VORNADO REALTY TRUST annual report, FY2018

Vornado Realty Trust 2018 Form 10-K Summary

Business context and reporting period

Combined Form 10-K for Vornado Realty Trust and Vornado Realty L.P. for the fiscal year ended December 31, 2018, including fourth-quarter results. Vornado is a fully integrated REIT that conducts substantially all operations through the Operating Partnership, which Vornado owned approximately 93.4% of at year-end.

The portfolio is concentrated in New York City and includes Manhattan office and retail properties, residential properties, Hotel Pennsylvania, a 32.4% interest in Alexander’s, theMART in Chicago, a 70% interest in 555 California Street, and real estate fund investments. Approximately 89% of 2018 NOI at share came from the New York City metropolitan area.

Financial performance and key metrics

Metric	2018	2017
Total revenues	$2.164 billion	$2.084 billion
Operating income	$583.0 million	$608.7 million
Net income attributable to common shareholders	$384.8 million	$162.0 million
Diluted earnings per share	$2.01	$0.85
FFO attributable to common shareholders plus assumed conversions	$729.7 million, or $3.82 per diluted share	$717.8 million, or $3.75 per diluted share
Net cash provided by operating activities	$802.6 million	$860.1 million
NOI at share	$1.383 billion	$1.401 billion
NOI at share, cash basis	$1.338 billion	$1.315 billion

Revenue increased 3.8% year over year, while operating income declined 4.2% as operating expenses rose faster than revenue. Operating margin was approximately 26.9%, compared with 29.2% in 2017. Net income attributable to common shareholders benefited materially from gains on asset and condominium sales, the Farley fair-value adjustment and lower preferred dividends. FFO increased approximately 1.7%, indicating relatively modest recurring operating growth.

Fourth-quarter 2018 net income attributable to common shareholders was $100.5 million, or $0.53 per diluted share, compared with $27.3 million, or $0.14, in the prior-year quarter. Fourth-quarter FFO was $210.1 million, or $1.10 per diluted share, compared with $153.2 million, or $0.80.

Occupancy at year-end was 97.0% for the New York segment, 94.7% at theMART and 99.4% at 555 California Street. New York office occupancy was 97.2% and retail occupancy was 97.3%.

Liquidity, debt and cash flow

Consolidated debt was $9.896 billion before deferred financing costs, with a weighted-average interest rate of 3.87%; $3.292 billion was variable-rate debt and $6.603 billion was fixed-rate debt.
Cash and cash equivalents were $570.9 million; cash, cash equivalents and restricted cash totaled $716.9 million, down from $1.915 billion at December 31, 2017.
Available borrowing capacity under unsecured revolving credit facilities was $2.407 billion, net of $13.3 million of letters of credit.
Management stated that cash flow from continuing operations was expected to fund operations, distributions, debt amortization and recurring capital expenditures for the next twelve months. Acquisitions and development may require additional borrowing or equity financing.
Debt maturities were $95.8 million in 2019 and $2.142 billion in 2020. Total contractual cash obligations were $13.249 billion, including principal and interest.
2018 operating cash flow declined by $57.5 million. Investing cash usage increased to $877.7 million, primarily due to acquisitions and development spending. Financing cash usage increased to $1.123 billion, including the $470.0 million redemption of preferred securities.
Recurring 2019 tenant improvements, leasing commissions and other capital expenditures were budgeted at approximately $213.0 million, excluding certain partially owned entities.

Material changes versus the prior comparable period

Acquisitions included the $442 million 1535 Broadway retail condominium, the $44 million 537 West 26th Street property and air rights, and the $42 million increase in the Farley project ownership interest.
Vornado sold its 49.5% interest in the 666 Fifth Avenue Office Condominium, 27 Washington Square North and other assets. It also received $214.8 million from sales of 11 220 Central Park South condominium units.
Vornado increased its Farley Office and Retail Building ownership from 50.1% to 95.0% and began consolidating the venture, recording a $44.1 million purchase price fair-value adjustment.
Net gains on dispositions increased to $246.0 million from $0.5 million, including gains on 666 Fifth Avenue, 220 Central Park South and 27 Washington Square North.
Real estate fund investments produced an $89.2 million loss, compared with $3.2 million of income in 2017, largely because of unrealized investment losses and transfer-tax expense.
Same-store NOI at share increased 0.8%, or 1.4% in New York, but declined 12.2% at theMART because of an additional $15.1 million real estate tax accrual. Same-store cash NOI increased 3.9% overall.
Vornado redeemed all outstanding 6.625% Series G and Series I preferred shares and units for $470.0 million, reducing annual preferred dividend expense but producing a $14.5 million write-off of issuance costs.
The company adopted accounting guidance that moved marketable-security fair-value changes into earnings, resulting in a $26.5 million 2018 loss and a $111.2 million reduction to beginning accumulated deficit.

Outlook, commentary, risks and unusual items

Management expects to continue investing in selected markets, particularly New York City, while pursuing acquisitions, redevelopment and development opportunities. The company expects approximately $1 billion of after-tax net income from sales of all 220 Central Park South units; 83% of units were sold or under contract at year-end, with closings scheduled through 2020.

Major active projects include 220 Central Park South, the Farley Office and Retail Building, Moynihan Train Hall, 512 West 22nd Street, 606 Broadway, 345 Montgomery Street, 825 Seventh Avenue, PENN1 and planned PENN2 redevelopment. The filing cautions that projects may not be completed on schedule or within budget.

Geographic concentration creates exposure to New York economic conditions, office and retail demand, tenant bankruptcies, rental-rate pressure and property valuations.
Debt refinancing and interest-rate risk are significant, particularly given 2020 maturities, variable-rate exposure and the potential discontinuation of LIBOR after 2021. A 1% increase in base rates was estimated to reduce annual net income attributable to Vornado by approximately $41.5 million after stated adjustments.
Development, construction, leasing and condominium-sale results depend on market conditions, costs, timing and buyer demand.
Vornado and Related each guarantee obligations relating to the Moynihan Train Hall development. Government agencies had funded $445.7 million of expenditures recognized with an offsetting obligation at year-end.
Potential additional New York City transfer taxes relating to One Park Avenue, Alexander’s and Independence Plaza were paid while appeals were pursued. The filing does not establish that the appeals will succeed.
Vornado reported approximately $404 million of construction commitments, approximately $18 million of expected additional capital contributions to partially owned entities and approximately $660 million of guarantees and master-lease obligations.
Insurance may not cover all losses, including losses from terrorism, earthquakes, floods, climate-related events or other uninsured risks. The company also identifies environmental, cyber-security, tenant, joint-venture, related-party and REIT-qualification risks.

Most important facts for investors to verify

Whether 220 Central Park South closings and projected approximately $1 billion of after-tax income occur on schedule and at expected values.
The refinancing plan and available liquidity for the $2.142 billion of debt maturing in 2020.
Underlying same-store leasing trends, particularly New York retail, theMART and office lease expirations.
The effect of the $15.1 million theMART tax accrual and whether similar assessments recur.
Progress, remaining costs and guarantees related to Farley, Moynihan Train Hall and other major development projects.
Performance and valuation of the real estate fund, marketable securities and partially owned investments, including PREIT and Alexander’s.
The outcome of pending transfer-tax appeals and the tax treatment of the Toys “R” Us investment loss.
Coverage and deductibles for property, earthquake, terrorism and other risks, as well as compliance with debt covenants.
FFO and cash NOI reconciliations, since GAAP earnings were materially affected by asset-sale gains, fair-value adjustments, impairment charges and other unusual items.