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, 2012
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, 2012, 186,143,105 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, 2012 and December 31, 2011
3
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 2012 and 2011
4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
for the Three and Nine Months Ended September 30, 2012 and 2011
5
Consolidated Statements of Changes in Equity (Unaudited) for the
Nine Months Ended September 30, 2012 and 2011
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
40
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
41
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
83
Item 4.
Controls and Procedures
84
PART II.
Other Information:
Legal Proceedings
85
Item 1A.
Risk Factors
86
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
87
EXHIBIT INDEX
88
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
2012
2011
Real estate, at cost:
Land
$
4,143,581
4,416,613
Buildings and improvements
11,851,152
12,041,054
Development costs and construction in progress
865,953
119,540
Leasehold improvements and equipment
128,168
126,712
Total
16,988,854
16,703,919
Less accumulated depreciation and amortization
(3,034,815)
(2,901,203)
Real estate, net
13,954,039
13,802,716
Cash and cash equivalents
465,884
606,553
Restricted cash
391,794
98,068
Marketable securities
485,001
741,321
Accounts receivable, net of allowance for doubtful accounts of $38,351 and $43,241
181,242
171,798
Investments in partially owned entities
1,319,710
1,233,650
Investment in Toys "R" Us
549,421
506,809
Real Estate Fund investments
482,442
346,650
Mezzanine loans receivable
131,585
133,948
Receivable arising from the straight-lining of rents, net of allowance of $4,448 and $3,290
755,866
701,827
Deferred leasing and financing costs, net of accumulated amortization of $220,846 and $237,766
389,155
364,855
Identified intangible assets, net of accumulated amortization of $362,516 and $347,039
252,683
295,432
Assets related to discontinued operations
537,938
1,049,153
Due from officers
-
13,127
Other assets
501,056
380,580
20,397,816
20,446,487
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Notes and mortgages payable
7,852,657
8,065,576
Senior unsecured notes
1,357,921
1,357,661
Revolving credit facility debt
600,000
138,000
Exchangeable senior debentures
497,898
Convertible senior debentures
10,168
Accounts payable and accrued expenses
442,644
423,512
Deferred revenue
465,929
511,959
Deferred compensation plan
103,003
95,457
Deferred tax liabilities
15,432
13,315
Liabilities related to discontinued operations
478,980
518,319
Other liabilities
396,897
145,498
Total liabilities
11,713,463
11,777,363
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 11,714,978 and 12,160,771 units outstanding
949,499
934,677
Series D cumulative redeemable preferred units - 1,800,001 and 9,000,001 units outstanding
46,000
226,000
Total redeemable noncontrolling interests
995,499
1,160,677
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 51,184,609 and 42,186,709 shares
1,237,699
1,021,660
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 186,143,105 and 185,080,020 shares
7,415
7,373
Additional capital
7,136,090
7,127,258
Earnings less than distributions
(1,319,118)
(1,401,704)
Accumulated other comprehensive (loss) income
(160,107)
73,729
Total Vornado shareholders' equity
6,901,979
6,828,316
Noncontrolling interests in consolidated subsidiaries
786,875
680,131
Total equity
7,688,854
7,508,447
See notes to 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
518,141
530,192
1,564,168
1,592,867
Tenant expense reimbursements
80,497
85,757
224,287
237,945
Cleveland Medical Mart development project
72,651
35,135
184,014
108,203
Fee and other income
39,688
36,776
106,018
111,813
Total revenues
710,977
687,860
2,078,487
2,050,828
EXPENSES:
Operating
264,487
262,837
764,018
773,331
Depreciation and amortization
124,335
126,935
386,974
373,380
General and administrative
48,742
46,121
151,142
154,359
70,431
33,419
177,127
101,637
Acquisition related costs and tenant buy-outs
1,070
2,288
4,314
22,455
Total expenses
509,065
471,600
1,483,575
1,425,162
Operating income
201,912
216,260
594,912
625,666
(Loss) income applicable to Toys "R" Us
(8,585)
(9,304)
88,696
80,794
Income from partially owned entities
21,268
13,140
53,491
55,035
Income from Real Estate Fund (of which $4,787 and $3,675 in
each three-month period, respectively, and $25,026 and $15,703
in each nine-month period, respectively, are attributable to
noncontrolling interests)
5,509
5,353
37,572
25,491
Interest and other investment income (loss), net
10,523
(30,011)
(22,984)
95,086
Interest and debt expense (including amortization of deferred
financing costs of $5,725 and $4,670, in each three-month period,
respectively, and $17,204 and $14,093 in each nine-month
period, respectively)
(120,770)
(131,998)
(377,600)
(394,192)
Net gain on disposition of wholly owned and partially owned assets
1,298
4,856
7,975
Income before income taxes
109,857
64,738
378,943
495,855
Income tax expense
(3,015)
(6,959)
(17,319)
(18,548)
Income from continuing operations
106,842
57,779
361,624
477,307
Income from discontinued operations
157,314
8,444
241,024
165,706
Net income
264,156
66,223
602,648
643,013
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(6,610)
(5,636)
(30,928)
(20,643)
Operating Partnership, including unit distributions
(16,240)
(6,825)
(40,595)
(47,364)
Net income attributable to Vornado
241,306
53,762
531,125
575,006
Preferred share dividends
(20,613)
(17,627)
(56,187)
(47,743)
Discount on preferred unit redemptions
11,700
5,000
NET INCOME attributable to common shareholders
232,393
41,135
486,638
532,263
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.45
0.18
1.40
2.04
Income from discontinued operations, net
0.80
0.04
1.22
0.85
Net income per common share
1.25
0.22
2.62
2.89
Weighted average shares outstanding
185,924
184,398
185,656
184,220
INCOME PER COMMON SHARE - DILUTED:
1.39
2.02
0.79
0.84
1.24
2.61
2.86
186,655
186,065
186,399
186,039
DIVIDENDS PER COMMON SHARE
0.69
2.07
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Other comprehensive income (loss):
Change in unrealized net gain (loss) on securities
available-for-sale
18,358
(161,178)
(202,167)
(120,334)
Pro rata share of other comprehensive (loss) income of
nonconsolidated subsidiaries
(12,607)
112
(38,861)
26,477
Change in value of interest rate swap
(2,866)
(24,424)
(8,868)
(42,458)
Other
(30)
(69)
343
(5,114)
Comprehensive income (loss)
267,011
(119,336)
353,095
501,584
Less comprehensive income attributable to noncontrolling interests
(23,027)
(400)
(55,806)
(59,050)
Comprehensive income (loss) attributable to Vornado
243,984
(119,736)
297,289
442,534
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Earnings
Non-
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
controlling
Shares
Amount
Capital
Distributions
Income (Loss)
Interests
Equity
Balance, December 31, 2010
32,340
783,088
183,662
7,317
6,932,728
(1,480,876)
73,453
514,695
6,830,405
20,643
595,649
Dividends on common shares
(381,382)
Dividends on preferred shares
(47,905)
Issuance of Series J preferred shares
9,850
239,037
Common shares issued:
Upon redemption of Class A
units, at redemption value
435
17
38,203
38,220
Under employees' share
option plan
369
15
21,603
(397)
21,221
Under dividend reinvestment plan
1
1,329
1,330
Contributions:
Real Estate Fund
109,241
364
Distributions:
(22,713)
(15,604)
Conversion of Series A preferred
shares to common shares
(3)
(165)
165
Deferred compensation shares
and options
7,866
Change in unrealized net gain (loss)
on securities available-for-sale
Pro rata share of other
comprehensive income of
Adjustments to carry redeemable
Class A units at redemption value
114,628
Redeemable noncontrolling interests'
share of above adjustments
8,957
Discount on redemption of preferred
units
(105)
(4,518)
149
4,558
(5,030)
Balance, September 30, 2011
42,187
1,021,855
184,496
7,350
7,112,004
(1,330,405)
(59,019)
611,184
7,362,969
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - CONTINUED
Balance, December 31, 2011
185,080
30,928
562,053
(384,353)
Issuance of Series K preferred shares
12,000
291,144
Redemption of Series E preferred
shares
(3,000)
(75,000)
624
25
51,191
51,216
414
16
8,915
(16,389)
(7,458)
1,269
1,270
120,606
140
(44,910)
(10)
(2)
105
7
11,009
(339)
10,670
comprehensive loss of
(63,657)
15,717
(2,971)
(2,638)
Balance, September 30, 2012
51,185
186,143
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)
419,007
414,992
Net gains on sale of real estate
(203,801)
(51,623)
Equity in net income of partially owned entities, including Toys “R” Us
(142,187)
(135,829)
Return of capital from Real Estate Fund investments
61,052
Distributions of income from partially owned entities
59,322
75,612
Straight-lining of rental income
(55,553)
(38,262)
Loss from the mark-to-market of J.C. Penney derivative position
53,343
27,136
Amortization of below-market leases, net
(39,693)
(49,988)
Other non-cash adjustments
39,360
20,261
Net unrealized gain on Real Estate Fund investments
(33,537)
(19,209)
Gain on sale of Canadian Trade Shows
(31,105)
Impairment losses
13,511
(4,856)
(7,975)
Net gain on extinguishment of debt
(83,907)
Mezzanine loans loss reversal and net gain on disposition
(82,744)
Changes in operating assets and liabilities:
(163,307)
(97,785)
Accounts receivable, net
(9,444)
11,292
Prepaid assets
(52,895)
(68,558)
(43,103)
(44,617)
34,546
32,227
7,338
22,635
Net cash provided by operating activities
510,646
566,671
Cash Flows from Investing Activities:
Proceeds from sales of real estate and related investments
408,856
135,762
Additions to real estate
(138,060)
(109,963)
Funding of J.C. Penney derivative collateral
(121,117)
(33,850)
(116,264)
(440,865)
(106,502)
(52,816)
Return of J.C. Penney derivative collateral
89,850
28,700
Acquisitions of real estate and other
(73,069)
(62,813)
121,463
Proceeds from sales of marketable securities
58,460
19,301
Proceeds from the sale of Canadian Trade Shows
52,504
Distributions of capital from partially owned entities
26,665
274,283
Proceeds from the repayment of loan to officer
13,123
Proceeds from sales and repayments of mezzanine loans and other
2,379
100,525
Investments in mezzanine loans receivable
(44,215)
Net cash provided by (used in) investing activities
34,012
(1,675)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Repayments of borrowings
(2,070,295)
(2,666,610)
Proceeds from borrowings
1,773,000
2,184,167
Dividends paid on common shares
Proceeds from the issuance of preferred shares
Purchases of outstanding preferred units and shares
(243,300)
(28,000)
Contributions from noncontrolling interests
120,746
109,605
Distributions to noncontrolling interests
(80,994)
(77,330)
Dividends paid on preferred shares
(54,034)
(43,675)
Repurchase of shares related to stock compensation agreements and/or related
tax withholdings
(30,034)
(747)
Debt issuance and other costs
(17,417)
(28,614)
Proceeds received from exercise of employee share options
10,210
22,947
Net cash used in financing activities
(685,327)
(670,602)
Net decrease in cash and cash equivalents
(140,669)
(105,606)
Cash and cash equivalents at beginning of period
690,789
Cash and cash equivalents at end of period
585,183
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $7,884 and $0
368,018
388,938
Cash payments for income taxes
19,222
10,299
Non-Cash Investing and Financing Activities:
Change in unrealized net loss on securities available-for-sale
Adjustments to carry redeemable Class A units at redemption value
L.A. Mart seller financing
35,000
Common shares issued upon redemption of Class A units, at redemption value
Contribution of mezzanine loan receivable to a joint venture
73,750
Marriott Marquis Times Square - retail and signage capital lease:
Asset (included in development costs and construction in progress)
240,000
Liability (included in other liabilities)
(240,000)
Like-kind exchange of real estate
230,913
45,625
Decrease in assets and liabilities resulting from deconsolidation
of discontinued operations:
(145,333)
(232,502)
Write-off of fully depreciated assets
(151,496)
(58,279)
9
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, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (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. Vornado is the sole general partner of, and owned approximately 93.8% of the common limited partnership interest in the Operating Partnership at September 30, 2012. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
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. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011, as filed with the SEC.
