Vornado Realty Trust — Q3 2016 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016; comparisons are to the corresponding 2015 periods. Vornado is an integrated REIT operating primarily in New York City, Washington, D.C./Northern Virginia and other U.S. markets. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $633.2 million | $627.6 million | $1.868 billion | $1.851 billion |
| Operating income | $189.2 million | $191.4 million | $375.7 million | $552.5 million |
| Net income attributable to Vornado | $92.6 million | $219.2 million | $239.6 million | $509.3 million |
| Net income attributable to common shareholders | $66.1 million | $198.9 million | $172.4 million | $449.1 million |
| Diluted EPS | $0.35 | $1.05 | $0.91 | $2.37 |
| FFO per diluted share | $1.19 | $1.25 | $3.47 | $4.11 |
| Common dividend per share | $0.63 | $0.63 | $1.89 | $1.89 |
Operating margin was approximately 29.9% in Q3 2016 versus 30.5% in Q3 2015, and approximately 20.1% for the first nine months versus 29.9% in the prior-year period. The decline primarily reflects the $160.7 million Skyline impairment recorded in the first quarter and higher expenses; 2015 also benefited from a $90.0 million deferred tax allowance reversal.
- Cash flow: Nine-month cash flow from operations was $574.2 million, compared with $443.5 million in 2015. Investing cash flow was negative $692.0 million, primarily due to $426.6 million of development spending and $262.0 million of real estate additions. Financing cash flow was negative $365.2 million.
- Liquidity: Cash and cash equivalents were $1.353 billion at September 30, 2016, down from $1.836 billion at December 31, 2015. Management expects continuing-operations cash flow over the next 12 months to fund operations, distributions, debt amortization and recurring capital expenditures.
- Debt: Consolidated debt was approximately $11.309 billion before deferred financing costs, with $9.968 billion of mortgages, $850.0 million of senior unsecured notes, $375.0 million of term debt and $115.6 million drawn on revolving facilities. Approximately $737.6 million matures during the remainder of 2016 and $359.6 million in 2017.
- Capital commitments: Construction commitments were approximately $687 million; expected additional funding to partially owned entities was approximately $66 million. Guarantees and master leases totaled approximately $811 million, and letters of credit outstanding were $38.9 million.
- Portfolio: New York office occupancy was 95.5%, New York retail occupancy was 96.7%, and Washington, D.C. office occupancy was 80.6%, including Skyline properties at 47.2% occupancy.
Material changes versus the prior comparable period
- Q3 revenue increased 0.9%, but common-share net income fell 66.7% and diluted EPS declined from $1.05 to $0.35. The comparison was affected by the absence of a $103.0 million Q3 2015 asset-disposition gain and by the $7.4 million Series J preferred-share issuance-cost write-off in 2016.
- Nine-month revenue increased 0.9%, while common-share net income declined 61.6% and FFO declined 15.5%. The 2016 period included the $160.7 million Skyline impairment and the 2015 period included a $90.0 million deferred-tax benefit.
- Same-store EBITDA increased 4.9% in New York and 5.2% in Washington, D.C. in Q3. For the first nine months, same-store EBITDA increased 5.7% in New York and 0.7% in Washington, D.C.
- Vornado sold a 47% interest in 7 West 34th Street while retaining 53%, receiving $127.4 million of net proceeds and recognizing a $159.5 million gain in the first half of 2016. A further $43.8 million gain remained deferred pending removal of a loan guarantee or repayment.
- Vornado redeemed all Series J preferred shares on September 1, 2016 for $246.25 million plus accrued dividends.
- The company completed or participated in multiple refinancings, including 770 Broadway, One Park Avenue, The Warner Building, 280 Park Avenue, 50-70 West 93rd Street and theMART.
Guidance, outlook, risks and unusual items
- Management expects 2016 Washington, D.C. EBITDA, as adjusted, to be approximately $7 million to $11 million below 2015. The expected decline reflects further Skyline occupancy reductions and taking 1726 M Street and 1150 17th Street out of service for future redevelopment.
- The $678 million non-recourse Skyline mortgage was transferred to a special servicer after cash flow became insufficient to service the debt. The loan was in default and immediately due, with the effective weighted-average rate increasing from 2.97% to 4.51%. Vornado accrued $5.3 million of default interest through nine months and continued negotiations with the special servicer.
- Vornado is developing major projects, including 220 Central Park South, The Bartlett, 512 West 22nd Street, 61 Ninth Avenue and 606 Broadway. Estimated costs, timing and completion remain subject to market, construction, leasing and financing risks.
- On October 31, 2016, the board approved a proposed tax-free spin-off of the Washington, D.C. business and its combination with selected JBG assets. The transaction was expected to close in the second quarter of 2017, subject to SEC, listing, regulatory, third-party consent and other conditions; completion was not assured.
- Interest-rate exposure was material: a 1% increase in base rates was estimated to reduce annual net income by approximately $55.8 million, or $0.29 per diluted share, after considering consolidated and pro rata unconsolidated debt.
- Management identified no material changes to the risk factors in the 2015 Form 10-K. Legal matters were considered ordinary-course and not expected to have a material adverse effect, although environmental, insurance, refinancing, development and tenant risks remain.
Important facts for investors to verify
- Reconcile FFO and same-store EBITDA to GAAP results; both are non-GAAP measures and were materially affected by asset sales, impairment, discontinued operations and other adjustments.
- Assess the resolution, collateral effects and potential timing of the Skyline mortgage default and special-servicer negotiations.
- Review debt maturities, variable-rate exposure, covenant headroom and refinancing capacity, particularly for 2016-2017 maturities.
- Evaluate the funding needs, cost-to-complete and projected returns of the development pipeline, including 220 Central Park South and Washington, D.C. redevelopment projects.
- Confirm the status and terms of the proposed Washington, D.C./JBG spin-off and combination, including conditions, tax treatment and effects on Vornado’s future earnings and cash flow.
- Monitor occupancy and leasing trends, especially Skyline and Washington, D.C. properties, and the effect of Hotel Pennsylvania’s weaker contribution.