Business Context and Reporting Period
Alexander’s, Inc. is a Delaware REIT that leases, manages, develops and redevelops seven properties in the greater New York City metropolitan area. Vornado Realty Trust manages the company and provides leasing and development services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $58.1 million | $57.1 million | $172.5 million | $169.7 million |
| Operating income | $27.2 million | $26.1 million | $80.9 million | $79.0 million |
| Operating margin | 46.8% | 45.8% | 46.9% | 46.5% |
| Net income | $20.3 million | $21.0 million | $62.6 million | $64.8 million |
| Net margin | 35.0% | 36.8% | 36.3% | 38.2% |
| Diluted EPS | $3.97 | $4.11 | $12.24 | $12.68 |
| FFO | $28.6 million | $28.9 million | $86.8 million | $90.2 million |
| FFO per diluted share | $5.59 | $5.66 | $16.98 | $17.64 |
Nine-month operating cash flow was $72.2 million, compared with $81.9 million in 2016. Cash, cash equivalents and restricted cash totaled $364.5 million at September 30, 2017, versus $374.7 million at December 31, 2016. Dividends paid during the nine months were $65.2 million, or $12.75 per common share.
Total mortgages payable, before deferred debt issuance costs, were $1.253 billion at September 30, 2017, compared with $1.056 billion at December 31, 2016. The estimated fair value of mortgages payable was $1.241 billion. Approximately $1.107 billion of debt was variable-rate, and management estimated that a 1% increase in base rates would reduce annualized diluted earnings by approximately $2.16 per share. A $500 million interest-rate cap limits LIBOR exposure on the refinanced 731 Lexington Avenue office loan to 6.0%.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $1.0 million, or approximately 1.7%, primarily from higher property rentals at The Alexander apartment tower and higher expense reimbursements.
- Nine-month revenue increased $2.8 million, or approximately 1.7%. Higher Alexander rental income and reimbursements more than offset the absence of $2.3 million of prior-year income from a Rego Park II lease termination.
- Third-quarter net income declined $0.7 million and diluted EPS declined $0.14, mainly because interest expense increased $3.3 million, partly offset by higher interest income and lower operating expenses.
- Nine-month net income declined $2.2 million and diluted EPS declined $0.44. Interest expense increased $5.9 million, primarily because of higher LIBOR and the 731 Lexington refinancing.
- FFO declined 1.2% in the quarter and 3.7% for the nine months. The 2016 nine-month results included $2.3 million of income from a Rego Park II lease termination.
- On June 1, 2017, the company refinanced the 731 Lexington Avenue office portion with a $500 million interest-only loan, replacing a $300 million loan. On July 28, 2017, it invested $200 million in a participation in the Rego Park II loan, which matures in November 2018.
- Marketable securities declined to $29.4 million from $37.9 million at year-end, reflecting an $8.5 million unrealized loss recognized in other comprehensive income.
Guidance, Outlook, Risks and Unusual Items
Management stated that operating cash flows over the next twelve months, together with existing cash balances, are expected to fund operations, dividends, debt amortization and capital expenditures. The filing does not provide quantitative earnings or FFO guidance.
- The portfolio comprised approximately 2.437 million square feet and was 99.3% occupied at September 30, 2017.
- Bloomberg accounted for approximately 46% of nine-month revenue. Loss of Bloomberg or a deterioration in its ability to pay could materially affect results and financial condition.
- Sears closed its 195,000-square-foot Rego Park I store in April 2017. The lease generates approximately $10.3 million of annual revenue and has approximately $4.6 million of related straight-line rent and deferred leasing assets subject to recoverability assessment.
- Toys “R” Us, an affiliate-related tenant, filed for Chapter 11 in September 2017. The lease produces approximately $2.7 million of annual revenue, with $1.6 million of related unamortized assets on the balance sheet.
- Le Cirque’s lease was terminated effective January 5, 2018. The company accelerated approximately $2.8 million of depreciation and amortization; $2.37 million was expected in the fourth quarter of 2017 and $0.13 million in the first quarter of 2018.
- The company faces refinancing and interest-rate risk, including maturities in 2018 for the Rego Park I, Paramus and Rego Park II mortgages. The Paramus mortgage matures in October 2018 and is secured by a property subject to an IKEA purchase option in 2021.
- Sears litigation related to Rego Park I remains pending; the company estimates reasonably possible losses, if any, at no more than approximately $650,000.
- New York City has asserted an additional $22.5 million transfer-tax assessment related to the 2012 Kings Plaza sale. Management believes the claim lacks merit, considers a loss not probable and does not expect a material adverse effect.
- The company is evaluating the future effects of revenue-recognition and lease-accounting standards, including expected classification changes for certain tenant reimbursements. The filing does not provide a clear estimate of the overall financial impact.
Important Facts for Investors to Verify
- Ability to retain and collect rent from Bloomberg, Sears and Toys “R” Us, including recoverability of related receivables and leasing assets.
- Refinancing plans and terms for the 2018 mortgage maturities, as well as sensitivity to LIBOR and other interest-rate changes.
- Actual impact of the $200 million Rego Park II loan participation and its November 2018 maturity.
- Timing and accounting effects of Le Cirque’s lease termination and any further tenant vacancies.
- Outcome of the $22.5 million NYC transfer-tax assessment and the remaining Sears litigation.
- Future dividend coverage relative to FFO and operating cash flow; nine-month dividends of $65.2 million exceeded reported net income of $62.6 million.
- Adoption effects of ASC 606 and ASC 842, including presentation of tenant reimbursements and recognition of the Flushing property ground lease liability.