We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year. Certain prior year balances have been reclassified in order to conform to current year presentation.
3. Recently Issued Accounting Literature
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”). ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures (see Note 14 – Fair Value Measurements).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions
On July 5, 2012, we entered into an agreement to acquire a retail condominium located at 666 Fifth Avenue at 53rd Street for $707,000,000. The property has 126 feet of frontage on Fifth Avenue and contains 114,000 square feet, 39,000 square feet in fee and 75,000 square feet by long-term lease from the 666 Fifth Avenue office condominium, which is 49.5% owned by Vornado. The acquisition will be funded with proceeds from asset sales and property level debt and is expected to close in the fourth quarter, subject to customary closing conditions.
On July 30, 2012, we entered into a lease with Host Hotels & Resorts, Inc. (NYSE: HST) (“Host”), under which we will redevelop the retail and signage components of the Marriott Marquis Times Square Hotel. The Marriott Marquis with over 1,900 rooms is one of the largest hotels in Manhattan. It is located in the heart of the bow-tie of Times Square and spans the entire block front from 45th Street to 46th Street on Broadway. The Marriott Marquis is directly across from our 1540 Broadway iconic retail property leased to Forever 21 and Disney flagship stores. We plan to spend as much as $140,000,000 to redevelop and substantially expand the existing retail space, including converting the below grade parking garage into retail, and creating six-story, 300 foot wide block front, dynamic LED signs. During the term of the lease we will pay fixed rent equal to the sum of $12,500,000 plus a portion of the property’s net cash flow, after we receive a 5.2% preferred return on our invested capital. The lease contains put/call options which, if exercised, would lead to our ownership. Host can exercise the put option during defined periods following the conversion of the project to a condominium. We can exercise our call option under the same terms, at any time after the fifteenth year of the lease term. We are accounting for this lease as a “capital lease” and have recorded a $240,000,000 capital lease asset and liability, which are included as a component of “development and construction in progress” and “other liabilities,” respectively, on our consolidated balance sheet. Although we have commenced paying the annual rent, there will be no income statement activity until the redevelopment is substantially complete.
5. Vornado Capital Partners Real Estate Fund (the “Fund”)
In February 2011, the Fund’s subscription period closed with an aggregate of $800,000,000 of capital commitments, of which we committed $200,000,000. We are the general partner and investment manager of the Fund, which has an eight-year term and a three-year investment period. During the investment period, which concludes in July 2013, the Fund is our exclusive investment vehicle for all investments that fit within its investment parameters, as defined. 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, retaining the fair value basis of accounting.
On April 26, 2012, the Fund acquired 520 Broadway, a 112,000 square foot office building located in Santa Monica, California for $59,650,000 and subsequently placed a $30,000,000 mortgage loan on the property. The three-year loan bears interest at LIBOR plus 2.25% and has two one-year extension options.
On July 2, 2012, the Fund acquired 1100 Lincoln Road, a 167,000 square foot retail property, the western anchor of the Lincoln Road Shopping District in Miami Beach, Florida, for $132,000,000. The purchase price consisted of $66,000,000 in cash and a $66,000,000 mortgage loan. The three-year loan bears interest at LIBOR plus 2.75% and has two one-year extension options.
On August 20, 2012, the Fund acquired 501 Broadway, a 9,000 square foot retail property in New York for $31,000,000. The purchase price consisted of $11,000,000 in cash and a $20,000,000 mortgage loan. The three-year loan bears interest at LIBOR plus 2.75% with a floor of 3.50%, and has two one-year extension options.
11
5. Vornado Capital Partners Real Estate Fund (the “Fund”) - continued
At September 30, 2012, the Fund had eight investments with an aggregate fair value of approximately $482,442,000, or $45,818,000 in excess of cost, and had remaining unfunded commitments of $314,371,000, of which our share was $78,592,750. Below is a summary of income from the Fund for the three and nine months ended September 30, 2012 and 2011.
For the Three Months
For the Nine Months
Ended September 30,
Operating (loss) income
(49)
(286)
4,035
3,197
Net realized gain
3,085
Net unrealized gains
5,558
5,639
33,537
19,209
Income from Real Estate Fund
Less (income) attributable to noncontrolling interests
(4,787)
(3,675)
(25,026)
(15,703)
Income from Real Estate Fund attributable to Vornado (1)
722
1,678
12,546
9,788
___________________________________
(1)
Excludes management, leasing and development fees of $681 and $638 for the three months ended September 30, 2012 and 2011, respectively, and $2,025 and $1,803 for the nine months ended September 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
6. Marketable Securities and Derivative InstrumentsMarketable Securities
Our portfolio of marketable securities is comprised of debt and equity securities that are classified as available for sale. Available for sale securities are presented on our consolidated balance sheets at fair value. Gains and losses resulting from the mark-to-market of these securities are included in “other comprehensive income (loss).” Gains and losses are recognized in earnings only upon the sale of the securities and are recorded based on the weighted average cost of such securities.
In the nine months ended September 30, 2012 and 2011, we sold certain marketable securities for aggregate proceeds of $58,460,000 and $19,301,000, resulting in net gains of $3,582,000 and $2,139,000, respectively.
Below is a summary of our marketable securities portfolio as of September 30, 2012 and December 31, 2011.
As of September 30, 2012
As of December 31, 2011
GAAP
Unrealized
Maturity
Fair Value
Cost
(Loss) Gain
Gain
Equity securities:
J.C. Penney
n/a
451,406
591,214
(139,808)
653,228
591,069
62,159
33,595
14,228
19,367
30,568
14,585
15,983
Debt securities
04/13 - 10/18
57,525
53,941
3,584
605,442
(120,441)
659,595
81,726
12
6. Marketable Securities and Derivative Instruments - continued
Investment in J.C. Penney Company, Inc. (“J.C. Penney”) (NYSE: JCP)
We own 23,400,000 J.C. Penney common shares, or 10.7% of its outstanding common shares. Below are the details of our investment.
We own 18,584,010 common shares at an average economic cost of $25.76 per share, or $478,677,000 in the aggregate. As of September 30, 2012, these shares have an aggregate fair value of $451,406,000, based on J.C. Penney’s closing share price of $24.29 per share. Unrealized gains and losses from the mark-to-market of these shares are included in “other comprehensive income (loss).” The three and nine months ended September 30, 2012 include $18,213,000 of unrealized gains and $201,967,000 of unrealized losses, respectively. The three and nine months ended September 30, 2011 include unrealized losses of $144,212,000 and $102,920,000, respectively.
We also own an economic interest in 4,815,990 common shares through a forward contract at a weighted average strike price of $29.01 per share, or $139,723,000 in the aggregate. The forward contract was amended on October 8, 2012, such that, among other things, the contract may be settled, at our election, in cash or common shares, in whole or in part, at any time prior to October 8, 2022. The counterparty may accelerate settlement, in whole or in part, on October 8, 2014, or any anniversary thereof, or in the event we were to receive a credit downgrade. The forward contract strike price per share increases at an annual rate of LIBOR plus 95 basis points during the first two years of the contract and LIBOR plus 80 basis points thereafter. The contract is a derivative instrument that does not qualify for hedge accounting treatment. Gains and losses from the mark-to-market of the underlying common shares are recognized in “interest and other investment income (loss), net” on our consolidated statements of income. In the three and nine months ended September 30, 2012 we recognized income of $4,344,000 and a loss of $53,343,000, respectively, from the mark-to-market of the underlying common shares, and as of September 30, 2012, have funded $31,267,000 in connection with this derivative position. In the three and nine months ended September 30, 2011, we recognized losses of $37,537,000 and $27,136,000, respectively, from the mark-to-market of the underlying common shares.
At September 30, 2012, the aggregate economic net loss on our investment in J.C. Penney, after dividends, was $20,667,000, based on our economic cost of $26.43 per share.
7. Investments in Partially Owned Entities
Toys “R” Us (“Toys”)
As of September 30, 2012, we own 32.5% 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 32.5% 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, 2012, 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.
Below is a summary of Toys’ latest available financial information on a purchase accounting basis:
Balance as of
Balance Sheet:
July 28, 2012
October 29, 2011
Assets
11,680,000
13,221,000
Liabilities
9,836,000
11,530,000
Noncontrolling interests
39,000
Toys “R” Us, Inc. equity
1,805,000
1,691,000
For the Three Months Ended
Income Statement:
July 30, 2011
2,552,000
2,648,000
11,089,000
11,256,000
Net (loss) income attributable to Toys
(34,000)
(36,000)
249,000
227,000
13
7. Investments in Partially Owned Entities – continued
As of September 30, 2012, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity. 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, 2012, Alexander’s owed us $39,794,000 in fees under these agreements.
