Vornado Realty Trust — Q2 2013 Form 10-Q Summary
Business context and reporting period
Vornado Realty Trust is a fully integrated REIT operating primarily through Vornado Realty L.P. Its portfolio is concentrated in New York City, Washington, D.C., retail properties and other real estate investments. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. Vornado reported 186,991,076 common shares outstanding at June 30, 2013.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $685.9 million, versus $678.0 million | $1.406 billion, versus $1.346 billion |
| Operating income | $216.5 million, versus $202.8 million | $467.9 million, versus $385.0 million |
| Operating margin | 31.6%, versus 29.9% | 33.3%, versus 28.6% |
| Income from continuing operations | $118.3 million, versus $40.4 million | $200.1 million, versus $249.3 million |
| Net income attributable to common shareholders | $145.9 million; diluted EPS $0.78 | $377.9 million; diluted EPS $2.01 |
| FFO attributable to common shareholders plus assumed conversions | $235.3 million; $1.25 per diluted share | $437.2 million; $2.33 per diluted share |
| Dividends per common share | $0.73 | $1.46 |
| Net cash provided by operating activities | Not separately provided for the quarter | $444.8 million, versus $263.9 million |
At June 30, 2013, real estate assets, net, were $14.390 billion, cash and cash equivalents were $781.7 million, restricted cash was $312.1 million, and marketable securities were $402.9 million. Consolidated debt totaled $10.025 billion, consisting primarily of $8.583 billion of mortgages, $1.358 billion of senior unsecured notes and $84.0 million drawn on revolving facilities. Estimated fair value of consolidated debt was $10.082 billion.
Cash flow from investing activities was $1.071 billion, driven by real estate and investment sales, capital distributions from partially owned entities and the sale of LNR. Financing activities used $1.694 billion, principally for debt repayments, preferred security purchases, dividends and distributions. Cash declined by $178.7 million from December 31, 2012.
Portfolio occupancy at June 30, 2013 was 96.1% in New York, 83.6% in Washington, D.C. including the Skyline properties, and 94.0% in retail properties. Excluding Skyline, Washington, D.C. occupancy was 89.2%.
Material changes versus the prior comparable period
- Second-quarter revenue increased 1.2%, while six-month revenue increased 4.4%. Growth was led by New York operations, acquisitions and higher fee income, partly offset by lower Washington, D.C. and Cleveland Medical Mart development revenue.
- Second-quarter net income attributable to common shareholders rose from $20.5 million to $145.9 million, primarily reflecting higher discontinued-operation gains and a favorable change in the J.C. Penney derivative mark-to-market.
- Six-month net income attributable to common shareholders increased 48.6%, largely because 2013 included substantial gains on dispositions. However, six-month FFO declined 15.3% because 2012 benefited from Toys “R” Us income and other nonrecurring items.
- New York same-store EBITDA increased 4.4% on a GAAP basis and 8.8% on a cash basis for the quarter; retail properties increased 3.1% and 4.2%, respectively. Washington, D.C. same-store EBITDA declined 5.5% on a GAAP basis and 5.9% on a cash basis.
- Vornado sold Green Acres Mall, The Plant, a Philadelphia retail property and its LNR investment. It also sold other non-core properties. Discontinued operations contributed $64.0 million in the quarter and $271.1 million year to date, including significant real estate gains.
- Vornado refinanced or financed properties with $390 million at 666 Fifth Avenue, $300 million at Bergen Town Center and $550 million at Independence Plaza. It also reduced revolving-credit borrowings from $1.170 billion to $84.0 million.
- Vornado issued $300 million of 5.40% Series L preferred shares and redeemed $262.5 million of Series F and H preferred shares and $45.0 million face amount of Series D-15 preferred units.
Guidance, outlook, risks and unusual items
- Management expects cash flow from continuing operations over the following twelve months to fund operations, distributions, dividends, debt amortization and recurring capital expenditures. Development and acquisition spending may require additional borrowings or equity issuance.
- Management expects full-year 2013 Washington, D.C. EBITDA to be approximately $10 million to $15 million below 2012, after a first-half decline of approximately $15.8 million. The primary pressure is the Base Realignment and Closure statute and related vacancies.
- The Skyline properties were 54.8% occupied, or 45.2% vacant. The related mortgage was transferred to a special servicer; $47.6 million of interest had been deferred, and the latest forbearance extension ran through September 1, 2013. Restructuring discussions remained unresolved.
- Vornado retained a significant J.C. Penney exposure. It owned or had an economic interest in 13.4 million shares and recognized a $39.5 million impairment, a $36.8 million loss on sold shares and a six-month $13.5 million derivative mark-to-market loss. Results may remain volatile because the derivative is not designated as a hedge.
- Toys “R” Us produced a $36.9 million loss applicable to Vornado in the quarter and a $35.1 million loss year to date, including a $78.5 million noncash impairment in the first quarter. Vornado’s investment carrying amount was $417.8 million at June 30, 2013.
- The Real Estate Fund generated $51.0 million of income year to date, including $47.1 million of unrealized gains. Its investments were Level 3 fair-value measurements, with $246.6 million of unfunded commitments, including $61.6 million attributable to Vornado.
- Remaining 2013 and 2014 consolidated debt maturities were $177.1 million and $235.5 million, respectively. A 1% increase in base rates was estimated to reduce annual net income by approximately $21.2 million after considering noncontrolling interests.
- Vornado expected to fund approximately $168 million of additional capital to partially owned entities. It also had approximately $372 million of guarantees and master leases, $22.1 million of letters of credit, and an $11.5 million Cleveland Medical Mart funding commitment, of which $3.2 million had been funded.
- Major development and redevelopment projects included Springfield Mall, estimated at $225 million, a planned 699-unit Pentagon City residential project estimated at $250 million, and the 280 Park Avenue repositioning project, with Vornado’s share of estimated costs of approximately $62 million.
- The filing states that there were no material changes to the risk factors in the 2012 Form 10-K and that ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for an investor to verify
- Reconcile reported earnings with recurring FFO and identify the effect of disposition gains, discontinued operations, Toys “R” Us, J.C. Penney and other nonrecurring items.
- Review Washington, D.C. leasing, BRAC-related vacancy, Skyline restructuring and the September 2013 forbearance expiration.
- Assess debt maturities, refinancing requirements, covenant compliance, variable-rate exposure and the availability of revolving-credit capacity.
- Evaluate the valuation sensitivity of Level 3 Real Estate Fund investments and the remaining J.C. Penney shares and derivative position.
- Confirm the timing, budget and funding requirements for Springfield Mall, Pentagon City, 280 Park Avenue and other development projects.
- Verify the sustainability of the $0.73 quarterly common dividend relative to recurring cash flow, FFO, capital expenditures and required distributions.
- Note that the interim financial statements were reviewed, not audited, and that management stated quarterly results are not necessarily indicative of full-year performance.