Business Context and Reporting Period
Alexander's, Inc. (NYSE: ALX) is a Real Estate Investment Trust (REIT) incorporated in Delaware, engaged in leasing, managing, developing, and redeveloping properties in the greater New York City metropolitan area. The company is managed by Vornado Realty Trust. This summary covers the fiscal year ended December 31, 2007.
The portfolio consists of seven properties, including the 731 Lexington Avenue multi-use building in Manhattan, Kings Plaza Regional Shopping Center in Brooklyn, Rego Park I in Queens, and the Paramus land lease in New Jersey. A significant portion of the portfolio is under development (Rego Park II) or planned for development (Rego Park III).
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $207,980,000 | $198,772,000 |
| Net Income (Loss) | $114,341,000 | ($74,983,000) |
| Diluted EPS | $22.44 | ($14.92) |
| Funds from Operations (FFO) | $136,284,000 | ($53,242,000) |
| Total Debt | $1,110,197,000 | $1,068,498,000 |
| Cash and Cash Equivalents | $560,231,000 | $615,516,000 |
| Stockholders' Equity | $135,103,000 | $27,182,000 |
Debt Profile: Total debt to total enterprise value was 47.6% at year-end. The company holds a mix of fixed-rate mortgages and a variable-rate construction loan for the Rego Park II project.
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $114.3 million in 2007, a significant improvement from a net loss of $75.0 million in 2006. This swing was primarily driven by a $43.5 million reversal of Stock Appreciation Rights (SARs) compensation expense in 2007, compared to a $148.6 million accrual of SARs expense in 2006.
- Revenue Growth: Total revenues increased by approximately 4.6% to $208.0 million. This was driven by increased property rentals ($141.6 million vs. $137.1 million) due to the lease-up of remaining space at 731 Lexington Avenue and the commencement of a ground lease with Lowe's at Kings Plaza.
- Operating Expenses: Operating expenses decreased slightly to $70.5 million from $72.0 million, aided by lower costs at the Kings Plaza energy plant.
- Development Activity: Capital expenditures increased significantly to $110.3 million, primarily related to the Rego Park II shopping center development. As of year-end, $156.7 million had been expended on the project.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance: Management anticipates that cash from operations and existing balances will fund operations and debt amortization for the next twelve months. The company notes that the "credit crisis" and stress in capital markets may negatively impact real estate transactions and cap rates in the future, potentially leading to lower occupancy and effective rents.
Key Risks:
- Tenant Concentration: Bloomberg L.P. accounted for 32% of consolidated revenues in 2007. Loss of this tenant or deterioration in their credit quality would materially affect results.
- Development Risk: The Rego Park II project (estimated cost $410 million) faces risks regarding completion timing and budget adherence. There is no assurance the project will be completed on time or within budget.
- Environmental Liability: An oil spill discovered in 2006 at Kings Plaza requires remediation. Estimated costs are $2.5 million, with $426,000 paid as of year-end. A claim has been made under insurance subject to a $500,000 deductible.
- Related Party Transactions: Vornado Realty Trust owns 32.8% of the company and manages its properties. Significant fees are owed to Vornado for leasing, development, and management services.
- Dividend Policy: Due to Net Operating Loss (NOL) carryovers of approximately $1.6 million, the company paid no dividends in 2007 or 2006 and does not expect to pay regular dividends until NOLs are utilized.
Investor Verification Checklist
- SARs Liability: Verify the status of the $141.4 million liability for Stock Appreciation Rights (SARs) and the potential cash outflow if exercised, given the cash settlement requirement.
- Bloomberg Lease: Confirm the status and terms of the lease with Bloomberg L.P., which represents nearly one-third of total revenue.
- Rego Park II Financing: Review the terms of the $350 million construction loan (LIBOR + 1.20%) and monitor construction progress against the $410 million budget.
- Environmental Remediation: Track the progress and final cost of the Kings Plaza oil spill cleanup to ensure it remains within the estimated $2.5 million range.
- Dividend Eligibility: Monitor the utilization of Net Operating Loss (NOL) carryovers to determine when the company might resume dividend distributions.