VORNADO REALTY TRUST quarterly report, Q2 FY2015

Vornado Realty Trust — Q2 2015 Form 10-Q Summary

Business context and reporting period

Vornado Realty Trust is a fully integrated REIT focused primarily on office, retail, residential and development properties in New York City and Washington, D.C. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods.

On January 15, 2015, Vornado spun off substantially all of its retail segment to Urban Edge Properties, including 79 strip shopping centers, three malls, a warehouse park and $225 million of cash. Related results are presented as discontinued operations.
At June 30, 2015, Vornado owned approximately 94.0% of Vornado Realty L.P. and had 188.5 million common shares outstanding.

Financial performance and key metrics

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Total revenues	$616.3 million	$574.4 million	$1.223 billion	$1.137 billion
Operating income	$193.4 million	$189.3 million	$361.1 million	$334.5 million
Net income attributable to common shareholders	$165.7 million	$76.6 million	$250.2 million	$139.0 million
Diluted earnings per share	$0.87	$0.41	$1.32	$0.74
FFO per diluted share	$1.71	$1.15	$2.87	$2.46
Dividends per common share	$0.63	$0.73	$1.26	$1.46

Revenue increased 7.3% in the quarter and 7.6% year to date, driven by acquisitions, development and redevelopment, and higher same-store property income.
Operating income margin was approximately 31.4% in Q2 and 29.5% year to date, compared with approximately 33.0% and 29.4%, respectively, in the prior-year periods.
Net income attributable to common shareholders increased 116% in Q2 and 80% year to date. Comparability was significantly affected by a $90.0 million deferred-tax valuation allowance reversal in 2015, discontinued operations, impairment charges, gains and prior-year Toys “R” Us items.
FFO attributable to common shareholders plus assumed conversions increased 49% in Q2 and 17% year to date. FFO is a non-GAAP measure and is not equivalent to cash flow from operations.
New York same-store EBITDA increased 1.5% in Q2 and 2.3% year to date; Washington, D.C. same-store EBITDA increased 0.8% and 0.4%, respectively. Washington, D.C. cash-basis same-store EBITDA declined 3.3% in Q2 and 4.3% year to date.

Cash flow, balance sheet and liquidity

Cash provided by operating activities was $184.6 million for the six months ended June 30, 2015, down from $447.6 million in the prior-year period.
Investing activities used $474.6 million, including $381.0 million for acquisitions, $201.0 million for development and construction, $137.5 million for investments in partially owned entities and $137.5 million for additions to real estate. Proceeds from sales were $334.7 million.
Financing activities used $392.2 million, including $237.2 million of common dividends and $225.0 million transferred in connection with the Urban Edge spin-off, partly offset by $1.746 billion of borrowings.
Cash and cash equivalents declined to $516.3 million from $1.198 billion at December 31, 2014.
Consolidated debt was $9.810 billion, up from $9.610 billion at year-end. Mortgages payable were $8.562 billion, senior unsecured notes were $847.5 million and revolving credit facility debt was $400.0 million.
Approximately $2.612 billion of consolidated debt was variable rate. Management estimated that a 1% increase in base rates would reduce annual net income by approximately $37.7 million, or $0.20 per diluted share, after noncontrolling interests.
Management stated that continuing-operations cash flow is expected to fund operations, distributions, debt amortization and recurring capital expenditures over the next twelve months. Additional borrowing or equity financing may be required for development and acquisitions.

Material changes and unusual items

The company recognized an $88.1 million income-tax benefit in Q2, primarily from reversing a $90.0 million valuation allowance after entering into agreements to sell approximately 40% of the 220 Central Park South condominium project for aggregate proceeds of $1.4 billion. The benefit is non-recurring and materially increased reported earnings.
Vornado acquired the Center Building in Long Island City for $142 million and 150 West 34th Street and related air rights for approximately $355 million. It also increased its interest in the Crowne Plaza Times Square Hotel to 33%.
Vornado entered into a 55%-owned joint venture to develop a 173,000-square-foot office building at 510 West 22nd Street. Estimated development cost is approximately $225 million, with completion expected in 2017.
Development and redevelopment projects include 220 Central Park South, The Bartlett, Marriott Marquis Times Square retail, 2221 South Clark Street and other New York and Washington-area projects. The filing states that completion dates and costs are subject to uncertainty.
Discontinued operations contributed $15.1 million for the first six months of 2015 versus $35.4 million in 2014, while Q2 2015 discontinued operations produced a $0.8 million loss versus $26.9 million of income in Q2 2014.
Income from real estate fund investments declined to $26.4 million in Q2 and $50.5 million year to date, from $100.1 million and $118.3 million, respectively, primarily because prior-year periods included larger realized gains.

Guidance, outlook and risks

Management expects 2015 Washington, D.C. EBITDA from continuing operations to be flat compared with 2014.
At June 30, 2015, Washington, D.C. properties had 2.395 million square feet affected by the BRAC program; 1.262 million square feet had been leased or was pending, 393,000 square feet was removed from service for redevelopment and 740,000 square feet remained to be resolved.
Key risks include property occupancy and rental rates, tenant credit quality, competition, construction costs and delays, availability and cost of capital, interest-rate fluctuations, market valuation changes, and the ability to refinance maturing debt.
The company expected approximately $81 million of additional capital funding requirements for certain partially owned entities. It also had approximately $369 million of guarantees and master leases and $39.4 million of outstanding letters of credit.
Insurance availability and pricing, including coverage for terrorism and earthquakes, may affect financing and operating costs. Environmental matters and ordinary-course litigation were not expected by management to have a material adverse effect.
No material changes were reported to the risk factors in the 2014 Form 10-K. Management represented that disclosure controls were effective as of June 30, 2015.

Investor verification checklist

Separate recurring operating performance and FFO from the $90.0 million deferred-tax valuation allowance reversal and other non-recurring items.
Reconcile the post-spin Urban Edge property base and discontinued-operations presentation when comparing 2015 with 2014.
Review debt maturities, variable-rate exposure, revolving-credit availability and compliance with interest-coverage and debt-to-market-capitalization covenants.
Assess leasing trends, particularly Washington, D.C. BRAC exposure and declining cash-basis same-store EBITDA.
Verify the funding requirements, budgets, construction schedules and expected returns for 220 Central Park South, The Bartlett, Marriott Marquis and other development projects.
Monitor the valuation sensitivity of Level 3 real estate fund investments, partially owned entities and marketable securities.
Confirm subsequent events disclosed after quarter-end, including the $580 million refinancing of 100 West 33rd Street and the acquisition of 260 Eleventh Avenue.