As of September 30, 2012, the market value of our investment in Alexander’s, based on Alexander’s September 30, 2012 closing share price of $427.49, was $707,098,000, or $520,384,000 in excess of the carrying amount on our consolidated balance sheet. As of September 30, 2012, 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 $57,292,000. 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 real estate (land and buildings). We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This amortization is not material to our share of equity in Alexander’s net income. The basis difference related to the land will be recognized upon disposition of our investment.
On October 21, 2012, Alexander’s entered into an agreement to sell its Kings Plaza Regional Shopping Center located in Brooklyn, New York, for $751,000,000. Upon completion of the sale, we will recognize a financial statement gain of approximately $181,000,000. Alexander’s expects to distribute the taxable gain to its stockholders as a special long-term capital gain dividend, of which our share is approximately $202,000,000 and we expect to pay this amount to our common shareholders as a special long-term capital gain dividend. The sale, which is subject to customary closing conditions, is expected to be completed in the fourth quarter.
Below is a summary of Alexander’s latest available financial information:
December 31, 2011
1,765,000
1,771,000
1,401,000
1,408,000
4,000
Stockholders' equity
359,000
September 30, 2011
49,000
47,000
143,000
139,000
Net income attributable to Alexander’s
19,000
20,000
57,000
59,000
Lexington Realty Trust (“Lexington”) (NYSE: LXP)
As of September 30, 2012, we own 18,468,969 Lexington common shares, or approximately 11.8% of Lexington’s common equity. We account for our investment in Lexington under 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 file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its consolidated financial statements.
14
Based on Lexington’s September 30, 2012 closing share price of $9.66, the market value of our investment in Lexington was $178,410,000, or $128,139,000 in excess of the September 30, 2012 carrying amount on our consolidated balance sheet. As of September 30, 2012, the carrying amount of our investment in Lexington was less than our share of the equity in the net assets of Lexington by approximately $45,445,000. This basis difference resulted primarily from $107,882,000 of non-cash impairment charges recognized in 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. We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This amortization is not material to our share of equity in Lexington’s net income or loss. The basis difference related to the land will be recognized upon disposition of our investment. Below is a summary of Lexington’s latest available financial information:
June 30, 2012
3,017,000
3,164,000
1,937,000
1,888,000
28,000
Shareholders’ equity
1,052,000
1,217,000
June 30, 2011
84,000
78,000
250,000
238,000
Net income (loss) attributable to Lexington
(44,000)
22,000
(49,000)
In October 2012, Lexington sold 15,000,000 shares in an underwritten public offering at a public offering price of $9.45 per share. As a result, our ownership in Lexington will decrease to 10.8% and we will record a $12,983,000 net gain in connection with this stock issuance, in the fourth quarter.
LNR Property LLC (“LNR”)
As of September 30, 2012, we own a 26.2% equity interest in LNR. We account for our investment in LNR under the equity method and record our 26.2% share of LNR’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to receiving LNR’s consolidated financial statements.
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), which aggregate approximately $83 billion as of June 30, 2012, 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 fair value of these assets each period are offset by changes in the fair value of the related liabilities through LNR’s consolidated income statement. As of September 30, 2012, the carrying amount of our investment in LNR does not materially differ from our share of LNR’s equity. Below is a summary of LNR’s latest available financial information:
83,899,000
128,536,000
83,087,000
127,809,000
9,000
55,000
LNR Property Corporation equity
803,000
672,000
73,000
163,000
156,000
Net income attributable to LNR
63,000
52,000
150,000
152,000
Below is a schedule of our investments in partially owned entities as of September 30, 2012 and December 31, 2011.
Percentage
Ownership at
Investments:
Toys
32.5 %(1)
Alexander’s
32.4 %
186,714
189,775
Lexington
11.8 %(2)
50,271
57,402
LNR
26.2 %
197,231
174,408
India real estate ventures
4.0%-36.5%
94,241
80,499
Partially owned office buildings:
280 Park Avenue
49.5 %
190,034
184,516
Rosslyn Plaza
43.7%-50.4%
62,272
53,333
West 57th Street properties
50.0 %
57,920
58,529
One Park Avenue
30.3 %
50,275
47,568
666 Fifth Avenue Office Condominium
34,162
23,655
330 Madison Avenue
25.0 %
24,900
20,353
1101 17th Street
55.0 %
22,271
20,407
Warner Building
11,603
2,715
Fairfax Square
20.0 %
5,870
6,343
Other partially owned office buildings
Various
10,042
11,547
Other investments:
Independence Plaza Partnership (3)
51.0 %
53,545
48,511
Verde Realty Operating Partnership (4)
8.3 %
52,910
59,801
Downtown Crossing, Boston
47,605
46,691
Monmouth Mall
7,536
Other investments (5)
160,471
140,061
32.7% at December 31, 2011.
12.0% at December 31, 2011.
Represents an investment in mezzanine loans to the property owner entity.
(4)
In the third quarter of 2012, we converted our 2,015,151 units in Verde Realty Operating Partnership into 2,015,151 common shares of Verde Realty ("Verde"). Pursuant to a merger agreement which was approved by Verde shareholders on September 14, 2012, we accepted an offer to receive cash of $13.85 per share, or $27,910 in the aggregate; accordingly, we recognized a $4,936 impairment loss in the third quarter. At September 30, 2012, the $52,910 carrying amount of our investment in Verde is comprised of the $27,910 value of the common shares and $25,000 of convertible debentures that are senior to the equity and mature in December 2018. Upon completion of the merger, we will reclassify the convertible debentures to other assets.
(5)
Includes interests in 85 10th Avenue, Farley Project, Suffolk Downs, Dune Capital L.P., Fashion Centre Mall and others.
7. Investments in Partially Owned Entities - continued
Below is a schedule of income recognized from investments in partially owned entities for the three and nine months ended September 30, 2012 and 2011.
Ownership
Our Share of Net Income (Loss):
Toys:
32.5 %
Equity in net (loss) income before income taxes
(22,074)
(26,773)
99,649
104,049
Income tax benefit (expense)
11,118
15,135
(17,982)
(29,914)
Equity in net (loss) income
(10,956)
(11,638)
81,667
74,135
Management fees
2,371
2,334
7,029
6,659
Alexander’s:
Equity in net income
7,137
6,437
19,210
18,507
Fee income
1,821
1,758
5,617
5,545
8,958
8,195
24,827
24,052
Lexington:
11.8 %
(323)
(617)
371
449
Net gain resulting from Lexington's stock issuance
9,760
10,209
LNR:
16,600
13,656
39,319
24,916
Net gains from asset sales and tax settlement gains
14,997
39,913
82
(690)
(4,526)
(692)
Warner Building:
Equity in net loss
(2,839)
(2,783)
(7,438)
(6,308)
Straight-line reserves and write-off of tenant
improvements
(9,022)
(15,330)
280 Park Avenue (acquired in May 2011)
(1,717)
(6,461)
(9,267)
(8,645)
666 Fifth Avenue Office Condominium (acquired
in December 2011)
1,744
5,244
1,224
315
2,036
1,440
591
671
1,920
2,094
One Park Avenue (acquired in March 2011)
256
124
890
(1,347)
167
298
732
634
(204)
(60)
99
2,160
(33)
(22)
(85)
505
1,079
1,587
5,165
(306)
(6,839)
(4,282)
(13,822)
Verde Realty Operating Partnership (1)
(5,388)
2,413
(6,000)
1,204
Independence Plaza Partnership (acquired in June 2011) (2)
1,828
1,811
5,243
347
631
1,007
1,588
(38)
(408)
(872)
(1,156)
Other investments (3)
(492)
(5,012)
(1,596)
(8,072)
(3,743)
(565)
(2,218)
(4,625)
2012 includes a $4,936 impairment loss (see note 4 on page 16)
Below is a summary of the debt of our partially owned entities as of September 30, 2012 and December 31, 2011, none of which is recourse to us.
Interest
100% of
Rate at
Partially Owned Entities’ Debt at
Notes, loans and mortgages payable
2013-2021
7.40 %
5,423,735
6,047,521
Alexander's:
Mortgage notes payable
2013-2018
3.50 %
1,319,776
1,330,932
2012-2037
5.45 %
1,739,466
1,712,750
2013-2031
3.89 %
466,882
353,504
Liabilities of consolidated CMBS and CDO trusts
5.32 %
82,522,220
127,348,336
82,989,102
127,701,840
666 Fifth Avenue Office Condominium mortgage
note payable
02/19
6.76 %
1,090,592
1,035,884
280 Park Avenue mortgage notes payable
06/16
6.65 %
738,009
737,678
Warner Building mortgage note payable
05/16
6.26 %
292,700
One Park Avenue mortgage note payable
03/16
5.00 %
330 Madison Avenue mortgage note payable
06/15
1.73 %
Fairfax Square mortgage note payable
12/14
7.00 %
70,344
70,974
Rosslyn Plaza mortgage note payable
43.7% to 50.4%
56,680
West 57th Street properties mortgage note payable
02/14
4.94 %
20,628
21,864
6.38 %
69,839
70,230
2,682,112
2,686,010
India Real Estate Ventures:
TCG Urban Infrastructure Holdings mortgage notes
payable
2012-2022
13.13 %
241,208
226,534
Other:
Verde Realty Operating Partnership mortgage notes
2013-2025
5.52 %
503,211
340,378
Monmouth Mall mortgage note payable
09/15
5.44 %
160,662
162,153
Other(3)
4.93 %
994,009
992,872
1,657,882
1,495,403
Includes interests in Suffolk Downs, Fashion Centre Mall and others.
Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $25,648,473,000 and $37,531,298,000 at September 30, 2012 and December 31, 2011, 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 partially owned entities debt was $4,049,108,000 and $4,199,145,000 at September 30, 2012 and December 31, 2011, respectively.
18
8. Discontinued Operations
2012 Activity:
During 2012, we sold or have entered into agreements to sell (i) five Mart properties, (ii) four Washington, DC properties, (iii) 13 non-core strip shopping centers and the Green Acres Mall, for an aggregate of $1,500,000,000. Below are the details of these transactions.
