Vornado(VNO) - 2019 Q2 - Quarterly Report

PART I. Financial Information Financial Statements This section presents the unaudited consolidated financial statements for Vornado Realty Trust and Vornado Realty L.P., including balance sheets, income, and cash flow statements, notably impacted by the Fifth Avenue and Times Square JV and ASC 842 adoption Vornado Realty Trust Financial Statements Vornado Realty Trust reported a significant increase in net income for Q2 and H1 2019, primarily due to a $2.57 billion gain from the Fifth Avenue and Times Square JV, impacting assets and liabilities Vornado Realty Trust - Key Financial Highlights (Q2 & H1 2019 vs 2018) | Metric (in thousands, except per share) | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $463,103 | $541,818 | $997,771 | $1,078,255 | | Net Gain on transfer to Fifth Avenue and Times Square JV | $2,571,099 | $0 | $2,571,099 | $0 | | Net Income attributable to common shareholders | $2,400,195 | $111,534 | $2,581,683 | $93,693 | | Diluted EPS | $12.56 | $0.58 | $13.51 | $0.49 | Vornado Realty Trust - Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Real estate, net | $10,148,187 | $13,057,708 | | Total Assets | $17,913,857 | $17,180,794 | | Mortgages payable, net | $6,256,808 | $8,167,798 | | Total Liabilities | $9,555,651 | $11,289,349 | | Total Shareholders' Equity | $6,860,554 | $4,465,231 | - Cash and cash equivalents increased significantly to $922.6 million as of June 30, 2019, from $570.9 million at the end of 2018, reflecting proceeds from asset sales and joint ventures[17] Vornado Realty L.P. Financial Statements Vornado Realty L.P.'s financial statements are substantially identical to Vornado Realty Trust's, reflecting its role as the operating entity, with a similar net income increase driven by the Fifth Avenue and Times Square JV - The assets and liabilities on the Vornado Realty L.P. balance sheet are identical to those of Vornado Realty Trust, reflecting the UPREIT structure where the Operating Partnership holds substantially all assets and liabilities[41] Vornado Realty L.P. - Key Income Statement Highlights (Q2 & H1 2019 vs 2018) | Metric (in thousands, except per unit) | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $463,103 | $541,818 | $997,771 | $1,078,255 | | Net Income attributable to Class A unitholders | $2,562,669 | $118,931 | $2,756,318 | $99,917 | | Diluted Income per Class A unit | $12.54 | $0.58 | $13.50 | $0.48 | Notes to Consolidated Financial Statements These notes detail accounting policies and significant transactions, including ASC 842 adoption, revenue recognition, the Fifth Avenue and Times Square JV, 220 Central Park South unit sales, debt refinancing, and 608 Fifth Avenue impairment - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the recognition of $526.9 million in Right-of-Use (ROU) assets and corresponding lease liabilities for its ground leases[68] - A major transaction was the formation of the Fifth Avenue and Times Square JV on April 18, 2019. Vornado transferred several properties into the JV, sold a 48.5% common interest, and recognized a financial statement net gain of $2.57 billion[97][100] - During the first six months of 2019, the company closed on the sale of 23 condominium units at 220 Central Park South for net proceeds of $690.7 million, resulting in a financial statement net gain of $269.6 million[126] - The company recognized a $93.9 million non-cash impairment loss related to its retail property at 608 Fifth Avenue after the tenant, Topshop, filed for bankruptcy and closed its U.S. stores[183] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a significant increase in Q2 2019 net income to $2.4 billion due to the Fifth Avenue and Times Square JV gain, alongside a decrease in FFO, and covers dispositions, financing, and liquidity Overview This overview summarizes Q2 2019 financial results, including a surge in net income to $2.4 billion from the Fifth Avenue and Times Square JV gain, a decrease in FFO, and details significant dispositions and leasing activity Q2 2019 vs Q2 2018 Financial Results Summary | Metric (per diluted share) | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Net Income | $12.56 | $0.58 | | FFO | $0.86 | $1.02 | - The primary driver for the substantial increase in net income was the formation of the Fifth Avenue and Times Square JV, which resulted in a financial statement net gain of $2.57 billion[264] - Significant dispositions in H1 2019 included the sale of all common shares of Lexington Realty Trust for $167.7 million and all partnership units of Urban Edge Properties for $108.5 million[259][260] Same Store NOI Growth (Q2 2019 vs Q2 2018) | Portfolio | Same Store NOI (GAAP) | Same Store NOI (Cash) | | :--- | :--- | :--- | | Total | 1.2% | 4.3% | | New York | (0.7)% | 2.5% | | theMART | 12.1% | 15.5% | | 555 California Street | 13.0% | 12.9% | Results of Operations This section details operational results for Q2 and H1 2019, showing a decrease in total revenues due to the Fifth Avenue JV deconsolidation, an