Vornado Realty Trust 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
Vornado Realty Trust is an integrated real estate investment trust operating primarily through Vornado Realty L.P. The filing covers the three and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods. The portfolio is concentrated in New York, Washington, D.C./Northern Virginia and selected other markets, with approximately 44.5 million square feet attributable to Vornado at quarter-end.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $621.7 million, up from $616.3 million | $1.235 billion, up from $1.223 billion |
| Operating income | $186.8 million | $186.5 million |
| Net income attributable to common shareholders | $220.5 million; $1.16 diluted EPS | $106.3 million; $0.56 diluted EPS |
| FFO attributable to common shareholders plus assumed conversions | $229.4 million; $1.21 per diluted share | $433.1 million; $2.28 per diluted share |
| Net cash provided by operating activities | Not separately reported | $323.3 million |
| Dividends per common share | $0.63 | $1.26 cumulative |
Reported operating margin was approximately 30.0% for the quarter and 15.1% for the six-month period. Six-month operating income was materially reduced by a $160.7 million non-cash impairment loss on the Skyline properties mortgage loan. Consolidated EBITDA was $546.7 million for the quarter and $757.1 million for the six months; EBITDA is a non-GAAP measure.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $1.644 billion at June 30, 2016, down $191.6 million from December 31, 2015.
- Consolidated debt was approximately $11.079 billion, consisting primarily of $9.747 billion of mortgages, $844.9 million of senior unsecured notes, $371.5 million of unsecured term debt and $115.6 million drawn on revolving facilities.
- Revolving credit facility borrowings declined from $550.0 million at year-end to $115.6 million. Letters of credit outstanding totaled $38.6 million.
- Debt maturities were reported at $1.288 billion during the remainder of 2016 and $362.1 million during 2017.
- Operating cash flow of $323.3 million was more than offset by $432.3 million of investing cash outflows and $82.7 million of financing cash outflows.
- Investing outflows included $277.2 million of development and construction costs, $170.3 million of real estate additions and $90.7 million invested in partially owned entities.
- Management stated that expected cash flow from continuing operations should fund operations, distributions, debt amortization and recurring capital expenditures over the next twelve months. Development and acquisitions may require additional borrowing or equity financing.
Material Changes Versus the Prior Comparable Period
- Quarterly common-share net income increased to $220.5 million from $165.7 million, primarily because of a $159.5 million gain recognized on the sale of a 47% interest in 7 West 34th Street. Six-month common-share net income declined to $106.3 million from $250.2 million because of the Skyline impairment and the absence of the prior-year deferred tax benefit.
- Quarterly FFO declined to $1.21 per diluted share from $1.71; six-month FFO declined to $2.28 from $2.87. The prior-year periods benefited from a $90.0 million reversal of a deferred tax valuation allowance and other nonrecurring items.
- New York same-store EBITDA increased 6.9% for the quarter and 6.2% for the six months. Washington, D.C. same-store EBITDA decreased 1.3% and 1.4%, respectively.
- Revenue growth was driven primarily by same-store New York operations, partially offset by dispositions, lower Hotel Pennsylvania revenue, lower Washington, D.C. revenue and reduced fee income.
- Interest and debt expense increased to $105.6 million from $92.1 million for the quarter and to $206.1 million from $183.8 million for the six months, reflecting additional financings, lower capitalized interest and Skyline default interest.
- The company completed or participated in several significant refinancings, including 770 Broadway, One Park Avenue, The Warner Building and 280 Park Avenue.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2016 Washington, D.C. EBITDA, as adjusted, to be approximately $7 million to $11 million below 2015, driven by further Skyline occupancy declines and taking 1726 M Street and 1150 17th Street out of service for redevelopment.
- The $678 million Skyline mortgage was transferred to special servicing after property cash flow became insufficient. Vornado stopped making debt-service payments in the second quarter; the loan is in default, immediately due and payable, and bears increased default interest. The loan is recourse only to the Skyline properties, and negotiations with the special servicer were ongoing.
- The 7 West 34th Street transaction generated $127.4 million of net proceeds and a $203.3 million total gain, of which $159.5 million was recognized. The remaining $43.8 million gain was deferred pending removal of a loan guarantee or repayment of the loan.
- Development commitments included approximately $1.3 billion of incremental estimated costs for 220 Central Park South, $250 million for The Bartlett and other projects. Aggregate construction commitments were approximately $721.2 million, and expected additional capital contributions to partially owned entities totaled approximately $70 million.
- Vornado reported approximately $857 million of guarantees and master leases. Insurance availability and cost, interest-rate movements, tenant credit, occupancy, construction costs, environmental matters and refinancing risk remain material considerations.
- There were no material changes to the risk factors disclosed in the 2015 Form 10-K. Management stated that disclosure controls were effective as of June 30, 2016.
Important Facts for Investors to Verify
- Reconcile reported earnings and FFO to recurring property-level performance, excluding the 7 West 34th Street gain, Skyline impairment, default interest and prior-year tax benefit.
- Monitor the resolution, collateral value and potential cash impact of the Skyline mortgage default and special-servicer negotiations.
- Review debt maturities, refinancing assumptions, covenant compliance and sensitivity to higher interest rates.
- Assess Washington, D.C. occupancy trends, especially the Skyline properties and BRAC-affected space, as well as the planned redevelopment of 1726 M Street and 1150 17th Street.
- Evaluate funding requirements and execution risk for 220 Central Park South, The Bartlett and other development projects.
- Confirm the sustainability of the $0.63 quarterly common dividend against recurring FFO and operating cash flow.