Alexander’s, Inc. 2014 Form 10-K Summary
Business context and reporting period
Alexander’s, Inc. is a Delaware REIT focused on leasing, managing, developing and redeveloping six properties in the greater New York City metropolitan area. Vornado Realty Trust manages the Company and leases and develops its properties. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results.
The portfolio totaled approximately 2.178 million square feet and was 99.7% occupied at year-end, compared with 99.4% at December 31, 2013. The Rego Park II Apartment Tower, comprising 312 units and 255,000 square feet, was under construction and expected to be completed in 2015.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenues | $200.8 million | $196.5 million | +$4.4 million |
| Operating income | $96.7 million | $97.5 million | -$0.8 million |
| Net income attributable to Alexander’s | $67.9 million | $56.9 million | +$11.0 million |
| Diluted earnings per share | $13.29 | $11.14 | +$2.15 |
| FFO attributable to common stockholders | $97.0 million | $85.7 million | +$11.3 million |
| Diluted FFO per share | $18.98 | $16.78 | +$2.20 |
| Net cash provided by operating activities | $49.5 million | $73.9 million | -$24.4 million |
| Cash and cash equivalents | $227.8 million | $347.7 million | -$119.9 million |
| Total debt | $1.033 billion | $1.050 billion | -$17.2 million |
Revenue increased primarily from higher parking revenue and tenant expense reimbursements. Operating expenses rose $5.0 million to $69.9 million, driven mainly by higher real estate taxes and non-reimbursable operating expenses. Interest and debt expense fell $12.5 million to $32.1 million, primarily because of the refinancing of the office portion of 731 Lexington Avenue.
Calculated margins were approximately 48.1% for operating income and 33.8% for net income in 2014, compared with approximately 49.6% and 29.0%, respectively, in 2013. FFO represented approximately 48.3% of revenue. The filing does not present a company-defined net operating margin or adjusted EBITDA measure.
Fourth-quarter 2014 revenue was $51.3 million, net income attributable to Alexander’s was $18.2 million, diluted earnings per share was $3.55, and FFO was $25.5 million, or $4.99 per diluted share. Fourth-quarter 2013 figures were $50.5 million, $15.8 million, $3.09 and $23.0 million, or $4.50 per diluted share, respectively.
Cash flow, debt and liquidity
- Operating cash flow was $49.5 million. Investing cash outflows were $81.5 million, primarily reflecting $62.0 million of construction and real estate additions and $25.0 million invested in short-term investments.
- Financing cash outflows were $87.9 million, including $317.2 million of debt repayments and $66.4 million of dividends, partially offset by $300.0 million of refinancing proceeds.
- Debt consisted of $1.033 billion of mortgage debt. Management reported debt at 34.3% of total enterprise value and scheduled 2014 principal and interest payments of $35.8 million.
- Debt maturities included $78.2 million on Rego Park I and $320.0 million on the 731 Lexington retail space in 2015, $68.0 million on Paramus and $266.5 million on Rego Park II in 2018, and $300.0 million on the 731 Lexington office space. The filing states that the Company intends to refinance maturing debt.
- The 2015 contractual-obligation table shows $420.5 million of long-term debt obligations due within one year, plus $37.0 million of purchase obligations, primarily construction commitments. Rego Park I’s loan was 100% cash collateralized.
- The 731 Lexington office refinancing bears interest at LIBOR plus 0.95% and is described in the narrative as maturing in March 2017 with four one-year extension options; the debt table presents March 2021 as the extended maturity. An interest-rate cap limits LIBOR to 6.0% on the $300.0 million loan.
Management stated that cash flows from continuing operations and existing cash were expected to fund operations, dividends, debt amortization, recurring capital expenditures and Rego Park II development expenditures over the following twelve months. The regular quarterly dividend was increased after year-end to $3.50 per share, or an indicated annual rate of $14.00 per share.
Material changes versus the prior comparable period
- Net income increased 19.3%, while diluted EPS increased 19.3%, largely because of substantially lower interest expense and a larger income tax benefit.
- FFO increased 13.1%, and diluted FFO per share increased 13.1%.
- Revenue increased 2.2%, but operating income declined 0.8% as operating expenses grew faster than revenue.
- Operating cash flow declined 33.0%, primarily because of a $40.4 million payment of accrued leasing commissions to Vornado.
- Cash decreased by $119.9 million, while total debt declined by $17.2 million.
- Real estate at cost increased to $993.9 million from $919.6 million, primarily due to $70.4 million of development and construction-in-progress additions.
- Marketable securities, consisting of Macerich common shares, increased in fair value to $44.6 million from $31.5 million, producing a $13.1 million unrealized gain in other comprehensive income.
- Bloomberg extended leases covering 188,608 square feet of office space for five years beyond their scheduled December 2015 expiration; the rental rate for the extension period remained under negotiation.
Outlook, commentary, risks and unusual items
- Rego Park II Apartment Tower was estimated to cost approximately $125.0 million, of which $73.3 million had been incurred by December 31, 2014. Completion timing and total cost were not assured.
- Bloomberg accounted for $91.1 million, or 45% of 2014 revenue, and 731 Lexington Avenue accounted for $133.0 million, or 66% of revenue. Loss of Bloomberg or a material problem at 731 Lexington Avenue would materially affect results.
- The Company is highly concentrated geographically, with all properties and revenue located in the greater New York City metropolitan area.
- Vornado owned 32.4% of Alexander’s, while Vornado, Interstate and related parties together beneficially controlled approximately 58.7% of the common stock. Vornado also provides management, leasing and development services, creating related-party and potential conflict-of-interest considerations.
- Sears sued Alexander’s, Vornado and subsidiaries concerning water intrusions, two fires and alleged Americans with Disabilities Act violations at Rego Park I. Sears seeks at least $4 million in damages and estimates future damages of at least $25 million; the Company stated that reasonably possible losses could not be estimated.
- Insurance includes up to $1.7 billion of property and rental-value coverage and terrorism coverage, but deductibles, exclusions and losses exceeding coverage could be material. Up to $75.0 million of the 731 Lexington retail mortgage may become recourse following a substantial casualty.
- The Company’s investment in Macerich had a $44.6 million carrying value and could be subject to impairment if its value declines significantly.
- Other risks include tenant defaults and bankruptcies, anchor-tenant weakness, interest-rate increases, refinancing availability, real estate market conditions, environmental and regulatory liabilities, cybersecurity incidents, natural disasters and the ability to retain REIT qualification.
- The 2012 comparison period included a $599.6 million gain on the sale of Kings Plaza and a $623.2 million special dividend; therefore, 2012 net income and dividends are not representative of recurring operations.
Important facts for investors to verify
- Confirm the refinancing status and final maturity or extension terms for the $398.2 million of debt scheduled for 2015 maturity, particularly the $320.0 million 731 Lexington retail loan and the $78.2 million Rego Park I loan.
- Monitor completion costs, leasing progress and stabilization of the Rego Park II Apartment Tower.
- Review the negotiated rental rate and ultimate lease economics for Bloomberg’s five-year extension.
- Track the Sears litigation, potential repair obligations and any reserve or insurance recoveries.
- Assess dividend coverage using recurring cash flow rather than FFO alone, given 2014 operating cash flow of $49.5 million and dividends paid of $66.4 million.
- Evaluate exposure to Vornado through management, leasing, development and related-party fee arrangements, including the December 2014 elimination of the annual installment cap on accrued leasing commissions.
- Reconcile the filing’s stated debt maturity presentation for the 731 Lexington office loan, which refers to March 2017 in the narrative and March 2021 in the debt table after extensions.