UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
June 30, 2008
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from:
to
Commission File Number:
001-11954
VORNADO REALTY TRUST
(Exact name of registrant as specified in its charter)
Maryland
22-1657560
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
888 Seventh Avenue, New York, New York
10019
(Address of principal executive offices)
(Zip Code)
(212) 894-7000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x Large Accelerated Filer
o Accelerated Filer
o Non-Accelerated Filer (Do not check if smaller reporting company)
o Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2008, 153,889,331 of the registrant’s common shares of beneficial interest are outstanding.
PART I.
Financial Information:
Item 1.
Financial Statements:
Page Number
Consolidated Balance Sheets (Unaudited) as of June 30, 2008 and December 31, 2007
3
Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2008 and 2007
4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and 2007
5
Notes to Consolidated Financial Statements (Unaudited)
7
Report of Independent Registered Public Accounting Firm
32
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
68
Item 4.
Controls and Procedures
69
PART II.
Other Information:
Legal Proceedings
70
Item 1A.
Risk Factors
71
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits
Signatures
72
Exhibit Index
73
2
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
ASSETS
December 31, 2007
Real estate, at cost:
Land
$
4,417,348
4,576,479
Buildings and improvements
11,720,752
11,523,977
Development costs and construction in progress
1,087,294
821,991
Leasehold improvements and equipment
109,711
106,060
Total
17,335,105
17,028,507
Less accumulated depreciation and amortization
(1,969,257
)
(1,802,055
Real estate, net
15,365,848
15,226,452
Cash and cash equivalents
1,712,032
1,154,595
Escrow deposits and restricted cash
384,019
378,732
Marketable securities
275,629
322,992
Accounts receivable, net of allowance for doubtful accounts of $23,181 and $19,151
163,190
168,183
Investments in partially owned entities, including Alexander’s of $140,400 and $122,797
1,079,359
1,206,742
Investment in Toys “R” Us
343,116
298,089
Mezzanine loans receivable
466,674
492,339
Receivable arising from the straight-lining of rents, net of allowance of $3,403 and $3,076
551,792
513,137
Deferred leasing and financing costs, net of accumulated amortization of $146,760 and $123,624
303,132
273,958
Assets related to discontinued operations
112,164
1,632,318
Due from officers
13,185
13,228
Other assets
731,433
798,170
21,501,573
22,478,935
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes and mortgages payable
8,661,452
7,938,457
Convertible senior debentures
2,365,237
2,360,412
Senior unsecured notes
698,964
698,656
Exchangeable senior debentures
493,679
492,857
Revolving credit facility debt
—
405,656
Accounts payable and accrued expenses
515,863
480,123
Deferred credit
780,225
848,852
Officers’ deferred compensation plan
81,824
67,714
Deferred tax liabilities
19,698
241,895
Other liabilities
151,767
118,983
Liabilities related to discontinued operations
750
1,332,630
Total liabilities
13,769,459
14,986,235
Minority interest, including unitholders in the Operating Partnership
1,383,350
1,374,301
Commitments and contingencies
Shareholders’ equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000 shares; issued and outstanding 33,958,724 and 33,980,362 shares
824,013
825,095
Common shares of beneficial interest: $.04 par value per share; authorized, 250,000,000 shares; issued and outstanding 153,889,331 and 153,076,606 shares
6,216
6,140
Additional capital
5,382,214
5,339,570
Earnings in excess of (less than) distributions
164,652
(82,178
Accumulated other comprehensive (loss) income
(28,331
29,772
Total shareholders’ equity
6,348,764
6,118,399
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended June 30,
For The Six Months Ended June 30,
(Amounts in thousands, except per share amounts)
2008
2007
REVENUES:
Property rentals
558,855
481,131
1,092,289
912,739
Tenant expense reimbursements
84,898
77,267
172,058
149,690
Fee and other income
30,612
24,822
59,300
53,843
Total revenues
674,365
583,220
1,323,647
1,116,272
EXPENSES:
Operating
256,358
227,212
517,609
438,961
Depreciation and amortization
130,948
110,768
261,558
198,921
General and administrative
50,285
49,789
99,670
90,203
Costs of acquisitions not consummated
726
3,009
8,807
Total expenses
438,317
387,769
881,846
736,892
Operating income
236,048
195,451
441,801
379,380
Income applicable to Alexander’s
15,351
9,484
23,280
23,003
(Loss) income applicable to Toys “R” Us
(30,711
(20,029
49,651
38,632
Income (loss) from partially owned entities
4,285
8,195
(26,068
16,890
Interest and other investment income
23,793
119,689
37,897
173,193
Interest and debt expense (including amortization of deferred financing costs of $4,681 and $3,676 in each three-month period, respectively, and $8,924 and $7,514 in each six-month period, respectively)
(150,316
(140,293
(298,495
(270,991
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate
3,386
15,778
16,687
Minority interest of partially owned entities
1,837
1,346
2,243
1,696
Income before income taxes
103,673
189,621
233,695
378,490
Income tax (expense) benefit
(4,915
(2,508
212,414
(2,597
Income from continuing operations
98,758
187,113
446,109
375,893
Income from discontinued operations, net of minority interest
53,005
478
154,340
624
Income before allocation to minority limited partners
151,763
187,591
600,449
376,517
Minority limited partners’ interest in the Operating Partnership
(7,285
(16,852
(38,955
(34,029
Perpetual preferred unit distributions of the Operating Partnership
(4,818
(4,819
(9,637
Net income
139,660
165,920
551,857
332,851
Preferred share dividends
(14,274
(14,295
(28,549
(28,591
NET INCOME applicable to common shares
125,386
151,625
523,308
304,260
INCOME PER COMMON SHARE – BASIC:
0.48
1.00
2.40
2.01
Income from discontinued operations
0.34
1.01
Net income per common share
0.82
3.41
INCOME PER COMMON SHARE – DILUTED:
0.46
0.96
2.32
1.92
0.33
0.94
0.79
3.26
DIVIDENDS PER COMMON SHARE
0.90
0.85
1.80
1.70
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of debt issuance costs)
291,689
249,259
Write-off of deferred tax liability
(222,174
Net gain on sale of Americold
(112,690
Equity in income of partially owned entities, including Alexander’s and Toys
(81,431
(79,333
Net gains on sale of real estate
(57,411
55,035
34,022
Amortization of below market leases, net
(49,129
(34,322
Straight-lining of rental income
(40,710
(42,128
Write-off of pre-development costs
34,200
Net losses (gains) from derivative positions
21,830
(81,454
Distributions of income from partially owned entities
20,051
11,767
Other non-cash adjustments
15,994
10,481
9,637
Marketable equity security – impairment loss
9,073
(5,818
(8,232
Net gains on dispositions of wholly owned and partially owned assets other than depreciable real estate
(3,386
(16,687
Write-off for costs of acquisitions not consummated
8,707
Loss on early extinguishment of debt and write-off of unamortized financing costs
5,969
Changes in operating assets and liabilities:
Accounts receivable, net
7,029
4,744
(17,542
(31,288
10,304
(78,829
14,099
4,274
Net cash provided by operating activities
453,516
299,438
Cash Flows from Investing Activities:
Proceeds from sales of real estate and real estate related investments
350,591
(253,159
(140,253
Distributions of capital from partially owned entities
140,069
8,997
Investments in partially owned entities
(96,277
(166,611
Additions to real estate
(97,804
(76,164
Proceeds received from repayment of notes and mortgage loans receivable
50,951
113,291
Acquisitions of real estate and other
(32,484
(2,585,928
Deposits in connection with real estate acquisitions, including pre-acquisition costs
(9,185
(20,691
Proceeds from sales of, and return of investment in, marketable securities
8,338
36,253
Investments in notes and mortgage loans receivable
(7,397
(204,914
Cash restricted, including mortgage escrows
(16,340
18,473
Purchases of marketable securities
(2,140
(151,024
Proceeds received from Officer loan repayment
2,000
Net cash provided by (used in) investing activities
35,163
(3,166,571
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Proceeds from borrowings
1,215,500
2,510,217
Repayments of borrowings
(793,599
(714,873
Dividends paid on common shares
(276,478
(257,943
Distributions to minority partners
(47,083
(41,929
Dividends paid on preferred shares
(28,567
(28,645
Debt issuance costs
(13,155
(8,156
Proceeds from exercise of share options and other
12,140
5,304
Purchase of marketable securities in connection with the defeasance of mortgage notes payable
(86,653
Net cash provided by financing activities
68,758
1,377,322
Net increase (decrease) in cash and cash equivalents
557,437
(1,489,811
Cash and cash equivalents at beginning of period
2,233,317
Cash and cash equivalents at end of period
743,506
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest (including capitalized interest of $31,817 and $22,640)
316,642
289,832
Cash payments for income taxes
4,078
3,402
Non-Cash Transactions:
Financing assumed in acquisitions
1,296,398
Marketable securities transferred in connection with the defeasance of mortgage notes payable
86,653
Mortgage notes payable defeased
83,542
Conversion of Class A Operating Partnership units to common shares
23,819
30,885
Unrealized net loss on securities available for sale
(33,737
(26,970
Operating partnership units issued in connection with acquisitions
22,382
Increases in assets and liabilities resulting from the consolidation of our 50% investment in H Street partially owned entities upon acquisition of the remaining 50% interest on April 30, 2007:
342,764
Restricted cash
369
11,648
55,272
3,101
2,407
112,797
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
Vornado Realty Trust is a fully-integrated real estate investment trust (“REIT”) and conducts its business through Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). All references to “our,” “we,” “us,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries. We are the sole general partner of, and owned approximately 90.3% of the common limited partnership interest in, the Operating Partnership at June 30, 2008.
Substantially all of Vornado Realty Trust’s assets are held through subsidiaries of the Operating Partnership. Accordingly, Vornado Realty Trust’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors.
2.
Basis of Presentation
The accompanying consolidated financial statements are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC. The results of operations for the three and six months ended June 30, 2008, are not necessarily indicative of the operating results for the full year.
The accompanying consolidated financial statements include the accounts of Vornado and the Operating Partnership, as well as certain partially owned entities in which we own more than 50%, unless a partner has shared board and management representation and substantive participation rights on all significant business decisions, or 50% or less when (i) we are the primary beneficiary and the entity qualifies as a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities (“FIN 46R”), or (ii) when we are a general partner that meets the criteria under Emerging Issues Task Force (“EITF”) Issue No. 04-5. All significant inter-company amounts have been eliminated. Equity interests in partially owned entities are accounted for under the equity method of accounting when they do not meet the criteria for consolidation and our ownership interest is greater than 20%. When partially owned investments are in partnership form, the 20% threshold for equity method accounting is generally reduced to 3% to 5%, based on our ability to influence the operating and financial policies of the partnership. Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities. Investments in partially owned entities that do not meet the criteria for consolidation or for equity method accounting are accounted for on the cost method.
We have made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Certain prior year balances related to discontinued operations and income tax (expense) benefit have been reclassified in order to conform to current year presentation.
In connection with purchase accounting for H Street, in July 2005 and April 2007 we recorded an aggregate of $222,174,000 of deferred tax liabilities representing the differences between the tax basis and the book basis of the acquired assets and liabilities multiplied by the effective tax rate. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.
Recently Issued Accounting Literature
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. SFAS 157 was effective for our financial assets and liabilities on January 1, 2008. The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain non-financial assets and liabilities until January 1, 2009. This standard did not materially affect how we determine fair value, but resulted in certain additional disclosures. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Financial assets and liabilities measured at fair value in our consolidated financial statements consist of (i) marketable equity securities–available for sale, (ii) derivative positions in marketable equity securities and (iii) the assets of our officers’ deferred compensation plan (primarily marketable equity securities and equity investments in partially owned entities), for which there is a corresponding liability on our consolidated balance sheet. Financial assets and liabilities carried at fair value as of June 30, 2008 are presented in the table below based on the hierarchy used to measure fair value:
Fair Value Hierarchy
Level 1
Level 2
Level 3
Marketable equity securities
178,181
Officers’ deferred compensation plan assets
40,796
41,028
(2)
Interest rate caps
27
Total Assets, reported at fair value (1)
260,032
218,977
Derivative positions in marketable equity securities
4,996
Officers’ deferred compensation plan liabilities
Total Liabilities, reported at fair value (1)
86,820
___________________
(1)
We chose not to elect the fair value option prescribed by Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), for our financial assets and liabilities that had not been previously carried at fair value. These financial assets and liabilities include our outstanding debt, accounts receivable, accounts payable and investments in partially owned entities.
The fair value of Level 3 “officers’ deferred compensation plan assets” represents equity investments in certain limited partnerships, for which there is a corresponding Level 3 liability to the officers. The following is a reconciliation of the beginning balance at January 1, 2008 to the ending balance at June 30, 2008: Beginning balance of $50,578, less total unrealized gains/losses included in earnings of $8,294, and purchases, issuances and settlements of $1,256, which equals the ending balance of $41,028. The total unrealized gains and losses related to the plan assets and liabilities are included as a component of “interest and other investment income” and “general and administrative,” respectively, in our consolidated statement of income.
In September 2006, the FASB issued Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of SFAS No. 87, 88, 106 and 132R (“SFAS 158”). SFAS 158 requires an employer to (i) recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status; (ii) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The adoption of the requirement to recognize the funded status of a benefit plan and the disclosure requirements as of December 31, 2006 did not have a material effect on our consolidated financial statements. The requirement to measure plan assets and benefit obligations to determine the funded status as of the end of the fiscal year and to recognize changes in the funded status in the year in which the changes occur is effective on January 1, 2009. The adoption of the measurement date provisions of this standard is not expected to have a material effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS 159, which permits companies to measure many financial instruments and certain other items at fair value. SFAS 159 was effective on January 1, 2008. We have not elected the fair value option for any of our existing financial instruments on the effective date and have not determined whether we will elect this option for any eligible financial instruments we acquire in the future.
8
Recently Issued Accounting Literature - continued
In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R also broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and requires that acquisition related costs be expensed rather than included as part of the basis of the acquisition. SFAS 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for all transactions entered into on or after January 1, 2009. The adoption of this standard on January 1, 2009 could materially impact our future financial results to the extent that we acquire significant amounts of real estate, as related acquisition costs will be expensed as incurred compared to our current practice of capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective on January 1, 2009. We are currently evaluating the impact SFAS 160 will have on our consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures related to derivative instruments and hedging activities, including disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement), (the “FSP”). The adoption of this FSP would affect the accounting for our convertible and exchangeable senior debentures and Series D-13 convertible preferred units. The FSP would require the initial proceeds from the sale of our convertible and exchangeable senior debentures and Series D-13 convertible preferred units to be allocated between a liability component and an equity component. The resulting discount would be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP would be effective for our fiscal year beginning on January 1, 2009 and require retroactive application. The adoption of the FSP on January 1, 2009 would result in the recognition of an aggregate unamortized debt discount of $161,259,000 (as of June 30, 2008) in our consolidated balance sheets and additional interest expense in our consolidated statements of income. Our current estimate of the incremental interest expense, net of minority interest, for each reporting period is as follows:
For the year ended December 31:
2005
3,405
2006
6,065
28,233
35,113
2009
37,856
2010
40,114
2011
41,112
2012
8,192
9
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). The purpose of this statement is to improve financial reporting by providing a consistent framework for determining applicable accounting principles to be used in the preparation of financial statements presented in conformity with GAAP. SFAS 162 will become effective 60 days after the SEC’s approval. We believe that the adoption of this standard on its effective date will not have a material effect on our consolidated financial statements.
In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance Contracts (“SFAS 163”). SFAS 163 was issued to decrease inconsistencies within Statement No. 60, Accounting and Reporting by Insurance Enterprises, and clarify how it applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition of premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have any effect on our consolidated financial statements.
4.
Investments in Partially Owned Entities
Toys “R” Us (“Toys”)
Toys prepares its consolidated financial statements using the historical cost basis (“Recap basis”) of accounting. We account for our investment in Toys on the purchase accounting basis. In July 2008, in connection with an audit of Toys’ purchase accounting basis financial statements for its fiscal years 2006 and 2007, it was determined that the purchase accounting basis income tax expense was understated. Our share of this non-cash charge is $14,900,000, which we recognized as part of our equity in Toys’ net loss in the three months ended June 30, 2008. This non-cash charge has no effect on cash actually paid for income taxes or Toys’ previously issued Recap basis consolidated financial statements.
At June 30, 2008, we owned 32.7% of Toys. Toys’ business is highly seasonal. Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income. Because Toys’ fiscal year ends on the Saturday nearest January 31, we record our 32.7% share of Toys’ net income or loss on a one-quarter lag basis. Below is a summary of Toys’ latest available financial information.
