Alexander’s, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a New York metropolitan-area REIT engaged in leasing, managing, developing and redeveloping properties. Vornado Realty Trust manages the company and leases and develops its properties; Vornado owned 32.4% of Alexander’s outstanding common stock as of September 30, 2012. The filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
The company reported six properties totaling approximately 2.179 million square feet. Continuing-operations occupancy was 99.1% at September 30, 2012, compared with 98.1% at September 30, 2011 and 98.7% at December 31, 2011.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $48.642 million, versus $46.949 million | $142.821 million, versus $138.688 million |
| Operating income | $23.795 million, versus $24.106 million | $72.165 million, versus $73.829 million |
| Income from continuing operations | $12.410 million, versus $14.941 million | $38.008 million, versus $41.513 million |
| Net income attributable to Alexander’s | $18.856 million, versus $20.425 million | $57.230 million, versus $58.789 million |
| Net income per diluted share | $3.69, versus $4.00 | $11.20, versus $11.51 |
| FFO attributable to common stockholders | $27.461 million, or $5.38 per share | $82.893 million, or $16.23 per share |
| Dividends per common share | $3.75, versus $3.00 | $11.25, versus $9.00 |
Operating margin was approximately 48.9% for the quarter and 50.5% for the nine-month period, compared with approximately 51.3% and 53.2%, respectively, in the prior-year periods. Net income attributable to Alexander’s represented approximately 38.8% of quarterly revenue and 40.1% of nine-month revenue.
- Cash and cash equivalents were $508.363 million at September 30, 2012, compared with $506.619 million at December 31, 2011. Restricted cash was $89.185 million.
- Net cash provided by operating activities was $72.676 million for the nine months, compared with $67.923 million in 2011. Approximately $21.397 million related to discontinued operations.
- Investing activities used $1.918 million, including $6.502 million of real estate additions and construction spending, primarily at Rego Park II.
- Financing activities used $69.014 million, principally for $57.458 million of dividends and $11.156 million of debt repayments.
- Mortgages payable totaled $1.070 billion at September 30, 2012, down from $1.081 billion at December 31, 2011. Estimated fair value was $1.136 billion.
- Variable-rate debt, including amounts due to Vornado, totaled approximately $311.960 million. Management estimated that a 1% increase in base rates would reduce annual earnings by approximately $3.120 million, or $0.61 per diluted share.
- Total equity was $364.097 million, compared with $363.245 million at December 31, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.6% for the quarter and 3.0% for the nine months, primarily because of higher tenant expense reimbursements from increased real estate taxes, reimbursable operating expenses and occupancy.
- Operating expenses increased 13.7% for the quarter and 10.1% for the nine months. Drivers included higher real estate taxes, reimbursable and non-reimbursable costs, and bad debt expense.
- Interest and debt expense increased $2.192 million for the quarter and $1.593 million for the nine months. The 2011 periods benefited from a $2.561 million reversal of previously accrued interest expense related to an income-tax liability.
- Continuing-operations income declined 16.9% for the quarter and 8.4% for the nine months. FFO declined 4.8% for the quarter and 1.0% for the nine months.
- Income from discontinued operations increased to $20.002 million for the nine months from $18.762 million, primarily because of lower interest expense, despite lower quarterly results due mainly to higher bad debt expense.
- Dividends increased to $11.25 per share for the first nine months from $9.00 per share in the prior-year period.
- Bloomberg L.P. accounted for 45% of nine-month revenue, compared with 46% in 2011, creating substantial tenant concentration.
Outlook, Commentary, Risks and Unusual Items
- Management stated that operating cash flow and existing cash balances were expected to be adequate over the next 12 months for operations, regular dividends, debt amortization and maturities, and recurring capital expenditures.
- On October 21, 2012, after the reporting date, the company agreed to sell Kings Plaza Regional Shopping Center to The Macerich Company for $751 million. The sale was expected to close in the fourth quarter, subject to customary conditions. Estimated net proceeds were approximately $481 million after debt repayment and closing costs.
- The Kings Plaza transaction was expected to generate an approximately $602 million financial-statement gain and an approximately $624 million tax gain, with the tax gain expected to be distributed as a special long-term capital-gain dividend. The company could elect to receive up to $30 million of consideration in Macerich common shares.
- Kings Plaza’s results and related assets and liabilities were classified as discontinued operations. The transaction and related special dividend could materially affect future reported earnings, cash balances and per-share distributions.
- Debt maturities include approximately $78.246 million in March 2013 and $330.629 million in February 2014. Management noted that debt may be refinanced or repaid at maturity.
- The company is exposed to refinancing, interest-rate, tenant-credit, occupancy, real estate valuation, construction, insurance and local economic risks. Mortgage loans are generally nonrecourse, except for up to $75 million of the $320 million 731 Lexington Avenue mortgage in the event of a substantial casualty.
- Flushing litigation remained subject to an appeal and motion to re-argue after a court denied a $50 million damages claim; the company stated that any reasonably possible loss could not be estimated.
- An environmental remediation program at Kings Plaza had estimated aggregate costs of approximately $3 million; $500,000 had been paid and the remainder was covered by insurance.
- Approximately $3.998 million of standby letters of credit were outstanding. Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Completion timing, final proceeds, debt repayment amounts and consideration mix for the Kings Plaza sale.
- Whether the expected approximately $624 million tax gain is distributed as a special dividend and the resulting impact on liquidity and future recurring dividends.
- Refinancing plans and terms for the March 2013 and February 2014 mortgage maturities.
- Bloomberg’s lease status, credit condition and contribution to recurring revenue.
- Changes in occupancy, rental rates, tenant reimbursements and bad debt expense.
- Current status and potential exposure from the Flushing appeal, environmental remediation, insurance coverage and other contingencies.
- FFO should be evaluated alongside GAAP earnings and operating cash flow because management states that FFO is not a liquidity measure or a substitute for net income.