Vornado Realty Trust — 2011 Q3 Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust is an integrated real estate investment trust operating primarily through Vornado Realty L.P. Its portfolio is concentrated in New York City and Washington, D.C. office properties, retail properties, the Merchandise Mart, investments in operating companies and partially owned real estate entities.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Vornado owned approximately 93.3% of the Operating Partnership and had 184.5 million common shares outstanding at September 30, 2011.
Financial condition and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenues | $727.3 million | $687.1 million | $2.174 billion | $2.038 billion |
| Operating income | $225.5 million | $225.3 million | $659.1 million | $685.6 million |
| Net income attributable to Vornado | $53.8 million | $104.3 million | $575.0 million | $390.9 million |
| Net income attributable to common shareholders | $41.1 million | $95.2 million | $532.3 million | $353.3 million |
| Diluted earnings per common share | $0.22 | $0.52 | $2.86 | $1.92 |
| FFO per diluted share | $1.05 | $1.31 | $4.96 | $4.29 |
| Dividends per common share | $0.69 | $0.65 | $2.07 | $1.95 |
| Net cash provided by operating activities | Not presented | Not presented | $566.7 million | $594.7 million |
Operating margin was approximately 31.0% in the third quarter, compared with 32.8% in the prior-year quarter. Nine-month operating margin was approximately 30.3%, compared with 33.7% in 2010. The filing does not provide a consolidated net margin measure; net income attributable to common shareholders represented approximately 5.7% of third-quarter revenue and 24.5% of nine-month revenue.
- Assets totaled $20.19 billion at September 30, 2011, including $14.48 billion of net real estate.
- Cash and cash equivalents were $585.2 million; restricted cash was $125.0 million.
- Marketable securities totaled $631.4 million, including a $497.7 million J.C. Penney equity position.
- Consolidated debt totaled $10.41 billion, compared with $10.89 billion at December 31, 2010. Debt fair value was estimated at $10.59 billion.
- Revolving credit facility borrowings were $300.0 million, with $2.545 billion of stated availability under revolving facilities.
- Pro rata debt of partially owned entities, excluding nonrecourse LNR CMBS and CDO trust liabilities, was $3.54 billion.
- Quarter-end occupancy was 95.4% for New York office, 90.4% for Washington, D.C. properties, 92.3% for retail, 91.3% for Merchandise Mart office and 91.9% for Merchandise Mart showroom properties.
Material changes versus the prior comparable period
- Third-quarter revenue increased 5.9%, primarily because of $35.1 million of Cleveland Medical Mart development revenue. The corresponding $33.4 million of development costs substantially offset that revenue.
- Nine-month revenue increased 6.7%, with $108.2 million attributable to Cleveland Medical Mart development revenue and $101.6 million of related costs.
- Third-quarter common-share earnings declined 56.8% to $0.22 per diluted share, while nine-month earnings increased 49.0% to $2.86, largely because of significant 2011 gains from discontinued operations and other unusual items.
- Third-quarter FFO declined 19.8% to $1.05 per diluted share, principally reflecting a $37.5 million loss on the J.C. Penney derivative position versus a $32.2 million gain in 2010, Merchandise Mart restructuring costs and other comparability items.
- Nine-month FFO increased 15.6% to $4.96 per diluted share, aided by an $83.9 million gain on extinguishment of High Point debt and an $82.7 million mezzanine-loan reversal and disposition gain.
- Cash flow from operations declined 4.7% despite higher net income, partly because of changes in noncash items and increased investment in Real Estate Fund assets.
- Cash decreased $105.6 million during the first nine months, primarily because financing activities used $670.6 million. Financing included $2.67 billion of debt repayments, $381.4 million of common dividends and $239.0 million of net proceeds from Series J preferred shares.
- Same-store cash-basis EBITDA increased 1.6% in New York office, 1.3% in Washington, D.C. office, 1.1% in retail and 0.5% in Merchandise Mart year over year for the third quarter. Nine-month increases were 0.5%, 2.5%, 6.5% and 2.0%, respectively.
Guidance, outlook, commentary and unusual items
- Management expects cash flow from continuing operations over the next twelve months to fund operations, distributions, dividends, debt amortization and recurring capital expenditures. Acquisitions and development may require additional borrowings, equity issuance or asset sales.
- Debt maturities were approximately $624 million during the remainder of 2011 and $1.593 billion during 2012. Management stated that maturities may be refinanced or repaid using available cash and revolving-credit capacity.
- The Fund had $543.9 million of aggregate unfunded equity commitments, including $136.0 million attributable to Vornado.
- Vornado committed approximately $400 million to $425 million for 220 Central Park South, expects to fund approximately $264 million of additional capital to certain partially owned entities and estimated approximately $300 million for a planned redevelopment of 1851 South Bell Street. Project timing and costs are subject to change.
- Cleveland Medical Mart construction is expected to be completed in 2013. Vornado expects approximately $10 million of annual net settled payments during the 17-year development and operating period, subject to the agreement’s conditions.
- Washington, D.C. operations remain exposed to Base Realignment and Closure-related vacancies. DOD leases subject to future BRAC expirations totaled 1.338 million square feet, with 792,000 square feet scheduled to expire in 2012.
- J.C. Penney market values caused a $102.9 million unrealized loss in other comprehensive income on owned shares and a $27.1 million nine-month loss on the related derivative position. The investment represented approximately 10.9% of J.C. Penney’s outstanding shares on an economic basis.
- Discontinued operations included a $83.9 million gain on extinguishment of High Point debt and $51.6 million of gains on real estate sales during the first nine months.
- Interest-rate sensitivity was material: a 1% increase in base rates was estimated to reduce annual net income by approximately $26.7 million, or $0.14 per diluted share, after considering consolidated and pro rata nonconsolidated debt.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts investors should verify
- Debt refinancing progress, particularly the $624 million of remaining 2011 maturities and $1.593 billion of 2012 maturities, as well as renewal of the $1.595 billion revolving facility.
- Liquidity after committed development, redevelopment and partially owned entity funding requirements.
- Washington, D.C. occupancy and the financial effect of BRAC-related expirations and re-leasing efforts.
- J.C. Penney share-price exposure, derivative settlement terms, collateral requirements and potential future mark-to-market volatility.
- Whether the unusually high nine-month earnings benefit from discontinued operations, debt extinguishment and mezzanine-loan items recurs.
- Performance and funding requirements of the Real Estate Fund, 280 Park Avenue, Independence Plaza and other partially owned investments.
- The outcome of the Stop & Shop litigation. Vornado reported a $40.7 million receivable, with $23.1 million reserved, and identified a maximum reasonably possible loss of up to the full receivable.
- Insurance availability and cost, including earthquake, terrorism and other catastrophe coverage, and the potential impact on financing requirements.