Vornado Realty Trust 10-Q Summary
Reporting period: Three months ended March 31, 2016. Vornado is an integrated REIT operating primarily through Vornado Realty L.P., with a portfolio concentrated in New York City and Washington, D.C. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
Financial Results and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $613.0 million | $606.8 million | +$6.2 million |
| Operating income (loss) | $(0.3) million | $167.7 million | $(168.0) million |
| Net income (loss) | $(91.6) million | $125.2 million | $(216.9) million |
| Net income (loss) attributable to common shareholders | $(114.2) million | $84.6 million | $(198.8) million |
| Diluted earnings per common share | $(0.61) | $0.45 | $(1.06) |
| FFO attributable to common shareholders plus assumed conversions | $203.1 million, or $1.07 per diluted share | $220.1 million, or $1.16 per diluted share | Down 7.7% per share |
| Net cash provided by operating activities | $276.6 million | $194.5 million | +$82.1 million |
| Dividends per common share | $0.63 | $0.63 | Unchanged |
Revenue growth was driven primarily by higher same-store rental income in New York, partly offset by lower Washington, D.C. rental income, reduced tenant reimbursements and lower fee and other income. Reported profitability was dominated by a $160.7 million non-cash impairment loss on the Skyline properties and $4.6 million of acquisition and transaction costs.
New York same-store EBITDA increased 5.5%, or 6.0% excluding Hotel Pennsylvania. Washington, D.C. same-store EBITDA decreased 2.9%, reflecting lower rental revenue and higher operating expenses. Consolidated EBITDA was $210.4 million versus $374.5 million, primarily because of the Skyline impairment.
Balance Sheet, Debt and Liquidity
- Total assets were $20.87 billion at March 31, 2016, compared with $21.14 billion at December 31, 2015. Net real estate was $14.59 billion.
- Cash and cash equivalents were $1.67 billion, down $162.1 million from year-end. Restricted cash was $109.1 million and marketable securities were $162.1 million.
- Consolidated debt was approximately $11.06 billion, including $9.84 billion of mortgages, $844.5 million of senior unsecured notes and $371.1 million of unsecured term debt. No revolving credit facility borrowings were outstanding at quarter-end.
- Debt maturities were $708.6 million during the remainder of 2016 and $363.8 million during 2017. Management stated that cash flow from continuing operations over the next 12 months is expected to fund operations, distributions, debt amortization and recurring capital expenditures; acquisitions and development may require additional borrowings or equity.
- Debt refinancing activity included a $700.0 million refinancing of 770 Broadway, generating approximately $330.0 million of net proceeds, and a $300.0 million refinancing of One Park Avenue.
- Common equity was $6.52 billion and total equity was $7.30 billion at March 31, 2016. The company had 188.8 million common shares outstanding.
Material Changes and Unusual Items
- Vornado notified the servicer of the $678.0 million Skyline mortgage that property cash flow was insufficient to service the debt and related costs and that Vornado would not fund additional shortfalls. The loan was transferred to the special servicer, and Vornado recorded the $160.7 million impairment loss.
- Washington, D.C. office occupancy was 81.9%, including 47.4% occupancy at the Skyline properties. Management expected 2016 Washington comparable EBITDA to be approximately $7 million to $11 million below 2015, due to further Skyline occupancy declines and properties taken out of service for redevelopment.
- Discontinued operations generated $0.7 million of income in Q1 2016 versus $16.2 million in Q1 2015. The prior-year amount included gains and transaction activity associated primarily with the Urban Edge Properties spin-off and property sales.
- Real estate fund investment income declined to $11.3 million from $24.1 million, while income attributable to Vornado declined to $5.3 million from $10.6 million.
- Development and construction spending was $127.3 million during the quarter, and additions to real estate were $77.2 million. Major projects include 220 Central Park South, The Bartlett, 512 West 22nd Street and 61 Ninth Avenue.
- Vornado adopted ASU 2015-02, which identified additional variable interest entities but had no material effect other than expanded disclosures. The company was evaluating the future effects of new revenue recognition, financial instruments, lease and share-based compensation standards.
Outlook, Risks and Contingencies
- Management expects continuing-operations cash flow to cover near-term operating needs, distributions, debt amortization and recurring capital expenditures, but development, redevelopment and acquisitions may require external financing.
- Construction commitments totaled approximately $810.7 million, and expected additional capital funding to partially owned entities totaled approximately $80.0 million.
- Guarantees and master leases totaled approximately $481.0 million. Letters of credit outstanding under a revolving facility totaled $32.5 million.
- Interest-rate exposure included $3.63 billion of variable-rate consolidated debt. Management estimated that a 1% increase in base rates would reduce annual net income by approximately $48.2 million, or $0.25 per diluted share, after considering noncontrolling interests.
- Material risks include refinancing and interest-rate exposure, declining Skyline occupancy and loan servicing issues, construction cost and completion risk, tenant credit and occupancy risk, real estate valuation risk, availability and cost of insurance, environmental liabilities and market conditions.
- Management reported no material changes to the risk factors disclosed in the 2015 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Investor Verification Checklist
- Verify the status, collateral value, servicing process and ultimate resolution of the $678.0 million Skyline mortgage and related properties.
- Reconcile reported net loss to FFO and assess the recurring operating impact after excluding the Skyline impairment and other nonrecurring items.
- Review debt maturities through 2017, refinancing plans, covenant compliance and available liquidity.
- Monitor Washington, D.C. occupancy, BRAC-related leasing and properties taken out of service for redevelopment.
- Assess funding requirements and execution risk for the approximately $810.7 million of construction commitments and major development projects.
- Evaluate whether New York same-store rent and EBITDA growth can offset weakness in Washington, D.C. and Hotel Pennsylvania.
- Confirm the sustainability of the $0.63 quarterly common dividend relative to FFO, operating cash flow and capital requirements.