Alexander’s(ALX) - 2018 Q4 - Annual Report

Part I Business Alexander's, Inc. is a REIT managing seven NYC-area properties, operated by Vornado, with Bloomberg L.P. as a major tenant - Alexander's, Inc. is a REIT engaged in leasing, managing, and developing properties, with all operations managed by Vornado Realty Trust[10] - The company's portfolio consists of seven properties in the greater New York City area, including six operating properties and one property to be developed (Rego Park III)[11][12] - As of December 31, 2018, Vornado owned 32.4% of Alexander's common stock. Key executives and directors of Alexander's also hold senior positions at Vornado, indicating a close relationship and shared management[15] Revenue from Significant Tenant (Bloomberg L.P.) | Year | Revenue (in thousands) | Percentage of Total Revenue | | :--- | :--- | :--- | | 2018 | $107,356 | ~46% | | 2017 | $105,224 | ~46% | | 2016 | $104,590 | ~46% | Risk Factors The company faces risks from NYC property concentration, tenant dependence, substantial debt, operational issues, and Vornado conflicts Geographic Concentration Risk - All company properties are located in the greater New York City metropolitan area, exposing the business to risks inherent to this specific region, including local economic downturns, business relocations, and changes in state and local taxes[24][25] - The company is subject to risks affecting the NYC retail environment, such as changes in consumer spending, competition from online shopping, and the threat of terrorism, which could decrease demand for space and property values[27][28] Real Estate and Tenant Risks - The property 731 Lexington Avenue accounts for approximately 65% of total revenues, making any loss or damage to this building a significant risk to financial results[42] - Bloomberg L.P. is a critical tenant, contributing about 46% of total revenues. The loss of Bloomberg or its failure to meet lease obligations would materially harm the company's financial condition[43] - The company faces risks from anchor tenant closures and bankruptcies. Sears closed its store at Rego Park I and rejected its lease after filing for bankruptcy. Kohl's announced plans to close and sublease its store at Rego Park II[40] Operational and Financial Risks - The company is exposed to cybersecurity risks, including attacks that could disrupt operations, compromise confidential information, and damage business relationships, potentially leading to material adverse effects on financial results[46][47] - The company maintains insurance coverage, including for terrorism, but is responsible for uninsured losses, deductibles, and losses exceeding coverage limits, which could be material[52][54] - As of December 31, 2018, the company had $1.17 billion in total debt outstanding. This substantial indebtedness poses risks, including insufficient cash flow to meet debt service and potential foreclosure if income from mortgaged properties is inadequate[68][69] - Failure to maintain qualification as a REIT would result in the company being subject to federal income tax at corporate rates, significantly reducing funds available for distribution to stockholders[71] Organizational and Ownership Risks - The company's charter includes provisions, such as stock ownership limits and a classified board of directors, that may delay or prevent a change in control, even if beneficial to stockholders[75][76][77] - Vornado, Interstate Properties, and their partners beneficially own approximately 58.6% of the company's common stock, giving them substantial influence and reducing the likelihood of a third-party tender offer[79] - Significant overlap in management and board members between Alexander's and Vornado creates potential conflicts of interest regarding business opportunities, strategic decisions, and the terms of agreements between the two entities[82][84][85] Unresolved Staff Comments There are no unresolved comments from the SEC staff as of the report date - There are no unresolved comments from the SEC staff as of the filing date of this Form 10-K[91] Properties As of December 31, 2018, the company's portfolio includes seven NYC-area properties: mixed-use, retail, residential, and development Property Portfolio Overview (as of Dec 31, 2018) | Property | Location | Type | Size (sq. ft.) | Occupancy | | :--- | :--- | :--- | :--- | :--- | | 731 Lexington Avenue | New York, NY | Office/Retail | 1,063,000 | 100% (Office), 99% (Retail) | | Rego Park I | Queens, NY | Retail | 343,000 | 43% | | Rego Park II | Queens, NY | Retail | 609,000 | 100% | | The Alexander | Queens, NY | Residential | 255,000 (312 units) | 96% | | Paramus | Paramus, NJ | Land Lease | 30.3 acres | 100% | | Flushing | Queens, NY | Retail | 167,000 | 100% | | Rego Park III | Queens, NY | Development | 3.2 acres | N/A | - The 731 Lexington Avenue property is encumbered by two separate mortgage loans: a $500 million loan on the office portion and a $350 million loan on the retail portion[98][99] - The Rego Park I shopping center's occupancy was significantly impacted by the closure and lease rejection of its 195,000 sq. ft. Sears anchor store[100] - The land in Paramus, NJ is ground-leased to IKEA Property, Inc. until 2041, with a purchase option for IKEA in 2021 for $75 million[105] Legal Proceedings The