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:
September 30, 2010
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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 the 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 September 30, 2010, 182,670,995 of the registrant’s common shares of beneficial interest are outstanding.
Part I.
Financial Information:
Page Number
Item 1.
Financial Statements:
Consolidated Balance Sheets (Unaudited) as of
September 30, 2010 and December 31, 2009
3
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 2010 and 2009
4
Consolidated Statements of Changes in Equity (Unaudited)
for the Nine Months Ended September 30, 2010 and 2009
5
Consolidated Statements of Cash Flows (Unaudited)
6
Notes to Consolidated Financial Statements (Unaudited)
8
Report of Independent Registered Public Accounting Firm
36
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
37
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
71
Item 4.
Controls and Procedures
72
Part II.
Other Information:
Legal Proceedings
73
Item 1A.
Risk Factors
74
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Item 5.
Other Information
Item 6.
Exhibits
Signatures
75
Exhibit Index
76
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
September 30,
December 31,
ASSETS
2010
2009
Real estate, at cost:
Land
$
4,619,205
4,606,065
Buildings and improvements
13,092,999
12,902,086
Development costs and construction in progress
202,841
313,310
Leasehold improvements and equipment
128,004
128,056
Total
18,043,049
17,949,517
Less accumulated depreciation and amortization
(2,772,079)
(2,494,441)
Real estate, net
15,270,970
15,455,076
Real Estate Fund investments (see Note 4)
62,500
-
Cash and cash equivalents
846,254
535,479
Restricted cash
148,246
293,950
Short-term investments
40,000
Marketable securities
355,800
380,652
Accounts receivable, net of allowance for doubtful accounts of $56,894 and $46,708
192,895
157,325
Investments in partially owned entities
953,011
799,832
Investment in Toys "R" Us
457,141
409,453
Mezzanine loans receivable, net of allowance of $133,216 and $190,738
144,473
203,286
Receivable arising from the straight-lining of rents, net of allowance of $5,901 and $4,680
726,248
681,526
Deferred leasing and financing costs, net of accumulated amortization of $214,199 and $183,224
353,847
311,825
Due from officers
13,182
13,150
Identified intangible assets, net of accumulated amortization of $354,199 and $312,957
385,337
442,510
Other assets
724,224
461,408
20,634,128
20,185,472
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Notes and mortgages payable
8,992,805
8,445,766
Senior unsecured notes
1,231,196
711,716
Exchangeable senior debentures
489,332
484,457
Convertible senior debentures
396,714
445,458
Revolving credit facility debt
852,218
Accounts payable and accrued expenses
507,755
475,242
Deferred credit
632,427
682,384
Deferred compensation plan
88,559
80,443
Deferred tax liabilities
17,648
17,842
Other liabilities
372,695
88,912
Total liabilities
12,729,131
12,284,438
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 13,530,016 and 13,892,313 units outstanding
1,157,222
971,628
Series D cumulative redeemable preferred units - 10,400,000 and 11,200,000 units outstanding
260,000
280,000
Total redeemable noncontrolling interests
1,417,222
1,251,628
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 32,348,784 and 33,952,324 shares
783,527
823,686
Common shares of beneficial interest: $.04 par value per share; authorized,
250,000,000 shares; issued and outstanding 182,670,995 and 181,214,161 shares
7,277
7,218
Additional capital
6,809,905
6,961,007
Earnings less than distributions
(1,604,889)
(1,577,591)
Accumulated other comprehensive income
45,272
28,449
Total Vornado shareholders' equity
6,041,092
6,242,769
Noncontrolling interest in consolidated subsidiaries
446,683
406,637
Total equity
6,487,775
6,649,406
See notes to the consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
For the Three
For the Nine
Months Ended September 30,
(Amounts in thousands, except per share amounts)
REVENUES:
Property rentals
576,896
550,054
1,713,622
1,654,357
Tenant expense reimbursements
97,835
89,530
278,836
270,934
Fee and other income
32,301
31,635
107,010
98,284
Total revenues
707,032
671,219
2,099,468
2,023,575
EXPENSES:
Operating
281,548
265,952
828,528
814,561
Depreciation and amortization
134,755
130,503
405,844
398,845
General and administrative
56,557
51,684
154,869
180,381
Litigation loss accrual, impairment losses and acquisition costs
5,921
17,907
Total expenses
478,781
448,139
1,407,148
1,393,787
Operating income
228,251
223,080
692,320
629,788
(Loss) income applicable to Toys "R" Us
(2,557)
22,077
102,309
118,897
(Loss) income from partially owned entities
(1,996)
2,513
13,800
(3,080)
(Loss) from Real Estate Fund (of which $1,091 is allocated
to noncontrolling interests)
(1,410)
Interest and other investment income (loss), net
47,352
20,486
65,936
(63,608)
Interest and debt expense (including amortization of deferred
financing costs of $5,200 and $4,350 in each three-month
period, respectively, and $14,169 and $12,722 in each nine-month
period, respectively)
(152,358)
(158,205)
(441,980)
(475,028)
Net (loss) gain on early extinguishment of debt
(724)
3,407
(1,796)
26,996
Net gain on disposition of wholly owned and partially owned
assets other than depreciable real estate
5,072
4,432
12,759
Income before income taxes
121,630
117,790
441,938
238,397
Income tax expense
(5,498)
(5,267)
(16,051)
(15,773)
Income from continuing operations
116,132
112,523
425,887
222,624
Income from discontinued operations
43,321
49,276
Net income
155,844
271,900
Net income attributable to noncontrolling interests, including
unit distributions
(11,880)
(15,227)
(34,977)
(28,808)
Net income attributable to Vornado
104,252
140,617
390,910
243,092
Preferred share dividends
(13,442)
(14,269)
(41,975)
(42,807)
Discount on preferred share redemptions
4,382
NET INCOME attributable to common shareholders
95,192
126,348
353,317
200,285
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.52
0.48
1.94
0.91
Income from discontinued operations, net
0.23
0.27
Net income per common share
0.71
1.18
Weighted average shares
182,462
178,689
182,014
168,820
INCOME PER COMMON SHARE - DILUTED:
1.92
0.90
0.22
0.70
1.17
184,168
180,977
183,826
170,378
DIVIDENDS PER COMMON SHARE
0.65
1.95
2.55
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
(Amounts in thousands)
Earnings
Other
Non-
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
controlling
Shares
Amount
Capital
Distributions
Income (Loss)
Interests
Equity
Balance, December 31, 2008
33,954
823,807
155,286
6,195
6,025,976
(1,047,340)
(6,899)
412,913
6,214,652
Net income (loss)
(3,442)
239,650
Dividends paid on common
shares
5,736
230
236,920
(431,237)
(194,087)
Dividends paid on preferred
(42,809)
Common shares issued:
In connection with April 2009
public offering
17,250
690
709,536
710,226
Upon redemption of Class A
units, at redemption value
1,222
48
53,043
53,091
Under employees' share
option plan
28
(14)
1,219
(440)
765
Conversion of Series A
preferred shares to common
(2)
(89)
89
Deferred compensation shares
and options
11,527
11,529
Change in unrealized net gain
or loss on securities
available-for-sale
4,099
Our share of partially owned
entities OCI adjustments
11,846
Voluntary surrender of equity
awards on March 31, 2009
32,588
Adjustments to carry redeemable
Class A units at redemption value
(77,004)
(763)
7
7,443
(3,325)
3,362
Balance, September 30, 2009
33,952
823,718
179,524
7,151
6,993,131
(1,278,727)
16,489
406,146
6,967,908
Balance, December 31, 2009
181,214
1,490
392,400
(354,937)
(42,100)
Redemption of preferred shares
(1,600)
(39,982)
(35,600)
822
33
62,573
62,606
596
24
10,922
(25,583)
(14,637)
Under dividend reinvestment
plan
17
1
1,231
1,232
Real Estate Fund limited
partners' contributions
37,698
(3)
(177)
177
6,155
6,156
34,497
(12,080)
(232,099)
(61)
30
(5,594)
858
(4,767)
Balance, September 30, 2010
32,349
182,671
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of deferred financing costs)
419,638
413,697
Equity in income of Toys “R” Us
(102,309)
(118,897)
Straight-lining of rental income
(55,581)
(75,702)
Amortization of below-market leases, net
(49,144)
(56,270)
Distributions of income from partially owned entities
36,829
21,484
Other non-cash adjustments
36,058
119
Income from the mark-to-market of derivative positions in marketable equity securities
(32,249)
Litigation loss accrual and impairment losses
15,197
Net gain on dispositions of assets other than depreciable real estate
(12,759)
(4,432)
Equity in income of partially owned entities
(13,800)
3,080
Mezzanine loans loss accrual
6,900
122,738
Net loss (gain) on early extinguishment of debt
1,796
(26,996)
Net gain on sale of real estate
(42,655)
Write-off of unamortized costs from the voluntary surrender of equity awards
Amortization of discount on convertible and exchangeable senior debentures
29,106
Changes in operating assets and liabilities:
Real Estate Fund investments
(62,500)
Accounts receivable, net
(6,468)
11,611
Prepaid assets
(45,104)
(119,608)
(59,614)
(43,004)
78,153
70,511
13,791
217
Net cash provided by operating activities
594,721
489,487
Cash Flows from Investing Activities:
(159,053)
(28,738)
Proceeds from sales of, and return of investment in, marketable securities
126,015
59,873
125,204
81,195
Proceeds from repayment of mezzanine loans receivable
109,594
46,339
Additions to real estate
(98,789)
(145,981)
(86,871)
(384,655)
Investments in mezzanine loans receivable and other
(75,697)
Proceeds from sales of real estate and related investments
48,998
291,652
Distributions of capital from partially owned entities
45,613
13,112
Proceeds from maturing short-term investments
Purchases of marketable securities
(13,917)
(11,597)
Deposits in connection with real estate acquisitions
(10,000)
1,000
Net cash provided by (used in) investing activities
51,097
(77,800)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Cash Flows from Financing Activities:
Proceeds from borrowings
1,603,359
1,208,204
Repayments of borrowings
(1,462,652)
(996,218)
Dividends paid on common shares
Purchases of outstanding preferred units and shares
(48,600)
(24,330)
Dividends paid on preferred shares
Distributions to noncontrolling interests
(41,055)
(30,291)
Contributions from noncontrolling interests
39,351
Repurchase of shares related to stock compensation agreements and related tax witholdings
(13,467)
22
Debt issuance costs
(14,942)
(9,246)
Proceeds from issuance of common shares
Net cash (used in) provided by financing activities
(335,043)
621,471
Net increase in cash and cash equivalents
310,775
1,033,158
Cash and cash equivalents at beginning of period
1,526,853
Cash and cash equivalents at end of period
2,560,011
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest (including capitalized interest of $875 and $14,054)
409,953
461,802
Cash payments for income taxes
5,348
6,880
Non-Cash Investing and Financing Activities:
Investment in J.C. Penney, Inc
271,372
Adjustments to carry redeemable Class A units at redemption value
Redemption of Class A Operating Partnership units for common shares, at redemption value
Unrealized net gain on securities available for sale
Extinguishment of a liability in connection with the acquisition of real estate
20,500
Dividends paid in common shares
237,150
Unit distributions paid in Class A units
20,072
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Vornado Realty Trust (“Vornado”) 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”). Vornado is the sole general partner of, and owned approximately 92.8% of the common limited partnership interest in the Operating Partnership at September 30, 2010. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
Substantially all of Vornado’s assets are held through subsidiaries of the Operating Partnership. Accordingly, Vornado’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.
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado, and the Operating Partnership and its consolidated partially owned entities. All intercompany amounts have been eliminated. 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. 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 fina ncial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
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 Reports on Form 10-K and Form 10-K/A for the year ended December 31, 2009, as filed with the SEC. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the operating results for the full year.
3. Recently Issued Accounting Literature
On January 21, 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, adding new requirements for disclosures about transfers into and out of Levels 1 and 2 fair value measurements and additional disclosures about the activity within Level 3 fair value measurements. The application of this guidance on January 1, 2010 did not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued an update to ASC 810, Consolidation, which modifies the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity (“VIE”) by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The adoption of this guidance on January 1, 2010 did not have a material effect on our consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Vornado Capital Partners, L.P.
On July 6, 2010, we completed the first closing of Vornado Capital Partners, L.P., our real estate investment fund (the “Fund”), with aggregate equity commitments of $550,000,000, of which we committed $200,000,000. We expect to raise an additional $450,000,000 bringing total commitments to $1 billion. We are the general partner and investment manager of the Fund and it is our exclusive investment vehicle during the three-year investment period for all investments that fit within the Fund’s investment parameters, including debt, equity and other interests in real estate, and excluding (i) investments in vacant land and ground-up development; (ii) investments acquired by merger or primarily for our securities or properties; (iii) properties which can be combined with or relate to our exi sting properties; (iv) securities of commercial mortgage loan servicers and investments derived from any such investments; (v) noncontrolling interests in equity and debt securities; and (vi) investments located outside of North America. The Fund has a term of eight years from the final closing date. The Fund is accounted for under the AICPA Investment Company Guide and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings. We consolidate the accounts of the Fund into our consolidated financial statements. In the three and nine months ended September 30, 2010, we expensed $3,752,000 and $6,482,000, respectively, for organization costs, which are included as a component of “general and administrative” expenses on our consolidated statement of income.
In September 2010, the Fund received $59,240,000 of capital from partners, including $21,542,000 from us. In October 2010, the Fund received an additional $53,300,000 of capital from partners, including $19,382,000 from us, for total capital contributions to date of $112,540,000. In the third quarter of 2010, the Fund acquired two investments aggregating $42,500,000 in cash, and in October 2010, the Fund acquired a third investment for $168,000,000, of which $100,000,000 was mortgage financed and $68,000,000 was paid in cash. In addition, the Fund reimbursed us for $1,500,000 of organization costs.
5. Derivative Instruments and Marketable SecuritiesInvestment in J.C. Penney Company, Inc. (“J.C. Penney”) (NYSE: JCP)
We currently own an economic interest in 23,400,000 common shares of J.C Penney, or 9.9% of its outstanding common shares. Below are the details of our investment.
In September 2010, we acquired 2,684,010 common shares at an average price of $26.87 per share, or $72,107,000 in the aggregate. These shares are included as a component of marketable equity securities on our consolidated balance sheet and are classified as “available for sale.” Gains or losses resulting from the mark-to-market of these shares are recognized as an increase or decrease in “accumulated other comprehensive income” (a component of shareholders’ equity on our consolidated balance sheet) and not recognized in income. In the quarter ended September 30, 2010, we recognized an $845,000 unrealized gain based on J.C. Penney’s September 30, 2010 closing share price of $27.18 per share. In October 2010, we acquired an additional 400,000 common shares at an average price of $27.46 per share, or $10,983,000 in the ag gregate. Accordingly, we currently own 3,084,010 common shares at an average price of $26.94 per share, or $83,090,000 in the aggregate.
