ITEM 2.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Certain statements contained in this Quarterly Report constitute forward-looking statements as such term is defined in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and
assumptions. Our future results, financial condition, results of operations and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as
approximates, believes, expects, anticipates, estimates, intends, plans, would, may or other similar expressions in this Quarterly Report on
Form
10-Q.
These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine
these items are beyond our ability to control or predict. For a further discussion of factors that could materially affect the outcome of our forward-looking statements, see Item 1A Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2016. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form
10-Q
or the date of any document incorporated by
reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly, any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form
10-Q.
Managements Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our
consolidated financial statements for the three and nine months ended September 30, 2017 and 2016. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the operating results for the full year.
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form
10-K
for the year ended December 31, 2016 in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 2 Summary of
Significant Accounting Policies to the consolidated financial statements included therein. There have been no significant changes to these policies during 2017.
17
Overview
Alexanders, Inc. (NYSE: ALX) is a real estate investment trust (REIT), incorporated in Delaware, engaged in
leasing, managing, developing and redeveloping its properties. All references to we, us, our, Company, and Alexanders, refer to Alexanders, Inc. and its consolidated
subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust (Vornado) (NYSE: VNO). We have seven properties in the greater New York City metropolitan area.
We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends of the
world, national and local economies, the financial condition and operating results of current and prospective tenants and customers, the availability and cost of capital, construction and renovation costs, taxes, governmental regulations,
legislation, population trends, zoning laws, and our ability to lease, sublease or sell our properties, at profitable levels. Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.
Quarter Ended September 30, 2017 Financial Results Summary
Net income for the quarter ended September 30, 2017 was $20,299,000, or $3.97 per diluted share, compared to $21,036,000,
or $4.11 per diluted share for the quarter ended September 30, 2016. Funds from operations (FFO) for the quarter ended September 30, 2017 was $28,598,000, or $5.59 per diluted share, compared to $28,949,000, or $5.66 per
diluted share for the quarter ended September 30, 2016.
Nine Months Ended September 30, 2017 Financial Results Summary
Net income for the nine months ended September 30, 2017 was $62,626,000, or $12.24 per diluted share, compared to
$64,822,000, or $12.68 per diluted share for the nine months ended September 30, 2016. FFO for the nine months ended September 30, 2017 was $86,846,000, or $16.98 per diluted share, compared to $90,198,000, or $17.64 per diluted share for
the nine months ended September 30, 2016. Net income and FFO for the nine months ended September 30, 2016 included rental income of $2,257,000, or $0.44 per diluted share, resulting from a tenant lease termination at our Rego Park II
property in September 2016. Net income for the nine months ended September 30, 2016 also included additional depreciation and amortization of tenant improvements and deferred leasing costs of $1,077,000, or $0.21 per diluted share, related to
this lease termination.
Square Footage, Occupancy and Leasing Activity
As of September 30, 2017, our portfolio was comprised of seven properties aggregating 2,437,000 square feet and was 99.3%
occupied.
Tenant Matters
On April 4, 2017, Sears closed its 195,000 square foot store it leases from us at our Rego Park I property. Annual
revenue is approximately $10,337,000, under a lease which expires in March of 2021. In its 2016 annual report on Form
10-K,
Sears indicated that substantial doubt exists related to its ability to continue as a
going concern. There is a straight-line rent receivable of approximately $4,160,000 and unamortized deferred leasing costs of approximately $437,000 on our consolidated balance sheet as of September 30, 2017 which we will continue to assess for
recoverability.
On September 18, 2017, Toys R Us (Toys), which leases 47,000 square feet of retail space
at our Rego Park II shopping center ($2,700,000 of annual revenue) filed for Chapter 11 bankruptcy relief. There are $1,617,000 of unamortized assets on our consolidated balance sheet related to the Toys lease as of September 30, 2017,
including tenant improvements, deferred leasing costs and receivables arising from the straight-lining of rent.
