Business Context and Reporting Period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P. The combined unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Vornado owned approximately 92.3% of the Operating Partnership at quarter-end. The portfolio is concentrated in New York, with additional properties in Chicago and San Francisco.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $453.5 million, versus $378.9 million | $895.6 million, versus $758.9 million |
| Net income | $68.9 million, versus $76.8 million | $122.3 million, versus $103.8 million |
| Net income attributable to common shareholders | $50.4 million, or $0.26 per diluted share | $76.9 million, or $0.40 per diluted share |
| FFO attributable to common shareholders plus assumed conversions | $155.0 million, or $0.80 per diluted share | $310.0 million, or $1.60 per diluted share |
| NOI at share | $288.9 million | $573.2 million |
| NOI at share, cash basis | $284.7 million | $565.8 million |
| Net cash provided by operating activities | Not separately presented for the quarter | $430.6 million, versus $472.7 million |
Second-quarter same-store NOI at share increased 7.1%, and same-store NOI at share on a cash basis increased 8.4%. For the six months, the increases were 5.3% and 7.3%, respectively. The filing identifies NOI and FFO as non-GAAP measures that should not be viewed as substitutes for net income or operating cash flow.
At June 30, 2022, total assets were $17.2 billion and total equity was $6.7 billion. Cash and cash equivalents were $988.4 million, restricted cash was $127.9 million, and U.S. Treasury bill investments were $494.0 million.
Debt consisted of $5.8 billion of net mortgages, $1.2 billion of senior unsecured notes, $792.6 million of net unsecured term-loan debt and $575.0 million drawn on unsecured revolving facilities. Total debt before deferred financing costs was $8.5 billion, with an estimated fair value of $8.2 billion. Management reported approximately $3.5 billion of liquidity, comprising $1.1 billion of cash and restricted cash, $494 million of Treasury bills and $1.9 billion of available revolving capacity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 19.7% in the second quarter and 18.0% for the six months, driven by development and redevelopment activity, same-store operations, resumed trade shows at theMART, and other property and fee income.
- Net income attributable to common shareholders increased 4.9% in the quarter and 47.5% for the six months. Comparability benefited from the 2021 Hotel Pennsylvania loss and differed because of property dispositions, the transfer-tax refund and condominium sales.
- Interest and debt expense increased 20.7% in the quarter and 12.5% for the six months, primarily due to higher average rates on variable-rate debt and lower capitalized interest.
- Net cash provided by operating activities declined $42.1 million year over year, while investing cash use increased substantially because of Treasury bill purchases and higher development spending. Financing activities used $528.8 million, versus providing $297.7 million in the prior-year period.
- Same-store performance improved, but total New York occupancy declined to 90.8% from 91.3% at December 31, 2021. New York office occupancy was 92.1%, retail occupancy was 76.3% and residential occupancy was 97.6% at June 30, 2022.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific quantitative full-year earnings or FFO outlook. Management stated that operating cash flow over the following twelve months, together with cash on hand, was expected to fund operations, distributions, debt amortization and recurring capital expenditures. Development, redevelopment and acquisition needs may require additional borrowings, equity issuance or asset sales.
- Major development projects include Farley Office and Retail, PENN 1, PENN 2 and PENN 15. Construction commitments were approximately $459 million, and estimated future development costs remain material. Management cautioned that projects may not be completed on schedule or within budget.
- The company completed a $480 million refinancing of 100 West 33rd Street and a $700 million refinancing of 770 Broadway. It also extended a $800 million unsecured term loan and amended and extended one $1.25 billion revolving facility. The 770 Broadway loan was subsequently fully hedged at a blended fixed rate of 4.98% through July 2027.
- A 1% increase in base rates was estimated to reduce annual net income attributable to Vornado by approximately $42.4 million after considering hedges and noncontrolling interests.
- COVID-19 continued to affect office attendance, Manhattan tourism, retail tenants and trade-show activity. The company also cited tenant credit, economic conditions, capital availability, refinancing costs, construction costs and real-estate market conditions as significant risks.
- The Crowne Plaza Times Square investment remained associated with a defaulted non-recourse loan. Real estate fund investments had a fair value of only $0.9 million, $275.5 million below cost, with remaining unfunded commitments of $28.5 million, of which Vornado’s share was $8.8 million.
- Unusual items included a $15.2 million gain on the Center Building sale, a $13.6 million New York City transfer-tax refund, a $7.0 million gain on a 220 Central Park South condominium sale, and a $17.9 million Hotel Pennsylvania loss for the six-month period.
- Guarantees and master leases totaled approximately $1.6 billion. The company also disclosed insurance deductibles and coverage limitations, a potential $25.2 million fund incentive-allocation clawback, approximately $10.3 million of expected additional contributions to partially owned entities and a pending dispute involving a Regus-related lease guaranty.
Most Important Facts to Verify
- Reconcile reported FFO and NOI growth with recurring property operations versus gains, refunds, resumed trade shows, development effects and other nonrecurring items.
- Review debt maturities, extension tests, covenant compliance and exposure to SOFR and other floating-rate changes.
- Assess funding requirements and execution risk for Farley, PENN 1, PENN 2 and PENN 15, including the remaining costs to complete.
- Monitor Manhattan office and retail occupancy, tenant credit quality, leasing spreads and the ongoing effects of remote work and reduced tourism.
- Evaluate liquidity after development spending, dividends, debt repayments and potential asset sales.
- Confirm the status and recoverability of the Regus-related claims, the Crowne Plaza default, insurance coverage and the disclosed guarantees and contingencies.
- Note that the financial statements were reviewed, not audited, and that management reported effective disclosure controls with no material changes to internal control over financial reporting.