On September 28, 2010, we acquired call options to purchase 15,500,000 common shares at a strike price of $12.2437 per share for $199,265,000, which expire on March 27, 2012. We may exercise all or portions of the options prior to expiration. The options may be settled, at our election, in cash or common shares. These options are derivative instruments that do not qualify for hedge accounting treatment. Gains or losses resulting from the mark-to-market of the derivative instruments are recognized as an increase or decrease in “interest and other investment income (loss), net” on our consolidated statement of income. In the quarter ended September 30, 2010, we recognized a $32,249,000 net gain, based on J.C. Penney’s September 30, 2010 closing share price of $27.18 per share and our weighted average cost of $25.10 per share. At September 30, 2010, the $199,265,000 cost of the options and the $32,249,000 mark-to-market increase in the value of the options are included in “other assets” and the $199,265,000 settled on October 1, 2010 is included in “other liabilities” on our consolidated balance sheet.
On October 7, 2010, we entered into a forward contract to acquire 4,815,990 common shares at an initial weighted average strike price of $28.41 per share. We may accelerate settlement, in whole or in part, at any time prior to October 9, 2012. The counterparty may accelerate settlement, in whole or in part, upon one year’s notice to us. The forward contract may be settled, at our election, in cash or common shares. Pursuant to the terms of the contract, the strike price for each share increases at an annual rate of LIBOR plus 80 basis points and decreases for dividends received on the shares. The contract is a derivative instrument that does not qualify for hedge accounting treatment. Gains or losses resulting from the mark-to-market of the derivative instrument are recognized as an increase or decrease in “interest and other investment income (loss), net” on our consolidated statement of income.
9
5. Derivative Instruments and Marketable Securities - continued
Marketable Securities
The carrying amount of marketable securities classified as available for sale on our consolidated balance sheets and their corresponding fair values at September 30, 2010 and December 31, 2009 are as follows:
As of September 30, 2010
As of December 31, 2009
Carrying
Fair
Value
Equity securities
159,980
79,925
Debt securities
195,820
300,727
319,393
399,318
In the nine months ended September 30, 2010, we sold certain of our investments in marketable securities for an aggregate of $155,118,000 and recognized an $8,960,000 net gain, of which $5,052,000 was recognized in the third quarter of 2010. Such gain is included as a component of "net gain on disposition of wholly owned and partially owned assets other than depreciable real estate" on our consolidated statement of income. At September 30, 2010 and December 31, 2009, our marketable securities portfolio had $40,990,000 and $13,026,000, respectively, of gross unrealized gains. There were no unrealized losses at September 30, 2010 and $1,223,000 of gross unrealized losses at December 31, 2009.
6. Investments in Partially Owned Entities
LNR Property Corporation (“LNR”)
On July 29, 2010, as a part of LNR’s recapitalization, we acquired a 26.2% equity interest in LNR for $116,000,000 in cash and conversion into equity of our $15,000,000 mezzanine loan (the then current carrying amount) made to LNR’s parent, Riley Holdco Corp. The recapitalization involved an infusion of a total of $417,000,000 in new cash equity and the reduction of LNR’s total debt to $425,000,000 from $1.3 billion, excluding liabilities related to the consolidated CMBS and CDO trusts described below. We account for our equity interest in LNR under the equity method. Upon finalization of purchase accounting in the fourth quarter, we will recognize our 26.2% pro-rata share of LNR’s earnings for the period from July 29, 2010 (date of acquisition) to September 30, 2010, which will not be material to our consolidated statement of income, as we ll as our share of their fourth quarter earnings.
LNR consolidates certain commercial mortgage-backed securities (“CMBS”) and Collateralized Debt Obligation (“CDO”) trusts for which it is the primary beneficiary. The assets of these trusts (primarily commercial mortgage loans) are the sole source of repayment of the related liabilities, which are non-recourse to LNR and its equity holders, including us. Changes in the estimated fair value of the assets and liabilities of these trusts each period are recognized in LNR’s consolidated income statement and allocated to the noncontrolling interests, which is applied to “appropriated deficit” on LNR’s consolidated balance sheet and not to LNR’s equity holders, including us.
Below is a summary of LNR’s consolidated balance sheet at July 29, 2010:
As of
Balance Sheet:
July 29, 2010
Assets
120,569,958
Liabilities
142,795,134
Noncontrolling interests
55,754
Stockholders' deficiency (including appropriated deficit of $22,479,116)
(22,280,930)
10
6. Investments in Partially Owned Entities - continued
Toys “R” Us (“Toys”)
As of September 30, 2010, we own 32.7% of Toys. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income. We account for our investment in Toys under the equity method and record our 32.7% share of Toys net income or loss on a one-quarter lag basis because Toys’ fiscal year ends on the Saturday nearest January 31, and our fiscal year ends on December 31. As of September 30, 2010, the carrying amount of our investment in Toys does not differ materially from our share of the equity in the net assets of Toys on a purchase accounting basis.
On May 28, 2010, Toys filed a registration statement with the SEC for the offering and sale of its common stock. The offering, if completed, would result in a reduction of our percentage ownership of Toys’ equity. The size of the offering and its completion are subject to market and other conditions.
In August 2010, in connection with certain financing and refinancing transactions, Toys paid us an aggregate of $9,600,000 for our share of advisory fees. Since Toys has capitalized these fees and is amortizing them over the term of the related debt, we recorded the fees as a reduction of the basis of our investment in Toys and will amortize the fees into income over the term of the related debt.
Below is a summary of Toys’ latest available financial information on a purchase accounting basis:
Balance as of
July 31, 2010
October 31, 2009
11,243,000
12,589,000
9,717,000
11,198,000
112,000
Toys “R” Us, Inc. equity
1,526,000
1,279,000
For the Three Months Ended
Income Statement:
August 1, 2009
2,565,000
2,567,000
11,030,000
10,505,000
Net (loss) income attributable to Toys
(15,500)
62,000
292,500
304,000
As of September 30, 2010, we own 32.4% of the outstanding common stock of Alexander’s. We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable. As of September 30, 2010, Alexander’s owed us $58,409,000 in fees under these agreements.
Based on Alexander’s September 30, 2010 closing share price of $315.78, the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s is $522,322,000, or $322,634,000 in excess of the September 30, 2010 carrying amount on our consolidated balance sheet. As of September 30, 2010, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander’s by approximately $59,868,000. The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to the real estate (land and buildings).&nb sp; The basis difference related to the buildings is being amortized over their estimated useful lives as an adjustment to our equity in net income of Alexander’s. This amortization is not material to our share of equity in Alexander’s net income or loss. The basis difference related to the land will be recognized upon disposition of our investment.
11
Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX) – continued
Below is a summary of Alexander’s latest available financial information:
December 31, 2009
1,718,000
1,704,000
1,379,000
1,389,000
3,000
2,000
Stockholders' equity
336,000
313,000
September 30, 2009
61,000
58,000
179,000
166,000
Net income attributable to Alexander’s
18,000
49,000
117,000
Lexington Realty Trust (“Lexington”) (NYSE: LXP)
As of September 30, 2010, we own 18,468,969 Lexington common shares, or approximately 13.7% of Lexington’s common equity. We account for our investment in Lexington on the equity method because we believe we have the ability to exercise significant influence over Lexington’s operating and financial policies, based on, among other factors, our representation on Lexington’s Board of Trustees and the level of our ownership in Lexington as compared to other shareholders. We record our pro rata share of Lexington’s net income or loss on a one-quarter lag basis because we fil e 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 September 30, 2010 closing share price of $7.16, the market value (“fair value” pursuant to ASC 820) of our investment in Lexington was $132,238,000, or $80,804,000 in excess of the September 30, 2010 carrying amount on our consolidated balance sheet. As of September 30, 2010, the carrying amount of our investment in Lexington was less than our share of the equity in the net assets of Lexington by approximately $69,788,000. This basis difference resulted primarily from $107,882,000 of non-cash impairment charges recognized during 2008, partially offset by purchase accounting for our acquisition of an additional 8,000,000 common shares of Lexington in October 2008, of which the majority relates to our estimate of the fair values of Lexington’s real estate (land and buildings) as compared to the carrying amounts in Lexington’s consolidated financial statements. The basis difference related to the buildings is being amortized over their estimated useful lives as an adjustment to our equity in net income or loss of Lexington. This amortization is not material to our share of equity in Lexington’s net income or loss. The basis difference attributable to the land will be recognized upon disposition of our investment. Below is a summary of Lexington’s latest available financial information:
June 30, 2010
3,513,000
3,702,000
2,224,000
2,344,000
79,000
94,000
Shareholders’ equity
1,210,000
1,264,000
For the Three Months Ended June 30,
For the Nine Months Ended June 30,
86,000
264,000
284,000
Net loss attributable to Lexington
(24,000)
(77,000)
(97,000)
(156,000)
12
The carrying amount of our investments in partially owned entities and income (loss) recognized from such investments are as follows:
Investments:
Toys
Alexander’s
199,688
193,174
Partially owned office buildings
155,754
158,444
LNR (see page 10)
131,000
India real estate ventures
126,211
93,322
Lexington
51,434
55,106
Other equity method investments
288,924
299,786
For the Three Months
For the Nine Months
Ended September 30,
Our Share of Net (Loss) Income:
Toys:
32.7% share of:
Equity in net (loss) income before income taxes
(32,574)
(15,985)
(1)
93,662
106,545
Income tax benefit (expense)
27,501
36,122
1,914
(7,335)
Equity in net (loss) income
(5,073)
20,137
95,576
99,210
Non-cash purchase price accounting adjustments
13,946
Interest and other income
2,516
1,940
6,733
5,741
Alexander’s – 32.4% share of:
Equity in net income before reversal of stock
appreciation rights compensation expense
4,971
5,088
13,668
12,906
Income tax benefit and reversal of stock
641
24,773
Equity in net income
5,612
18,756
14,309
37,679
Management, leasing and development fees
1,945
2,541
6,774
8,365
7,557
21,297
21,083
46,044
Lexington – 13.7% share in 2010 and 16.1%
share in 2009 of equity in net (loss) income
(2,301)
(15,054)
3,316
(24,969)
India real estate ventures – 4% to 36.5% range in our
share of equity in net (loss) income
(195)
(465)
2,062
(1,386)
Other, net (4)
(7,057)
(3,265)
(12,661)
(22,769)
(5)
___________________________________
Includes $10,200 for our share of income from a litigation settlement.
The three and nine months ended September 30, 2009 include $14,541 and $19,121, respectively, for our share of non-cash impairment losses recognized by Lexington.
Includes a $5,998 net gain resulting from Lexington’s March 2010 stock issuance.
(4)
Represents equity in net income or loss of partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Verde Realty Operating Partnership, 85 10th Avenue Associates and others.
Includes $7,650 of expense for our share of the Downtown Crossing, Boston lease termination payment.
13
6. Investments in Partially Owned Entities – continued
Below is a summary of the debt of our partially owned entities as of September 30, 2010 and December 31, 2009; none of which is recourse to us.
Interest
100% of
Rate at
Partially Owned Entities’ Debt at
Maturity
Toys (32.7% interest) (as of July 31, 2010 and October 31, 2009,
respectively):
Senior unsecured notes (Face value – $950,000)
07/17
10.75 %
927,499
925,931
Senior unsecured notes (Face value – $725,000)
12/17
8.50 %
715,339
$1.6 billion credit facility
05/12
5.25 %
52,510
418,777
$800 million secured term loan facility
07/12
4.51 %
798,433
797,911
Senior U.K. real estate facility
04/13
5.02 %
550,037
578,982
7.625% bonds (Face value – $500,000)
08/11
8.82 %
494,566
490,613
7.875% senior notes (Face value – $400,000)
9.50 %
384,905
381,293
7.375% senior notes (Face value – $400,000)
10/18
9.99 %
342,351
338,989
$181 million unsecured term loan facility
01/13
5.26 %
180,567
180,456
Spanish real estate facility
02/13
168,432
191,436
Japan borrowings
03/11
0.83 %
127,600
168,720
Japan bank loans
01/11-08/14
1.20%-2.85%
175,367
172,902
Junior U.K. real estate facility
6.84 %
96,380
101,861
French real estate facility
81,255
92,353
8.750% debentures (Face value – $21,600)
09/21
9.17 %
21,046
21,022
Mortgage loan
n/a
800,000
European and Australian asset-based revolving credit facility
10/12
102,760
Various
152,543
136,206
5,268,830
5,900,212
Alexander’s (32.4% interest):
731 Lexington Avenue mortgage note payable, collaterallized by
the office space (prepayable without penalty after 12/13)
02/14
5.33 %
354,630
362,989
731 Lexington Avenue mortgage note payable, collateralized by
the retail space (prepayable without penalty after 12/13)
07/15
4.93 %
320,000
Rego Park construction loan payable
12/10
1.66 %
296,665
266,411
Kings Plaza Regional Shopping Center mortgage note payable
(prepayable without penalty after 12/10)
06/11
7.46 %
152,408
183,319
Rego Park mortgage note payable (prepayable without penalty)
03/12
0.75 %
78,246
Paramus mortgage note payable (prepayable without penalty)
10/11
5.92 %
68,000
1,269,949
1,278,965
Lexington (13.7% interest) (as of June 30, 2010 and
September 30, 2009, respectively):
Mortgage loans collateralized by Lexington’s real estate (various
prepayment terms)
2010-2037
5.78 %
2,033,209
2,132,253
LNR (26.2% interest):
Mortgage notes payable
2011-2043
5.75 %
512,360
Liabilities of consolidated CMBS and CDO trusts
6.06 %
141,893,340
142,405,700
14
Partially owned office buildings:
330 Madison Avenue (25% interest) mortgage note payable
06/15
1.91 %
150,000
Kaempfer Properties (2.5% and 5.0% interests in two partnerships)
mortgage notes payable, collateralized by the partnerships’ real estate
11/11-12/11
5.86 %
139,896
141,547
100 Van Ness, San Francisco office complex (9% construction interest)
up to $132 million loan payable
07/13
6.50 %
85,249
Fairfax Square (20% interest) mortgage note payable (prepayable
without penalty after 07/14)
12/14
7.00 %
71,953
72,500
Rosslyn Plaza (46% interest) mortgage note payable
12/11
1.47 %
56,680
330 West 34th Street (34.8% interest) mortgage note payable,
collateralized by land; we obtained a fee interest in the land upon
foreclosure of our $9,041 mezzanine loan in 2010
07/22
5.71 %
50,150
West 57th Street (50% interest) mortgage note payable (prepayable
without penalty)
4.94 %
23,007
29,000
825 Seventh Avenue (50% interest) mortgage note payable (prepayable
without penalty after 04/14)
10/14
8.07 %
20,680
20,773
India Real Estate Ventures:
TCG Urban Infrastructure Holdings (25% interest) mortgage notes
payable, collateralized by the entity’s real estate (various
2010-2022
13.39 %
198,360
178,553
India Property Fund L.P. (36.5% interest) revolving credit facility,
repaid upon maturity in 03/10
77,000
Other:
Verde Realty Operating Partnership (8.3% interest) mortgage notes
payable, collateralized by the partnerships’ real estate (various
2010-2025
5.85 %
582,982
607,089
Green Courte Real Estate Partners, LLC (8.3% interest) (as of
June 30, 2010 and September 30, 2009), mortgage notes payable,
collateralized by the partnerships’ real estate (various
2011-2018
5.51 %
299,601
304,481
Waterfront Associates (2.5% interest) construction and land loan
up to $250 million payable
09/11
2.26% - 3.76%
214,011
183,742
Monmouth Mall (50% interest) mortgage note payable (prepayable
without penalty after 07/15)
09/15
5.44 %
165,000
San Jose, California (45% interest) construction loan(1)
03/13
4.32 %
127,917
132,570
Wells/Kinzie Garage (50% interest) mortgage note payable
12/13
6.87 %
14,537
14,657
Orleans Hubbard Garage (50% interest) mortgage note payable
10,019
10,101
431,222
425,717
On October 15, 2010, we acquired the remaining 55% interest in this property for $97,000, consisting of $27,000 in cash and the assumption of $70,000 of existing debt. We will consolidate the accounts of this property into our consolidated financial statements in the fourth quarter, from the date of acquisition.
Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities, was $40,139,660,000 and $3,149,640,000 as of September 30, 2010 and December 31, 2009, respectively. Excluding our pro rata share of LNR’s liabilities related to consolidated CMBS and CDO trusts which are non-recourse to LNR and its equity holders, including us, our pro rata share of the debt is $3,000,497,000 at September 30, 2010 and $3,149,640,000 at December 31, 2009.
15
7. Mezzanine Loans Receivable
The following is a summary of our investments in mezzanine loans as of September 30, 2010 and December 31, 2009.
Interest Rate
as of
Carrying Amount as of
Mezzanine Loans Receivable:
Tharaldson Lodging Companies
04/11
4.56 %
71,959
74,701
280 Park Avenue
06/16
10.25 %
68,422
73,750
Equinox (1)
97,968
Riley HoldCo Corp. (see discussion of
LNR in Note 6)
74,437
Other, net
8/11-8/15
1.36% - 8.95%
137,308
73,168
277,689
394,024
Valuation allowance (2)
(133,216)
(190,738)
In January 2010, Equinox prepaid the entire balance of this loan which was scheduled to mature in February 2013. We received $99,314, including accrued interest, for our 50% interest in the loan which we acquired in 2006 for $57,500.
Represents loan loss accruals on certain mezzanine loans based on our estimate of the net realizable value of each loan. Our estimates are based on the present value of expected cash flows, discounted at each loan’s effective interest rate, or if a loan is collateralized, based on the fair value of the underlying collateral, adjusted for estimated costs to sell. The excess of the carrying amount over the net realizable value of a loan is recognized as a reduction of “interest and other investment income (loss), net” in our consolidated statements of income.
8. Discontinued Operations
The table below sets forth the combined results of operations of assets related to discontinued operations for the three and nine months ended September 30, 2010 and 2009 and includes the operating results of 1999 K Street, which was sold on September 1, 2009 and 15 other retail properties, which were sold during 2009.
1,356
9,846
3,225
666
6,621
Net gain on sale of 1999 K Street
41,211
Net gains on sale of other real estate
1,444
16
9. Identified Intangible Assets and Intangible Liabilities
The following summarizes our identified intangible assets (primarily acquired above-market leases) and intangible liabilities (primarily acquired below-market leases) as of September 30, 2010 and December 31, 2009.
Identified intangible assets:
Gross amount
739,536
755,467
Accumulated amortization
(354,199)
(312,957)
Net
Identified intangible liabilities (included in deferred credit):
925,845
942,968
(348,845)
(309,476)
577,000
633,492
Amortization of acquired below-market leases, net of acquired above-market leases resulted in an increase to rental income of $16,935,000 and $18,728,000 for the three months ended September 30, 2010 and 2009, respectively, and $49,144,000 and $56,270,000 for the nine months ended September 30, 2010 and 2009, respectively. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases for each of the five succeeding years commencing January 1, 2011 is as follows:
2011
58,593
2012
54,285
2013
46,355
2014
40,397
2015
37,555
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $15,198,000 and $15,698,000 for the three months ended September 30, 2010 and 2009, respectively, and $45,926,000 and $49,262,000 for the nine months ended September 30, 2010 and 2009, 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 commencing January 1, 2011 is as follows:
51,703
46,388
38,894
20,083
14,990
We are a tenant under ground leases for certain properties. Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $509,000 and $533,000 for the three months ended September 30, 2010 and 2009, respectively and $1,527,000 and $1,599,000 for the nine months ended September 30, 2010 and 2009, respectively. Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2011 is as follows:
2,036
10. Debt
The following is a summary of our debt:
Balance at
Notes and mortgages payable:
Maturity (1)
Fixed rate:
New York Office:
350 Park Avenue
01/12
5.48 %
430,000
1290 Avenue of the Americas
5.97 %
426,826
434,643
770 Broadway
03/16
5.65 %
353,000
888 Seventh Avenue
01/16
318,554
Two Penn Plaza
02/11
4.97 %
278,667
282,492
909 Third Avenue
04/15
5.64 %
207,976
210,660
Eleven Penn Plaza
5.20 %
200,287
203,198
Washington, DC Office:
Skyline Place
02/17
5.74 %
678,000
Warner Building (see page 28)
05/16
6.26 %
292,700
River House Apartments
5.43 %
195,546
Bowen Building
6.14 %
115,022
1215 Clark Street, 200 12th Street and 251 18th Street
01/25
7.09 %
111,711
113,267
Universal Buildings
04/14
6.37 %
103,957
106,630
Reston Executive I, II, and III
5.57 %
93,000
2011 Crystal Drive
08/17
7.30 %
81,641
82,178
1550 and 1750 Crystal Drive
11/14
7.08 %
80,030
81,822
1235 Clark Street
6.75 %
52,557
53,252
2231 Crystal Drive
08/13
46,916
48,533
1750 Pennsylvania Avenue
06/12
7.26 %
45,326
45,877
1225 Clark Street
28,064
28,925
1800, 1851 and 1901 South Bell Street
6.91 %
12,486
19,338
1101 17th, 1140 Connecticut, 1730 M and 1150 17th Street(2)
85,910
241 18th Street(3)
45,609
Retail:
Cross-collateralized mortgages on 40 strip shopping centers(4)
09/20
4.18 %
600,000
Springfield Mall (including present value of purchase option)(5)
10/12-04/13
9.02 %
249,789
242,583
Montehiedra Town Center
07/16
6.04 %
120,000
Broadway Mall
5.30 %
90,833
92,601
828-850 Madison Avenue Condominium
06/18
5.29 %
80,000
Las Catalinas Mall
11/13
6.97 %
58,139
59,304
Other(6)
09/11-05/36
5.10%-10.70%
120,706
156,709
Merchandise Mart:
Merchandise Mart
12/16
550,000
High Point Complex(7)
09/16
10.36 %
225,372
217,815
Boston Design Center
68,828
69,667
Washington Design Center
11/11
6.95 %
43,654
44,247
555 California Street
5.79 %
640,332
664,117
Industrial Warehouses
24,512
24,813
Total fixed rate notes and mortgages payable
5.96 %
7,024,431
6,640,012
___________________
See notes on page 20.
18
10. Debt - continued
Spread over
LIBOR
Variable rate:
Manhattan Mall
02/12
L+55
0.81 %
232,000
866 UN Plaza
05/11
L+40
0.84 %
44,978
2101 L Street
L+120
1.69 %
West End 25 (construction loan)
L+130
1.59 %
95,220
85,735
1101 17th, 1140 Connecticut, 1730 M and
1150 17th Street(2)
06/14
L+140
84,966
220 20th Street (construction loan)
01/11
L+115
1.52 %
83,251
75,629
04/18
n/a (8)
1.68 %
64,000
2200/2300 Clarendon Boulevard
01/15
L+75
1.01 %
60,750
65,133
Green Acres Mall
1.87 %
335,000
Bergen Town Center (construction loan)
L+150
1.95 %
273,651
261,903
Beverly Connection(9)
L+350 (9)
5.00 %
100,000
4 Union Square South
L+325
3.66 %
75,000
Cross-collateralized mortgages on 40 strip
shopping centers (4)
L+136 (4)
2.36 %
60,000
435 Seventh Avenue (10)
08/14
L+300 (10)
51,961
52,000
11/12
L+375
4.01 %
22,237
22,758
220 Central Park South
L+235–L+245
2.64 %
123,750
Other (11) (12)
09/10-02/12
1.76%-4.00%
111,610
117,868
Total variable rate notes and mortgages payable
2.11 %
1,968,374
1,805,754
Total notes and mortgages payable
5.11 %
Senior unsecured notes:
Senior unsecured notes due 2015 (13)
4.25 %
499,255
Senior unsecured notes due 2039(14)
10/39
7.88 %
460,000
446,134
Senior unsecured notes due 2010
4.75 %
148,318
148,240
Senior unsecured notes due 2011 (15)
5.60 %
100,373
117,342
Floating rate senior unsecured notes due 2011
L+200
2.26 %
23,250
Total senior unsecured notes
3.88% exchangeable senior debentures due 2025
(see page 22)
04/12
5.32 %
Convertible senior debentures: (see page 22)
3.63% due 2026(16)(17)
375,069
424,207
2.85% due 2027(16)(17)
5.45 %
21,645
21,251
Total convertible senior debentures (18)
Unsecured revolving credit facilities:
$1.595 billion unsecured revolving credit facility
09/12
427,218
$1.000 billion unsecured revolving credit facility
($14,233 reserved for outstanding letters of credit)
425,000
Total unsecured revolving credit facilities
___________________________
See notes on the following page.
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 June 1, 2010, we refinanced this loan in the same amount. The new loan, which is guaranteed by the Operating Partnership, has a rate of LIBOR plus 1.40% (1.66% at September 30, 2010) and matures in June 2011 with three one-year extension options.
On September 1, 2010, we repaid the $44,900 outstanding balance of this loan which was scheduled to mature in October 2010.
In August 2010, we sold $660,000 of 10-year mortgage notes in a single issuer securitization. The notes are comprised of a $600,000 fixed rate component and a $60,000 variable rate component and are cross-collateralized by 40 strip shopping centers. The variable rate portion of the debt has a LIBOR floor of 1.00%.
In the fourth quarter of 2009, we notified the master servicer of this debt that the cash flows currently generated from this property are insufficient to fund debt service payments and that we were not prepared to fund any cash shortfalls. Accordingly, we requested that the loan be placed with the special servicer. We have ceased making debt service payments and are currently in default. Pursuant to the terms of the debt agreement and in accordance with GAAP, we have accrued interest on this loan at the default rate. As a result, we have accrued $5,823 of additional interest expense in the nine months ended September 30, 2010, of which $3,038 was accrued in the current quarter. We are in negotiations with the special servicer but there can be no assurance as to the timing and ultimate resolution of these negotiations.
(6)
In March 2010, we notified the master servicer of the mortgage loan on a retail property in California, that the cash flows generated from this property were insufficient to fund debt service payments and that we were not prepared to fund any cash shortfalls. Accordingly, we requested that the loan be placed with the special servicer. On October 14, 2010, the special servicer foreclosed on the property. In the fourth quarter, we will remove the property and the related debt from our consolidated balance sheet, which will not have a material impact on our consolidated statement of income.
(7)
In March 2010, we notified the master servicer of this debt that the cash flows currently generated from this property are insufficient to fund debt service payments and that we were not prepared to fund any cash shortfalls. Accordingly, we requested that the loan be placed with the special servicer. We have ceased making debt service payments and are currently in default. Pursuant to the terms of the debt agreement and in accordance with GAAP, we have accrued interest on this loan at the default rate. As a result, we have accrued $5,913 of additional interest expense in the nine months ended September 30, 2010, of which $2,565 was accrued in the current quarter. In October, 2010, the special servicer filed a motion to place the property in receivership. There can be no assurance as to the timing and ultimate resolution of this matter.
(8)
This loan bears interest at the Freddie Mac Reference Note Rate plus 1.53%.
(9)
This loan has a LIBOR floor of 1.50%.
(10)
This loan has a LIBOR floor of 2.00%.
20
(11)
In June 2010, we extended the maturity date of a $50,000 construction loan to February 2011, with a one-year extension option.
(12)
In October 2010, we repaid a $36,000 loan which matured on September 30, 2010.
(13)
On March 26, 2010, we completed a public offering of $500,000 aggregate principal amount of 4.25% senior unsecured notes due April 1, 2015. Interest on the notes is payable semi-annually on April 1 and October 1, commencing on October 1, 2010. The notes were sold at 99.834% of their face amount to yield 4.287%. The notes can be redeemed without penalty beginning January 1, 2015. We retained net proceeds of approximately $496,000.
These notes may be redeemed at our option in whole or in part beginning on October 1, 2014, at a price equal to the principal amount plus accrued interest. In the quarter ended March 31, 2010, we reclassified $13,866 of deferred financing costs to “deferred leasing and financing costs” on our consolidated balance sheet.
(15)
In the third quarter of 2010, we purchased $17,000 aggregate face amount ($16,981 aggregate carrying amount) of these senior unsecured notes for $17,382 in cash, resulting in a net loss of $401.
(16)
In 2010, we purchased $55,251 aggregate face amount ($53,972 aggregate carrying amount) of our convertible senior debentures for $55,367 in cash, resulting in a net loss of $1,395, of which $324 was recognized in the third quarter of 2010.
(17)
On October 1 2010, pursuant to our September 2, 2010 tender offer, we purchased $189,827 aggregate face amount of our 3.63% convertible senior debentures and $12,246 aggregate face amount of our 2.85% convertible senior debentures for an aggregate of $206,053 in cash, resulting in a net loss of approximately $8,500 which will be recognized in the fourth quarter of 2010.
(18)
The net proceeds from the offering of these debentures were contributed to the Operating Partnership in the form of an inter-company loan and the Operating Partnership fully and unconditionally guaranteed payment of these debentures. There are no restrictions which limit the Operating Partnership from making distributions to Vornado and Vornado has no independent assets or operations outside of the Operating Partnership.
21
10. Debt – continued
Pursuant to the provisions of ASC 470-20, Debt with Conversion and Other Options, below is a summary of required disclosures related to our convertible and exchangeable senior debentures.
2.85% Convertible
3.63% Convertible
3.88% Exchangeable
Senior Debentures due 2027
Senior Debentures due 2026
Senior Debentures due 2025
Principal amount of debt component
22,479
382,046
437,297
499,982
Unamortized discount
(834)
(1,228)
(6,977)
(13,090)
(10,650)
(15,525)
Carrying amount of debt component
Carrying amount of equity component
2,104
20,490
23,457
Effective interest rate
5.45%
5.32%
Maturity date (period through which
discount is being amortized)
4/1/12
11/15/11
4/15/12
Conversion price per share, as adjusted
157.18
148.46
87.17
Number of shares on which the
aggregate consideration to be
delivered upon conversion is
determined
- (1)
__________________
Our convertible senior debentures require that upon conversion, the entire principal amount is to be settled in cash, and at our option, any excess value above the principal amount may be settled in cash or common shares. Based on the September 30, 2010 closing share price of our common shares and the conversion prices in the table above, there was no excess value; accordingly, no common shares would be issued if these securities were settled on this date. The number of common shares on which the aggregate consideration that would be delivered upon conversion is 143 and 2,573 common shares, respectively.
