Vornado Realty Trust — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013, including fourth-quarter results. Vornado is an integrated REIT operating primarily through Vornado Realty L.P.; it owns or controls office, retail, residential, hotel and other real-estate investments, concentrated in New York City and Washington, DC/Northern Virginia. Vornado owned approximately 94.0% of the Operating Partnership at year-end.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $2.761 billion | $2.736 billion | Up 0.9% |
| Operating income | $874.2 million | $664.6 million | Up 31.6% |
| Net income attributable to common shareholders | $392.0 million; $2.09 diluted EPS | $549.3 million; $2.94 diluted EPS | Down 28.6% |
| Income from continuing operations attributable to common shareholders | $(0.03) diluted EPS | $1.46 diluted EPS | Declined materially |
| FFO attributable to common shareholders plus assumed conversions | $641.0 million; $3.41 per diluted share | $818.6 million; $4.39 per diluted share | Down 21.7% |
| Cash flow from operating activities | $1.041 billion | $825.0 million | Up 26.1% |
| Debt | $9.979 billion | $11.127 billion | Down $1.149 billion |
| Cash and cash equivalents | $583.3 million | $960.3 million | Down $377.0 million |
| Total assets | $20.097 billion | $22.065 billion | Down 8.9% |
Reported 2013 net income and FFO were significantly affected by gains on property dispositions, impairment charges, the loss and impairment of the Toys “R” Us investment, and marketable-securities activity. FFO is a non-GAAP measure and does not represent cash generated from operations.
Operations and Portfolio
- At year-end, the portfolio included approximately 73.2 million square feet, with Vornado’s ownership share of approximately 62.2 million square feet.
- Reported occupancy was 96.8% in New York, 83.4% in Washington, DC, and 94.3% in Retail Properties.
- Same-store EBITDA increased 5.5% in New York and 2.8% in Retail Properties, but declined 2.8% in Washington, DC, on a GAAP basis.
- Approximately 96% of 2013 EBITDA, excluding comparability items, came from properties in the New York City and Washington, DC/Northern Virginia metropolitan areas.
Material Changes Versus 2012
- Revenue increased modestly, while operating income improved due primarily to lower Cleveland Medical Mart development expenses and stronger New York and retail property performance.
- New York same-store EBITDA benefited from higher office and retail rents, signage revenue and management fees. Washington, DC performance weakened because of BRAC-related move-outs and a sluggish leasing environment.
- Vornado recognized a $362.4 million loss from its 32.6% Toys “R” Us investment, including a $240.8 million non-cash impairment charge, compared with $14.9 million of income in 2012.
- Vornado sold 20 assets and marketable securities during 2013 for aggregate gross proceeds of approximately $1.8 billion, with net proceeds of approximately $1.3 billion as described in the Business section; the MD&A separately reports $1.430 billion of asset dispositions and approximately $940 million of net proceeds for the transactions included in that analysis.
- Major 2013 acquisitions included interests in 650 Madison Avenue, 655 Fifth Avenue, the 220 Central Park South development site and three Manhattan street-retail properties.
- Debt declined primarily through substantial repayments and refinancing activity. Fixed-rate debt represented approximately 89% of consolidated debt at year-end, based on reported balances.
- Vornado issued $300 million of 5.40% Series L preferred shares and redeemed its Series F and H preferred shares and Series D-15 preferred units.
Liquidity, Debt and Cash Requirements
- Available borrowing capacity under revolving credit facilities was approximately $2.171 billion, net of borrowings and letters of credit. Vornado reported compliance with applicable debt covenants at December 31, 2013.
- Consolidated debt had a weighted-average interest rate of 4.44%; variable-rate debt was $1.065 billion at a weighted-average rate of 2.01%.
- Debt maturities were $142.8 million in 2014 and $943.7 million in 2015. Management may refinance or repay maturing debt using cash or revolving facilities.
- Management expected continuing-operations cash flow over the following twelve months to fund operations, distributions, debt amortization and recurring capital expenditures. Acquisition and development needs may require additional borrowing or equity issuance.
- Expected 2014 capital expenditures and leasing commissions were approximately $273 million, excluding certain partially owned entities.
- Planned development and redevelopment commitments included approximately $130 million for Springfield Mall, $118 million for Marriott Marquis retail and signage, $27.3 million for Vornado’s share of 280 Park Avenue, and additional funding for 220 Central Park South and Pentagon City projects.
Outlook, Risks and Unusual Items
- Management estimated that 2014 Washington, DC EBITDA would be $10 million to $15 million below 2013 levels because of BRAC-related vacancies and weak leasing conditions.
- Vornado declared a $0.73 quarterly common dividend for January 2014, indicating an annual rate of $2.92 per common share. Estimated 2014 cash requirements included approximately $547 million of common dividends, $82 million of preferred dividends and $33 million of Operating Partnership distributions.
- Subsequent events included a $600 million loan secured by the 220 Central Park South site and an agreement to sell Broadway Mall for $94 million. Vornado recorded a $13.4 million impairment on Broadway Mall in the fourth quarter of 2013.
- Montehiedra Town Center’s mortgage was transferred to a special servicer after tenant departures reduced operating cash flow below debt-service requirements. Vornado was negotiating a restructuring, with no assurance regarding timing or outcome.
- Key risks include geographic concentration, occupancy and rent pressure, tenant defaults and bankruptcies, interest-rate and refinancing risk, capital-market access, development execution, property impairments, retail-sector weakness, insurance availability, environmental and regulatory exposure, cybersecurity incidents, and conflicts involving related parties.
- Vornado’s 32.6% Toys investment and its substantial non-recourse debt were important sources of earnings volatility. Toys had approximately $5.7 billion of debt at November 2, 2013, of which Vornado’s pro rata share was approximately $1.9 billion, none recourse to Vornado.
- The filing states that financial statements required under Rule 3-09 of Regulation S-X for Toys “R” Us were omitted and that an amendment would be filed when those statements became available.
- Management and Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile recurring operating performance and FFO excluding the Toys impairment, disposition gains, J.C. Penney losses, Stop & Shop settlement income and other comparability items.
- Review the 2014 and 2015 debt maturities, refinancing assumptions, covenant headroom and actual availability under revolving facilities.
- Assess Washington, DC leasing, BRAC vacancy resolution and the estimated $10 million to $15 million 2014 EBITDA decline.
- Evaluate the recoverability and future funding requirements of Toys, the Real Estate Fund, development projects and partially owned entities.
- Monitor the Montehiedra special-servicing process, Broadway Mall disposition and other property-level contingencies.
- Confirm the final Rule 3-09 financial statements for Toys “R” Us and any related amendment to the Form 10-K.