Vornado Realty Trust — Form 10-Q Summary
Reporting period: Quarterly and six months ended June 30, 2011, compared with the corresponding 2010 periods. The financial statements are unaudited. Vornado is an integrated REIT operating primarily through Vornado Realty L.P.; it owned approximately 93.3% of the Operating Partnership at June 30, 2011. Amounts are in thousands except per-share data.
Business Context and Financial Position
- Core activities include ownership, operation, development and redevelopment of office, retail and Merchandise Mart properties, primarily in the New York metropolitan area and Washington, D.C.
- Total assets were $20.54 billion at June 30, 2011, including net real estate of $14.77 billion, marketable securities of $791.7 million, investments in partially owned entities of $1.16 billion and cash and cash equivalents of $591.5 million.
- Common shares outstanding were 184.4 million. Total equity was $7.37 billion, including Vornado shareholders’ equity of $6.76 billion.
Key Financial Metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenues | $730.2 million | $684.0 million | $1.47 billion | $1.37 billion |
| Operating income | $243.0 million | $237.4 million | $441.6 million | $465.6 million |
| Operating margin | 33.3% | 34.7% | 30.1% | 34.0% |
| Income from continuing operations | $130.5 million | $80.9 million | $442.0 million | $323.0 million |
| Net income attributable to common shareholders | $91.9 million | $57.8 million | $491.1 million | $258.1 million |
| Diluted earnings per common share | $0.49 | $0.31 | $2.63 | $1.41 |
| FFO per diluted share | $1.27 | $1.11 | $3.91 | $2.98 |
| Dividends per common share | $0.69 | $0.65 | $1.38 | $1.30 |
- Net cash provided by operating activities was $260.0 million for the six months, down from $532.4 million in 2010.
- Net cash provided by investing activities was $23.3 million; net cash used in financing activities was $382.6 million. Cash declined by $99.3 million from year-end 2010.
- Capital expenditures and leasing commissions on a cash basis were $97.1 million for the six months.
- Consolidated debt was $10.54 billion, with a weighted average interest rate of 4.89%. Variable-rate consolidated debt was $2.09 billion; a 1% increase in base rates was estimated to reduce annual net income by approximately $25.3 million, or $0.13 per diluted share, after noncontrolling interests.
- Revolving credit facilities totaled $2.845 billion, of which $300.0 million was drawn. Available liquidity, including cash and revolving capacity, was reported at approximately $3.14 billion.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased $46.2 million, or approximately 6.7%; six-month revenue increased $98.0 million, or approximately 7.2%. The Cleveland Medical Mart development contributed $32.4 million of second-quarter revenue and $73.1 million for the six months, substantially offset by related development costs.
- Second-quarter net income attributable to common shareholders increased approximately 59%; six-month net income increased approximately 90%. The six-month comparison was heavily affected by nonrecurring and valuation-related items.
- FFO increased to $243.4 million for the quarter and $749.3 million for the six months, compared with $204.8 million and $565.1 million, respectively.
- Same-store EBITDA for the six months increased on a GAAP basis in Washington, D.C., retail and Merchandise Mart, but declined 1.5% in New York office. Cash-basis same-store EBITDA increased 6.1% in Washington, D.C., 8.5% in retail and 4.1% in Merchandise Mart, while declining 0.2% in New York office.
- Occupancy at June 30, 2011 was 94.8% for New York office, 93.1% for Washington, D.C. office, 92.3% for retail and 90.9% for Merchandise Mart showroom space.
- The company issued $214.5 million of net proceeds from 6.875% Series J cumulative redeemable preferred shares and renewed and expanded one revolving facility to $1.25 billion.
- Debt declined from $10.89 billion at December 31, 2010, primarily as revolving credit borrowings declined from $874.0 million to $300.0 million, although notes and mortgages payable increased.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash flow from continuing operations was expected to be adequate over the next 12 months for operations, distributions, dividends, debt amortization and recurring capital expenditures. Development and acquisition funding may require borrowings or equity offerings.
- Approximately $1.235 billion of consolidated debt was scheduled to mature during the remainder of 2011. The filing did not provide formal earnings guidance.
- Major investments included One Park Avenue, the 280 Park Avenue joint venture and Independence Plaza. The 280 Park Avenue venture expected to spend approximately $150 million on re-tenanting and repositioning.
- Six-month results included an $83.9 million gain from extinguishment of High Point debt, a $45.9 million gain from sales of 1140 Connecticut Avenue and 1227 25th Street, a $72.3 million reversal and recognition of income related to the 280 Park Avenue mezzanine loan, and a $10.4 million gain from marking the J.C. Penney derivative position to market.
- Vornado owned an economic interest in 23.4 million J.C. Penney shares; the investment’s fair value was approximately $641.9 million for directly held shares at June 30, 2011. Market movements can materially affect investment income and comprehensive income.
- Toys “R” Us generated a second-quarter loss attributable to Vornado of $22.8 million, reflecting the investment’s seasonal pattern. Vornado recognized six-month income from Toys of $90.1 million.
- Commitments included approximately $189.3 million of additional capital to partially owned entities, including $136.0 million to the Real Estate Fund; up to $52 million to a proposed LNR-managed fund; and estimated costs of $400 million to $425 million for 220 Central Park South.
- The Cleveland Medical Mart project has a development budget of up to $465 million, expected completion in 2013, and a required post-completion funding obligation of approximately $11.5 million. Cost overruns and operating performance remain relevant risks.
- Vornado reported a $39.5 million receivable from Stop & Shop, with $21.9 million reserved. The company stated that the maximum reasonably possible loss could equal the full receivable.
- Insurance availability and cost, interest-rate movements, refinancing risk, tenant credit, occupancy, construction costs, environmental matters and covenant compliance remain material risks. No material changes to previously disclosed risk factors were reported.
Investor Verification Points
- Reconcile reported net income and FFO to recurring property-level operating performance, excluding gains, valuation changes and loan-reserve reversals.
- Review the maturity schedule for the $1.235 billion of debt maturing during the remainder of 2011 and the company’s refinancing plans.
- Assess liquidity after planned acquisitions, development spending, distributions, preferred dividends and committed investments.
- Monitor New York office occupancy and same-store EBITDA, particularly the decline versus the prior year.
- Evaluate exposure to J.C. Penney securities and derivatives, including potential earnings volatility from mark-to-market accounting.
- Review the status and potential exposure of the Stop & Shop litigation and the related reserved receivable.
- Assess the Cleveland Medical Mart, 220 Central Park South and other development commitments for cost, timing and funding risks.