Business Context and Reporting Period
Company: Vornado Realty Trust (Vornado)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2009
Business Overview: Vornado is a fully-integrated Real Estate Investment Trust (REIT) operating primarily through Vornado Realty L.P. Its portfolio is concentrated in the New York City metropolitan area and Washington, DC/Northern Virginia, spanning office, retail, and merchandise mart segments. The company also holds significant investments in partially owned entities, including Toys "R" Us (32.7%), Alexander's, Inc. (32.4%), and Lexington Realty Trust (16.1%).
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $682.0 million | $649.3 million |
| Net Income (GAAP) | $156.4 million | $449.7 million |
| Net Income Attributable to Common Shareholders | $125.8 million | $389.6 million |
| Diluted EPS (Common) | $0.79 | $2.38 |
| Funds From Operations (FFO) per Diluted Share | $1.63 | $3.17 |
| Operating Cash Flow | $169.8 million | $221.6 million |
| Total Debt (Consolidated) | $12.73 billion | $12.17 billion |
| Cash and Cash Equivalents | $1.63 billion | $1.54 billion |
| Dividends per Common Share | $0.95 | $0.90 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $32.7 million (5.0%) year-over-year, driven primarily by leasing activity and tenant expense reimbursements across New York Office, Washington DC Office, and Retail segments.
- Net Income Decline: Net income attributable to common shareholders decreased significantly by $263.7 million (67.7%). This decline is largely attributable to the absence of a $112.7 million net gain on the sale of Americold Realty Trust recorded in Q1 2008 and a $222.2 million reversal of deferred income taxes related to the H Street acquisition in the prior year.
- Expense Increases: General and administrative expenses rose by $29.7 million, primarily due to a $32.6 million non-cash write-off of unamortized costs from the voluntary surrender of equity awards by senior executives.
- Debt Levels: Consolidated debt increased by $220.2 million, driven by $300 million in draws on revolving credit facilities, partially offset by debt repayments and the purchase of senior unsecured notes.
- Accounting Changes: The company adopted FSP 14-1 on January 1, 2009, requiring retrospective adjustments to interest expense for convertible and exchangeable senior debentures, adding $8.4 million to interest expense for the comparable 2008 period.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the economic recession has negatively affected the commercial real estate industry, leading to diminished transactions and rising capitalization rates. While initial rents on re-leased space exceeded expiring rents, spreads were significantly lower than in 2008. Retail tenant delinquencies have risen, increasing the allowance for doubtful accounts.
Outlook: The company anticipates that cash flow from continuing operations will be adequate to fund operations, dividends, and debt amortization over the next twelve months. However, significant acquisitions and development expenditures may require additional funding from borrowings or equity offerings.
Risks and Contingencies:
- Market Conditions: Continued economic downturn may lead to lower occupancy rates, effective rents, and potential impairment charges on investments in joint ventures and marketable securities.
- Investment Valuations: As of March 31, 2009, the market value of the investment in Lexington Realty Trust was $39.3 million below its carrying amount, and marketable securities were $41.4 million below carrying amount. Management concluded these declines were not "other-than-temporary."
- Legal Proceedings: Ongoing litigation includes a dispute with Stop & Shop regarding rent reallocation and a lawsuit involving Donald J. Trump regarding the sale of former Penn Central rail yards. Management believes these matters will not have a material adverse effect.
- Debt Covenants: Credit facilities and notes contain financial covenants regarding interest coverage and debt-to-market capitalization ratios. A decline in credit ratings below Baa3/BBB could trigger higher interest rates.
Investor Verification Checklist
- FFO vs. GAAP: Verify the reconciliation of Net Income to Funds From Operations (FFO), noting the significant impact of discontinued operations (Americold sale) in the prior year.
- Equity Award Write-off: Confirm the $32.6 million non-cash charge related to the voluntary surrender of executive equity awards and its impact on future compensation expenses.
- Debt Maturities: Review the schedule of debt maturities, noting $439.9 million due in 2009 and $1.04 billion due in 2010, and assess refinancing risks.
- Investment Impairments: Monitor the valuation of partially owned entities (Lexington, Toys "R" Us) and marketable securities for potential future "other-than-temporary" impairment charges.
- Subsequent Events: Note the April 22, 2009, equity offering of 17.25 million shares for approximately $710 million in net proceeds and the April 30, 2009, tender offer for senior unsecured notes.