On
September 19, 2017, the bankruptcy court approved the terms of an order stipulation between Le Cirque, a restaurant operator which leases 13,000 square feet at our 731 Lexington Avenue property (approximately $1,200,000 of annual revenue), and
the Company which terminates the lease on January 5, 2018 (original lease expiration was May of 2021). As a result, we began accelerating depreciation and amortization of approximately $2,780,000 of tenant improvements and deferred leasing
costs over the new lease term, of which approximately $280,000 was recognized in the quarter ended September 30, 2017 and approximately $2,370,000 and $130,000 will be recognized in the quarters ending December 31, 2017 and March 31,
2018, respectively.
18
Overview continued
Rego Park II Loan Participation
On July 28, 2017, we entered into a participation and servicing agreement with the lender on our Rego Park II shopping
center loan, which matures on November 30, 2018. We paid $200,000,000 to participate in the loan and are entitled to interest of LIBOR plus 1.60% (2.84% as of September 30, 2017).
Financing
On
June 1, 2017, we completed a $500,000,000 refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus 0.90% and matures in June 2020, with four
one-year
extension
options. In connection therewith, we purchased an interest rate cap with a notional amount of $500,000,000 that caps LIBOR at a rate of 6.0%. The property was previously encumbered by a $300,000,000 interest-only mortgage at LIBOR plus 0.95% which
was scheduled to mature in March 2021.
Significant Tenant
Bloomberg L.P. (Bloomberg) accounted for revenue of $78,786,000 and $78,567,000 for the nine months ended
September 30, 2017 and 2016, respectively, representing approximately 46% of our total revenues in each period. No other tenant accounted for more than 10% of our total revenues. If we were to lose Bloomberg as a tenant, or if Bloomberg were to
be unable to fulfill its obligations under its lease, it would adversely affect our results of operations and financial condition. In order to assist us in our continuing assessment of Bloombergs creditworthiness, we receive certain
confidential financial information and metrics from Bloomberg. In addition, we access and evaluate financial information regarding Bloomberg from other private sources, as well as publicly available data.
19
Results of Operations Three Months Ended September 30, 2017, compared to
September 30, 2016
Property Rentals
Property rentals were $37,970,000 in the quarter ended September 30, 2017, compared to $37,598,000 in the prior
years quarter, an increase of $372,000. This increase was primarily due to higher rental income from The Alexander apartment tower, which was placed in service in phases beginning July 2015 and leased up to stabilization in September 2016.
Expense Reimbursements
Tenant expense reimbursements were $20,124,000 in the quarter ended September 30, 2017, compared to $19,522,000 in the
prior years quarter, an increase of $602,000. This increase was primarily due to higher reimbursable real estate taxes and higher reimbursable operating expenses.
Operating Expenses
Operating expenses were $21,272,000 in the quarter ended September 30, 2017, compared to $21,714,000 in the prior
years quarter, a decrease of $442,000. This decrease was primarily due to (i) lower bad debt expense of $539,000 and (ii) lower marketing expenses for The Alexander apartment tower of $330,000, partially offset by (iii) higher
real estate taxes of $402,000.
Depreciation and Amortization
Depreciation and amortization was $8,430,000 in the quarter ended September 30, 2017, compared to $8,045,000 in the prior
years quarter, an increase of $385,000. This increase was primarily due to additional depreciation and amortization of tenant improvements and deferred leasing costs related to Le Cirques lease termination agreement at our 731 Lexington
Avenue property in September 2017.
General and Administrative Expenses
General and administrative expenses were $1,228,000 in the quarter ended September 30, 2017, compared to $1,225,000 in the
prior years quarter, an increase of $3,000.
Interest and Other Income, net
Interest and other income, net was $2,081,000 in the quarter ended September 30, 2017, compared to $522,000 in the prior
years quarter, an increase of $1,559,000. This increase was primarily due to higher interest income of $1,538,000 of which $899,000 was from higher average interest rates and $640,000 was from higher average investment balances.
