Alexander’s, Inc. 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan area real estate investment trust engaged in leasing, managing, developing and redeveloping seven properties totaling 2.437 million square feet. Vornado Realty Trust manages the company and leases and develops its properties; Vornado owned 32.4% of outstanding common stock as of March 31, 2016. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
- Office and retail occupancy was 99.7% at March 31, 2016.
- The 312-unit Alexander apartment tower was 42.1% occupied and was expected to reach stabilized occupancy in 2017.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $55.6 million | $52.0 million | +$3.5 million, 6.8% |
| Operating income | $26.3 million | $24.4 million | +$2.0 million, 8.1% |
| Net income | $22.0 million | $17.8 million | +$4.2 million, 23.5% |
| Diluted EPS | $4.31 | $3.49 | +$0.82, 23.5% |
| FFO | $30.3 million | $25.1 million | +$5.1 million, 20.3% |
| FFO per diluted share | $5.92 | $4.92 | +$1.00, 20.3% |
| Net cash from operations | $45.4 million | $45.1 million | +$0.3 million |
- Operating margin was approximately 47.4%, compared with 46.8% in the prior-year quarter. Net margin was approximately 39.6%, compared with 34.2%.
- Property rentals increased to $36.7 million from $34.5 million, while expense reimbursements increased to $18.9 million from $17.5 million.
- Cash and cash equivalents were $276.2 million at March 31, 2016, up from $259.3 million at December 31, 2015. Restricted cash was $83.6 million and marketable securities were $42.4 million.
- Mortgages payable, net of deferred debt issuance costs, were $1.053 billion. Gross mortgage balances were $1.059 billion, with approximately $912.5 million at variable rates and $146.2 million at fixed rates.
- Investing cash outflows were $7.2 million, primarily for $8.9 million of construction and real estate additions related principally to The Alexander. Financing cash outflows were $21.3 million, including $20.5 million of dividends.
- Dividends were $4.00 per common share in Q1 2016, compared with $3.50 in Q1 2015.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the January 2016 Bloomberg lease amendment and $0.8 million of rental income from The Alexander, which was not in service during the prior-year quarter.
- The Bloomberg amendment converted 192,000 square feet from gross-rent to net-rent terms and increased recoveries of real estate taxes and operating expenses.
- Interest and debt expense declined to $5.4 million from $6.9 million, primarily because the August 2015 refinancing of the 731 Lexington Avenue retail mortgage reduced the applicable rate versus the former 4.93% fixed-rate loan.
- Operating expenses increased $0.6 million, and depreciation and amortization increased $1.0 million, primarily due to The Alexander.
- Interest and other income increased $0.7 million, partly because of settlements with a former bankrupt tenant and a retail tenant.
- Rego Park I’s 100% cash-collateralized mortgage was extended by two years in March 2016 to March 2018 at a fixed 0.35% interest rate.
- Fees to Vornado increased to $8.3 million from $2.8 million, primarily due to a $6.5 million leasing fee associated with the Bloomberg amendment.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash flows from continuing operations over the next twelve months, together with existing cash balances, are expected to fund operations, dividends, debt amortization and capital expenditures. The filing provides no formal earnings or revenue guidance.
- Bloomberg represented approximately 48% of Q1 2016 revenue. Its leases covering the relevant space were extended through February 2029, with a ten-year extension option, and Bloomberg provided a $200 million letter of credit subject to specified conditions.
- The principal operating risks include tenant concentration, occupancy and rental-rate changes, local economic conditions, construction and renovation costs, availability and cost of capital, refinancing risk, regulation and the ability to lease or sell properties profitably.
- The company has a $300 million interest-rate cap limiting LIBOR to 6.0%. Management estimated that a 1% increase in base rates would increase annual interest expense by approximately $9.1 million and reduce diluted earnings per share by approximately $1.78.
- Sears withdrew its claim for future damages in March 2016. The remaining Rego Park I property-damage claim was estimated at approximately $650,000, with reasonably possible losses not expected to exceed that amount.
- The New York City Department of Finance assessed an additional $20.1 million of transfer taxes, interest and penalties related to the 2012 Kings Plaza sale. The company believes the assessment lacks merit and considers a loss unlikely.
- The company has approximately $2.1 million of standby letters of credit outstanding. Insurance coverage may not remain available on commercially reasonable terms, and the company remains responsible for deductibles and losses exceeding coverage.
- The Paramus property has a $75 million purchase option exercisable by IKEA in 2021. If exercised, the company expects approximately $7 million of net cash proceeds and an approximately $60 million gain.
- New accounting standards for revenue recognition, financial instruments, leases and share-based payments were issued or pending adoption. The company was evaluating their effects; the filing does not provide quantified impacts.
Important Facts for Investors to Verify
- Confirm Bloomberg’s lease performance, creditworthiness, letter-of-credit terms and the effect of its substantial revenue concentration.
- Monitor lease-up progress and development costs for The Alexander apartment tower, including the expected 2017 stabilization date.
- Review variable-rate debt exposure, refinancing dates, interest-rate-cap coverage and compliance with mortgage covenants.
- Assess the outcome of the $20.1 million NYC transfer-tax assessment and the remaining Sears litigation claim.
- Reconcile FFO to GAAP net income and remember that FFO is a non-GAAP measure and does not represent cash available for requirements.
- Verify dividend sustainability against operating cash flow, debt amortization and recurring and development capital expenditures.
- Consider the effect of Vornado’s ownership, management role and related-party fees, including the elevated leasing fees recorded in Q1 2016.