Three Months Ended
Nine Months Ended
2.85% Convertible Senior Debentures due 2027:
Coupon interest
160
8,693
480
28,204
Discount amortization – original issue
23
1,203
69
3,836
Discount amortization – ASC 470-20 implementation
110
5,631
325
17,958
293
15,527
874
49,998
3.63% Convertible Senior Debentures due 2026:
3,523
8,102
11,328
25,929
417
908
1,320
2,846
1,117
2,430
3,533
7,616
5,057
11,440
16,181
36,391
3.88% Exchangeable Senior Debentures due 2025:
4,844
14,532
14,585
389
369
1,151
1,091
1,258
1,193
3,724
3,532
6,491
6,406
19,407
19,208
11. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests on our consolidated balance sheets represent Operating Partnership units held by third parties and are comprised of Class A units and Series D-10, D-11, D-14 and D-15 (collectively, “Series D”) cumulative redeemable preferred units. Redeemable noncontrolling interests on our consolidated balance sheets are recorded at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity. Below is a table summarizing the activity of redeemable noncontrolling interests.
Balance at December 31, 2008
1,177,978
32,250
(31,313)
Conversion of Class A units into common shares, at redemption value
(53,091)
Adjustment to carry redeemable Class A units at redemption value
77,004
9,937
Balance at September 30, 2009
1,212,765
Balance at December 31, 2009
33,487
(40,702)
(62,606)
232,099
Redemption of Series D-12 redeemable units
(13,000)
16,316
Balance at September 30, 2010
As of September 30, 2010 and December 31, 2009, the aggregate redemption value of redeemable Class A units was $1,157,222,000 and $971,628,000, respectively.
Redeemable noncontrolling interests exclude our Series G convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares. Accordingly the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $61,516,000 and $60,271,000 as of September 30, 2010 and December 31, 2009, respectively.
In March and May of 2010, we redeemed 246,153 and 553,847 Series D-12 cumulative redeemable preferred units, respectively, for $16.25 per unit in cash, or $13,000,000 in the aggregate. In connection with these redemptions, we recognized a $6,972,000 net gain, of which $4,818,000 was recognized in the second quarter of 2010. Such gain is included as a component of “net income attributable to noncontrolling interests, including unit distributions,” on our consolidated statement of income.
12. Shareholders’ Equity
In September 2010, we purchased all of the 1,600,000 outstanding Series D-10 preferred shares with a liquidation preference of $25.00 per share, for $22.25 per share in cash, or $35,600,000 in the aggregate. In connection therewith, the $4,382,000 discount was included as “discount on preferred share redemptions” on our consolidated statement of income.
13. Fair Value Measurements
ASC 820, Fair Value Measurement and Disclosures defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 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 mar kets 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 that 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. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.& nbsp;
Financial Assets and Liabilities Measured at Fair Value
Financial assets and liabilities that are measured at fair value in our consolidated financial statements consist of (i) marketable securities, (ii) derivative positions in marketable equity securities (iii) the assets of our deferred compensation plan, which are primarily marketable equity securities and equity investments in limited partnerships, (iv) Real Estate Fund investments, (v) short-term investments (CDARS classified as available-for-sale), and (vi) mandatorily redeemable instruments (Series G convertible preferred units and Series D-13 cumulative redeemable preferred units). The tables below aggregate the fair values of financial assets and liabilities by the levels in the fair value hierarchy at September 30, 2010 and December 31, 2009, respectively.
Level 1
Level 2
Level 3
Derivative positions in marketable equity securities
231,514
Deferred compensation plan assets (included in other assets)
42,522
46,037
20,000
42,500
Total assets
738,373
418,322
88,537
Mandatorily redeemable instruments (included in other liabilities)
61,516
40,854
39,589
Marketable equity securities
200,368
160,779
60,271
The table below summarizes the changes in fair value of the Level 3 assets above for the three and nine months ended September 30, 2010 and 2009, respectively.
Beginning balance
43,598
36,168
34,176
Total realized/unrealized gains
487
688
1,637
1,998
Purchases, sales, other settlements and issuances, net
44,452
367
47,311
1,049
Ending balance
37,223
Purchases in the three and nine months ended September 30, 2010, include the investments of our consolidated Real Estate Fund.
13. Fair Value Measurements - continued
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value in our consolidated financial statements include mezzanine loans receivable and debt. Estimates of the fair values of these instruments are based on our assessments of available market information and valuation methodologies, including discounted cash flow analyses. The table below summarizes the carrying amounts and fair values of these financial instruments as of September 30, 2010 and December 31, 2009.
Mezzanine loans receivable
136,555
192,612
Debt:
9,058,839
7,858,873
1,282,997
718,302
571,229
547,480
412,503
461,275
11,110,047
11,325,568
10,939,615
10,438,148
14. Stock-based Compensation
On May 13, 2010, our shareholders approved the 2010 Omnibus Share Plan (the “Plan’), which replaces the 2002 Omnibus Share Plan. Under the Plan, the Compensation Committee of the Board (the “Committee”) may grant eligible participants awards of stock options, stock appreciation rights, performance shares, restricted shares and other stock-based awards and operating partnership units, certain of which may provide for dividends or dividend equivalents and voting rights prior to vesting. Awards may be granted up to a maximum of 6,000,000 shares, if all awards granted are Full Value Awards, as defined, and up to 12,000,000 shares, if all of the awards granted are Not Full Value Awards, as defined. Full Value Awards are awards of securities, such as restricted shares, that, if all vesting requirements are met, do not require the payment of an exercise price or strike price to acquire the securities. Not Full Value Awards are awards of securities, such as options, that do require the payment of an exercise price or strike price. This means, for example, if the Committee were to award only restricted shares, it could award up to 6,000,000 restricted shares. On the other hand, if the Committee were to award only stock options, it could award options to purchase up to 12,000,000 shares (at the applicable exercise price). The Committee may also issue any combination of awards under the Plan, with reductions in availability of future awards made in accordance with the above limitations.
We account for all stock-based compensation in accordance ASC 718, Compensation – Stock Compensation. Stock-based compensation expense for the three and nine months ended September 30, 2010 and 2009 consists of stock option awards, restricted stock awards, Operating Partnership unit awards and out-performance plan awards. Stock-based compensation expense was $11,210,000 and $5,639,000 in the quarter ended September 30, 2010 and 2009, respectively, and $26,167,000 and $21,539,000 in the nine months ended September 30, 2010 and 2009, respectively. Stock-based compensation for the three and nine months ended September 30, 2010 includes $2,800,000 of expense resulting from accelerating the ves ting of certain Operating Partnership units and our 2006 out-performance Plan units, which were scheduled to fully vest in the first quarter of 2011.
On March 31, 2009, our nine most senior executives voluntarily surrendered their 2007 and 2008 stock option awards and their 2008 out-performance plan awards. Accordingly, we recognized $32,588,000 of expense in the first quarter of 2009 representing the unamortized portion of these awards, which is included as a component of “general and administrative” expense on our consolidated statement of income.
25
15. Fee and Other Income
The following table sets forth the details of our fee and other income:
For The Three Months
For The Nine Months
Tenant cleaning fees
13,613
11,842
40,733
37,034
Management and leasing fees
3,555
2,837
16,075
8,255
Lease termination fees
2,301
1,608
11,577
4,356
Other income
12,832
15,348
38,625
48,639
Fee and other income above includes management fee income from Interstate Properties, a related party, of $192,000 and $197,000 for the three months ended September 30, 2010 and 2009, respectively, and $584,000 and $578,000 for the nine months ended September 30, 2010 and 2009, respectively. The above table excludes fee income from partially owned entities which is included in income from partially owned entities (see Note 6 – Investments in Partially Owned Entities).
16. Interest and Other Investment Income (Loss), Net
The following table sets forth the details of our interest and other investment income (loss):
Income from the mark-to-market of derivative positions in marketable
equity securities
32,249
Dividends and interest on marketable securities
6,445
6,071
21,068
18,584
Mark-to-market of investments in our deferred compensation plan (1)
3,907
5,687
5,684
6,103
Interest on mezzanine loans
2,620
6,521
7,660
26,625
Mezzanine loans receivable loss accrual
(6,900)
(122,738)
2,131
2,207
6,175
7,818
__________________________
This income is entirely offset by the expense resulting from the mark-to-market of the deferred compensation plan liability, which is included in "general and administrative" expense.
26
17. Income Per Share
The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and potentially dilutive share equivalents. Potentially dilutive share equivalents include our Series A convertible preferred shares, employee stock options, restricted stock and exchangeable senior debentures due 2025.
Numerator:
Income from continuing operations, net of income
attributable to noncontrolling interests
100,518
197,038
Income from discontinued operations, net of income attributable to
noncontrolling interests
40,099
46,054
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(29)
(38)
(79)
(147)
Numerator for basic income per share
95,163
126,310
353,238
200,138
Impact of assumed conversions:
Convertible preferred share dividends
43
121
Numerator for diluted income per share
126,353
353,359
Denominator:
Denominator for basic income per share –
weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,706
2,213
1,741
1,558
Convertible preferred shares
Denominator for diluted income per share –
weighted average shares and assumed conversions
INCOME PER COMMON SHARE – BASIC:
INCOME PER COMMON SHARE – DILUTED:
The effect of dilutive securities above excludes anti-dilutive weighted average common share equivalents. Accordingly the three months ended September 30, 2010 and 2009 exclude 19,837 and 21,314 weighted average common share equivalents, respectively, and the nine months ended September 30, 2010 and 2009 exclude 19,843 and 21,418 weighted average common share equivalents, respectively.
27
18. Comprehensive Income
Other comprehensive income
7,675
52,340
16,823
23,388
Comprehensive income
123,807
208,184
442,710
295,288
Less: Comprehensive income attributable to noncontrolling interests
12,414
19,257
36,148
30,796
Comprehensive income attributable to Vornado
111,393
188,927
406,562
264,492
Substantially all of other comprehensive income for the three and nine months ended September 30, 2010 and 2009 relates to income from the mark-to-market of marketable securities classified as available-for-sale and our share of other comprehensive income or loss of partially owned entities.
19. Retirement Plan
In the first quarter of 2009, we finalized the termination of the Merchandise Mart Properties Pension Plan, which resulted in a $2,800,000 pension settlement expense that is included as a component of “general and administrative” expense on our consolidated statement of income.
20. Subsequent Events
On October 8, 2010, we acquired 510 Fifth Avenue for $57,000,000, comprised of $24,700,000 in cash and $32,300,000 of existing mortgage debt. This five-story building is located on the southwest corner of 43rd Street and Fifth Avenue in New York and consists of 60,000 square feet of retail and office space. We will consolidate the accounts of this property into our consolidated financial statements in the fourth quarter, from the date of the acquisition.
On October 20, 2010, we sold a 45% common ownership interest in 1299 Pennsylvania Avenue (the Warner Building) and 1101 17th Street NW, for $236,700,000, comprised of $91,000,000 in cash and the assumption of existing mortgage debt. We retained the remaining 55% ownership interest and continue to manage and lease the properties. Based on the Warner Building’s implied fair value of $445,000,000, we realized a net gain of $54,000,000 which will be recognized in the fourth quarter of 2010. The gain on 1101 17th Street, based on an implied fair value of $81,000,000, will be recognized when we monetize our investment.
21. Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, including coverage for terrorist acts, with sub-limits for certain perils such as floods. Our California properties have earthquake insurance with coverage of $150,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $150,000,000 annual aggregate.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of our earthquake insurance coverage and as a direct insurer for coverage for acts of terrorism, including nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by TRIPRA. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. Our coverage for NBCR losses is up to $2 billion per occurrence, for which PPIC is responsible for a deductible of $3,200,000 and 15% of the balance of a covered loss and the Federal government is responsible for the remaining 85% of a covered loss. We are ultimately responsible for any loss borne by PPIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.
Our debt instruments, consisting of mortgage loans secured by our properties which are 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 for purposes of 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.
Other Commitments and Contingencies
Our mortgage loans are non-recourse to us. However, in certain cases we have provided guarantees or master leased tenant space. These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans. As of September 30, 2010, the aggregate dollar amount of these guarantees and master leases is approximately $245,057,000.
At September 30, 2010, $14,233,000 of letters of credit were outstanding under one of our revolving credit facilities. Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide 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.
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 are committed to fund additional capital to certain of our partially owned entities aggregating approximately $195,672,000, of which $178,458,000 is committed to the Fund. In addition, we have agreed in principle to contribute up to $52,000,000 to a new investment management fund which will be managed by LNR.
As part of the process of obtaining the required approvals to demolish and develop our 220 Central Park South property into a new residential tower, we have committed to fund the estimated project cost of approximately $400,000,000 to $425,000,000.
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21. Commitments and Contingencies - continued
Litigation
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.
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 reallocate 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 State 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 State 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 dec ision 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. Discovery is now complete. On October 19, 2009, Stop & Shop filed a motion for leave to amend its pleadings to assert new claims for relief, including a claim for damages in an unspecified amount, and an additional affirmative defense. On April 26, 2010, Stop and Shop’s motion was denied. A tentative trial date has been set for November 8, 2010. We intend to continue 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.
In July 2005, we acquired H Street Building Corporation (“H Street”) which has a subsidiary that owns, among other things, a 50% tenancy in common interest in land located in Arlington County, Virginia, known as "Pentagon Row," leased to two tenants, Street Retail, Inc. and Post Apartment Homes, L.P. In April 2007, H Street acquired the remaining 50% interest in that fee. On September 25, 2008, both tenants filed suit against us and the former owners claiming the right of first offer to purchase the fee interest, damages in excess of $75,000,000 and punitive damages. In April 2010, the Trial Court entered judgment in favor of the tenants, that we sell the land to the tenants for a net sales price of $14,992,000, representing the Trial Court’s allocation of our purchase price for H Street. T he request for damages and punitive damages was denied. The Trial Court’s judgment is stayed pending the outcome of our appeal. As a result of the Trial Court’s decision, we recorded a $10,056,000 loss accrual in the three months ended March 31, 2010, primarily representing previously recognized rental income.
22. Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and nine months ended September 30, 2010 and 2009.
