Alexander’s, Inc. 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan area real estate investment trust engaged in leasing, managing, developing and redeveloping seven properties totaling approximately 2.437 million square feet. Vornado Realty Trust owns 32.4% of the outstanding common stock and manages, leases and develops the Company’s properties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
- Office and retail properties were 100.0% occupied at September 30, 2016.
- The 312-unit Alexander apartment tower was 97.4% leased.
- Bloomberg accounted for approximately 46% of nine-month 2016 revenue.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 |
|---|---|---|---|---|
| Total revenue | $57.1 million | $52.4 million | $169.7 million | $155.1 million |
| Operating income | $26.1 million | $23.8 million | $79.0 million | $72.1 million |
| Net income | $21.0 million | $18.2 million | $64.8 million | $53.3 million |
| Diluted EPS | $4.11 | $3.55 | $12.68 | $10.43 |
| FFO | $28.9 million | $26.1 million | $90.2 million | $75.9 million |
| FFO per diluted share | $5.66 | $5.11 | $17.64 | $14.85 |
- Revenue increased 9.0% in the quarter and 9.4% for the nine-month period.
- Net income increased 15.8% in the quarter and 21.5% for the nine-month period.
- Operating margins were approximately 45.8% in the quarter and 46.5% for the nine months; net margins were approximately 36.8% and 38.2%, respectively.
- Dividends were $4.00 per share for the quarter and $12.00 per share for the nine months, compared with $3.50 and $10.50, respectively, in 2015.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $264.1 million at September 30, 2016, compared with $259.3 million at December 31, 2015. Restricted cash was $85.0 million and marketable securities were $43.3 million.
- Nine-month operating cash flow was $81.9 million, compared with $72.3 million in 2015.
- Investing cash flow used $13.2 million, primarily for construction in progress and real estate additions of $13.4 million.
- Financing cash flow used $63.9 million, primarily reflecting $61.4 million of dividends and $2.6 million of debt repayments.
- Mortgages payable were $1.053 billion, net of deferred debt issuance costs, compared with $1.053 billion at year-end 2015. The debt’s estimated fair value was $1.045 billion.
- Approximately $910.8 million of debt was variable-rate and $146.2 million was fixed-rate. A 1% increase in base rates was estimated to reduce annualized earnings by approximately $9.1 million, or $1.78 per diluted share.
- Management stated that expected operating cash flows and existing cash balances should be adequate over the next twelve months to fund operations, dividends, debt amortization and capital expenditures.
Material Changes Versus the Prior Comparable Period
- The Alexander apartment tower contributed $2.5 million of third-quarter rental revenue and $4.7 million for the nine-month period, while adding related operating costs and depreciation.
- A January 2016 Bloomberg lease amendment increased rental income and expense reimbursements. The amendment converted 192,000 square feet from gross rent to net rent and extended the related lease term through February 2029, with a ten-year extension option.
- The Company recognized $2.3 million of nine-month FFO from a tenant lease termination at Rego Park II.
- Interest expense declined by $0.5 million in the quarter and $3.5 million for the nine months, primarily due to the 2015 refinancing of the 731 Lexington Avenue retail loan.
- Vornado-related fees increased to $12.6 million for the nine months from $7.3 million, primarily due to $7.4 million of leasing fees associated with the Bloomberg lease amendment. The Company also paid Vornado a $5.8 million development fee related to The Alexander.
- Real estate additions declined to $13.4 million from $41.9 million in the prior-year nine-month period as The Alexander development neared completion.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no specific earnings or revenue guidance. Management expects liquidity to be adequate for the next twelve months, but notes that full-year results may differ from interim results.
- Revenue concentration is significant: Bloomberg represented approximately 46% of nine-month 2016 revenue. Loss of Bloomberg or a failure to perform under its lease could materially affect results and financial condition, although the lease was extended and supported by a $200 million letter of credit.
- Debt refinancing and interest-rate risk remain important. Mortgage maturities include approximately $78.2 million in March 2018, $68.0 million in October 2018 and $260.8 million in November 2018, subject to the stated extension rights.
- The Company faces ordinary real estate risks, including occupancy, tenant credit, rental rates, construction and renovation costs, taxes, regulation, capital availability and the ability to refinance debt.
- Sears litigation related to Rego Park I remains outstanding; the remaining property-damage claim is estimated at approximately $650,000, and reasonably possible losses are not expected to exceed that amount.
- The New York City Department of Finance has assessed $20.9 million of additional transfer taxes related to the 2012 Kings Plaza sale. The Company disputes the assessment, considers a loss unlikely and does not expect a material adverse effect.
- Insurance coverage, including terrorism coverage, may become unavailable or more expensive. The Company is responsible for deductibles and losses exceeding coverage and for certain NBCR-related losses through its insurance subsidiary.
- The Company is evaluating several new accounting standards, including revenue recognition, financial instruments, leases and stock-based compensation. The filing does not provide a quantified adoption impact.
Most Important Facts for Investors to Verify
- Bloomberg lease concentration, credit quality, lease terms through February 2029 and the continuing availability of the $200 million letter of credit.
- Refinancing plans and extension rights for the 2018 mortgage maturities, particularly the variable-rate loans.
- Sustainability of dividends relative to operating cash flow and FFO.
- Actual stabilization, leasing and operating performance of The Alexander apartment tower.
- Resolution and potential financial exposure from the Sears litigation and the $20.9 million transfer-tax assessment.
- Future Vornado-related management, development and leasing fees, including the related-party governance implications.