(Amounts in millions)
Balance Sheet:
As of May 3, 2008
As of May 5, 2007
Total Assets
11,678
11,266
Total Liabilities
10,345
10,156
Total Equity
1,333
1,110
For the Three Months Ended
For the Six Months Ended
Income Statement:
May 3, 2008
May 5, 2007
Total Revenues
2,719
2,581
8,546
8,260
Net (Loss) Income
(95
(62
144
111
Alexander’s (NYSE: ALX)
At June 30, 2008, we owned 32.6% of the outstanding common stock of Alexander’s. We manage, lease and develop Alexander’s properties pursuant to agreements, that expire in March of each year and are automatically renewed. As of June 30, 2008, Alexander’s owed us $42,376,000 for fees under these agreements.
Based on Alexander’s June 30, 2008 closing share price on the NYSE of $310.60, the market value (“fair value” pursuant to SFAS 157) of our investment in Alexander’s is $513,754,000, or $373,354,000 in excess of the carrying amount on our consolidated balance sheet.
10
Investments in Partially Owned Entities – continued
The Lexington Master Limited Partnership (“Lexington MLP”)
At June 30, 2008, we owned 8,149,593 limited partnership units of Lexington MLP which are exchangeable on a one-for-one basis into common shares of Lexington Realty Trust (“Lexington”) (NYSE: LXP) or a 7.7% limited partnership interest. We record our pro rata share of Lexington MLP’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.
Based on Lexington’s June 30, 2008 closing share price of $13.63 on the NYSE, the market value (“fair value” pursuant to SFAS 157) of our investment in Lexington MLP was $111,079,000, or $42,693,000 below the carrying amount on our consolidated balance sheet. Lexington’s common shares have traded at market prices in excess of our carrying amount per unit during the last 12 months. We have the ability and intent to hold these units until they recover in value. In addition, we account for our investment in Lexington MLP on the equity method, under which the carrying amount of our investment is reduced by (i) the amount of distributions we receive from Lexington MLP (current annual run rate of $1.32 per unit) and (ii) our pro rata share of Lexington MLP’s net losses. During the six months ended June 30, 2008, the carrying amount of our investment was reduced by approximately $4,564,000. This reduction would have been greater if Lexington MLP did not have net gains on sales of real estate during this period. Based on these factors, we have concluded that the decline in the value of our investment is not “other-than-temporary” as of June 30, 2008. However, if the current market conditions deteriorate further, or a recovery in market value does not occur, we may be required to record additional unrealized or realized losses in future periods.
GMH Communities L.P. (“GMH”)
Prior to June 11, 2008, we owned 7,337,857 GMH limited partnership units, which were exchangeable on a one-for-one basis into common shares of GMH Communities Trust (“GCT”) (NYSE: GCT), and 2,517,247 common shares of GCT, or 13.8% of the limited partnership interest of GMH, which had an aggregate carrying amount of $101,634,000, or $10.31 per share/unit. We accounted for our investment in GMH on the equity method and recorded our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we filed our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT filed its financial statements.
Pursuant to the sale of GMH’s military housing division and the merger of its student housing division with American Campus Communities, Inc (“ACC”) (NYSE: ACC), subsequent to June 11, 2008 we received an aggregate of $105,180,000, consisting of $82,142,000 in cash and 753,126 shares of ACC common stock valued at $23,038,000 based on ACC’s then closing share price of $30.59, in exchange for our entire interest in GMH. We subsequently sold all of the ACC common shares. The above transactions resulted in a net gain of $2,038,000, which was recognized in the quarter ended June 30, 2008, and is included as a component of “net gains on disposition of wholly owned and partially owned assets other than depreciable real estate” in our consolidated statement of income.
The aggregate net income realized from inception of this investment in 2004 through its disposition was $77,000,000.
India Real Estate Ventures
We are a partner in four joint ventures established to develop real estate in India’s leading cities. During the six months ended June 30, 2008, we funded $39,077,000 of cash to the four ventures, including $34,077,000 to the India Property Fund L.P. (“IPF”). As of June 30, 2008, our aggregate investment in these four ventures was $83,524,000 and our remaining capital commitment to these ventures is $91,923,000, of which $80,923,000 is to IPF. At June 30, 2008 and December 31, 2007, our ownership interest in IPF was 36.5% and 50.6%, respectively. Based on the reduction of our ownership interest in 2008, we no longer consolidate the accounts of IPF into our consolidated financial statements and beginning on January 1, 2008 we account for our investment in IPF under the equity method.
11
Investments in Partially Owned Entities - continued
The carrying amount of our investments in partially owned entities and income (loss) recognized from such investments are as follows:
Investments: (Amounts in thousands)
Balance as of
Toys
Lexington MLP
153,772
160,868
Partially Owned Office Buildings
259,225
215,153
GMH
103,260
83,524
123,997
Alexander’s
140,400
122,797
Beverly Connection Joint Venture (“Beverly Connection”)
100,526
91,302
Other Equity Method Investments
341,912
389,365
Our Share of Net Income (Loss): (Amounts in thousands)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Toys:
32.7% share of equity in net (loss) income (see page 10)
(32,698
(21,324
45,657
35,490
Interest and other income
1,987
1,295
3,994
3,142
Alexander’s:
32.6% share of:
Equity in net income before stock appreciation rights compensation income
5,331
4,865
10,458
10,981
Stock appreciation rights compensation income
7,157
1,222
6,952
5,916
Equity in net income
12,488
6,087
17,410
16,897
Management and leasing fees
1,979
2,129
4,106
4,310
Development fees
884
1,268
1,764
1,796
Beverly Connection:
50% share of equity in net income (loss) (1)
2,326
(1,062
635
(2,389
Interest and fee income
3,529
2,330
6,944
4,607
5,855
7,579
2,218
Lexington MLP –7.7% share of equity in net income (loss) (2)
60
(242
1,887
H Street partially owned entities – 50% share of equity in net income
3,089
4,311
(3)
GMH –13.8% share of equity in net income (loss)
31
(281
India Real Estate Ventures – 4% to 36.5% share of equity in net losses
(614
(1,028
Other (4)
(1,016
4,049
(34,506
)(5)
10,884
_________________________
See notes on following page.
12
Notes to preceding tabular information
(Amounts in thousands):
The three and six months ended June 30, 2008 include $4,100 for the reversal of non-cash charges recorded by the joint venture in prior periods which, pursuant to paragraph 19(n) of APB Opinion 18 “The Equity Method of Accounting For Investments In Common Stock,” should have been eliminated in the determination of our share of the earnings of the venture.
We recognize our share of Lexington MLP’s net earnings on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.
Represents our 50% share of equity in net income from January 1, 2007 through April 29, 2007. On April 30, 2007, we acquired the remaining 50% interest of these entities and began to consolidate the accounts into our consolidated financial statements and no longer account for this investment under the equity method.
(4)
Includes our equity in net earnings of partially owned entities, including partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Dune Capital LP, Verde Group LLC, and others.
(5)
Includes a $34,200 write-off for our share of two joint ventures’ pre-development costs, of which $23,000 represents our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project.
13
Below is a summary of the debt of partially owned entities as of June 30, 2008 and December 31, 2007, none of which is guaranteed by us.
100% of Partially Owned Entities Debt
Toys (32.7% interest) (as of May 4, 2008 and November 3, 2007, respectively):
$1.3 billion senior credit facility, due 2010, LIBOR plus 3.00% (6.14% at June 30, 2008)
1,300,000
$2.0 billion credit facility, due 2010, LIBOR plus 1.00%-3.75%
489,000
Mortgage loan, due 2010, LIBOR plus 1.30% (3.78% at June 30, 2008)
800,000
$804 million secured term loan facility, due 2012, LIBOR plus 4.25% (9.01% at June 30, 2008)
797,000
Senior U.K. real estate facility, due 2013, with interest at 5.02%
698,000
741,000
7.625% bonds, due 2011 (Face value – $500,000)
483,000
481,000
7.875% senior notes, due 2013 (Face value – $400,000)
375,000
373,000
7.375% senior notes, due 2018 (Face value – $400,000)
333,000
331,000
4.51% Spanish real estate facility, due 2013
204,000
193,000
$181 million unsecured term loan facility, due 2013, LIBOR plus 5.00%
(7.48% at June 30, 2008)
180,000
Japan bank loans, due 2011-2014, 1.20%-2.80%
152,000
161,000
Japan borrowings, due 2008-2011 (weighted average rate of 1.28% at June 30, 2008)
238,000
243,000
6.84% Junior U.K. real estate facility, due 2013
124,000
132,000
4.51% French real estate facility, due 2013
98,000
93,000
8.750% debentures, due 2021 (Face value – $22,000)
21,000
Note at an effective cost of 2.23% due in semi-annual installments through 2008
19,000
Multi-currency revolving credit facility, due 2010, LIBOR plus 1.50%-2.00%
28,000
Other
48,000
41,000
5,851,000
6,423,000
Alexander’s (32.6% interest):
731 Lexington Avenue mortgage note payable collateralized by the office space, due in February 2014, with interest at 5.33% (prepayable with yield maintenance)
378,721
383,670
731 Lexington Avenue mortgage note payable, collateralized by the retail space, due in July 2015, with interest at 4.93% (prepayable with yield maintenance)
320,000
Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011, with interest at 7.46% (prepayable with yield maintenance)
201,533
203,456
Rego Park construction loan payable, due in December 2010, LIBOR plus 1.20% (3.66% at June 30, 2008)
111,617
55,786
Rego Park mortgage note payable, due in June 2009, with interest at 7.25% (prepayable without penalty after March 2009)
78,844
79,285
Paramus mortgage note payable, due in October 2011, with interest at 5.92% (prepayable without penalty)
68,000
1,158,715
1,110,197
Lexington MLP (7.7% interest) (as of March 31, 2008 and September 30, 2007, respectively): Portion of first mortgages collateralized by the partnership’s real estate, due from 2008 to 2024, with a weighted average interest rate of 5.73% at June 30, 2008 (various prepayment terms)
2,697,877
3,320,261
GMH – 13.8% interest in mortgage notes payable
995,818
14
Kaempfer Properties (2.5% and 5.0% interests in two partnerships) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2011 to 2031, with a weighted average interest rate of 5.72% at June 30, 2008 (various prepayment terms)
143,640
144,340
100 Van Ness, San Francisco office complex (9% interest) up to $132 million construction loan payable, due in July 2013, LIBOR plus 2.75% with an interest rate floor of 6.50%
85,249
330 Madison Avenue (25% interest) mortgage note payable (refinanced in May 2008 up to $150,000), due in June 2015, with interest at 3.98%
70,000
60,000
Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%
63,440
64,035
Rosslyn Plaza (46% interest) mortgage note payable, due in December 2011, LIBOR plus 1.0% (3.46% at June 30, 2008)
56,680
West 57th Street (50% interest) mortgage note payable, due in October 2009, with interest at 4.94% (prepayable without penalty after July 2009)
29,000
825 Seventh Avenue (50% interest) mortgage note payable, due in October 2014, with interest at 8.07% (prepayable with yield maintenance)
21,620
21,808
India Real Estate Ventures:
TCG Urban Infrastructure Holdings (25% interest) mortgage notes payable, collateralized by the entity’s real estate, due from 2008 to 2022, with a weighted average interest rate of 13.14% at June 30, 2008 (various prepayment terms)
163,657
136,431
India Property Fund L.P. (36.5% interest) $120 million secured revolving credit facility, due in December 2009, LIBOR plus 2.75% (5.23% at June 30, 2008)
85,500
Verde Realty Master Limited Partnership (8.5% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2008 to 2037, with a weighted average interest rate of 6.00% at June 30, 2008 (various prepayment terms)
554,786
487,122
Green Courte Real Estate Partners, LLC (8.3% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2008 to 2015, with a weighted average interest rate of 5.33% at June 30, 2008 (various prepayment terms)
302,263
225,704
Beverly Connection (50% interest) mortgage and mezzanine loans payable, with a weighted average interest rate of 8.32%, $70,000 of which is due to Vornado
170,000
Monmouth Mall (50% interest) mortgage note payable, due in September 2015, with interest at 5.44% (prepayable with yield maintenance)
165,000
San Jose, California Ground-up Development (45% interest) construction loan, due in March 2009, with a one-year extension option; $114 million fixed at 4.62%, balance at LIBOR plus 1.75%
(4.19% at June 30, 2008)
119,456
101,045
Wells/Kinzie Garage (50% interest) mortgage note payable, due in June 2009, with interest at 7.03%
14,246
14,422
Orleans Hubbard Garage (50% interest) mortgage note payable, due in April 2009, with interest at 7.03%
8,932
9,045
278,405
282,320
Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $2,998,810,000 and $3,289,873,000 as of June 30, 2008 and December 31, 2007, respectively.
15
5.
Mezzanine Loans Receivable
The following is a summary of our investments in mezzanine loans as of June 30, 2008 and December 31, 2007.
Interest Rate
Carrying Amount as of
Mezzanine Loans Receivable:
Maturity
as ofJune 30,2008
Tharaldson Lodging Companies
04/09
6.70%
76,341
76,219
Riley HoldCo Corp.
02/15
10.00%
74,325
74,268
280 Park Avenue
06/16
10.25%
73,750
Equinox
02/13
14.00%
78,483
73,162
MPH, net of a valuation allowance of $46,700 and $57,000, respectively (1)
19,300
9,000
11/08-08/15
4.75% - 15.0%
144,475
185,940
_____________________
On June 5, 2007, we acquired a 42% interest in two MPH mezzanine loans totaling $158,700, for $66,000 in cash. The loans, which were due on February 8, 2008 and have not been repaid, are subordinate to $2.9 billion of mortgage and other debt and secured by the equity interests in four New York City properties: Worldwide Plaza, 1540 Broadway office condominium, 527 Madison Avenue and Tower 56. At December 31, 2007, we reduced the net carrying amount of the loans to $9,000, by recognizing a $57,000 non-cash charge which was included as a reduction of “interest and other investment income” in our 2007 consolidated statement of income. On April 2, 2008, we sold a sub-participation interest in the loans for $19,300. The sub-participation did not meet the criteria for sale accounting under Statement of Financial Accounting Standard No. 140 –Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) because the sub-participant is not free to pledge or exchange the asset. In the first quarter of 2008, we reduced our valuation allowance from $57,000 to $46,700, resulting in the recognition of $10,300 of “interest and other investment income” in our consolidated statement of income.
16
6.
Identified Intangible Assets, Intangible Liabilities and Goodwill
The following summarizes our identified intangible assets, intangible liabilities (deferred credit) and goodwill as of June 30, 2008 and December 31, 2007.
Identified intangible assets (included in other assets):
Gross amount
788,383
727,205
Accumulated amortization
(220,069
(163,688
Net
568,314
563,517
Goodwill (included in other assets):
4,345
Identified intangible liabilities (included in deferred credit):
967,366
977,574
(223,716
(163,473
743,650
814,101
Amortization of acquired below market leases, net of acquired above market leases (a component of rental income) was $25,858,000 and $20,327,000 for the three months ended June 30, 2008 and 2007, respectively, and $49,129,000 and $34,343,000 for the six months ended June 30, 2008 and 2007, respectively. Estimated annual amortization of acquired below market leases, net of acquired above market leases for each of the five succeeding years is as follows:
68,411
61,123
57,916
54,265
2013
46,299
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $19,404,000 and $6,779,000 for the three months ended June 30, 2008 and 2007, respectively, and $44,358,000 and $13,084,000 for the six months ended June 30, 2008 and 2007, respectively. Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years is as follows:
58,896
56,253
53,837
49,202
41,254
We are a tenant under ground leases for certain of our properties. Amortization of these acquired below market leases resulted in an increase to rent expense of $533,000 and $393,000 for the three months ended June 30, 2008 and 2007, respectively, and $1,066,000 and $777,000 for the six months ended June 30, 2008 and 2007, respectively. Estimated annual amortization of these below market leases for each of the five succeeding years is as follows:
2,133
17
7.
