Business Context and Reporting Period
Vornado Realty Trust, a fully integrated REIT, conducts substantially all operations through Vornado Realty L.P. The portfolio is concentrated in New York, with additional properties in Chicago and San Francisco, including office, retail, residential, trade-show and mixed-use assets. Vornado owned approximately 92.6% of the Operating Partnership as of March 31, 2022.
This unaudited combined Form 10-Q covers the three months ended March 31, 2022, with comparisons to the three months ended March 31, 2021. The financial statements received an unqualified review conclusion from Deloitte & Touche LLP.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $442.1 million | $380.0 million | +$62.2 million |
| Net income | $53.4 million | $27.0 million | +$26.4 million |
| Net income attributable to common shareholders | $26.5 million | $4.1 million | +$22.4 million |
| Diluted earnings per share | $0.14 | $0.02 | +$0.12 |
| FFO attributable to common shareholders plus assumed conversions | $154.9 million, or $0.80 per share | $118.4 million, or $0.62 per share | +$36.5 million, or $0.18 per share |
| Net cash provided by operating activities | $171.0 million | $224.2 million | -$53.2 million |
| NOI at share | $284.3 million | $250.1 million | +13.7% |
| NOI at share, cash basis | $281.1 million | $248.9 million | +12.9% |
Operating expenses were $216.5 million, depreciation and amortization was $117.4 million, general and administrative expense was $41.2 million, and interest and debt expense was $52.1 million. Net income attributable to common shareholders represented approximately 6.0% of revenue; this margin is affected by real estate depreciation, interest expense, taxes and noncontrolling interests.
Balance Sheet, Debt and Liquidity
- Total assets were $17.49 billion at March 31, 2022, including $9.91 billion of net real estate and $3.30 billion of investments in partially owned entities.
- Cash and cash equivalents were $973.9 million, restricted cash was $167.4 million, and U.S. Treasury bill investments were $645.4 million.
- Total debt, before deferred financing costs, was approximately $8.67 billion, consisting primarily of $6.09 billion of mortgages, $1.20 billion of senior unsecured notes, an $800.0 million unsecured term loan and $575.0 million drawn on revolving credit facilities. The weighted average interest rate was 2.43%.
- Management reported approximately $3.9 billion of liquidity, comprising $1.1 billion of cash and restricted cash, $645 million of Treasury bills and $2.2 billion available under $2.75 billion of revolving credit facilities.
- Cash and cash equivalents plus restricted cash declined by $789.1 million during the quarter to $1.14 billion, primarily because of Treasury bill purchases, development spending, dividends and distributions.
- Variable-rate consolidated debt totaled approximately $4.53 billion. Management estimated that a 1% increase in base rates would reduce annual net income attributable to Vornado by approximately $47.6 million after considering hedges and noncontrolling interests.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16.4%, principally from development and redevelopment activity, resumed trade shows at theMART, same-store growth and acquisitions, dispositions and other changes.
- Same-store NOI at share increased 3.1%; same-store NOI at share on a cash basis increased 5.8%. New York same-store cash NOI increased 5.0%, theMART increased 14.6% and 555 California Street increased 5.3%.
- Rental revenue increased $58.0 million. Trade-show revenue contributed $5.1 million in Q1 2022 versus none in Q1 2021, as trade shows resumed in the third quarter of 2021.
- Net income benefited from $6.6 million of net disposition gains, including a $6.0 million gain on one 220 Central Park South condominium unit and a $0.6 million gain on two SoHo retail properties.
- FFO increased 30.8% to $154.9 million, or $0.80 per diluted share. FFO is a non-GAAP measure and is not equivalent to cash flow from operations or cash available for distribution.
- Operating cash flow decreased 23.7%, reflecting lower distributions from partially owned entities and working-capital timing. Investing cash outflows increased substantially because of $645.9 million of Treasury bill purchases and higher development spending.
- Debt repayments were only $5.4 million in Q1 2022 versus $358.3 million in Q1 2021; there were no new borrowings in Q1 2022 compared with $350.0 million in Q1 2021.
- Vornado permanently closed the Hotel Pennsylvania in April 2021. Its prior-year operating losses no longer affected Q1 2022 NOI, while the site is being developed as PENN 15.
Outlook, Commentary, Risks and Unusual Items
- Management expects cash flow from continuing operations over the next twelve months, together with cash on hand, to fund operations, distributions, debt amortization and recurring capital expenditures. Development, redevelopment and acquisitions may require additional borrowings, equity issuance or asset sales.
- Major development projects include Farley Office and Retail, PENN 1, PENN 2 and PENN 15. Construction commitments totaled approximately $503 million. Management cautioned that projects may not be completed on schedule or within budget.
- Farley Office and Retail had estimated total development costs of approximately $1.12 billion at Vornado's 95% share, with $982.0 million expended as of March 31, 2022. PENN 1, PENN 2 and PENN District improvements had estimated costs of $450 million, $750 million and $100 million, respectively.
- On April 27, 2022, Vornado agreed to sell the 498,000-square-foot Center Building at 33-00 Northern Boulevard for $172.75 million. Closing was expected in the third quarter of 2022, subject to customary conditions, with an estimated financial statement gain of approximately $15 million and tax gain of approximately $74 million.
- COVID-19 continued to affect office attendance, Manhattan tourism, retail tenants and trade-show attendance. Management stated that future effects remain uncertain and could be material.
- The real estate fund had three investments with fair value of $13.4 million, $322.4 million below cost, and had exposure to defaulted non-recourse loans on the Crowne Plaza Times Square Hotel and 1100 Lincoln Road. Remaining unfunded commitments were $28.5 million, of which Vornado's share was $8.8 million.
- Guarantees and master leases totaled approximately $1.575 billion. Additional expected funding to partially owned entities was approximately $10.3 million. Letters of credit outstanding under a revolving facility totaled $15.3 million.
- The company disclosed a potential $25.4 million clawback of previously paid incentive allocations from the real estate fund; this amount was already accrued and would not affect the income statement upon liquidation.
- Vornado was pursuing litigation against a Regus successor and related parties concerning a disputed lease and guaranty. Management did not expect ordinary-course legal proceedings to have a material adverse effect, but recovery remains uncertain.
- The company adopted ASU 2020-06 effective January 1, 2022 with no material financial statement impact, and adopted ASU 2021-05 with no impact.
Facts Investors Should Verify
- Reconcile the reported $0.14 diluted EPS with FFO of $0.80 per share and assess the effects of depreciation, disposition gains and other adjustments.
- Monitor office occupancy, leasing spreads, tenant concessions and remote-work trends, particularly across the New York portfolio.
- Verify the timing, sale proceeds and estimated gain for the Center Building disposition.
- Assess funding requirements, completion risks and budget changes for Farley, PENN 1, PENN 2 and PENN 15.
- Evaluate refinancing and interest-rate exposure for the $4.53 billion of variable-rate consolidated debt, including the effectiveness and expiration of hedges.
- Review the defaulted real estate fund loans, the $322.4 million aggregate fund investment deficit to cost, unfunded commitments and potential clawback.
- Confirm liquidity after development spending, dividends, distributions, debt maturities and any additional asset sales or financing activity.
- Consider uninsured property, terrorism, earthquake and environmental risks, as well as guarantees and master leases totaling approximately $1.575 billion.