Alexander’s, Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Alexander’s, Inc. is a New York metropolitan-area REIT that leases, manages, develops and redevelops seven properties totaling approximately 2.437 million square feet. Vornado Realty Trust manages the company and leases and develops its properties; Vornado owned 32.4% of outstanding common stock as of September 30, 2018. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
The portfolio was 99.3% occupied at September 30, 2018. Bloomberg L.P. represented approximately 46% of total revenue in both nine-month periods.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $59.1 million | $58.1 million | $175.3 million | $172.5 million |
| Operating income | $23.4 million | $27.2 million | $75.8 million | $80.9 million |
| Operating margin | 39.5% | 46.8% | 43.2% | 46.9% |
| Net income | $15.0 million | $20.3 million | $22.9 million | $62.6 million |
| Net income per diluted share | $2.93 | $3.97 | $4.47 | $12.24 |
| FFO, non-GAAP | $23.1 million | $28.6 million | $47.7 million | $86.8 million |
| FFO per diluted share | $4.52 | $5.59 | $9.32 | $16.98 |
Revenue increased 1.8% in the third quarter and 1.6% for the nine-month period. Property rentals increased modestly, while expense reimbursements rose primarily because of higher reimbursable real estate taxes and operating expenses.
Operating expenses increased 24.2% in the quarter and 11.6% year to date, primarily because of higher bad debt expense associated with Sears, higher real estate taxes and higher reimbursable operating expenses. Interest and debt expense increased to $11.3 million in the quarter and $32.1 million year to date, primarily due to higher LIBOR and the 2017 refinancing of the 731 Lexington Avenue office loan.
Net income and FFO declined substantially. The nine-month results included a $23.8 million discontinued-operations charge for potentially additional New York City real property transfer taxes, a $5.6 million decrease in the fair value of Macerich shares, and a $3.0 million Sears straight-line rent receivable write-off. The quarterly results included the $3.0 million Sears write-off.
Cash flow, balance sheet, debt and liquidity
| Metric | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $303.7 million | $307.5 million |
| Cash plus restricted cash | $309.2 million | $393.3 million |
| Mortgages payable, net | $1.163 billion | $1.240 billion |
| Total assets | $1.501 billion | $1.632 billion |
| Total equity | $298.1 million | $344.0 million |
- Net cash provided by operating activities was $66.7 million for the first nine months of 2018, compared with $72.2 million in the prior-year period.
- Net cash used in investing activities was $0.2 million, compared with $202.4 million in 2017, when the company funded the Rego Park II loan participation.
- Net cash used in financing activities was $150.5 million, including $159.5 million of debt repayments and $69.1 million of dividends paid.
- Dividends were $4.50 per share in the third quarter and $13.50 per share year to date, compared with $4.25 and $12.75, respectively, in 2017.
- Debt consisted primarily of variable-rate mortgages. The September 30, 2018 debt balance was $1.171 billion before deferred issuance costs, with a weighted-average interest rate of 3.41%. A 1% increase in base rates would have an estimated annual effect of approximately $11.0 million before considering the interest-rate cap.
- The company had a $500 million interest-rate cap limiting LIBOR to 6.0% and stated that operating cash flow and existing cash balances were expected to fund operations, dividends, debt amortization and capital expenditures over the following 12 months.
Material changes, outlook and unusual items
- Sears filed for Chapter 11 bankruptcy on October 15, 2018 and indicated it intended to reject its 195,000-square-foot Rego Park I lease, which had generated approximately $10.3 million of annual revenue. Alexander’s wrote off a $3.0 million straight-line rent receivable and accelerated $0.3 million of deferred leasing costs.
- Toys “R” Us rejected its 47,000-square-foot Rego Park II lease effective June 30, 2018. The lease represented approximately $2.6 million of annual revenue. Alexander’s wrote off a $0.5 million straight-line rent receivable and accelerated $0.8 million of tenant-improvement and leasing-cost balances.
- The company paid and accrued $23.8 million related to contested potential New York City transfer taxes from the 2012 Kings Plaza sale. The matter is on hold pending an appeal by a related Vornado joint venture.
- Alexander’s adopted revenue recognition and financial-instrument accounting updates in 2018. ASC 606 had no material impact; changes in the fair value of Macerich shares began flowing through earnings rather than accumulated other comprehensive income.
- The company planned to adopt the new lease standard on January 1, 2019 using the permitted transition option. The filing indicates that the Flushing ground lease will result in recognition of a right-of-use asset and lease liability.
- The Paramus mortgage was extended on October 3, 2018 to October 4, 2021 at a fixed 4.72% rate. Rego Park II debt was scheduled to mature in November 2018, subject to the company’s refinancing or repayment decisions.
- No formal earnings or operating guidance was provided. Management stated that future results depend on occupancy, tenant credit, rental rates, capital availability, refinancing conditions, economic conditions and other real estate risks.
Principal risks and contingencies
- Tenant concentration is significant: Bloomberg accounted for approximately 46% of revenue, creating material exposure to its renewal, creditworthiness and continued occupancy.
- Sears-related vacancy and Toys “R” Us lease rejection may reduce rental income and require re-leasing expenditures.
- Approximately $1.103 billion of debt was variable rate at September 30, 2018, exposing the company to higher interest expense as rates rise.
- The company faces refinancing risk on maturing mortgages and may need to refinance or repay debt on acceptable terms.
- The company carries insurance and terrorism-related exposure, including responsibility for specified deductibles, uninsured losses and certain NBCR losses.
- The remaining Sears litigation claim was estimated at approximately $0.65 million, with reasonably possible losses not expected to exceed that amount. Standby letters of credit totaled approximately $1.0 million.
Investor verification checklist
- Verify the status and final resolution of the contested $23.8 million Kings Plaza transfer-tax assessment and any potential recovery.
- Assess the financial and leasing impact of Sears and Toys “R” Us vacancies, including re-leasing costs and replacement rental rates.
- Review Bloomberg’s lease term, renewal prospects and credit metrics because of its approximately 46% revenue contribution.
- Confirm the refinancing, repayment or extension of the Rego Park II mortgage and monitor the company’s variable-rate debt exposure.
- Evaluate whether operating cash flow continues to cover dividends, capital expenditures, debt maturities and other obligations.
- Track the effect of ASC 842 adoption on reported assets, liabilities and lease-related disclosures beginning January 1, 2019.