Alexander’s, Inc. — FY2012 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 office, retail and land properties. Vornado Realty Trust manages, leases and develops the portfolio and owned 32.4% of Alexander’s common stock at December 31, 2012. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results.
- The continuing portfolio comprised six properties totaling approximately 2.179 million square feet, with 99.1% occupancy at year-end versus 98.7% at December 31, 2011.
- 731 Lexington Avenue generated 66% of 2012 total revenue; Bloomberg accounted for 45%.
Financial performance and key metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Total revenue | $191.3 million | $185.2 million | +3.3% |
| Operating income | $95.6 million | $97.7 million | -2.2% |
| Operating margin | 50.0% | 52.8% | Down |
| Income from continuing operations | $50.0 million | $54.8 million | -8.7% |
| Net income attributable to Alexander’s | $674.4 million | $79.4 million | Primarily due to asset-sale gain |
| Continuing-operations diluted EPS | $9.80 | $10.74 | -8.8% |
| Net diluted EPS | $132.04 | $15.55 | Primarily due to asset-sale gain |
| FFO | $107.6 million, or $21.07 per share | $112.9 million, or $22.11 per share | -4.7% |
| FFO from continuing operations | $78.7 million, or $15.40 per share | $82.7 million, or $16.21 per share | -4.9% |
| Cash flow from operating activities | $109.7 million | $92.5 million | +18.6% |
Property rentals increased to $134.8 million from $133.7 million, while tenant expense reimbursements increased to $56.5 million from $51.6 million. Operating expenses rose to $61.8 million from $55.5 million, primarily because of higher real estate taxes, reimbursable operating costs and bad-debt expense. Interest and debt expense increased to $45.7 million from $43.9 million.
Fourth-quarter 2012 revenue was $48.5 million, compared with $46.6 million in the fourth quarter of 2011. Net income attributable to Alexander’s was $617.2 million, or $120.82 per diluted share, versus $20.6 million, or $4.04 per share, primarily because of the Kings Plaza sale gain. Fourth-quarter continuing-operations income was $12.0 million, or $2.36 per diluted share, versus $13.3 million, or $2.61 per share. Fourth-quarter FFO declined to $24.7 million, or $4.84 per share, from $29.1 million, or $5.71 per share.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $353.4 million at December 31, 2012, down from $506.6 million, largely because of the special dividend and debt repayment.
- Total mortgages payable were $1.066 billion, down from $1.081 billion. Total debt represented 44.4% of enterprise value.
- Debt maturities included $78.2 million in March 2013, $327.4 million in February 2014 and $320.0 million in July 2015. The Rego Park I loan was 100% cash collateralized.
- 2012 cash flow included $714.1 million of proceeds from the Kings Plaza sale, $699.8 million of dividends paid and $265.0 million of debt repayments.
- Management stated that cash flow from continuing operations and existing cash balances were expected to fund operations, dividends, debt amortization and maturities, and recurring capital expenditures over the next twelve months.
- Regular quarterly dividends were reduced to $2.75 per share, or an indicated annual rate of $11.00, effective January 2013, following the Kings Plaza disposition. A special $122.00 per-share dividend was declared and paid in connection with the sale.
Material changes versus the prior comparable period
- Alexander’s sold Kings Plaza on November 28, 2012, for $751.0 million. Net proceeds after debt repayment and closing costs were $479.0 million, including $30.0 million of Macerich common shares.
- The transaction produced a $601.976 million financial-statement gain, of which $599.628 million was recognized in the fourth quarter and $2.348 million was deferred until disposition of the Macerich shares.
- Kings Plaza was classified as discontinued operations. FY2012 income from discontinued operations was $625.0 million versus $26.2 million in FY2011.
- Following the sale, Alexander’s held 535,265 Macerich shares with a December 31, 2012 fair value of $31.2 million and an unrealized gain of $1.2 million recorded in other comprehensive income.
- Vornado management and development arrangements were amended effective December 1, 2012. Alexander’s accrued a $7.5 million Vornado sales commission related to Kings Plaza.
Outlook, commentary, risks and unusual items
- Management was evaluating a proposed Rego Park II apartment tower of approximately 300 units and 250,000 square feet, with estimated funding of $100 million to $120 million. There was no assurance that the project would proceed or be completed on schedule or within budget.
- Rego Park III remains a preliminary development opportunity on approximately 3.4 acres; final plans and costs had not been established.
- Revenue and cash flow are highly concentrated. 731 Lexington Avenue represented 66% of revenue, and Bloomberg represented 45%; loss of Bloomberg or deterioration in its credit quality would be material.
- The portfolio is geographically concentrated in the greater New York City metropolitan area and is exposed to local economic conditions, retail demand, natural disasters, terrorism and climate-related events, including potential effects from Superstorm Sandy.
- Refinancing risk is significant because substantial debt matures in 2013 through 2015. Variable-rate debt exposure was $318.0 million; a 1% increase in base rates was estimated to reduce annual earnings by approximately $3.2 million, or $0.62 per diluted share.
- Flushing-related litigation remained subject to appeal. The company stated that any reasonably possible loss could not be estimated.
- Insurance coverage included $1.7 billion of property and rental-value coverage and $300 million of general liability coverage, but deductibles and losses exceeding coverage could be material.
- The company remained subject to REIT qualification requirements, including distribution of at least 90% of taxable income. Management stated that it distributes 100% of taxable income.
- Management and Deloitte & Touche reported effective disclosure controls and effective internal control over financial reporting, with unqualified audit opinions.
Investor verification checklist
- Verify the sustainability of continuing-operations FFO after the Kings Plaza disposition and the reduction in the regular dividend.
- Review refinancing plans and available liquidity for the March 2013, February 2014 and July 2015 maturities.
- Assess Bloomberg’s lease terms, credit quality and concentration within 731 Lexington Avenue.
- Confirm the final accounting and tax treatment of the Kings Plaza sale, including the deferred $2.348 million gain and Macerich share valuation.
- Monitor the Flushing appeal and any potential indemnification exposure.
- Evaluate whether the proposed Rego Park II apartment tower will proceed, its funding requirements and budget risk.
- Review related-party fees, commissions and governance implications arising from Vornado’s management role and ownership position.