Vornado Realty Trust — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing combines Vornado Realty Trust and Vornado Realty L.P.; Vornado owned approximately 93.5% of the Operating Partnership. The financial statements are unaudited.
Business Context
Vornado is an integrated REIT focused primarily on New York City office and retail properties, with additional investments in Chicago, San Francisco, hotels, residential properties, partially owned entities and real estate funds. Approximately 88% of third-quarter NOI at share was generated in the New York City metropolitan area.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenues | $542.0 million | $528.8 million | $1.620 billion | $1.548 billion |
| Operating income | $157.0 million | $162.2 million | $448.3 million | $448.9 million |
| Net income attributable to common shareholders | $190.6 million | $(29.0) million | $284.3 million | $134.7 million |
| Diluted EPS | $1.00 | $(0.15) | $1.49 | $0.71 |
| FFO attributable to common shareholders plus assumed conversions | $182.5 million | $100.2 million | $494.9 million | $564.4 million |
| FFO per diluted share | $0.95 | $0.52 | $2.59 | $2.95 |
| NOI at share | $349.6 million | $354.2 million | $1.053 billion | $1.038 billion |
| NOI at share, cash basis | $340.9 million | $331.9 million | $1.014 billion | $972.3 million |
Approximate operating margins were 29.0% for the third quarter and 27.7% for the nine-month period, based on operating income divided by revenues. Dividends were $0.63 per common share in the quarter and $1.89 per share for the nine-month period.
- Same-store NOI at share increased 0.9% in the quarter and 3.3% for nine months; cash-basis same-store NOI increased 4.3% and 5.9%, respectively.
- Portfolio occupancy at September 30, 2018 was 97.3% for New York office properties, 96.6% for retail, 95.5% for theMART and 99.4% for 555 California Street.
- Net cash provided by operating activities was $488.0 million for the nine months, compared with $661.6 million in the prior-year period.
- Net cash used in investing activities was $652.3 million, including $500.2 million of acquisitions, $274.1 million of development spending and $219.7 million of proceeds from property and investment sales.
- Net cash used in financing activities was $830.7 million, including the $470.0 million redemption of preferred shares or units and $359.5 million of common dividends or distributions.
- Cash and restricted cash totaled $919.8 million at September 30, 2018, down $995.0 million from December 31, 2017.
Debt and Liquidity
- Consolidated debt totaled approximately $9.852 billion before deferred financing costs, consisting primarily of $8.172 billion of mortgages, $850.0 million of senior unsecured notes, a $750.0 million unsecured term loan and $80.0 million drawn under revolving credit facilities.
- Consolidated debt carried a weighted-average interest rate of 3.72%; approximately $3.996 billion was variable-rate debt. Management estimated that a 1% increase in base rates would increase annual net income attributable to Vornado by approximately $49.3 million, after stated adjustments.
- Management stated that continuing-operations cash flow over the next twelve months is expected to fund operations, distributions, debt amortization and recurring capital expenditures. Development and acquisitions may require additional debt or equity financing.
- On October 26, 2018, the $750.0 million unsecured term loan was extended to February 2024 and its spread was reduced to LIBOR plus 1.00%.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 2.5%, while operating income declined 3.3% because expenses grew faster than revenue. Nine-month revenue increased 4.7%, while operating income was essentially flat.
- Net income and EPS benefited substantially from $141.3 million of third-quarter gains on asset dispositions, primarily the sale of Vornado’s 49.5% interest in the 666 Fifth Avenue Office Condominium and repayment of its related mortgage participation.
- For the nine months, net gains on asset dispositions were $164.8 million versus $0.5 million in the prior-year period. These gains increased reported earnings but are excluded or adjusted in FFO.
- Quarterly FFO increased 82% year over year, but nine-month FFO declined 12.3%, primarily reflecting prior-year gains and other nonrecurring items, including the 2017 UE unit issuance gain and the 2017 PREIT impairment comparison.
- Interest and debt expense increased to $89.0 million in the quarter and $264.8 million for nine months, driven by higher variable rates and the full funding of the $750.0 million term loan in October 2017.
- Vornado adopted ASC 606 and ASU 2016-01 in 2018. Adoption produced a $14.5 million cumulative-effect adjustment for ASC 606 and a $111.2 million reduction to beginning accumulated deficit for ASU 2016-01; management stated ASC 606 did not materially affect the financial statements.
Development, Outlook and Unusual Items
- Approximately 83% of the 220 Central Park South condominium units were under sales contracts at September 30, 2018, with closings scheduled through 2020. Management expects approximately $1 billion of after-tax cash flow and net income from sales of all units.
- The 220 Central Park South project has an estimated development cost of approximately $1.4 billion, excluding $515.4 million of land cost; approximately $1.1 billion had been expended by September 30, 2018. Units representing approximately 16% of total development cost were ready for sale at quarter-end.
- Construction commitments totaled approximately $295 million, and expected additional capital funding to partially owned entities was approximately $19 million.
- The Company recorded approximately $23.5 million of its share of potential New York City transfer taxes and related items during the nine months. The Company is appealing the underlying Tax Tribunal interpretation.
- The Company’s 32.5%-owned Toys “R” Us investment was carried at zero after the company’s bankruptcy and cessation of U.S. operations. Vornado stated it does not guarantee Toys’ obligations and may have a future tax deduction based on an approximately $420 million tax basis.
- Management identified interest-rate exposure, market conditions, tenant credit, leasing activity, construction costs, financing availability, environmental matters, insurance availability and development execution as key risks. No material changes were reported to the risk factors in the 2017 Form 10-K.
Important Facts to Verify
- Reconcile reported EPS with FFO and assess the impact of the 666 Fifth Avenue disposition gains, marketable-security losses and other nonrecurring items.
- Monitor 220 Central Park South contract closings, construction costs, completion timing and the expected approximately $1 billion cash-flow contribution.
- Review debt maturities, variable-rate exposure, covenant compliance and the availability and cost of revolving-credit capacity.
- Assess whether same-store NOI growth can offset higher operating costs, interest expense and leasing or redevelopment spending.
- Follow the appeals and potential cash effects of the New York City transfer-tax assessments.
- Evaluate liquidity after acquisitions, development expenditures, preferred redemptions and distributions, including the decline to $919.8 million of cash and restricted cash.
- Confirm the treatment and timing of condominium revenue and tax recognition, which differ between tax accounting and GAAP.