Business Context and Reporting Period
Alexander's, Inc. filed its Quarterly Report on Form 10-Q for the period ended September 30, 2003. The Company is a real estate investment trust (REIT) focused on the development and ownership of commercial properties. A significant portion of its current operations and capital allocation is dedicated to the construction of a 1.3 million square foot multi-use building at Lexington Avenue in New York City, with completion expected in 2005. The Company maintains a significant relationship with Vornado Realty Trust, which owns 33.1% of the Company's common stock and manages its properties.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 |
|---|---|---|---|
| Total Revenues | $19,902,000 | $59,781,000 | $57,030,000 |
| Net (Loss) Income | $(13,560,000) | $(13,152,000) | $19,778,000 |
| Net (Loss) Income Per Share | $(2.71) | $(2.63) | $3.95 |
| Funds from Operations (FFO) | $(11,770,000) | $(8,106,000) | $14,356,000 |
| Cash from Operating Activities | N/A | $23,559,000 | $8,531,000 |
| Total Debt | $678,553,000 | $678,553,000 | $543,807,000 |
| Cash and Cash Equivalents | $20,660,000 | $20,660,000 | $90,840,000 |
Note: Amounts in thousands except per share data. The 2002 Net Income included a significant gain from discontinued operations.
Material Changes vs. Prior Period
- Profitability Decline: The Company reported a net loss of $13.6 million for the quarter and $13.2 million for the nine months ended September 30, 2003, compared to net income of $17.4 million and $19.8 million, respectively, in the prior year periods. This reversal is primarily due to the absence of a $10.4 million gain on the sale of the Third Avenue property in 2002 (classified as discontinued operations) and a significant non-cash charge for stock appreciation rights.
- Non-Cash Compensation: General and administrative expenses included $18.7 million (quarter) and $28.6 million (nine months) in non-cash compensation expense for stock appreciation rights. In contrast, the prior year included a reversal of such accruals.
- Debt Increase: Total debt increased to $678.6 million from $543.8 million at year-end 2002. This increase was driven by drawdowns on the $490 million construction loan for the Lexington Avenue project.
- Revenue Growth: Total revenues increased slightly to $59.8 million for the nine months ended September 30, 2003, compared to $57.0 million in the prior year, driven by higher occupancy at the Kings Plaza Regional Shopping Center and increased expense reimbursements.
- Cash Flow: Net cash provided by operating activities improved to $23.6 million for the nine months ended September 30, 2003, compared to $8.5 million in the prior year, largely due to the non-cash stock appreciation rights expense offsetting the net loss.
Outlook, Risks, and Contingencies
- Lexington Avenue Development: Construction is expected to be completed in 2005. The project is 56% funded by a construction loan ($187.3 million drawn of $490 million available) and the remainder by the Company. Vornado Realty Trust has provided a "Completion Guarantee" to fund costs in excess of the budget if necessary. There is a risk that if the project is not completed on time, the lease with anchor tenant Bloomberg L.P. could be cancelled with significant penalties.
- Liquidity: Operating properties currently do not generate sufficient cash flow to cover all expenses. The Company expects cash flow to become positive after the completion of the Lexington Avenue project. The Company has $21 million remaining availability under its line of credit with Vornado.
- Insurance and Debt Covenants: Debt instruments require specific insurance coverage. There is a risk that lenders may declare an event of default if the Company's current policies (which differ from pre-9/11 policies regarding terrorist acts) are deemed insufficient, potentially accelerating debt repayment.
- Environmental Remediation: The Kings Plaza property has soil and groundwater contamination. The Company has accrued $2.7 million for remediation, with $2.4 million paid as of September 30, 2003. Additional costs may be incurred if regulators require more extensive remediation.
- Flushing Property Dispute: A pending sale of the Flushing property is in dispute. The purchaser failed to close, and the landlord has alleged defaults. The Company has obtained an injunction against lease termination but cannot assure the sale will be consummated or that the $1.9 million deposit will not be returned.
Investor Verification Checklist
- Stock Appreciation Rights (SARs): Verify the impact of the $28.6 million non-cash SAR expense on the reported net loss and confirm the valuation methodology used.
- Lexington Avenue Budget: Confirm the remaining construction budget requirements and the status of the $140 million equity gap the Company must fund.
- Debt Covenants: Review the specific insurance covenants in the debt agreements to assess the risk of default related to terrorist act coverage.
- Flushing Property Status: Monitor the resolution of the legal dispute regarding the Flushing property sale and the potential return of the $1.9 million deposit.
- Bloomberg L.P. Lease: Assess the timeline for Lexington Avenue completion relative to the lease terms with Bloomberg L.P. to evaluate penalty risks.