Vornado Realty Trust — Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust is an integrated REIT operating primarily through Vornado Realty L.P. Its portfolio includes New York and Washington, D.C. office properties, retail properties, the Merchandise Mart, and investments in partially owned entities, including Toys “R” Us, Alexander’s and Lexington Realty Trust. This unaudited filing covers the three months ended March 31, 2010, with comparisons to the three months ended March 31, 2009. The company had 181.9 million common shares outstanding at March 31, 2010 and owned approximately 92.4% of the Operating Partnership.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenues | $696.3 million | $678.6 million | Up $17.8 million |
| Operating income | $222.7 million | $188.9 million | Up $33.7 million |
| Net income | $232.5 million | $156.4 million | Up $76.1 million |
| Net income attributable to Vornado | $214.6 million | $140.1 million | Up $74.4 million |
| Net income attributable to common shareholders | $200.3 million | $125.8 million | Up $74.4 million |
| Diluted earnings per share | $1.09 | $0.80 | Up $0.29 |
| FFO attributable to common shareholders plus assumed conversions | $353.8 million, or $1.87 per diluted share | $268.6 million, or $1.65 per diluted share | Up 31.8% in dollars |
| Net cash provided by operating activities | $288.0 million | $169.8 million | Up $118.2 million |
| Common dividend per share | $0.65 | $0.95 | Down $0.30 |
Operating margin was approximately 32.0% in Q1 2010 versus 27.8% in Q1 2009. Net income attributable to common shareholders represented approximately 28.8% of revenue versus 18.5% in the prior-year quarter.
- Cash and cash equivalents were $788.9 million at March 31, 2010, compared with $535.5 million at December 31, 2009.
- Consolidated debt was $11.09 billion, including $8.43 billion of notes and mortgages, $1.22 billion of senior unsecured notes, $486.1 million of exchangeable debentures, $447.3 million of convertible debentures and $500.2 million drawn on revolving facilities.
- Debt fair value was approximately $394.8 million below carrying value. Consolidated variable-rate debt was $2.31 billion; management estimated that a 1% increase in base rates would reduce annual net income by approximately $27.6 million after the effect of noncontrolling interests.
- The company’s pro rata share of debt of unconsolidated entities was $2.82 billion and was non-recourse to Vornado.
- Net cash used in financing activities was $41.9 million, after $118.0 million of common dividends, $14.3 million of preferred dividends and $525.2 million of debt repayments.
- Development and construction in progress expenditures were $37.6 million, and cash capital expenditures and leasing commissions were $37.9 million.
Material changes versus the prior comparable period
- Revenue increased 2.6%, principally from higher leasing activity, development and redevelopment, and increased fee and other income. Tenant expense reimbursements declined by $5.1 million.
- Operating expenses were broadly stable, while general and administrative expense declined by $30.3 million. The prior-year period included a $32.6 million charge for the voluntary surrender of executive equity awards and $2.8 million of pension termination costs.
- Income from Toys “R” Us increased to $125.9 million from $97.1 million. Toys’ results are highly seasonal and are recorded on a one-quarter lag; historically, more than 80% of its annual net income occurs in its fiscal fourth quarter.
- Interest and debt expense declined $18.0 million, primarily due to the acquisition, repayment and retirement of approximately $2.1 billion of convertible and senior unsecured debt, partly offset by interest on debt issued in September 2009.
- Same-store EBITDA increased year over year on both GAAP and cash bases in New York office, Washington, D.C. office and retail, but declined in the Merchandise Mart. GAAP same-store EBITDA changes were 1.2%, 6.4%, 3.8% and negative 6.3%, respectively.
- Occupancy at March 31, 2010 was 95.3% for New York office, 94.4% for Washington, D.C. office, 91.2% for retail, 87.5% for Merchandise Mart office and 89.1% for Merchandise Mart showroom.
- Net income benefited from a $6.0 million gain related to Lexington’s stock issuance, a $2.4 million gain on redemption of preferred units, and a $2.4 million gain on condominium sales. These were partly offset by a $10.1 million litigation accrual.
Guidance, outlook, risks and unusual items
Management stated that cash flow from continuing operations over the next twelve months is expected to fund operations, distributions, debt amortization and recurring capital expenditures. Significant acquisitions and development expenditures may require additional borrowings, equity offerings or asset sales. No specific earnings or FFO guidance was provided.
- Debt maturities were $532.1 million during the remainder of 2010 and $2.28 billion during 2011. Management expected to refinance or repay maturities using cash and revolving facilities, but stated that refinancing outcomes were not assured.
- Three property-level loans were in default or had been placed with special servicers: the Springfield Mall mortgage with a principal balance of $164.3 million, a California retail property loan of $17.5 million, and the High Point Complex mortgage. The company was negotiating with special servicers regarding resolution.
- Additional near-term financing pressure included a $59.0 million construction loan extended only to May 7, 2010 and a separate $36.0 million loan that had matured and was subject to refinancing or extension discussions.
- Vornado completed a $500.0 million offering of 4.25% senior unsecured notes due April 1, 2015 and retained approximately $496.0 million of net proceeds. Revolving credit borrowings declined by $352.0 million during the quarter.
- Vornado committed to fund approximately $18.4 million of additional capital for partially owned entities and estimated $400 million to $425 million for the proposed 220 Central Park South development.
- A Pentagon Row legal judgment required sale of land to tenants for $15.0 million. Vornado recorded a $10.1 million loss accrual and intended to appeal. The tenants’ damages and punitive damages claims were denied.
- Other litigation included the longstanding Stop & Shop rent dispute and a threatened new action by Donald Trump concerning partnership interests. Management stated that these matters were not expected to have a material adverse effect, although outcomes were uncertain.
- Insurance availability and pricing, particularly for terrorism and earthquake coverage, could affect the company’s ability to finance or refinance properties.
- Management stated that the economic recovery was emerging but that its timing and effect on future results could not be quantified. The filing also cautions that quarterly results are not necessarily indicative of full-year results.
Investor verification checklist
- Verify the status, restructuring terms and ultimate resolution of the Springfield Mall, California retail and High Point Complex loan defaults.
- Review the 2010–2011 debt maturity schedule, refinancing capacity, covenant headroom and availability under revolving credit facilities.
- Separate recurring operating performance from seasonal Toys “R” Us income and nonrecurring gains, including the Lexington gain, preferred-unit redemption gain and condominium gains.
- Assess occupancy, leasing spreads, tenant improvements and leasing commissions, particularly the negative New York office re-leasing spread and lower Merchandise Mart performance.
- Evaluate the funding requirements and execution risks for the $400 million to $425 million 220 Central Park South commitment and other development projects.
- Monitor the Pentagon Row appeal, Stop & Shop litigation and any new Trump-related proceedings.
- Reconcile FFO and EBITDA to GAAP results and review the company’s non-GAAP definitions before comparing them with other REITs.