Merchandise Mart Properties
On January 6, 2012, we completed the sale of 350 West Mart Center, a 1.2 million square foot office building in Chicago, Illinois, for $228,000,000 in cash, which resulted in a net gain of $54,911,000.
On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.
On July 5, 2012, we entered into agreements to sell the Washington Design Center, the Boston Design Center and the Canadian Trade Shows, for an aggregate of $175,000,000 in cash. The sales of the Canadian Trade Shows and the Washington Design Center were completed in July 2012 and the sale of the Canadian Trade Shows resulted in an after-tax net gain of $19,657,000. The sale of the Boston Design Center will result in a net gain of approximately $5,300,000 and is expected to be completed in the fourth quarter, subject to customary closing conditions.
Washington, DC Properties
On July 26, 2012, we completed the sale of 409 Third Street S.W., a 409,000 square foot office building in Washington, DC, for $200,000,000 in cash, which resulted in a net gain of $126,621,000. This building is contiguous to the Washington Design Center and was sold to the same purchaser.
On October 26, 2012, we entered into an agreement to sell three office buildings (“Reston Executive”) located in suburban Fairfax County, Virginia, containing 494,000 square feet for $126,000,000, which will result in a net gain of approximately $35,000,000. The sale, which is subject to customary closing conditions, is expected to be completed in the fourth quarter.
Retail Properties
In 2012, we sold 12 non-core strip shopping centers in separate transactions, for an aggregate of $157,000,000 in cash, which resulted in a net gain aggregating $22,266,000, of which $4,464,000 was recognized in the third quarter. In addition we have entered into an agreement to sell a building on Market Street, Philadelphia, which is part of the Gallery at Market East for $60,000,000, which will result in a net gain of approximately $35,000,000. The sale, which is subject to customary closing conditions, is expected to be completed in the fourth quarter.
On October 21, 2012, we entered into an agreement to sell the Green Acres Mall located in Valley Stream, New York, for $500,000,000. Net proceeds from the sale will be approximately $185,000,000. The financial statement gain will be approximately $195,000,000. The tax gain will be approximately $304,000,000, which is expected to be deferred as part of a like-kind exchange. The sale, which is expected to be completed in the first quarter of 2013, is subject to customary closing conditions and is conditioned on the closing of the sale of Kings Plaza (an Alexander’s property), which is being sold to the same purchaser.
2011 Activity:
During 2011, we (i) completed the disposition of the High Point Complex in North Carolina, which resulted in an $83,907,000 net gain on extinguishment of debt and (ii) sold three non-core strip shopping centers and two office buildings in Washington, DC for an aggregate of $168,000,000 in cash, which resulted in a net gain aggregating $51,623,000.
19
8. Discontinued Operations - continued
We have reclassified the revenues and expenses of all of the properties discussed above, as well as eight other retail properties that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying financial statements. The tables below set forth the assets and liabilities related to discontinued operations at September 30, 2012 and December 31, 2011 and their combined results of operations for the three and nine months ended September 30, 2012 and 2011.
Assets Related to
Liabilities Related to
Discontinued Operations as of
384,973
520,014
319,233
351,083
86,933
152,568
93,000
66,032
376,571
66,747
74,236
27,651
49,656
112,585
160,747
21,082
41,212
81,508
130,571
6,569
31,077
30,176
131,088
203,801
51,623
Gain on sale of Canadian Trade Shows, net of $11,448 of
income taxes
19,657
(13,511)
Net gain on extinguishment of High Point debt
83,907
9. Mezzanine Loans Receivable
As of September 30, 2012 and December 31, 2011, the carrying amount of mezzanine loans receivable was $131,585,000 and $133,948,000, respectively. These loans have a weighted average interest rate of 9.53% and maturities ranging from August 2014 to May 2016.
On October 19, 2012, we acquired a 25% participation in a $475,000,000 first mortgage and mezzanine loan for the acquisition and redevelopment of a 10-story retail building at 701 Seventh Avenue in Times Square. The loan has an interest rate of LIBOR plus 10.2%, with a LIBOR floor of 1.0%. Of the $475,000,000, we have funded $93,750,000, representing our 25% share of the $375,000,000 that has been funded. $25,000,000, our 25% share of the remaining $100,000,000, will be funded during the development of the property.
20
10. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily acquired above-market leases) and liabilities (primarily acquired below-market leases) as of September 30, 2012 and December 31, 2011.
Identified intangible assets:
Gross amount
615,199
642,471
Accumulated amortization
(362,516)
(347,039)
Net
Identified intangible liabilities (included in deferred revenue):
816,774
830,411
(398,262)
(367,525)
418,512
462,886
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $13,242,000 and $15,847,000 for the three months ended September 30, 2012 and 2011, respectively, and $39,228,000 and $48,681,000 for the nine months ended September 30, 2012 and 2011, 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, 2013 is as follows:
2013
42,023
2014
36,603
2015
33,816
2016
31,333
2017
25,841
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $11,940,000 and $15,397,000 for the three months ended September 30, 2012 and 2011, respectively, and $38,361,000 and $42,090,000 for the nine months ended September 30, 2012 and 2011, 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, 2013 is as follows:
40,739
22,450
17,244
14,714
11,853
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 $408,000 and $344,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,182,000 and $1,033,000 for the nine months ended September 30, 2012 and 2011, respectively. Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2013 is as follows:
1,472
1,457
21
11. Debt
The following is a summary of our debt:
Balance at
Notes and mortgages payable:
Maturity (1)
Fixed rate:
New York:
Two Penn Plaza
03/18
5.13 %
425,000
1290 Avenue of the Americas
01/13
5.97 %
410,021
413,111
770 Broadway
5.65 %
353,000
888 Seventh Avenue
01/16
5.71 %
318,554
350 Park Avenue(2)
01/17
3.75 %
300,000
430,000
909 Third Avenue
04/15
5.64 %
200,241
203,217
828-850 Madison Avenue Condominium - retail
06/18
5.29 %
80,000
510 5th Avenue - retail
5.60 %
31,377
31,732
Washington, DC:
Skyline Properties(3)
02/17
5.74 %
694,711
678,000
River House Apartments
5.43 %
195,546
2101 L Street(4)
08/24
3.97 %
2121 Crystal Drive
03/23
5.51 %
Bowen Building
6.14 %
115,022
1215 Clark Street, 200 12th Street and 251 18th Street
01/25
7.09 %
106,628
108,423
West End 25
06/21
4.88 %
101,671
Universal Buildings
04/14
6.49 %
94,497
98,239
2011 Crystal Drive
08/17
7.30 %
79,865
80,486
1550 and 1750 Crystal Drive
11/14
7.08 %
74,765
76,624
220 20th Street
02/18
4.61 %
74,246
75,037
2231 Crystal Drive
08/13
42,160
43,819
1225 Clark Street
25,219
26,211
1235 Clark Street
51,309
1750 Pennsylvania Avenue
44,330
Retail:
Cross-collateralized mortgages on 40 strip shopping centers
09/20
4.23 %
576,281
585,398
Montehiedra Town Center
07/16
6.04 %
120,000
Broadway Mall
07/13
5.30 %
85,840
87,750
North Bergen (Tonnelle Avenue)
01/18
4.59 %
75,000
Las Catalinas Mall
11/13
6.97 %
54,719
55,912
06/14-05/36
5.12%-7.30%
87,055
88,237
Merchandise Mart:
Merchandise Mart
12/16
5.57 %
550,000
555 California Street
09/21
5.10 %
Borgata Land
02/21
5.14 %
60,000
Total fixed rate notes and mortgages payable
5.40 %
6,231,418
6,321,628
___________________
See notes on page 24.
22
11. Debt - continued
Spread over
LIBOR
Variable rate:
Eleven Penn Plaza
01/19
L+235
2.58 %
330,000
100 West 33rd Street - office & retail(5)
03/17
L+250
2.73 %
325,000
232,000
4 Union Square South - retail
L+325
3.48 %
435 Seventh Avenue - retail(6)
08/19
L+225
2.47 %
98,000
51,353
866 UN Plaza
L+125
1.48 %
44,978
04/18
n/a (7)
1.63 %
64,000
2200/2300 Clarendon Boulevard
01/15
L+75
0.98 %
48,859
53,344
1730 M and 1150 17th Street
06/14
L+140
1.62 %
43,581
2101 L Street (4)
Bergen Town Center
03/13
L+150
282,312
283,590
San Jose Strip Center
L+400
4.25 %
106,332
112,476
Cross-collateralized mortgages on 40 strip
shopping centers (8)
L+136 (8)
2.36 %
Beverly Connection
100,000
11/12
L+375
3.98 %
19,427
19,876
220 Central Park South
10/13
L+275
2.97 %
123,750
Total variable rate notes and mortgages payable
2.50 %
1,621,239
1,743,948
Total notes and mortgages payable
4.80 %
Senior unsecured notes:
Senior unsecured notes due 2015
499,586
499,462
Senior unsecured notes due 2039 (9)
10/39
7.88 %
460,000
Senior unsecured notes due 2022
01/22
398,335
398,199
Total senior unsecured notes
5.70 %
Unsecured revolving credit facilities:
$1.25 billion unsecured revolving credit facility
11/16
1.43 %
($22,576 reserved for outstanding letters of credit)
L+135
Total unsecured revolving credit facilities
3.88% exchangeable senior debentures(10)
2.85% convertible senior debentures(10)
See notes on the following page.
23
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.
On January 9, 2012, we completed a $300,000 refinancing of this property. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000 of existing cash were used to repay the existing loan and closing costs.
In the first quarter of 2012, we notified the lender that due to scheduled lease expirations resulting primarily from the effects of the Base Realignment and Closure statute, the Skyline properties had a 26% vacancy rate, which is expected to increase and, accordingly, cash flows are expected to decrease. As a result, our subsidiary that owns these properties does not have and is not expected to have for some time sufficient funds to pay all of its current obligations, including interest payments to the lender. Based on the projected vacancy and the significant amount of capital required to re-tenant these properties, at our request, the mortgage loan was transferred to the special servicer. In the second quarter of 2012, we entered into a forbearance agreement with the special servicer to apply cash flows of the property, before interest on the loan, towards the repayment of $4,000 of tenant improvements and leasing commissions we recently funded in connection with a new lease at these properties. In the third quarter, we were repaid our capital in full. The forbearance agreement (amended September 1, 2012, to extend its maturity) provides that through the December 1, 2012 payment date, any interest shortfall would be deferred and added to the principal balance of the loan and not give rise to a loan default. As of September 30, 2012, the deferred interest amounted to $16,711. We continue to negotiate with the special servicer to restructure the terms of the loan.
