Vornado Realty Trust — Q1 2020 Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust, through Vornado Realty L.P., is a fully integrated REIT focused primarily on office, retail, residential, hotel, trade-show and development assets concentrated in New York City, with additional properties in Chicago and San Francisco. The filing covers the three months ended March 31, 2020. Vornado owned approximately 92.7% of the Operating Partnership at quarter-end.
The quarter was materially affected by the COVID-19 pandemic, including tenant closures, remote office operations, cancellation of trade shows, temporary closure of Hotel Pennsylvania and pauses in certain development projects.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $444.5 million | $534.7 million | Down $90.1 million, or 16.9% |
| Rental revenues | $401.3 million | $499.9 million | Down $98.6 million, or 19.7% |
| Net loss | $104.5 million | Net income of $213.0 million | Adversely affected by investment losses |
| Net income attributable to common shareholders | $5.0 million | $181.5 million | Down 97.3% |
| Diluted EPS | $0.03 | $0.95 | Down $0.92 |
| FFO attributable to common shareholders plus assumed conversions | $130.4 million, or $0.68 per share | $247.7 million, or $1.30 per share | Down 47.4% |
| NOI at share | $280.9 million | $337.8 million | Down 16.8% |
| NOI at share, cash basis | $284.0 million | $332.6 million | Down 14.6% |
| Cash flow from operating activities | $51.4 million | $64.1 million | Down $12.7 million |
Net loss attributable to common shareholders was approximately 1.1% of revenue, compared with net income of approximately 34.0% of revenue in Q1 2019. The filing does not present a GAAP operating margin.
Balance sheet, debt and liquidity
- Total assets were $18.21 billion at March 31, 2020, compared with $18.29 billion at December 31, 2019.
- Cash and cash equivalents were $1.587 billion; cash, cash equivalents and restricted cash totaled $1.667 billion.
- Consolidated debt, excluding deferred financing costs, was approximately $8.0 billion, consisting primarily of $5.671 billion of mortgages, $450 million of senior unsecured notes, an $800 million unsecured term loan and $1.075 billion drawn on revolving credit facilities.
- Debt increased from approximately $7.445 billion at December 31, 2019, primarily because the company increased its term loan by $50 million and drew an additional $500 million on its revolving facilities.
- Management reported approximately $3.4 billion of liquidity, comprising $1.7 billion of cash and restricted cash and $1.7 billion available under $2.75 billion of revolving credit facilities.
- Management also reported approximately $9.0 billion of unencumbered assets. The company expected operating cash flow over the following twelve months to fund operations, distributions, debt amortization and recurring capital expenditures, while noting that COVID-19 could materially affect this assessment.
Material changes versus the prior comparable period
- Revenue declined primarily because of the transfer of properties to the Fifth Avenue and Times Square joint venture, lower development-related revenue, lower Hotel Pennsylvania revenue and canceled trade shows. Fee and other income increased by $8.5 million.
- NOI at share declined 2.5% on a same-store basis, while same-store NOI at share on a cash basis declined 1.5%. Excluding Hotel Pennsylvania, same-store NOI at share declined 0.3%; excluding trade shows, theMART same-store NOI at share increased 1.1%.
- The company recorded a $183.5 million unrealized loss on real estate fund investments, compared with an immaterial loss in Q1 2019. The fund investments had a fair value of $45.1 million at quarter-end, $296.4 million below cost.
- The company adopted the expected-credit-loss standard effective January 1, 2020, recording a $16.1 million cumulative-effect reduction to beginning accumulated deficit and $7.3 million of additional credit losses during the quarter.
- Interest and debt expense fell to $58.8 million from $102.5 million, primarily because Q1 2019 included debt prepayment costs and higher interest expense associated with prior debt.
- Net gains on asset dispositions fell to $68.6 million from $220.3 million. Q1 2020 gains primarily reflected seven 220 Central Park South condominium closings, compared with condominium gains and the sale of Urban Edge Properties in Q1 2019.
- The company sold its 6.25 million PREIT shares for net proceeds of $28.4 million and recognized a $4.9 million mark-to-market loss.
- Financing cash flow was positive $108.1 million, compared with negative $274.7 million in Q1 2019, despite $498.5 million of common dividends and distributions, including the $1.95 per share special dividend paid in January 2020.
Outlook, management commentary, risks and unusual items
- Management did not provide formal full-year earnings or operating guidance. It stated that the impact of COVID-19 remained highly uncertain and could be material.
- March rent collections were substantially complete. For April, the company collected 90% of office rent and 53% of retail rent, or 83% in aggregate. Tenants requested rent relief and deferrals, which management expected to evaluate case by case.
- Management reported 1,803 temporary employee furloughs, executive salary waivers and the deferral of non-management trustee cash retainers effective April 1, 2020.
- Four additional 220 Central Park South units closed in April for net proceeds of $157.7 million. Management expected approximately $745 million of additional net cash proceeds during the remainder of 2020, but warned that construction pauses could delay future closings.
- The company had approximately $559 million of construction commitments, approximately $11 million of expected additional funding obligations to partially owned entities and approximately $1.543 billion of guarantees and master-lease obligations.
- The company had $17.5 million of outstanding letters of credit under its revolving facilities. Revolving credit agreements include interest coverage and debt-to-market-capitalization covenants, with potential higher borrowing costs if ratings fall below Baa3/BBB.
- Interest-rate exposure included $2.197 billion of consolidated variable-rate debt; a 1% change in base rates was estimated to affect annual income by approximately $22.0 million before hedging effects. Interest-rate swaps had total notional amounts of approximately $1.925 billion.
- The company recognized a $7.6 million immediate expense related to accelerated vesting under the 2020 Outperformance Plan and granted approximately $32.9 million of performance-based awards to senior executives.
- The filing identifies legal proceedings involving a disputed Regus lease at 345 Montgomery Street and a dispute concerning Pier 92 lease obligations. Management did not expect ordinary-course legal matters to have a material adverse effect, but the filing notes potential exposure to uninsured losses, environmental costs and construction or development overruns.
Most important facts for investors to verify
- Subsequent-quarter rent collections, rent deferrals, abatements, tenant defaults and occupancy trends, particularly for retail and office tenants.
- Availability and covenant capacity under the revolving credit facilities, debt maturities and refinancing requirements.
- Whether 220 Central Park South closings and the expected approximately $745 million of remaining 2020 proceeds occur on schedule.
- Potential impairment charges or further valuation declines in real estate fund investments and the broader property portfolio.
- Progress, revised timing and remaining costs for 220 Central Park South, PENN1, PENN2, the Farley Office and Retail Building, Moynihan Train Hall and other paused developments.
- Cash distributions and dividends relative to recurring cash flow, FFO and liquidity needs.
- Exposure under the approximately $1.543 billion of guarantees and master leases, the Pier 92 dispute, the Regus litigation and construction commitments.
- Subsequent changes in COVID-19 restrictions, tenant operations, trade shows, Hotel Pennsylvania and the company’s ability to maintain effective internal controls while employees work remotely.