company is involved in ordinary legal actions, notably a Sears lawsuit regarding Rego Park I, which is currently stayed due to Sears' bankruptcy - In June 2014, Sears filed a lawsuit against the company regarding its leased space at Rego Park I, claiming damages of not less than $4 million. The claim for future damages was withdrawn, leaving a remaining property damage claim estimated at approximately $650,000[109] - The Sears lawsuit was automatically stayed on October 15, 2018, due to Sears filing for Chapter 11 bankruptcy relief[109] Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable to the registrant[110] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "ALX"; no unregistered securities were sold or equity repurchased in 2018 - The company's common stock trades on the NYSE under the symbol "ALX"[112] - During 2018, the company did not sell any unregistered securities or repurchase any of its equity securities[113] Five-Year Cumulative Total Return Comparison | Index | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Alexander's, Inc. | $100 | $137 | $125 | $144 | $139 | $113 | | S&P 500 Index | $100 | $114 | $115 | $129 | $157 | $150 | | NAREIT All Equity Index | $100 | $128 | $132 | $143 | $155 | $149 | Selected Financial Data Key financial data from 2014-2018 shows steady revenue growth, but 2018 net income declined due to discontinued operations and securities valuation Selected Financial Data (2014-2018) | (In thousands, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $232,825 | $230,574 | $226,936 | $207,915 | $200,814 | | Income from continuing operations | $56,641 | $80,509 | $86,477 | $76,907 | $67,396 | | Net income | $32,844 | $80,509 | $86,477 | $76,907 | $67,925 | | Net income per common share - diluted | $6.42 | $15.74 | $16.91 | $15.04 | $13.29 | | Dividends per common share | $18.00 | $17.00 | $16.00 | $14.00 | $13.00 | | Total assets | $1,481,257 | $1,632,395 | $1,451,230 | $1,447,808 | $1,418,392 | | Mortgages payable, net | $1,161,534 | $1,240,222 | $1,052,359 | $1,053,262 | $1,027,956 | | Total equity | $285,092 | $343,955 | $352,845 | $352,880 | $348,399 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income declined in 2018 due to tax expenses, securities losses, and tenant bankruptcies, with liquidity maintained through rental income and cash Overview 2018 vs. 2017 Financial Summary | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income | $32.8M | $80.5M | | Diluted EPS | $6.42 | $15.74 | | FFO (non-GAAP) | $77.4M | $114.9M | | FFO per Diluted Share (non-GAAP) | $15.13 | $22.46 | - 2018 net income was significantly impacted by a $23.8 million expense for contested transfer taxes on the 2012 Kings Plaza sale and an $11.9 million decrease in the fair value of marketable securities[123] - The company recorded a $23.8 million expense for potential additional real property transfer taxes related to the 2012 sale of Kings Plaza, which is currently being contested in court[129][131] - Tenant bankruptcies impacted results: Sears rejected its lease at Rego Park I in October 2018, and Toys "R" Us rejected its lease at Rego Park II in June 2018, leading to write-offs and accelerated depreciation[132][133] Results of Operations Comparison of Operations (2018 vs. 2017) | (In thousands) | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $232,825 | $230,574 | $2,251 | | Operating Expenses | $93,775 | $85,127 | $8,648 | | Depreciation & Amortization | $33,089 | $34,925 | ($1,836) | | Interest and Debt Expense | $44,533 | $31,474 | $13,059 | | Change in Fair Value of Marketable Securities | ($11,990) | $0 | ($11,990) | | Loss from Discontinued Operations | ($23,797) | $0 | ($23,797) | - Operating expenses increased by $8.6 million in 2018, primarily due to higher bad debt expense of $4.4 million and higher real estate taxes of $2.2 million[152] - Interest and debt expense rose by $13.1 million in 2018, mainly driven by an $8.5 million increase from higher average LIBOR and costs associated with the June 2017 refinancing of 731 Lexington Avenue[156] Liquidity and Capital Resources - The primary source of cash flow is property rental income, which is considered sufficient, along with existing cash, to fund operations, dividends, and capital expenditures for the next twelve months[172] - In 2018, the company extended a $68 million mortgage on its Paramus property to October 2021 and completed a $252.5 million refinancing of its Rego Park II shopping center, extending the maturity to December 2025[174][176] Contractual Obligations as of December 31, 2018 (in thousands) | Obligation Type | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $1,388,931 | $43,602 | $154,502 | $411,860 | $778,967 | | Operating leases | $6,467 | $800 | $1,600 | $1,600 | $2,467 | | Total | $1,395,398 | $44,402 | $156,102 | $413,460 | $781,434 | - Cash and cash equivalents decreased by $103.8 million in 2018, primarily due to $176.2 million used in financing activities (net debt repayments and dividends), partially offset by $73.5 million provided by operating activities[189][190] Funds from Operations (FFO) Reconciliation of Net Income to FFO (non-GAAP) | (In thousands) | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net income | $32,844 | $80,509 | | Depreciation and amortization of real property | $32,595 | $34,399 | | Change