Alexander’s, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. Alexander’s is a REIT with seven properties totaling approximately 2.437 million square feet in the greater New York City metropolitan area. Vornado Realty Trust manages the company and provides leasing and development services. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $57.229 million | $55.558 million | +$1.671 million, 3.0% |
| Operating income | $27.107 million | $26.336 million | +$0.771 million, 2.9% |
| Net income | $21.667 million | $22.019 million | -$0.352 million, 1.6% |
| Net income per diluted share | $4.24 | $4.31 | Down $0.07 |
| FFO | $29.581 million | $30.250 million | Down 2.2% |
| FFO per diluted share | $5.78 | $5.92 | Down $0.14 |
| Cash flow from operations | $41.623 million | $45.376 million | Down $3.753 million, 8.3% |
| Dividends paid | $21.737 million | $20.452 million | Up 6.3% |
Operating margin was approximately 47.4%, compared with 47.4% in the prior-year quarter. Net margin was approximately 37.9%, compared with 39.6%. The portfolio was 99.6% occupied at March 31, 2017.
Cash, cash equivalents and restricted cash totaled $392.026 million at March 31, 2017, including $306.530 million of cash and cash equivalents and $85.496 million of restricted cash. Net cash increased by $17.348 million during the quarter. Investing activities used $1.628 million, primarily for construction in progress and real estate additions.
Mortgages payable, net of deferred issuance costs, totaled $1.052 billion. Gross mortgage principal was $1.055 billion, with a weighted-average interest rate of 2.18%; approximately $909 million was variable-rate debt. The company reported estimated debt fair value of $1.042 billion and maintains a $300 million interest-rate cap with a 6.0% LIBOR ceiling.
Material changes versus the prior comparable period
- Property rentals increased $1.620 million, primarily because The Alexander apartment tower completed its lease-up and stabilization process in September 2016.
- Operating expenses increased $1.267 million, principally from higher reimbursable real estate taxes.
- Interest and debt expense increased $0.754 million because of higher average LIBOR.
- Interest and other income declined $0.364 million, primarily because the 2016 period included a $0.367 million retail-tenant cost reimbursement settlement.
- Operating cash flow declined despite higher revenue, mainly reflecting changes in operating assets and liabilities.
- Capital spending declined to $1.628 million from $8.853 million, as the prior-year period included substantial development spending and a $5.784 million development fee to Vornado.
- Unrealized losses on available-for-sale Macerich securities were $3.447 million in other comprehensive income, compared with a $0.777 million loss in Q1 2016. The investment’s fair value was $34.471 million at March 31, 2017.
- Dividends per common share increased to $4.25 from $4.00.
Outlook, risks, contingencies and unusual items
Management stated that expected cash flows from continuing operations, together with existing cash balances, should be adequate over the next twelve months to fund operations, dividends, debt amortization and capital expenditures. The filing does not provide quantitative earnings or FFO guidance.
- Tenant concentration: Bloomberg generated $26.010 million, or approximately 45% of total revenue. The loss of Bloomberg or deterioration in its ability to pay could materially affect results.
- Sears exposure: Sears closed its 195,000-square-foot Rego Park I store in April 2017. The lease produces approximately $10.337 million of annual revenue, including reimbursements, and expires in March 2021. The balance sheet included approximately $4.757 million of straight-line rent receivable and $0.499 million of deferred leasing costs related to the lease.
- Litigation: A remaining Sears claim concerning Rego Park I property damage is estimated at approximately $0.650 million; management does not expect reasonably possible losses to exceed that amount.
- Tax assessment: New York City assessed approximately $21.7 million of additional transfer taxes, interest and penalties related to the 2012 Kings Plaza sale. The company disputes the assessment and states that a loss is not probable and is not expected to materially affect financial position, results or cash flows.
- Debt refinancing: Mortgages secured by Rego Park I, Paramus and Rego Park II mature in 2018, creating refinancing and interest-rate risk. A 1% increase in base rates would increase annual interest expense by approximately $9.090 million, or approximately $1.78 per diluted share, based on the filing’s sensitivity analysis.
- Paramus option: The IKEA ground lease includes a 2021 purchase option for $75 million. If exercised, the company expects approximately $7 million of net cash proceeds and an approximately $60 million gain on sale; the filing does not indicate whether the option will be exercised.
- Related-party transactions: Vornado owned approximately 32.4% of Alexander’s common stock and received $1.727 million of management, development, leasing, property-management and related fees during Q1 2017, compared with $8.317 million in Q1 2016. The prior-year amount included significant leasing and development fees.
- Accounting changes: The company early adopted cash-flow guidance for restricted cash and certain cash-flow classifications effective January 1, 2017, without a material impact. It is evaluating the future effects of revenue-recognition and lease-accounting standards.
- Management change: Matthew Iocco was elected chief financial officer effective May 2, 2017, succeeding Joseph Macnow.
Investor verification priorities
- Verify Bloomberg’s lease terms, credit metrics and concentration of approximately 45% of revenue.
- Assess the expected effect of Sears’s closure, including reletting prospects and potential write-offs of straight-line rent and deferred leasing costs.
- Review 2018 mortgage maturities, refinancing plans and the proportion of variable-rate debt.
- Reconcile FFO to net income and distinguish FFO from cash available for dividends or debt repayment.
- Monitor the $21.7 million NYC transfer-tax assessment and the remaining Sears litigation claim.
- Evaluate Vornado’s related-party fees, ownership position and continuing management and leasing role.
- Confirm the status of the 2021 IKEA purchase option and its potential effect on future cash flow and gains.