Interest and Debt Expense
Interest and debt expense was $8,940,000 in the quarter ended September 30, 2017, compared to $5,615,000 in the prior
years quarter, an increase of $3,325,000. This increase was primarily due to additional interest expense of (i) $1,507,000 due to higher average LIBOR, (ii) $1,198,000 resulting from the refinancing of the office portion of 731 Lexington
Avenue on June 1, 2017 for $500,000,000 at LIBOR plus 0.90% (previously a $300,000,000 loan at LIBOR plus 0.95%) and (iii) $642,000 of higher amortization of debt issuance costs.
Income Taxes
Income tax
expense was $6,000 in the quarter ended September 30, 2017, compared to $7,000 in the prior years quarter.
20
Results of Operations Nine Months Ended September 30, 2017, compared to
September 30, 2016
Property Rentals
Property rentals were $114,507,000 in the nine months ended September 30, 2017, compared to $113,129,000 in the prior
years nine months, an increase of $1,378,000. This increase was primarily due to higher rental income of $3,763,000 from The Alexander apartment tower, which was placed in service in phases beginning July 2015 and leased up to stabilization in
September 2016, partially offset by income of $2,257,000 in the prior years nine months resulting from a tenant lease termination at our Rego Park II property in June 2016.
Expense Reimbursements
Tenant expense reimbursements were $58,006,000 in the nine months ended September 30, 2017, compared to $56,554,000 in the
prior years nine months, an increase of $1,452,000. This increase was primarily due to higher reimbursable real estate taxes and higher reimbursable operating expenses.
Operating Expenses
Operating expenses were $62,937,000 in the nine months ended September 30, 2017, compared to $60,702,000 in the prior
years nine months, an increase of $2,235,000. This increase was primarily due to (i) higher real estate taxes of $2,723,000 and (ii) higher reimbursable operating expenses of $555,000, partially offset by (iii) lower marketing
costs for The Alexander apartment tower of $1,007,000 and (iv) lower bad debt expense of $270,000.
Depreciation and Amortization
Depreciation and amortization was $24,613,000 in the nine months ended September 30, 2017, compared to $25,745,000 in the
prior years nine months, a decrease of $1,132,000. This decrease was primarily due to additional depreciation and amortization of tenant improvements and deferred leasing costs of $1,077,000 in the prior years nine months related to a
tenant lease termination at our Rego Park II property in June 2016.
General and Administrative Expenses
General and administrative expenses were $4,080,000 in the nine months ended September 30, 2017, compared to $4,285,000 in
the prior years nine months, a decrease of $205,000. This decrease was primarily due to lower directors fees and stock-based compensation expense as a result of having one less member on our Board of Directors than in the prior
years nine months.
Interest and Other Income, net
Interest and other income, net was $4,105,000 in the nine months ended September 30, 2017, compared to $2,388,000 in the
prior years nine months, an increase of $1,717,000. This increase was primarily due to higher interest income of $2,130,000 of which $1,530,000 was from higher average interest rates and $616,000 was from higher average investment balances,
partially offset by income of $367,000 included in the prior years nine months from a cost reimbursement settlement with a retail tenant at our 731 Lexington Avenue property.
Interest and Debt Expense
Interest and debt expense was $22,355,000 in the nine months ended September 30, 2017, compared to $16,476,000 in the
prior years nine months, an increase of $5,879,000. This increase was primarily due to additional interest expense of (i) $3,890,000 due to higher average LIBOR, (ii) $1,479,000 resulting from the refinancing of the office portion of 731
Lexington Avenue on June 1, 2017 for $500,000,000 at LIBOR plus 0.90% (previously a $300,000,000 loan at LIBOR plus 0.95%) and (iii) $511,000 of higher amortization of debt issuance costs.
Income Taxes
Income tax
expense was $7,000 in the nine months ended September 30, 2017, compared to $41,000 in the prior years nine months.