Debt
The following is a summary of our notes and mortgages payable:
Notes and Mortgages Payable:
Maturity (1)
At June 30, 2008
Fixed Interest:
New York Office:
1290 Avenue of the Americas
01/13
5.97%
449,470
454,166
350 Park Avenue
01/12
5.48%
430,000
770 Broadway
03/16
5.65%
353,000
888 Seventh Avenue
01/16
5.71%
318,554
Two Penn Plaza
02/11
4.97%
289,722
292,000
909 Third Avenue
04/15
5.64%
215,694
217,266
Eleven Penn Plaza
12/11
5.20%
208,600
210,338
Washington, DC Office:
Skyline Place
02/17
5.74%
678,000
Warner Building
05/16
6.26%
292,700
1215, 1225, 1235 Clark Street, 200 12th Street and 251 18th Street
10/10-08/13
6.75%-7.09%
201,977
203,679
River House Apartment Complex (2)
5.43%
195,546
46,339
2011, 2032, 2345 Crystal Drive
09/08-08/13
6.66%-7.08%
148,388
150,084
1550, 1750 Crystal Drive and 241 18th Street
10/10-11/14
6.82%-7.08%
132,182
133,471
Bowen Building
6.14%
115,022
Reston Executive I, II and III
5.57%
1101 17th , 1140 Connecticut, 1730 M and 1150 17th Street
08/10
6.74%
88,722
89,514
Universal Buildings
04/14
4.88%
61,254
62,613
1750 Pennsylvania Avenue
06/12
7.26%
46,893
47,204
1800, 1851, 1901 South Bell Street
6.91%
31,763
35,558
Retail:
Cross collateralized mortgages payable on 42 shopping centers
03/10
7.93%
452,084
455,907
Springfield Mall (including present value of purchase option)
04/13
5.45%
254,817
256,796
Green Acres Mall (3)
02/08
6.75%
137,331
Montehiedra Town Center
6.04%
120,000
Broadway Mall
06/13
6.42%
95,975
97,050
828-850 Madison Avenue Condominium
06/18
5.29%
80,000
Las Catalinas Mall
11/13
6.97%
61,460
62,130
05/09-11/34
4.00%-7.57%
164,441
165,299
Merchandise Mart:
Merchandise Mart
12/16
550,000
High Point Complex
08/16
6.34%
221,186
221,258
Boston Design Center
09/15
5.02%
71,252
71,750
Washington Design Center
11/11
6.95%
45,342
45,679
Other:
555 California Street
05/10-09/11
720,150
719,568
Industrial Warehouses
10/11
25,465
25,656
Total Fixed Interest Notes and Mortgages Payable
7,212,659
7,230,932
See notes on page 20.
18
Debt - continued
Interest Rate as of
Spread over LIBOR
Variable Interest:
Manhattan Mall
02/12
L+55
3.02%
232,000
866 UN Plaza
05/11
L+40
2.90%
44,978
2101 L Street (4)
L+120
3.59%
150,000
Courthouse Plaza One and Two
01/15
L+75
3.35%
72,768
74,200
River House Apartments (2)
04/18
3.68%
64,000
Commerce Executive III, IV and V
07/09
3.01%
50,223
1999 K Street (5)
12/10
L+130
3.77%
43,277
220 20th Street (6)
01/11
L+115
3.63%
16,453
West End 25 (7)
3.76%
10,044
L+140
3.86%
335,000
Bergen Town Center (8)
03/13
L+150
4.11%
182,136
220 Central Park South
11/10
L+235 – L+245
4.84%
128,998
India Property Fund L.P. (9)
(9)
82,500
07/09 – 10/10
Various
4.76%
118,916
94,626
Total Variable Interest Notes and Mortgages Payable
3.79%
1,448,793
707,525
Total Notes and Mortgages Payable
5.61%
Convertible Senior Debentures:
Due 2027
04/12
2.85%
1,379,076
1,376,278
Due 2026
986,161
984,134
Total Convertible Senior Debentures
3.17%
Senior Unsecured Notes:
Senior unsecured notes due 2009
08/09
4.50%
249,556
249,365
Senior unsecured notes due 2010
4.75%
199,530
199,436
Senior unsecured notes due 2011
5.60%
249,878
249,855
Total Senior Unsecured Notes
4.96%
Exchangeable Senior Debentures due 2025
3.88%
Unsecured Revolving Credit Facilities:
$1.595 billion unsecured revolving credit facility
09/12
300,000
$1.000 billion unsecured revolving credit facility ($45,690 reserved for outstanding letters of credit)
06/11
105,656
Total Unsecured Revolving Credit Facilities
_______________________
19
Notes to preceding tabular information (Amounts in thousands):
Represents the extended maturity for certain loans in which we have the unilateral right, ability and intent to extend. In the case of our convertible and exchangeable debt, represents the earliest date holders may require us to repurchase the debentures.
On March 12, 2008, we completed a $260,000 refinancing of the River House Apartment Complex. The financing is comprised of a $196,000 interest-only seven-year 5.43% fixed rate mortgage and a $64,000 interest-only ten-year floating rate mortgage at the Freddie Mac Reference Note Rate plus 1.53% (3.68% at June 30, 2008). We retained net proceeds of $205,000 after repaying the existing loan.
On February 11, 2008, we completed a $335,000 refinancing of the Green Acres regional mall. This interest-only loan has a rate of LIBOR plus 1.40% (3.86% at June 30, 2008) and matures in February 2011, with two one-year extension options. We retained net proceeds of $193,000 after repaying the existing loan.
On February 26, 2008, we completed a $150,000 financing of 2101 L Street. The loan bears interest at LIBOR plus 1.20% (3.59% at June 30, 2008) and matures in February 2011 with two one-year extension options. We retained net proceeds of $148,000.
On March 27, 2008, we closed a construction loan providing up to $124,000 to finance the redevelopment of 1999 K Street. The interest-only loan has a rate of LIBOR plus 1.30% (3.77% at June 30, 2008) and matures in December 2010 with two six-month extension options.
(6)
On January 18, 2008, we closed a construction loan providing up to $87,000 to finance the residential redevelopment project at 220 20th Street (formally Crystal Plaza Two). The construction loan bears interest at LIBOR plus 1.15% (3.63% at June 30, 2008) and matures in January 2011 with two six-month extension options.
(7)
On February 20, 2008, we closed a construction loan providing up to $104,000 to finance the residential redevelopment project at 1229-1231 25th Street NW (“West End 25”). The construction loan bears interest at LIBOR plus 1.30% (3.76% at June 30, 2008) and matures in February 2011 with two six-month extension options.
(8)
On March 24, 2008, we closed a construction loan providing up to $290,000 to finance the redevelopment of a portion of the Bergen Town Center. The interest-only loan has a rate of LIBOR plus 1.50% (4.11% at June 30, 2008) and matures in March 2011 with two one-year extension options.
Beginning in the first quarter of 2008, we account for our investment in the India Property Fund on the equity method and no longer consolidate its accounts into our consolidated financial statements, based on the reduction in our ownership interest from 50.6% as of December 31, 2007 to 36.5%.
8.
Fee and Other Income
The following table sets forth the details of our fee and other income:
Tenant cleaning fees
14,382
10,527
27,804
20,370
3,840
2,804
7,808
10,003
Lease termination fees
561
3,014
4,721
Other income
11,829
10,196
20,674
18,749
Fee and other income above include management fee income from Interstate Properties, a related party, of $197,000 and $205,000 for the three months ended June 30, 2008 and 2007, respectively, and $408,000 and $410,000 for the six months ended June 30, 2008 and 2007, respectively. The above table excludes fee income from partially owned entities, which is included in income (loss) from partially owned entities (see Note 4 – Investments in Partially Owned Entities).
20
9.
Discontinued Operations
On March 31, 2008, we sold our 47.6% interest in Americold Realty Trust (“Americold”), our Temperature Controlled Logistics segment, for $220,000,000, in cash, which resulted in a net gain of $112,690,000.
On June 6, 2008, we sold our Tysons Dulles Plaza office building complex located in Tysons Corner, Virginia for approximately $152,800,000, in cash, which resulted in a net gain of $56,831,000.
In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classified our Temperature Controlled Logistics segment and our Tysons Dulles Plaza office building complex as discontinued operations and reported their revenues and expenses as “income from discontinued operations, net of minority interest” and the related assets and liabilities as “assets related to discontinued operations” and “liabilities related to discontinued operations” for all periods presented in the accompanying consolidated financial statements. The following table sets forth the assets (primarily net book value of real estate) and liabilities (primarily mortgage debt) related to discontinued operations at June 30, 2008 and December 31, 2007.
Assets related to Discontinued Operations as of
Liabilities related to Discontinued Operations as of
H Street – land under sales contract
108,293
108,470
Retail properties
3,871
4,030
Americold
1,424,770
1,332,627
Tysons Dulles Plaza
95,048
The following table sets forth the combined results of discontinued operations for the three and six months ended June 30, 2008 and 2007.
Revenues
2,940
211,459
222,361
416,868
Expenses
6,766
210,981
238,122
416,244
Net (loss) income
(3,826
(15,761
112,690
Net gain on sale of Tysons Dulles Plaza
56,831
Net gain on sale of other real estate
580
21
10.
Income Per Share
The table below computes (i) basic income per common share - which utilizes weighted average common shares outstanding without regard to potential dilutive common shares, and (ii) diluted income per common share - which includes weighted average common shares outstanding and dilutive common share equivalents. Potentially dilutive common share equivalents include our Series A convertible preferred shares, employee stock options and restricted share awards, exchangeable senior debentures due 2025, as well as Operating Partnership convertible preferred units.
Numerator:
Income from continuing operations, net of minority interest in the Operating Partnership
86,655
165,442
397,517
332,227
Numerator for basic income per share – net income applicable to common shares
Impact of assumed conversions:
Interest on 3.875% exchangeable senior debentures
5,203
10,509
10,512
Convertible preferred share dividends
48
100
143
Numerator for diluted income per share – net income applicable to common shares
125,434
156,897
533,917
314,915
Denominator:
Denominator for basic income per share – weighted average shares
153,675
151,794
153,488
151,612
Effect of dilutive securities (1):
Employee stock options and restricted share awards
4,691
6,770
4,575
6,916
3.875% exchangeable senior debentures
5,559
Convertible preferred shares
82
118
85
122
Denominator for diluted income per share – adjusted weighted average shares and assumed conversions
158,448
164,241
163,707
164,209
__________________
The effect of dilutive securities above excludes anti-dilutive weighted average common share equivalents. Accordingly, the three and six months ended June 30, 2008 excludes 7,522 and 1,941 weighted average common share equivalents, respectively. The three and six months ended June 30, 2007, exclude 1,725 and 1,684 weighted average common share equivalents, respectively.
11.
Comprehensive Income
Other comprehensive loss
(37,852
(31,720
(58,103
(24,959
Comprehensive income
101,808
134,200
493,754
307,892
Accumulated other comprehensive (loss) income was $(28,331,000) and $29,772,000 as of June 30, 2008 and December 31, 2007, respectively, and consists primarily of accumulated unrealized (loss) income from the mark-to-market of marketable equity securities classified as available-for-sale.
22
12.
Stock-based Compensation
Our Share Option Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, stock appreciation rights, performance shares and limited partnership units to certain of our employees and officers. We account for stock-based compensation in accordance with SFAS No. 123: Accounting for Stock-Based Compensation, as amended by SFAS No. 148: Accounting for Stock-Based Compensation - Transition and Disclosure and as revised by SFAS No. 123R: Share-Based Payment (“SFAS 123R”). We adopted SFAS 123R, using the modified prospective application, on January 1, 2006. Stock based compensation expense for the three and six months ended June 30, 2008 and 2007 consists of stock option awards, restricted common shares, Operating Partnership unit awards and Out-Performance Plan awards. We recognized $8,898,000 and $16,973,000 of stock based compensation expense in the three and six months ended June 30, 2008, respectively, of which $4,320,000 and $7,448,000 relates to our 2006 and 2008 out-performance plans. During the three and six months ended June 30, 2007, we recognized $6,973,000 and $12,620,000 of stock based compensation expense, respectively.
2008 Stock Options
On March 31, 2008, our Compensation Committee approved a grant of Vornado stock options to senior executives and employees. The options were granted with an exercise price 17.5% in excess of the average of the high and low price of our common shares on the New York Stock Exchange on that date. The options are expensed pro rata over the 5-year vesting period in accordance with SFAS 123R.
2008 Out-Performance Plan
On March 31, 2008, our Compensation Committee approved a $75,000,000 out-performance plan (the “2008 OPP”) that requires the achievement of performance objectives against both absolute and relative thresholds. The 2008 OPP establishes a potential performance pool in which 71 members of senior management have the opportunity to share in if the total return to our shareholders (the “Total Return”) resulting from both share appreciation and dividends for the four-year period from March 31, 2008 to March 31, 2012 exceeds both an absolute and a relative hurdle. The initial value from which to determine the Total Return is $86.20 per share, a 0.93% premium to the trailing 10-day average closing price on the New York Stock Exchange for our common shares on the date the plan was adopted.
The size of the out-performance pool for the 2008 OPP is 6% of the aggregate “out-performance return” subject to a maximum total award of $75,000,000 (the “Maximum Award”). The “out-performance return” is comprised of (i) 3% of the total dollar value of the Total Return in excess of 10% per annum (the “Absolute Component”), plus (ii) 3% of the total dollar value of the Total Return in excess of the Relative Threshold (the “Relative Component”), based on the SNL Equity REIT Index (the “Index”) over the four-year performance period. In the event that the Relative Component creates a negative award as a result of underperforming the Index, the value of any out-performance award potentially earned under the Absolute Component will be reduced dollar for dollar. In addition, awards potentially earned under the Relative Component will be reduced on a ratable sliding scale to the extent the Total Return is less than 10% per annum and to zero to the extent the Total Return is less than 7% per annum. The size of this out-performance pool, if any, will be determined based on the highest 30-trading day trailing average price of our common shares during the final 150 days of the four-year period. During the four-year performance period, participants are entitled to receive 10% of the common dividends paid on Vornado’s common shares for each OPP unit awarded, regardless of whether the OPP units are ultimately earned.
The 2008 OPP also provides participants an opportunity to earn partial awards during two interim measurement periods (the “Interim Periods”): (a) one for a period consisting of the first two years of the performance period and (b) one for a period consisting of the final two years of the performance period. For each Interim Period, participants may be entitled to share in 40% ($30,000,000) of the maximum $75,000,000 performance pool if the performance thresholds have been met for the applicable Interim Periods on a pro rated basis. The starting share price for the first Interim Period is $86.20 per share. The starting share price for the second Interim Period is equal to the greater of our common share price on March 31, 2010, or the initial starting share price of $86.20 per share less dividends paid during the first two years of the plan. If the maximum award is earned during the first Interim Period, participants lose the potential to earn the second Interim Period award, but not the potential to earn the remainder of the maximum award over the four-year period. The size of any out-performance pool for an Interim Period will be determined based on the highest 30-day trailing average price of our shares during the final 120 days of the applicable Interim Period.
Awards earned under the program (including any awards earned for the Interim Periods), will vest 50% on March 31, 2012 and 50% on March 31, 2013. The 2008 OPP is accounted for in accordance with SFAS 123R. The fair value of the OPP awards on the date of grant, as adjusted for estimated forfeitures, was approximately $21,600,000, which will be amortized into expense over a five-year period beginning on the date of grant through the final vesting period, using a graded vesting attribution model.
23
13.
Commitments and Contingencies
At June 30, 2008, $45,690,000 was reserved for outstanding letters of credit under our $1 billion revolving credit facility. Our credit facilities contain financial covenants, that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provides for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also contain customary conditions precedent to borrowing, including representations and warranties and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.
In connection with our investments in partially owned entities, we are committed to fund additional capital aggregating $122,178,000. Of this amount, $80,923,000 relates to our equity commitment to IPF which we have pledged as collateral to IPF’s lender and $18,090,000 relates to capital expenditures committed to the Springfield Mall, in which we have a 97.5% interest.
In June 2007 we formed Penn Plaza Insurance Company, LLC (“PPIC”), a wholly owned consolidated subsidiary, to act as a re-insurer with respect to a portion of our earthquake insurance coverage and as a direct insurer for coverage for “certified” acts of terrorism and for nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). Coverage for “certified” acts of terrorism is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. Prior to the formation of PPIC, we were uninsured for losses under NBCR coverage. Subsequently, we have $1.5 billion of NBCR coverage under TRIPRA, for which PPIC is responsible for 15% of each NBCR loss and the insurance company deductible of $1,000,000. We are ultimately responsible for any loss borne by PPIC.
Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), senior unsecured notes, exchangeable senior debentures, convertible senior debentures and revolving credit agreements, contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage under these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
We enter into agreements for the purchase and resale of U.S. government obligations for periods of up to one week. The obligations purchased under these agreements are held in safekeeping in our name by various money center banks. We have the right to demand additional collateral or return of these invested funds at any time the collateral value is less than 102% of the invested funds plus any accrued earnings thereon. We had $111,960,000 and $82,240,000 of cash invested in these agreements at June 30, 2008 and December 31, 2007, respectively.
On January 16, 2008, our Board of Trustees approved the termination of the Vornado Realty Trust Retirement Plan and the Merchandise Mart Properties Pension Plan. The plans were frozen in 1998 and 1999, respectively. The termination is expected to be completed in the third quarter of 2008. Our current estimate of the cost we will incur during the third quarter of 2008 to buy annuities from an insurance company or to make lump-sum payments to plan participants to terminate both plans is approximately $4,000,000.
From time to time, we have disposed of substantial amounts of real estate to third parties for which, as to certain properties, we remain contingently liable for rent payments or mortgage indebtedness that cannot be quantified.
We have guaranteed the completion of two joint venture development projects. The aggregate estimated cost to complete these projects is approximately $85,000,000.
