Alexander’s, Inc. 10-Q Summary
Business Context and Reporting Period
Alexander’s, Inc. is a real estate investment trust with seven properties totaling approximately 2.437 million square feet in the greater New York City metropolitan area. Vornado Realty Trust manages the Company and provides leasing and development services. This unaudited Form 10-Q covers the three and six months ended June 30, 2018.
The portfolio was 99.5% occupied at June 30, 2018. Bloomberg L.P. represented approximately 45% of six-month revenue, creating significant tenant concentration.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $58.3 million, up 1.9% | $116.1 million, up 1.5% |
| Operating income | $26.4 million; 45.2% margin | $52.4 million; 45.1% margin |
| Income from continuing operations | $17.6 million, or $3.43 per diluted share | $31.7 million, or $6.19 per diluted share |
| Net income | $17.6 million, or $3.43 per diluted share | $7.9 million, or $1.54 per diluted share |
| FFO, non-GAAP | $26.1 million, or $5.11 per diluted share | $24.6 million, or $4.81 per diluted share |
| Net cash from operating activities | Not separately provided for the quarter | $33.5 million |
| Dividends per common share | $4.50 | $9.00 |
Quarterly net income declined from $20.7 million in the prior-year quarter, while six-month net income declined from $42.3 million. Six-month results include a $23.8 million loss from discontinued operations related to contested New York City transfer taxes and a $4.7 million mark-to-market loss on Macerich shares. The reported six-month net margin was approximately 6.8%, compared with approximately 37.0% in the prior-year period.
At June 30, 2018, the Company had $293.8 million of cash and cash equivalents, $6.2 million of restricted cash, and $30.4 million of marketable securities. Mortgages payable, net of deferred debt issuance costs, totaled $1.163 billion, compared with $1.240 billion at December 31, 2017. Total liabilities were $1.218 billion and total equity was $306.2 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $1.1 million, driven by higher property rentals and expense reimbursements. Six-month revenue increased $1.7 million.
- Operating expenses increased $0.8 million for the quarter and $2.1 million for the six months, primarily due to higher real estate taxes, reimbursable operating expenses and bad debt expense.
- Interest and debt expense increased $3.7 million for the quarter and $7.4 million for the six months, mainly because of higher LIBOR, the larger 731 Lexington Avenue office mortgage, and increased amortization of debt issuance costs.
- FFO declined from $28.7 million to $26.1 million for the quarter and from $58.2 million to $24.6 million for the six months.
- The Toys “R” Us lease at Rego Park II was rejected effective June 30, 2018. The Company recorded $0.8 million of accelerated depreciation and amortization and wrote off a $0.5 million straight-line rent receivable.
- Cash, cash equivalents and restricted cash decreased $93.2 million during the first six months, primarily because of $126.4 million of financing cash outflows, including debt repayments and dividends.
- The Company adopted new accounting guidance for revenue recognition and financial instruments. The financial-instrument adoption moved marketable-securities fair-value changes into earnings and produced a $5.2 million beginning retained-earnings adjustment.
Liquidity, Debt and Cash Flow
Operating cash flow was $33.5 million for the first six months, compared with $35.8 million in the prior-year period. Investing activities used $0.3 million, while financing activities used $126.4 million. The Company paid $46.0 million of dividends and made substantial debt repayments.
Debt included $1.104 billion of variable-rate mortgages and a $68.0 million fixed-rate Paramus mortgage. The Paramus loan matures in October 2018, and the Rego Park II loan matures in November 2018. Management stated that cash flows from continuing operations over the next twelve months, together with existing cash, are expected to fund operations, dividends, debt amortization and capital expenditures. The Company may refinance maturing debt or repay it.
A $500 million notional interest-rate cap limits LIBOR exposure to 6.0%. Management estimated that a 1% increase in base rates would increase annual interest expense by approximately $11.0 million, or reduce diluted earnings by approximately $2.16 per share.
Outlook, Risks, Contingencies and Unusual Items
- No specific earnings, revenue or FFO guidance was provided. Management stated that quarterly and year-to-date results are not necessarily indicative of full-year results.
- The Company paid $23.8 million on April 5, 2018 for potential additional transfer taxes and interest related to the 2012 Kings Plaza sale. The assessment is contested, and the Company’s case is on hold pending an appeal by a related Vornado joint venture.
- Bloomberg’s revenue concentration creates material exposure to tenant creditworthiness, lease retention and potential lease disruption.
- Sears closed its Rego Park I store but remains under lease through March 2021. The Company is assessing the recoverability of $3.3 million of straight-line rent receivables and $0.3 million of deferred leasing costs related to the lease.
- A Sears lawsuit remains pending; the Company estimates reasonably possible losses, if any, will not exceed approximately $0.7 million.
- Approximately $1.0 million of standby letters of credit were outstanding at June 30, 2018. Insurance deductibles, uninsured losses and terrorism-related exposures could be material.
- The Company expects to adopt the new lease standard effective January 1, 2019. It expects recognition of a right-of-use asset and lease liability for the Flushing property ground lease, although the filing does not provide a quantified impact.
- The interim financial statements received a review report from Deloitte & Touche LLP with no material modifications identified; the filing was not an audited annual report.
Important Facts for Investors to Verify
- Refinancing or repayment plans for the $68.0 million Paramus mortgage and the Rego Park II loan maturing in 2018.
- Progress and potential recovery related to the $23.8 million Kings Plaza transfer-tax payment.
- Bloomberg’s lease status, financial condition and share of future revenue.
- Re-leasing plans and expected economics for the vacated Toys “R” Us space and the closed Sears location.
- Exposure to higher LIBOR and the effectiveness and remaining term of the interest-rate cap.
- The effect of the January 2019 lease-accounting adoption on reported assets, liabilities and leverage.
- Whether dividend payments remain adequately covered by recurring operating cash flow and FFO after debt service.