For the Three Months Ended September 30, 2010
New York
Washington, DC
Merchandise
Office
Retail
Mart
Other(3)
542,937
195,105
149,673
100,342
52,694
45,123
Straight-line rents:
Contractual rent increases
12,765
5,998
1,625
4,489
291
362
Amortization of free rent
4,259
1,569
(1,243)
3,563
(350)
720
Amortization of acquired below-
market leases, net
16,935
8,911
588
6,030
1,391
Total rentals
211,583
150,643
114,424
52,650
47,596
40,443
15,970
36,378
3,691
1,353
Fee and other income:
21,721
(8,108)
1,428
2,772
214
(857)
1,220
728
346
5,505
5,567
1,026
812
(78)
281,900
175,680
152,388
57,158
39,906
Operating expenses
124,323
60,390
54,105
28,832
13,898
44,235
37,266
27,061
12,671
13,522
4,514
5,985
8,846
7,353
29,859
Impairment losses and acquisition
costs
5,000
921
173,072
103,641
95,012
48,856
58,200
Operating income (loss)
108,828
72,039
57,376
8,302
(18,294)
(Loss) applicable to Toys
(Loss) income from partially owned
entities
1,705
(1,095)
833
(3,447)
(Loss) from Real Estate Fund
Interest and other investment
income, net
139
81
209
46,911
Interest and debt expense
(33,293)
(33,459)
(24,803)
(15,657)
(45,146)
Net (loss) on early extinguishment of
debt
Net gain on disposition of wholly
owned and partially owned assets
other than depreciable real estate
Income (loss) before income taxes
77,379
37,566
33,615
(17,038)
Income tax (expense) benefit
(861)
(1,050)
714
(4,299)
76,518
36,516
33,613
(6,621)
(21,337)
Net (income) loss attributable to
noncontrolling interests, including
(2,442)
397
(9,835)
Net income (loss) attributable to
Vornado
74,076
34,010
(31,172)
Interest and debt expense(2)
208,294
31,817
34,241
26,395
15,883
40,558
59,400
Depreciation and amortization(2)
179,148
42,531
41,394
28,024
12,782
30,079
24,338
Income tax (benefit) expense(2)
(23,013)
861
1,054
(714)
(27,501)
3,285
EBITDA(1)
468,681
149,285
113,205
88,431
21,330
40,579
55,851
See notes of page 35.
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22. Segment Information – continued
For the Three Months Ended September 30, 2009
509,968
189,896
137,139
91,286
52,269
39,378
16,676
10,126
3,573
2,827
135
4,682
(98)
2,760
1,963
38
18,728
10,710
1,069
4,826
2,093
210,634
144,541
100,902
52,453
41,524
36,360
14,892
32,121
3,661
2,496
17,989
(6,147)
1,269
1,984
557
(984)
1,226
234
5,854
4,979
648
3,461
406
273,332
166,630
134,228
59,595
37,434
117,362
57,889
49,304
26,469
14,928
42,621
35,187
24,091
13,654
14,950
4,895
6,079
6,802
7,198
26,710
164,878
99,155
80,197
47,321
56,588
108,454
67,475
54,031
12,274
(19,154)
Income applicable to Toys
Income (loss) from partially owned
1,646
1,876
767
(1,802)
190
254
20,020
(33,644)
(32,454)
(22,315)
(13,088)
(56,704)
Net gain on early extinguishment of
76,646
37,151
32,493
(776)
(49,801)
(585)
(44)
(39)
(847)
(3,752)
Income (loss) from continuing
operations
76,061
37,107
32,454
(1,623)
(53,553)
41,992
1,329
79,099
33,783
(2,817)
(12,425)
73,244
33,798
(65,978)
212,727
31,945
32,980
23,978
13,315
39,136
71,373
178,436
41,101
37,116
25,029
13,772
34,357
(30,479)
585
47
39
847
(36,122)
4,125
501,301
146,875
149,242
82,844
26,311
59,448
36,581
32
For the Nine Months Ended September 30, 2010
1,608,897
582,957
435,612
293,106
175,070
122,152
39,089
19,278
5,448
11,997
1,521
845
16,492
3,338
527
10,237
705
1,685
49,144
27,250
1,935
15,528
(91)
4,522
632,823
443,522
330,868
177,205
129,204
106,126
45,096
110,094
11,715
5,805
62,778
(22,045)
4,278
13,252
759
(2,245)
4,245
1,256
4,182
1,894
14,428
2,829
3,596
1,283
824,678
519,615
448,732
194,441
112,002
350,427
169,105
164,283
99,863
44,850
132,213
110,482
82,756
38,700
41,693
13,860
18,082
22,678
21,764
78,485
Litigation loss accrual, impairment
losses and acquisition costs
10,056
2,851
496,500
307,725
274,717
160,327
167,879
328,178
211,890
174,015
34,114
(55,877)
4,345
(1,099)
3,353
239
6,962
466
131
400
64,902
(99,026)
(102,247)
(63,702)
(44,699)
(132,306)
11,994
233,963
108,675
114,066
(9,544)
(107,531)
(1,670)
(1,150)
(37)
118
(13,312)
232,293
107,525
114,029
(9,426)
(120,843)
(7,290)
895
(28,582)
225,003
114,924
(149,425)
611,993
94,404
104,355
68,275
45,370
123,791
175,798
549,400
127,341
120,929
85,335
39,049
99,850
76,896
Income tax expense (benefit)(2)
13,553
1,670
1,161
(59)
(1,914)
12,658
1,565,856
448,418
333,970
268,571
74,934
324,036
115,927
See notes on page 35.
For the Nine Months Ended September 30, 2009
1,529,747
568,884
399,937
268,519
176,224
116,183
43,469
24,315
9,348
8,442
1,406
(42)
24,871
2,209
9,829
12,380
312
141
56,270
30,518
3,117
18,362
4,202
625,926
422,231
307,703
178,013
120,484
103,609
47,936
99,337
13,492
6,560
52,579
(15,545)
3,363
5,936
1,248
(2,317)
1,524
1,916
100
677
16,261
15,129
2,296
6,324
8,629
803,262
493,148
410,684
198,531
117,950
340,552
169,379
155,503
100,134
48,993
129,884
105,096
75,881
40,800
47,184
18,588
20,548
24,946
25,092
91,207
489,024
295,023
256,330
166,026
187,384
314,238
198,125
154,354
32,505
(69,434)
4,485
5,504
3,164
186
(16,419)
Interest and other investment (loss)
712
573
63
83
(65,039)
(100,118)
(94,408)
(67,093)
(38,888)
(174,521)
769
26,227
219,317
109,794
91,257
(6,114)
(294,754)
(845)
(1,232)
(316)
(1,755)
(11,625)
218,472
108,562
90,941
(7,869)
(306,379)
46,004
3,272
154,566
94,213
(6,438)
630
(23,000)
212,034
94,843
(329,379)
612,416
95,058
96,818
71,496
39,563
89,897
219,584
539,554
125,831
110,263
78,724
41,203
101,368
82,165
Income tax expense(2)
23,804
1,242
316
1,820
7,335
12,246
1,418,866
433,768
362,889
245,379
74,717
317,497
(15,384)
34
22. Segment Information - continued
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental measure for making decisions and assessing the unlevered 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.
Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
The tables below provide information about EBITDA from certain investments that are included in the "other" column of the preceding EBITDA by segment reconciliations. The totals for each of the columns below agree to the total EBITDA for the "other" column in the preceding EBITDA by segment reconciliations.
Alexander's
13,288
26,769
41,947
65,229
11,797
10,090
34,421
31,885
8,092
(1,863)
37,375
Hotel Pennsylvania
8,080
3,599
14,249
7,823
Industrial warehouses
460
2,067
3,902
Other investments
7,071
23,382
1,904
44,942
46,885
153,441
125,872
Corporate general and administrative expenses (1)
(20,712)
(18,619)
(60,668)
(56,653)
Investment income and other, net (1)
15,808
19,877
41,876
64,360
(11,584)
(14,969)
(33,487)
(32,250)
Real Estate Fund organization costs
(3,207)
(5,937)
Costs of acquisitions not consummated
(921)
(2,851)
Mezzanine loans receivable (loss) accrual
Write-off of unamortized costs from the voluntary surrender of equity
awards
(20,202)
The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting liability.
35
Shareholders and Board of TrusteesVornado Realty TrustNew York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the "Company") as of September 30, 2010, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2010 and 2009, and of changes in equity and cash flows for the nine-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2009, and the related consolidated statements of income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 2010, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to a change in method of accounting for debt with conversion options and noncontrolling interests in consolidated subsidiaries. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 2, 2010
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 expression s 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, see “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009. 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 includes a discussion of our consolidated financial statements for the three and nine months ended September 30, 2010. 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, 2009 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2010.
Overview
Business Objective and Operating Strategy
Our business objective is to maximize shareholder value, which we measure by the total return provided to our 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 ended September 30, 2010:
Total Return(1)
RMS
SNL
One-year
37.1%
30.5%
31.1%
Three-year
(15.6%)
(18.8%)
(16.2%)
Five-year
18.7%
9.8%
13.0%
Ten-year
290.6%
169.3%
184.1%
(1) 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 thereis 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; and
· Developing and redeveloping our existing properties to increase returns and maximize value.
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 may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire our shares or any other securities in the future.
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 rents 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. See “Risk Factors” in Item 1A of our Annual Report on form 10-K for the year ended December 31, 2009 for additional information regarding these factors.
The economic recession and illiquidity and volatility in the financial and capital markets during 2008 and 2009 negatively affected substantially all businesses, including ours. Although signs of an economic recovery in 2010 have emerged, it is not possible for us to quantify the timing and impact of such a recovery, or lack thereof, on our future financial results.
Overview - continued
2010 Acquisitions and Significant Investments
Investment in J.C. Penney Company, Inc. (“J.C. Penney”) (NYSE: JCP)
In September 2010, we acquired 2,684,010 common shares at an average price of $26.87 per share, or $72,107,000 in the aggregate. These shares are included as a component of marketable equity securities on our consolidated balance sheet and are classified as “available for sale.” Gains or losses resulting from the mark-to-market of these shares are recognized as an increase or decrease in “accumulated other comprehensive income” (a component of shareholders’ equity on our consolidated balance sheet) and not recognized in income. In the quarter ended September 30, 2010, we recognized an $845,000 unrealized gain based on J.C. Penney’s September 30, 2010 closing share price of $27.18 per share. In October 2010, we acquired an additional 400,000 common shares at an average price of $27.46 per share, or $10,983,000 in the agg regate. Accordingly, we currently own 3,084,010 common shares at an average price of $26.94 per share, or $83,090,000 in the aggregate.
On September 28, 2010, we acquired call options to purchase 15,500,000 common shares at a strike price of $12.2437 per share for $199,265,000, which expire on March 27, 2012. We may exercise all or portions of the options prior to expiration. The options may be settled, at our election, in cash or common shares. These options are derivative instruments that do not qualify for hedge accounting treatment. Gains or losses resulting from the mark-to-market of the derivative instruments are recognized as an increase or decrease in “interest and other investment income (loss), net” on our consolidated statement of income. In the quarter ended September 30, 2010, we recognized a $32,249,000 net gain, based on J.C. Penney’s September 30, 2010 closing share price of $27.18 per share and our weighted average cost of $25.10 per share. At September 30, 2010, the $199,265,000 cost of the options and the $32,249,000 mark-to-market increase in the value of the options are included in “other assets” and the $199,265,000 settled on October 1, 2010, is included in “other liabilities” on our consolidated balance sheet.
On October 7, 2010, we entered into a forward contract to acquire 4,815,990 common shares at an initial weighted average strike price of $28.41 per share. We may accelerate settlement, in whole or in part, at any time prior to October 9, 2012. The counterparty may accelerate settlement, in whole or in part, upon one year’s notice to us. The forward contract may be settled, at our election, in cash or common shares. Pursuant to the terms of the contract, the strike price for each share increases at an annual rate of LIBOR plus 80 basis points and decreases for dividends received on the shares. The contract is a derivative instrument that does not qualify for hedge accounting treatment. Gains or losses resulting from the mark-to-market of the derivative instrument are recognized as an increase or decrease in “interest and other i nvestment income (loss), net” on our consolidated statement of income.
Investment in LNR Property Corporation (“LNR”)
On July 29, 2010, as a part of LNR’s recapitalization, we acquired a 26.2% equity interest in LNR for $116,000,000 in cash and conversion into equity of our $15,000,000 mezzanine loan (the then current carrying amount) made to LNR’s parent, Riley Holdco Corp. The recapitalization involved an infusion of a total of $417,000,000 in new cash equity and the reduction of LNR’s total debt to $425,000,000 from $1.3 billion, excluding liabilities related to the consolidated CMBS and CDO trusts described below. We account for our equity interest in LNR under the equity method. Upon finalization of purchase accounting in the fourth quarter, we will recognize our 26.2% pro rata share of LNR’s earnings for the period from July 29, 2010 (date of acquisition) to September 30, 2010, which will not be material to our consolidated statements of income, as well as our share of their fourth quarter earnings.
LNR consolidates certain commercial mortgage-backed securities (“CMBS”) and Collateralized Debt Obligation (“CDO”) trusts for which it is the primary beneficiary. The assets of these trusts (primarily commercial mortgage loans) are the sole source of repayment of the related liabilities, which are non-recourse to LNR and its equity holders, including us. Changes in the estimated fair value of the assets and liabilities of these trusts each period are recognized in LNR’s consolidated income statement and allocated to the noncontrolling interests, which is applied to “appropriated deficit” on LNR’s consolidated balance sheet, and not to LNR’s equity holders, including us. As of July 29, 2010, LNR’s consolidated balance sheet included $119 billion of assets and $142 billion of liabilities related to CMBS and CDO trusts.
Vornado Capital Partners L.P.
On July 6, 2010, we completed the first closing of Vornado Capital Partners, L.P., our real estate investment fund (the “Fund”), with aggregate equity commitments of $550,000,000, of which we committed $200,000,000. We expect to raise an additional $450,000,000 bringing total commitments to $1 billion. We are the general partner and investment manager of the Fund and it is our exclusive investment vehicle during the three-year investment period for all investments that fit within the Fund’s investment parameters, including debt, equity and other interests in real estate, and excluding (i) investments in vacant land and ground-up development; (ii) investments acquired by merger or primarily for our securities or properties; (iii) properties which can be combined with or relate to our exis ting properties; (iv) securities of commercial mortgage loan servicers and investments derived from any such investments; (v) noncontrolling interests in equity and debt securities; and (vi) investments located outside of North America. The Fund has a term of eight years from the final closing date. The Fund is accounted for under the AICPA Investment Company Guide and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings. We consolidate the accounts of the Fund into our consolidated financial statements. In the three and nine months ended September 30, 2010, we expensed $3,752,000 and $6,482,000, respectively, for organization costs which are included as a component of “general and administrative” expenses on our consolidated statement of income.
In September 2010, the Fund received $59,240,000 of capital from partners, including $21,542,000 from us. In October 2010, the Fund received an additional $53,300,000 of capital from partners, including $19,382,000 from us, for total capital contributions to date of $112,540,000. In the third quarter of 2010, the Fund acquired two investments aggregating $42,500,000 in cash and in October 2010, the Fund acquired a third investment for $168,000,000, of which $100,000,000 was mortgage financed and $68,000,000 was paid in cash. In addition, the Fund reimbursed us for $1,500,000 of organization costs.
2010 Financing Activities
In 2010, through open market repurchases and tender offers, we purchased $257,324,000 aggregate face amount ($252,048,000 aggregate carrying amount) of our convertible senior debentures and $17,000,000 aggregate face amount ($16,981,000 aggregate carrying amount) of our senior unsecured notes for $261,420,000 and $17,382,000 in cash, respectively.
In August 2010, we sold $660,000,000 of 10-year mortgage notes in a single issuer securitization. The notes are comprised of a $600,000,000 fixed rate component and a $60,000,000 variable rate component and are cross-collateralized by 40 strip shopping centers in the Mid-Atlantic region. The $600,000,000 fixed rate portion bears interest at an initial rate of 4.18% and a weighted average rate of 4.31% over the 10-year term and amortizes based on a 30-year schedule. The variable rate portion bears interest at LIBOR plus 1.36%, with a 1% floor (2.36% at September 30, 2010).
