Vornado Realty Trust — FY2011 Form 10-K Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P. The filing covers the fiscal year ended December 31, 2011, including fourth-quarter results. Core operations comprise New York office properties, Washington, D.C. office properties, retail properties and Merchandise Mart Properties, supplemented by investments in Toys “R” Us, Alexander’s, J.C. Penney, LNR Property Corporation, the Vornado Capital Partners Real Estate Fund and other real estate investments.
- At year-end, Vornado owned or controlled approximately 20.8 million square feet in Midtown Manhattan, 20.5 million square feet in Washington, D.C./Northern Virginia, 24.2 million square feet of retail assets outside Manhattan, 5.7 million square feet of Merchandise Mart properties and a 70% interest in 555 California Street.
- Vornado owned approximately 93.5% of the Operating Partnership and had 185.1 million common shares outstanding.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenues | $2.916 billion | $2.741 billion | +6.4% |
| Operating income | $856.2 million | $792.4 million | +8.0% |
| Net income attributable to Vornado | $662.3 million | $647.9 million | +2.2% |
| Net income attributable to common shareholders | $601.8 million | $596.7 million | +0.8% |
| Diluted EPS | $3.23 | $3.24 | -0.3% |
| FFO attributable to common shareholders plus assumed conversions | $1.231 billion | $1.252 billion | -1.6% |
| FFO per diluted share | $6.42 | $6.59 | -2.6% |
| Operating cash flow | $702.5 million | $771.1 million | -8.9% |
Operating margin was approximately 29.4% and net income attributable to common shareholders represented approximately 20.6% of revenue. Revenue growth included $154.1 million of Cleveland Medical Mart development revenue, substantially offset by $145.8 million of related development costs.
- Same-store GAAP EBITDA increased 3.1% in Retail, 0.9% in Washington, D.C. Office, 0.5% in Merchandise Mart and decreased 0.1% in New York Office. Cash-basis same-store EBITDA increased 6.4%, 1.8%, 3.5% and 1.8%, respectively.
- Year-end occupancy was 95.6% for New York Office, 90.0% for Washington, D.C. Office, 92.9% for Retail and 85.2% for Merchandise Mart properties.
- Hotel Pennsylvania reported 89.1% average occupancy, a $150.91 average daily rate and $134.43 revenue per available room.
Fourth-quarter 2011
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $741.8 million | $702.8 million |
| Net income attributable to common shareholders | $69.5 million | $243.4 million |
| Diluted EPS | $0.37 | $1.31 |
| FFO per diluted share | $1.46 | $2.27 |
The year-over-year decline in fourth-quarter earnings and FFO primarily reflected substantially lower gains and other favorable nonrecurring items in the prior-year period. Q4 2011 included a $23.5 million recognition of previously reserved Stop & Shop receivables, a $40.1 million J.C. Penney derivative mark-to-market gain and a $13.8 million share of partially owned entity write-downs.
Balance sheet, debt and liquidity
- Total assets were $20.45 billion, including $14.53 billion of net real estate, $741.3 million of marketable securities and $1.234 billion of investments in partially owned entities.
- Consolidated debt was $10.56 billion, down from $10.89 billion; the weighted-average interest rate was 4.86%. Including Vornado’s pro rata share of partially owned entity debt, excluding non-recourse LNR CMBS/CDO liabilities, total debt was approximately $14.5 billion, or approximately 47% of total enterprise value.
- Cash and cash equivalents were $606.6 million. Revolving facilities totaled $2.5 billion, with $138.0 million drawn and approximately $2.340 billion of remaining borrowing capacity after letters of credit.
- Debt maturities were $1.293 billion in 2012 and $1.715 billion in 2013. Management stated that expected operating cash flow over the next twelve months should fund operations, distributions, debt amortization and recurring capital expenditures, while acquisitions and development may require additional debt or equity financing.
