VORNADO REALTY TRUST quarterly report, Q1 FY2023

Vornado Realty Trust 10-Q Summary

Business Context and Reporting Period

Combined quarterly report for Vornado Realty Trust and Vornado Realty L.P. covering the three months ended March 31, 2023. Vornado is a fully integrated REIT focused primarily on New York office, retail and residential properties, with additional investments in Chicago, San Francisco and other markets. Vornado owned approximately 91.4% of the Operating Partnership at quarter-end.

Key Financial Metrics

Metric	Q1 2023	Q1 2022	Change
Total revenues	$445.9 million	$442.1 million	+0.9%
Net income	$11.2 million	$53.4 million	-79.0%
Net income attributable to common shareholders	$5.2 million	$26.5 million	-80.5%
Diluted earnings per common share	$0.03	$0.14	Down $0.11
FFO attributable to common shareholders plus assumed conversions	$119.1 million, or $0.61 per share	$154.9 million, or $0.80 per share	-23.1%
NOI at share	$273.5 million	$284.3 million	-3.8%
NOI at share, cash basis	$278.5 million	$281.1 million	-0.9%
Net cash provided by operating activities	$91.9 million	$171.0 million	-46.3%

Operating expenses increased to $381.3 million from $374.2 million. Consolidated NOI was $217.2 million, representing approximately 48.7% of revenue, compared with approximately 51.0% in the prior-year quarter. Interest and debt expense rose 65.5% to $86.2 million, primarily because of higher average interest rates.

Same-store NOI at share was flat overall. New York increased 1.6%, 555 California Street increased 4.3%, and THE MART declined 22.6%. Same-store NOI at share on a cash basis increased 1.5% overall, with New York up 3.8%, 555 California Street up 8.3% and THE MART down 28.2%.

Balance Sheet, Debt and Liquidity

Total assets were $16.27 billion at March 31, 2023, including $9.93 billion of net real estate.
Total debt, before deferred financing costs and other adjustments, was approximately $8.34 billion, consisting of $5.77 billion of mortgages, $1.20 billion of senior unsecured notes, $800 million of unsecured term debt and $575 million drawn on revolving facilities.
Debt carried a weighted average interest rate of approximately 4.11%; the estimated fair value of consolidated debt was $7.92 billion.
Cash and cash equivalents plus restricted cash totaled $1.03 billion, and U.S. Treasury bills totaled $276.6 million.
Management reported approximately $3.2 billion of liquidity, including cash and restricted cash, Treasury bills and approximately $1.9 billion available under $2.5 billion of revolving credit facilities.
Variable-rate consolidated debt totaled approximately $2.20 billion. A 1% increase in base rates was estimated to increase annual net income attributable to Vornado by approximately $25.6 million after the effects of hedging and noncontrolling interests.

Material Changes Versus the Prior Comparable Period

Revenue increased modestly, but higher operating costs and substantially higher interest expense reduced net income, common-share earnings and FFO.
Income from partially owned entities fell to $16.7 million from $33.7 million, including weaker results from the Fifth Avenue and Times Square joint venture and losses from partially owned office buildings.
Operating cash flow decreased by $79.1 million, partly reflecting unfavorable working-capital timing and lower earnings.
Investing cash flow changed to a $125.7 million inflow from a $794.6 million outflow in the prior year, primarily due to $197.3 million of Treasury bill maturities, repayment of a $105 million 150 West 34th Street loan participation and lower development spending.
Debt repayments totaled $110.4 million, including the $105 million 150 West 34th Street loan participation repayment.
Vornado paid a $0.375 per common share dividend in the quarter, versus $0.53 in Q1 2022.

Guidance, Outlook, Commentary and Unusual Items

On April 26, 2023, after quarter-end, Vornado announced that it would postpone common-share dividends through the end of 2023. The 2023 dividend is expected to be paid after taxable income is finalized, in cash or a combination of cash and securities. Operating Partnership distributions to third-party Class A unitholders will also be postponed.
The Board authorized a common-share repurchase program of up to $200 million. Retained cash from postponed dividends and asset sales may be used for debt reduction and/or repurchases. No specific repurchase amount or timing was committed.
Citadel began a 10-year master lease of 350 Park Avenue with initial annual net rent of $36 million. The related development-site transaction and purchase of 39 East 51st Street were expected to close in Q2 2023, subject to future options and conditions described in the filing.
Alexander’s agreed to sell the Rego Park III land parcel for approximately $71.1 million. Vornado expects to recognize an approximate $16 million share of the gain if the sale closes, which was anticipated in Q2 2023.
The Company entered into an April 2023 settlement related to the Regus dispute for a $21.35 million payment, expected to be recognized in Q2 2023.
The Crowne Plaza Times Square bankruptcy restructuring became effective March 31, 2023. Vornado and its fund had no continuing ownership interest, carrying value or contingent liabilities related to the hotel, and the event had no Q1 consolidated financial statement impact.
The Fifth Avenue and Times Square joint venture had a $421 million defaulted mortgage on 697-703 Fifth Avenue and was negotiating a restructuring with lenders. The filing provides no assurance regarding timing or outcome.
Development commitments included estimated costs of $450 million for PENN 1, $750 million for PENN 2 and $100 million for Hotel Pennsylvania site and district improvements. Aggregate construction commitments were approximately $351 million at quarter-end.
Management stated that existing cash and expected operating cash flow should be adequate for the next twelve months of operations, debt amortization, recurring capital expenditures and distributions, but additional development, redevelopment and acquisition funding may require borrowings, equity issuance or asset sales.

Principal Risks and Contingencies

Higher interest rates and inflation are pressuring interest expense, property values, refinancing costs and tenant demand.
Office-market weakness and tenant credit risk remain significant, particularly for New York office properties and THE MART.
Vornado is exposed to refinancing and covenant risk, including minimum interest coverage and maximum debt-to-market-capitalization requirements.
Guarantees and master leases totaled approximately $1.03 billion, and a separate Farley Building rent and tax guarantee totaled $510 million, subject to stated termination conditions.
Insurance availability and pricing may deteriorate; the Company remains exposed to deductibles, uninsured losses and losses above policy limits, including terrorism, earthquake and other catastrophic risks.
The Company had approximately $10.3 million of expected additional capital contributions to partially owned entities and an estimated $26.2 million fund incentive-allocation clawback at liquidation, which was already accrued.
Results are unaudited and interim results are not necessarily indicative of full-year performance. The independent accountants performed a review rather than an audit.

Investor Verification Checklist

Verify the timing, form and tax basis of the postponed 2023 common dividend and whether any share repurchases were executed.
Monitor refinancing, restructuring and maturity developments for the 697-703 Fifth Avenue loan and the $100 million remaining 150 West 34th Street mortgage loan maturing in May 2024.
Assess office occupancy, leasing spreads, tenant improvements and leasing commissions, especially in New York and at THE MART.
Reconcile reported FFO and NOI to GAAP earnings and cash flow, recognizing that these are non-GAAP measures and do not represent cash available for all obligations.
Track completion costs, funding requirements and leasing progress for PENN 1, PENN 2, the Hotel Pennsylvania site and the proposed 350 Park Avenue development.
Confirm the closing of the Rego Park III sale and recognition of the expected Vornado share of gain, as well as the Q2 2023 recognition of the Regus settlement.
Review interest-rate exposure, hedge expirations, debt fair values and compliance with revolving-credit covenants.