VORNADO REALTY TRUST quarterly report, Q3 FY2014

Vornado Realty Trust — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2014; filed November 3, 2014. The interim financial statements are unaudited. Vornado is an integrated REIT focused primarily on New York City and Washington, D.C. real estate, with additional retail, hotel, trade-show, fund and operating-company investments.

Financial Performance and Position

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Total revenue	$670.9 million	$669.0 million	$1,997.7 million	$2,058.5 million
Operating income	$220.6 million	$234.9 million	$614.1 million	$695.6 million
Income from continuing operations	$111.1 million	$108.0 million	$371.2 million	$303.5 million
Net income attributable to common shareholders	$131.2 million	$83.0 million	$270.2 million	$460.9 million
Diluted earnings per share	$0.69	$0.44	$1.43	$2.46
FFO per diluted share	$1.15	$1.12	$3.63	$3.45
Operating cash flow	Not separately provided	Not separately provided	$828.6 million	$789.6 million

Q3 operating margin was approximately 32.9%, compared with 35.1% in the prior-year quarter. Nine-month operating margin was approximately 30.7%, compared with 33.8% in the prior-year period. Net income included discontinued operations of $58.1 million in Q3 2014 and $61.8 million for the nine months, compared with $24.3 million and $300.0 million, respectively, in the comparable 2013 periods.

Cash and cash equivalents were $1.683 billion at September 30, 2014, compared with $583.3 million at December 31, 2013.
Consolidated debt was $11.153 billion, consisting of $9.273 billion of mortgages, $1.792 billion of senior unsecured notes and $88.1 million of revolver borrowings.
Debt increased $1.175 billion from December 31, 2013, primarily reflecting new property and development financings. The weighted-average interest rate on consolidated debt was 4.21%.
Vornado shareholders’ equity was $6.517 billion; total equity was $7.225 billion. Real estate, net, was $14.943 billion.
Common dividends were $0.73 per share for the quarter and $2.19 per share for the nine months.
Capital expenditures and leasing commissions were $225.3 million on a cash basis, and development and redevelopment expenditures were $368.6 million during the first nine months.

Material Changes Versus Prior Comparable Period

Q3 revenue was broadly flat, while operating income declined 6.1% because expenses increased faster than revenue. Nine-month revenue declined 3.0%, largely due to the absence of 2013 income from the Stop & Shop settlement, the completed Cleveland Medical Mart project and the deconsolidation of Independence Plaza.
Q3 net income attributable to common shareholders increased 58.0%, primarily because 2014 included higher discontinued-operation gains and 2013 included J.C. Penney-related losses. Nine-month common earnings declined 41.4% because 2013 benefited from substantially larger real estate disposition gains, including the Green Acres Mall sale.
FFO increased to $1.15 per diluted share in Q3 from $1.12 and to $3.63 for nine months from $3.45. Management identified $30.8 million of Q3 and $66.2 million of nine-month 2014 unfavorable comparability items affecting FFO.
Same-store EBITDA increased 4.6% in New York, declined 2.7% in Washington, D.C., and increased 1.1% in retail properties during Q3. For the nine months, the changes were 5.3%, (2.4%) and 1.4%, respectively.
Vornado recognized a $74.2 million nine-month loss related to Toys “R” Us, including a $75.2 million non-cash impairment loss. Toys represented a continuing exposure despite the investment carrying value being reduced to zero.
Real Estate Fund income increased to $142.4 million for the nine months from $73.9 million, primarily from realized gains on One Park Avenue and The Shops at Georgetown Park.

Transactions, Financing and Outlook

Vornado announced plans to spin off its shopping-center business into Urban Edge Properties by the end of 2014, subject to SEC, NYSE, third-party and Board approvals. The company could abandon or modify the transaction before completion.
During 2014, Vornado completed or arranged financings including a $600 million loan on 220 Central Park South, a $450 million green-bond offering, and property financings for 909 Third Avenue, Las Catalinas and the Universal buildings. One $1.25 billion revolving facility was extended to November 2018 at improved pricing.
After quarter-end, Vornado redeemed $445 million of 7.875% senior notes and obtained $140 million of financing for 655 Fifth Avenue. The redemption is expected to produce a $12.5 million fourth-quarter write-off of deferred financing costs.
Vornado expected to complete the $700 million St. Regis Fifth Avenue retail acquisition and use it in a like-kind exchange related to the planned sale of 1740 Broadway. The company subsequently agreed to sell 1740 Broadway for approximately $605 million, with expected net proceeds of approximately $585 million and an estimated financial-statement gain of approximately $443 million, subject to closing conditions.
Management expected Washington, D.C. 2014 EBITDA from continuing operations to be $5 million to $10 million below 2013, primarily because of BRAC-related move-outs and weak leasing conditions. Management expected cash flow from continuing operations over the next 12 months to fund operations, distributions, debt amortization and recurring capital expenditures; acquisitions and development may require additional borrowing or equity.

Risks, Contingencies and Unusual Items

Washington, D.C. office occupancy was 80.5%, including 53.2% at the Skyline properties, versus 96.7% New York occupancy. BRAC-affected space included 1.05 million square feet still to be resolved as of September 30, 2014.
Vornado had approximately $744.2 million of consolidated debt maturing in 2015; no consolidated debt was scheduled to mature during the remainder of 2014. Revolving facilities contain interest-coverage and debt-to-market-capitalization covenants and potential pricing increases if ratings fall below Baa3/BBB.
Letters of credit outstanding were $39.9 million; guarantees and master-lease obligations totaled approximately $360 million; and Vornado expected to fund approximately $111 million of additional capital to partially owned entities.
A 1% increase in base interest rates was estimated to reduce annual net income by approximately $28.4 million, or $0.15 per diluted share, after considering consolidated and pro rata unconsolidated debt.
Development and redevelopment projects involve significant remaining commitments, including approximately $1.0 billion of incremental costs for 220 Central Park South and approximately $210 million for Marriott Marquis Times Square retail and signage. The filing states that projects may not be completed on schedule or within budget.
Vornado recorded a $10.3 million non-cash impairment and loan-loss reserve on Suffolk Downs in Q3 and a $20.0 million non-cash impairment on Springfield Town Center in Q1.
Legal matters were described as arising in the ordinary course and not expected to have a material adverse effect. Environmental assessments had not identified material contamination, but future costs cannot be ruled out.

Investor Verification Points

Verify completion, terms and tax treatment of the Urban Edge spin-off and the disposition of retained retail assets.
Assess the effect of the 1740 Broadway sale, St. Regis acquisition and related like-kind exchange on leverage, earnings and liquidity.
Review debt maturities, refinancing capacity, covenant compliance and exposure to variable interest rates.
Separate recurring operating performance from disposition gains, fund valuation gains, discontinued operations and other non-recurring items when evaluating FFO and earnings quality.
Monitor Toys “R” Us, Suffolk Downs and other partially owned investments for additional losses, capital requirements or changes in carrying values.
Evaluate leasing trends and redevelopment execution, particularly BRAC-related vacancy in Washington, D.C. and the remaining commitments at 220 Central Park South.