- Common dividends were $2.76 per share for 2011. Management estimated 2012 cash requirements of approximately $510 million for common dividends, $71 million for preferred dividends and $49 million for Operating Partnership distributions.
Material changes and unusual items
- Revenues increased primarily from the Cleveland Medical Mart project, leasing activity, Hotel Pennsylvania and trade-show operations. The project generated $154.1 million of revenue and $145.8 million of expense in 2011.
- FFO declined despite higher operating income, principally because 2010 benefited from a $130.2 million J.C. Penney derivative gain, while 2011 included $13.0 million; 2011 also benefited from mezzanine loan reversals and gains totaling $82.7 million.
- Discontinued operations contributed $145.5 million in 2011, including an $83.9 million gain on extinguishment of High Point debt, a $45.9 million gain on the sale of Washington, D.C. properties and $5.8 million of retail property gains.
- Vornado issued $400 million of 5.0% senior unsecured notes, renewed $2.5 billion of revolving facilities and raised $238.8 million net from Series J preferred shares.
- Significant investments included One Park Avenue, 666 Fifth Avenue, Independence Plaza, 280 Park Avenue and the Executive Tower. The Fund had five investments with fair value of approximately $346.7 million and $416.6 million of unfunded commitments, including Vornado’s $104.2 million share.
- On January 6, 2012, Vornado sold 350 West Mart Center for $228 million and expects to recognize a $54.2 million gain in the first quarter of 2012. On January 9, 2012, it refinanced 350 Park Avenue with a $300 million loan at 3.75%.
Guidance, outlook, risks and contingencies
- Management projected Washington, D.C. office occupancy would decline from 90% at year-end 2011 to 82%–84% in 2012, with 2012 EBITDA approximately $55 million–$65 million below 2011. The decline is driven primarily by 2.902 million square feet of 2012 lease expirations and BRAC-related government relocations; management estimated two to three years for full absorption and EBITDA recovery.
- Vornado requested that the Skyline mortgage be placed with the special servicer because vacancy was 26% and was expected to rise, requiring substantial re-tenanting capital.
- The company was evaluating development and redevelopment projects that could require up to $1.5 billion over five years. 2012 recurring capital expenditures and leasing commissions were budgeted at approximately $218 million, excluding certain partially owned entities.
- Major risks include concentrated exposure to New York and Washington, D.C., tenant defaults and vacancies, refinancing and interest-rate risk, capital-market access, development costs, retail and hotel cyclicality, mezzanine loan losses, marketable-security volatility, environmental and insurance exposures, and the ability to maintain REIT qualification.
- Stop & Shop appealed a $56.6 million judgment in Vornado’s favor. Vornado recorded a $41.983 million receivable and recognized $23.521 million of previously reserved income; management stated that the maximum reasonably possible loss from the appeal could equal the receivable.
- Vornado had approximately $283.6 million of guarantees and master-lease obligations, $288.8 million of expected additional capital contributions to partially owned entities and $22.1 million of outstanding letters of credit.
- The filing omits financial statements required under Rule 3-09 for Toys “R” Us; Vornado stated that it would file an amendment when those statements became available.
Most important facts for investors to verify
- Reconcile reported earnings and FFO to recurring property operations after removing discontinued operations, derivative gains, litigation-related income, mezzanine loan reversals and other nonrecurring items.
- Track Washington, D.C. occupancy, BRAC-related vacancy, Skyline’s special-servicing status and the projected $55 million–$65 million EBITDA decline.
- Review the 2012–2013 debt maturities, refinancing progress, covenant compliance and available liquidity after dividends and capital expenditures.
- Assess exposure to partially owned entities, including 666 Fifth Avenue, 280 Park Avenue, Toys “R” Us, LNR and the Capital Partners Fund, including unfunded commitments and non-recourse debt.
- Monitor the Stop & Shop appeal and collectibility of the $41.983 million receivable.
- Verify the impact and timing of the Cleveland Medical Mart completion, 350 West Mart Center disposition and planned redevelopment spending.