24
Commitments and Contingencies - continued
Litigation
On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) claiming we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty. Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, froze our right to re-allocate which effectively terminated our right to collect the additional rent from Stop & Shop. On March 3, 2003, after we moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint. On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint. We removed the action to the United States District Court for the Southern District of New York. In January 2005 that court remanded the action to the New York Supreme Court. On February 14, 2005, we served an answer in which we asserted a counterclaim seeking a judgment for all the unpaid additional rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the additional rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. On May 17, 2005, we filed a motion for summary judgment. On July 15, 2005, Stop & Shop opposed our motion and filed a cross-motion for summary judgment. On December 13, 2005, the Court issued its decision denying the motions for summary judgment. Both parties appealed the Court’s decision and on December 14, 2006, the Appellate Court division issued a decision affirming the Court’s decision. On January 16, 2007 we filed a motion for the reconsideration of one aspect of the Appellate Court’s decision which was denied on March 13, 2007. We are currently engaged in discovery and anticipate that a trial date will be set for some time in 2008. We intend to vigorously pursue our claims against Stop & Shop. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.
On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas and the 555 California Street complex. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump. In August 2005, Mr. Trump brought a lawsuit in the New York State Supreme Court against, among others, the general partners of the partnerships referred to above. Mr. Trump’s claims arose out of a dispute over the sale price of, and use of proceeds from, the sale of properties located on the former Penn Central rail yards between West 59th and 72nd Streets in Manhattan which were formerly owned by the partnerships. In decisions dated September 14, 2005 and July 24, 2006, the Court denied various of Mr. Trump’s motions and ultimately dismissed all of Mr. Trump’s claims, except for his claim seeking access to books and records. In a decision dated October 1, 2007, the Court determined that Mr. Trump already received access to the books and records to which he was entitled, with the exception of certain documents which were subsequently delivered to Mr. Trump. Mr. Trump has sought re-argument and renewal on, and filed a notice of appeal in connection with, his dismissed claims. In connection with the acquisition, we agreed to indemnify the sellers for liabilities and expenses arising out of Mr. Trump’s claim that the general partners of the partnerships we acquired did not sell the rail yards at a fair price or could have sold the rail yards for a greater price and any other claims asserted in the legal action; provided however, that if Mr. Trump prevails on certain claims involving partnership matters, other than claims relating to sale price, the sellers will be required to reimburse us for certain costs related to those claims. We believe that the claims relating to the sale price are without merit. All other allegations are not asserted as a basis for damages and regardless of merit would not be material to our consolidated financial statements.
There are various other legal actions against us in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.
25
14.
Retirement Plans
On January 16, 2008, our Board of Trustees approved the termination of the Vornado Realty Trust Retirement Plan (“Vornado Plan”) and the Merchandise Mart Properties Pension Plan (“Mart Plan”). The termination is expected to be completed in the third quarter of 2008. Our current estimate of the cost we will incur during the third quarter of 2008 to buy annuities from an insurance company or to make lump-sum payments to plan participants to terminate both plans is approximately $4,000,000.
The following table sets forth the components of net periodic benefit costs:
Interest cost
292
293
584
585
Expected return on plan assets
(309
(299
(618
(598
Amortization of net loss
65
61
129
Net periodic benefit cost
55
95
109
Employer Contributions
During the six months ended June 30, 2008 and 2007, we contributed $202,000 and $982,000, respectively, to the plans. We anticipate making additional contributions of $2,315,000 to the plans during the remainder of 2008.
15.
Costs of Acquisitions Not Consummated
In the three and six months ended June 30, 2008, we wrote-off $726,000 and $3,009,000, respectively, of costs associated with acquisitions not consummated (primarily Hudson Rail Yards). In the three months ended March 31, 2007, we wrote-off $8,807,000 of costs associated with The Equity Office Properties Trust acquisition not consummated.
16.
Marketable Equity Securities
In the first quarter of 2008, we determined that an investment in a marketable equity security was “other-than-temporarily” impaired and recorded a non-cash charge of $9,073,000, based on the March 31, 2008 closing share price of this security, which is included in “interest and other investment income” on our consolidated statement of income.
26
17.
Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended June 30, 2008 and 2007.
For the Three Months Ended June 30, 2008
New York Office
Washington, DC Office
Retail
Other (2)
514,258
180,993
126,083
86,968
68,896
51,318
Straight-line rents:
Contractual rent increases
13,448
5,500
3,173
3,263
1,416
96
Amortization of free rent
5,291
3,586
1,329
1
311
64
Amortization of acquired below- market leases, net
25,858
15,412
1,104
7,571
1,746
Total rentals
205,491
131,689
97,803
70,648
53,224
31,075
14,833
31,178
4,832
2,980
Fee and other income:
Tenant cleaning revenue
18,510
(4,128
2,495
1,952
198
(876
105
290
166
4,315
4,901
519
1,633
461
261,991
153,375
129,988
77,350
51,661
Operating expenses
106,801
52,953
46,346
35,606
14,652
49,452
32,104
20,556
13,786
15,050
4,857
5,328
7,945
7,031
25,124
Costs of acquisition not consummated
161,110
90,385
74,847
56,423
55,552
Operating income (loss)
100,881
62,990
55,141
20,927
(3,891
190
14,971
Loss applicable to Toys
2,560
1,573
6,957
302
(7,107
715
551
88
79
22,360
Interest and debt expense
(33,754
(33,140
(22,290
(13,019
(48,113
Net gain on disposition of wholly owned and partially owned assets other than depreciable real estate
2,653
Income (loss) before income taxes
69,716
31,974
40,146
8,289
(15,741
Income tax expense
(181
(4,672
Income (loss) from continuing operations
31,912
8,108
(20,413
Income (loss) from discontinued operations, net
58,081
(40
(5,036
Income (loss) before allocation to minority limited partners
89,993
40,106
(25,449
Net income (loss)
(37,552
Interest and debt expense (1)
192,239
31,827
34,086
25,932
13,230
33,906
53,258
Depreciation and amortization(1)
170,493
47,005
33,870
21,766
13,919
34,034
19,899
Income tax expense (benefit) (1)
5,999
181
(197
5,955
EBITDA
508,391
148,548
158,009
87,804
35,438
37,032
41,560
The Washington, DC Office segment includes a $56,831 net gain on sale of real estate (included in “Income (loss) from discontinued operations, net”). The Other segment EBITDA includes a $3,468 net loss on the mark-to-market of derivative instruments, a $2,038 net gain on disposition of our 13.8% interest in GMH and a $726 write-off for costs of acquisitions not consummated.
See notes on page 31.
Segment Information – continued
For the Three Months Ended June 30, 2007
439,483
152,850
112,962
80,070
57,483
36,118
10,824
4,526
2,573
2,911
629
185
10,497
5,726
3,753
239
567
212
20,327
10,387
1,160
7,608
90
1,082
173,489
120,448
90,828
58,769
37,597
29,642
11,281
28,887
4,914
2,543
13,062
(2,535
974
1,972
(19
(703
131
902
162
4,242
4,171
301
2,152
(670)
221,509
138,003
121,498
65,978
36,232
93,287
44,667
41,688
31,796
15,774
36,744
28,577
22,109
10,756
12,582
5,502
6,079
6,329
6,929
24,950
135,533
79,323
70,126
49,481
53,306
85,976
58,680
51,372
16,497
(17,074
164
9,130
Income from partially owned entities
1,900
3,743
2,093
448
469
738
117
93
118,272
(32,113
(30,520
(19,775
(13,048
(44,837
(569
1,904
55,853
32,641
33,982
3,990
83,184
(1,867
(182
(199
(260
30,774
33,800
3,791
82,924
1,075
(44
(553
31,849
33,756
82,371
60,700
202,843
31,831
32,095
22,478
13,264
40,984
62,191
165,990
36,600
33,466
22,912
10,890
33,303
28,819
Income tax (benefit) expense (1)
(8,071
1,100
3,831
182
199
(14,934
1,551
526,682
125,384
101,241
79,328
28,144
39,324
153,261
The Other segment EBITDA includes a $72,074 net gain on mark-to-market of derivative instruments, a $15,778 net gain on sale of marketable equity securities and $1,677 for our share of India real estate ventures organization costs.
________________________
28
Segment Information - continued
For the Six Months Ended June 30, 2008
1,002,450
357,496
249,485
173,689
126,439
95,341
31,320
12,783
6,443
9,062
2,793
9,390
4,457
2,834
(1,220
2,664
655
49,129
30,741
2,216
12,525
58
3,589
405,477
260,978
194,056
131,954
99,824
62,598
30,048
64,868
9,421
5,123
35,664
(7,860
3,897
5,108
563
211
(1,971
2,029
665
320
8,250
9,101
140
3,073
110
517,915
305,235
260,292
144,979
95,226
213,447
104,540
94,400
70,974
34,248
95,227
68,970
41,692
25,573
30,096
9,643
12,397
15,707
14,502
47,421
318,317
185,907
151,799
111,049
114,774
199,598
119,328
108,493
33,930
(19,548
379
338
22,563
Income applicable to Toys
(Loss) income from partially owned entities
5,137
2,852
9,864
820
(44,741
1,423
1,230
330
172
34,742
(69,385
(62,762
(42,536
(26,040
(97,772
(1,821
74
135,331
60,648
76,563
8,882
(97,380
Income tax benefit (expense)
221,615
(2
(391
(8,808
282,263
76,561
8,491
(106,188
59,068
(560
95,832
341,331
76,001
(10,356
(58,948
400,200
65,831
64,714
49,759
26,463
75,401
118,032
351,678
90,625
73,112
43,968
25,826
68,136
50,011
(116,781
(221,612
391
93,722
10,716
1,186,954
291,787
257,545
169,730
61,171
286,910
119,811
The Washington, DC Office segment includes a $222,174 reduction in income tax expense resulting from a reversal of deferred tax liabilities in connection with the acquisition of H Street, and a $56,831 net gain on sale of real estate (included in “Income (loss) from discontinued operations, net”). The Other segment EBITDA includes, a $112,690 net gain on sale of our 47.6% interest in Americold (included in “Income (loss) from discontinued operations, net”), a $34,200 write-off of pre-development costs, a $21,830 net loss on the mark-to-market of derivative instruments, a $10,300 reversal of a mezzanine loan loss accrual, a $9,073 impairment loss on a marketable equity security, a $3,009 write-off for costs of acquisitions not consummated and a $2,038 net gain on disposition of our 13.8% interest in GMH.
29
For the Six Months Ended June 30, 2007
836,911
290,498
215,764
157,791
118,509
54,349
18,038
7,879
2,741
5,808
1,283
327
23,447
8,593
511
946
34,343
17,679
2,144
12,847
120
1,553
329,241
229,242
176,957
120,858
56,441
58,350
20,594
57,584
9,707
3,455
25,148
(4,778
1,829
8,533
924
(1,286
1,898
205
8,023
7,251
3,434
424,489
265,831
238,527
134,207
53,218
181,539
83,224
82,205
63,377
28,616
66,549
53,280
39,392
21,847
17,853
9,448
14,461
13,331
14,367
38,596
257,536
150,965
134,928
99,591
93,872
166,953
114,866
103,599
34,616
(40,654
378
373
22,252
3,187
7,435
3,388
787
1,142
1,051
192
188
170,620
(61,581
(65,042
(39,783
(25,895
(78,690
2,207
109,510
58,310
67,827
9,696
94,515
(1,643
(512
56,667
67,645
9,184
94,255
2,290
(78
(1,588
58,957
67,567
92,667
49,001
401,614
61,969
68,003
45,275
26,328
87,618
112,421
329,141
67,342
62,310
41,198
22,127
88,699
47,465
Income tax expense (1)
47,513
5,463
512
38,463
1,793
1,111,119
239,921
194,733
154,222
58,151
253,412
210,680
The Washington, DC Office segment includes $1,891 of expense for H Street litigation costs. The Other segment EBITDA includes a net gain of $81,451 on the mark-to-market of derivative instruments, a $16,687 net gain on sale of marketable equity securities, an $8,807 write-off for costs of acquisition not consummated and $1,677 for our share of India real estate ventures organization costs.
See notes on the following page.
30
EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.” We consider EBITDA a supplemental measure for making decisions and assessing the un-levered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.
Other EBITDA is comprised of:
22,225
17,166
37,112
37,499
11,743
6,349
23,388
7,391
5,984
18,468
Hotel Pennsylvania
12,452
11,177
17,865
14,781
Industrial warehouses
1,226
823
2,196
GMH (see page 11)
4,177
8,345
Other investments
(2,235
1,052
(5,069
4,963
52,802
46,728
94,428
80,117
Corporate general and administrative expenses
(22,226
(20,990
(42,468
(33,364
Write-off of pre-development costs (see Note (4) on page 13)
(34,200
(726
(3,009
(8,807
Investment income and other
23,813
131,772
35,132
182,834
Discontinued operations of Americold, net (including a $112,690 net gain on sale in the six months ended June 30, 2008)
17,422
118,520
33,566
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust as of June 30, 2008, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2008 and 2007, and of cash flows for the six-month periods ended June 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended prior to reclassification for the discontinued operations described in Note 9 to the accompanying financial statements (not presented herein); and in our report dated February 26, 2008, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 9 that were applied to reclassify the December 31, 2007 consolidated balance sheet of Vornado Realty Trust (not presented herein) for discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted consolidated balance sheet as of December 31, 2007.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 5, 2008
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained herein 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 performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition 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. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements and our future results and financial condition, see “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007. 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 our 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 occurring after the date of this Quarterly Report on Form 10-Q.
Management’s Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our consolidated financial statements for the three and six months ended June 30, 2008. 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.
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, 2007 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2008.
Overview
Business Objective and Operating Strategy
Our business objective is to maximize shareholder value. We measure our success in meeting this objective by our total return to shareholders. Below is a table comparing our performance to the Morgan Stanley REIT Index (“RMS”) and the SNL REIT Index (“SNL”) for the following periods ending June 30, 2008:
Total Return (1)
Vornado
RMS
SNL
One-year
(17.0%)
(14.2%)
(13.5%)
Three-years
22.7%
15.1%
15.8%
Five-years
151.3%
93.3%
95.5%
Ten-years
276.7%
172.7%
173.7%
Past performance is not necessarily indicative of how we will perform in the future.
We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:
•
Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;
Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is a high likelihood of capital appreciation;
Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;
Investing in retail properties in select under-stored locations such as the New York City metropolitan area;
Investing in fully-integrated operating companies that have a significant real estate component;
Developing and redeveloping our existing properties to increase returns and maximize value; and
Providing specialty financing to real estate related companies.
We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets.
We have a large concentration of properties in the New York City metropolitan area and in the Washington, DC and Northern Virginia areas. We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rent charged, attractiveness of location, the quality of the property and breadth and quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.
Beginning in the second half of 2007, the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining residential home values and increasing inventory nationwide. This “credit” crisis spread to the broader commercial credit markets and has reduced the availability of financing and widened spreads. These factors, coupled with a slowing economy, have reduced the volume of real estate transactions and increased capitalization rates. If these conditions continue, our real estate portfolio may experience lower occupancy and effective rents which would result in a corresponding decrease in net income, funds from operations and cash flows. In addition, the value of our investments in joint ventures, marketable securities, and mezzanine loans may also decline as a result of the above factors. Such declines may result in impairment charges and/or valuation allowances which would result in a corresponding decrease in net income and funds from operations.
34
Overview – continued
Quarter Ended June 30, 2008 Financial Results Summary
Net income applicable to common shares for the quarter ended June 30, 2008 was $125,386,000, or $0.79 per diluted share, versus $151,625,000, or $0.96 per diluted share, for the quarter ended June 30, 2007. Net income for the quarter ended June 30, 2008 includes $56,831,000 for our share of net gains on sale of real estate. Net income for the quarters ended June 30, 2008 and 2007 also include certain items that affect comparability which are listed in the table below. The aggregate of these items and net gains on sale of real estate, net of minority interest, increased net income applicable to common shares for the quarter ended June 30, 2008 by $45,883,000, or $0.29 per diluted share and increased net income applicable to common shares for the quarter ended June 30, 2007 by $63,111,000, or $0.38 per diluted share.
Funds from operations applicable to common shares plus assumed conversions (“FFO”) for the quarter ended June 30, 2008 was $208,260,000, or $1.27 per diluted share, compared to $281,741,000, or $1.72 per diluted share, for the prior year’s quarter. FFO for the quarters ended June 30, 2008 and 2007 include certain items that affect comparability which are listed in the table below. The aggregate of these items, net of minority interest, decreased FFO for the quarter ended June 30, 2008 by $4,227,000, or $0.03 per diluted share and increased FFO for the quarter ended June 30, 2007 by $70,467,000, or $0.43 per diluted share.
