Vornado Realty Trust — 2013 Q3 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. Vornado is an integrated REIT operating primarily in New York City, Washington, D.C., and retail properties, with additional investments in partially owned entities and a real estate fund. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $683.4 million | $703.1 million | $2.086 billion | $2.047 billion |
| Operating income | $240.6 million | $199.3 million | $707.7 million | $584.3 million |
| Operating margin | 35.2% | 28.4% | 33.9% | 28.6% |
| Income from continuing operations | $113.5 million | $105.7 million | $313.2 million | $355.4 million |
| Net income attributable to common shareholders | $83.0 million | $232.4 million | $460.9 million | $486.6 million |
| Diluted earnings per share | $0.44 | $1.24 | $2.46 | $2.61 |
| FFO per diluted share | $1.12 | $1.34 | $3.45 | $4.07 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $789.6 million | $510.6 million |
| Common dividends per share | $0.73 | $0.69 | $2.19 | $2.07 |
Balance sheet and liquidity: At September 30, 2013, cash and cash equivalents were $872.3 million, restricted cash was $321.0 million, and total assets were $20.275 billion. Consolidated debt was $10.001 billion, consisting primarily of $8.567 billion of mortgages and $1.351 billion of senior unsecured notes. Revolving credit facility borrowings were $84.0 million, compared with $1.170 billion at December 31, 2012.
Cash flow and capital allocation: Operating cash flow was $789.6 million. Investing activities provided $1.020 billion, principally from asset, marketable security and investment sales. Financing activities used $1.898 billion, including $2.851 billion of debt repayments, $409.3 million of common dividends and $299.4 million for preferred unit and share purchases. Cash declined by $88.0 million from year-end 2012.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue decreased 2.8%, primarily because Cleveland Medical Mart development revenue declined by $67.8 million as the project neared completion. Nine-month revenue increased 1.9%.
- Operating income increased 20.7% in the quarter and 21.1% for the nine months, helped by lower Cleveland Medical Mart development expenses and higher New York operating performance.
- Common-share net income and FFO declined because the 2012 periods benefited from substantially larger real estate disposition gains and stronger discontinued-operations results. Nine-month FFO declined 15.6% to $3.45 per diluted share.
- New York same-store EBITDA increased 7.0% in the quarter and 5.3% for the nine months. Retail Properties same-store EBITDA increased 2.5% and 2.6%, respectively. Washington, D.C. same-store EBITDA decreased 1.8% and 5.0%, respectively, primarily because of lower office occupancy and BRAC-related vacancies.
- Vornado sold or monetized significant investments, including LNR, J.C. Penney shares and multiple retail properties. Aggregate 2013 asset sales were approximately $1.230 billion, producing approximately $790 million of net proceeds and $307 million of gains.
- Vornado acquired a 20.1% interest in a joint venture that purchased 650 Madison Avenue for $1.295 billion. Independence Plaza was deconsolidated after Vornado reduced its economic interest to 50.1% and no longer controlled the entity.
- The company issued $290.5 million of net proceeds from Series L preferred shares, redeemed $262.5 million of Series F and H preferred shares, and redeemed $36.9 million of Series D-15 preferred units.
Guidance, Outlook, Risks and Unusual Items
- Management expects cash flow from continuing operations over the following twelve months to fund operations, distributions, debt amortization and recurring capital expenditures. Acquisitions and development may require additional borrowings or equity financing.
- Management expects full-year 2013 Washington, D.C. EBITDA to be approximately $10 million to $15 million below 2012, partly offset by anticipated fourth-quarter improvement.
- The Washington, D.C. portfolio has 2.395 million square feet affected by BRAC, including 930,000 square feet vacant and 292,000 square feet expiring in 2014. The Skyline properties mortgage was subsequently restructured on October 31, 2013, extending maturity to 2022 with a one-year extension option.
- Unusual items included a $78.5 million non-cash impairment related to Toys “R” Us, $39.5 million of non-cash J.C. Penney impairment, $54.9 million of losses on J.C. Penney share sales, and $33.5 million of J.C. Penney derivative mark-to-market losses for the nine months.
- Fee and other income included $87.6 million of lease termination fees for the nine months, including $59.6 million from a Stop & Shop settlement. These amounts are not necessarily recurring.
- The Real Estate Fund reported $73.9 million of income, including $59.5 million of unrealized gains; the fund had $239.2 million of unfunded commitments, of which Vornado’s share was $59.8 million.
- Additional commitments included approximately $155 million of expected capital funding to partially owned entities, $11.5 million related to the Cleveland Medical Mart project, and approximately $367 million of guarantees and master leases.
- Risks include tenant and occupancy conditions, BRAC-related vacancies, interest-rate exposure, refinancing requirements, property and development execution, market-value changes in investments, environmental matters, insurance availability and credit-facility covenants. Management reported no material changes to the risk factors in the 2012 Form 10-K.
Investor Verification Items
- Reconcile FFO and same-store EBITDA to GAAP results and separate recurring property performance from disposition gains, lease termination fees, fund valuation gains and other nonrecurring items.
- Assess Washington, D.C. leasing progress, BRAC vacancy exposure and the effect of the Skyline debt restructuring.
- Review consolidated and pro rata debt maturities, interest-rate sensitivity and compliance with credit-facility covenants.
- Evaluate the remaining unfunded commitments of the Real Estate Fund and partially owned entities against available liquidity.
- Monitor Toys “R” Us operating performance and the potential for additional impairment or valuation changes.
- Consider the effect of asset sales, deconsolidation of Independence Plaza and the completion of Cleveland Medical Mart on future revenue and earnings comparability.