VORNADO REALTY TRUST annual report, FY2010

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Vornado Realty Trust 2010 Form 10-K Summary

Business context and reporting period

Vornado Realty Trust is a fully integrated REIT operating through Vornado Realty L.P. The filing covers the fiscal year ended December 31, 2010, with supplemental fourth-quarter results. Core operations include New York and Washington, D.C. office properties, retail properties, Merchandise Mart properties, and investments in Toys “R” Us and other real estate-related entities. Vornado owned approximately 93.2% of the Operating Partnership at year-end and had 183.7 million common shares outstanding.

  • Portfolio at year-end included approximately 17.4 million square feet of New York office properties, 21.1 million square feet of Washington, D.C. properties, 25.6 million square feet of retail properties and 6.9 million square feet of Merchandise Mart properties.
  • Management reported that approximately 74% of 2010 EBITDA, excluding comparability items, came from the New York/New Jersey and Washington, D.C./Northern Virginia markets.

Financial performance and key metrics

Metric20102009
Total revenues$2.780 billion$2.697 billion
Operating income$805.9 million$790.9 million
Income from continuing operations$728.4 million$88.0 million
Net income attributable to common shareholders$596.7 million$49.1 million
Diluted net income per common share$3.24$0.28
FFO attributable to common shareholders plus assumed conversions$1.150 billion, or $6.05 per diluted share$583.6 million, or $3.36 per diluted share
Net cash provided by operating activities$771.1 million$633.6 million
Cash and cash equivalents$690.8 million$535.5 million
Consolidated debt$10.894 billion$10.686 billion
Total assets$20.517 billion$20.185 billion

Operating income margin was approximately 29.0% in 2010 versus 29.3% in 2009. FFO and net income benefited materially from non-recurring and market-sensitive items, including J.C. Penney derivative gains, a gain on early extinguishment of debt and real estate disposition gains.

Fourth-quarter 2010 revenue was $713.0 million, net income attributable to common shareholders was $243.4 million, or $1.31 per diluted share, and FFO was $335.8 million, or $1.76 per diluted share. Fourth-quarter 2009 included a net loss attributable to common shareholders of $151.2 million, or $0.84 per diluted share.

Material changes versus the prior comparable period

  • Revenue increased $83.0 million, or approximately 3.1%, primarily from leasing activity, development and redevelopment, higher Hotel Pennsylvania revenue, and trade-show activity.
  • Same-store GAAP EBITDA increased 1.7% in New York office, 5.2% in Washington, D.C. office and 8.6% in Merchandise Mart properties, but declined 3.3% in retail. Cash-basis same-store EBITDA changes were 2.3%, 10.0%, 9.6% and negative 2.3%, respectively.
  • New York office occupancy was 95.6% versus 95.5% in 2009; Washington, D.C. office occupancy was 94.3% versus 93.3%; retail occupancy was 92.3% versus 91.6%; and Merchandise Mart occupancy was 92.5% versus 89.4%.
  • Interest and debt expense declined $57.7 million to $560.3 million, primarily due to prior debt repurchases and repayments, partially offset by new debt issuance.
  • Net income benefited from a $94.8 million gain on early extinguishment of debt, principally related to the Springfield Mall mortgage transaction, compared with a $25.9 million loss in 2009.
  • Interest and other investment income improved to $235.3 million from a $116.4 million loss, including $130.2 million of mark-to-market gains on derivative positions related to J.C. Penney and a $53.1 million reversal of prior mezzanine-loan loss accruals.
  • 2010 investing cash flow included $504.1 million of marketable-securities purchases, $173.4 million of real estate acquisitions, $165.2 million of investments in partially owned entities and $156.8 million of development expenditures.

Guidance, outlook, commentary, risks and unusual items

  • Management stated that continuing-operations cash flow over the next twelve months was expected to fund operations, distributions, debt amortization and recurring capital expenditures. Acquisition and development funding could require additional borrowings or equity offerings.
  • Management increased the quarterly common dividend to $0.69 per share in January 2011, an indicated annual rate of $2.76. The filing estimated 2011 cash requirements of approximately $507 million for common dividends, $57 million for preferred dividends and $53 million for Operating Partnership distributions.
  • Vornado formed Vornado Capital Partners in July 2010 with $550 million of aggregate commitments, including a $200 million commitment from Vornado. The Fund had received $146.8 million of capital and made approximately $145 million of investments by year-end.
  • Major 2010 investments included a 9.9% economic interest in J.C. Penney, a 26.2% interest in LNR, 510 Fifth Avenue, the remaining interest in a San Jose retail property and land beneath part of the Borgata complex.
  • Vornado sold a 45% interest in the Warner Building and 1101 17th Street for $236.7 million, recognizing a $54 million fourth-quarter gain on the Warner Building.
  • The High Point Complex mortgage was in default after Vornado stopped debt-service payments in March 2010; the property entered receivership in November. Management expected a sale in the first half of 2011 and an approximately $80 million gain, but the outcome was contingent on the receivership and sale process.
  • 2011 post-year-end transactions included refinancing Two Penn Plaza for $425 million, financing 2121 Crystal Drive for $150 million, financing North Bergen for $75 million and a planned sale of two Washington, D.C. properties expected to generate approximately $44 million of gain.
  • Vornado had approximately $2.07 billion of consolidated debt maturing in 2011 and $2.10 billion maturing in 2012. Contractual cash obligations totaled approximately $15.1 billion, including principal and interest.
  • Management identified risks from concentrated geographic exposure, tenant defaults and bankruptcies, interest-rate and refinancing risk, capital-market volatility, retail and hotel cyclicality, development cost overruns, environmental and insurance exposures, REIT qualification requirements and conflicts involving affiliated entities.
  • The filing states that Toys “R” Us had approximately $5.9 billion of debt, of which Vornado’s pro rata share was approximately $1.9 billion and none was recourse to Vornado. Toys results are recorded on a one-quarter lag and are highly seasonal.
  • The filing initially omitted financial statements required under Rule 3-09 of Regulation S-X for Toys “R” Us; an amendment was expected after those financial statements became available.

Most important facts for an investor to verify

  • Reconcile reported net income and FFO to recurring property-level operating performance, excluding J.C. Penney mark-to-market gains, debt-extinguishment gains, disposition gains, impairment charges and other comparability items.
  • Review 2011 and 2012 debt maturities, refinancing capacity, revolver availability, covenant compliance and the effect of variable-rate debt.
  • Assess the status and ultimate proceeds from the High Point receivership and other discontinued operations.
  • Evaluate tenant concentration, lease expirations and re-leasing assumptions, particularly in New York office, Washington, D.C. office and retail portfolios.
  • Verify the valuation, settlement terms and potential volatility of the J.C. Penney forward contract and other derivative positions.
  • Review the omitted Rule 3-09 Toys “R” Us financial statements and any subsequent 10-K amendment.
  • Assess funding requirements for the Fund, Cleveland Medical Mart, 220 Central Park South and other development commitments, including potential cost overruns.
  • Consider the implications of related-party arrangements with Alexander’s, Interstate Properties and entities associated with senior management.