Items that affect comparability (income) expense: Partially owned entities – non-cash purchase price accounting adjustments:
14,900
Beverly Connection
(4,100
3,468
(72,074
Reversal of Alexander’s stock appreciation rights compensation expense
(7,157
(1,222
Net gain on sale of our 13.8% interest in GMH
(2,038
India real estate ventures – organization costs
1,677
Other, net
(1,154
2,131
4,645
(69,488
47.6% share of Americold’s FFO (Net loss of $557 in the three months ended June 30, 2007) – sold on March 31, 2008
(6,348
13.8% share of GMH’s FFO (Equity in net income of $31 in the three months ended June 30, 2007)
(1,714
(77,550
Minority limited partners’ share of above adjustments
(418
7,083
Total items that affect comparability
4,227
(70,467
We did not recognize income during the quarter ended June 30, 2008, on certain assets with an aggregate carrying amount of approximately $1.4 billion at June 30, 2008, because they were out of service for redevelopment. Assets under development include all or portions of the Bergen Town Center, 2101 L Street, 220 20th Street, 1229-1231 25th Street (“West End 25”), 1999 K Street, 220 Central Park South, 40 East 66th Street, and certain investments in joint ventures including Beverly Connection, Wasserman and 800 17th Street/PNC Place investments.
The percentage increase in the same-store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended June 30, 2008 over the quarter ended June 30, 2007 and the trailing quarter ended March 31, 2008 are summarized below.
Quarter Ended:
New York
Office
Washington, DC
June 30, 2008 vs. June 30, 2007
7.0%
3.9%
3.3%
15.2%(1)
June 30, 2008 vs. March 31, 2008
2.7%
1.3%
0.7%
30.7%(2)
Results primarily from an increase in EBITDA from the Art Chicago trade show which operated at a loss in 2007, its initial year of operation.
Results from the timing of trade shows.
Calculations of same-store EBITDA, reconciliations of net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
35
Six Months Ended June 30, 2008 Financial Results Summary
Net income applicable to common shares for the six months ended June 30, 2008 was $523,308,000, or $3.26 per diluted share, versus $304,260,000, or $1.92 per diluted share, for the six months ended June 30, 2007. Net income for the six months ended June 30, 2008 includes $62,833,000 for our share of net gains on sale of real estate. Net income for the six months ended June 30, 2008 and 2007 also include certain items that affect comparability which are listed in the table below. The aggregate of these items and net gains on sale of real estate, net of minority interest, increased net income applicable to common shares for the six months ended June 30, 2008 by $305,998,000, or $1.87 per diluted share and increased net income applicable to common shares for the six months ended June 30, 2007 by $59,677,000, or $0.36 per diluted share.
FFO for the six months ended June 30, 2008 was $743,471,000, or $4.54 per diluted share, compared to $551,906,000, or $3.36 per diluted share, for the prior year’s six months. FFO for the six months ended June 30, 2008 and 2007 includes certain items that affect comparability which are listed in the table below. The aggregate of these items, net of minority interest, increased FFO for the six months ended June 30, 2008 by $255,382,000, or $1.56 per diluted share and increased FFO for the six months ended June 30, 2007 by $74,641,000, or $0.45 per diluted share.
Items that affect comparability (income) expense:
Reversal of deferred income taxes initially recorded in connection with H Street acquisition (see below)
Net gain on sale of our 47.6% interest in Americold
Derivative positions in marketable equity security
Write-off of pre-development costs (see below)
Partially owned entities – non-cash purchase price accounting adjustments:
Reversal of MPH mezzanine loan loss accrual
(10,300
Marketable equity security - impairment loss
(6,952
(5,916
Prepayment penalties and write-off of unamortized financing costs
5,861
H Street litigation costs
1,891
509
(274,733
(67,003
47.6% share of Americold’s FFO (Net losses of $1,076 and $1,505 in each six-month period, respectively) – sold on March 31, 2008
(6,098
(12,151
13.8% share of GMH’s FFO (Equity in net loss of $281 in the six months ended June 30, 2007)
(3,033
(280,831
(82,187
25,449
7,546
(255,382
(74,641
In connection with the purchase accounting for H Street, in July 2005 and April 2007 we recorded an aggregate of $222,174,000 of deferred tax liabilities representing the differences between the tax basis and the book basis of the acquired assets and liabilities multiplied by the effective tax rate. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.
The six months ended June 30, 2008 includes a $34,200,000 write-off for our share of two joint ventures’ pre-development costs, of which $23,000,000 represents our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project.
36
The percentage increase in the same-store “EBITDA” of our operating segments for the six months ended June 30, 2008 over the six months ended June 30, 2007 is summarized below.
6.7%
5.7%
4.2%
4.5%
2008 Dispositions:
On March 31, 2008, we sold our 47.6% interest in Americold, our Temperature Controlled Logistics segment, for $220,000,000, in cash, which resulted in a net gain of $112,690,000.
2008 Financings:
On January 18, 2008, we closed a construction loan providing up to $87,000,000 to finance the residential redevelopment project at 220 20th Street (formally Crystal Plaza Two). The construction loan bears interest at LIBOR plus 1.15% (3.63% at June 30, 2008) and matures in January 2011 with two six-month extension options. As of June 30, 2008, $7,000,000 was drawn under this loan.
On February 11, 2008, we completed a $335,000,000 refinancing of the Green Acres regional mall. This interest-only loan has a rate of LIBOR plus 1.40% (3.86% at June 30, 2008) and matures in February 2011, with two one-year extension options. We retained net proceeds of $193,000,000 after repaying the existing loan.
On February 20, 2008, we closed a construction loan providing up to $104,000,000 to finance the residential redevelopment project at 1229-1231 25th Street NW (“West End 25”). The construction loan bears interest at LIBOR plus 1.30% (3.76% at June 30, 2008) and matures in February 2011 with two six-month extension options. As of June 30, 2008, $6,500,000 was drawn under this loan.
On February 26, 2008, we completed a $150,000,000 financing of our 2101 L Street property located in Washington, DC. The loan bears interest at LIBOR plus 1.20% (3.59% at June 30, 2008) and matures in February 2011 with two one-year extension options. We retained net proceeds of $148,000,000.
On March 12, 2008 we completed a $260,000,000 refinancing of the River House Apartment Complex. The financing is comprised of a $196,000,000 interest-only seven year 5.43% fixed rate mortgage and a $64,000,000 interest-only ten year floating rate mortgage at the Freddie Mac Reference Note Rate plus 1.53% (3.68% at June 30, 2008). We retained net proceeds of $205,000,000 after repaying the existing loan.
On March 24, 2008, we closed a construction loan providing up to $290,000,000 to finance the redevelopment of a portion of the Bergen Town Center. The interest-only loan has a rate of LIBOR plus 1.50% (4.11% at June 30, 2008) and matures in March 2011 with two one-year extension options. As of June 30, 2008, $158,000,000 was drawn under this loan.
On March 27, 2008, we closed a construction loan providing up to $124,000,000 to finance the redevelopment of 1999 K Street. The interest-only loan has a rate of LIBOR plus 1.30% (3.77% at June 30, 2008) and matures in December 2010 with two 6-month extension options. As of June 30, 2008, $31,000,000 was drawn under this loan.
37
Overview - continued
The following table sets forth certain information for the properties we own directly or indirectly, including leasing activity. The leasing activity presented below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue recognition in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Tenant improvements and leasing commissions are presented below based on square feet leased during the period, on a per square foot and per square foot per annum basis based on weighted average lease terms and as a percentage of initial rent per square foot.
(Square feet in thousands)
As of June 30, 2008:
Showroom
Square feet (in service)
16,074
17,553
21,928
2,390
6,360
Number of properties
177
Occupancy rate
97.5%
93.9%
94.5%
96.7%
93.4%
Leasing Activity:
Quarter Ended June 30, 2008:
Square feet
435
395
286
157
260
Initial rent per square foot (1)
67.83
40.52
31.47
23.91
32.16
Weighted average lease terms (years)
9.5
6.8
8.4
9.4
5.8
Rent per square foot – relet space:
392
220
136
91
242
Initial Rent (1)
70.39
36.69
30.01
23.73
32.06
Prior escalated rent
47.00
33.71
24.74
26.27
32.60
Percentage increase (decrease):
Cash basis
49.8%
8.8%
21.3%
(9.7)%
(1.7)%
GAAP basis
46.8%
15.9%
25.0%
13.6%
Rent per square foot – vacant space:
43
175
150
66
Initial rent (1)
44.06
45.36
32.79
24.17
33.53
Tenant improvements and leasing commissions:
Per square foot
51.37
13.14
11.55
50.05
13.07
Per square foot per annum
5.41
1.93
1.38
5.35
2.27
Percentage of initial rent
8.0%
4.8%
4.4%
22.4%
7.1%
Six Months Ended June 30, 2008:
780
1,274
158
463
71.52
38.18
30.71
29.58
9.0
7.5
7.7
9.3
5.4
718
919
355
92
441
73.49
35.09
29.64
23.72
29.26
49.66
29.13
25.36
26.22
29.40
48.0%
20.5%
16.9%
(9.5)%
(0.5)%
51.5%
21.1%
24.5%
2.6%
12.2%
62
225
48.81
46.20
32.41
35.99
48.90
19.88
9.49
49.76
9.14
5.43
2.65
1.24
5.34
1.69
7.6%
6.9%
4.0%
22.3%
38
Overview (continued)
(Square feet and cubic feet in thousands)
As of March 31, 2008:
Square feet/ cubic feet
16,025
17,874
21,820
6,169
176
97.6
%
93.4
94.2
92.6
93.5
As of December 31, 2007:
17,931
21,934
6,139
84
93.3
94.3
96.8
93.7
As of June 30, 2007:
15,962
17,900
21,053
2,756
6,330
97.8
93.6
96.3
91.3
_______________________________
Most leases include periodic step-ups in rent which are not reflected in the initial rent per square foot leased.
Because GAAP requires tenant leases to be marked to fair value when they are acquired, the cash basis increase is greater than the GAAP basis rent increase when the acquired space is relet.
39
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 was effective for our financial assets and liabilities on January 1, 2008. The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain non-financial assets and liabilities until January 1, 2009. This standard did not materially affect how we determine fair value, but resulted in certain additional disclosures. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Financial assets and liabilities measured at fair value in our consolidated financial statements consist of (i) marketable equity securities–available for sale, (ii) derivative positions in marketable equity securities and (iii) the assets of our officers’ deferred compensation plan (primarily marketable equity securities and equity investments in partially owned entities), for which there is a corresponding liability on our consolidated balance sheet. Financial assets and liabilities carried at fair value as of June 30, 2008 are presented in the table below based on the hierarchy used to measure fair value:
40
In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R also broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and stipulates that acquisition related costs be expensed rather than included as part of the basis of the acquisition. SFAS 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for all transactions entered into on or after January 1, 2009. The adoption of this standard on January 1, 2009 could materially impact our future financial results to the extent that we acquire significant amounts of real estate, as related acquisition costs will be expensed as incurred compared to our current practice of capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement), (the “FSP”). The adoption of this FSP would affect the accounting for our convertible and exchangeable senior debentures and Series D-13 convertible preferred units. The FSP would require the initial proceeds from the sale of our convertible and exchangeable senior debentures and Series D-13 convertible preferred units to be allocated between a liability component and an equity component. The resulting discount would be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP would be effective for our fiscal year beginning on January 1, 2009 and require retroactive application. The adoption of the FSP on January 1, 2009 would result in the recognition of an aggregate unamortized debt discount of $161,259,000 (as of June 30, 2008) on our consolidated balance sheet and additional interest expense on our consolidated statements of income. Our current estimate of the incremental interest expense, net of minority interest, for each reporting period is as follows:
41
42
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2008 and 2007
See notes on page 45.
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2008 and 2007 - continued
______________________________
44
Notes to preceding tabular information:
Discontinued operations of Americold, net (sold on March 31, 2008)
45
Results of Operations – Three Months Ended June 30, 2008 Compared to June 30, 2007
Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below market leases, and fee income, were $674,365,000 for the quarter ended June 30, 2008, compared to $583,220,000 in the prior year’s first quarter, an increase of $91,145,000. Below are the details of the increase (decrease) by segment:
Property rentals:
Increase (decrease) due to:
Acquisitions:
18,329
13,559
H Street (effect of consolidating from May 1, 2007 vs. equity method prior)
4,815
5,708
414
5,302
(8
Development/Redevelopment
(2,514
(551
(1,435
(528
Amortization of acquired below market leases, net
5,527
5,025
(60
(37
(65
664
Operations:
2,052
Trade shows
11,679
Leasing activity (see page 38)
18,569
8,648
6,623
3,145
273
(120
Total increase in property rentals
77,724
32,002
11,241
6,975
11,879
15,627
Tenant expense reimbursements:
Acquisitions/development
4,067
1,752
610
969
736
Operations
3,564
(319
)(3)
2,942
1,322
(82
Total increase (decrease) in tenant expense reimbursements
7,631
1,433
3,552
2,291
437
Increase (decrease) in:
Lease cancellation fee income
(734
(131
(612
1,036
1,521
(20
(382
(173
BMS Cleaning revenue
3,855
5,448
(1,593
)(4)
730
218
(519
1,131
Total increase (decrease) in fee and other income
5,790
7,047
579
(776
(425
(635
Total increase in revenues
91,145
40,482
15,372
8,490
11,372
15,429
Revenue per available room (“REVPAR”) was $152.70 for the three months ended June 30, 2008 compared to $139.21 for the prior year’s quarter.
Primarily from (i) $5,879 due to the timing of three trade shows held in April 2008 versus March 2007, and (ii) higher revenues from the Art Chicago Show.
Primarily from a decrease in real estate taxes and new tenant base years.
Represents the elimination of inter-company cleaning revenue from our other operating segments upon consolidation. See page 47 for the elimination of inter-company cleaning charges.
46
Results of Operations – Three Months Ended June 30, 2008 Compared to June 30, 2007 (continued)
Our expenses, which consist of operating, depreciation and amortization and general and administrative expenses, were $438,317,000 for the quarter ended June 30, 2008, compared to $387,769,000 in the prior year’s quarter, an increase of $50,548,000. Below are the details of the increase (decrease) by segment:
Operating:
7,395
6,233
H Street (effective of consolidating from May 1, 2007 vs. equity method prior)
1,073
2,662
586
380
(81
(253
Hotel activity
683
Trade shows activity
1,687
9,494
6,119
6,880
2,790
1,743
(8,038
Total increase (decrease) in operating expenses
29,146
13,514
8,286
4,658
3,810
(1,122
Depreciation and amortization:
Acquisitions/Development
7,484
9,756
(2,774
(2,297
2,799
Operations (due to additions to buildings and improvements)
12,696
2,952
6,301
744
3,030
(331
Total increase (decrease) in depreciation and amortization
20,180
12,708
3,527
(1,553
2,468
General and administrative:
Acquisitions/Development and Other
2,134
(152
259
1,245
782
(1,638
(493
(1,010
371
102
(608
Total increase (decrease) in general and administrative
496
(645
(751
1,616
174
Total increase in expenses
50,548
25,577
11,062
6,942
2,246
Primarily from the timing of three trade shows held in April 2008 versus March 2007.
Primarily from a $4,667 increase in BMS operating expenses and a $3,454 increase in property level operating expenses, partially offset by, a $1,082 decrease in bad debt expense and a $920 decrease in real estate taxes.
Primarily from an increase in the elimination of inter-company fees of our operating segments upon consolidation.
47
Income Applicable to Alexander’s
Our 32.6% share of Alexander’s net income (comprised of equity in net income, management, leasing, and development fees) was $15,351,000 for the three months ended June 30, 2008, compared to $9,484,000 for the prior year’s first quarter, an increase of $5,867,000. This increase was primarily due to $7,157,000 of income for our share of the reversal of accrued stock appreciation rights compensation expense in the current quarter, compared to $1,222,000 for our share of such income in the prior year’s quarter.
Loss Applicable to Toys
Our 32.7% share of Toys’ net loss (comprised of equity in net loss, interest income on loans receivable, and management fees) was $30,711,000 for the three months ended June 30, 2008, or $30,908,000 before our share of Toys’ income tax benefit, compared to $20,029,000, or $34,963,000 before our share of Toys’ income tax benefit for the prior year’s quarter.
Historically, Toys’ fourth quarter net income, which we recorded on a lag basis in our first quarter, accounts for more than 80% of Toys’ fiscal year net income.
Income (Loss) from Partially Owned Entities
Summarized below are the components of income (loss) from partially owned entities for the three months ended June 30, 2008 and 2007.
Equity in Net Income (Loss):
Lexington MLP – 7.7% share of equity in net income (loss) (2)
India real estate ventures – 4% to 36.5% share of equity in net losses (3)
GMH Communities L.P. – 13.8% share of equity in net income in 2007 (4)
H Street partially owned entities – 50% share of equity in net income (5)
Other (6)
The three months ended June 30, 2008 includes $4,100 for the reversal of non-cash charges recorded by the joint venture in prior periods which, pursuant to paragraph 19(n) of APB Opinion 18 “The Equity Method of Accounting For Investments In Common Stock,” should have been eliminated in the determination of our share of the earnings of the venture.