On July 26, 2012, we completed a $150,000 refinancing of this property. The twelve-year fixed rate loan bears interest at 3.97% and amortizes based on a 30-year schedule beginning in the third year.
On March 5, 2012, we completed a $325,000 refinancing of this property. The three-year loan bears interest at LIBOR plus 2.50% and has two one-year extension options. We retained net proceeds of approximately $87,000, after repaying the existing loan and closing costs.
(6)
On August 17, 2012, we completed a $98,000 refinancing of this property. The seven-year loan bears interest at LIBOR plus 2.25%. We retained net proceeds of approximately $44,000 after repaying the existing loan and closing costs.
(7)
Interest at the Freddie Mac Reference Note Rate plus 1.53%.
(8)
LIBOR floor of 1.00%.
(9)
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 April 2012, we redeemed all of the outstanding exchangeable and convertible senior debentures at par, for an aggregate of $510,215 in cash.
24
12. 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-15 and D-16 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, 2010
1,327,974
47,364
(38,393)
Conversion of Class A units into common shares, at redemption value
(38,220)
(114,628)
Redemption of Series D-11 redeemable units
Other, net
4,623
Balance at September 30, 2011
1,160,720
Balance at December 31, 2011
40,595
(34,138)
(51,216)
63,657
Redemption of Series D-10 and D-14 redeemable units
(168,300)
(15,776)
Balance at September 30, 2012
On July 19, 2012, we redeemed all of the outstanding 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units with an aggregate face amount of $180,000,000 for $168,300,000 in cash, plus accrued and unpaid distributions through the date of redemption.
As of September 30, 2012 and December 31, 2011, the aggregate redemption value of redeemable Class A units was $949,499,000 and $934,677,000, respectively.
Redeemable noncontrolling interests exclude our Series G-1 through G-4 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 $55,097,000 and $54,865,000 as of September 30, 2012 and December 31, 2011, respectively.
13. Shareholders’ Equity
On July 11, 2012, we sold 12,000,000 5.70% Series K Cumulative Redeemable Preferred Shares at a price of $25.00 per share in an underwritten public offering pursuant to an effective registration statement. We retained aggregate net proceeds of $291,144,000, after underwriters’ discounts and issuance costs. Dividends on the Series K Preferred Shares are cumulative and payable quarterly in arrears. The Series K Preferred Shares are not convertible into, or exchangeable for, any of our properties or securities. On or after five years from the date of issuance (or sooner under limited circumstances), we may redeem the Series K Preferred Shares at a redemption price of $25.00 per share, plus accrued and unpaid dividends through the date of redemption. The Series K Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.
On August 16, 2012, we redeemed all of the outstanding 7.0% Series E Cumulative Redeemable Preferred Shares at par, for an aggregate of $75,000,000 in cash, plus accrued and unpaid dividends through the date of redemption.
14. 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 markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs 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.
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) Real Estate Fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) derivative positions in marketable equity securities, (v) interest rate swaps and (vi) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units). The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at September 30, 2012 and December 31, 2011, respectively.
Level 1
Level 2
Level 3
Real Estate Fund investments (75% of which is attributable to
Deferred compensation plan assets (included in other assets)
42,236
60,767
J.C. Penney derivative position (included in other assets)(1)
8,524
Total assets
1,078,970
527,237
543,209
Mandatorily redeemable instruments (included in other liabilities)
55,097
Interest rate swap (included in other liabilities)
52,935
108,032
(1) Represents the cash deposited with the counterparty in excess of the mark-to-market loss on the derivative position.
39,236
56,221
30,600
1,214,028
780,557
402,871
54,865
44,114
98,979
(1) Represents the mark-to-market gain on the derivative position.
26
14. Fair Value Measurements – continued
Financial Assets and Liabilities Measured at Fair Value - continued
Real Estate Fund Investments
At September 30, 2012, our Real Estate Fund had eight investments with an aggregate fair value of approximately $482,442,000, or $45,818,000 in excess of cost. These investments are classified as Level 3. We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period. The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 1.8 to 6.4 years. Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit. Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor. Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs.
The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these Fund investments at September 30, 2012.
Weighted Average
(based on fair
Unobservable Quantitative Input
Range
value of investments)
Discount rates
12.5% to 23.3%
14.6 %
Terminal capitalization rates
5.3% to 6.8%
6.0 %
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate, may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values. The table below summarizes the changes in the fair value of Fund investments that are classified as Level 3, for the three and nine months ended September 30, 2012 and 2011.
Beginning balance
388,455
255,795
144,423
Purchases
88,429
163,021
123,047
Sales/Returns
(61,052)
(12,831)
Realized gains
Unrealized gains
(17)
286
(15,516)
Ending balance
261,417
27
Deferred Compensation Plan Assets
Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The third-party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements. The table below summarizes the changes in the fair value of Deferred Compensation Plan Assets for the three and nine months ended September 30, 2012 and 2011.
58,313
53,724
47,850
1,650
3,155
5,416
22,259
Sales
(276)
(1,044)
(4,287)
(18,538)
Realized and unrealized gain (loss)
1,080
(2,051)
3,349
2,166
103
68
150
53,887
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, a stock purchase warrant, and our secured and unsecured debt. Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument. The fair value of our mezzanine loans receivable and the stock purchase warrant are classified as Level 3 and the fair value of our secured and unsecured debt are classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of September 30, 2012 and December 31, 2011.
Carrying
Fair
Value
Assets:
127,000
129,000
Stock purchase warrant (residential property)
162,000
Liabilities:
7,900,000
8,181,000
1,476,000
1,426,000
510,000
10,000
9,810,578
9,976,000
10,069,303
10,265,000
28
15. Incentive Compensation
Our Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, restricted Operating Partnership units and out-performance plan rewards to certain of our employees and officers. We account for all stock-based compensation in accordance ASC 718, Compensation – Stock Compensation.
On March 30, 2012, our Compensation Committee (the “Committee”) approved the 2012 formulaic annual incentive program for our senior executive management team. Under the program, our senior executive management team, including our Chairman and our President and Chief Executive Officer, will have the ability to earn annual incentive payments (cash or equity) if and only if we achieve comparable funds from operations (“Comparable FFO”) of at least 80% or more of the prior year Comparable FFO. Moreover, even if we achieve the stipulated Comparable FFO performance requirement, the Committee retains the right, consistent with best practices, to elect to make no payments under the program. Comparable FFO excludes the impact of certain non-recurring items such as income or loss from discontinued operations, the sale or mark-to-market of marketable securities or derivatives and early extinguishment of debt, restructuring costs and non-cash impairment losses, among others, and thus the Committee believes provides a better metric than total FFO for assessing management’s performance for the year. Aggregate incentive awards earned under the program are subject to a cap of 1.25% of Comparable FFO for the year, with individual award allocations determined by the Committee based on an assessment of individual and overall performance.
On March 30, 2012, the Committee also approved the 2012 Out-Performance Plan, a multi-year, performance-based equity compensation plan (the “2012 OPP”). The aggregate notional amount of the 2012 OPP is $40,000,000. Under the 2012 OPP, participants, including our Chairman and our President and Chief Executive Officer, have the opportunity to earn compensation payable in the form of equity awards if and only if we outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to a relative TSR in any year during a three-year performance period. Specifically, awards under our 2012 OPP may be earned if we (i) achieve a TSR above that of the SNL US REIT Index (the “Index”) over a one-year, two-year or three-year performance period (the “Relative Component”), and/or (ii) achieve a TSR level greater than 7% per annum, or 21% over the three-year performance period (the “Absolute Component”). To the extent awards would be earned under the Absolute Component of the 2012 OPP but we underperform the Index, such awards would be reduced (and potentially fully negated) based on the degree to which we underperform the Index. In certain circumstances, in the event we outperform the Index but awards would not otherwise be earned under the Absolute Component, awards may still be earned under the Relative Component. To the extent awards would otherwise be earned under the Relative Component but we fail to achieve at least a 6% per annum absolute TSR level, such awards would be reduced based on our absolute TSR performance, with no awards being earned in the event our TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which we may outperform the Index. If the designated performance objectives are achieved, OPP Units are also subject to time-based vesting requirements. Dividends on awards issued accrue during the performance period and are paid to participants if and only if awards are ultimately earned based on the achievement of the designated performance objectives. Awards earned under the 2012 OPP vest 33% in year three, 33% in year four and 34% in year five. The fair value of the 2012 OPP on the date of grant, as adjusted for estimated forfeitures, was $12,250,000, and is being amortized into expense over a five-year period from the date of grant, using a graded vesting attribution model.
Stock-based compensation expense consists of stock option awards, restricted stock awards, Operating Partnership unit awards and out-performance plan awards. Stock-based compensation expense was $7,774,000 and $7,320,000 in the three months ended September 30, 2012 and 2011, respectively, and $22,821,000 and $21,384,000 in the nine months ended September 30, 2012 and 2011, respectively.
29
16. Fee and Other Income
The following table sets forth the details of our fee and other income:
BMS cleaning fees
16,945
15,647
49,437
46,479
Signage revenue
4,783
5,085
14,252
14,746
Management and leasing fees
7,234
4,773
16,534
16,660
Lease termination fees
282
4,803
1,172
12,478
Other income
10,444
6,468
24,623
21,450
Management and leasing fees include management fees from Interstate Properties, a related party, of $197,000 and $195,000 for the three months ended September 30, 2012 and 2011, respectively, and $588,000 and $586,000 for the nine months ended September 30, 2012 and 2011, respectively. The above table excludes fee income from partially owned entities, which is typically included in “income from partially owned entities” (see Note 7 – Investments in Partially Owned Entities).
17. Interest and Other Investment Income (Loss), Net
The following table sets forth the details of our interest and other investment income (loss):
Income (loss) from the mark-to-market of J.C. Penney derivative position
4,344
(37,537)
(53,343)
(27,136)
Interest on mezzanine loans receivable
2,852
3,442
8,867
9,169
Mark-to-market of investments in our deferred compensation plan (1)
1,116
(5,243)
5,267
1,502
Dividends and interest on marketable securities
7,605
11,093
22,941
82,744
2,211
1,722
5,132
5,866
__________________________
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.
