Vornado Realty Trust 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed February 26, 2013. The filing also presents fourth-quarter 2012 results. Vornado is a fully integrated REIT operating primarily through Vornado Realty L.P., in which it owned approximately 94.0% of the common limited partnership interest.
Business Context
Vornado owns and operates a diversified real estate portfolio concentrated in New York City and Washington, DC/Northern Virginia, with additional retail, Merchandise Mart, hotel, residential, investment-fund and operating-company interests. At year-end, the portfolio included approximately 63.1 million square feet attributable to Vornado, with reported occupancy of 96.2% in New York, 84.1% in Washington, DC, 93.4% in Retail Properties and 92.6% in Merchandise Mart.
- New York: approximately 21.8 million square feet attributable to Vornado, including office, street retail, residential properties, Hotel Pennsylvania and a 32.4% interest in Alexander’s.
- Washington, DC: approximately 16.5 million square feet attributable to Vornado, including office and residential properties.
- Retail Properties: approximately 18.6 million square feet attributable to Vornado across strip centers and regional malls.
- Other interests included 555 California Street, Vornado Capital Partners Real Estate Fund, Toys “R” Us, J.C. Penney and Lexington Realty Trust.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenues | $2.766 billion | $2.733 billion | Up $33.6 million |
| Operating income | $677.6 million | $823.6 million | Down $145.9 million |
| Income from continuing operations | $408.6 million | $578.9 million | Down $170.3 million |
| Net income attributable to common shareholders | $549.3 million | $601.8 million | Down $52.5 million |
| Diluted earnings per common share | $2.94 | $3.23 | Down $0.29 |
| FFO attributable to common shareholders plus assumed conversions | $818.6 million, or $4.39 per diluted share | $1.231 billion, or $6.42 per diluted share | Down $412.4 million |
| Cash flow from operating activities | $825.0 million | $702.5 million | Up $122.6 million |
| Total assets | $21.966 billion | $20.446 billion | Up $1.519 billion |
| Consolidated debt | $11.296 billion | $10.077 billion | Up $1.220 billion |
| Total equity | $7.904 billion | $7.508 billion | Up $395.7 million |
Amounts in the table are from the filing’s financial statements and are generally presented in thousands, except per-share amounts. Consolidated debt had a weighted-average interest rate of 4.27%, comprising $3.167 billion of variable-rate debt and $8.129 billion of fixed-rate debt. Management reported approximately $14.7 billion of total debt including Vornado’s pro rata share of debt of partially owned entities, and a total-debt-to-enterprise-value ratio of approximately 46%.
At December 31, 2012, Vornado had $960.3 million of cash and cash equivalents and $1.307 billion of available borrowing capacity under its revolving credit facilities, net of borrowings and letters of credit. Management stated that cash flow from continuing operations was expected to fund operations, distributions, debt amortization and recurring capital expenditures over the following twelve months.
Material Changes Versus 2011
- Revenue increased modestly, but operating income and continuing-operations income declined because of higher operating and impairment-related expenses, lower Washington, DC performance and unfavorable investment-market results.
- Interest and other investment income changed from $148.8 million of income in 2011 to a $260.9 million loss in 2012. The change primarily reflected a $224.9 million non-cash impairment loss on J.C. Penney shares and a $75.8 million mark-to-market loss on the J.C. Penney derivative position.
- FFO declined substantially, primarily because of the J.C. Penney losses, the $40.0 million non-cash impairment of the Toys “R” Us investment and the absence of certain favorable 2011 items.
- Washington, DC same-store EBITDA declined 8.6% on a GAAP basis and 9.8% on a cash basis, primarily due to Base Realignment and Closure-related vacancies. New York same-store EBITDA increased 2.0%, Retail Properties increased 1.2% and Merchandise Mart increased 4.5% on a GAAP basis.
- Consolidated debt increased by $1.220 billion, while cash increased by $353.8 million. Revolving-credit borrowings increased to $1.170 billion from $138.0 million.
- Vornado acquired the 666 Fifth Avenue retail condominium for $707.0 million and increased its interest in Independence Plaza to 58.75%, recognizing $105.4 million of related income.
- The Real Estate Fund made four investments totaling $203.7 million. Its nine investments had a fair value of $600.8 million at year-end, with $217.7 million of unfunded commitments, including $54.4 million attributable to Vornado.
- Vornado completed multiple asset sales and recognized $487.4 million of net gains on real estate sales during 2012, including gains from Washington, DC and Merchandise Mart dispositions.
Guidance, Outlook, Risks and Unusual Items
- Management estimated that 2013 Washington, DC EBITDA would be $5 million to $15 million below 2012 EBITDA. Skyline properties had 49.8% vacancy at year-end, deferred interest of $27.0 million and a loan under special-servicer forbearance, with restructuring discussions ongoing.
- 2013 expected capital expenditures and leasing commissions were approximately $256 million, excluding certain partially owned entities. Planned spending on 280 Park Avenue and Springfield Mall was approximately $285 million in total, with $132 million expected in 2013.
- Vornado expected approximately $1.070 billion of debt maturities in 2013 and $240.0 million in 2014. Refinancing, repayment and access to capital markets remain important liquidity considerations.
- On February 6, 2013, Vornado received $124.0 million from a Stop & Shop settlement. The settlement terminated its right to approximately $6.0 million of annual rent potentially payable through 2031; approximately $59.0 million of net income was expected to be recognized in the first quarter of 2013.
- On January 24, 2013, Vornado completed the sale of Green Acres Mall for $500.0 million and expected to recognize a $205.0 million financial-statement gain in the first quarter. Vornado also agreed to sell additional assets and its 26.2% interest in LNR, with expected net proceeds of approximately $241.0 million.
- Vornado increased its quarterly common dividend from $0.69 to $0.73 per share effective January 2013, implying an annualized rate of $2.92 per share.
- Subsequent preferred-security activity included the issuance of $300.0 million of Series L preferred shares at a 5.40% dividend rate and the February 2013 redemption of Series F and H preferred shares for $262.5 million.
- Major risks include concentrated exposure to New York and Washington, DC, tenant defaults and vacancies, interest-rate and refinancing risk, real estate valuation and impairment risk, retail-sector weakness, development costs, insurance limitations, environmental liabilities, REIT qualification requirements and conflicts involving related parties.
Most Important Facts for Investors to Verify
- Reconcile reported FFO and earnings excluding the J.C. Penney impairment and derivative losses, Toys “R” Us impairment, real estate gains and other comparability items.
- Review 2013 debt maturities, revolving-credit usage, covenant compliance and the refinancing status of Independence Plaza and Skyline Properties.
- Assess Washington, DC leasing trends, BRAC-related vacancy exposure and the expected $5 million to $15 million 2013 EBITDA decline.
- Evaluate the sustainability of the increased common dividend against recurring cash flow, capital expenditures, preferred dividends and required distributions.
- Verify the timing and proceeds of announced 2013 asset sales, including Green Acres Mall, the Plant, Gallery at Market East and LNR.
- Review valuation assumptions for real estate, the Real Estate Fund and partially owned investments, including the sensitivity of Level 3 fair values to discount and capitalization rates.
- Consider the economic exposure to J.C. Penney, Toys “R” Us and other non-core investments, including potential additional impairments.
- Review related-party arrangements with Alexander’s, Interstate Properties and affiliated management, leasing and development entities.