We are a partner in four joint ventures established to develop real estate in India’s leading cities. During the six months ended June 30, 2008, we funded $39,077 of cash to the four ventures, including $34,077 to the India Property Fund L.P. (“IPF”). As of June 30, 2008, our aggregate investment in these four ventures was $83,524 and our remaining capital commitment to these ventures is $91,923, of which $80,923 is to IPF. At June 30, 2008 and December 31, 2007, our ownership interest in IPF was 36.5% and 50.6%, respectively. Based on the reduction of our ownership interest in 2008, we no longer consolidate the accounts of IPF into our consolidated financial statements and beginning on January 1, 2008 we account for our investment in IPF under the equity method.
Pursuant to the sale of GMH’s military housing division and the merger of its student housing division with American Campus Communities, Inc (“ACC”) (NYSE: ACC), in June 2008, we received an aggregate of $105,180, consisting of $82,142 in cash and 753,126 shares of ACC common stock valued at $23,038 based on ACC’s then closing share price of $30.59, in exchange for our entire interest in GMH. We subsequently sold all of the ACC common shares. The above transactions resulted in a net gain of $2,038, which was recognized in the quarter ended June 30, 2008, and is included as a component of “net gains on disposition of wholly owned and partially owned assets other than depreciable real estate” in our consolidated statement of income.
On April 30, 2007, we acquired the corporations that own the remaining 50% interest in these entities. As of April 30, 2007, we consolidate the accounts of these entities into our consolidated financial statements and no longer account for them on the equity method.
49
Interest and Other Investment Income
Interest and other investment income (mark-to-market of derivative positions, interest income on mortgage loans receivable, other interest income and dividend income) was $23,793,000 for the three months ended June 30, 2008, compared to $119,689,000 in the prior year’s quarter, a decrease of $95,896,000. This decrease resulted primarily from:
Derivative positions in marketable equity securities – net loss of $3,468 this quarter compared to a net gain of $72,074 in the prior year’s quarter
(75,542
Decrease in interest income as a result of lower average yields on investments (2.2% in the current quarter compared to 5.2% in the prior year’s quarter)
(13,902
(6,452
(95,896
Interest and Debt Expense
Interest and debt expense was $150,316,000 in the three months ended June 30, 2008, compared to $140,293,000 in the prior year’s quarter, an increase of $10,023,000. This increase resulted primarily from $19,966,000 of interest expense on $929,811,000 of debt resulting from property acquisitions and refinancings subsequent to the second quarter of 2007, partially offset by reductions in interest expense of (i) $4,095,000 as a result of repaying the $500 million senior unsecured debentures in May 2007, (ii) $3,586,000 due to a 2.77% decrease in weighted average interest rates on our variable rate debt, and (iii) $2,622,000 of higher capitalized interest due to a larger amount of assets under development.
Net Gains on Disposition of Wholly Owned and Partially Owned Assets Other than Depreciable Real Estate
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate was $3,386,000 in the three months ended June 30, 2008, compared to $15,778,000 in the three months ended June 30, 2007. The three months ended June 30, 2008 includes a $2,038,000 net gain on disposition of our 13.8% interest in GMH and net gains on sale of marketable securities. The three months ended June 30, 2007 represents net gains on sale of marketable securities.
Minority Interest of Partially Owned Entities
Minority interest of partially owned entities was income of $1,837,000 in the six months ended June 30, 2008, compared to income of $1,346,000 in the prior year’s three months and represents the minority partners’ pro rata share of the net loss of consolidated partially owned entities, including 1290 Avenue of the Americas, 555 California Street, 220 Central Park South, Wasserman and the Springfield Mall.
Income Tax Expense
Income tax expense was $4,915,000 in the quarter ended June 30, 2008, compared to $2,508,000 in the prior year’s quarter, an increase of $2,407,000. This increase was primarily due to the acquisitions of 1290 Avenue of the Americas and 555 California Street in May 2007.
50
The combined results of discontinued operations for the three months ended June 30, 2008 and 2007 include the operating results of Tysons Dulles Plaza, which was sold on June 10, 2008; Americold, which was sold on March 31, 2008; 19.6 acres of land we acquired as part of our acquisition of H Street, of which 11 acres were sold in September 2007; Vineland, New Jersey, which was sold on July 16, 2007; Crystal Mall Two, which was sold on August 9, 2007; and Arlington Plaza, which was sold on October 17, 2007.
Minority Limited Partners’ Interest in the Operating Partnership
Minority limited partners’ interest in the Operating Partnership was $7,285,000 in the three months ended June 30, 2008, compared to $16,852,000 in the prior year’s quarter, a decrease of $9,567,000. This decrease results primarily from lower net income subject to allocation to the minority limited partners.
Perpetual Preferred Unit Distributions of the Operating Partnership
Perpetual preferred unit distributions of the Operating Partnership were $4,818,000 in the three months ended June 30, 2008, compared to $4,819,000 in the prior year’s quarter.
Preferred Share Dividends
Preferred share dividends were $14,274,000 in the three months ended June 30, 2008, compared to $14,295,000 in the prior year’s quarter.
51
EBITDA by Segment
Below are the details of the changes in EBITDA by segment for the three months ended June 30, 2008 from the three months ended June 30, 2007.
Three Months ended June 30, 2007
2008 Operations: Same store operations(1)
8,431
3,754
2,364
5,315
Acquisitions, dispositions and non-same store income and expenses
14,733
53,014
6,112
Three Months ended June 30, 2008
% increase in same store operations
15.2
% (2)
__________________________
Represents the increase in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses. We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers. Same store operations may not be comparable to similarly titled measures employed by other companies.
52
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2008 and 2007
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the six months ended June 30, 2008 and 2007.
See notes on page 55.
53
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2008 and 2007 - continued
54
Discontinued operations of Americold, net (including a $112,690 net gain on sale in 2008)
Results of Operations – Six Months Ended June 30, 2008 Compared to June 30, 2007 - continued
Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below market leases, net of above market leases, and fee income, were $1,323,647,000 for the six months ended June 30, 2008, compared to $1,116,272,000 in the prior year’s six months, an increase of $207,375,000. Below are the details of the increase (decrease) by segment:
46,780
37,301
19,330
17,847
1,280
11,948
4,619
(4,638
(2,100
(2,010
14,786
(322
2,036
4,828
6,479
36,837
16,394
13,154
7,483
(254
179,550
76,236
31,736
17,099
11,096
43,383
12,588
6,041
2,235
2,463
1,849
9,780
(1,793
)(2)
7,219
4,821
(286
22,368
4,248
9,454
7,284
1,668
(1,707
(211
(1,742
115
(2,195
2,068
(3,425
(361
208
(685
7,434
10,516
(3,082
1,925
227
1,850
(515
724
5,457
12,942
(1,786
(2,618
(38
(3,043
207,375
93,426
39,404
21,765
10,772
42,008
Revenue per available room (“REVPAR”) was $131.12 for the six months ended June 30, 2008 compared to $114.31 for the prior year’s six months.
Primarily from leasing fees in 2007 in connection with our management of a development project.
Represents the elimination of inter-company cleaning revenue from our other operating segments upon consolidation. See page 57 for the elimination of inter-company cleaning charges.
56
Our expenses, which consist of operating, depreciation and amortization and general and administrative expenses, were $881,846,000 for the six months ended June 30, 2008, compared to $736,892,000 in the prior year’s six months, an increase of $144,954,000. Below are the details of the increase (decrease) by segment:
19,148
17,442
8,300
10,067
1,386
4,273
4,408
(812
863
1,618
464
21,558
12,760
12,442
7,059
2,725
(13,428
Total increase in operating expenses
78,648
31,908
21,316
12,195
7,597
5,632
Increase due to:
43,308
23,618
6,793
848
12,049
19,329
5,060
8,897
1,452
3,726
194
Total increase in depreciation and amortization
62,637
28,678
15,690
2,300
12,243
6,339
(14
1,635
4,718
3,128
195
(2,050
741
135
4,107
9,467
(2,064
2,376
8,825
(5,798
144,954
60,781
34,942
16,871
11,458
20,902
Primarily from a $9,179 increase in BMS operating expenses and a $4,835 increase in property level operating expenses, partially offset by a $1,992 decrease in real estate taxes.
Primarily from an increase in compensation expense and professional fees.
57
Our 32.6% share of Alexander’s net income (comprised of equity in net income, management, leasing, and development fees) was $23,280,000 for the six months ended June 30, 2008, compared to $23,003,000 for the prior year’s six months, an increase of $277,000.
Income Applicable to Toys
Our 32.7% share of Toys’ net income (comprised of equity in net income, interest income on loans receivable, and management fees) was $49,651,000 for the six months ended June 30, 2008, or $143,373,000 before our share of Toys’ income tax expense, compared to $38,632,000, or $77,095,000 before our share of Toys’ income tax expense for the prior year’s six months. Toys prepares its consolidated financial statements using the historical cost basis (“Recap basis”) of accounting. We account for our investment in Toys on the purchase accounting basis. In July 2008, in connection with an audit of Toys’ purchase accounting basis financial statements for its fiscal years 2006 and 2007, it was determined that the purchase accounting basis income tax expense was understated. Our share of this non-cash charge is $14,900,000, which we recognized as part of our equity in Toys’ net loss in the three months ended June 30, 2008. This non-cash charge has no effect on cash actually paid for income taxes or Toys’ previously issued Recap basis consolidated financial statements.
(Loss) Income from Partially Owned Entities
Summarized below are the components of (loss) income from partially owned entities for the six months ended June 30, 2008 and 2007.
Equity in Net (Loss) Income:
India real estate ventures – 4% to 36.5% share of equity in net loss (3)
GMH Communities L.P. – 13.8% share of equity in net loss in 2007 (4)
Other (6) (7)
The six months ended June 30, 2008 includes $4,100 for the reversal of non-cash charges recorded by the joint venture in prior periods which, pursuant to paragraph 19(n) of APB Opinion 18 “The Equity Method of Accounting For Investments In Common Stock,” should have been eliminated in the determination of our share of the earnings of the venture.
The six months ended June 30, 2008 includes a $34,200 write-off for our share of two joint ventures’ pre-development costs, of which $23,000 represents our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project.
Interest and other investment income (mark-to-market of derivative positions, interest income on mortgage loans receivable, other interest income and dividend income) was $37,897,000 in the six months ended June 30, 2008, compared to $173,193,000 in the prior year’s six months, a decrease of $135,296,000. This decrease resulted primarily from:
Derivative positions in marketable equity securities – net loss of $21,830 in the current year’s six months compared to a net gain of $81,454 in the prior year’s six months
(103,284
Decrease in interest income as a result of lower average yields on investments (2.7% in the current year’s six months compared to 5.1% in the prior year’s six months)
(29,292
Partial reversal of MPH mezzanine loan loss accrual (see below)
10,300
(9,073
(3,947
(135,296
On June 5, 2007, we acquired a 42% interest in two MPH mezzanine loans totaling $158,700,000, for $66,000,000 in cash. The loans, which were due on February 8, 2008 and have not been repaid, are subordinate to $2.9 billion of mortgage and other debt and secured by the equity interests in four New York City properties: Worldwide Plaza, 1540 Broadway office condominium, 527 Madison Avenue and Tower 56. As of December 31, 2007, we reduced the net carrying amount of the loans to $9,000,000 by recognizing a $57,000,000 non-cash charge which is included as a reduction of “interest and other investment income” on our consolidated statement of income. On April 2, 2008, we sold a sub-participation interest in the loans for $19,300,000. The sub-participation did not meet the criteria for sale accounting under Statement of Financial Accounting Standard No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) because the sub-participant is not free to pledge or exchange the asset. In the first quarter of 2008, we reduced our valuation allowance from $57,000,000 to $46,700,000, resulting in the recognition of $10,300,000 of “interest and other investment income” in our consolidated statement of income in the six months ended June 30, 2008.
Interest and debt expense was $298,495,000 in the six months ended June 30, 2008, compared to $270,991,000 in the prior year’s six months, an increase of $27,504,000. This increase resulted primarily from $45,632,000 of interest expense on $929,811,000 of debt resulting from property acquisitions and refinancings subsequent to the first half of 2007, partially offset by $9,177,000 of higher capitalized interest related to a larger amount of assets under development, and $5,771,000 as a result of debt extinguishments in 2007.
Net gains on disposition of wholly owned and partially owned assets other than depreciable real estate was $3,386,000 in the six months ended June 30, 2008, compared to $16,687,000 in the six months ended June 30, 2007. The six months ended June 30, 2008 includes a $2,038,000 net gain on disposition of our 13.8% interest in GMH and net gains on sale of marketable securities. The six months ended June 30, 2007 represents net gains on sale of marketable securities.
Minority interest of partially owned entities was income of $2,243,000 in the six months ended June 30, 2008, compared to income of $1,696,000 in the prior years six months and represents the minority partners’ pro rata share of the net income or loss of consolidated partially owned entities, including 1290 Avenue of the Americas, 555 California Street, 220 Central Park South, Wasserman and the Springfield Mall.
59
Income Tax Benefit / Expense
In the six months ended June 30, 2008, we had an income tax benefit of $212,414,000, compared to an expense of $2,597,000 in the prior year’s six months, a decrease of $215,011,000. The decrease results from $222,174,000 for the reversal of deferred taxes recorded in connection with the acquisition of H Street. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.
Discontinued Operations (including $112,690,000 net gain on sale of Americold in 2008)
The combined results of discontinued operations for the six months ended June 30, 2008 and 2007 include the operating results of Tysons Dulles Plaza, which was sold on June 10, 2008; Americold, which was sold on June 30, 2008; 19.6 acres of land we acquired as part of our acquisition of H Street, of which 11 acres were sold in September 2007; Vineland, New Jersey, which was sold on July 16, 2007; Crystal Mall Two, which was sold on August 9, 2007; and Arlington Plaza, which was sold on October 17, 2007.
Net gain on sale of real estate
Minority limited partners’ interest in the Operating Partnership was $38,955,000 in the six months ended June 30, 2008, compared to $34,029,000 in the prior year’s six months, an increase of $4,926,000. This increase results primarily from higher net income subject to allocation to the minority limited partners.
Perpetual preferred unit distributions of the Operating Partnership were $9,637,000 in the six-month periods ended June 30, 2008 and 2007.
Preferred share dividends were $28,549,000 in the six months ended June 30, 2008, compared to $28,591,000 in the prior year’s six months.
Below are the details of the changes in EBITDA by segment for the six months ended June 30, 2008 from the six months ended June 30, 2007.
Six Months ended June 30, 2007
15,905
10,369
5,950
3,276
35,961
52,443
9,558
(256
Six Months ended June 30, 2008
LIQUIDITY AND CAPITAL RESOURCES
We may from time to time seek to purchase or retire our outstanding debt securities though cash purchases and/or exchanges for our equity securities, in open market purchases, privately negotiated transactions or otherwise. Such purchases and/or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Cash Flows for the Six Months Ended June 30, 2008
Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties. Other sources of liquidity to fund our cash requirements include proceeds from debt financings, including mortgage loans and corporate level unsecured borrowings; our $2.6 billion revolving credit facility; proceeds from the issuance of common and preferred equity; and asset sales. Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, distributions to our common and preferred shareholders, as well as acquisition and development costs. Our cash and cash equivalents were $1,712,032,000 at June 30, 2008, a $557,437,000 increase over the balance at December 31, 2007. This increase resulted from $453,516,000 of net cash provided by operating activities $68,758,000 of net cash provided by financing activities and $35,163,000 of net cash provided by investing activities. Property rental income represents our primary source of net cash provided by operating activities.
Our consolidated outstanding debt was $12,219,332,000 at June 30, 2008, a $323,294,000 increase over the balance at December 31, 2007. This increase resulted primarily from debt associated with property refinancings during the current quarter. As of June 30, 2008 and December 31, 2007, $0 and $405,656,000, respectively, was outstanding under our revolving credit facilities. During 2008 and 2009, $58,057,000 and $421,019,000 of our outstanding debt matures, respectively. We may refinance such debt or choose to repay all or a portion, using existing cash balances or our revolving credit facilities.
Our share of debt of unconsolidated subsidiaries was $2,998,810,000 at June 30, 2008, a $291,063,000 decrease from the balance at December 31, 2007. This resulted primarily from a decrease in our share of Toys “R” Us outstanding debt of $187,135,000 and $137,722,000 resulting from the disposition of our 13.8% interest in GMH.
Cash flows provided by operating activities of $453,516,000 was primarily comprised of (i) net income of $551,857,000, net of $132,282,000 of non-cash adjustments, including depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities, minority interest expense, (ii) distributions of income from partially owned entities of $20,051,000, and (iii) the net change in operating assets and liabilities of $13,890,000.