In March 2010, we completed a public offering of $500,000,000 aggregate principal amount of 4.25% senior unsecured notes due April 1, 2015. Interest on the notes is payable semi-annually on April 1 and October 1, commencing on October 1, 2010. The notes were sold at 99.834% of their face amount to yield 4.287%. The notes can be redeemed without penalty beginning January 1, 2015. We retained net proceeds of approximately $496,000,000.
Recently Issued Accounting Literature
40
Quarter Ended September 30, 2010 Financial Results Summary
Net income attributable to common shareholders for the quarter ended September 30, 2010 was $95,192,000, or $0.52 per diluted share, compared to $126,348,000, or $0.70 per diluted share, for the quarter ended September 30, 2009. Net income for the quarter ended September 30, 2009 includes $43,329,000 of net gains on sale of real estate. In addition, the quarters ended September 30, 2010 and September 30, 2009 include certain items that affect comparability which are listed in the table below. The aggregate of the net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders by $18,043,000, or $0.10 per diluted share for the quarter ended September 30, 2010, and $52,847,000, or $0.29 per diluted share for the quarter ended September 30, 2009.
Funds from operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended September 30, 2010 was $248,964,000, or $1.31 per diluted share, compared to $234,246,000, or $1.25 per diluted share, for the prior year’s quarter. FFO for the quarters ended September 30, 2010 and 2009 include certain items that affect comparability which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO by $18,043,000, or $0.09 per diluted share for the quarter ended September 30, 2010, and $12,870,000 or $0.07 per diluted share for the quarter ended September 30, 2009.
Items that affect comparability (income) expense:
(Income) from the mark-to-market of derivative positions in marketable equity securities
Impairment losses and costs of acquisitions not consummated
Default interest and fees accrued on three loans in special servicing
5,887
Discount on redemption of preferred shares
(4,382)
3,752
724
(3,407)
Our share of partially owned entities:
Alexander's – income tax benefit
(641)
(13,668)
Lexington Realty Trust - impairment losses
14,541
Toys "R" Us – litigation settlement income
(10,200)
1,564
(1,172)
(19,424)
(13,906)
Noncontrolling interests’ share of above adjustments
1,381
1,036
Items that affect comparability, net
(18,043)
(12,870)
The percentage increase in GAAP basis and cash basis same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended September 30, 2010 over the quarter ended September 30, 2009 and the trailing quarter ended June 30, 2010 are summarized below.
Same Store EBITDA:
September 30, 2010 vs. September 30, 2009
GAAP basis
3.3%
4.7%
12.3%
(5.4%)
Cash Basis
4.8%
9.5%
(4.7%)
September 30, 2010 vs. June 30, 2010
(0.7%)
(0.9%)
5.3%
(17.8%)
(0.5%)
5.4%
(15.7%)
Primarily from the timing of trade shows.
41
Overview – continued
Nine Months Ended September 30, 2010 Financial Results Summary
Net income attributable to common shareholders for the nine months ended September 30, 2010 was $353,317,000, or $1.92 per diluted share, compared to $200,285,000, or $1.17 per diluted share, for the nine months ended September 30, 2009. Net income for the nine months ended September 30, 2010 and 2009 includes $307,000 and $44,002,000, respectively, of net gains on sale of real estate. In addition, the nine months ended September 30, 2010 and 2009 include certain items that affect comparability which are listed in the table below. The aggregate of net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the nine months ended September 30, 2010 by $7,475,000, or $0.04 per diluted share and decreased net incom e attributable to common shareholders for the nine months ended September 30, 2009 by $55,408,000, or $0.33 per diluted share.
FFO for the nine months ended September 30, 2010 was $814,030,000, or $4.29 per diluted share, compared to $602,825,000, or $3.42 per diluted share, for the prior year’s nine months. FFO for the nine months ended September 30, 2010 and 2009 includes certain items that affect comparability which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO for the nine months ended September 30, 2010 by $7,206,000, or $0.04 per diluted share and decreased FFO for the nine months ended September 30, 2009 by $96,077,000, or $0.55 per diluted share.
Litigation loss accrual, impairment losses and costs of acquisitions not consummated
12,445
Discount on redemption of preferred units and shares
(11,354)
6,482
Net gain resulting from Lexington's March 2010 stock issuance
(5,998)
Alexander's - income tax benefit and stock appreciation rights
(24,773)
Toys - purchase accounting adjustments and litigation settlement income
(24,146)
Lexington - impairment losses
19,121
Filene's, Boston - lease termination payment
7,650
(3,032)
(1,791)
(7,744)
104,391
538
(8,314)
(7,206)
96,077
The percentage increase (decrease) in GAAP basis and cash basis same store EBITDA of our operating segments for the nine months ended September 30, 2010 over the nine months ended September 30, 2009 is summarized below.
2.2%
5.7%
9.7%
(2.4%)
3.4%
8.1%
11.1%
(2.8%)
Calculations of same store EBITDA, reconciliations of our 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 the Financial Condition and Results of Operations.
42
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 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 September 30, 2010:
Retail (3)
Showroom
Square feet (in service)
16,180
18,566
22,907
2,633
6,161
Number of properties
84
163
Occupancy rate
96.0%
94.7%(2)
92.5%
91.1%
91.5%
Leasing Activity:
Quarter Ended September 30, 2010:
Square feet
566
155
Initial rent per square foot (1)
50.12
38.19
31.09
24.66
22.81
Weighted average lease terms (years)
8.3
5.3
10.6
4.9
3.8
Rent per square foot - relet space:
390
66
Initial rent - cash basis (1)
50.82
38.09
26.25
Prior escalated rent - cash basis
51.67
35.78
23.33
23.71
23.74
Percentage (decrease) increase:
Cash basis
(1.6%)
6.5%
12.5%
4.0%
(3.9%)
10.2%
16.6%
(5.6%)
1.1%
Rent per square foot - vacant space:
225
Initial rent (1)
39.81
39.49
32.52
Tenant improvements and leasing
commissions:
Per square foot
52.33
11.75
10.30
18.14
3.09
Per square foot per annum:
6.30
2.22
0.97
3.70
0.81
Percentage of initial rent
12.6%
5.8%
3.1%
15.0%
3.6%
Nine Months Ended September 30, 2010:
1,031
1,289
1,022
329
925
48.42
38.30
24.09
29.15
24.41
7.7
4.5
8.8
13.7
4.0
868
1,050
348
65
49.54
38.44
16.53
26.05
52.16
35.83
15.47
24.90
25.90
(5.0%)
7.3%
6.9%
4.6%
(5.8%)
(3.2%)
11.6%
12.0%
17.6%
674
264
42.63
37.70
27.99
29.92
52.24
11.62
12.29
88.33
4.09
6.78
2.58
1.40
6.46
1.02
14.0%
6.7%
22.2%
4.2%
See notes on the following table
As of June 30, 2010:
16,187
18,558
22,767
2,630
6,166
164
95.5%
95.0%(2)
92.3%
91.7%
As of December 31, 2009:
16,173
18,560
22,553
2,464
6,301
93.3%(2)
91.6%
88.9%
88.4%
As of September 30, 2009:
16,167
18,156
22,096
2,447
6,319
93.5%(2)
87.1%
Most leases include periodic step-ups in rent which are not reflected in the initial rent per square foot leased.
Excluding residential and other properties, occupancy rates for the office properties were as follows.
94.3%
94.8%
94.6%
94.5%
Mall sales per square foot, including partially owned malls, for the trailing twelve months ended September 30, 2010 and 2009 were $465 and
$471, respectively.
44
Net Income and EBITDA by Segment for the Three Months Ended September 30, 2010 and 2009
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended September 30, 2010 and 2009.
See notes on page 47.
45
Net Income and EBITDA by Segment for the Three Months Ended September 30, 2010 and 2009 - continued
46
(1) EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.” We consider EBITDA a supplemental measure for making decisions and assessing the unlevered 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.
(2) Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
(3) The tables below provide information about EBITDA from certain investments that are included in the “other” column of the preceding EBITDA by segment reconciliations. The totals for each of the columns below agree to the total EBITDA for the “other” column in the preceding EBITDA by segment reconciliations.
Net income attributable to noncontrolling interests, including unit distributions
The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting
liability.
Includes $13,668 for our share of an income tax benefit.
Includes $14,541 for our share of non-cash impairment losses recognized by Lexington.
Results of Operations – Three Months Ended September 30, 2010 Compared to September 30, 2009
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 $707,032,000 for the quarter ended September 30, 2010, compared to $671,219,000 in the prior year’s quarter, an increase of $35,813,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions and other
(1,296)
(1,124)
(172)
Development/redevelopment
3,612
3,104
508
Amortization of acquired below-market
leases, net
(1,793)
(1,799)
(481)
1,204
(702)
6,651
Trade shows
320
Leasing activity (see page 43)
19,348
2,748
4,603
11,982
(108)
123
Increase in property rentals
26,842
949
6,102
197
6,072
Tenant expense reimbursements:
Acquisitions/development
2,691
(32)
2,723
Operations
5,614
4,083
1,110
1,534
(1,143)
Increase (decrease) in tenant expense
reimbursements
8,305
1,078
4,257
Lease cancellation fee income
693
494
(139)
718
159
788
(343)
127
BMS cleaning fees
1,771
3,732
(1,961)
(2,516)
(349)
378
(2,649)
(484)
Increase (decrease) in fee and other income
3,536
1,870
381
(2,664)
(2,457)
Total increase (decrease) in revenues
35,813
8,568
9,050
18,160
(2,437)
2,472
Primarily due to higher REVPAR.
Primarily from the elimination of inter-company fees from operating segments upon consolidation. See note (2) on page 49.
Primarily due to $1,650 of income in the prior year in connection with a tenant surrendering its space.
Results of Operations – Three Months Ended September 30, 2010 Compared to September 30, 2009 - continued
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $478,781,000 for the quarter ended September 30, 2010, compared to $448,139,000 in the prior year’s quarter, an increase of $30,642,000. Below are the details of the increase (decrease) by segment:
Operating:
(2,063)
(2,672)
(46)
655
427
415
Hotel activity
2,964
Trade shows activity
(670)
14,938
9,633
2,132
4,134
3,033
(3,994)
Increase (decrease) in operating expenses
15,596
6,961
2,501
4,801
2,363
(1,030)
Depreciation and amortization:
(943)
167
Operations (due to additions to buildings
and improvements)
5,028
1,614
3,022
2,803
(983)
(1,428)
Increase (decrease) in depreciation and
amortization
4,252
2,079
2,970
General and administrative:
855
Mark-to-market of deferred compensation
plan liability (3)
(1,780)
3,207
2,591
(381)
(94)
1,189
1,722
Increase (decrease) in general and
administrative
4,873
2,044
3,149
Litigation loss accrual, impairment losses and
acquisition costs
Total increase in expenses
30,642
8,194
4,486
14,815
1,535
1,612
Results from increases in (i) reimbursable operating expenses of $5,621, (ii) BMS operating expenses of $2,863, and (iii) non-reimbursable operating expenses of $1,149.
Primarily from the elimination of inter-company fees from operating segments upon consolidation. See note (2) on page 48.
This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment income (loss), net” on our consolidated statements of income.
Primarily from higher stock-based compensation expense as a result of awards granted in March 2010.
49
(Loss) Income Applicable to Toys
During the quarter ended September 30, 2010, we recognized a net loss of $2,557,000 from our investment in Toys, comprised of $5,073,000 for our 32.7% share of Toys’ net loss ($32,574,000 before our share of Toys’ income tax benefit) and $2,516,000 of interest and other income.
During the quarter ended September 30, 2009, we recognized net income of $22,077,000 from our investment in Toys, comprised of $20,137,000 for our 32.7% share of Toys’ net income (a net loss of $15,985,000 before our share of Toys’ income tax benefit), and $1,940,000 of interest and other income.
(Loss) Income from Partially Owned Entities
Summarized below are the components of loss from partially owned entities for the three months ended September 30, 2010 and 2009.
Equity in Net (Loss) Income:
Alexander's - 32.4% share of equity in net income
Lexington - 13.7% share in 2010 and 16.1% share in 2009 of equity in net loss
India real estate ventures - 4% to 36.5% range in our share of equity in net loss
Other, net (3)
Loss from Real Estate Fund
In the three months ended September 30, 2010, we recognized a $1,410,000 loss from our Real Estate Fund, primarily from $1,500,000 of organization costs. Of this loss, $1,091,000 is allocated to the noncontrolling interest and is included as a reduction of “net income attributable to noncontrolling interests, including unit distributions,” on our consolidated statement of income.
50
Interest and Other Investment Income, net
Interest and other investment income, net (comprised of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable, other interest income and dividend income) was $47,352,000 for the three months ended September 30, 2010, compared to $20,486,000 in the prior year’s quarter, an increase of $26,866,000. This increase resulted from:
Mark-to-market of derivative positions in marketable equity securities in 2010
Lower average mezzanine loan investments ($111,000 in this quarter compared to $268,000 in the
prior year's quarter)
(3,901)
Decrease in the value of investments in our deferred compensation plan (offset by a corresponding
decrease in the liability for plan assets in general and administrative expenses)
298
26,866
Interest and Debt Expense
Interest and debt expense was $152,358,000 for the three months ended September 30, 2010, compared to $158,205,000 in the prior year’s quarter, a decrease of $5,847,000. This decrease was primarily due to savings of (i) $21,825,000 from the acquisition and retirement of an aggregate of $2.1 billion of our convertible senior debentures and senior unsecured notes in 2009 and (ii) $8,027,000 from the repayment of $400,000,000 of cross-collateralized debt secured by our portfolio of 42 strip shopping centers, partially offset by (iii) $14,309,000 from the issuance of $460,000,000 of senior unsecured notes in September 2009 and $500,000,000 of senior unsecured notes in March 2010, (iv) $5,887,000 of default interest and fees accrued on three loans in special servicing and (v) $3,175,000 from the issuance of $660,000,000 of cross-collateralized debt secured by 40 of our strip shopping centers.
Net (Loss) Gain on Early Extinguishment of Debt
In the three months ended September 30, 2010, we recognized a $724,000 net loss on the early extinguishment of debt, compared to a $3,407,000 net gain in the prior year’s quarter. The current year’s loss and the prior year’s gain resulted from the acquisition and retirement of our convertible senior debentures and senior unsecured notes.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets Other Than Depreciable Real Estate
Net gain on disposition of wholly owned and partially owned assets other than depreciable real estate was $5,072,000 in the three months ended September 30, 2010, compared to $4,432,000 in the prior year’s quarter and was primarily comprised of net gains on sale of marketable securities.
Income Tax Expense
Income tax expense was $5,498,000 in the three months ended September 30, 2010, compared to $5,267,000 in the prior year’s quarter.
51
Discontinued Operations
The table below sets forth the combined results of operations of assets related to discontinued operations for the three months ended September 30, 2010 and 2009 and include the operating results of 1999 K Street, which was sold on September 1, 2009 and 15 other retail properties, which were sold during 2009.
