Vornado Realty Trust and Vornado Realty L.P. — Q3 2022 Form 10-Q
Business context and reporting period
Vornado is a fully integrated REIT conducting substantially all operations through Vornado Realty L.P., which owned approximately 92.1% by Vornado as of September 30, 2022. The portfolio is concentrated in New York office, retail and residential properties, with additional investments in theMART, 555 California Street, Alexander’s and other partially owned entities. The filing covers the three and nine months ended September 30, 2022; financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenues | $457.4 million | $409.2 million | $1.353 billion | $1.168 billion |
| Net income | $20.1 million | $71.8 million | $142.4 million | $175.6 million |
| Net income attributable to common shareholders | $7.8 million | $37.7 million | $84.7 million | $89.8 million |
| Diluted earnings per common share | $0.04 | $0.20 | $0.44 | $0.47 |
| FFO attributable to common shareholders plus assumed conversions | $152.5 million | $158.3 million | $462.5 million | $430.1 million |
| FFO per diluted share | $0.79 | $0.82 | $2.39 | $2.24 |
| Net cash provided by operating activities | Not applicable | Not applicable | $559.8 million | $478.1 million |
- Q3 NOI at share increased to $297.1 million from $255.3 million; NOI at share cash basis increased to $295.7 million from $257.2 million. Nine-month NOI at share cash basis increased 13.9% to $861.5 million.
- Same-store NOI at share increased 11.7% in Q3 and 7.4% for the nine-month period. Same-store NOI at share cash basis increased 13.8% and 9.4%, respectively.
- At September 30, 2022, total assets were $17.176 billion, cash and cash equivalents were $845.4 million, restricted cash was $131.6 million and U.S. Treasury bills were $445.2 million.
- Liquidity was reported at approximately $3.3 billion, consisting of $977 million of cash and restricted cash, $445 million of Treasury bills and $1.9 billion of undrawn revolving credit capacity.
- Debt consisted of $5.832 billion of mortgages, $1.191 billion of senior unsecured notes, $793 million of unsecured term debt and $575 million drawn on revolving credit facilities. Consolidated debt totaled approximately $8.458 billion before deferred financing costs.
- Common shareholders received a quarterly dividend of $0.53 per share, or $1.59 per share for the first nine months.
Material changes versus the prior comparable period
- Revenue rose 11.8% in Q3 and 15.8% for the first nine months, driven by development and redevelopment activity, same-store operations, resumed and increased trade-show activity at theMART, and higher fee and other income.
- Net income attributable to common shareholders declined primarily because of higher depreciation and amortization, higher interest expense and the absence of the prior-year $27.9 million tax benefit. Q3 2022 also included a $26.6 million Hotel Pennsylvania loss.
- Interest and debt expense increased 50.7% in Q3 and 25.2% for the nine-month period, primarily due to higher average rates on variable-rate debt and lower capitalized interest.
- FFO increased 7.5% for the nine-month period but declined 3.7% in Q3. Management identified certain items reducing Q3 FFO by $4.9 million and nine-month FFO by $7.4 million in 2022.
- Cash, cash equivalents and restricted cash declined by $953.3 million from year-end 2021, reflecting $849.7 million of investing outflows and $663.4 million of financing outflows, partly offset by $559.8 million of operating cash flow.
- Vornado sold two SoHo retail properties and the Center Building during 2022, generating $253.96 million of total real estate sale proceeds. One 220 Central Park South condominium unit and related amenities were also sold for $16.1 million of proceeds.
- The company entered into an agreement to sell 40 Fulton Street for $102 million, with closing expected in the fourth quarter of 2022 and an estimated gain of approximately $33 million, subject to customary conditions.
Guidance, outlook, risks and unusual items
- Management stated that operating cash flow over the following 12 months, together with cash on hand, was expected to fund operations, distributions, debt amortization and recurring capital expenditures. Development, redevelopment and acquisitions may require additional borrowings, equity issuance or asset sales.
- Major development commitments include Farley Office and Retail, PENN 1, PENN 2 and PENN 15. Construction commitments totaled approximately $492 million; additional funding commitments to partially owned entities totaled approximately $10.3 million.
- Estimated development costs and cash expended through September 30, 2022 included Farley at approximately $1.120 billion total cost and $1.069 billion expended at Vornado’s share; PENN 1 at $450 million estimated cost and $354.8 million expended; PENN 2 at $750 million estimated cost and $330.3 million expended; and PENN District improvements at $100 million estimated cost and $40.8 million expended.
- Management cited continuing risks from COVID-19 effects, remote and hybrid work, reduced Manhattan tourism, retail tenant conditions, inflation, rising interest rates, construction costs, capital availability and real estate market conditions. No formal earnings guidance was provided in the filing.
- Interest-rate exposure remained material: a 1% increase in base rates was estimated to reduce annual net income attributable to Vornado by approximately $27.0 million after noncontrolling interests. Interest-rate swaps and caps had a reported fair value asset of $189.9 million at September 30, 2022.
- The Crowne Plaza Times Square investment had defaulted on a $274.4 million non-recourse loan; the Fund had two remaining investments with aggregate fair value of $0.9 million and remaining unfunded commitments of $28.5 million, of which Vornado’s share was $8.8 million.
- Guarantees and master leases totaled approximately $1.593 billion. Insurance coverage may not be available on commercially reasonable terms, and the company remains exposed to uninsured losses, deductibles and losses exceeding policy limits.
- The company reported a potential $25.0 million clawback obligation related to previously paid incentive allocations of its real estate fund, already accrued with no expected income-statement impact upon liquidation.
Important facts for investors to verify
- Confirm the timing, conditions and expected gain from the 40 Fulton Street sale.
- Monitor refinancing and maturity risk, particularly the July 2024 maturity of the 770 Broadway mortgage and the company’s exposure to floating rates despite hedging.
- Assess leasing demand and mark-to-market trends: Q3 office and 555 California leasing spreads were positive, while retail and theMART re-leasing spreads were negative.
- Track execution, funding needs and completion costs for Farley, PENN 1, PENN 2 and PENN 15.
- Evaluate liquidity after development spending, dividends, debt repayments and potential asset sales.
- Review exposure to office occupancy, retail weakness, hybrid work, trade-show recovery, insurance availability, guarantees and litigation involving the Regus lease.
- Distinguish GAAP earnings from FFO and NOI, which are non-GAAP measures and include significant adjustments for depreciation, dispositions and unusual items.