Alexander’s, Inc. 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a Delaware REIT engaged in leasing, managing, developing and redeveloping six properties totaling approximately 2.178 million square feet in the greater New York City metropolitan area. Vornado Realty Trust manages the company and provides leasing and development services; Vornado owned 32.4% of outstanding common stock at September 30, 2014.
This filing covers the three and nine months ended September 30, 2014. The interim financial statements are unaudited. The portfolio was 99.7% occupied at September 30, 2014, compared with 99.4% at December 31, 2013.
Financial Performance and Financial Position
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 |
|---|---|---|---|---|
| Total revenues | $50.1 million | $49.9 million | $149.5 million | $146.0 million |
| Operating income | $24.4 million | $24.4 million | $72.9 million | $73.2 million |
| Net income | $17.7 million | $13.8 million | $49.8 million | $41.1 million |
| Net income per diluted share | $3.46 | $2.71 | $9.74 | $8.05 |
| FFO | $24.9 million | $21.0 million | $71.5 million | $62.7 million |
| FFO per diluted share | $4.88 | $4.12 | $13.99 | $12.27 |
| Dividends per share | $3.25 | $2.75 | $9.75 | $8.25 |
Operating margin was approximately 48.7% for the quarter and 48.8% for the nine-month period. Net margin was approximately 35.3% and 33.3%, respectively.
- Cash and cash equivalents were $309.0 million at September 30, 2014, down from $347.7 million at December 31, 2013.
- Restricted cash was $84.8 million and marketable securities were $34.2 million, including 535,265 Macerich shares.
- Total assets were $1.465 billion and total equity was $336.4 million.
- Mortgages payable totaled $1.034 billion, compared with $1.050 billion at December 31, 2013. Estimated fair value of debt was $1.070 billion.
- Net cash provided by operating activities was $66.4 million, compared with $54.3 million in the prior-year period.
- Capital expenditures and real estate additions were $40.0 million, primarily for the Rego Park II apartment tower.
- Net cash used in financing activities was $70.5 million, reflecting $316.4 million of debt repayments, $300.0 million of refinancing proceeds, $49.8 million of dividends and $4.2 million of debt issuance costs.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 0.4%; nine-month revenue increased 2.4%, primarily from higher expense reimbursements.
- Quarterly net income increased 28.0%; nine-month net income increased 21.0%. The primary driver was an $8.7 million year-to-date reduction in interest and debt expense following the 731 Lexington Avenue refinancing.
- Quarterly and nine-month FFO increased approximately 18.4% and 14.0%, respectively.
- Operating income was essentially unchanged for the quarter and decreased slightly for the nine-month period because higher operating expenses offset revenue growth.
- Operating expenses increased 1.9% for the quarter and 8.1% for the nine-month period, including higher reimbursable real estate taxes and operating expenses.
- On February 28, 2014, the company refinanced the 731 Lexington Avenue office loan with a $300.0 million interest-only loan at LIBOR plus 0.95%, compared with the prior fixed rate of 5.33%. The new loan matures in March 2017 and has four one-year extension options.
- Dividends increased to $3.25 per share for the quarter and $9.75 per share year to date, compared with $2.75 and $8.25, respectively, in the prior-year periods.
Guidance, Outlook, Risks and Unusual Items
- Management expects operating cash flows and existing cash balances to fund operations, dividends, debt amortization, recurring capital expenditures and Rego Park II development expenditures over the next twelve months.
- No debt matures in 2014. Approximately $398.2 million of debt is scheduled to mature in 2015, including $78.2 million that is cash collateralized. Management intends to refinance maturing debt as it comes due.
- The Rego Park II apartment tower is expected to contain approximately 300 units and 250,000 square feet and is expected to be completed in 2015. Estimated project cost is approximately $125.0 million, of which $54.0 million had been incurred at September 30, 2014. Completion timing and final cost are uncertain.
- Bloomberg accounted for 45% of nine-month revenue, creating significant tenant concentration risk. In October 2014, Bloomberg exercised a five-year extension option covering 188,608 square feet; the rental rate remained under negotiation.
- A 1% increase in base interest rates would have an estimated annual effect of approximately $6.1 million on the company’s variable-rate debt exposure, or approximately $1.19 per diluted share. A $300.0 million interest-rate cap limits LIBOR to 6.0%.
- Sears filed litigation concerning water intrusion, fires and alleged accessibility violations at Rego Park I. Sears seeks at least $4.0 million plus estimated future damages of at least $25.0 million and injunctive relief. The company stated that any reasonably possible loss cannot be estimated.
- Terrorism insurance coverage and the Terrorism Risk Insurance Program were subject to renewal and availability risks. The company could be responsible for deductibles and losses exceeding coverage.
- The company reported no material changes to previously disclosed risk factors. Its disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Verify the ability to refinance the approximately $398.2 million of debt maturing in 2015 on acceptable terms.
- Monitor Bloomberg’s lease extension, negotiated rental rate and continued creditworthiness given its 45% contribution to revenue.
- Track Rego Park II construction progress, remaining funding needs and potential cost or schedule overruns.
- Assess exposure to variable interest rates despite the $300.0 million LIBOR cap.
- Follow the Sears litigation and any resulting remediation costs, damages or insurance recoveries.
- Review dividend coverage in relation to recurring operating cash flow, FFO and development spending.
- Consider the company’s reliance on Vornado and related-party fees, which totaled $8.6 million during the first nine months of 2014.