21
Liquidity and Capital Resources
Cash Flows
Property
rental income is our primary source of cash flow and is dependent on a number of factors, including the occupancy level and rental rates of our properties, as well as our tenants ability to pay their rents. Our properties provide us with a
relatively consistent stream of cash flow that enables us to pay our operating expenses, interest expense, recurring capital expenditures and cash dividends to stockholders. Other sources of liquidity to fund cash requirements include our existing
cash, proceeds from financings, including mortgage or construction loans secured by our properties and proceeds from asset sales. We anticipate that cash flows from continuing operations over the next twelve months, together with existing cash
balances, will be adequate to fund our business operations, cash dividends to stockholders, debt amortization and capital expenditures.
Nine Months
Ended September 30, 2017
Cash and cash equivalents and restricted cash were $364,514,000 as of
September 30, 2017, compared to $374,678,000 as of December 31, 2016, a decrease of $10,164,000. This decrease resulted from (i) $202,430,000 of net cash used in investing activities, partially offset by (ii) $120,056,000 of net cash
provided by financing activities and (iii) $72,210,000 of net cash provided by operating activities.
Net cash used in
investing activities of $202,430,000 was primarily comprised of the Rego Park II loan participation payment of $200,000,000 and construction in progress and real estate additions of $3,155,000.
Net cash provided by financing activities of $120,056,000 was primarily comprised of (i) $500,000,000 of proceeds from the
refinancing of the office portion of 731 Lexington Avenue, partially offset by (ii) debt repayments of $302,754,000 (primarily the repayment of the former loan on the office portion of 731 Lexington Avenue) and (iii) dividends paid of
$65,218,000.
Net cash provided by operating activities of $72,210,000 was comprised of (i) net income of
$62,626,000, (ii) adjustments for
non-cash
items of $30,666,000 and (iii) the net change in operating assets and liabilities of $21,082,000. The adjustments for
non-cash
items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $27,049,000, (ii) straight-lining of rental income of $3,223,000 and
(iii) stock-based compensation expense of $394,000.
22
Liquidity and Capital Resources continued
Nine Months Ended September 30, 2016
Cash and cash equivalents and restricted cash were $349,179,000 as of September 30, 2016, compared to $344,656,000 as of
December 31, 2015, an increase of $4,523,000. This increase resulted from (i) $81,898,000 of net cash provided by operating activities, partially offset by (ii) $63,934,000 of net cash used in financing activities and (iii) $13,441,000 of net
cash used in investing activities.
Net cash provided by operating activities of $81,898,000 was comprised of net income
of $64,822,000, adjustments for
non-cash
items of $29,710,000 and the net change in operating assets and liabilities of $12,634,000. The adjustments for
non-cash
items
were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $27,666,000, (ii) straight-lining of rental income of $1,594,000 and (iii) stock-based compensation expense of $450,000.
Net cash used in financing activities of $63,934,000 was primarily comprised of dividends paid of $61,363,000.
Net cash used in investing activities of $13,441,000 was comprised of construction in progress and real estate additions
primarily due to The Alexander apartment tower, including the payment of a development fee to Vornado of $5,784,000.
Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and
all-risk
property and rental value insurance coverage with limits of $1.7 billion per occurrence, including coverage for acts of terrorism, with
sub-limits
for certain
perils such as floods and earthquakes on each of our properties.
Fifty Ninth Street Insurance Company, LLC
(FNSIC), our wholly owned consolidated subsidiary, acts as a direct insurer for coverage for acts of terrorism, including nuclear, biological, chemical and radiological (NBCR) acts, as defined by the Terrorism Risk Insurance
Program Reauthorization Act, which expires in December 2020. Coverage for acts of terrorism (including NBCR acts) is up to $1.7 billion per occurrence and in the aggregate. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured
by third party insurance companies and the Federal government with no exposure to FNSIC. For NBCR acts, FNSIC is responsible for a $293,000 deductible and 17% of the balance of a covered loss, and the Federal government is responsible for the
remaining 83% of a covered loss. We are ultimately responsible for any loss incurred by FNSIC.
We continue to monitor the
state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in
excess of our insurance coverage, which could be material.