30
18. 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 includes 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 dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options and restricted stock.
Numerator:
Income from continuing operations, net of income
attributable to noncontrolling interests
93,433
45,553
303,755
418,163
Income from discontinued operations, net of income
147,873
8,209
227,370
156,843
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(71)
(48)
(149)
(199)
Numerator for basic income per share
232,322
41,087
486,489
532,064
Impact of assumed conversions:
Convertible preferred share dividends
94
Numerator for diluted income per share
232,350
486,574
532,158
Denominator:
Denominator for basic income per share –
weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
681
1,667
693
1,764
Convertible preferred shares
50
55
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 equivalent of 12,652 and 18,857 in the three months ended September 30, 2012 and 2011, respectively, and 15,048 and 18,687 in the nine months ended September 30, 2012 and 2011, respectively.
31
19. 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 $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and 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 the Terrorism Risk Insurance Program Reauthorization Act. 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. Coverage for NBCR losses is up to $2.0 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 losses incurred 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 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 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, 2012, the aggregate dollar amount of these guarantees and master leases is approximately $267,090,000.
At September 30, 2012, $22,576,000 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.
Two of our wholly owned subsidiaries that are contracted to develop and operate the Cleveland Medical Mart and Convention Center, in Cleveland, Ohio, are required to fund $11,500,000, primarily for tenant improvements, and they are responsible for operating expenses and are entitled to the net operating income, if any, upon the completion of development and the commencement of operations. As of September 30, 2012, our subsidiaries have funded $1,100,000 of the commitment.
As of September 30, 2012, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $244,463,000.
32
19. 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 matter referred to below, is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
In 2003, Stop & Shop filed an action against us in the New York Supreme Court, claiming that we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to a Master Agreement and Guaranty, because of the expiration of the leases to which the annual rent was previously allocated. Stop & Shop asserted that an order of the Bankruptcy Court for the Southern District of New York, as modified on appeal by the District Court, froze our right to reallocate and effectively terminated our right to collect the annual rent from Stop & Shop. We asserted a counterclaim seeking a judgment for all the unpaid annual rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the annual rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. After summary judgment motions by both sides were denied, the parties conducted discovery. A trial was held in November 2010. On November 7, 2011, the Court determined that we have a continuing right to allocate the annual rent to unexpired leases covered by the Master Agreement and Guaranty, and directed entry of a judgment in our favor ordering Stop & Shop to pay us the unpaid annual rent accrued through February 28, 2011 in the amount of $37,422,000, a portion of the annual rent due from March 1, 2011 through the date of judgment, interest, and attorneys’ fees. On December 16, 2011, a money judgment based on the Court’s decision was entered in our favor in the amount of $56,597,000 (including interest and costs). The amount for attorneys’ fees is being addressed in a proceeding before a special referee. Stop & Shop appealed the Court’s decision and the judgment, and has posted a bond to secure payment of the judgment. On January 12, 2012, we commenced a new action against Stop & Shop seeking recovery of $2,500,000 of annual rent not included in the money judgment, plus additional annual rent as it accrues. A motion by Stop & Shop to dismiss the new action was denied on July 19, 2012. Stop & Shop’s appeal of that ruling was heard on October 18, 2012, and a decision has not yet been issued.
As of September 30, 2012, we have a $46,400,000 receivable from Stop & Shop, excluding amounts due to us for interest and costs resulting from the Court’s judgment. As a result of Stop & Shop appealing the Court’s decision, we believe, after consultation with counsel, that the maximum reasonably possible loss is up to the total amount of the receivable of $46,400,000.
20. Related Party Transactions
On March 8, 2012, Steven Roth, the Chairman of our Board of Trustees, repaid his $13,122,500 outstanding loan from the Company.
33
21. Segment Information
Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment). Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation. See note (4) on page 38 for the elements of the New York segment’s EBITDA. 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, 2012 and 2011.
For the Three Months Ended September 30, 2012
Retail
Merchandise
New York
Washington, DC
Properties
Mart
492,989
255,703
115,641
67,919
31,625
22,101
Straight-line rent adjustments
11,910
8,140
1,267
2,392
(171)
Amortization of acquired below-
market leases, net
13,242
8,458
506
2,868
1,410
Total rentals
272,301
117,414
73,179
31,454
23,793
45,164
9,601
21,069
1,201
3,462
Cleveland Medical Mart development
project
Fee and other income:
23,918
(6,973)
1,816
4,615
736
142
(75)
78
128
73
8,288
632
481
(73)
349,176
140,046
95,689
105,932
20,134
Operating expenses
159,048
50,305
33,519
19,130
2,485
57,967
29,825
18,202
7,439
10,902
6,739
6,668
6,103
4,120
25,112
Acquisition related costs and
tenant buy-outs
223,754
86,798
57,824
101,120
39,569
Operating income (loss)
125,422
53,248
37,865
4,812
(19,435)
(Loss) applicable to Toys
Income (loss) from partially owned
entities
9,309
(2,182)
342
219
13,580
Interest and other investment
income, net
1,057
9,438
Interest and debt expense
(36,817)
(28,311)
(14,732)
(7,906)
(33,004)
Income (loss) before income taxes
98,971
22,779
23,479
(2,875)
(23,912)
Income tax (expense) benefit
(815)
(4,391)
Income (loss) from continuing
operations
98,156
22,804
(709)
(28,303)
Income from discontinued
126,437
11,085
19,792
Net income (loss)
149,241
34,564
19,083
Less net (income) loss attributable to
noncontrolling interests in:
(2,092)
97
(4,615)
Operating Partnership, including
unit distributions
Net income (loss) attributable to
Vornado
96,064
34,661
(49,158)
Interest and debt expense(2)
183,241
46,823
33,280
17,499
8,916
34,526
42,197
Depreciation and amortization(2)
177,593
62,905
35,071
21,345
7,662
33,160
17,450
Income tax expense (benefit)(2)
3,850
871
(25)
9,281
(11,118)
4,841
EBITDA(1)
605,990
206,663
217,567
73,505
44,942
47,983
15,330
Less EBITDA from discontinued
(176,110)
(128,745)
(15,160)
(32,205)
EBITDA from continuing operations
429,880
88,822
58,345
12,737
See notes on page 38.
34
21. Segment Information – continued
For the Three Months Ended September 30, 2011
507,258
247,794
133,659
67,616
35,586
22,603
7,087
6,445
(1,308)
1,911
(501)
540
15,847
9,833
557
4,346
1,111
264,072
132,908
73,873
35,085
24,254
49,125
9,640
23,059
1,681
2,252
22,571
(6,924)
1,022
2,670
755
45
281
3,540
1,002
261
1,049
5,039
229
543
(392)
346,464
151,259
98,177
72,489
19,471
152,880
49,013
37,415
21,289
2,240
55,685
32,346
20,414
7,642
10,848
6,452
6,502
6,088
9,206
17,873
1,558
35
695
216,575
87,861
63,952
71,556
31,656
129,889
63,398
34,225
933
(12,185)
1,203
(1,356)
575
38
12,680
(loss) income, net
1,047
39
(31,099)
(39,088)
(28,928)
(17,639)
(7,866)
(38,477)
Net gain on disposition of wholly
owned and partially owned assets
93,051
33,153
17,162
(6,894)
(62,430)
(678)
(881)
(784)
(4,616)
92,373
32,272
(7,678)
(67,046)
Income (loss) from discontinued
1,622
6,272
483
(98)
92,538
33,894
23,434
(7,195)
(67,144)
(2,219)
110
(3,527)
90,319
23,544
(77,496)
197,864
33,703
20,678
9,523
38,018
49,251
193,394
65,539
38,085
24,117
12,230
34,293
Income tax (benefit) expense(2)
(7,350)
734
925
(15,135)
5,236
437,670
203,283
106,607
68,339
15,448
47,872
(3,879)
(22,597)
(4,568)
(11,288)
(6,563)
98
415,073
203,007
102,039
57,051
8,885
(3,781)
For the Nine Months Ended September 30, 2012
1,469,751
735,587
356,459
203,237
107,687
66,781
55,189
42,334
4,382
7,285
580
608
39,228
23,776
1,537
9,648
4,267
801,697
362,378
220,170
108,267
71,656
118,861
30,471
64,915
3,702
6,338
70,476
(21,039)
4,037
9,782
2,640
188
(113)
334
74
508
3,449
18,846
1,361
1,221
(254)
1,013,106
421,733
289,160
297,900
56,588
447,910
143,923
104,788
59,929
7,468
168,391
107,395
56,830
22,324
32,034
21,980
19,849
18,803
14,877
75,633
638,281
271,167
180,421
274,257
119,449
374,825
150,566
108,739
23,643
(62,861)
Income applicable to Toys
20,345
(4,571)
1,040
560
36,117
3,166
(26,271)
(109,365)
(85,408)
(49,705)
(23,467)
(109,655)
288,971
60,684
60,098
(120,242)
(2,480)
(1,277)
(13,905)
286,491
59,407
(134,147)
(640)
130,979
36,404
67,291
6,990
285,851
190,386
96,502
68,370
(127,157)
(7,266)
308
(23,970)
278,585
96,810
(191,722)
567,265
140,294
99,486
58,039
26,492
103,388
139,566
552,794
188,480
122,987
65,751
26,966
100,371
48,239
Income tax expense(2)
50,076
2,677
1,532
11,658
17,982
16,227
1,701,260
610,036
414,391
220,600
133,486
310,437
12,310
(279,464)
640
(138,707)
(48,251)
(86,156)
(6,990)
1,421,796
610,676
275,684
172,349
47,330
5,320
36
For the Nine Months Ended September 30, 2011
1,517,994
727,886
400,909
202,701
118,540
67,958
26,192
22,636
(2,138)
4,666
(1,261)
2,289
48,681
33,173
1,597
10,552
3,359
783,695
400,368
217,919
117,279
73,606
125,921
27,242
71,926
4,988
7,868
66,913
(20,434)
3,560
9,629
3,068
348
9,176
3,013
289
3,391
15,316
1,791
(220)
1,007,402
455,568
294,374
232,609
60,875
435,519
142,211
113,167
71,210
11,224
165,031
96,940
57,472
21,594
32,343
20,409
19,496
20,046
22,659
71,749
16,558
3,040
2,822
637,517
258,647
190,720
220,140
118,138
369,885
196,921
103,654
12,469
(57,263)
13,320
(6,038)
292
46,240
3,169
119
91,796
(114,381)
(85,971)
(53,024)
(23,342)
(117,474)
271,993
105,031
51,852
(10,580)
(3,235)
(1,637)
(2,055)
(1,523)
(13,328)
270,356
102,976
51,847
(12,103)
(16,563)
398
51,274
26,010
88,365
(341)
270,754
154,250
77,857
76,262
(16,904)
(6,815)
196
(14,024)
263,939
78,053
(78,292)
599,668
132,248
100,017
62,144
32,025
121,546
151,688
561,738
181,611
118,290
68,294
34,632
101,862
57,049
42,135
1,644
2,380
29,914
5,981
1,778,547
579,442
374,937
208,496
145,130
334,116
136,426
(211,539)
(710)
(60,220)
(40,988)
(109,962)
341
1,567,008
578,732
314,717
167,508
35,168
136,767
37
21. 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 (benefit) expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
The following table reconciles income from discontinued operations to EBITDA from discontinued operations.
