Alexander’s, Inc. — 2016 Second-Quarter Form 10-Q
Business context and reporting period
Alexander’s, Inc. is a Delaware real estate investment trust engaged in leasing, managing, developing and redeveloping seven properties totaling approximately 2.437 million square feet in the greater New York City metropolitan area. Vornado Realty Trust owns 32.4% of the outstanding common stock and manages, leases and develops the properties. This filing covers the three and six months ended June 30, 2016; the interim financial statements are unaudited.
Office and retail properties were 99.7% occupied at June 30, 2016. The 312-unit Alexander apartment tower was in lease-up at 77.2% occupancy, with stabilization expected in 2017.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenues | $57.0 million | $50.6 million | $112.6 million | $102.7 million |
| Operating income | $26.5 million | $23.9 million | $52.8 million | $48.2 million |
| Operating margin | 46.4% | 47.1% | 46.9% | 47.0% |
| Net income | $21.8 million | $17.3 million | $43.8 million | $35.2 million |
| Net margin | 38.2% | 34.2% | 38.9% | 34.2% |
| Net income per diluted share | $4.26 | $3.39 | $8.56 | $6.88 |
| FFO | $31.0 million | $24.6 million | $61.2 million | $49.8 million |
| FFO per diluted share | $6.06 | $4.82 | $11.98 | $9.74 |
Six-month operating cash flow was $32.7 million, compared with $25.0 million in the prior-year period. Investing activities used $13.7 million, principally for real estate additions and construction, while financing activities used $42.6 million, including $40.9 million of dividends. Cash and cash equivalents were $235.8 million at June 30, 2016, compared with $259.3 million at December 31, 2015.
Mortgages payable, net of deferred debt issuance costs, were $1.053 billion at June 30, 2016, compared with $1.053 billion at December 31, 2015. Gross mortgage principal was $1.058 billion, with maturities ranging from March 2018 through August 2022. Approximately $911.7 million was variable-rate debt and $146.2 million was fixed-rate debt. A 1% increase in base rates would increase annual interest expense by approximately $9.1 million, or approximately $1.78 per diluted share. The estimated fair value of debt was $1.046 billion.
Total assets were $1.446 billion and total equity was $358.8 million at June 30, 2016. Marketable securities consisted of 535,265 Macerich common shares valued at $45.7 million. The company stated that existing cash and expected operating cash flow should fund operations, dividends, debt amortization and capital expenditures over the next twelve months.
Material changes versus the prior comparable period
- Second-quarter revenue increased $6.4 million, or approximately 12.6%; six-month revenue increased $9.9 million, or approximately 9.6%.
- Second-quarter net income increased $4.4 million, or approximately 25.5%; six-month net income increased $8.6 million, or approximately 24.5%.
- Second-quarter and six-month FFO increased approximately 25.8% and 23.0%, respectively.
- Growth reflected a $2.257 million tenant lease-termination payment at Rego Park II, rental income from the Alexander apartment tower, and higher Bloomberg rental and expense recoveries following a January 2016 lease amendment.
- Operating expenses and depreciation increased due primarily to the Alexander apartment tower and additional amortization associated with the Rego Park II lease termination.
- Interest and debt expense declined $1.5 million in the quarter and $3.0 million year to date, primarily because of the August 2015 refinancing of the retail portion of 731 Lexington Avenue at a substantially lower rate.
- The company extended the 100%-cash-collateralized Rego Park I mortgage by two years in March 2016. Dividends increased to $4.00 per share for the quarter and $8.00 per share for the first six months, versus $3.50 and $7.00, respectively.
Guidance, outlook, risks and unusual items
- No quantitative full-year earnings or FFO guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Bloomberg accounted for approximately 46% of six-month revenue. Its lease amendment extends the relevant 731 Lexington Avenue leases through February 2029, with a ten-year extension option, and provides a $200 million letter of credit subject to specified conditions. Loss of Bloomberg or a failure to meet its lease obligations would materially affect results and financial condition.
- FFO included $2.257 million, or $0.44 per diluted share, from the Rego Park II tenant lease termination. FFO is a non-GAAP measure and does not represent cash generated from operations or cash available for dividends.
- The company faces refinancing, interest-rate, tenant-credit, occupancy, construction-cost, real estate market, regulatory and insurance risks. Its mortgage loans are non-recourse but contain customary insurance covenants.
- Sears litigation relating to Rego Park I continued, with the remaining property-damage claim estimated at approximately $650,000 after withdrawal of the future-damages claim. The company does not expect reasonably possible losses to exceed that amount.
- The New York City Department of Finance assessed an additional $20.5 million of transfer taxes related to the 2012 Kings Plaza sale. Management believes the claim lacks merit, considers a loss not probable and does not expect a material adverse effect.
- The Paramus IKEA lease includes a $75 million purchase option in 2021. If exercised, the company expects approximately $7 million of net cash proceeds and an approximately $60 million gain on sale; the filing does not indicate whether the option will be exercised.
- Approximately $2.1 million of standby letters of credit were outstanding. The company is evaluating the potential effects of recently issued revenue recognition, financial instruments, lease and share-based compensation standards.
Important facts for investors to verify
- Verify the sustainability of revenue and FFO growth excluding the $2.257 million lease-termination item.
- Monitor Bloomberg’s concentration, creditworthiness, lease performance and the conditions governing its $200 million letter of credit.
- Review the 2018–2022 mortgage maturities, variable-rate exposure and refinancing assumptions.
- Track lease-up and eventual stabilization of the Alexander apartment tower.
- Assess dividend coverage against operating cash flow, capital expenditures and debt amortization.
- Follow the Sears litigation and the $20.5 million NYC transfer-tax assessment.
- Confirm the future treatment and valuation of the Macerich investment and the potential 2021 Paramus purchase-option outcome.