Business Context and Reporting Period
Vornado Realty Trust, a fully integrated REIT operating primarily through Vornado Realty L.P., owns and manages office, retail, residential and other real estate, concentrated in New York City and Washington, D.C. This unaudited Form 10-Q covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012. Vornado owned approximately 94.0% of the Operating Partnership and had 186.9 million common shares outstanding at March 31, 2013.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $721.0 million | $669.2 million | Up $51.8 million |
| Operating income | $251.5 million | $182.2 million | Up $69.3 million |
| Operating margin | 34.9% | 27.2% | Improved |
| Income from continuing operations | $81.9 million | $208.9 million | Down $127.0 million |
| Net income | $288.9 million | $280.3 million | Up $8.7 million |
| Net income attributable to common shareholders | $232.0 million | $233.7 million | Down $1.7 million |
| Diluted earnings per common share | $1.24 | $1.25 | Down $0.01 |
| FFO attributable to common shareholders plus assumed conversions | $201.8 million; $1.08 per diluted share | $348.5 million; $1.82 per diluted share | Down materially |
| Net cash provided by operating activities | $414.9 million | $307.1 million | Up $107.8 million |
| Net cash provided by investing activities | $527.7 million | $172.1 million | Up $355.6 million |
| Net cash used in financing activities | $(1.317) billion | $(471.4) million | Greater use of cash |
| Cash and cash equivalents | $585.8 million | $614.4 million | Down from December 31, 2012 balance of $960.3 million |
| Consolidated debt | $10.421 billion | $11.191 billion at December 31, 2012 | Down $770.2 million sequentially |
| Common dividend per share | $0.73 | $0.69 | Up $0.04 |
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from higher property rentals, acquisitions, operating performance and $59.6 million of income from a Stop & Shop settlement. The Cleveland Medical Mart development project contributed $12.1 million of revenue versus $55.1 million in the prior-year quarter.
- Operating income improved because expenses declined $17.5 million, principally from lower Cleveland Medical Mart development costs, while revenues increased.
- Continuing-operations income declined substantially because of a $39.5 million impairment of J.C. Penney shares, a $22.5 million mark-to-market loss on the J.C. Penney derivative position, a $36.8 million loss on the sale of J.C. Penney shares and lower income from Toys “R” Us.
- Net income remained higher because discontinued operations included a $202.3 million gain on the January 2013 sale of Green Acres Mall. Discontinued-operations income was $207.1 million versus $71.4 million in Q1 2012.
- FFO fell to $1.08 per diluted share from $1.82, reflecting the absence of significant prior-year Toys “R” Us and discontinued-operations benefits, as well as the impact of preferred share redemptions and other unusual items.
- New York same-store EBITDA increased 4.6% on a GAAP basis and 9.1% on a cash basis. Washington, D.C. same-store EBITDA declined 7.4% on a GAAP basis and 9.4% on a cash basis. Retail Properties same-store EBITDA increased 2.8% on a GAAP basis and 2.2% on a cash basis.
- Occupancy at March 31, 2013 was 96.0% for New York office properties, 80.9% for Washington, D.C. office properties and 93.6% for retail properties.
Debt, Liquidity and Capital Resources
- Debt consisted of $9.063 billion of mortgages and $1.358 billion of senior unsecured notes. No balance was outstanding under revolving credit facilities at March 31, 2013, compared with $1.170 billion at December 31, 2012.
- Variable-rate consolidated debt was $1.602 billion, with a reported one-percentage-point increase in base rates estimated to reduce annual net income by approximately $16.0 million before related offsets. Including Vornado’s pro rata share of nonconsolidated debt, the estimated annual impact was approximately $23.9 million, or $0.13 per diluted share.
- Cash flow from operations exceeded dividends and distributions, but cash declined because of substantial debt repayments, preferred security purchases, dividends, distributions and other financing uses.
- Debt maturities were disclosed as $654.7 million during the remainder of 2013 and $237.8 million during 2014. Management stated that cash flow from continuing operations should be adequate over the next twelve months for operations, distributions, debt amortization and recurring capital expenditures; development and acquisition funding may require borrowings or equity.
- Vornado completed $390.0 million and $300.0 million fixed-rate property financings during the quarter and extended a revolving credit facility to June 2017, with extension options and reduced pricing.
- Vornado issued $300.0 million of 5.40% Series L preferred shares and redeemed $262.5 million of Series F and Series H preferred shares.
- Cash-basis capital expenditures and leasing commissions were $75.4 million, and development and redevelopment expenditures were $35.3 million. The Springfield Mall renovation is estimated to cost approximately $225.0 million, with substantial completion expected in 2014.
Guidance, Outlook, Commentary and Risks
- Management previously estimated that 2013 Washington, D.C. EBITDA would be $5 million to $15 million below 2012. At March 31, 2013, continuing-operations EBITDA was approximately $9.7 million below the prior year.
- The Washington, D.C. portfolio remains exposed to the federal Base Realignment and Closure program. Skyline properties were 43.4% vacant, had insufficient cash flow to pay current obligations and had $37.1 million of deferred interest. The related loan was under a forbearance agreement extended through June 1, 2013, while restructuring discussions continued.
- Vornado retained significant exposure to J.C. Penney. At March 31, 2013, it had an economic interest in 13.4 million shares, and the derivative position had an aggregate strike value of approximately $140.5 million, with $76.0 million funded. Market-value changes can cause substantial earnings volatility.
- Toys “R” Us is highly seasonal, with more than 80% of historical annual net income generated in the fourth quarter. Vornado recognized $78.5 million of its share of Toys’ income and an offsetting impairment loss in Q1 2013.
- Vornado had approximately $258.0 million of unfunded Real Estate Fund commitments, including approximately $64.5 million attributable to Vornado, and expected to fund approximately $169.0 million of additional capital to partially owned entities.
- Guarantees and master leases totaled approximately $305.0 million, and letters of credit outstanding under a revolving credit facility totaled $22.2 million.
- Vornado’s credit facilities contain financial covenants, events of default and provisions for higher interest rates if ratings decline below Baa3/BBB. Insurance availability and cost, environmental matters, leasing conditions, tenant credit, refinancing and capital-market access remain material risks.
- Management reported no material changes to the risk factors in the 2012 Form 10-K, no defaults upon senior securities and effective disclosure controls as of March 31, 2013.
Important Facts for Investors to Verify
- Reconcile GAAP net income and diluted EPS with recurring operating performance and FFO, excluding the Green Acres Mall gain, Stop & Shop settlement, J.C. Penney losses, Toys “R” Us impairment and other unusual items.
- Review the maturity schedule and refinancing plans for the $654.7 million of debt maturing during the remainder of 2013 and the $237.8 million maturing in 2014.
- Monitor the Skyline loan restructuring, deferred interest, occupancy and required capital spending in Washington, D.C.
- Assess J.C. Penney share-price and derivative exposure, including collateral requirements and potential counterparty acceleration provisions.
- Evaluate the sustainability of occupancy, rental growth and same-store EBITDA, particularly the decline in Washington, D.C. performance.
- Verify funding requirements for the Real Estate Fund, partially owned entities, Springfield Mall redevelopment and Cleveland Medical Mart commitments.
- Consider the effect of asset sales and discontinued operations on future recurring earnings, cash flow and FFO.