Business Context and Reporting Period
Alexander's, Inc. is a Delaware-incorporated Real Estate Investment Trust (REIT) managed by Vornado Realty Trust. The company operates, develops, and redevelops properties primarily in the greater New York City metropolitan area. This Form 10-K covers the fiscal year ended December 31, 2003.
The portfolio consists of six properties: four operating assets (Kings Plaza, Rego Park I, Paramus, and Flushing), one major property under development (Lexington Avenue), and one property to be developed (Rego Park II). The company is heavily dependent on the completion of the Lexington Avenue project to achieve positive cash flow.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Total Revenues | $87,162,000 | $76,800,000 |
| Net (Loss) Income | $(17,742,000) | $23,584,000 |
| Funds From Operations (FFO) | $(10,245,000) | $19,921,000 |
| Total Debt | $731,485,000 | $543,807,000 |
| Stockholders' Equity | $50,923,000 | $68,665,000 |
| Cash and Cash Equivalents | $21,336,000 | $45,239,000 |
| Net Operating Loss (NOL) Carryovers | $64,518,000 | $94,064,000 |
Liquidity: Operating properties currently do not generate sufficient cash flow to cover all expenses. The company relies on external financing and expects cash flow to turn positive only after the completion of the Lexington Avenue project in 2005.
Material Changes vs. Prior Period
- Net Loss vs. Income: The company reported a net loss of $17.7 million in 2003 compared to net income of $23.6 million in 2002. This reversal was primarily driven by a $44.9 million non-cash accrual for Stock Appreciation Rights (SARs) compensation expense due to a rise in stock price.
- Revenue Growth: Total revenues increased by $10.4 million (13.6%) to $87.2 million. This was largely due to the commencement of rent recognition for the Bloomberg L.P. lease at the Lexington Avenue property ($5.1 million recognized in late 2003).
- Debt Increase: Total debt increased by approximately $187.7 million to $731.5 million to fund the Lexington Avenue development. This includes a $124 million indebtedness to Vornado Realty Trust.
- Discontinued Operations: Income from discontinued operations dropped significantly from $11.2 million in 2002 (driven by a $10.4 million gain on the sale of the Third Avenue property) to $1.2 million in 2003 (reversal of contingent liabilities).
Outlook, Risks, and Management Commentary
Guidance and Outlook
Management expects cash flow to become positive only after the completion of the Lexington Avenue project, anticipated in 2005. The company has secured a $400 million mortgage financing for the office portion of the project (completed February 2004) to refinance construction loans.
Key Risks and Contingencies
- Development Risk: There is no assurance the Lexington Avenue project will be completed on time or within the $630 million budget. Delays or cost overruns could adversely affect financial condition.
- Tenant Concentration: Sears accounted for 18% of consolidated revenues in 2003. The Bloomberg L.P. lease will represent a significant portion of revenues in 2004.
- Environmental Liability: Ongoing remediation is required at the Kings Plaza property due to soil and groundwater contamination. The company has accrued $2.7 million, with $2.4 million paid as of year-end, but additional costs may be incurred.
- Related Party Dependence: The company is managed by Vornado Realty Trust, which owns 33.1% of the stock. Vornado provides a completion guarantee for the Lexington Avenue project but charges significant management, leasing, and development fees.
- Insurance: While the company has obtained coverage for certified terrorist acts under the Terrorism Risk Insurance Act of 2002, it remains at risk for losses exceeding policy limits.
Investor Verification Checklist
- SAR Liability: Verify the cash impact of the $44.9 million SAR liability and the company's ability to fund potential cash settlements if stock prices rise further.
- Lexington Avenue Budget: Monitor construction expenditures against the $630 million budget and the $237 million remaining availability on the construction loan.
- Vornado Debt Terms: Review the terms of the $124 million debt owed to Vornado, specifically the 12.48% interest rate and the maturity date tied to the Lexington Avenue construction loan repayment.
- Environmental Costs: Track any updates from the NYDEC regarding the Kings Plaza remediation scope and potential for increased accruals.
- Dividend Policy: Confirm the utilization of Net Operating Loss (NOL) carryovers ($64.5 million) which currently offset the requirement to distribute 90% of taxable income as dividends.