Net gain on sale of other real estate
.
Net Income Attributable to Noncontrolling Interests, Including Unit Distributions
Net income attributable to noncontrolling interests was $11,880,000, in the three months ended September 30, 2010, compared to $15,227,000 in the prior year’s quarter. Net income attributable to noncontrolling interests for the three months ended September 30, 2010 and 2009 is comprised of (i) allocations of income to redeemable noncontrolling interests of $7,119,000 and $10,151,000, respectively, (ii) net income attributable to noncontrolling interests in consolidated subsidiaries of $296,000 and $258,000, respectively, and (iii) preferred unit distributions of the Operating Partnership of $4,465,000 and $4,818,000, respectively.
Preferred Share Dividends
Preferred share dividends were $13,442,000 for the three months ended September 30, 2010, compared to $14,269,000 for the prior year’s quarter.
Discount on Preferred Share Redemptions
Discount on preferred share redemptions of $4,382,000 in the three months ended September 30, 2010 resulted from the redemption of 1,600,000 Series D-10 preferred shares.
52
Same Store EBITDA
Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods. Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items. We present same store EBITDA on both a GAAP basis and a cash basis, which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments. We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers. Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies.
Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.
EBITDA for the three months ended September 30, 2010
Add-back: non-property level overhead
expenses included above
Less: EBITDA from acquisitions, dispositions
and other non-operating income or expenses
(1,634)
(735)
251
GAAP basis same store EBITDA for the three months
ended September 30, 2010
154,384
117,556
96,542
28,934
Less: Adjustments for straight-line rents,
amortization of below-market leases, net and other
non-cash adjustments
(14,845)
(110)
(11,136)
Cash basis same store EBITDA for the three months
139,539
117,446
85,406
28,978
EBITDA for the three months ended September 30, 2009
(2,284)
(42,998)
(3,686)
(2,924)
ended September 30, 2009
149,486
112,323
85,960
30,585
(16,334)
(5,088)
(8,193)
(184)
133,152
107,235
77,767
30,401
Increase (decrease) in GAAP basis same store EBITDA for
the three months ended September 30, 2010 over the
three months ended September 30, 2009
4,898
5,233
10,582
(1,651)
Increase (decrease) in Cash basis same store EBITDA for
6,387
10,211
7,639
(1,423)
% increase (decrease) in GAAP basis same store EBITDA
% increase (decrease) in Cash basis same store EBITDA
53
Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2010 and 2009
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the nine months ended September 30, 2010 and 2009.
See notes on page 56.
54
Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2010 and 2009 - continued
55
(2) Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of our net income (loss) to EBITDA includes our share of these items from partially owned entities.
The amount in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting
Includes an aggregate of $24,773 of income for our share of an income tax benefit and the reversal of accrued stock appreciation rights
compensation expense.
Includes a $5,998 net gain resulting from Lexington's March 2010 stock issuance.
Includes $19,121 for our share of non-cash impairment losses recognized by Lexington.
56
Results of Operations – Nine Months Ended September 30, 2010 Compared to September 30, 2009
Revenues
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 $2,099,468,000 for the nine months ended September 30, 2010, compared to $2,023,575,000 in the prior year’s nine months, an increase of $75,893,000. Below are the details of the increase (decrease) by segment:
(1,472)
(2,028)
(460)
2,064
(1,048)
9,944
7,406
2,538
(7,126)
(3,268)
(1,182)
(2,834)
(162)
10,596
2,002
45,321
10,165
17,095
23,921
(4,712)
(1,148)
Increase (decrease) in property rentals
59,265
6,897
21,291
23,165
(808)
8,720
3,398
(72)
3,719
(249)
4,504
2,517
(2,768)
7,038
(1,777)
(506)
7,902
(2,840)
10,757
(755)
7,221
2,721
(660)
4,082
1,217
7,820
915
7,316
(489)
3,699
10,199
(6,500)
(10,014)
(1,833)
1,360
533
(2,728)
(7,346)
8,726
12,002
8,016
4,126
(1,505)
(13,913)
75,893
21,416
26,467
38,048
(4,090)
(5,948)
Primarily from leasing fees in connection with our management of a development project.
Primarily from the elimination of inter-company fees from operating segments upon consolidation. See note (2) on page 58.
Primariy due to $5,402 of income in the prior year, resulting from the termination of a lease with a partially owned entity.
57
Results of Operations – Nine Months Ended September 30, 2010 Compared to September 30, 2009 - continued
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $1,407,148,000 for the nine months ended September 30, 2010, compared to $1,393,787,000 in the prior year’s nine months, an increase of $13,361,000. Below are the details of the increase (decrease) by segment:
(Decrease) increase due to:
(5,938)
(6,338)
(182)
(492)
1,770
(696)
2,634
2,896
(262)
6,834
448
9,989
16,213
(2,988)
9,534
(2,489)
(10,281)
13,967
9,875
(274)
8,780
(271)
(4,143)
1,070
(607)
5,929
2,329
4,745
5,839
(2,100)
(4,884)
6,999
5,386
6,875
(5,491)
Write-off of unamortized costs from the
voluntary surrender of equity awards (3)
(32,588)
(3,451)
(3,131)
(4,793)
(1,011)
plan liability (4)
(419)
5,937
(1,277)
665
2,525
1,962
Decrease in general and administrative
(25,512)
(4,728)
(2,466)
(2,268)
(3,328)
(12,722)
Litigation loss accrual, impairment losses
and acquisition costs
Total increase (decrease) in expenses
13,361
7,476
12,702
18,387
(5,699)
(19,505)
Results from increases in (i) BMS operating expense of $9,221, (ii) reimbursable operating expenses of $5,407 and (iii) non-reimbursable operating expenses of $1,585.
Primarily from the elimination of inter-company fees from operating segments upon consolidation. See note (3) on page 57.
On March 31, 2009, our nine most senior executives voluntarily surrendered their 2007 and 2008 stock option awards and their 2008 out-performance plan awards. Accordingly, we recognized $32,588 of expense in the first quarter of 2009, representing the unamortized portion of these awards.
Primarily due to $2,800 of pension plan termination costs in 2009.
For additional information, see page 69.
58
Income Applicable to Toys
During the nine months ended September 30, 2010, we recognized net income of $102,309,000 from our investment in Toys, comprised of $95,576,000 for our 32.7% share of Toys’ net income ($93,662,000 before our share of Toys’ income tax benefit) and $6,733,000 of interest and other income.
During the nine months ended September 30, 2009, we recognized net income of $118,897,000 from our investment in Toys, comprised of (i) $99,210,000 for our 32.7% share of Toys’ net income ($106,545,000 before our share of Toys’ income tax expense), (ii) $13,946,000 for our share of income from previously recognized deferred financing cost amortization expense, which we initially recorded as a reduction of the basis of our investment in Toys, and (iii) $5,741,000 of interest and other income.
Income (Loss) from Partially Owned Entities
Summarized below are the components of loss from partially owned entities for the nine months ended September 30, 2010 and 2009.
Equity in Net Income (Loss):
Lexington - 13.7% share in 2010 and 16.1% share in 2009 of equity in
net income (loss) (2)
India real estate ventures - 4% to 36.5% range in our share of equity in net income (loss)
Includes an aggregate of $24,773 of income for our share of an income tax benefit and the reversal of accrued stock appreciation rights compensation expense.
2010 includes a $5,998 net gain resulting from Lexington's March 2010 stock issuance and 2009 includes $19,121 of expense for our share of non-cash impairment losses recognized by Lexington.
Represents our equity in net income or loss of partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Verde Realty Operating Partnership, 85 10th Avenue Associates and others.
Includes $7,650 of expense for our share of Downtown Crossing, Boston lease termination payment.
In the nine months ended September 30, 2010, we recognized a $1,410,000 loss from our Real Estate Fund, primarily from $1,500,000 of organization costs. Of this loss, $1,091,000 is allocated to the noncontrolling interest and is included as a reduction of “net income attributable to noncontrolling interests, including unit distributions,” on our consolidated statement of income.
59
Interest and Other Investment Income (Loss), net
Interest and other investment income (loss), net (comprised of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable, other interest income and dividend income) was income of $65,936,000 for the nine months ended September 30, 2010, compared to a loss of $63,608,000 in the prior year’s nine months, an increase in income of $129,544,000. This increase resulted from:
Mezzanine loans receivable loss accrual ($6,900 in this year's nine months compared to $122,738 in
the prior year's nine months)
115,838
Mark-to-market of derivative positions in marketable equity securities
Lower average mezzanine loan investments ($128,000 in this year's nine months compared to $403,000
in the prior year's nine months)
(18,965)
Lower average yields on investments (0.1% in this year's nine months compared to 0.4% in the prior
year's nine months)
(1,905)
Increase in dividends and interest on marketable securities
2,484
increase in the liability for plan assets in general and administrative expenses)
262
129,544
Interest and debt expense was $441,980,000 for the nine months ended September 30, 2010, compared to $475,028,000 in the prior year’s nine months, a decrease of $33,048,000. This decrease was primarily due to savings of (i) $76,111,000 from the acquisition, retirement and repayment of an aggregate of $2.1 billion of our convertible senior debentures and senior unsecured notes in 2009 and (ii) $24,486,000 from the repayment of $400,000,000 cross-collateralized debt secured by our portfolio of 42 strip shopping centers, partially offset by (iii) $38,073,000 from the issuance of $460,000,000 of senior unsecured notes in September 2009 and $500,000,000 of a senior unsecured notes in March 2010, (iv) $13,179,000 of lower capitalized interest, (v) $12,445,000 of default interest and fees accrued on three loans in special servicing and (vi) $3,175,000 from the issua nce of $660,000,000 of cross-collateralized debt secured by 40 of our strip shopping centers.
In the nine months ended September 30, 2010, we recognized a $1,796,000 net loss on the early extinguishment of debt, compared to a $26,996,000 net gain in the prior year’s nine months. The current year’s loss and the prior year’s gain resulted from the acquisition and retirement of our convertible senior debentures and senior unsecured notes.
Net gain on disposition of wholly owned and partially owned assets other than depreciable real estate was $12,759,000 in the nine months ended September 30, 2010, compared to $4,432,000 in the prior year’s nine months and was primarily comprised of net gains on the sale of marketable securities. The nine months ended September 30, 2010 also includes gains on sale of condominiums at our 40 East 66th Street property.
Income tax expense was $16,051,000 in the nine months ended September 30, 2010, compared to $15,773,000 in the prior year’s nine months.
60
The table below sets forth the combined results of operations of assets related to discontinued operations for the nine months ended September 30, 2010 and 2009 and include the operating results of 1999 K Street, which was sold on September 1, 2009 and 15 other retail properties, which were sold during 2009.
Net income attributable to noncontrolling interests was $34,977,000 in the nine months ended September 30, 2010, compared to $28,808,000 in the prior year’s nine months. Net income attributable to noncontrolling interests for the nine months ended September 30, 2010 and 2009 is comprised of (i) allocations of income to redeemable noncontrolling interests of $26,785,000 and $17,795,000, respectively, (ii) net income and net loss attributable to noncontrolling interests in consolidated subsidiaries of $1,490,000 and $3,442,000, respectively, (iii) preferred unit distributions of the Operating Partnership of $13,674,000 and $14,455,000, respectively and (iv) a net gain of $6,972,000 on the redemption of all of the Series D-12 perpetual preferred units in the current year. The increase of $8,990,000 in allocations of income to redeemable noncontrol ling interests resulted primarily from higher net income subject to allocation to unitholders.
Preferred share dividends were $41,975,000 for the nine months ended September 30, 2010, compared to $42,807,000 for the prior year’s nine months.
Discount on preferred share redemptions of $4,382,000 in the nine months ended September 30, 2010 resulted from the redemption of 1,600,000 Series D-10 preferred shares.
61
Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.
EBITDA for the nine months ended September 30, 2010
(2,353)
(812)
(10,633)
(3,363)
GAAP basis same store EBITDA for the nine months
459,925
351,240
280,616
93,335
(45,075)
(5,156)
(31,150)
(2,135)
Cash basis same store EBITDA for the nine months
414,850
346,084
249,466
91,200
EBITDA for the nine months ended September 30, 2009
(2,413)
(51,197)
(14,471)
(4,182)
449,943
332,240
255,854
95,627
(48,656)
(12,083)
(31,303)
(1,789)
401,287
320,157
224,551
93,838
the nine months ended September 30, 2010 over the
nine months ended September 30, 2009
9,982
19,000
24,762
(2,292)
13,563
25,927
24,915
(2,638)
62
SUPPLEMENTAL INFORMATION
Three Months Ended September 30, 2010 vs. Three Months Ended June 30, 2010
Our revenues and expenses are subject to seasonality during the year which impacts quarterly net earnings, cash flows and funds from operations, and therefore impacts comparisons of the current quarter to the previous quarter. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income, which we record 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. The Retail segment revenue in the fourth quarter is typically higher due to the recognition of percentage rental income. Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the three months ended September 30, 2010, compared to the three months ended June 30, 2010.
Add-back: non-property level overhead expenses
included above
839
154,638
Less: Adjustments for straight-line rents, amortization of
below-market leases, net and other non-cash adjustments
139,793
EBITDA for the three months ended June 30, 2010(1)
153,045
114,272
88,100
27,886
4,767
6,200
6,827
7,181
(2,059)
(1,855)
(3,221)
120
ended June 30, 2010
155,753
118,617
91,706
(14,622)
(592)
(10,652)
(803)
141,131
118,025
81,054
34,384
(Decrease) increase in GAAP basis same store EBITDA for
three months ended June 30, 2010
(1,115)
(1,061)
4,836
(6,253)
(Decrease) increase in Cash basis same store EBITDA for
(1,338)
(579)
4,352
(5,406)
% (decrease) increase in GAAP basis same store EBITDA
% (decrease) increase in Cash basis same store EBITDA
Below is the reconciliation of net income (loss) to EBITDA for the three months ended June 30, 2010
Net income (loss) attributable to Vornado for the three months
78,379
40,252
37,074
(1,779)
31,595
34,943
22,526
16,478
42,736
39,694
28,500
12,785
Income tax expense (benefit)
335
(617)
402
EBITDA for the three months ended June 30, 2010
LIQUIDITY AND CAPITAL RESOURCES
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 cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, and our revolving credit facilities; 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 common and preferred shareholders, as well as acquisition and development costs. Our cash and cash equivalents were $846,254,000 at September 30, 2010, a $310,775,000 increase over the balance at December 31, 2009. This increase resulted from $594,721,000 of net cash provided by operating activities, $61,205,000 of net cash p rovided by investing activities, partially offset by $345,151,000 of net cash used in financing activities. Our consolidated outstanding debt was $11,110,047,000 at September 30, 2010, a $170,432,000 increase over the balance at December 31, 2009.
