Alexander’s, Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan-area real estate investment trust managed, leased and developed by Vornado Realty Trust. The filing covers the fiscal year ended December 31, 2016, including fourth-quarter results. The portfolio comprised seven properties totaling approximately 2.437 million square feet, with 99.8% overall occupancy at year-end.
- Major assets include 731 Lexington Avenue, Rego Park I and II, The Alexander apartment tower, Paramus, Flushing and the Rego Park III development parcel.
- Vornado owned 32.4% of Alexander’s outstanding common stock; Vornado and related parties collectively controlled approximately 58.7%.
- Bloomberg occupied all office space at 731 Lexington Avenue and contributed 46% of 2016 revenue.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $226.9 million | $207.9 million | +9.2% |
| Property rentals | $151.4 million | $138.7 million | +$12.8 million |
| Expense reimbursements | $75.5 million | $69.2 million | +$6.3 million |
| Operating income | $105.5 million | $95.2 million | +10.8% |
| Net income | $86.5 million | $76.9 million | +12.4% |
| Net income per diluted share | $16.91 | $15.04 | +12.4% |
| FFO | $119.8 million | $107.6 million | +11.3% |
| FFO per diluted share | $23.42 | $21.06 | +11.2% |
| Cash flow from operations | $130.8 million | $106.2 million | +23.2% |
| Cash and cash equivalents | $288.9 million | $259.3 million | +11.4% |
Operating margin was approximately 46.5%, compared with 45.8% in 2015. Net margin was approximately 38.1%, compared with 37.0%. Results benefited from the phased lease-up of The Alexander apartment tower, the January 2016 Bloomberg lease amendment and Rego Park II lease termination income.
Fourth-quarter 2016 revenue was $57.3 million, net income was $21.7 million, or $4.23 per diluted share, and FFO was $29.6 million, or $5.78 per diluted share. Fourth-quarter net income and FFO declined from the prior-year quarter, which included a $3.9 million special dividend from a marketable securities investment and higher bankruptcy recoveries.
Debt, Liquidity and Capital Allocation
- Total mortgage debt was $1.056 billion, or approximately 35.8% of enterprise value; net mortgage debt on the balance sheet was $1.052 billion after deferred issuance costs.
- Debt carried a weighted-average interest rate of 2.01%; $909.9 million was variable-rate debt. Management estimated that a 1% increase in base rates would reduce annual earnings by approximately $9.1 million, or $1.78 per diluted share.
- Contractual debt maturities include approximately $402.4 million in 2018, $300.0 million in 2021 and $350.0 million thereafter. Management stated that it intends to refinance maturing debt.
- Operating cash flow of $130.8 million funded $81.8 million of dividends and $15.5 million of real estate additions and construction activity. Capital spending primarily related to The Alexander apartment tower.
- The Company stated that operating cash flow and existing cash balances were expected to fund operations, dividends, debt amortization and capital expenditures over the next twelve months.
- The regular quarterly dividend was increased to $4.25 per share in January 2017, representing an indicated annual rate of $17.00 per share and expected 2017 distributions of approximately $86.9 million.
Material Changes Versus the Prior Comparable Period
- Property rental revenue increased $12.8 million, primarily from $7.3 million of Alexander apartment tower income, $3.4 million from the Bloomberg amendment and $2.3 million of Rego Park II lease termination income.
- Expense reimbursements rose $6.3 million, mainly from higher Bloomberg recoveries after converting 192,000 square feet to a net rent basis and from higher reimbursable real estate taxes.
- Operating expenses increased $6.0 million, driven by The Alexander, higher real estate taxes and higher bad debt expense.
- Interest and debt expense declined $2.0 million, primarily because of the 2015 refinancing of the 731 Lexington retail mortgage at a lower rate.
- Interest and other income declined $2.6 million because 2015 included a $2.1 million special Macerich dividend and higher bankruptcy recoveries.
- Cash flow from operations increased $24.6 million, while dividends paid increased $10.3 million.
- In January 2016, the Company extended 192,000 square feet of Bloomberg office leases to February 2029, with a ten-year extension option, and received a $200 million letter of credit subject to lease conditions.
Outlook, Risks, Contingencies and Unusual Items
- Management provided no formal earnings or revenue guidance. It stated that near-term liquidity was expected to be adequate and that maturing debt would be refinanced.
- Key concentration risks include 731 Lexington Avenue, which generated approximately 65% of 2016 revenue, and Bloomberg, which generated approximately 46% of revenue.
- Sears announced in January 2017 that it planned to close its Rego Park I store in the second quarter of 2017, although its lease requires rent payments through March 2021.
- The Company is exposed to interest-rate increases, refinancing risk, tenant defaults, retail-sector weakness, competition, New York metropolitan-area concentration, terrorism, natural disasters, insurance limitations, environmental liabilities and cybersecurity incidents.
- The Company is managed by Vornado under automatically renewable agreements. 2016 fees to Vornado totaled $14.4 million, including management, development, leasing, property management, cleaning and security fees.
- A Sears lawsuit relating to water intrusion, fires and alleged accessibility violations remained outstanding. Sears withdrew its future-damages claim; the remaining potential property-damage loss was estimated at no more than approximately $650,000.
- The New York City Department of Finance assessed approximately $21.3 million of additional transfer taxes related to the 2012 Kings Plaza sale. The Company believes the claim lacks merit, considers a loss not probable and does not expect a material adverse outcome.
- The Company held Macerich shares with a December 31, 2016 carrying value of $37.9 million, down from $43.2 million in 2015, with the unrealized loss recorded in other comprehensive income.
- Paramus includes a 2021 purchase option for IKEA at $75 million. If exercised, the Company expects approximately $7 million of net cash proceeds and an approximately $60 million gain on sale.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Bloomberg lease retention, credit quality, letter-of-credit terms and the effect of its 46% revenue concentration.
- Refinancing plans and terms for approximately $402 million of debt maturing in 2018, as well as exposure to variable interest rates.
- Actual impact of Sears’s planned closure, including rent collection through 2021 and any required re-leasing costs.
- Occupancy, rental rates and operating performance of The Alexander apartment tower and Rego Park retail properties.
- Status and ultimate resolution of the Sears litigation and the $21.3 million transfer-tax assessment.
- Dividend sustainability relative to FFO, operating cash flow, capital expenditures and refinancing requirements.
- Fees, leasing commissions and potential conflicts arising from the Company’s controlled-company structure and its relationship with Vornado.