in fair value of marketable securities | $11,990 | — | | FFO (non-GAAP) | $77,429 | $114,908 | | FFO per diluted share (non-GAAP) | $15.13 | $22.46 | - FFO for 2018 included a $23.8 million expense ($4.65 per share) for the contested Kings Plaza transfer taxes[202] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations on variable-rate debt, mitigated by an interest rate cap on its $500 million notional amount Interest Rate Sensitivity Analysis (as of Dec 31, 2018) | Debt Type | Balance (in thousands) | Weighted Avg. Interest Rate | Effect of 1% Change in Base Rates (in thousands) | | :--- | :--- | :--- | :--- | | Variable Rate | $1,102,544 | 3.61% | $11,025 | | Fixed Rate | $68,000 | 4.72% | $0 | | Total | $1,170,544 | 3.67% | $11,025 | - A 1% change in base interest rates would impact diluted earnings per share by an estimated $2.15[206] - The estimated fair value of the company's consolidated debt was $1.165 billion as of December 31, 2018, compared to a carrying value of $1.171 billion[207] Financial Statements and Supplementary Data Audited financial statements for 2016-2018 show decreased assets, a sharp decline in 2018 net income from discontinued operations, and net cash decrease from financing Consolidated Balance Sheets Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Real estate, net | $730,270 | $754,324 | | Cash and cash equivalents | $283,056 | $307,536 | | Total Assets | $1,481,257 | $1,632,395 | | Mortgages payable, net | $1,161,534 | $1,240,222 | | Total Liabilities | $1,196,165 | $1,288,440 | | Total Equity | $285,092 | $343,955 | Consolidated Statements of Income Consolidated Income Statement Data (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenues | $232,825 | $230,574 | $226,936 | | Operating Income | $100,622 | $105,270 | $105,461 | | Income from continuing operations | $56,641 | $80,509 | $86,477 | | Loss from discontinued operations | ($23,797) | $0 | $0 | | Net Income | $32,844 | $80,509 | $86,477 | | Net income per common share | $6.42 | $15.74 | $16.91 | Consolidated Statements of Cash Flows Consolidated Cash Flow Data (in thousands) | Cash Flow Category | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $73,538 | $123,426 | $130,820 | | Net cash used in investing activities | ($1,137) | ($201,971) | ($15,506) | | Net cash (used in) provided by financing activities | ($176,185) | $97,146 | ($85,292) | | Net (decrease) increase in cash | ($103,784) | $18,601 | $30,022 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported - None reported[311] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2018, with no material changes to internal controls, and auditors issued an unqualified opinion - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2018[312] - There were no changes in internal control over financial reporting during the fourth quarter that materially affected, or are reasonably likely to materially affect, internal controls[313] - The independent registered public accounting firm, Deloitte & Touche LLP, audited the company's internal control over financial reporting and concluded that it was effective in all material respects as of December 31, 2018[318][320] Other Information No other information is reported under this item - None[326] Part III Part III incorporates information on directors, executive officers, corporate governance, compensation, security ownership, and related party transactions by reference from the Proxy Statement Directors, Executive Officers and Corporate Governance This section lists executive officers, with detailed information on directors and corporate governance incorporated by reference from the Proxy Statement Executive Officers | Name | Age | Position(s) | | :--- | :--- | :--- | | Steven Roth | 77 | Chairman of the Board and Chief Executive Officer | | Matthew Iocco | 48 | Chief Financial Officer | - Information regarding directors, the audit committee, and the audit committee financial expert is incorporated by reference from the company's Proxy Statement[327] Executive Compensation Executive compensation information is incorporated by reference from the company's Proxy Statement - All information regarding executive compensation is incorporated by reference from the Proxy Statement[330] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans as of December 31, 2018, with further security ownership information incorporated by reference from the Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 10,057 | N/A | 495,730 | | Not approved by security holders | N/A | N/A | N/A | | Total | 10,057 | N/A | 495,730 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the Proxy Statement - All information regarding related transactions and director independence is incorporated by reference from the Proxy Statement[334] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the Proxy Statement - All information regarding principal accounting fees and services is incorporated by reference from the Proxy Statement[335] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements and supplementary schedules for Valuation and Real Estate - The filing includes financial statement schedules for Valuation and Qualifying Accounts (Schedule II) and Real Estate and Accumulated Depreciation (Schedule III)[338] Form 10-K Summary No summary is provided under this item - None[359]