Vornado Realty Trust 2014 Form 10-K Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P. The company owns and manages office, retail, residential, hotel and showroom properties, with major concentrations in New York City and Washington, D.C./Northern Virginia. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results.
- At December 31, 2014, Vornado owned or had interests in approximately 70.4 million square feet of real estate; its ownership share was approximately 59.5 million square feet.
- New York occupancy was 96.9%; Washington, D.C. occupancy was 83.8%; Retail Properties occupancy was 95.9%.
- Approximately 98% of 2014 EBITDA, excluding comparability items, came from the New York City metropolitan area and Washington, D.C./Northern Virginia.
- On January 15, 2015, Vornado completed the spin-off of substantially all of its retail segment to Urban Edge Properties, transferring 79 strip centers, three malls, a warehouse park and $225 million of cash. Vornado received 5.712 million Urban Edge operating partnership units, representing approximately 5.4% ownership.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenues | $2.636 billion | $2.669 billion | Down $33.3 million |
| Operating income | $815.6 million | $850.3 million | Down $34.6 million |
| Income from continuing operations | $494.2 million | $118.0 million | Up $376.2 million |
| Net income attributable to common shareholders | $783.4 million | $392.0 million | Up $391.4 million |
| Diluted net income per common share | $4.15 | $2.09 | Up $2.06 |
| FFO attributable to common shareholders plus assumed conversions | $911.1 million | $641.0 million | Up $270.1 million |
| FFO per diluted share | $4.83 | $3.41 | Up $1.42 |
| Cash flow from operating activities | $1.135 billion | $1.041 billion | Up $94.5 million |
| Cash and cash equivalents | $1.198 billion | $583.3 million | Up $615.2 million |
| Consolidated debt | $10.899 billion | $9.979 billion | Up $920.1 million |
Operating income margin was approximately 30.9% in 2014 versus 31.9% in 2013. Net income and FFO benefited materially from real estate sales, gains and other nonrecurring items; FFO excludes real estate depreciation, sales gains and certain other items and is not a substitute for operating cash flow.
- 2014 income from discontinued operations was $514.8 million, including $507.2 million of net real estate sale gains and $26.5 million of impairment losses.
- 2014 same-store EBITDA increased 4.7% in New York and 1.7% in Retail Properties, but declined 2.4% in Washington, D.C. Cash-basis same-store EBITDA increased 7.6%, 2.3% and declined 2.3%, respectively.
- Quarter-four 2014 net income attributable to common shareholders was $513.2 million, or $2.72 diluted per share, compared with a $68.9 million loss, or $0.37 loss per share, in fourth-quarter 2013. Fourth-quarter FFO was $230.1 million, or $1.22 per diluted share, versus negative FFO of $6.8 million, or $0.04 per share.
- Common dividends were $2.92 per share for 2014, paid at $0.73 per quarter.
Liquidity, debt and capital resources
- Cash and cash equivalents were $1.198 billion at year-end. Revolving credit facilities had $2.460 billion of available capacity, net of borrowings and letters of credit; outstanding revolver borrowings were zero and letters of credit totaled $39.6 million.
- Consolidated debt consisted of $9.552 billion of mortgages and $1.347 billion of senior unsecured notes. The weighted-average interest rate was 4.00%, versus 4.44% in 2013.
- Variable-rate debt totaled $1.841 billion; management estimated that a 1% increase in base rates would increase annual consolidated interest expense by approximately $18.4 million before considering nonconsolidated debt.
- Debt maturities included $742.7 million during 2015 and $1.530 billion during 2016. Contractual cash obligations totaled $15.562 billion, including principal and interest, operating leases, capital leases and purchase obligations.
- 2014 financing included $2.0 billion of mortgage financings, a $450 million 2.50% senior unsecured note issuance, redemption of $445 million of 7.875% notes and redemption of $500 million of 4.25% notes on January 1, 2015.
- 2015 anticipated capital expenditures and leasing commissions were approximately $323 million, excluding certain partially owned entities. Management expected operating cash flow over the next twelve months to fund operations, distributions, debt amortization and recurring capital expenditures; acquisitions and development could require additional borrowing or equity.
Material changes versus the prior comparable period
- Revenue declined modestly because 2013 included a $59.6 million Stop & Shop settlement, $36.4 million of Cleveland Medical Mart development revenue and other nonrecurring items. Excluding identified items, management reported revenue growth of $86.6 million.
- New York operating performance improved, driven by higher rents, cleaning fees and signage revenue. Washington, D.C. remained pressured by BRAC-related move-outs and a weak leasing environment.
- The Toys “R” Us investment produced a $73.6 million loss in 2014, including a $75.2 million non-cash impairment loss, compared with a $362.4 million loss in 2013. The carrying value of the investment was reduced to zero, and equity-method accounting was suspended.
- Income from the Real Estate Fund increased to $163.0 million from $102.9 million, primarily reflecting higher realized and unrealized gains.
- Vornado acquired the St. Regis Hotel retail condominium for $700 million, acquired the land under 715 Lexington Avenue for $63 million and increased its ownership of One Park Avenue to 55%.
- Vornado sold nine assets for aggregate gross proceeds of approximately $1.025 billion and net proceeds of approximately $989 million, including 1740 Broadway for $605 million and Beverly Connection for $260 million.
- Cash flow from investing activities changed from $722.1 million of inflow in 2013 to $574.5 million of outflow in 2014 as development, acquisitions and investment spending increased.
Guidance, outlook, risks and unusual items
- Management expected 2015 Washington, D.C. EBITDA from continuing operations to be flat with 2014.
- Major development and redevelopment projects included 220 Central Park South, the Marriott Marquis Times Square retail and signage project, The Bartlett residential project and Crystal City redevelopment. Estimated costs and completion dates remain subject to market, leasing, financing and construction risks.
- Vornado recorded $26.5 million of real estate impairment losses in discontinued operations and $85.5 million of non-cash impairment losses on partially owned entities, including Toys, in 2014.
- Vornado faces risks from concentrated geographic exposure, office and retail demand, tenant defaults and bankruptcies, BRAC-related leasing pressure, interest-rate changes, refinancing needs, property values, development costs, environmental and insurance matters, cyber incidents and capital-market conditions.
- Mortgage debt is generally non-recourse, but Vornado had approximately $359 million of guarantees and master-lease obligations. It also expected to fund approximately $104 million of additional capital to partially owned entities.
- The filing states that the annual report omits financial statements required under Rule 3-09 for Toys “R” Us; an amendment was expected after those financial statements became available.
- Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported 2014 earnings and FFO to recurring property-level performance, excluding sale gains, discontinued operations, impairments, Fund valuation gains and other comparability items.
- Assess the post-spin-off composition of Vornado’s portfolio, revenue, EBITDA, leverage and dividend capacity after retail assets and $225 million of cash were transferred to Urban Edge.
- Review 2015 and 2016 debt maturities, refinancing plans, covenant headroom and exposure to variable interest rates.
- Evaluate Washington, D.C. occupancy, BRAC-related vacant space and the stated expectation of flat 2015 EBITDA.
- Review completion costs, financing and expected returns for 220 Central Park South, The Bartlett, Marriott Marquis and other redevelopment projects.
- Verify the status and financial impact of the omitted Rule 3-09 Toys “R” Us financial statements and any subsequent 10-K amendment.
- Consider related-party and governance exposures involving Alexander’s, Interstate Properties, Urban Edge and overlapping executive and trustee relationships.