3,799
4,732
11,415
17,917
9,236
14,818
26,916
Income taxes
11,437
185
12,207
1,000
EBITDA from discontinued operations
176,110
22,597
279,464
211,539
The elements of "New York" EBITDA from continuing operations are summarized below.
Office
139,894
137,295
419,054
399,182
46,165
43,109
135,399
121,136
(a)
Alexander's
13,080
12,830
39,477
40,032
Hotel Pennsylvania
7,524
9,773
16,746
18,382
Total New York
The EBITDA for the nine months ended September 30, 2011 is after a $16,558 expense for the buy-out of below-market leases.
The elements of "Retail Properties" EBITDA from continuing operations are summarized below.
Strip shopping centers
42,468
41,282
125,072
120,887
Regional malls
15,877
15,769
47,277
46,621
Total Retail properties
Notes to preceding tabular information - continued:
The elements of "other" EBITDA from continuing operations are summarized below.
Our share of Real Estate Fund:
Income before net realized/unrealized gains
1,874
743
4,162
2,550
1,389
8,384
4,802
Net realized gains
771
Carried interest
(2,541)
(475)
1,665
18,773
46,006
38,569
10,714
11,220
31,406
32,608
7,859
8,424
24,780
27,970
Other investments
11,121
10,173
24,954
30,352
49,189
47,264
139,692
139,287
Corporate general and administrative expenses(a)
(22,811)
(21,585)
(66,940)
(62,964)
Investment income and other, net(a)
5,033
12,541
28,865
37,284
Fee income from Alexander's
Income (loss) from the mark-to-market of J.C. Penney derivative
position
Verde Realty impairment loss
(4,936)
Acquisition costs
(1,070)
(695)
(4,314)
(2,822)
Net gain on sale of residential condominiums
1,274
5,884
Real Estate Fund placement fees
(3,451)
Net income attributable to noncontrolling interests in the
The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting liability.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of September 30, 2012, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011, and of changes in equity and cash flows for the nine-month periods ended September 30, 2012 and 2011. 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, 2011, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2012, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the change in method of presenting comprehensive income due to the adoption of FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011 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 1, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Quarterly Report constitute forward‑looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2012. 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.
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, 2012.
Total Return(1)
RMS
SNL
One-year
12.3%
32.4%
34.6%
Three-year
38.7%
75.1%
78.7%
Five-year
(12.1%)
11.1%
16.4%
Ten-year
212.5%
192.3%
209.7%
(1) Past performance is not necessarily indicative of future performance.
We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:
· Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;
· Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is a high likelihood of capital appreciation;
· Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;
· Investing in retail properties in select under-stored locations such as the New York City metropolitan area;
· Developing and redeveloping existing properties to increase returns and maximize value; and
· Investing in operating companies that have a significant real estate component.
We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from 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 these securities in the future.
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 the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, the 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 “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for additional information regarding these factors.
42
Overview – continued
Quarter Ended September 30, 2012 Financial Results Summary
Net income attributable to common shareholders for the quarter ended September 30, 2012 was $232,393,000, or $1.24 per diluted share, compared to $41,135,000, or $0.22 per diluted share for the quarter ended September 30, 2011. Net income for the quarters ended September 30, 2012 and 2011 include $132,244,000 and $3,591,000, respectively, of net gains on sale of real estate. In addition, the quarters ended September 30, 2012 and 2011 include certain other 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 quarter ended September 30, 2012 by $159,126,000, or $0.85 per diluted share and decreased net income attributable to common shareholders for the quarter ended September 30, 2011 by $20,238,000, or $0.11 per diluted share.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended September 30, 2012 was $251,019,000, or $1.34 per diluted share, compared to $195,125,000, or $1.05 per diluted share for the prior year’s quarter. FFO for the quarters ended September 30, 2012 and 2011 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 for the quarter ended September 30, 2012 by $38,781,000, or $0.20 per diluted share and decreased FFO for the quarter ended September 30, 2011 by $14,620,000, or $0.08 per diluted share.
For the Three Months Ended September 30,
Items that affect comparability income (expense):
After-tax net gain on sale of Canadian Trade Shows
FFO attributable to discontinued operations, including discontinued operations
of a partially owned entity
12,649
19,825
Buy-out of a below-market lease
(1,593)
(2,084)
(2,626)
41,330
(15,633)
Noncontrolling interests' share of above adjustments
(2,549)
1,013
Items that affect comparability, net
38,781
(14,620)
The percentage increase (decrease) 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, 2012 over the quarter ended September 30, 2011 and the trailing quarter ended June 30, 2012 are summarized below.
Same Store EBITDA:
September 30, 2012 vs. September 30, 2011
GAAP basis
0.3%
(6.9%)
0.1%
(0.9%)
Cash basis
0.7%
(9.2%)
2.5%
(2.7%)
September 30, 2012 vs. June 30, 2012
(2.2%)
(24.2%)
0.6%
(2.3%)
1.0%
(23.1%)
Excluding the Hotel Pennsylvania, same store increased by 1.3% and 1.9% on a GAAP and Cash basis, respectively.
Excluding the Hotel Pennsylvania, same store decreased by (1.3%) on a GAAP basis and increased by 1.8% on a Cash basis.
43
Nine Months Ended September 30, 2012 Financial Results Summary
Net income attributable to common shareholders for the nine months ended September 30, 2012 was $486,638,000, or $2.61 per diluted share, compared to $532,263,000, or $2.86 per diluted share for the nine months ended September 30, 2011. Net income for the nine months ended September 30, 2012 and 2011 include $205,852,000 and $59,474,000, respectively, of net gains on sale of real estate and $23,754,000 of real estate impairment losses in the nine months ended September 30, 2012. In addition, the nine months ended September 30, 2012 and 2011 include certain items that affect comparability, which are listed in the table below. The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders by $179,124,000, or $0.96 per diluted share for the nine months ended September 30, 2012 and $233,998,000, or $1.26 per diluted share for the nine months ended September 30, 2011.
FFO for the nine months ended September 30, 2012 was $767,347,000, or $4.07 per diluted share, compared to $951,054,000, or $4.96 per diluted share for the nine months ended September 30, 2011. FFO for the nine months ended September 30, 2012 and 2011 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 by $22,909,000, or $0.12 per diluted share for the nine months ended September 30, 2012 and $204,971,000, or $1.07 per diluted share for the nine months ended September 30, 2011.
For the Nine Months Ended September 30,
FFO attributable to discontinued operations, including discontinued operations of
a partially owned entity
52,768
63,785
7,000
Our share of LNR's asset sales and tax settlement gains
Net gain resulting from Lexington's stock issuances
Buy-out of below-market leases
(16,593)
(2,704)
(5,604)
24,416
218,744
(1,507)
(13,773)
22,909
204,971
The percentage increase (decrease) in GAAP basis and Cash basis same store EBITDA of our operating segments for the nine months ended September 30, 2012 over the nine months ended September 30, 2011 is summarized below.
2.3%
(7.0%)
(0.6%)
2.8%
1.5%
(6.0%)
(0.5%)
(0.3%)
Excluding the Hotel Pennsylvania, same store increased by 2.6% and 1.7% on a GAAP and Cash basis, respectively.
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.
44
Overview - continued
2012 Acquisitions
On July 30, 2012, we entered into a lease with Host Hotels & Resorts, Inc. (NYSE: HST) (“Host”), under which we will redevelop the retail and signage components of the Marriott Marquis Times Square Hotel. The Marriott Marquis with over 1,900 rooms is one of the largest hotels in Manhattan. It is located in the heart of the bow-tie of Times Square and spans the entire block front from 45th Street to 46th Street on Broadway. The Marriott Marquis is directly across from our 1540 Broadway iconic retail property leased to Forever 21 and Disney flagship stores. We plan to spend as much as $140,000,000 to redevelop and substantially expand the existing retail space, including converting the below grade parking garage into retail, and creating six-story, 300 foot wide block front, dynamic LED signs. During the term of the lease we will pay fixed rent equal to the sum of $12,500,000 plus a portion of the property’s net cash flow, after we receive a 5.2% preferred return on our invested capital. The lease contains put/call options which, if exercised, would lead to our ownership. Host can exercise the put option during defined periods following the conversion of the project to a condominium. We can exercise our call option under the same terms, at any time after the fifteenth year of the lease term.
On April 26, 2012, our 25% owned Real Estate Fund acquired 520 Broadway, a 112,000 square foot office building in Santa Monica, California for $59,650,000 and subsequently placed a $30,000,000 mortgage loan on the property. The three-year loan bears interest at LIBOR plus 2.25% and has two one-year extension options.
On July 2, 2012, our 25% owned Real Estate Fund acquired 1100 Lincoln Road, a 167,000 square foot retail property, the western anchor of the Lincoln Road Shopping District in Miami Beach, Florida, for $132,000,000. The purchase price consisted of $66,000,000 in cash and a $66,000,000 mortgage loan. The three-year loan bears interest at LIBOR plus 2.75% and has two one-year extension options.
