Vornado Realty Trust 2019 Form 10-K Summary
Business context and reporting period
Vornado Realty Trust, together with Vornado Realty L.P., reported for the fiscal year ended December 31, 2019. Vornado is a fully integrated REIT conducting substantially all operations through its 93.1%-owned Operating Partnership. 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 in San Francisco, and other investments.
- Portfolio occupancy at December 31, 2019 was 96.7% in New York, 94.6% at theMART, and 99.8% at 555 California Street.
- Approximately 87% of 2019 NOI at share came from the New York metropolitan area.
- The audited financial statements and internal control over financial reporting received unqualified opinions from Deloitte & Touche LLP.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $1.925 billion | $2.164 billion | Down 11.0% |
| Net income | $3.334 billion | $422.6 million | Up materially, primarily from unusual gains |
| Net income attributable to common shareholders | $3.098 billion | $384.8 million | Up materially |
| Diluted EPS | $16.21 | $2.01 | Up materially |
| FFO attributable to common shareholders plus assumed conversions | $1.003 billion, or $5.25 per diluted share | $729.7 million, or $3.82 per diluted share | Up 37.5% |
| NOI at share | $1.260 billion | $1.383 billion | Down 8.9% |
| NOI at share, cash basis | $1.254 billion | $1.338 billion | Down 6.3% |
| Net cash provided by operating activities | $662.5 million | $802.6 million | Down 17.5% |
| Cash and restricted cash | $1.607 billion | $716.9 million | Up $890.2 million |
| Consolidated debt, net | $7.407 billion | $9.837 billion | Down $2.430 billion |
| Total equity | $7.311 billion | $5.108 billion | Up $2.203 billion |
Reported net income margin was approximately 173% of revenue because of large disposition and fair-value gains; this is not representative of recurring operating profitability. Recurring operating performance was better reflected by NOI and FFO. Same-store NOI at share increased 2.1% for the year, or 3.6% on a cash basis, while New York same-store NOI increased 0.5%, or 1.6% on a cash basis.
Material changes versus the prior comparable period
- Vornado transferred a 48.5% common interest in the Fifth Avenue and Times Square joint venture to institutional investors, retained a 51.5% common interest and $1.828 billion of preferred equity interests, and recognized a $2.571 billion net gain. The properties were valued at $5.556 billion and were deconsolidated into equity-method investments.
- The company generated $1.179 billion of net cash proceeds from the joint venture transaction and received an additional $500 million from redemption of temporary preferred equity in 640 Fifth Avenue.
- Vornado sold 54 condominium units at 220 Central Park South for $1.605 billion of net proceeds and recognized a $604.4 million financial statement gain. At year-end, 91% of units were sold or under contract.
- Other significant dispositions included Lexington Realty Trust shares for $167.7 million, Urban Edge units for $108.5 million, the 25% interest in 330 Madison Avenue for approximately $100 million, and 3040 M Street for $49.8 million.
- Debt declined substantially following asset sales, loan repayments, deconsolidation of joint-venture debt, and redemption of $400 million of 5.00% senior unsecured notes. Interest and debt expense declined to $286.6 million from $347.9 million.
- The unsecured revolving credit facilities were increased to $1.5 billion, extended to March 2024, and repriced to LIBOR plus 0.90%.
- Vornado adopted ASC 842, recording $526.9 million of right-of-use assets and lease liabilities for ground leases. Internal leasing costs are now expensed rather than capitalized.
- Revenue declined principally because of the transfer of properties to the Fifth Avenue and Times Square joint venture, dispositions, development activity, and weaker Hotel Pennsylvania performance.
Guidance, outlook, risks and unusual items
- Management expects cash flow from continuing operations over the next twelve months to fund operations, distributions, debt amortization, and recurring capital expenditures. Acquisitions and development may require additional borrowing or equity financing.
- Management estimated approximately $2 billion of net cash from sales of all 220 Central Park South units, including approximately $1 billion of after-tax net gain.
- 2020 recurring tenant improvements, leasing commissions, and other capital expenditures were budgeted at approximately $303 million. This excludes capital expenditures of nonconsolidated partially owned entities.
- Major projects include 220 Central Park South, PENN1, PENN2, the Penn District, the Farley Office and Retail Building, Moynihan Train Hall, 345 Montgomery Street, and 825 Seventh Avenue. Estimated costs and completion schedules remain subject to change.
- 2019 included $107.2 million of non-cash impairment losses, primarily related to 608 Fifth Avenue following the bankruptcy and U.S. store closures of the Topshop operator. Vornado gave notice to surrender the property in May 2020; a $71.6 million lease liability remained at year-end.
- Debt maturities were $450 million in 2020 and $2.327 billion in 2021. The company had $1.515 billion of cash and cash equivalents and $2.159 billion of available revolving capacity, net of letters of credit, at year-end.
- Contractual cash obligations totaled $10.647 billion, including debt principal and interest, operating leases, construction-related purchase obligations, and other obligations.
- Guarantees and master leases totaled approximately $1.524 billion, including obligations associated with 640 Fifth Avenue, 7 West 34th Street, 435 Seventh Avenue, Farley, and other arrangements.
- Risks include concentration in New York, office and retail demand changes, tenant defaults and bankruptcies, refinancing and interest-rate risk, LIBOR discontinuation, development cost overruns, joint-venture control and partner risk, climate and terrorism exposure, insurance availability, environmental liabilities, cyber risk, and REIT qualification requirements.
- The company is pursuing litigation against a Regus subsidiary concerning the purported termination of a 345 Montgomery Street lease and related guarantee. Management does not expect ordinary-course legal matters to have a material adverse effect, but outcomes are uncertain.
- Vornado declared a $1.95 per share special dividend paid January 15, 2020 and declared a $0.66 quarterly dividend, representing an indicated annual rate of $2.64 per common share.
Most important facts for an investor to verify
- Separate recurring operating results from the $2.571 billion Fifth Avenue and Times Square joint-venture gain and other asset-sale gains.
- Verify the sustainability of FFO and same-store NOI after the transfer of properties, dispositions, development activity, and Hotel Pennsylvania weakness.
- Review the 2020 and 2021 debt maturities, refinancing plans, covenant compliance, variable-rate exposure, and LIBOR transition provisions.
- Assess remaining costs, leasing progress, timing, and guarantees for 220 Central Park South, the Penn District, Farley, and Moynihan Train Hall.
- Evaluate New York concentration, office and retail lease expirations, tenant credit quality, and exposure to changing office-use patterns and online retail.
- Review the 608 Fifth Avenue impairment and surrender, the Regus litigation, the $1.524 billion of guarantees and master leases, and the $627 million of construction commitments.
- Confirm the effect of the special dividend and ongoing preferred dividends, common dividends, and Operating Partnership distributions on liquidity.