VORNADO REALTY TRUST quarterly report, Q1 FY2011

Vornado Realty Trust — Q1 2011 Form 10-Q Summary

Business context and reporting period

Vornado Realty Trust is an integrated REIT operating primarily through Vornado Realty L.P., which owned approximately 93.3% of the Operating Partnership at March 31, 2011. The portfolio includes New York and Washington, D.C. office properties, retail properties, the Merchandise Mart, investments in partially owned entities and Toys “R” Us. This unaudited Form 10-Q covers the three months ended March 31, 2011, with comparisons to the three months ended March 31, 2010. The company reported 184.2 million common shares outstanding at March 31, 2011.

Key financial metrics

Metric	Q1 2011	Q1 2010	Change
Total revenues	$737.1 million	$685.3 million	+7.6%
Operating income	$198.6 million	$228.2 million	-13.0%
Income from continuing operations	$311.5 million	$242.1 million	+28.7%
Net income attributable to common shareholders	$399.2 million	$200.3 million	+99.3%
Diluted earnings per share	$2.12	$1.09	+$1.03
FFO attributable to common shareholders plus assumed conversions	$505.9 million, or $2.64 per diluted share	$353.8 million, or $1.87 per diluted share	+43.0% per share
Net cash provided by operating activities	$196.1 million	$288.0 million	-31.9%
Dividends per common share	$0.69	$0.65	+6.2%

Operating margin was approximately 26.9% in Q1 2011 versus 33.3% in Q1 2010. Net income margin was approximately 60.5% versus 33.9%, substantially reflecting non-recurring and market-driven items rather than core property operations.

Balance sheet, debt and liquidity

Total assets were $20.49 billion at March 31, 2011, compared with $20.52 billion at December 31, 2010.
Cash and cash equivalents were $618.4 million, with restricted cash of $234.3 million and marketable securities of $821.9 million.
Consolidated debt was $10.63 billion, consisting primarily of $8.59 billion of notes and mortgages, $982.6 million of senior unsecured notes, $492.7 million of exchangeable debentures, $187.2 million of convertible debentures and $374.0 million drawn under revolving facilities.
Debt declined by $262.2 million from December 31, 2010. Revolver borrowings declined from $874.0 million to $374.0 million.
Consolidated debt had a weighted average interest rate of approximately 4.86%; a 1% increase in base rates was estimated to reduce annual net income by approximately $26.5 million, or $0.14 per diluted share, after including relevant non-consolidated debt.
Debt maturities were $1.44 billion during the remainder of 2011 and $1.72 billion during 2012. The filing states that cash flow from continuing operations is expected to fund operations, distributions, debt amortization and recurring capital expenditures over the next 12 months; development and acquisition funding may require additional borrowings or equity.

Material changes versus the prior comparable period

Revenue increased $51.8 million, driven primarily by $40.7 million of Cleveland Medical Mart development revenue, higher leasing activity and higher retail and Merchandise Mart revenue. Development revenue was largely offset by $38.3 million of related development costs.
Expenses increased $81.4 million, including Cleveland Medical Mart costs, higher operating expenses, $18.3 million of acquisition and other costs, and higher general and administrative expense.
Operating income declined despite higher revenue because expense growth exceeded revenue growth.
Interest and other investment income increased to $117.1 million from $14.7 million, primarily due to an $82.7 million mezzanine-loan loss-reserve reversal and disposition gain and a $17.2 million mark-to-market gain on a J.C. Penney derivative position.
Discontinued operations contributed $134.3 million, compared with a $9.6 million loss in Q1 2010. The 2011 amount included an $83.9 million gain from extinguishment of High Point debt and gains of $45.9 million and $5.3 million on property sales.
Same-store GAAP EBITDA increased 5.1% in Washington, D.C. office, 3.9% in retail and 8.6% in Merchandise Mart, but declined 1.7% in New York office. Cash-basis same-store EBITDA changes were negative 0.7%, positive 10.7%, positive 6.9% and positive 9.6%, respectively.
Occupancy at March 31, 2011 was 95.7% for New York office, 93.4% for Washington, D.C. office, 92.4% for retail and 90.8% for Merchandise Mart. Office occupancy excluding residential and other properties was 92.5%, down from 94.6% at March 31, 2010.

Investments, outlook, risks and unusual items

Vornado and its real estate fund acquired a 95% interest in One Park Avenue for $374.0 million, funded with cash and mortgage debt. Vornado also formed a 50/50 joint venture with SL Green Realty Corp. for 280 Park Avenue mezzanine loans, contributing a loan with a $73.8 million face amount and paying $111.3 million in cash plus assuming $15.0 million of debt.
The company’s $800.0 million real estate fund had received $232.3 million of partner capital and had five investments totaling approximately $230.0 million at March 31, 2011. Vornado had committed $200.0 million to the fund.
On April 20–21, 2011, after quarter-end, Vornado issued 8.05 million Series J preferred shares through an underwritten offering and retained net proceeds of approximately $194.7 million. The filing does not provide formal full-year earnings or FFO guidance.
Vornado committed approximately $195.3 million of additional capital to partially owned entities, including $141.9 million to the real estate fund, and agreed in principle to contribute up to $52.0 million to a new LNR-managed fund.
The company committed estimated project costs of approximately $400 million to $425 million for redevelopment of 220 Central Park South.
The Cleveland Medical Mart and Convention Center has a $465.0 million development budget funded by Cuyahoga County. Completion was expected in 2013; Vornado’s subsidiaries are required to fund approximately $11.5 million upon completion and may face cost overruns or operating-performance requirements.
Mortgage loans are generally non-recourse, but guarantees and master leases totaled approximately $203.3 million. Letters of credit outstanding under a revolving facility totaled $12.4 million.
Key risks include refinancing substantial near-term debt maturities, interest-rate exposure, property occupancy and rental trends, capital commitments, market value volatility of securities and derivatives, insurance availability and cost, environmental matters, and litigation. The filing states that there were no material changes to previously disclosed risk factors.
A long-running Stop & Shop rent dispute remained pending after trial and closing arguments. Management stated that the matter was not expected to have a material adverse effect, but the ultimate outcome was unresolved.

Most important facts for investors to verify

Separate recurring property and FFO performance from the $167.5 million of net comparable-period adjustments included in Q1 2011 FFO, particularly the mezzanine-loan reversal, debt extinguishment gain, derivative gain and tax settlement gain.
Assess the ability to refinance or repay the $1.44 billion of debt maturing during the remainder of 2011 and $1.72 billion maturing in 2012.
Reconcile cash generation: operating cash flow was $196.1 million versus common dividends of $126.9 million, before preferred dividends, capital expenditures and other investment requirements.
Monitor New York office occupancy, which declined to 92.5% excluding residential and other properties, and evaluate leasing spreads, tenant improvements and leasing commissions.
Review exposure to J.C. Penney securities and derivatives, whose mark-to-market changes can materially affect reported investment income and equity.
Evaluate funding needs and execution risks for 220 Central Park South, Cleveland Medical Mart, the real estate fund and other partially owned investments.
Confirm the terms and use of proceeds of the $194.7 million Series J preferred equity issuance completed after quarter-end.