Net cash provided by investing activities of $35,163,000 were primarily comprised of (i) proceeds from the sale of real estate and investments (primarily Americold and Tysons Dulles Plaza) of $350,591,000, (ii) distributions of capital from partially owned entities of $140,069,000 and (iii) proceeds received from repayments on mortgage loans receivable of $50,951,000, partially offset by, (iv) development and redevelopment expenditures of $253,159,000, (v) investments in partially owned entities of $96,277,000, (vi) additions to real estate of $97,804,000, (vii) acquisitions of real estate and related investments of $32,484,000 and (viii) investments in notes and mortgage loans receivable of $7,397,000.
Net cash provided by financing activities of $68,758,000 was primarily comprised of (i) proceeds from borrowings of $1,215,500,000, partially offset by, (ii) repayments of borrowings of $793,599,000, (iii) dividends paid on common shares of $276,478,000, (iv) distributions to minority partners of $47,083,000 and (v) dividends paid on preferred shares of $28,567,000.
Capital Expenditures
Capital expenditures are categorized as follows:
Recurring -- capital improvements expended to maintain a property’s competitive position within the market and tenant improvements and leasing commissions for costs to re-lease expiring leases or renew or extend existing leases.
Non-recurring -- capital improvements completed in the year of acquisition and the following two years which were planned at the time of acquisition and tenant improvements and leasing commissions for space which was vacant at the time of acquisition of a property.
Development and redevelopment expenditures include all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions and capitalized interest and operating costs until the property is substantially complete and ready for its intended use.
LIQUIDITY AND CAPITAL RESOURCES - continued
Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2008.
(Accrual basis):
Expenditures to maintain the assets:
Recurring
26,259
5,432
1,595
7,089
1,662
Non-recurring
6,098
2,237
1,094
2,767
32,357
12,718
6,526
4,429
Tenant improvements:
48,632
15,596
18,981
3,805
10,250
7,134
6,822
284
55,766
22,418
4,089
Leasing Commissions:
16,633
10,101
4,183
523
1,826
6,004
5,908
75
22,637
16,009
598
24.91
19.47
3.24
3.05
Total Capital Expenditures and Leasing Commissions (accrual basis)
110,760
51,145
29,690
6,282
19,165
4,478
Adjustments to reconcile accrual basis to cash basis:
Expenditures in the current year applicable to prior periods
72,689
36,925
11,116
3,262
18,515
2,871
Expenditures to be made in future periods for the current period
(65,053
(34,332
(18,158
(4,687
(7,827
(49
Total Capital Expenditures and Leasing Commissions (Cash basis)
118,396
53,738
22,648
29,853
7,300
Development and Redevelopment Expenditures (1):
Bergen Town Center
55,902
Wasserman venture
29,910
23,481
40 East 66th Street
18,563
Crystal Plaza Two
14,309
1999 K Street
13,733
13,524
2101 L Street
7,916
Springfield Mall
6,100
North Bergen, New Jersey
4,130
Green Acres Mall
2,671
62,920
11,740
18,997
22,084
4,213
5,886
253,159
54,955
104,411
77,840
Excludes development expenditures of partially owned, non-consolidated investments.
63
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Cash Flows for the Six Months Ended June 30, 2007
Our cash and cash equivalents were $743,506,000 at June 30, 2007, a $1,489,811,000 decrease over the balance at December 31, 2006. This decrease resulted from $3,166,571,000 of net cash used in investing activities, partially offset by, $1,377,322,000 of net cash provided by financing activities and $299,438,000 of net cash provided by operating activities. Property rental income represents our primary source of net cash provided by operating activities.
Our consolidated outstanding debt was $12,572,462,000 at June 30, 2007, a $3,017,664,000 increase over the balance at December 31, 2006. This increase resulted primarily from the issuance of $1.4 billion of convertible senior debentures due 2027 and from mortgage debt associated with asset acquisitions and property refinancings during the current quarter. As of June 30, 2007 and December 31, 2006, our revolving credit facility had a $94,000,000 balance and a zero outstanding balance, respectively.
Our share of debt of unconsolidated subsidiaries was $2,989,235,000 at June 30, 2007, a $333,772,000 decrease from the balance at December 31, 2006. This decrease resulted primarily from our $351,302,000 share of Toys’ decrease in outstanding debt.
Cash flows provided by operating activities of $299,438,000 was primarily comprised of (i) net income of $332,851,000, after adjustments of $55,919,000 for non-cash items, including depreciation and amortization expense, net gains from derivative positions, the effect of straight-lining of rental income, equity in net income of partially owned entities, minority interest expense, and (ii) distributions of income from partially owned entities of $11,767,000, partially offset by (iii) the net change in operating assets and liabilities of $101,099,000.
Net cash used in investing activities of $3,166,571,000 was primarily comprised of (i) acquisitions of real estate of $2,585,928,000, (ii) investments in notes and mortgage loans receivable of $204,914,000, (iii) deposits in connection with real estate acquisitions and pre-acquisition costs of $20,691,000, (iv) investments in partially owned entities of $166,611,000, (v) development and redevelopment expenditures of $140,253,000, and (vi) investments in marketable securities of $151,024,000, partially offset by (vii) proceeds received from repayments on mortgage loans receivable of $113,291,000.
Net cash provided by financing activities of $1,377,322,000 was primarily comprised of (i) proceeds from borrowings of $2,510,217,000, of which $1,372,000,000 were proceeds received from the offering of the 2.85% convertible senior debentures due 2027, partially offset by, (ii) repayments of borrowings of $714,873,000, (iii) dividends paid on common shares of $257,943,000, (iv) purchases of marketable securities in connection with the legal defeasance of mortgage notes payable of $86,653,000, (v) distributions to minority partners of $41,929,000, and (vi) dividends paid on preferred shares of $28,645,000.
Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2007.
Washington, DCOffice
16,697
4,571
5,813
6,121
39,299
11,619
14,330
1,722
11,628
39,559
1,982
15,985
6,728
4,692
2,258
2,307
16,096
2,369
18.03
40.95
12.38
11.68
18.99
2.52
5.85
2.00
1.32
72,352
22,918
24,835
4,543
20,056
40,297
9,776
20,477
2,769
7,275
(45,597
(15,736
(14,973
(10,941
67,052
16,958
30,339
3,365
16,390
32,747
Crystal Mall Two
18,663
16,975
15,502
11,435
9,605
1925 K Street
2,772
2,617
Arlington Plaza
1,810
1740 Broadway
1,204
19,672
2,163
6,377
6,518
4,614
140,253
3,367
45,124
70,292
21,470
___________________________
SUPPLEMENTAL INFORMATION
Three Months Ended June 30, 2008 vs. Three Months Ended March 31, 2008
Our revenues and expenses are subject to seasonality during the year which impacts quarter-by-quarter net earnings, cash flows and funds from operations. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income, which we recorded on a one-quarter lag basis in our first quarter, accounts for more than 80% of Toys’ fiscal year net income. The Office and Merchandise Mart segments have historically experienced higher utility costs in the first and third quarters of the year. The Merchandise Mart segment also has experienced higher earnings in the second and fourth quarters of the year due to major trade shows occurring in those quarters.
Below are the details of the changes in EBITDA by segment for the three months ended June 30, 2008 from the three months ended March 31, 2008.
For the three months ended March 31, 2008
678,563
143,239
99,536
81,926
25,733
78,251
4,044
1,364
520
10,210
1,265
57,109
5,358
(505
For the three months ended June 30, 2008
30.7%
______________________________________
The following table reconciles net income to EBITDA for the quarter ended March 31, 2008.
Net income (loss) for the three months ended March 31, 2008
412,197
65,615
251,338
35,895
383
80,362
(21,396
207,961
34,004
30,628
23,827
13,233
41,495
64,774
181,185
43,620
39,242
22,202
11,907
34,102
30,112
Income tax (benefit) expense
(122,780
(221,672
210
93,919
4,761
EBITDA for the three months ended March 31, 2008
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 net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO and FFO per diluted share are used by management, investors and industry analysts as supplemental measures of operating performance of equity REITs. FFO and FFO per diluted share should be evaluated along with GAAP net income and income per diluted share (the most directly comparable GAAP measures), as well as cash flow from operating activities, investing activities and financing activities, in evaluating the operating performance of equity REITs. Management believes that FFO and FFO per diluted share are helpful to investors as supplemental performance measures because these measures exclude the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs which implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, these non-GAAP measures can facilitate comparisons of operating performance between periods and among other equity REITs. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as disclosed in Our Statements of Cash Flows. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity. The calculations of both the numerator and denominator used in the computation of income per share are disclosed in footnote 10 – Income Per Share, in the notes to our consolidated financial statements on page 22 of this Quarterly Report on Form 10-Q.
FFO for the Three and Six Months Ended June 30, 2008, and 2007
FFO applicable to common shares plus assumed conversions was $208,260,000, or $1.27 per diluted share for the three months ended June 30, 2008, compared to $281,741,000, or $1.72 per diluted share in the prior year’s quarter. FFO applicable to common shares plus assumed conversions was $743,471,000 or $4.54 per diluted share, for the six months ended June 30, 2008, compared to $551,906,000, or $3.36 per diluted share, for the prior year’s six months. Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”
(Amounts in thousands except per share amounts)
Reconciliation of Net Income to FFO:
Depreciation and amortization of real property
122,227
114,511
252,087
208,176
(56,831
Proportionate share of adjustments to equity in net income of Toys to arrive at FFO:
16,358
17,112
33,010
51,035
Income tax effect of above adjustments
(5,948
(5,807
(11,776
(17,690
Proportionate share of adjustments to equity in net income of partially owned entities, excluding Toys, to arrive at FFO:
11,668
13,403
23,254
22,464
(1,772
(7,194
(8,130
(13,882
(22,416
(26,500
FFO
217,232
290,764
761,411
569,843
FFO applicable to common shares
202,958
276,469
732,862
541,252
5,254
Series A convertible preferred dividends
142
FFO applicable to common shares plus assumed conversions
208,260
281,741
743,471
551,906
Reconciliation of Weighted Average Shares:
Weighted average common shares outstanding
Effect of dilutive securities:
4,690
Series A convertible preferred shares
Denominator for diluted FFO per share
164,006
FFO applicable to common shares plus assumed conversions per diluted share
1.27
1.72
4.54
3.36
67
We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:
As at June 30, 2008
As at December 31, 2007
Consolidated debt:
Balance
Weighted Average Interest Rate
Effect of 1% Change In Base Rates
Variable rate
14,488
1,113,181
5.86%
Fixed rate
10,770,539
5.19%
10,782,857
5.24%
12,219,332
11,896,038
Pro-rata share of debt of non- consolidated entities (non-recourse):
Variable rate – excluding Toys
266,851
4.33%
2,668
193,655
Variable rate – Toys
903,944
5.23%
9,039
1,072,431
7.14%
Fixed rate (including $1,010,270, and $1,010,487 of Toys debt in 2008 and 2007)
1,828,015
7.08%
2,023,787
6.88%
2,998,810
6.28%
11,707
3,289,873
6.96%
Minority limited partners’ share of above
(2,620
Total change in annual net income
23,575
Per share-diluted
0.15
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of June 30, 2008, variable rate debt with an aggregate principal amount of $410,998,000 and a weighted average interest rate of 3.80% was subject to LIBOR caps. These caps are based on a notional amount of $412,000,000 and cap LIBOR at a weighted average rate of 6.34%. As of June 30, 2008, we have investments in mezzanine loans with an aggregate carrying amount of $99,788,000 that are based on variable interest rates which partially mitigate our exposure to a change in interest rates on our variable rate debt.
Fair Value of Debt
As of June 30, 2008, the carrying amount of our debt exceeds its aggregate fair value by approximately $168,803,000, based on discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt.
Derivative Instruments in Marketable Equity Securities
We have, and may in the future enter into, derivative positions in marketable equity securities that do not qualify for hedge accounting treatment. Because these derivatives do not qualify for hedge accounting treatment, the gains or losses resulting from their mark-to-market at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statements of income. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative positions and a specified spread over LIBOR. Because the market value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our investment income or expense.
During the three and six months ended June 30, 2008 we recognized net losses of $3,468,000 and $21,830,000, respectively, and during the three and six months ended June 30, 2007 we recognized net gains of $72,074,000, and $81,454,000, respectively, after all expenses and LIBOR charges.
Disclosure Controls and Procedures: The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2008, such disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters, including the matters referred to below, are not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Stop & Shop
On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) claiming that we had no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty, because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, froze our right to re-allocate which effectively terminated our right to collect the additional rent from Stop & Shop. On March 3, 2003, after we moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint. On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint. We removed the action to the United States District Court for the Southern District of New York. In January 2005 that court remanded the action to the New York Supreme Court. On February 14, 2005, we served an answer in which we asserted a counterclaim seeking a judgment for all the unpaid additional rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the additional rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. On May 17, 2005, we filed a motion for summary judgment. On July 15, 2005, Stop & Shop opposed our motion and filed a cross-motion for summary judgment. On December 13, 2005, the Court issued its decision denying the motions for summary judgment. Both parties appealed the Court’s decision and on December 14, 2006, the Appellate Court division issued a decision affirming the Court’s decision. On January 16, 2007, we filed a motion for the reconsideration of one aspect of the Appellate Court’s decision which was denied on March 13, 2007. We are currently engaged in discovery and anticipate that a trial date will be set for some time in 2008. We intend to vigorously pursue our claims against Stop & Shop. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.
1290 Avenue of the Americas and 555 California Street
On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas and the 555 California Street complex. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump.
In August 2005, Mr. Trump brought a lawsuit in the New York State Supreme Court against, among others, the general partners of the partnerships referred to above. Mr. Trump’s claims arose out of a dispute over the sale price of and use of proceeds from, the sale of properties located on the former Penn Central rail yards between West 59th and 72nd Streets in Manhattan which were formerly owned by the partnerships. In decisions dated September 14, 2005 and July 24, 2006, the Court denied various of Mr. Trump’s motions and ultimately dismissed all of Mr. Trump’s claims, except for his claim seeking access to books and records. In a decision dated October 1, 2007, the Court determined that Mr. Trump had already received access to the books and records to which he was entitled, with the exception of certain documents which were subsequently delivered to Mr. Trump. Mr. Trump has sought re-argument and renewal on, and filed a notice of appeal in connection with, his dismissed claims.
In connection with the acquisition, we agreed to indemnify the sellers for liabilities and expenses arising out of Mr. Trump’s claim that the general partners of the partnerships we acquired did not sell the rail yards at a fair price or could have sold the rail yards for a greater price and any other claims asserted in the legal action; provided however, that if Mr. Trump prevails on certain claims involving partnership matters, other than claims relating to sale price, the sellers will be required to reimburse us for certain costs related to those claims. We believe that the claims relating to the sale price are without merit. All other allegations are not asserted as a basis for damages and regardless of merit would not be material to our consolidated financial statements.
Item 1A. Risk Factors
There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.
None.
On May 15, 2008, we held our annual meeting of shareholders. The shareholders voted on the following matters: (i) the election of four nominees to serve on the Board of Trustees for a three-year term and until their respective successors are duly elected and qualified, (ii) the ratification of the selection of independent auditors with regard to the current fiscal year and (iii) a shareholder proposal requesting that the Board of Trustees initiate the appropriate process to amend the Company’s governance documents to provide that trustee nominees be elected by an affirmative vote of the majority of votes cast at the annual meeting of shareholders, with a plurality vote standard retained for contested trustee elections, that is, when the number of trustee nominees exceeds the number of board seats. The results of the voting are shown below:
Votes Cast for
Votes Cast Against or Withheld
Abstentions
(i) Election of Trustees:
Anthony W. Deering
117,026,596
14,222,065
Michael Lynne
123,205,927
8,042,734
Robert H. Smith
120,384,294
10,864,367
Ronald G. Targan
122,429,738
8,818,923
(ii) Ratification of selection of independent auditors for the current fiscal year
129,777,483
654,438
816,740
(iii) Shareholder proposal regarding majority voting in the election of trustees
75,170,930
40,624,393
897,327
In addition to the four Trustees re-elected, Steven Roth, Michael D. Fascitelli, Russell B. Wight, Jr., Robert P. Kogod, David Mandelbaum, Dr. Richard West and Candace K. Beinecke continue to serve as Trustees after the meeting.
Because of the nature of the above elections, there were no broker non-votes.
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: August 5, 2008
By:
/s/ Joseph Macnow
Joseph Macnow, Executive Vice President - Finance and Administration and Chief Financial Officer (duly authorized officer and principal financial and accounting officer)
EXHIBIT INDEX
Exhibit No.
