Vornado Realty Trust 10-Q Summary
Business Context and Reporting Period
Vornado Realty Trust is an integrated REIT focused primarily on office, retail and residential properties in New York City and Washington, D.C., with additional investments in operating companies and real estate funds. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
At March 31, 2014, Vornado owned approximately 93.9% of Vornado Realty L.P. and had 187.4 million common shares outstanding. Portfolio occupancy was 97.0% in New York, 83.3% in Washington, D.C., and 94.2% across retail properties.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $660.6 million | $718.7 million | Down $58.1 million |
| Operating income | $165.6 million | $250.3 million | Down $84.7 million |
| Operating margin | 25.1% | 34.8% | Down 9.7 percentage points |
| Net income | $98.2 million | $288.9 million | Down $190.8 million |
| Net income attributable to common shareholders | $62.3 million | $232.0 million | Down $169.6 million |
| Diluted earnings per share | $0.33 | $1.24 | Down $0.91 |
| FFO attributable to common shareholders plus assumed conversions | $247.1 million; $1.31 per diluted share | $201.8 million; $1.08 per diluted share | Up 22.4% per share |
| Cash flow from operating activities | $309.1 million | $414.9 million | Down $105.8 million |
| Cash and cash equivalents | $1.157 billion | $585.8 million at March 31, 2013 | Up $573.4 million from Dec. 31, 2013 |
| Consolidated debt | $10.345 billion | $9.979 billion at Dec. 31, 2013 | Up $366.2 million |
| Common dividend per share | $0.73 | $0.73 | Unchanged |
Debt consisted primarily of $8.913 billion of mortgages, $1.343 billion of senior unsecured notes and $88.1 million drawn on revolving credit facilities. The weighted-average interest rate on consolidated debt was 4.41%. The company reported an estimated consolidated debt fair value of $10.249 billion.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Q1 2013 included $59.6 million of Stop & Shop settlement income and $12.1 million from the completed Cleveland Medical Mart development project.
- Q1 2013 included $202.8 million of gains from real estate sales, while Q1 2014 included only $9.6 million of gains, primarily from land and residential condominium dispositions.
- Interest and other investment income improved to $11.9 million from a $49.1 million loss, principally because Q1 2013 included J.C. Penney investment impairment and derivative mark-to-market losses totaling approximately $62.0 million.
- Interest and debt expense decreased to $109.4 million from $120.3 million, reflecting Skyline mortgage restructuring savings and higher capitalized interest.
- Q1 2014 included a $20.0 million non-cash impairment loss on Springfield Town Center and $20.8 million of total impairment losses, compared with $5.2 million of real estate impairment losses in Q1 2013.
- Retail EBITDA fell sharply because Q1 2013 benefited from the Green Acres Mall sale gain and Stop & Shop settlement. Excluding comparability items, retail EBITDA was broadly stable.
- Same-store GAAP EBITDA increased 6.2% in New York and 2.2% in retail properties, but declined 2.5% in Washington, D.C. Cash-basis same-store EBITDA increased 10.1%, 0.5% and 2.4%, respectively.
- FFO increased despite lower GAAP net income, reflecting the absence of large prior-year disposition gains and investment losses and the exclusion of real estate depreciation and amortization.
Guidance, Outlook, Commentary and Unusual Items
- Management expects 2014 Washington, D.C. EBITDA from continuing operations to be $10 million to $15 million below 2013, primarily because of Base Realignment and Closure-related move-outs and a sluggish leasing environment.
- Management expects cash flow from continuing operations over the next twelve months to fund operations, dividends, Operating Partnership distributions, debt amortization and recurring capital expenditures. Development and acquisition spending may require additional borrowings or equity financing.
- On April 11, 2014, Vornado announced plans to spin off 81 strip shopping centers and four malls into a new publicly traded REIT. The company expected to file a Form 10 by the end of Q2 2014 and complete the transaction by year-end 2014, subject to regulatory, listing, third-party consent and board approvals. The transaction could be abandoned or modified.
- Vornado completed the sale of Broadway Mall for $94 million and agreed to sell Beverly Connection for $260 million, with closing expected in Q3 2014. It also agreed to transfer the redeveloped Springfield Town Center to PREIT for $465 million, consisting of $340 million in cash and $125 million of PREIT operating partnership units.
- Development commitments included approximately $850 million for 220 Central Park South, $250 million for Metropolitan Park 4 & 5, $215 million for the Marriott Marquis Times Square redevelopment, and $250 million for Springfield Town Center. The filing states that project timing and costs are subject to uncertainty.
- Vornado expects to fund approximately $125 million of additional capital to certain partially owned entities. Partially owned entity debt is non-recourse to Vornado, but Vornado’s pro rata share was approximately $3.953 billion.
- Debt maturities were approximately $133.7 million during the remainder of 2014 and $941.1 million during 2015. The company subsequently completed a $350 million refinancing of 909 Third Avenue on April 16, 2014, generating approximately $145 million of net proceeds.
Risks and Contingencies
- Washington, D.C. occupancy was 80.5% for office properties, including 58.7% for Skyline Properties, and BRAC-related space remains a material leasing risk.
- A 1% increase in base interest rates would increase estimated annual net income exposure by approximately $25.4 million, or $0.13 per diluted share, including Vornado’s pro rata share of nonconsolidated debt.
- Revolving credit facilities require compliance with interest coverage and debt-to-market-capitalization covenants and could bear higher rates if credit ratings decline below Baa3/BBB. Letters of credit outstanding totaled $38.5 million.
- Guarantees and master leases totaled approximately $420 million. Mortgage loans are generally non-recourse, subject to these arrangements and other exceptions.
- Insurance availability and cost, environmental matters, litigation, valuation assumptions for Level 3 investments, tenant credit, development execution and capital-market access could materially affect results.
- The company reported no material changes to the risk factors in its 2013 Form 10-K, no defaults on senior securities and no legal proceedings expected to have a material adverse effect.
Investor Verification Items
- Verify the completion, final terms and tax treatment of the proposed shopping-center spin-off.
- Track the timing and proceeds of the Beverly Connection and Springfield Town Center transactions and the use of related cash and PREIT units.
- Reconcile reported FFO with GAAP earnings and assess the effect of Toys “R” Us impairments, fund valuation gains and other nonrecurring items.
- Monitor Washington, D.C. leasing, BRAC vacancy resolution and management’s $10 million to $15 million EBITDA decline outlook.
- Review debt maturities, refinancing activity, covenant compliance, variable-rate exposure and the effect of subsequent financing transactions.
- Assess funding requirements for development projects and expected $125 million of additional contributions to partially owned entities.