respectively, in 2016.
Property rentals increased to $152.9 million from $151.4 million, primarily due to higher income from The Alexander, partly offset by the absence of a $2.3 million lease-termination payment recognized in 2016.
Expense reimbursements increased to $77.7 million from $75.5 million, while operating expenses rose to $85.1 million from $82.2 million, principally because of higher real estate taxes and reimbursable operating expenses.
Interest and debt expense increased to $31.5 million from $22.2 million, driven by higher LIBOR, the larger 731 Lexington office loan and increased amortization of debt issuance costs.
Total assets were $1.632 billion and total equity was $344.0 million at year-end. Real estate, net, was $754.3 million.

Fourth-Quarter Results

Revenue was $58.1 million versus $57.3 million in the fourth quarter of 2016.
Net income was $17.9 million, or $3.50 per diluted share, versus $21.7 million, or $4.23 per share.
FFO was $28.1 million, or $5.49 per diluted share, versus $29.6 million, or $5.78 per share.
Fourth-quarter results included $2.2 million, or $0.43 per diluted share, of accelerated depreciation and amortization related to the Le Cirque lease termination at 731 Lexington Avenue.

Cash Flow, Debt and Liquidity

Operating cash flow was $123.4 million. Investing cash outflows were $202.0 million, primarily the $200.0 million Rego Park II loan participation. Financing cash inflows were $97.1 million, primarily the $500.0 million 731 Lexington office refinancing, partly offset by $303.7 million of debt repayments and $87.0 million of dividends.
Total mortgage debt was $1.252 billion, or $1.240 billion net of deferred issuance costs. Debt to total enterprise value was 42.2%.
Variable-rate debt totaled $1.106 billion and fixed-rate debt totaled $146.2 million. Management estimated that a 1% increase in base rates would reduce annual earnings by approximately $11.1 million, or $2.16 per diluted share, before considering the interest-rate cap.
Debt listed as maturing in 2018 totaled $402.4 million, comprising Rego Park I ($78.2 million), Paramus ($68.0 million) and Rego Park II ($256.2 million). The filing states that debt may be refinanced or repaid as it comes due.
Management stated that operating cash flow and existing cash balances are expected to fund operations, dividends, debt amortization and capital expenditures for the next twelve months.
The quarterly dividend was increased from $4.25 to $4.50 per share in January 2018, implying an indicated annual rate of $18.00 per share and approximately $92.1 million of 2018 dividends if declared for the full year.

Material Changes, Outlook and Unusual Items

On June 1, 2017, the Company refinanced the 731 Lexington office mortgage with a $500.0 million LIBOR-plus-0.90% interest-only loan and purchased a $500.0 million interest-rate cap with a 6.0% LIBOR strike.
On July 28, 2017, Alexander’s invested $200.0 million in a participation in the Rego Park II loan, earning interest at LIBOR plus 1.60%.
Sears closed its 195,000-square-foot Rego Park I store on April 4, 2017, although its lease, generating approximately $10.6 million of annual revenue, expires in March 2021. The Company is assessing $3.9 million of straight-line rent receivables and $0.4 million of deferred leasing costs related to the lease.
Toys “R” Us, an affiliate of Vornado and a tenant at Rego Park II generating approximately $2.6 million of annual revenue, filed for Chapter 11 bankruptcy protection on September 18, 2017. Related tenant improvements, deferred leasing costs and straight-line rent receivables totaled approximately $1.5 million at year-end.
Le Cirque’s 13,000-square-foot lease at 731 Lexington Avenue terminated on January 5, 2018, resulting in approximately $2.8 million of accelerated amortization, of which $2.65 million was recognized in 2017.
The Paramus ground lease includes a $75.0 million purchase option exercisable in 2021. If exercised, the Company expects approximately $7.0 million of net cash proceeds and an approximately $60.0 million gain; the filing does not indicate whether the option will be exercised.
The Company expects the adoption of ASC 606 and ASU 2016-01 in 2018 to have no material impact on the consolidated financial statements. It expects adoption of the new lease standard in 2019 to require recognition of a right-of-use asset and lease liability for the Flushing ground lease.

Risks, Contingencies and Governance Considerations

Revenue and asset exposure is highly concentrated geographically in the New York metropolitan area and operationally in 731 Lexington Avenue and Bloomberg.
Tenant credit and retail-sector risks include Sears’ store closure and going-concern disclosure and Toys’ bankruptcy filing.
Approximately $1.474 million of standby letters of credit were outstanding at year-end.
Sears litigation remains pending; the Company estimates reasonably possible losses, if any, will not exceed approximately $650,000.
The New York City Department of Finance asserted a $22.9 million transfer-tax assessment related to the 2012 Kings Plaza sale. Management believes the claim lacks merit, considers a loss not probable and does not expect a material adverse outcome.
The Company is exposed to refinancing, variable-rate interest, LIBOR transition, tenant default, property damage, terrorism, natural-disaster, climate, insurance, environmental and cybersecurity risks.
Vornado and related parties collectively held approximately 58.6% of the common stock and provide management, leasing and development services. Related-party fees paid to Vornado totaled $8.8 million in 2017.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.

Most Important Facts to Verify

Whether the 2018 maturities totaling approximately $402.4 million were refinanced or repaid on acceptable terms.
Whether Sears and Toys produce further write-offs, rent losses, concessions or leasing costs.
Bloomberg’s continuing creditworthiness and occupancy commitment, given its approximately 46% revenue contribution.
The sustainability of the $18.00 indicated annual dividend relative to FFO, operating cash flow and debt requirements.
The status and economics of the Paramus purchase option and the Rego Park III development plans.
The outcome of the Sears litigation and the $22.9 million NYC transfer-tax assessment.
The effect of rising interest rates on variable-rate debt and the adequacy of the $500.0 million LIBOR cap.