3.1
-
Articles of Restatement of Vornado Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on July 30, 2007 - Incorporated by reference to Exhibit 3.75 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 001-11954), filed on July 31, 2007
*
3.2
Amended and Restated Bylaws of Vornado Realty Trust, as amended on March 2, 2000 - Incorporated by reference to Exhibit 3.12 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000
3.3
Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of October 20, 1997 (the “Partnership Agreement”) – Incorporated by reference to Exhibit 3.26 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003
3.4
Amendment to the Partnership Agreement, dated as of December 16, 1997 – Incorporated by reference to Exhibit 3.27 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003
3.5
Second Amendment to the Partnership Agreement, dated as of April 1, 1998 – Incorporated by reference to Exhibit 3.5 to Vornado Realty Trust’s Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998
3.6
Third Amendment to the Partnership Agreement, dated as of November 12, 1998 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on November 30, 1998
3.7
Fourth Amendment to the Partnership Agreement, dated as of November 30, 1998 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on February 9, 1999
3.8
Fifth Amendment to the Partnership Agreement, dated as of March 3, 1999 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on March 17, 1999
3.9
Sixth Amendment to the Partnership Agreement, dated as of March 17, 1999 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on July 7, 1999
3.10
Seventh Amendment to the Partnership Agreement, dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on July 7, 1999
3.11
Eighth Amendment to the Partnership Agreement, dated as of May 27, 1999 - Incorporated by reference to Exhibit 3.4 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on July 7, 1999
3.12
Ninth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 25, 1999
3.13
Tenth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by reference to Exhibit 3.4 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 25, 1999
_______________________ Incorporated by reference.
3.14
Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on December 23, 1999
3.15
Twelfth Amendment to the Partnership Agreement, dated as of May 1, 2000 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on May 19, 2000
3.16
Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on June 16, 2000
3.17
Fourteenth Amendment to the Partnership Agreement, dated as of December 8, 2000 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on December 28, 2000
3.18
Fifteenth Amendment to the Partnership Agreement, dated as of December 15, 2000 - Incorporated by reference to Exhibit 4.35 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001
3.19
Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001 - Incorporated by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001
3.20
Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001 - Incorporated by reference to Exhibit 3.4 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001
3.21
Eighteenth Amendment to the Partnership Agreement, dated as of January 1, 2002 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K/A (File No. 001-11954), filed on March 18, 2002
3.22
Nineteenth Amendment to the Partnership Agreement, dated as of July 1, 2002 - Incorporated by reference to Exhibit 3.47 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954), filed on August 7, 2002
3.23
Twentieth Amendment to the Partnership Agreement, dated April 9, 2003 - Incorporated by reference to Exhibit 3.46 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003
Twenty-First Amendment to the Partnership Agreement, dated as of July 31, 2003 - Incorporated by reference to Exhibit 3.47 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 001-11954), filed on November 7, 2003
3.25
Twenty-Second Amendment to the Partnership Agreement, dated as of November 17, 2003 – Incorporated by reference to Exhibit 3.49 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-11954), filed on March 3, 2004
Twenty-Third Amendment to the Partnership Agreement, dated May 27, 2004 – Incorporated by reference to Exhibit 99.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on June 14, 2004
3.27
Twenty-Fourth Amendment to the Partnership Agreement, dated August 17, 2004 – Incorporated by reference to Exhibit 3.57 to Vornado Realty Trust and Vornado Realty L.P.’s Registration Statement on Form S-3 (File No. 333-122306), filed on January 26, 2005
3.28
Twenty-Fifth Amendment to the Partnership Agreement, dated November 17, 2004 – Incorporated by reference to Exhibit 3.58 to Vornado Realty Trust and Vornado Realty L.P.’s Registration Statement on Form S-3 (File No. 333-122306), filed on January 26, 2005
3.29
Twenty-Sixth Amendment to the Partnership Agreement, dated December 17, 2004 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on December 21, 2004
3.30
Twenty-Seventh Amendment to the Partnership Agreement, dated December 20, 2004 – Incorporated by reference to Exhibit 3.2 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on December 21, 2004
3.31
Twenty-Eighth Amendment to the Partnership Agreement, dated December 30, 2004 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on January 4, 2005
3.32
Twenty-Ninth Amendment to the Partnership Agreement, dated June 17, 2005 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 21, 2005
3.33
Thirtieth Amendment to the Partnership Agreement, dated August 31, 2005 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on September 1, 2005
3.34
Thirty-First Amendment to the Partnership Agreement, dated September 9, 2005 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on September 14, 2005
3.35
Thirty-Second Amendment and Restated Agreement of Limited Partnership, dated as of December 19, 2005 – Incorporated by reference to Exhibit 3.59 to Vornado Realty L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 000-22685), filed on May 8, 2006
Thirty-Third Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of April 25, 2006 – Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on May 1, 2006
3.37
Thirty-Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of May 2, 2006 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on May 3, 2006
3.38
Thirty-Fifth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of August 17, 2006 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Form 8-K (File No. 000-22685), filed on August 23, 2006
3.39
Thirty-Sixth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of October 2, 2006 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Form 8-K (File No. 000-22685), filed on January 22, 2007
3.40
Thirty-Seventh Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of June 28, 2007 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 27, 2007
Thirty-Eighth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of June 28, 2007 – Incorporated by reference to Exhibit 3.2 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 27, 2007
3.42
Thirty-Ninth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of June 28, 2007 – Incorporated by reference to Exhibit 3.3 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 27, 2007
3.43
Fortieth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of June 28, 2007 – Incorporated by reference to Exhibit 3.4 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 27, 2007
3.44
Forty-First Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of March 31, 2008 – Incorporated by reference to Exhibit 3.44 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (file No. 001-11954), filed on May 6, 2008
4.1
Indenture and Servicing Agreement, dated as of March 1, 2000, among Vornado Finance LLC, LaSalle Bank National Association, ABN Amro Bank N.V. and Midland Loan Services, Inc. - Incorporated by reference to Exhibit 10.48 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000
4.2
Indenture, dated as of June 24, 2002, between Vornado Realty L.P. and The Bank of New York, as Trustee - Incorporated by reference to Exhibit 4.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 24, 2002
4.3
Indenture, dated as of November 25, 2003, between Vornado Realty L.P. and The Bank of New York, as Trustee - Incorporated by reference to Exhibit 4.10 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 001-11954), filed on April 28, 2005
4.4
Indenture, dated as of November 20, 2006, among Vornado Realty Trust, as Issuer, Vornado Realty L.P., as Guarantor and The Bank of New York, as Trustee – Incorporated by reference to Exhibit 4.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on November 27, 2006
Certain instruments defining the rights of holders of long-term debt securities of Vornado Realty Trust and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. Vornado Realty Trust hereby undertakes to furnish to the Securities and Exchange Commission, upon request, copies of any such instruments.
10.1
**
Vornado Realty Trust’s 1993 Omnibus Share Plan - Incorporated by reference to Exhibit 4.1 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 331-09159), filed on July 30, 1996
10.2
Vornado Realty Trust’s 1993 Omnibus Share Plan, as amended - Incorporated by reference to Exhibit 4.1 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 333-29011), filed on June 12, 1997
10.3
Master Agreement and Guaranty, between Vornado, Inc. and Bradlees New Jersey, Inc. dated as of May 1, 1992 - Incorporated by reference to Vornado, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 001-11954), filed May 8, 1992
10.4
Registration Rights Agreement between Vornado, Inc. and Steven Roth, dated December 29, 1992 - Incorporated by reference to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993
* **
_______________________ Incorporated by reference. Management contract or compensatory agreement.
76
10.5
Stock Pledge Agreement between Vornado, Inc. and Steven Roth dated December 29, 1992 - Incorporated by reference to Vornado, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993
10.6
Management Agreement between Interstate Properties and Vornado, Inc. dated July 13, 1992 - Incorporated by reference to Vornado, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993
10.7
Employment Agreement, dated as of April 15, 1997, by and among Vornado Realty Trust, The Mendik Company, L.P. and David R. Greenbaum - Incorporated by reference to Exhibit 10.4 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997
10.8
Consolidated and Restated Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated as of March 1, 2000, between Entities named therein (as Mortgagors) and Vornado (as Mortgagee) - Incorporated by reference to Exhibit 10.47 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000
10.9
Promissory Note from Steven Roth to Vornado Realty Trust, dated December 23, 2005 – Incorporated by reference to Exhibit 10.15 to Vornado Realty Trust Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-11954), filed on February 28, 2006
10.10
Letter agreement, dated November 16, 1999, between Steven Roth and Vornado Realty Trust - Incorporated by reference to Exhibit 10.51 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000
10.11
Agreement and Plan of Merger, dated as of October 18, 2001, by and among Vornado Realty Trust, Vornado Merger Sub L.P., Charles E. Smith Commercial Realty L.P., Charles E. Smith Commercial Realty L.L.C., Robert H. Smith, individually, Robert P. Kogod, individually, and Charles E. Smith Management, Inc. - Incorporated by reference to Exhibit 2.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on January 16, 2002
10.12
Registration Rights Agreement, dated January 1, 2002, between Vornado Realty Trust and the holders of the Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Current Report on Form 8-K/A (File No. 1-11954), filed on March 18, 2002
10.13
Tax Reporting and Protection Agreement, dated December 31, 2001, by and among Vornado, Vornado Realty L.P., Charles E. Smith Commercial Realty L.P. and Charles E. Smith Commercial Realty L.L.C. - Incorporated by reference to Exhibit 10.3 to Vornado Realty Trust’s Current Report on Form 8-K/A (File No. 1-11954), filed on March 18, 2002
10.14
Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit 10.7 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 001-11954), filed on May 1, 2002
10.15
First Amendment, dated October 31, 2002, to the Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit 99.6 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002
77
10.16
Registration Rights Agreement, dated as of July 21, 1999, by and between Vornado Realty Trust and the holders of Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Registration Statement on Form S-3 (File No. 333-102217), filed on December 26, 2002
10.17
Form of Registration Rights Agreement between Vornado Realty Trust and the holders of Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.3 to Vornado Realty Trust’s Registration Statement on Form S-3 (File No. 333-102217), filed on December 26, 2002
10.18
Amendment to Real Estate Retention Agreement, dated as of July 3, 2002, by and between Alexander’s, Inc. and Vornado Realty L.P. - Incorporated by reference to Exhibit 10(i)(E)(3) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002
10.19
59th Street Real Estate Retention Agreement, dated as of July 3, 2002, by and between Vornado Realty L.P., 731 Residential LLC and 731 Commercial LLC - Incorporated by reference to Exhibit 10(i)(E)(4) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002
10.20
Amended and Restated Management and Development Agreement, dated as of July 3, 2002, by and between Alexander’s, Inc., the subsidiaries party thereto and Vornado Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(1) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002
10.21
59th Street Management and Development Agreement, dated as of July 3, 2002, by and between 731 Residential LLC, 731 Commercial LLC and Vornado Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(2) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002
10.22
Amendment dated May 29, 2002, to the Stock Pledge Agreement between Vornado Realty Trust and Steven Roth dated December 29, 1992 - Incorporated by reference to Exhibit 5 of Interstate Properties’ Schedule 13D/A dated May 29, 2002 (File No. 005-44144), filed on May 30, 2002
10.23
Vornado Realty Trust’s 2002 Omnibus Share Plan - Incorporated by reference to Exhibit 4.2 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 333-102216) filed December 26, 2002
10.24
Registration Rights Agreement by and between Vornado Realty Trust and Bel Holdings LLC dated as of November 17, 2003 – Incorporated by reference to Exhibit 10.68 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-11954), filed on March 3, 2004
10.25
Registration Rights Agreement, dated as of May 27, 2004, by and between Vornado Realty Trust and 2004 Realty Corp. – Incorporated by reference to Exhibit 10.75 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005
10.26
Registration Rights Agreement, dated as of December 17, 2004, by and between Vornado Realty Trust and Montebello Realty Corp. 2002 – Incorporated by reference to Exhibit 10.76 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005
78
10.27
Form of Stock Option Agreement between the Company and certain employees – Incorporated by reference to Exhibit 10.77 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005
10.28
Form of Restricted Stock Agreement between the Company and certain employees – Incorporated by reference to Exhibit 10.78 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005
10.29
Employment Agreement between Vornado Realty Trust and Sandeep Mathrani, dated February 22, 2005 and effective as of January 1, 2005 – Incorporated by reference to Exhibit 10.76 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 001-11954), filed on April 28, 2005
10.30
Contribution Agreement, dated May 12, 2005, by and among Robert Kogod, Vornado Realty L.P. and certain Vornado Realty Trust’s affiliates – Incorporated by reference to Exhibit 10.49 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-11954), filed on February 28, 2006
10.31
Amendment, dated March 17, 2006, to the Vornado Realty Trust Omnibus Share Plan – Incorporated by reference to Exhibit 10.50 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 001-11954), filed on May 2, 2006
10.32
Form of Vornado Realty Trust 2006 Out-Performance Plan Award Agreement, dated as of April 25, 2006 – Incorporated by reference to Exhibit 10.1 to Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on May 1, 2006
10.33
Form of Vornado Realty Trust 2002 Restricted LTIP Unit Agreement – Incorporated by reference to Vornado Realty Trust’s Form 8-K (Filed No. 001-11954), filed on May 1, 2006
10.34
Revolving Credit Agreement, dated as of June 28, 2006, among the Operating Partnership, the banks party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents, Deutsche Bank Trust Company Americas, Lasalle Bank National Association, and UBS Loan Finance LLC, as Documentation Agents and Vornado Realty Trust – Incorporated by reference to Exhibit 10.1 to Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on June 28, 2006
10.35
Amendment No.2, dated May 18, 2006, to the Vornado Realty Trust Omnibus Share Plan – Incorporated by reference to Exhibit 10.53 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 001-11954), filed on August 1, 2006
10.36
Amended and Restated Employment Agreement between Vornado Realty Trust and Joseph Macnow dated July 27, 2006 – Incorporated by reference to Exhibit 10.54 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 001-11954), filed on August 1, 2006
10.37
Guaranty, made as of June 28, 2006, by Vornado Realty Trust, for the benefit of JP Morgan Chase Bank – Incorporated by reference to Exhibit 10.53 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 001-11954), filed on October 31, 2006
10.38
Amendment, dated October 26, 2006, to the Vornado Realty Trust Omnibus Share Plan – Incorporated by reference to Exhibit 10.54 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 001-11954), filed on October 31, 2006
10.39
Amendment to Real Estate Retention Agreement, dated January 1, 2007, by and between Vornado Realty L.P. and Alexander’s Inc. – Incorporated by reference to Exhibit 10.55 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-11954), filed on February 27, 2007
10.40
Amendment to 59th Street Real Estate Retention Agreement, dated January 1, 2007, by and among Vornado Realty L.P., 731 Retail One LLC, 731 Restaurant LLC, 731 Office One LLC and 731 Office Two LLC. – Incorporated by reference to Exhibit 10.56 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-11954), filed on February 27, 2007
10.41
Stock Purchase Agreement between the Sellers identified and Vornado America LLC, as the Buyer, dated as of March 5, 2007 – Incorporated by reference to Exhibit 10.45 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 001-11954), filed on May 1, 2007
10.42
Employment Agreement between Vornado Realty Trust and Mitchell Schear, as of April 19, 2007 – Incorporated by reference to Exhibit 10.46 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 001-11954), filed on May 1, 2007
10.43
Revolving Credit Agreement, dated as of September 28, 2007, among Vornado Realty L.P. as borrower, Vornado Realty Trust as General Partner, the Banks signatory thereto, each as a Bank, JPMorgan Chase Bank, N.A. as Administrative Agent, Bank of America, N.A. as Syndication Agent, Citicorp North America, Inc., Deutsche Bank Trust Company Americas, and UBS Loan Finance LLC as Documentation Agents, and J.P. Morgan Securities Inc. and Bank of America Securities LLC as Lead Arrangers and Bookrunners. - Incorporated by reference to Exhibit 10.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 4, 2007
10.44
Second Amendment to Revolving Credit Agreement, dated as of September 28, 2007, by and among Vornado Realty L.P. as borrower, Vornado Realty Trust as General Partner, the Banks listed on the signature pages thereof, and J.P. Morgan Chase Bank N.A., as Administrative Agent for the Banks - Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 4, 2007
10.45
Form of Vornado Realty Trust 2002 Omnibus Share Plan Non-Employee Trustee Restricted LTIP Unit Agreement – Incorporated by reference to Exhibit 10.45 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-11954) filed on February 26, 2008
10.46
Form of Vornado Realty Trust 2008 Out-Performance Plan Award Agreement – Incorporated by reference to Exhibit 10.46 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001-11954) filed on May 6, 2008
15.1
Letter Regarding Unaudited Interim Financial Information
31.1
Rule 13a-14 (a) Certification of the Chief Executive Officer
31.2
Rule 13a-14 (a) Certification of the Chief Financial Officer
32.1
Section 1350 Certification of the Chief Executive Officer
32.2
Section 1350 Certification of the Chief Financial Officer
80