VNO

Business Context and Reporting Period

Company: Vornado Realty Trust (Vornado)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: Vornado is a fully-integrated Real Estate Investment Trust (REIT) owning and operating office, retail, and showroom properties, with significant concentrations in the New York City metropolitan area and the Washington, D.C./Northern Virginia region. The Company also holds a 60% interest in a partnership owning cold storage warehouses nationwide.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Debt figures exclude liabilities related to discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $28.1 million, driven by acquisitions (Forest Plaza, 25 W. 14th Street), increased amortization of acquired below-market leases, and leasing activity. Office segment revenues grew by $18.9 million.
• Net Income Decline: Net income applicable to common shares decreased by $11.9 million. This was primarily due to a $9.9 million charge for Alexander's stock appreciation rights compensation expense and a $1.0 million loss on early extinguishment of debt by Alexander's, partially offset by income from the Bloomberg lease commencement.
• EBITDA: Consolidated EBITDA remained relatively flat at $231.8 million compared to $232.0 million in the prior year, with a 2.3% increase in same-store operations.
• Investing Activities: Net cash provided by investing activities turned positive ($68.6 million) compared to a use of cash ($21.2 million) in the prior year, largely due to $147.4 million in distributions from partially-owned entities.
• Financing Activities: Significant cash outflows ($251.5 million) were driven by the redemption of preferred shares and units ($112.5 million) and dividend payments ($103.7 million on common shares).

Guidance, Outlook, and Risks

• Acquisitions & Dispositions:
  • Acquired: Forest Plaza Shopping Center ($32.5M) and 25 W. 14th Street retail building ($40M). Both funded via Section 1031 exchanges.
  • Disposed: Agreed to sell the Palisades Residential Complex (538 units) for $222.5 million, expecting a gain of approximately $70 million. Closing expected in Q3 2004.
• Financing Actions: Redeemed all Series D-2 Preferred Units ($27.5M) and Series B Preferred Shares ($85M) during the quarter.
• Liquidity: Management anticipates cash from continuing operations will be adequate to fund operations and dividends for the next 12 months. A $600 million revolving credit facility remains available with a zero balance.
• Risks & Contingencies:
  • Legal: Ongoing litigation with Stop & Shop regarding rent reallocation; mediation pending.
  • Market: Exposure to interest rate fluctuations on variable-rate debt ($1.2 billion wholly-owned). A 1% increase in rates would decrease annual net income by approximately $12.4 million.
  • Operational: Temperature Controlled Logistics segment reported lower gross margins due to start-up costs and revenue mix changes.

Investor Verification Checklist

• Alexander's Compensation Charge: Verify the impact of the $9.9 million stock appreciation rights expense on future earnings, as this is a non-cash but significant reduction in net income.
• Palisades Sale Closing: Monitor the closing of the Palisades Residential Complex sale in Q3 2004 to confirm the realization of the projected $70 million gain.
• Temperature Controlled Logistics: Review the trend in AmeriCold Logistics' gross margins and rent collection, as $6.5 million of rent was not recognized in Q1 2004 due to collection uncertainty.
• Preferred Share Redemptions: Confirm the reduction in preferred dividend obligations following the redemption of Series B and D-2 securities.
• Interest Rate Sensitivity: Assess the impact of rising interest rates on the $1.2 billion of variable-rate debt, noting the use of interest rate swaps and caps.