Alexander’s, Inc. 10-Q Summary
Business context and reporting period
Alexander’s, Inc. is a Delaware real estate investment trust focused on 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 owns 32.4% of the outstanding common stock and manages, leases and develops the Company’s properties. The filing covers the three and six months ended June 30, 2014; the financial statements are unaudited.
Portfolio occupancy was 99.4% at June 30, 2014, unchanged from December 31, 2013. Bloomberg L.P. represented 45% of six-month revenue, creating significant tenant concentration.
Financial performance and key metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $50.0 million | $47.3 million | $99.5 million | $96.1 million |
| Operating income | $24.0 million | $23.9 million | $48.5 million | $48.8 million |
| Net income | $16.8 million | $13.1 million | $32.1 million | $27.3 million |
| Net income per diluted share | $3.29 | $2.57 | $6.28 | $5.34 |
| FFO | $24.1 million | $20.3 million | $46.5 million | $41.7 million |
| FFO per diluted share | $4.71 | $3.98 | $9.11 | $8.15 |
| Dividends per share | $3.25 | $2.75 | $6.50 | $5.50 |
Quarterly operating margin was approximately 48.0% and net margin was approximately 33.7%. Six-month operating margin was approximately 48.8% and net margin was approximately 32.2%.
- Cash and cash equivalents were $307.9 million at June 30, 2014, down from $347.7 million at December 31, 2013. Restricted cash was $85.6 million and marketable securities were $35.7 million.
- Net cash provided by operating activities was $22.3 million for the six months, compared with $16.3 million in the prior-year period.
- Net cash used in investing activities was $8.9 million, including $13.4 million of real estate and construction expenditures.
- Net cash used in financing activities was $53.1 million, including $315.7 million of debt repayments, $300.0 million of refinancing proceeds, $33.2 million of dividends and $4.3 million of debt issuance costs.
- Mortgages payable totaled $1.034 billion, compared with $1.050 billion at December 31, 2013. Estimated fair value of consolidated debt was $1.078 billion.
- Variable-rate debt and amounts due to Vornado totaled approximately $609.3 million. Management estimated that a 1% increase in base rates would reduce annual pre-tax earnings by approximately $6.1 million, or $1.19 per diluted share. A $300 million interest-rate cap limits LIBOR to 6.0% on the refinanced 731 Lexington Avenue office loan.
Material changes versus the prior comparable period
- Quarterly revenue increased 5.7%, primarily from a $2.3 million increase in expense reimbursements. Six-month revenue increased 3.5%.
- Quarterly net income increased 28.1%, and six-month net income increased 17.5%. FFO increased 18.5% for the quarter and 11.7% for the six months.
- Interest and debt expense declined by $3.6 million for the quarter and $5.0 million for the six months, primarily due to the February 2014 refinancing of the 731 Lexington Avenue office portion.
- Operating expenses increased $2.6 million for the quarter and $3.5 million for the six months, driven by higher reimbursable operating expenses, real estate taxes and bad debt expense.
- The Company completed a $300 million interest-only refinancing on February 28, 2014. The loan bears interest at LIBOR plus 0.95% and matures in March 2017, with four one-year extension options.
- Construction in progress increased to $25.1 million from $4.9 million at year-end, reflecting development of the Rego Park II apartment tower.
- Accumulated other comprehensive income increased to $5.6 million from $1.5 million, principally from a $4.2 million unrealized gain on Macerich securities.
Guidance, outlook, risks and unusual items
Management stated that operating cash flows and existing cash balances are expected to fund operations, dividends, debt amortization, recurring capital expenditures and Rego Park II development expenditures over the next twelve months. No formal earnings guidance was provided.
- The Rego Park II apartment tower is expected to contain approximately 300 units and 250,000 square feet, with completion expected in 2015. Estimated total cost is approximately $125 million, of which $23 million had been incurred by June 30, 2014. Completion timing and cost are uncertain.
- 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. The Company intends to refinance maturing debt.
- Sears filed a lawsuit concerning water intrusion, two February 2014 fires and alleged Americans with Disabilities Act violations at Rego Park I. Sears seeks at least $4 million in damages plus estimated future damages of at least $25 million, as well as injunctive relief. The reasonably possible loss cannot currently be estimated.
- Bloomberg’s concentration at 45% of revenue exposes the Company to material tenant credit, renewal and retention risk.
- Terrorism-risk insurance coverage under the applicable federal program was scheduled to expire in December 2014. The Company may face higher costs, reduced coverage or losses exceeding insurance limits.
- Vornado-related fees totaled $4.2 million for the six months, including management, development, leasing and property-service fees. Amounts due to Vornado included $41.3 million of leasing fees.
- Approximately $3.3 million of standby letters of credit were outstanding at June 30, 2014. The Paramus property has a $75 million purchase option exercisable by IKEA in 2021.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Bloomberg renews or remains financially capable of performing under its lease, given its 45% contribution to revenue.
- The refinancing outlook and terms for approximately $398.2 million of debt maturing in 2015.
- Rego Park II construction progress, remaining funding needs and any schedule or cost overruns.
- The potential financial and operational effect of the Sears litigation and any related insurance recovery.
- Exposure to higher interest rates, including the amount of variable-rate debt and the effectiveness and duration of the $300 million interest-rate cap.
- Whether the Company can sustain dividends of $6.50 per share for the first six months against six-month FFO of $9.11 per share.