Business Context and Reporting Period
Company: Vornado Realty Trust (Vornado)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
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 showroom properties, as well as significant investments in partially owned entities such as Toys "R" Us, Alexander's, Inc., and Lexington Realty Trust. As of June 30, 2010, the company had 182,290,243 common shares outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $1,392,436,000 | $1,352,356,000 |
| Net Income (Loss) Attributable to Common Shareholders | $258,125,000 | $73,937,000 |
| Diluted EPS (Common Shareholders) | $1.41 | $0.45 |
| Funds From Operations (FFO) Attributable to Common Shareholders | $552,070,000 | $355,692,000 |
| FFO Per Diluted Share | $2.98 | $2.15 |
| Net Cash Provided by Operating Activities | $532,365,000 | $379,439,000 |
| Total Consolidated Debt | $10,670,218,000 | $10,939,615,000 |
| Cash and Cash Equivalents | $652,121,000 | $2,068,498,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $40.1 million (3.0%) compared to the prior year, driven primarily by leasing activity and development/redevelopment contributions, partially offset by a decrease in amortization of acquired below-market leases.
- Profitability Surge: Net income attributable to common shareholders increased significantly by $184.2 million. This improvement was largely due to a substantial reduction in mezzanine loan loss accruals (down from $122.7 million in 2009 to $6.9 million in 2010) and strong performance from the Toys "R" Us investment.
- Debt Reduction: Consolidated debt decreased by approximately $269 million, primarily due to net repayments of $700 million under revolving credit facilities, partially offset by a $500 million public offering of senior unsecured notes in March 2010.
- Investment Performance: The company recognized $104.9 million in income from its 32.7% interest in Toys "R" Us for the six months ended June 30, 2010, compared to $96.8 million in the prior year period.
Guidance, Outlook, and Risks
- Capital Markets Activity: On July 8, 2010, Vornado completed the first closing of "Vornado Capital Partners, L.P.," a real estate investment fund, with initial equity commitments of $550 million (including $200 million from Vornado). The company expects to raise an additional $450 million, targeting total commitments of $1 billion.
- Financing Outlook: The company anticipates that cash flow from operations will be adequate to fund operations, dividends, and recurring capital expenditures. However, development and acquisition costs may require additional borrowings or equity offerings.
- Debt Maturities: Approximately $373 million of debt matures in the remainder of 2010, and $1.98 billion matures in 2011. The company plans to refinance or repay these using existing cash or credit facilities.
- Legal Contingencies:
- Stop & Shop Litigation: Ongoing dispute regarding the reallocation of $5 million in annual rent. Discovery is complete, and a trial date is anticipated in 2010.
- Pentagon Row Litigation: A trial court ordered Vornado to sell land to tenants for $14.99 million. Vornado has appealed, and the judgment is stayed. A $10.1 million loss accrual was recorded in Q1 2010.
- Donald Trump Litigation: Claims regarding the dissolution of limited partnerships were dismissed with prejudice in June 2010.
- Mezzanine Loans: On July 29, 2010, Vornado acquired a 26.2% equity interest in LNR Property Corporation, converting a mezzanine loan and investing an additional $116 million in cash.
Investor Verification Checklist
- Mezzanine Loan Exposure: Verify the status and valuation of remaining mezzanine loans receivable, noting the significant reduction in loss accruals compared to 2009.
- Toys "R" Us Investment: Monitor the impact of Toys "R" Us's potential IPO (registration statement filed May 2010) on Vornado's ownership percentage and equity income.
- Debt Refinancing: Assess the company's ability to refinance the $373 million maturing in late 2010 and the $1.98 billion maturing in 2011 given current market conditions.
- Legal Outcomes: Track the resolution of the Stop & Shop rent reallocation dispute and the Pentagon Row appeal, as these could impact future cash flows.
- Fund Performance: Monitor the capital raising progress and investment performance of the newly launched Vornado Capital Partners fund.