Alexander’s, Inc. 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a real estate investment trust that leases, manages, develops and redevelops seven properties in the greater New York City metropolitan area. Vornado Realty Trust owns 32.4% of the company and provides management, leasing and development services. This Form 10-Q covers the three months ended March 31, 2012; financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $63.660 million | $62.872 million | +1.3% |
| Operating income | $32.577 million | $32.352 million | +0.7% |
| Operating margin | 51.2% | 51.4% | Down 0.2 percentage points |
| Net income attributable to Alexander’s | $19.482 million | $18.207 million | +7.0% |
| Net margin attributable to Alexander’s | 30.6% | 29.0% | Up 1.6 percentage points |
| Diluted earnings per share | $3.81 | $3.57 | +6.7% |
| FFO attributable to common stockholders | $28.030 million | $26.304 million | +6.6% |
| FFO per diluted share | $5.49 | $5.15 | +6.6% |
| Net cash provided by operating activities | $43.618 million | $40.547 million | +7.6% |
| Cash and cash equivalents at period end | $530.252 million | $431.931 million | Prior-year period-end comparison |
Property rentals increased to $43.829 million from $43.465 million, while expense reimbursements increased to $19.831 million from $19.407 million. Operating expenses were $21.262 million, depreciation and amortization was $8.697 million, and interest and debt expense was $13.068 million. Interest expense declined primarily because the average interest rate decreased to 3.62% from 4.46%.
Total debt was $1.327 billion at March 31, 2012, compared with $1.331 billion at December 31, 2011. Estimated fair value of notes and mortgages payable was $1.386 billion. Cash exceeded restricted cash and short-term investments by $530.252 million; the company held no short-term investments at March 31, 2012. Total equity was $363.518 million.
Quarter-end portfolio occupancy was 97.6%. The company leased 55,455 square feet during the quarter, all retail space. Bloomberg L.P. contributed $21.222 million, or 33% of consolidated revenue.
Cash Flow, Dividends and Liquidity
- Operating cash flow was $43.618 million, supported by net income, depreciation and amortization, prepaid expense amortization and higher prepaid rents.
- Investing activities provided $3.259 million, including $5.000 million from maturing short-term investments, partly offset by $2.709 million of real estate and construction expenditures.
- Financing activities used $23.244 million, including $19.151 million of dividends and $3.698 million of debt repayments.
- Cash increased $23.633 million during the quarter to $530.252 million.
- Quarterly dividends were $3.75 per common share, compared with $3.00 in the prior-year quarter.
- Management stated that expected operating cash flow and existing cash balances should be adequate over the next twelve months to fund operations, dividends, debt amortization and maturities, and recurring capital expenditures.
Material Changes Versus the Prior Comparable Period
- Revenue increased 1.3%, but operating income increased only 0.7% as depreciation and amortization and general and administrative expenses rose.
- Net income attributable to Alexander’s increased 7.0%, primarily reflecting lower interest expense.
- FFO increased 6.6%, with FFO per diluted share rising to $5.49.
- Operating cash flow increased $3.071 million, while investing cash inflow declined substantially because the prior-year period included $23.000 million of maturing short-term investments.
- Dividends paid increased $3.833 million, or approximately 25%, from the prior-year quarter.
- Leasing activity produced a 5.4% increase in GAAP-basis straight-line rent for second-generation reletting space, while the cash-basis increase was 0.3%.
- Vornado-related fees declined to $2.828 million from $3.579 million, primarily because leasing fees decreased.
- Adoption of new fair-value measurement disclosure guidance had no material effect on the financial statements.
Outlook, Risks, Contingencies and Unusual Items
The filing provides liquidity expectations but does not provide formal earnings or revenue guidance. Management’s outlook depends on rental income, occupancy, tenant credit, access to capital, interest rates, construction costs and the ability to refinance debt on acceptable terms.
- Bloomberg represents a significant tenant concentration at 33% of revenue; loss of the tenant or failure to perform could materially affect results and financial condition.
- Debt includes a $78.246 million mortgage maturing in March 2013 and other mortgages maturing between 2014 and 2018. The company may refinance or repay debt as it matures.
- Approximately $4.998 million of standby letters of credit were outstanding.
- A Flushing-related action seeks $50 million in damages from a tenant, which is seeking indemnification from the company. Management believes the claim is without merit, but the reasonably possible loss cannot be estimated.
- Kings Plaza environmental remediation is estimated at approximately $2.5 million; $0.5 million has been paid and the remainder is covered by insurance.
- Insurance coverage includes up to $1.7 billion for property and rental value losses and terrorism risks, but deductibles, uncovered losses and future availability of coverage could be material.
- The Paramus lease with IKEA includes a $75 million purchase option in 2021. If exercised, the company expects approximately $7 million of net cash proceeds and an estimated $62 million gain on sale of land.
- Variable-rate debt exposure was $564.240 million; a 1% change in base rates was estimated to affect annualized earnings by approximately $5.642 million, or $1.10 per diluted share.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to previously reported risk factors were disclosed.
Important Facts for Investors to Verify
- Verify the maturity and refinancing plans for the March 2013 Rego Park I mortgage and subsequent debt maturities.
- Assess Bloomberg’s lease duration, renewal prospects and credit condition given its 33% revenue concentration.
- Review recurring FFO, dividend coverage and the sustainability of the $3.75 quarterly dividend.
- Monitor occupancy, lease rollover, rent spreads and capital requirements across the seven-property portfolio.
- Evaluate exposure to variable interest rates, insurance limitations and potential losses from the Flushing litigation and environmental remediation.
- Confirm the terms and potential economic impact of Vornado’s management, development and leasing arrangements, including related-party fees and amounts payable.