Vornado Realty Trust — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; filed November 2, 2015. Financial statements are unaudited and amounts are generally in thousands, except per-share data. Vornado is an integrated REIT focused primarily on office, retail, residential and other real estate in New York City and Washington, D.C.
Business Context and Reporting Period
- Vornado completed the January 15, 2015 spin-off of substantially all of its retail segment to Urban Edge Properties, including 79 strip centers, three malls, a warehouse park and $225 million of cash. Related historical results are presented as discontinued operations.
- At September 30, 2015, Vornado owned approximately 93.6% of its Operating Partnership and had 188.5 million common shares outstanding.
- Portfolio occupancy was 96.2% in New York, 84.7% in Washington, D.C., and 93.6% across the disclosed operating portfolio, excluding properties without reported occupancy.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $627.6 million | $578.7 million | $1,850.7 million | $1,715.5 million |
| Operating income | $191.4 million | $182.1 million | $552.5 million | $516.6 million |
| Operating margin | 30.5% | 31.5% | 29.9% | 30.1% |
| Net income attributable to common shareholders | $198.9 million | $131.2 million | $449.1 million | $270.2 million |
| Diluted earnings per share | $1.05 | $0.69 | $2.37 | $1.43 |
| FFO per diluted share | $1.25 | $1.15 | $4.11 | $3.63 |
| EBITDA | $515.5 million | $474.3 million | $1,266.6 million | $1,393.5 million |
- Revenue drivers: Nine-month revenue increased $135.2 million, primarily from acquisitions, development and redevelopment, and same-store operations, particularly in New York.
- Profitability: Nine-month net income attributable to common shareholders rose substantially, but included significant gains on asset dispositions and a $90.0 million deferred-tax valuation allowance reversal.
- Cash flow: Nine-month cash flow from operating activities was $443.5 million, down from $828.6 million. Investing cash use was $480.4 million, including $388.6 million of acquisitions, $339.6 million of development and construction costs, and $207.8 million of real estate additions. Financing cash use was $373.5 million.
- Liquidity: Cash and cash equivalents were $788.1 million versus $1,198.5 million at December 31, 2014. No borrowings were outstanding under revolving credit facilities; letters of credit totaled $40.6 million.
- Debt: Consolidated debt was $10.0 billion, up from $9.6 billion at year-end 2014. Mortgages payable were $9.2 billion, with a weighted average rate of 3.69%; senior unsecured notes were $847.6 million at 3.68%. Approximately $1.41 billion of debt matures in 2016.
- Distributions: Common dividends were $0.63 per share in the third quarter and $1.89 per share for the nine months, compared with $0.73 and $2.19, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 8.5%, while operating income increased 5.1%; the operating margin declined modestly because expenses grew faster than revenue.
- Q3 common-shareholder earnings increased 51.7%, primarily reflecting the approximately $102 million gain on the sale of 1750 Pennsylvania Avenue and lower losses from partially owned entities.
- Nine-month common-shareholder earnings increased 66.2%, driven by disposition gains, the $90 million deferred-tax benefit, lower interest expense and reduced losses from partially owned entities.
- FFO increased 8.6% in Q3 and 13.9% for the nine months, providing a less disposition-sensitive measure of operating performance than GAAP earnings.
- Same-store EBITDA increased 1.4% in New York and declined 4.5% in Washington, D.C. in Q3. For the nine months, New York increased 2.0% and Washington, D.C. declined 1.4%.
- Real estate fund investment income declined to $1.7 million in Q3 and $52.1 million for the nine months, versus $24.2 million and $142.4 million, respectively, reflecting lower realized and unrealized gains.
Guidance, Outlook, Risks and Unusual Items
- Management expected Washington, D.C. fourth-quarter EBITDA to be flat year over year and projected 2015 Washington, D.C. EBITDA before gains and discontinued operations to be approximately $3.5 million below 2014.
- Management stated that cash flow from continuing operations was expected to fund operations, distributions, debt amortization and recurring capital expenditures over the following 12 months. Acquisitions and development may require additional borrowing or equity financing.
- Major development commitments include 220 Central Park South, with approximately $1.3 billion of incremental development cost and $238 million spent by September 30, 2015; The Bartlett; Marriott Marquis retail redevelopment; and other New York and Washington projects.
- Vornado expects to fund approximately $76 million of additional capital to certain partially owned entities. Real estate fund investments had approximately $102.2 million of unfunded commitments, of which Vornado’s share was $25.6 million.
- Key operating risks include Washington, D.C. leasing and BRAC-related vacancies, interest-rate exposure, refinancing requirements, construction cost and completion risk, tenant credit risk, real estate valuation risk and availability and cost of insurance.
- A 1% increase in base rates was estimated to reduce annual net income by approximately $40.8 million, or $0.22 per diluted share, after considering consolidated and proportionate unconsolidated debt.
- As a subsequent event, Vornado entered into an agreement to sell its leasehold interest in 20 Broad Street for $200 million and expected approximately $156 million of income. It also entered into a $750 million unsecured delayed-draw term loan facility and initially drew $187.5 million.
- Legal matters were described as arising in the ordinary course and not expected to have a material adverse effect. Management reported no material changes to the risk factors in the prior Form 10-K and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Separate recurring operating performance from disposition gains, discontinued operations and the $90 million deferred-tax valuation allowance reversal.
- Review debt maturities, variable-rate exposure, refinancing assumptions and covenant compliance, particularly the approximately $1.41 billion maturing in 2016.
- Assess Washington, D.C. occupancy, BRAC-affected space and the projected decline in 2015 EBITDA.
- Evaluate funding needs and execution risk for 220 Central Park South and other development and redevelopment projects.
- Reconcile FFO and EBITDA to GAAP results and confirm the treatment of noncontrolling interests, discontinued operations and other comparability items.
- Monitor the subsequent 20 Broad Street sale and delayed-draw term loan, which occurred after the September 30 reporting date.