Business Context and Reporting Period
Alexander’s, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, including fourth-quarter results. The company is a New York metropolitan-area REIT that leases, manages, develops and redevelops seven properties. Vornado Realty Trust manages the company and its properties and owned 32.4% of outstanding common stock at year-end.
Properties totaled approximately 3.4 million square feet, including 731 Lexington Avenue, Kings Plaza, Rego Park I and II, the Paramus and Flushing properties, and the Rego Park III development parcel. Bloomberg accounted for 33% of 2011 consolidated revenue.
Financial Performance and Position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $254.3 million | $241.4 million | +5.3% |
| Net income attributable to Alexander’s | $79.4 million | $66.4 million | +19.6% |
| Diluted earnings per share | $15.55 | $13.01 | +19.5% |
| FFO attributable to common stockholders | $112.9 million | $97.3 million | +16.1% |
| Diluted FFO per share | $22.11 | $19.05 | +16.1% |
| Net cash provided by operating activities | $92.5 million | $76.0 million | +21.7% |
| Cash and cash equivalents | $506.6 million | $397.2 million | +27.5% |
| Total debt | $1.331 billion | $1.246 billion | +$84.5 million |
| Total equity | $363.2 million | $343.8 million | +5.7% |
Property rentals increased to $174.6 million from $166.4 million, while tenant expense reimbursements increased to $79.6 million from $74.9 million. Operating income was $130.9 million, implying an operating margin of approximately 51.5%; net income attributable to Alexander’s implied a margin of approximately 31.2%.
Fourth-quarter 2011 revenue was $64.6 million, net income attributable to common stockholders was $20.6 million, or $4.04 per diluted share, and FFO was $29.1 million, or $5.71 per diluted share. Comparable fourth-quarter 2010 amounts were $62.3 million of revenue, $17.9 million of net income, and $26.0 million of FFO.
Cash flow from operations was $92.5 million. Investing activities provided $0.4 million, primarily reflecting proceeds from maturing short-term investments offset by real estate additions and restricted cash increases. Financing activities provided $16.5 million after refinancing proceeds, debt repayments and $61.3 million of common dividends.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected lease-up at Kings Plaza, Rego Park I and Rego Park II, as well as higher reimbursable real estate taxes and operating expenses.
- Operating expenses increased $6.3 million to $84.9 million, and depreciation and amortization increased $2.7 million to $34.0 million, primarily because of Rego Park II assets placed into service.
- General and administrative expense declined $3.4 million to $4.4 million. The prior year included a $3.135 million Flushing litigation accrual; $0.807 million of that accrual was reversed following the 2011 settlement.
- Interest and debt expense declined $5.7 million to $52.7 million, primarily because the average interest rate decreased to 3.90% from 4.43%, partly offset by higher average debt.
- The company completed refinancings of Kings Plaza, Paramus and Rego Park II. These transactions generated approximately $95 million of net proceeds from the Kings Plaza refinancing and extended or replaced significant maturities.
- Dividends increased to $12.00 per share for 2011 from $7.50 per share in 2010. On January 18, 2012, the company increased the regular quarterly dividend to $3.75 per share, an indicated annual rate of $15.00.
Debt, Liquidity and Outlook
Total debt was $1.331 billion, equal to 49.0% of total enterprise value. Scheduled 2011 principal and interest payments were $68.8 million. Debt maturities included $78.2 million at Rego Park I in March 2012, $339.9 million of Lexington office debt in February 2014, and $320.0 million of Lexington retail debt in July 2015. Management stated that operating cash flow and existing cash balances were expected to fund operations, dividends, debt amortization and maturities, and recurring capital expenditures for the next twelve months.
Approximately $565.5 million of debt was variable-rate debt at year-end. Management estimated that a 1% increase in base rates would reduce annual earnings by approximately $5.7 million, or $1.11 per diluted share, based on the disclosed debt profile.
The Rego Park III development remains preliminary and may include up to 80,000 square feet of retail space. The filing provides no assurance regarding commencement, completion timing or final project cost.
Risks, Contingencies and Unusual Items
- Revenue is geographically concentrated in the greater New York metropolitan area and tenant concentration is significant: Bloomberg represented 33% of 2011 revenue.
- Substantially all properties are mortgage-encumbered. Financing agreements include covenants, tenant approval requirements and prepayment or yield-maintenance provisions.
- Refinancing risk is material, particularly for the Lexington Avenue loans maturing in 2014 and 2015. Interest-rate increases could raise refinancing costs and reduce funds available for dividends.
- An oil spill at Kings Plaza remains under remediation. Estimated cleanup costs are approximately $2.5 million; $0.5 million had been paid and the balance was covered by insurance.
- The company settled litigation involving the Flushing property for $2.4 million in 2011 and reversed $0.807 million of a previously recorded loss accrual.
- The Paramus lease includes a 2021 purchase option at $75 million. If exercised, management estimates approximately $7 million of net cash proceeds and a gain of approximately $62 million; the outcome is uncertain.
- Insurance coverage may not fully protect against terrorism, environmental liabilities, casualty losses, deductibles or losses exceeding policy limits. Up to $75 million of the Lexington retail mortgage may become recourse upon a substantial casualty.
- The company depends on Vornado for management, development and leasing services and owed Vornado $41.3 million at year-end, including $40.7 million for leasing fees. These related-party arrangements create potential conflicts of interest.
- The company reported effective disclosure controls and effective internal control over financial reporting. Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Confirm Bloomberg’s lease terms, credit profile and renewal outlook given its 33% contribution to revenue.
- Review the 2012-2015 debt maturities, refinancing plans, collateral requirements and exposure to variable interest rates.
- Reconcile dividends of $12.00 per share in 2011 and the announced $3.75 quarterly dividend with taxable income and available cash flow.
- Assess whether operating cash flow adequately covers dividends, recurring capital expenditures and required debt service.
- Monitor Kings Plaza environmental remediation, insurance recoveries and any remaining regulatory obligations.
- Evaluate the assumptions, timing and economics of the Rego Park III development and the Paramus purchase option.
- Review Vornado management, leasing and development fees, outstanding amounts and governance implications of the controlled-company structure.