Business Context and Reporting Period
Company: Vornado Realty Trust (Vornado)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Vornado is a fully-integrated Real Estate Investment Trust (REIT) operating primarily in New York City and Washington, D.C. Its portfolio includes office, retail, and merchandise mart properties, as well as significant investments in partially owned entities such as Toys "R" Us, Alexander's, and Lexington MLP.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $1,323,647,000 | $1,116,272,000 |
| Net Income (GAAP) | $551,857,000 | $332,851,000 |
| Net Income Applicable to Common Shares | $523,308,000 ($3.26 diluted EPS) | $304,260,000 ($1.92 diluted EPS) |
| Funds From Operations (FFO) | $743,471,000 ($4.54 diluted FFO/share) | $551,906,000 ($3.36 diluted FFO/share) |
| EBITDA | $1,186,954,000 | $1,111,119,000 |
| Cash and Cash Equivalents | $1,712,032,000 | $743,506,000 |
| Total Debt (Consolidated) | $12,219,332,000 | $12,572,462,000 |
| Revolving Credit Facility Usage | $0 | $94,000,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $207.4 million (18.6%) year-over-year, driven primarily by acquisitions (1290 Avenue of the Americas, 555 California Street, H Street) and leasing activity.
- Net Income Surge: Net income applicable to common shares increased significantly, largely due to a one-time $222.2 million income tax benefit from the reversal of deferred tax liabilities associated with the H Street acquisition upon its election of REIT status.
- Discontinued Operations: The company sold its 47.6% interest in Americold Realty Trust for a net gain of $112.7 million and sold the Tysons Dulles Plaza complex for a net gain of $56.8 million. These gains are classified as discontinued operations.
- Investment Income Volatility: Interest and other investment income decreased by $135.3 million compared to the prior year, primarily due to a net loss of $21.8 million on mark-to-market of derivative positions (versus a gain of $81.5 million in 2007) and lower yields on investments.
- Debt Reduction: Consolidated debt decreased by approximately $353 million, while the company fully paid down its revolving credit facility balance.
Guidance, Outlook, and Risks
Management Commentary:
- Market Conditions: Management notes the "credit crisis" and stress in commercial credit markets, which have reduced financing availability and widened spreads. This environment may lead to lower occupancy and effective rents.
- Development Pipeline: Approximately $1.4 billion in assets were out of service for redevelopment as of June 30, 2008, including projects at Bergen Town Center, 2101 L Street, and 220 Central Park South.
- Accounting Changes: Adoption of new accounting standards (SFAS 157, 141R, 160) is expected in 2009. Specifically, SFAS 141R will require acquisition costs to be expensed rather than capitalized, potentially impacting future financial results.
Risks and Contingencies:
- Legal Proceedings: Ongoing litigation with Stop & Shop regarding rent reallocation and a dispute involving Donald J. Trump regarding the sale of former Penn Central rail yards (1290 Avenue of the Americas/555 California Street). Management believes these will not have a material adverse effect.
- Derivatives: Significant exposure to fluctuations in derivative positions in marketable equity securities, which do not qualify for hedge accounting and are marked-to-market.
- Joint Venture Commitments: Remaining capital commitments to partially owned entities total approximately $122.2 million, including $80.9 million to the India Property Fund.
Investor Verification Checklist
- One-Time Tax Benefit: Verify the sustainability of earnings by excluding the $222.2 million non-recurring tax benefit from the H Street REIT election.
- Discontinued Operations: Assess core operating performance by excluding the $169.5 million in net gains from the sales of Americold and Tysons Dulles Plaza.
- Derivative Exposure: Review the volatility of "Interest and other investment income" driven by mark-to-market adjustments on derivatives, which swung from a $81.5M gain in 2007 to a $21.8M loss in 2008.
- Debt Maturities: Confirm refinancing plans for $58.1 million of debt maturing in 2008 and $421.0 million maturing in 2009.
- Development Costs: Monitor the $253.2 million in development and redevelopment expenditures and the timeline for bringing $1.4 billion of assets back into service.