Alexander’s, Inc. 2015 Form 10-K Summary
Business context and reporting period
Alexander’s, Inc. is a Delaware REIT focused on leasing, managing, developing and redeveloping seven properties in the greater New York City metropolitan area. Vornado Realty Trust manages, leases and develops the portfolio and owned 32.4% of Alexander’s outstanding common stock at December 31, 2015. The filing covers the fiscal year ended December 31, 2015; fourth-quarter results are also disclosed. Financial statements were audited by Deloitte & Touche LLP with unqualified opinions.
- Portfolio totaled approximately 2.437 million square feet.
- Office and retail occupancy was 99.7%; The Alexander apartment tower was 25.6% occupied at year-end.
- Bloomberg accounted for approximately 45% of total revenue, and 731 Lexington Avenue accounted for approximately 65%.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $207.9 million | $200.8 million | +3.5% |
| Operating income | $95.2 million | $96.7 million | -1.5% |
| Net income | $76.9 million | $67.9 million | +13.2% |
| Diluted earnings per share | $15.04 | $13.29 | +13.2% |
| FFO | $107.6 million | $97.0 million | +11.0% |
| FFO per diluted share | $21.06 | $18.98 | +11.0% |
| Net cash provided by operating activities | $106.2 million | $49.5 million | +114.6% |
| Cash and cash equivalents | $259.3 million | $227.8 million | +$31.5 million |
| Total debt outstanding | $1.060 billion | $1.033 billion | +$26.8 million |
| Total assets | $1.448 billion | $1.418 billion | +2.1% |
Operating margin was approximately 45.8%, compared with 48.2% in 2014; net margin was approximately 37.0%, compared with 33.8%. Interest and debt expense declined to $24.2 million from $32.1 million. The filing does not present a separately labeled EBITDA measure.
- Property rentals increased to $138.7 million from $136.6 million.
- Tenant expense reimbursements increased to $69.2 million from $64.2 million.
- Operating expenses increased to $76.2 million from $69.9 million, primarily from higher real estate taxes and Alexander apartment tower expenses.
- Real estate, net of accumulated depreciation, was $803.9 million; total equity was $352.9 million.
- Dividends paid during 2015 were $71.6 million, or $14.00 per share. The quarterly dividend was increased to $4.00 per share in January 2016, implying an annualized rate of $16.00 per share.
Debt, liquidity and cash flow
- Mortgage debt was $1.060 billion gross, or $1.053 billion net of deferred issuance costs. The reported debt-to-total-enterprise-value ratio was 38.4%.
- Debt consisted primarily of mortgages secured by Rego Park I, Paramus, Rego Park II and 731 Lexington Avenue. Approximately 86% of debt was variable-rate at year-end, creating interest-rate exposure; management estimated that a 1% increase in base rates would reduce annual earnings by approximately $9.1 million, or $1.79 per diluted share, before considering the interest-rate cap.
- Principal maturities include approximately $81.7 million in 2016 and $324.2 million in 2018. The Rego Park I loan, with a balance of $78.2 million, was scheduled to mature in March 2016 and was 100% cash collateralized.
- Management stated that operating cash flow and existing cash balances should fund operations, dividends, debt amortization, recurring capital expenditures and remaining Alexander apartment tower development costs over the following twelve months.
- Operating cash flow was $106.2 million. Investing cash flow used $25.8 million, including $50.1 million of real estate additions, primarily for The Alexander. Financing cash flow used $48.8 million after debt repayments, dividends and debt issuance costs, partially offset by $350.0 million of refinancing proceeds.
Material changes versus the prior comparable period
- Net income and FFO increased substantially, driven mainly by lower interest expense, higher rent and reimbursements, Macerich dividend income and a $2.1 million settlement receipt from a former bankrupt tenant.
- Interest expense declined by $7.8 million following refinancing of the office and retail portions of 731 Lexington Avenue. The retail refinancing in August 2015 replaced a prior 4.93% loan with a LIBOR-plus-1.40% loan.
- The Alexander apartment tower received a temporary certificate of occupancy for approximately 93% of the building in December 2015. The company had leased 84 of 312 units and expected the remaining certificate of occupancy in 2016 and stabilized occupancy in 2017.
- The Alexander project had an estimated total cost of approximately $125 million, of which $118.5 million had been incurred at December 31, 2015; remaining costs were expected in the first quarter of 2016.
- Operating expenses rose faster than revenue, and operating income declined despite stronger net income because of lower interest expense and other income.
- In January 2016, Bloomberg’s lease for 192,000 square feet was amended to align with its other office leases through February 2029, with a ten-year extension option. Bloomberg also provided a $200 million letter of credit, subject to potential reductions.
Guidance, outlook, risks and unusual items
- Management did not provide formal revenue, earnings or occupancy guidance. It expects stabilized occupancy at The Alexander in 2017 and intends to refinance maturing debt as it becomes due.
- The company is highly concentrated by geography, property and tenant. All properties are in the greater New York City metropolitan area, 731 Lexington Avenue generates approximately 65% of revenue, and Bloomberg generates approximately 45%.
- Key risks include tenant defaults or bankruptcies, loss of Bloomberg, retail-sector weakness, competition, changes in New York real estate conditions, interest-rate increases, refinancing availability, property damage, terrorism, natural disasters, environmental liabilities and cybersecurity incidents.
- A Sears lawsuit relating to water intrusions, fires and alleged Americans with Disabilities Act violations at Rego Park I seeks at least $4 million plus estimated future damages of at least $25 million. The company stated that a reasonable loss range could not be estimated.
- The New York City Department of Finance assessed an additional $20.3 million of transfer taxes, interest and penalties related to the 2012 Kings Plaza sale. The company disputes the assessment and determined that a loss was not probable.
- The company received approximately $2.1 million from a former bankrupt tenant in the fourth quarter, recorded in interest and other income.
- The company owns 535,265 Macerich shares with a December 31, 2015 fair value of $43.2 million. A significant decline could result in an impairment loss.
- Vornado-related fees totaled $11.8 million in 2015, and the related-party management, development and leasing arrangements are automatically renewable annually.
Most important facts for an investor to verify
- Bloomberg’s credit quality, lease compliance, renewal terms and the continuing significance of the $200 million letter of credit.
- Successful refinancing or extension of the Rego Park I maturity and future 2018 debt maturities.
- The Alexander apartment tower’s remaining construction costs, final certificate of occupancy, leasing pace and progress toward 2017 stabilization.
- Exposure to variable interest rates, including the effectiveness and remaining term of the $300 million LIBOR cap.
- Resolution and potential financial impact of the Sears litigation and $20.3 million NYC transfer-tax assessment.
- Sustainability of the increased $4.00 quarterly dividend relative to operating cash flow, taxable income and debt requirements.
- Potential conflicts of interest and fee economics arising from Vornado’s management, leasing and development arrangements and ownership control.