increase in expenses from the 608 Fifth Avenue impairment, and a decrease in interest expense - Q2 2019 revenues decreased by $78.7 million year-over-year, with a $62.6 million reduction directly attributable to properties transferred to the Fifth Avenue and Times Square JV[300] - Q2 2019 expenses increased by $90.2 million, mainly due to a $100.6 million charge for transaction costs and impairment losses, substantially related to the 608 Fifth Avenue property[302] - Interest and debt expense for Q2 2019 decreased by $24.6 million compared to Q2 2018, driven by lower debt balances from the JV transaction and paydowns of the 220 CPS loan[312] - Income tax expense rose to $26.9 million in Q2 2019 from $0.5 million in Q2 2018, primarily due to $22.8 million in taxes on the sale of 220 CPS condominium units[315] Liquidity and Capital Resources The company's liquidity strengthened in H1 2019, with cash increasing to $1.08 billion due to significant inflows from the Fifth Avenue JV and 220 CPS sales, largely offset by debt repayments, while outlining substantial ongoing development commitments Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $292,852 | $241,260 | | Net cash provided by (used in) investing activities | $2,113,511 | ($254,906) | | Net cash used in financing activities | ($2,046,358) | ($689,207) | - Major sources of cash in H1 2019 included $1.26 billion from the Fifth Avenue JV transaction and $690.7 million from 220 CPS condo sales[392] - Major uses of cash in H1 2019 included $1.94 billion in debt repayments and $407 million for the purchase of marketable securities to defease a mortgage[393] - As of June 30, 2019, the company has construction commitments of approximately $730 million and expects to fund an additional $15.4 million to partially owned entities[419] Funds From Operations (FFO) This section details the calculation and reconciliation of FFO, a non-GAAP measure, showing a decrease in Q2 2019 FFO to $164.3 million ($0.86/share) from $194.7 million ($1.02/share) in Q2 2018, with adjustments from net income FFO Reconciliation Summary (in thousands, except per share) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to common shareholders | $2,400,195 | $111,534 | $2,581,683 | $93,693 | | FFO adjustments, net | ($2,235,880) | $83,103 | ($2,169,699) | $235,928 | | FFO attributable to common shareholders | $164,315 | $194,637 | $411,984 | $329,621 | | FFO per diluted share | $0.86 | $1.02 | $2.16 | $1.72 | - The company has elected to exclude mark-to-market adjustments of marketable equity securities from its FFO calculation, in line with the December 2018 NAREIT restated definition[422] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk, with a 1% rate increase potentially decreasing annual net income by $30.1 million, which it mitigates using interest rate swaps on variable-rate debt Interest Rate Sensitivity Analysis (as of June 30, 2019) | Debt Type | Balance (in thousands) | Weighted Avg. Rate | Effect of 1% Rate Change (in thousands) | | :--- | :--- | :--- | :--- | | Consolidated Variable Rate | $1,763,182 | 4.06% | $17,632 | | Pro Rata Share of Non-Consolidated Variable Rate | $1,475,815 | 4.04% | $14,758 | | Total Annual Net Income Impact (Vornado) | | | $30,062 | - The company uses interest rate swaps to fix the rates on several large variable-rate loans, including its $750 million unsecured term loan (fixed at 3.87%) and a $700 million mortgage on 770 Broadway (fixed at 2.56%)[430] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter - Both Vornado Realty Trust and Vornado Realty L.P. concluded that their disclosure controls and procedures were effective as of June 30, 2019[433][435] - No material changes to internal control over financial reporting occurred during the second quarter of 2019[434][436] PART II. Other Information Legal Proceedings The company is involved in various legal actions, which management does not expect to have a material adverse effect on its financial position or operations - The company states that ongoing legal actions are not expected to have a material adverse effect on its financial condition[438] Risk Factors No material changes to the company's risk factors were reported for the period, consistent with disclosures in the prior annual report - No material changes to risk factors were reported for the period[439] Unregistered Sales of Equity Securities and Use of Proceeds Vornado Realty Trust reported no unregistered equity sales, while Vornado Realty L.P. issued 641,103 Class A units for equity awards, exempt from registration under Section 4(2) - Vornado Realty L.P. issued 641,103 Class A units in Q2 2019 related to employee equity awards, exempt from registration[441] Exhibits This section lists exhibits filed with the Form 10-Q, including the Crown Jewel Partner LLC Transaction Agreement, CEO/CFO certifications, and XBRL data files - Key exhibits filed include the Transaction Agreement with Crown Jewel Partner LLC, CEO/CFO certifications (Rule 13a-14 and Section 1350), and XBRL financial data[447]