Business Context and Reporting Period
Alexander’s, Inc. is a Delaware real estate investment trust that leases, manages, develops and redevelops seven properties in the greater New York City metropolitan area. Vornado Realty Trust owns 32.4% of the outstanding common stock and manages, leases and develops the properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2019.
The portfolio totaled 2.449 million square feet, including 2.254 million square feet in service and 195,000 square feet out of service for redevelopment. In-service occupancy was 97.3% at June 30, 2019.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Rental revenues | $55.9 million | $58.3 million | $112.7 million | $116.1 million |
| Net income | $11.3 million | $17.6 million | $29.1 million | $7.9 million |
| Net income per diluted share | $2.20 | $3.43 | $5.70 | $1.54 |
| FFO | $24.3 million | $25.7 million | $49.8 million | $29.3 million |
| FFO per diluted share | $4.75 | $5.02 | $9.74 | $5.73 |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $50.8 million | $33.5 million |
Quarterly operating expenses were $21.7 million, depreciation and amortization was $7.9 million, general and administrative expense was $1.9 million, and interest and debt expense was $10.2 million. The filing does not provide a consolidated operating margin; rental revenue less operating expenses was approximately $34.3 million for the quarter and $69.2 million for the six months, before depreciation, general and administrative expense and other items.
At June 30, 2019, cash and cash equivalents were $283.9 million, restricted cash was $5.4 million, and marketable securities were $17.9 million. Mortgages payable, net of deferred debt issuance costs, were $968.4 million, with gross mortgage balances of $974.8 million. Total liabilities were $1.008 billion and total equity was $268.6 million.
Mortgage debt consisted primarily of variable-rate borrowings: $906.8 million variable rate and $68.0 million fixed rate. The weighted-average interest rate was 3.61%. The company had a $500 million interest-rate cap with a 6.0% LIBOR cap. A 1% change in base rates was estimated to affect annual earnings by approximately $9.1 million, or $1.77 per diluted share.
The company paid $46.1 million in dividends during the first six months, equal to $9.00 per common share. Cash, cash equivalents and restricted cash were $289.3 million at June 30, 2019, compared with $289.5 million at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Second-quarter rental revenue declined $2.3 million, or approximately 4.0%, primarily because of the Sears vacancy at Rego Park I effective October 2018.
- Six-month rental revenue declined $3.4 million, or approximately 2.9%, due primarily to the Sears and Toys “R” Us vacancies, partially offset by higher revenue from a new tenant at 731 Lexington Avenue.
- Second-quarter net income declined $6.3 million, or approximately 35.8%, primarily because the company recorded a $5.3 million unfavorable change in the fair value of Macerich shares, compared with $0.4 million of income in the prior-year quarter.
- Six-month net income increased $21.3 million because the prior-year period included a $23.8 million loss from discontinued operations related to potential New York City transfer taxes on the 2012 Kings Plaza sale. Excluding that item, six-month income from continuing operations declined from $31.7 million to $29.1 million.
- Six-month FFO increased $20.5 million, primarily because the 2018 period included the $23.8 million Kings Plaza transfer-tax charge. Second-quarter FFO declined $1.4 million.
- Interest and debt expense decreased $0.8 million in the quarter and $0.5 million for the six months, primarily due to lower interest expense following the December 2018 refinancing of the Rego Park II mortgage, partly offset by higher average interest rates.
- Operating cash flow increased $17.3 million to $50.8 million, while investing cash outflows increased to $4.9 million from $0.3 million. Financing cash outflows declined substantially because the prior-year period included significant debt repayments and refinancing activity.
- The company adopted ASC 842, recording a $5.1 million right-of-use asset and a $5.4 million lease liability for the Flushing ground lease at January 1, 2019. The adoption did not materially affect reported results.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash flows from continuing operations over the next 12 months, together with existing cash balances, are expected to be adequate to fund operations, dividends, debt amortization and capital expenditures. Management may refinance maturing debt or repay it as it comes due. No numerical earnings or revenue guidance was provided.
- Bloomberg accounted for approximately 48% of six-month total revenue and leased an additional 49,000 square feet at 731 Lexington Avenue on June 28, 2019. The concentration creates material tenant-credit and renewal risk.
- Kohl’s closed its 133,000-square-foot Rego Park II store on April 13, 2019 but remained obligated under its lease through January 2031 and planned to sublease the space.
- The Sears Rego Park I litigation remained subject to an automatic stay following Sears’ bankruptcy. The company estimated reasonably possible losses, if any, at no more than approximately $650,000.
- The company had approximately $1.0 million of standby letters of credit outstanding.
- Insurance coverage includes $1.7 billion of all-risk property and rental-value coverage and terrorism coverage, but the company remains exposed to deductibles, uninsured losses, losses exceeding coverage and the future availability and cost of insurance.
- The Paramus land lease includes a $75 million purchase option in 2021. If exercised, management estimated approximately $7 million of net cash proceeds and an approximately $60 million gain; the filing does not indicate whether the option will be exercised.
- The $5.2 million quarterly and $5.2 million six-month unfavorable fair-value adjustment reflected the decline in Macerich’s share price. The company owned 535,265 Macerich shares with a June 30, 2019 fair value of $17.9 million versus an economic cost of $30.0 million.
- The company restated the December 31, 2018 balance-sheet presentation to reclassify a $195.7 million Rego Park II loan participation as a reduction of mortgages payable. The reclassification did not affect income, equity or cash flows.
Most Important Facts for Investors to Verify
- Confirm the sustainability of occupancy and rental revenue following the Sears and Toys “R” Us vacancies and the Kohl’s store closure.
- Monitor Bloomberg’s creditworthiness, lease concentration and the contribution from its new 49,000-square-foot lease.
- Review the maturity, refinancing and interest-rate exposure of the $974.8 million gross mortgage portfolio, particularly variable-rate debt and the 2021-2025 maturities.
- Distinguish recurring operating performance and FFO from GAAP net income affected by Macerich mark-to-market changes and the prior-year Kings Plaza tax contingency.
- Assess whether operating cash flow can continue to cover dividends, capital expenditures and debt obligations without asset sales or refinancing.
- Track the Rego Park I litigation, insurance renewals and the potential Paramus purchase-option outcome.