Our mortgage loans are
non-recourse
to us and contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to
obtain an equivalent amount of coverage at reasonable costs in the future. If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance our properties.
23
Liquidity and Capital Resources continued
Rego Park I Litigation
In June 2014, Sears Roebuck and Co. (Sears) filed a lawsuit in the Supreme Court of the State of New York against
Vornado and us (and certain of our subsidiaries) with regard to space that Sears leases at our Rego Park I property alleging that the defendants are liable for harm that Sears has suffered as a result of (a) water intrusions into the premises,
(b) two fires in February 2014 that caused damages to those premises, and (c) alleged violations of the Americans with Disabilities Act in the premises parking garage. Sears asserted various causes of actions for damages and sought
to compel compliance with landlords obligations to repair the premises and to provide security, and to compel us to abate a nuisance that Sears claims was a cause of the water intrusions into its premises. In addition to injunctive relief,
Sears sought, among other things, damages of not less than $4 million and future damages it estimated would not be less than $25 million. In March 2016, Sears withdrew its claim for future damages leaving a remaining claim for property
damages, which we estimate to be approximately $650,000 based on information provided by Sears. We intend to defend the remaining claim vigorously. The amount or range of reasonably possible losses, if any, is not expected to be greater than
$650,000.
Paramus
In 2001, we leased 30.3 acres of land located in Paramus, New Jersey to IKEA Property, Inc. The lease has a purchase option in
2021 for $75,000,000. The property is encumbered by a $68,000,000 interest-only mortgage loan with a fixed rate of 2.90%, which matures on October 5, 2018. The annual
triple-net
rent is the sum of
$700,000 plus the amount of debt service on the mortgage loan. If the purchase option is exercised, we will receive net cash proceeds of approximately $7,000,000 and recognize a gain on sale of land of approximately $60,000,000. If the purchase
option is not exercised, the
triple-net
rent for the last 20 years would include debt service sufficient to fully amortize $68,000,000 over the remaining
20-year
lease
term.
Letters of Credit
Approximately $1,474,000 of standby letters of credit were outstanding as of September 30, 2017.
Other
In October
2015, the New York City Department of Finance (NYC DOF) issued a Notice of Determination to us assessing an additional $22,490,000 of transfer taxes (including interest and penalties as of September 30, 2017) in connection with the
sale of Kings Plaza Regional Shopping Center in November 2012. We believe that the NYC DOFs claim is without merit and intend to vigorously contest this assessment. We have determined that the likelihood of a loss related to this issue is not
probable and, after consultation with legal counsel, that the outcome of this assessment is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
There are various other legal actions against us in the ordinary course of business. In our opinion, the outcome of such
matters in the aggregate will not have a material effect on our financial position, results of operations or cash flows.
24
Funds from Operations (FFO)
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate
Investment Trusts (NAREIT). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate
assets and other specified
non-cash
items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are used by management, investors and analysts to
facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly
assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available
to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. A reconciliation
of our net income to FFO is provided below.
FFO for the Three and Nine Months Ended September 30, 2017 and 2016
FFO for the quarter ended September 30, 2017 was $28,598,000, or $5.59 per diluted share, compared to $28,949,000, or
$5.66 per diluted share for the prior years quarter.
FFO for the nine months ended September 30, 2017 was
$86,846,000, or $16.98 per diluted share, compared to $90,198,000, or $17.64 per diluted share for the prior years nine months.
The following table reconciles our net income to FFO:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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(Amounts in thousands, except share and per share amounts)
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2017
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2016
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2017
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2016
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Net income
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$
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20,299
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$
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21,036
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$
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62,626
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$
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64,822
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Depreciation and amortization of real property
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8,299
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7,913
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24,220
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25,376
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FFO
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$
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28,598
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$
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28,949
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$
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86,846
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$
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90,198
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FFO per diluted share
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$
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5.59
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$
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5.66
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$
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16.98
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$
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17.64
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Weighted average shares used in computing FFO per diluted share
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5,115,982
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5,114,701
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5,115,339
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5,113,877
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25