Alexander’s, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. Alexander’s is a REIT with seven properties totaling 2.178 million square feet in the greater New York City area. Vornado Realty Trust manages the company and leases and develops its properties; Vornado owned 32.4% of outstanding common stock at September 30, 2015.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $52.4 million | $50.1 million | $155.1 million | $149.5 million |
| Operating income | $23.8 million | $24.4 million | $72.1 million | $72.9 million |
| Net income | $18.2 million | $17.7 million | $53.3 million | $49.8 million |
| Net income per diluted share | $3.55 | $3.46 | $10.43 | $9.74 |
| FFO | $26.1 million | $24.9 million | $75.9 million | $71.5 million |
| FFO per diluted share | $5.11 | $4.88 | $14.85 | $13.99 |
- Portfolio occupancy was 99.7% at September 30, 2015.
- Net cash provided by operating activities was $72.3 million for the first nine months, compared with $66.4 million in the prior-year period.
- Cash and cash equivalents were $252.9 million, compared with $227.8 million at December 31, 2014. Restricted cash was $84.8 million and marketable securities were $41.1 million.
- Mortgages payable increased to $1.060 billion from $1.033 billion at year-end 2014. Estimated fair value of debt was $1.054 billion.
- Net cash used in investing activities was $17.1 million, primarily reflecting $41.9 million of construction and real estate additions.
- Net cash used in financing activities was $30.1 million, including $53.7 million of dividends, $322.4 million of debt repayments, and $350.0 million of borrowing proceeds.
- Dividends were $3.50 per share for the quarter and $10.50 per share for the nine-month period, compared with $3.25 and $9.75, respectively, in 2014.
Material changes versus the prior comparable period
- Revenue increased 4.7% in the quarter and 3.7% year to date, driven primarily by higher tenant expense reimbursements and increased rental income.
- Net income increased 2.7% in the quarter and 7.2% year to date. FFO increased 4.9% in the quarter and 6.2% year to date.
- Operating expenses rose $2.1 million in the quarter and $5.0 million year to date, mainly from higher reimbursable real estate taxes and operating costs. Year-to-date expense also reflected the burn-off of certain 731 Lexington Avenue tax benefits.
- Interest and debt expense declined $1.4 million in the quarter and $4.8 million year to date, principally because of refinancing activity at 731 Lexington Avenue.
- The company refinanced the retail portion of 731 Lexington Avenue on August 5, 2015 with a $350.0 million interest-only loan at LIBOR plus 1.40%, maturing in August 2020 with two one-year extension options. Net proceeds were approximately $26.0 million.
- Depreciation and amortization increased as portions of The Alexander apartment tower were placed in service.
- Comprehensive income was $19.4 million in the quarter and $49.8 million year to date; year-to-date results included a $3.5 million decline in unrealized gains on available-for-sale securities.
Development, outlook, risks and unusual items
- The Alexander, a 312-unit, 255,000-square-foot apartment tower above Rego Park II, has an estimated total cost of approximately $125.0 million; $113.0 million had been incurred by September 30, 2015. Remaining construction was expected to be substantially complete and receive a TCO by December 31, 2015.
- Management expects operating cash flow and existing cash balances to fund operations, dividends, debt amortization, recurring capital expenditures and The Alexander development expenditures over the following twelve months.
- Bloomberg represented approximately 45% of nine-month revenue, creating significant tenant concentration risk. Bloomberg extended leases covering 188,608 square feet for five years, but the rental rate for the extension period remained under negotiation.
- The company is exposed to variable interest rates on approximately $914.2 million of debt. Management estimated that a 1% increase in base rates would reduce annual earnings by approximately $9.1 million, or $1.79 per diluted share. An interest-rate cap covers $300.0 million of notional debt with a 6.0% LIBOR cap.
- Sears litigation concerning water intrusion, fires and alleged Americans with Disabilities Act violations at Rego Park I seeks damages of at least $4.0 million plus estimated future damages of at least $25.0 million. The company stated that reasonably possible losses cannot be estimated.
- On October 15, 2015, the New York City Department of Finance assessed an additional $20.3 million of transfer taxes, interest and penalties related to the 2012 Kings Plaza sale. The company disputes the assessment and believes a loss is not probable.
- Insurance coverage includes up to $1.7 billion for property, rental value and terrorism risks, but the company remains responsible for deductibles and losses exceeding coverage. Future coverage may be unavailable on reasonable terms.
- The Paramus property is subject to an IKEA purchase option in 2021 for $75.0 million. If exercised, the company expects approximately $7.0 million of net cash proceeds and an approximately $60.0 million gain.
- No material changes to previously disclosed risk factors were reported. The company stated that disclosure controls and procedures were effective as of September 30, 2015.
Important facts for investors to verify
- Completion, lease-up and final cost of The Alexander development.
- Final rental rate and long-term economics of Bloomberg’s extended leases.
- Refinancing and maturity risks, particularly the March 2016 Rego Park I loan and exposure to LIBOR.
- Potential financial impact and resolution of the Sears litigation and $20.3 million NYC transfer-tax assessment.
- Sustainability of dividends relative to operating cash flow and FFO.
- Impact of Bloomberg tenant concentration and changes in its creditworthiness.
- Market value volatility of the Macerich shares, which declined from $44.6 million at year-end 2014 to $41.1 million at September 30, 2015.