We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures. During the remainder of 2010 and 2011, $184,000,000 and $2,087,000,000 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. Capital requirements for development expenditures and acquisitions (excluding Fund acquisitions as described below), may require funding from borrowings and/or equity offerings. We may from time to time purchase or retire outstanding debt securities. Such purchases, if any, will depend on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
In the fourth quarter of 2009 and the first quarter of 2010, we notified the master servicers of three non-recourse loans secured by properties in San Francisco, California, High Point, North Carolina, and Springfield, Virginia that the cash flows generated from these properties were insufficient to fund debt service payments and that we were not prepared to fund any cash shortfalls. Accordingly, we requested that each of these loans be placed with their respective special servicers. We have ceased making debt service payments on these loans and are in default. These defaults have not had, nor are expected to have, any material impact on our current or future business operations, our ability to raise capital or our credit ratings. On October 14, 2010, the special servicer of the loan secured by our San Francisco property foreclosed on the proper ty. As a result, in the fourth quarter, we will remove this property and related debt from our consolidated balance sheet, which will not have a material impact on our consolidated statement of income. In October 2010, the special servicer of the loan secured by our property in High Point, North Carolina filed a motion to place the property in receivership. We continue to negotiate with the special servicer of the loan secured by our property in Springfield, Virginia. There can be no assurance as to the timing and ultimate resolution of these matters. In the three and nine months ended September 30, 2010, we have accrued $5,887,000 and $12,445,000, respectively, of default interest on these loans.
We have raised, and may continue to raise, capital for future real estate acquisitions through our Real Estate Fund. On July 6, 2010, we completed the first closing of the Fund with aggregate equity commitments of $550,000,000, of which we committed $200,000,000. We expect to raise an additional $450,000,000 bringing total commitments to $1 billion. We are the general partner and investment manager of the Fund and it is our exclusive investment vehicle for all investments that fit within the Fund’s investment parameters during its three-year investment period.
Cash Flows for the Nine Months Ended September 30, 2010
Cash flows provided by operating activities of $594,721,000 was comprised of (i) net income of $425,887,000, (ii) $213,747,000 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, (iii) distributions of income from partially owned entities of $36,829,000, partially offset by (iv) the net change in operating assets and liabilities of $81,742,000, of which $62,500,000 relates to Real Estate Fund investments.
Net cash provided by investing activities of $51,097,000 was comprised of (i) proceeds from sales of marketable securities of $126,015,000, (ii) restricted cash of $125,204,000, (iii) proceeds received from repayment of mezzanine loans receivable of $109,594,000, (iv) proceeds from the sale of real estate and related investments of $48,998,000, (v) distributions of capital from partially owned entities of $45,613,000, (vi) proceeds from maturing short-term investments of $40,000,000, partially offset by (vii) investments in partially owned entities of $159,053,000, (viii) additions to real estate of $98,789,000, (ix) development and redevelopment expenditures of $86,871,000, (x) investments in mezzanine loans receivable and other of $75,697,000, (xi) purchases of marketable equity securities of $13,917,000 and (xii) deposits in connection with real estate acquisitions of $10,000,000.
Net cash used in financing activities of $335,043,000 was comprised of (i) repayments of borrowings, including the purchase of our senior unsecured notes, of $1,462,652,000, (ii) dividends paid on common shares of $354,937,000, (iii) purchases of outstanding preferred units and shares of $48,600,000, (iv) dividends paid on preferred shares of $42,100,000, (v) distributions to noncontrolling interests of $41,055,000, (vi) debt issuance costs of $14,942,000, and (vii) repurchase of shares related to stock compensation arrangements and related tax withholdings of $13,467,000, partially offset by (viii) proceeds from borrowings of $1,603,359,000, and (ix) contributions from noncontrolling interests of $39,351,000.
64
LIQUIDITY AND CAPITAL RESOURCES - continued
Capital Expenditures
Our capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions. Recurring capital improvements include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases. Non-recurring capital improvements include expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property. Our development and redevelopment expenditures include all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions , capitalized interest and operating costs until the property is substantially complete and ready for its intended use.
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 nine months ended September 30, 2010.
Capital Expenditures (accrual basis):
Expenditures to maintain assets
32,861
14,233
7,263
3,032
4,360
3,973
Tenant improvements
98,465
41,678
11,146
11,701
28,905
5,035
Leasing commissions
23,884
12,560
1,702
3,982
1,288
Non-recurring capital expenditures
5,514
4,599
Total capital expenditures and leasing
commissions (accrual basis)
160,724
68,471
22,761
17,350
37,247
14,895
Adjustments to reconcile to cash basis:
Expenditures in the current year
applicable to prior periods
55,822
29,758
12,781
5,793
4,085
3,405
Expenditures to be made in future
periods for the current period
(97,385)
(38,665)
(13,045)
(13,027)
(27,159)
(5,489)
commissions (cash basis)
119,161
59,564
22,497
10,116
14,173
12,811
Development and Redevelopment
Expenditures:
Bergen Town Center
12,588
Wasserman Venture
11,806
West End 25
9,011
1540 Broadway
7,493
6,991
220 20th Street
3,946
Beverly Connection
3,452
Poughkeepsie, New York
2,396
29,188
4,702
8,115
10,515
1,180
4,676
86,871
21,072
43,435
16,482
Cash Flows for the Nine Months Ended September 30, 2009
Our cash and cash equivalents were $2,560,011,000 at September 30, 2009, a $1,033,158,000 increase over the balance at December 31, 2008. This increase resulted from $489,487,000 of net cash provided by operating activities and $621,471,000 of net cash provided by financing activities, partially offset by $77,800,000 of net cash used in investing activities.
Our consolidated outstanding debt was $12,728,012,000 at September 30, 2009, a $290,089,000 increase from the balance at December 31, 2008. This increase resulted primarily from the issuance of $460,000,000 of 7.875% senior unsecured notes on September 30, 2009 which are due October 2039.
Cash flows provided by operating activities of $489,487,000 was primarily comprised of (i) net income of $271,900,000, adjusted for $276,376,000 of non-cash adjustments, including depreciation and amortization expense, mezzanine loan loss accruals, the effect of straight-lining of rental income, equity in net income of partially owned entities and amortization of below market leases, net of above market leases, (ii) distributions of income from partially owned entities of $21,484,000 partially offset by (iii) the net change in operating assets and liabilities of $80,273,000.
Net cash used in investing activities of $77,800,000 was primarily comprised of (i) development and redevelopment expenditures of $384,655,000, (ii) investments in partially owned entities of $28,738,000, (iii) additions to real estate of $145,981,000, partially offset by, (iv) proceeds from the sale of real estate of $291,652,000, (v) $81,195,000 of restricted cash (vi) proceeds from the sale of marketable securities of $59,873,000 and (vii) $46,339,000 received from mezzanine loan receivables repayments.
Net cash provided by financing activities of $621,471,000 was primarily comprised of (i) $710,226,000 of proceeds from the issuance of common shares in April 2009, (ii) proceeds from borrowings of $1,208,204,000, partially offset by, (iii) repayments of borrowings of $996,218,000, (iv) dividends paid on common shares of $194,087,000, (v) dividends paid on preferred shares of $42,809,000 (vi) distributions to noncontrolling interests of $30,291,000 and (vii) the purchase of outstanding Series G Preferred Units of $24,330,000.
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 nine months ended September 30, 2009.
29,744
11,804
12,013
1,953
3,974
43,976
25,571
14,518
946
2,941
14,435
8,289
5,339
732
21,705
11,343
644
9,684
109,860
57,007
32,514
3,665
6,990
97,888
53,067
33,515
4,693
2,479
(51,661)
(32,103)
(15,515)
(1,164)
(1,280)
(1,599)
156,087
77,971
50,514
6,635
10,403
10,564
50,975
49,323
38,238
36,468
1999 K Street (sold in September 2009)
31,874
20,144
North Bergen, New Jersey
19,495
South Hills Mall
17,446
Garfield, New Jersey
15,404
12,865
92,423
11,814
39,569
5,636
14,914
384,655
152,672
161,381
53,152
67
68
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 reallocate 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 State 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 State 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 dec ision 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. Discovery is now complete. On October 19, 2009, Stop & Shop filed a motion for leave to amend its pleadings to assert new claims for relief, including a claim for damages in an unspecified amount, and an additional affirmative defense. On April 26, 2010, Stop and Shop’s motion was denied. A tentative trial date has been set for November 8, 2010. We intend to continue 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. 0;
FUNDS FROM OPERATIONS (“FFO”)
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, depreciation and amortization expense from real estate assets, extraordinary items and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably o ver time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. The calculations of both the numerator and denominator used in the computation of income per share are disclosed in footnote 17 – Income Per Share, in the notes to our consolidated financial statements on page 27 of this Quarterly Report on Form 10-Q.
FFO for the Three and Nine Months Ended September 30, 2010, and 2009
FFO attributable to common shareholders plus assumed conversions for the three months ended September 30, 2010 was $248,964,000, or $1.31 per diluted share, compared to $234,246,000, or $1.25 per diluted share for the prior year’s quarter. FFO attributable to common shareholders plus assumed conversions for the nine months ended September 30, 2010 was $814,030,000 or $4.29 per diluted share, compared to $602,825,000, or $3.42 per diluted share for the prior year’s nine months. Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”
For The Three
For The Nine
Reconciliation of our net income to FFO:
Depreciation and amortization of real property
126,987
122,760
381,782
375,549
Net gains on sale of real estate
(42,653)
Proportionate share of adjustments to equity in net income of
Toys, to arrive at FFO:
18,132
17,685
53,296
49,831
(164)
Income tax effect of Toys' adjustments included above
(6,347)
(6,133)
(18,654)
(17,384)
partially owned entities, excluding Toys, to arrive at FFO:
19,481
18,552
58,555
52,508
(512)
(307)
(1,185)
Noncontrolling interests' share of above adjustments
(11,011)
(8,146)
(33,485)
(33,358)
FFO
251,494
242,006
832,097
626,236
FFO attributable to common shareholders
242,434
227,737
794,504
583,429
Interest on 3.875% exchangeable senior debentures
6,490
6,466
19,405
19,268
Convertible preferred dividends
128
FFO attributable to common shareholders plus assumed conversions
248,964
234,246
814,030
602,825
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
3.875% exchangeable senior debentures
5,764
70
Denominator for FFO per diluted share
189,974
186,741
189,562
176,218
FFO attributable to common shareholders plus assumed conversions per diluted share
1.31
1.25
4.29
3.42
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 September 30, 2010
As at December 31, 2009
Weighted
Effect of 1%
Average
Change In
Consolidated debt:
Balance
Base Rates
Variable rate
1,991,624
2.11%
19,916
2,657,972
1.67%
Fixed rate
9,118,423
5.88%
8,281,643
5.89%
5.20%
4.86%
Pro-rata share of debt of non-
consolidated entities (non-recourse):
Variable rate – excluding Toys
420,375
1.85%
4,204
331,980
2.87%
Variable rate – Toys
429,304
4.68%
4,293
852,040
3.45%
Fixed rate (including $1,295,184 and
$1,077,919 of Toys debt in 2010 and 2009)
2,150,818
7.37%
1,965,620
7.16%
3,000,497
6.21%
8,497
3,149,640
5.70%
Redeemable noncontrolling interests’ share of above
(2,032)
Total change in annual net income
26,381
Per share-diluted
0.14
Excludes $37 billion for our 26.2% pro rata shares of liabilities related to consolidated CMBS and CDO trusts which are non-recourse to LNR and its equity holders, including us.
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 September 30, 2010, variable rate debt with an aggregate principal amount of $567,711,408 and a weighted average interest rate of 2.49% was subject to LIBOR caps. These caps are based on a notional amount of $567,711,408 and cap LIBOR at a weighted average rate of 6.18%.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and 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. As of September 30, 2010, the estimated fair value of our consolidated debt was $11,325,568,000.
Derivative Instruments
We have, and may in the future enter into, derivative positions that do not qualify for hedge accounting treatment, including our economic interest in J.C. Penney common shares. 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 (loss), net” 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 i nvestment income or expense in any given period. In the three and nine months ended September 30, 2010, we recognized a $32,249,000 net gain from the mark-to-market of our derivative position in J.C. Penney's common shares.
Item 4. Controls and Procedures
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 September 30, 2010, 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.
Item 1. Legal Proceedings
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, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the third quarter of 2010, we issued 56,153 common shares upon the redemption of Class A units of the Operating Partnership held by persons who received units, in private placements in earlier periods, in exchange for their interests in limited partnerships that owned real estate. The common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4 (2) of that Act.
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under Part III, Item 12 of the Annual Report on Form 10-K for the year ended December 31, 2009, and such information is incorporated by reference herein.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
Item 6. Exhibits
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: November 2, 2010
By:
/s/ Joseph Macnow
Joseph Macnow, Executive Vice President -Finance and Administration andChief 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
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
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
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
_______________________
Incorporated by reference.
3.14
Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999 -
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
(File No. 001-11954), filed on May 19, 2000
3.16
Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000 -
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 -
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
(File No. 001 11954), filed on October 12, 2001
3.20
Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001 -
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 -
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
3.24
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
3.26
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
77
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
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
3.31
Twenty-Eighth Amendment to the Partnership Agreement, dated December 30, 2004 -
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 -
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
3.36
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
June 27, 2007
78
3.41
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
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
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
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, 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
4.2
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
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
10.2
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
10.3
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
10.4
**
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
Management contract or compensatory agreement.
79
10.5
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
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
10.7
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
10.8
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
10.9
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
10.10
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
10.11
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
10.12
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
10.13
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
10.14
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
10.15
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
80
10.16
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
10.17
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
10.18
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
10.19
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
10.20
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
10.21
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
10.22
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
10.23
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
10.24
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
10.25
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
10.26
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
10.27
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
10.28
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
10.29
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
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
10.31
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
10.32
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
10.33
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
10.34
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
10.35
Amendment to Employment Agreement between Vornado Realty Trust and Michael D.
Fascitelli, dated December 29, 2008. Incorporated by reference to Exhibit 10.47 to
Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31,
2008 (File No. 001-11954) filed on February 24, 2009
10.36
Amendment to Employment Agreement between Vornado Realty Trust and Joseph Macnow,
dated December 29, 2008. Incorporated by reference to Exhibit 10.48 to Vornado Realty
Trust’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No.
001-11954) filed on February 24, 2009
82
10.37
Amendment to Employment Agreement between Vornado Realty Trust and David R.
Greenbaum, dated December 29, 2008. Incorporated by reference to Exhibit 10.49 to
10.38
Amendment to Indemnification Agreement between Vornado Realty Trust and David R.
Greenbaum, dated December 29, 2008. Incorporated by reference to Exhibit 10.50 to
10.39
Amendment to Employment Agreement between Vornado Realty Trust and Mitchell N.
Schear, dated December 29, 2008. Incorporated by reference to Exhibit 10.51 to Vornado
Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2008 (File
No. 001-11954) filed on February 24, 2009
10.40
Amendment to Employment Agreement between Vornado Realty Trust and Christopher G.
Kennedy, dated December 29, 2008. Incorporated by reference to Exhibit 10.53 to
10.41
Vornado Realty Trust's 2010 Omnibus Share Plan. Incorporated by reference to Exhibit 10.41 to
Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010
(File No. 001-11954) filed on August 3, 2010
10.42
Employment Agreement between Vornado Realty Trust and Michael J. Franco, dated
September 24, 2010.
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
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase