Alexander’s, Inc. 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan-area REIT engaged in leasing, managing, developing and redeveloping seven properties totaling approximately 2.449 million square feet. Vornado Realty Trust owned 32.4% of outstanding common stock and manages, leases and develops the properties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 |
|---|---|---|---|---|
| Rental revenues | $57.8 million | $59.1 million | $170.5 million | $175.3 million |
| Net income | $16.5 million | $15.0 million | $45.6 million | $22.9 million |
| Diluted EPS | $3.22 | $2.93 | $8.92 | $4.47 |
| FFO, non-GAAP | $25.2 million | $23.9 million | $75.0 million | $53.3 million |
| FFO per diluted share | $4.92 | $4.68 | $14.66 | $10.41 |
| Cash flow from operations | Not separately provided | Not separately provided | $100.0 million | $66.7 million |
For the quarter, rental revenues declined 2.3%, while net income increased 9.9% and FFO increased 5.3%. For the nine-month period, rental revenues declined 2.7%, while net income increased 99.6% and FFO increased 40.9%. The nine-month 2018 results included a $23.8 million discontinued-operations charge related to potential New York City transfer taxes on the prior sale of Kings Plaza.
Operating expenses were $23.4 million in the quarter and $66.9 million year to date. Rental revenue less operating expense, a simple property-level operating margin proxy, was approximately 59.5% in the quarter and 60.8% year to date, compared with approximately 55.3% and 59.9%, respectively, in the comparable 2018 periods. These figures exclude depreciation, general and administrative expenses, interest and other items.
At September 30, 2019, total assets were $1.283 billion, including $304.2 million of cash and cash equivalents, $9.5 million of restricted cash and $16.9 million of marketable securities. Total liabilities were $1.021 billion and total equity was $262.1 million.
Mortgages payable were $969.7 million net of deferred debt issuance costs, consisting of $974.8 million of principal secured by four properties. Approximately $906.8 million was variable-rate debt and $68.0 million was fixed-rate debt. The company had a $500 million interest-rate cap limiting LIBOR to 6.0%. Estimated debt fair value was $973.0 million.
Cash, cash equivalents and restricted cash increased to $313.8 million from $289.5 million at December 31, 2018. Nine-month cash flow included $100.0 million from operating activities, $6.6 million used for real estate additions and $69.1 million used for financing activities, primarily $69.1 million of dividends. Dividends were $4.50 per share for the quarter and $13.50 per share for the nine-month period.
Material Changes and Operating Developments
- Rental revenue declined primarily because Sears vacated its 195,000-square-foot Rego Park I space; the lease had generated approximately $10.3 million of annual revenue.
- Operating expenses decreased because the prior-year periods included bad-debt expense related primarily to the Sears lease termination. Depreciation and amortization also declined because the prior year included accelerated amortization associated with Sears and Toys “R” Us lease terminations.
- On September 23, 2019, the company signed a 10-year lease with IKEA for 112,500 square feet at Rego Park I. IKEA may terminate after year five subject to a payment capped at the lesser of $10.0 million or remaining rent.
- Bloomberg accounted for approximately 48% of nine-month 2019 revenue, compared with 46% in the prior-year period. The company also signed a lease with Bloomberg for an additional 49,000 square feet at 731 Lexington Avenue.
- In-service space was 99.5% occupied at September 30, 2019; 195,000 square feet remained out of service for redevelopment.
- The company adopted ASC 842 leases on January 1, 2019, recording a $5.1 million right-of-use asset and a $5.4 million lease liability for its Flushing ground lease. The September 30, 2019 lease liability was $5.0 million.
- The company restated the December 31, 2018 balance-sheet presentation to reclassify a $195.7 million Rego Park II loan participation as a reduction of mortgages payable. The reclassification did not affect income, equity or cash flow.
- The fair value of the company’s 535,265 Macerich shares fell to $16.9 million from $23.2 million at December 31, 2018, producing a $6.3 million year-to-date earnings charge.
Outlook, Risks and Unusual Items
Management stated that cash flows from continuing operations over the next 12 months, together with existing cash balances, are expected to fund operations, dividends, debt amortization and capital expenditures. The company may refinance maturing debt or repay it as it comes due; no formal earnings or revenue guidance was provided.
- Debt refinancing and interest-rate exposure are significant risks. Approximately 93% of mortgage principal was variable rate at September 30, 2019; management estimated that a 1% change in base rates would affect annual interest expense by approximately $9.1 million, or diluted EPS by approximately $1.77.
- Bloomberg concentration is material: the tenant represented approximately 48% of nine-month revenue. A loss of Bloomberg or deterioration in its ability to pay could materially affect results.
- Kohl’s closed its 133,000-square-foot Rego Park II store in April 2019 but remains obligated under its lease through January 2031 and plans to sublease the space.
- The Sears-related Rego Park I litigation remained pending, with reasonably possible losses not expected to exceed approximately $650,000. The case was stayed following Sears’ bankruptcy and lease rejection.
- The Paramus IKEA ground lease includes a 2021 purchase option at $75.0 million. If exercised, management estimates net cash proceeds of approximately $7.0 million and a gain of approximately $60.0 million; the filing does not indicate whether exercise is expected.
- Insurance coverage, including terrorism coverage, may become more costly or unavailable on acceptable terms. The company remains responsible for uninsured losses, deductibles and losses exceeding policy limits.
- The nine-month 2018 discontinued-operations loss of $23.8 million related to a potential transfer-tax liability from the Kings Plaza sale; no comparable charge was recorded in 2019.
Investor Verification Items
- Verify the timing, rent economics and termination provisions of the new IKEA lease and the redevelopment plan for the remaining Rego Park I space.
- Monitor Bloomberg’s creditworthiness, lease occupancy and contribution to revenue.
- Review maturities, extension rights, floating-rate exposure and refinancing plans for the $974.8 million mortgage portfolio.
- Assess whether operating cash flow adequately covers the $69.1 million year-to-date dividend distribution, capital expenditures and debt obligations.
- Track Macerich share-price volatility and its effect on reported earnings and liquidity.
- Follow the Sears litigation, Kohl’s subleasing efforts, insurance renewal costs and the Paramus 2021 purchase option.
- Consider that FFO is a non-GAAP measure and does not represent cash generated from operations or cash available for dividends.