Business Context and Reporting Period
Alexander's, Inc. filed its Form 10-Q for the quarterly period ended September 30, 2002. The Company is a real estate investment trust (REIT) managed by Vornado Realty Trust, which owns 33.1% of the Company's common stock. The reporting period covers the three and nine months ended September 30, 2002, compared to the same periods in 2001. The financial statements are unaudited.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2001 |
|---|---|---|---|
| Total Revenues | $19,249 | $56,574 | $48,856 |
| Operating Income | $12,279 | $26,032 | $20,519 |
| Net Income | $17,380 | $19,778 | $29,919 |
| Funds from Operations (FFO) | $7,249 | $10,240 | $9,731 |
| Cash from Operating Activities | N/A | $8,531 | $7,394 |
| Total Debt | $544,467 | $544,467 | $515,831 |
| Cash and Equivalents | $90,840 | $90,840 | $135,258 |
Note: Net Income for the nine months ended Sep 30, 2002 includes a $10,366,000 gain from discontinued operations (sale of Third Avenue property). Net Income for the nine months ended Sep 30, 2001 includes a $19,026,000 gain on sale of Fordham Road property and a $3,534,000 extraordinary gain.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 21.4% for the quarter and 15.8% for the nine-month period compared to the prior year, driven by the commencement of the IKEA ground lease at the Paramus property and increased occupancy at Kings Plaza.
- Net Income Volatility: While quarterly net income increased significantly ($17.4M vs $2.2M), nine-month net income decreased ($19.8M vs $29.9M). This decrease is primarily due to the absence of the $19M gain on the Fordham Road property sale and $3.5M extraordinary gain recorded in the prior year, which were not present in the current year.
- Discontinued Operations: The Company reclassified properties held for sale as discontinued operations. The sale of the Third Avenue property generated a $10.4M gain in the current quarter.
- Debt Levels: Total debt increased to $544.5M from $515.8M at year-end 2001, reflecting new construction financing for the Lexington Avenue project.
- Operating Expenses: Operating expenses rose due to higher fuel costs at Kings Plaza and increased real estate taxes and maintenance.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capital Resources
The Company's operating properties currently do not generate sufficient cash flow to cover all expenses. Positive cash flow is expected once rents commence from the Lexington Avenue development project, with completion expected in 2004. The project has a total budget of $630M; $161M has been spent, and $185M is committed. A $490M construction loan from HVB Real Estate Capital was finalized in July 2002.
Material Risks and Contingencies
- Lexington Avenue Completion Risk: There is no assurance the project will be completed on time or within budget. Delays could trigger cancellation of the Bloomberg L.P. lease and significant penalties.
- Flushing Property Sale Dispute: The sale of the Flushing property for $18.8M is in dispute. The prospective purchaser failed to close, and the landlord has alleged defaults. The Company has obtained a temporary injunction but negotiations are ongoing with no assurance of success.
- Terrorism Insurance: Following 9/11, standard policies exclude terrorist acts. The Company has $200M separate coverage and $428M builder's risk coverage for Lexington Avenue. Lenders may view exclusions as a default event, potentially accelerating debt repayment.
- Environmental Remediation: Ongoing remediation at Kings Plaza for petroleum and phthalate contamination. An accrual of $2.7M exists, with $2.0M paid. Additional costs may be incurred if regulators require more extensive remediation.
- Vornado Dependence: The Company relies heavily on Vornado Realty Trust for management, leasing, and financing. Vornado holds a significant equity stake and provides a "Completion Guarantee" for the Lexington Avenue project.
Investor Verification Checklist
- Lexington Avenue Progress: Verify construction milestones, budget adherence, and the status of the Bloomberg L.P. and Hennes & Mauritz leases.
- Flushing Property Resolution: Monitor the outcome of negotiations regarding the failed sale and the landlord's default notice.
- Liquidity Position: Assess the adequacy of the $26M available line of credit with Vornado and the $90.8M cash balance against the $140M estimated funding gap for Lexington Avenue.
- Insurance Coverage: Confirm that lenders have not declared defaults based on terrorism insurance exclusions.
- Environmental Costs: Track any updates from the NYDEC regarding the Kings Plaza remediation scope and potential cost increases.