Vornado Realty Trust — Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P., which held substantially all assets and operations. Vornado owned approximately 93.5% of the Operating Partnership at June 30, 2018. The unaudited filing covers the three and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods.
The portfolio is concentrated in New York, which generated 88% of NOI at share. At June 30, 2018, the portfolio totaled approximately 36.2 million square feet and was 96.6% occupied in New York and 94.8% occupied overall based on the reported portfolio figures.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenues | $541.8 million | $511.1 million | $1,078.3 million | $1,019.1 million |
| Operating income | $156.5 million | $153.8 million | $291.3 million | $286.7 million |
| Operating margin | 28.9% | 30.1% | 27.0% | 28.1% |
| Net income attributable to common shareholders | $111.5 million | $116.0 million | $93.7 million | $163.7 million |
| Diluted earnings per share | $0.58 | $0.61 | $0.49 | $0.86 |
| FFO attributable to common shareholders plus assumed conversions | $209.7 million, or $1.10 per diluted share | $257.7 million, or $1.35 per diluted share | $312.3 million, or $1.63 per diluted share | $463.4 million, or $2.43 per diluted share |
| NOI at share | $354.4 million | $346.1 million | $703.5 million | $683.3 million |
| NOI at share, cash basis | $341.9 million | $323.7 million | $673.0 million | $640.3 million |
| Cash flow from operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $241.3 million | $316.2 million |
Common dividends were $0.63 per share in the second quarter and $1.26 per share for the first six months, compared with $0.71 and $1.42, respectively, in 2017.
At June 30, 2018, total assets were $16.9 billion, cash and cash equivalents were $1.1 billion, and cash plus restricted cash was $1.2 billion. Consolidated debt, net, was $9.8 billion, including $8.1 billion of mortgages, $843.4 million of senior unsecured notes, $749.5 million of unsecured term debt and $80.0 million drawn on revolving credit facilities. Approximately $4.0 billion of consolidated debt was variable rate; management estimated that a 1% increase in base rates would reduce annual income attributable to Vornado by approximately $49.3 million, after the stated adjustments.
Material changes versus the prior comparable period
- Second-quarter revenue increased 6.0%, while six-month revenue increased 5.8%, driven primarily by same-store operations, higher Hotel Pennsylvania and trade show revenue, and increased fee and other income.
- Same-store NOI at share increased 4.7% in the quarter and 4.5% for the six months. Same-store NOI at share on a cash basis increased 7.0% and 6.7%, respectively.
- Despite higher revenue and NOI, diluted EPS declined from $0.61 to $0.58 in the quarter and from $0.86 to $0.49 for the six months. FFO per diluted share declined from $1.35 to $1.10 in the quarter and from $2.43 to $1.63 for the six months.
- Results were affected by lower income from partially owned entities, losses and valuation changes in real estate fund investments, higher interest expense, and the absence of 2017 gains associated with Urban Edge and Suffolk Downs transactions.
- Six-month results included approximately $23.5 million of Vornado’s share of potential New York City transfer taxes related to One Park Avenue, Alexander’s and Independence Plaza. Vornado paid the amounts while appealing the underlying Tax Tribunal decision.
- The company adopted ASC 606 and ASU 2016-01 on January 1, 2018. ASC 606 resulted in a $14.5 million cumulative-effect adjustment to beginning accumulated deficit, while ASU 2016-01 moved marketable-securities fair value changes into earnings and resulted in a $111.2 million beginning accumulated-deficit adjustment.
- Vornado redeemed all outstanding 6.625% Series G and Series I preferred shares or units for $470.0 million in January 2018 and expensed $14.5 million of previously capitalized issuance costs.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash flow from continuing operations is expected to be adequate over the next 12 months to fund operations, distributions, debt amortization and recurring capital expenditures. No formal earnings or FFO guidance was provided in the filing. Additional development and acquisition funding may require borrowings, equity offerings or asset sales.
- Development and construction spending was $185.0 million in the first six months. The 220 Central Park South project had estimated development costs of approximately $1.4 billion excluding land, with $1.1 billion expended at June 30, 2018.
- Construction commitments totaled approximately $342.0 million, and expected additional capital funding to partially owned entities was approximately $34.0 million.
- Vornado recorded a $52.0 million asset and liability for estimated taxes related to 220 Central Park South, payable September 17, 2018. GAAP revenue for the project is recognized under the completed-contract method upon condominium closings.
- Vornado agreed to sell its 49.5% interest in the 666 Fifth Avenue Office Condominium. The transaction was expected to generate approximately $120.0 million of net proceeds and an estimated $134.0 million financial statement gain, but closing remained subject to conditions and was not assured.
- The company acquired 537 West 26th Street and related air rights for $44.0 million and sold 27 Washington Square North for $45.0 million, recognizing a $23.6 million gain.
- The Fund’s real estate investments were valued at $373.0 million and included significant Level 3 valuation inputs. The filing cautions that changes in discount rates, capitalization rates, market conditions or expected exit timing could materially affect fair values.
- Vornado owns 32.5% of Toys “R” Us and carries the investment at zero after the company’s Chapter 11 proceedings and liquidation. Vornado stated it does not guarantee Toys’ obligations.
- Mortgage debt is generally non-recourse, but guarantees and master leases totaled approximately $667.0 million. Letters of credit outstanding under revolving facilities totaled $13.3 million.
- Risks include interest-rate exposure, refinancing and covenant requirements, tenant credit and occupancy, development costs and delays, insurance availability and deductibles, environmental matters, litigation, market valuation changes and the concentration of NOI in the New York metropolitan area. Management reported no material changes to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Reconcile reported EPS and FFO with the substantial unusual items, including transfer taxes, marketable-securities valuation changes, dispositions, discontinued operations and preferred-share redemption costs.
- Review debt maturities, variable-rate exposure, interest-rate hedges, revolving-credit covenants and the planned refinancing of approximately $209.3 million of debt maturing in 2019.
- Assess funding needs and completion risk for 220 Central Park South, Moynihan Train Hall and other development or redevelopment projects.
- Confirm whether the proposed 666 Fifth Avenue Office Condominium sale closed and whether the estimated proceeds and gain were realized.
- Monitor the appeals and potential cash or tax consequences of the New York City transfer-tax assessments.
- Evaluate the sustainability of occupancy, leasing spreads, same-store NOI growth and the company’s $0.63 quarterly common dividend against cash flow and capital requirements.
- Consider the sensitivity of Level 3 real estate valuations and earnings to capitalization rates, discount rates and market conditions.