Vornado Realty Trust — FY2009 Form 10-K Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P., which Vornado owned approximately 92.5% of at December 31, 2009. The company owns and manages office, retail and showroom properties, with significant concentrations in New York City and Washington, D.C./Northern Virginia. It also holds interests in Toys “R” Us, Alexander’s, Lexington Realty Trust, 555 California Street, Hotel Pennsylvania, mezzanine loans and marketable securities.
This filing covers the fiscal year ended December 31, 2009, including fourth-quarter results. Michael D. Fascitelli became Chief Executive Officer on May 14, 2009, succeeding Steven Roth, who remained Chairman.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenues | $2.743 billion | $2.693 billion | +1.9% |
| Operating income | $795.8 million | $811.0 million | -1.9% |
| Net income | $128.5 million | $411.4 million | -68.8% |
| Net income attributable to common shareholders | $49.1 million | $302.2 million | -83.8% |
| Diluted earnings per common share | $0.28 | $1.91 | Down $1.63 |
| FFO attributable to common shareholders plus assumed conversions | $583.6 million, or $3.36 per diluted share | $813.1 million, or $4.97 per diluted share | -28.2%; per share -32.4% |
| Net cash provided by operating activities | $633.6 million | $817.8 million | -22.5% |
| Cash and cash equivalents | $535.5 million | $1.527 billion | -65.0% |
| Consolidated debt | $10.940 billion | $12.438 billion | -12.0% |
| Total assets | $20.185 billion | $21.418 billion | -5.8% |
Operating income represented approximately 29.0% of revenues. Net income attributable to common shareholders represented approximately 1.8% of revenues, reflecting substantial non-cash charges, investment losses and debt-extinguishment costs. Consolidated EBITDA was $1.672 billion, compared with $1.749 billion in 2008, while same-store cash-basis EBITDA increased in New York office, Washington office and retail properties but declined in Merchandise Mart properties.
At December 31, 2009, total debt including Vornado’s pro rata share of debt of partially owned entities was approximately $14.1 billion, equal to approximately 47% of total enterprise value. Consolidated variable-rate debt was $2.658 billion; management estimated that a one-percentage-point increase in base rates would reduce annual net income by approximately $26.6 million on consolidated variable-rate debt, or approximately $35.3 million including nonconsolidated debt.
Fourth-quarter 2009
- Revenue was $719.0 million, compared with $695.2 million in the fourth quarter of 2008.
- Net loss attributable to common shareholders was $151.2 million, or $0.84 per diluted share, compared with a $227.0 million loss, or $1.47 per diluted share.
- FFO attributable to common shareholders plus assumed conversions was approximately $20,000, or $0.00 per diluted share, compared with negative FFO of $88.2 million, or $0.57 per diluted share.
- Fourth-quarter results included approximately $189.5 million of net items affecting comparability, primarily development-related write-downs, mezzanine-loan loss accruals, impairment charges and debt-extinguishment losses.
Material changes versus the prior comparable period
- Revenue increased modestly, primarily from leasing activity and higher contributions from the New York office, Washington office and retail segments. Merchandise Mart revenue declined due to lower trade-show activity and leasing performance; Hotel Pennsylvania revenue also declined materially due to lower RevPAR.
- FFO declined substantially because of a $190.7 million mezzanine-loan loss accrual, development-related write-downs, partially owned entity impairments, the write-off of unamortized equity-award costs and debt-extinguishment losses.
- The company’s mezzanine-loan carrying amount declined to $203.3 million from $472.5 million, net of a $190.7 million valuation allowance.
- Consolidated debt decreased by approximately $1.5 billion, primarily because the company repurchased and retired approximately $1.9 billion face amount of convertible senior debentures and $352.7 million face amount of senior unsecured notes.
- Cash declined by approximately $991.4 million, primarily because of debt repurchases and repayments. Operating cash flow remained positive but declined to $633.6 million.
- The company issued 17.25 million common shares for net proceeds of $710.2 million and issued $460 million of 7.875% senior unsecured notes due 2039, receiving approximately $446 million net proceeds.
- Occupancy at December 31, 2009 was 95.5% for New York office, 94.9% for Washington office, 91.6% for retail properties and 88.5% for Merchandise Mart properties. New York and Washington office occupancy declined slightly from 2008, while Merchandise Mart occupancy fell materially.
Guidance, outlook, risks and unusual items
Management stated that cash flow from continuing operations over the following twelve months was expected to be adequate for operations, distributions, debt amortization and recurring capital expenditures. No specific earnings or FFO guidance was provided.
- Development and redevelopment projects had an estimated total budget of approximately $200 million. Approximately $71 million remained to be spent, substantially during 2010, including approximately $18 million expected to be funded through existing construction loans.
- Estimated 2010 capital expenditures and leasing commissions totaled approximately $210 million, excluding anticipated capital expenditures of unconsolidated entities.
- Management expected approximately $507 million of cash common dividends and $57 million of preferred dividends for 2010 if the stated dividend policy continued. Beginning with the first-quarter 2010 dividend, the company returned to an all-cash common dividend policy.
- Debt maturities were approximately $538.5 million in 2010 and $2.448 billion in 2011. The company expected to refinance or repay maturities using cash balances and revolving credit facilities.
- The Springfield Mall debt had been referred to the special servicer because renovation and repositioning plans might require debt renegotiation.
- Major risks include recessionary pressure on tenant demand and rents, tenant bankruptcies, concentrated exposure to New York and Washington markets, capital-market illiquidity, refinancing risk, interest-rate volatility, development delays or cost overruns, impairment risk and risks associated with Toys “R” Us and other partially owned entities.
- Unusual items included $190.7 million of mezzanine-loan loss accruals, $87.8 million of impairment and other losses, $25.9 million of net debt-extinguishment losses, a $32.6 million write-off from voluntary surrender of senior executive equity awards, and $27.1 million of income from a forfeited deposit on a terminated land sale, offset by a $24.9 million impairment charge on the land.
- Dispositions included the sale of 1999 K Street for $207.8 million and 15 retail properties for $55.0 million, generating aggregate net gains of approximately $45.3 million.
- Pending legal matters included the Stop & Shop dispute over approximately $5 million of annual additional rent and litigation relating to Pentagon Row. Management stated that these matters were not expected to have a material adverse effect, but the Stop & Shop claim remained unresolved.
- The filing states that financial statements required under Rule 3-09 of Regulation S-X for Toys “R” Us and Lexington Realty Trust were omitted and that an amendment would be filed when those statements became available.
Most important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and determine the recurring versus nonrecurring components of the 2009 decline.
- Review the $190.7 million mezzanine-loan valuation allowance and the collectibility and collateral supporting the remaining $203.3 million carrying amount.
- Assess 2010 and 2011 refinancing requirements, available revolver capacity, covenant compliance and the company’s ability to maintain liquidity after debt repayments, dividends and capital expenditures.
- Evaluate occupancy, lease expirations and releasing spreads, particularly the 2010–2012 office maturities and weaker Merchandise Mart performance.
- Monitor Springfield Mall debt negotiations, development commitments and the approximately $90.4 million of capital commitments to partially owned entities.
- Review the financial condition and debt maturities of Toys “R” Us, Alexander’s, Lexington and other unconsolidated investments, including the one-quarter reporting lag for Toys and Lexington.
- Confirm the subsequent SEC filing of the omitted Rule 3-09 financial statements and assess any effect on reported results.