On August 20, 2012, our 25% owned Real Estate Fund acquired 501 Broadway, a 9,000 square foot retail property in New York for $31,000,000. The purchase price consisted of $11,000,000 in cash and a $20,000,000 mortgage loan. The three-year loan bears interest at LIBOR plus 2.75% with a floor of 3.50%, and has two one-year extension options.
2012 Dispositions
During 2012, we sold or have entered into agreements to sell (i) five Mart properties, (ii) four Washington, DC properties, and (iii) 13 non-core strip shopping centers and the Green Acres Mall, for an aggregate of $1,500,000,000. Below are the details of these transactions.
On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California, for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.
In 2012, we sold 12 non-core strip shopping center properties in separate transactions, for an aggregate of $157,000,000 in cash, which resulted in a net gain aggregating $22,266,000 of which $4,464,000 was recognized in the third quarter. In addition we have entered into an agreement to sell a building on Market Street, Philadelphia, which is part of the Gallery at Market East for $60,000,000, which will result in a net gain of approximately $35,000,000. The sale, which is subject to customary closing conditions, is expected to be completed in the fourth quarter.
On October 21, 2012, Alexander’s, our 32.4% owned affiliate, entered into an agreement to sell its Kings Plaza Regional Shopping Center located in Brooklyn, New York, for $751,000,000. Upon completion of the sale, we will recognize a financial statement gain of approximately $181,000,000. Alexander’s expects to distribute the taxable gain to its stockholders as a special long-term capital gain dividend, of which our share is approximately $202,000,000 and we expect to pay this amount to our common shareholders as a special long-term capital gain dividend. The sale, which is subject to customary closing conditions, is expected to be completed in the fourth quarter.
46
2012 Financings
Secured Debt
On January 9, 2012, we completed a $300,000,000 refinancing of 350 Park Avenue, a 559,000 square foot Manhattan office building. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000,000 of existing cash were used to repay the existing loan and closing costs.
On March 5, 2012, we completed a $325,000,000 refinancing of 100 West 33rdStreet, a 1.1 million square foot property located on the entire Sixth Avenue block front between 32nd and 33rd Streets in Manhattan. The building contains the 257,000 square foot Manhattan Mall and 848,000 square feet of office space. The three-year loan bears interest at LIBOR plus 2.50% (2.73% at September 30, 2012) and has two one-year extension options. We retained net proceeds of approximately $87,000,000, after repaying the existing loan and closing costs.
On July 26, 2012, we completed a $150,000,000 refinancing of 2101 L Street, a 380,000 square foot office building located in Washington, DC. The twelve-year fixed rate loan bears interest at 3.97% and amortizes based on a 30-year schedule beginning in the third year.
On August 17, 2012, we completed a $98,000,000 refinancing of 435 Seventh Avenue, a 43,000 square foot retail property in Manhattan. The seven-year loan bears interest at LIBOR plus 2.25% (2.47% at September 30, 2012). We retained net proceeds of approximately $44,000,000 after repaying the existing loan and closing costs.
Senior Unsecured Debt
In April 2012, we redeemed all of the outstanding exchangeable and convertible senior debentures at par, for an aggregate of $510,215,000 in cash.
Preferred Equity
Redeemable Noncontrolling Interests
47
Recently Issued Accounting Literature
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS(“ASU No. 2011-04”). ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures.
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, 2011 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2012.
48
Leasing Activity:
The leasing activity in the table 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 based on our share of square feet leased during the period. Second generation relet space represents square footage that has not been vacant for more than nine months. The leasing activity for the New York segment excludes Alexander’s and the Hotel Pennsylvania.
(Square feet in thousands)
Strips
Malls
Showroom
Quarter Ended September 30, 2012:
Total square feet leased
79
581
129
Our share of square feet leased:
480
400
Initial rent(1)
58.74
199.10
44.02
24.41
41.01
33.01
39.59
Weighted average lease term (years)
10.9
6.4
9.1
6.5
6.9
14.9
5.9
Second generation relet space:
Square feet
359
314
63
Cash basis:
61.99
174.86
40.57
22.06
46.75
33.88
Prior escalated rent
56.95
142.55
37.24
21.21
43.74
16.78
40.22
Percentage increase (decrease)
8.9%
22.7%
4.0%
6.9%
101.9%
(1.6%)
GAAP basis:
Straight-line rent (2)
62.27
182.86
41.41
22.33
35.53
40.03
Prior straight-line rent
59.31
36.39
20.53
42.78
14.07
36.95
Percentage increase
5.0%
28.3%
13.8%
8.8%
9.3%
152.5%
8.3%
Tenant improvements and leasing
commissions:
Per square foot
75.87
37.98
50.97
2.22
32.17
97.44
7.89
Per square foot per annum:
6.96
5.93
5.60
0.34
4.66
6.54
1.34
Percentage of initial rent
11.8%
3.0%
12.7%
1.4%
11.4%
19.8%
3.4%
Nine Months Ended September 30, 2012:
1,492
183
1,630
953
71
593
322
1,317
180
1,496
58.20
105.39
40.30
18.04
43.92
32.97
38.20
9.5
12.0
7.3
8.4
4.7
14.7
1,032
152
1,367
721
59.78
101.56
39.25
15.66
62.80
32.24
56.92
85.04
38.90
14.14
57.60
24.88
38.94
19.4%
0.9%
10.7%
9.0%
29.6%
(1.9%)
59.46
109.81
39.15
16.29
63.75
32.38
38.49
56.81
86.31
37.45
13.04
55.73
23.15
35.59
4.7%
27.2%
4.5%
24.9%
14.4%
39.9%
8.1%
56.54
28.51
37.82
8.57
9.74
96.41
11.03
5.95
2.38
5.18
1.02
6.56
1.87
10.2%
12.9%
5.7%
19.9%
4.9%
Represents the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.
Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases, and includes the effect of free rent and periodic step-ups in rent.
Includes $6.50 per square foot per annum of tenant improvements and leasing commissions in connection with a 572,000 square foot lease.
49
Square footage (in service) and Occupancy as of September 30, 2012:
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
19,608
16,627
95.8%
2,041
1,883
95.9%
2,179
706
99.1%
1,400
Residential
284
96.6%
25,512
20,758
19,131
16,521
84.0%(1)
Retail Properties:
Strip Shopping Centers
113
15,461
14,879
93.6%
Regional Malls
5,226
3,589
92.6%
20,687
18,468
93.4%
1,728
1,719
92.4%
2,263
95.5%
3,991
3,982
94.2%
1,795
1,257
Primarily Warehouses
1,096
53.0%
2,891
2,353
Total square feet at September 30, 2012
72,212
62,082
The occupancy rate for office properties excluding residential and other properties is 81.1%.
Square footage (in service) and Occupancy as of December 31, 2011:
properties
19,571
16,598
96.2%
2,239
1,982
95.6%
98.7%
25,389
20,686
19,626
17,022
90.6%(1)
15,417
14,834
93.3%
5,448
3,800
92.7%
20,865
18,634
93.1%
1,220
1,211
90.3%
89.8%
3,935
3,926
89.9%
1,235
45.3%
3,030
2,492
Total square feet at December 31, 2011
72,845
62,760
The occupancy rate for office properties excluding residential and other properties is 89.3%.
Square footage (in service) and Occupancy as of September 30, 2011:
19,236
17,136
95.4%
2,100
1,907
97.1%
2,192
710
98.1%
24,928
21,153
95.7%
19,699
16,961
91.0%(1)
111
15,577
14,994
92.3%
5,412
3,773
20,989
18,767
92.5%
1,207
1,198
90.9%
2,728
95.0%
93.8%
35.2%
Total square feet at September 30, 2011
72,581
63,299
The occupancy rate for office properties excluding residential and other properties is 89.7%.
51
Washington, DC Properties Segment
In our Form 10-K for the year ended December 31, 2011, as a result of the Base Realignment and Closure (“BRAC”) statute, we estimated that occupancy will decrease from 90% at year end, to between 82% to 84% in 2012 and that 2012 EBITDA from continuing operations will be lower than 2011 by approximately $55,000,000 to $65,000,000 based on 2,902,000 square feet expiring in 2012, partially offset by leasing over 1,000,000 square feet.
At September 30, 2012, occupancy is at 84.0% and EBITDA from continuing operations for the three and nine months ended September 30, 2012 is lower by approximately $13,200,000 and $39,000,000, respectively, than it was for the three and nine months ended September 30, 2011. Based on leasing activity as of September 30, 2012, we currently estimate that 2012 EBITDA from continuing operations will be lower than 2011 by approximately $50,000,000 to $60,000,000.
Of the 2,395,000 square feet subject to BRAC, 348,000 square feet has been taken out of service for redevelopment and 523,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of September 30, 2012.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of September 30, 2012
38.45
432,000
344,000
88,000
Leases pending
39.49
91,000
38,000
53,000
Taken out of service for redevelopment
348,000
871,000
730,000
To Be Resolved:
Already vacated
35.95
1,024,000
541,000
473,000
Expiring in:
37.39
126,000
43,000
83,000
32.32
304,000
103,000
201,000
42.23
70,000
65,000
1,524,000
709,000
722,000
Total square feet subject to BRAC
2,395,000
1,439,000
810,000
146,000
In the first quarter of 2012, we notified the lender that due to scheduled lease expirations resulting primarily from the effects of the BRAC statute, the Skyline properties had a 26% vacancy rate, which is expected to increase and, accordingly, cash flows are expected to decrease. As a result, our subsidiary that owns these properties does not have and is not expected to have for some time sufficient funds to pay all of its current obligations, including interest payments to the lender. Based on the projected vacancy and the significant amount of capital required to re-tenant these properties, at our request, the mortgage loan was transferred to the special servicer. In the second quarter of 2012, we entered into a forbearance agreement with the special servicer to apply cash flows of the property, before interest on the loan, towards the repayment of $4,000,000 of tenant improvements and leasing commissions we recently funded in connection with a new lease at these properties. In the third quarter, we were repaid our capital in full. The forbearance agreement (amended September 1, 2012, to extend its maturity) provides that through the December 1, 2012 payment date, any interest shortfall would be deferred and added to the principal balance of the loan and not give rise to a loan default. As of September 30, 2012 the deferred interest amounted to $16,711,000. We continue to negotiate with the special servicer to restructure the terms of the loan.
52
Net Income and EBITDA by Segment for the Three Months Ended September 30, 2012 and 2011
Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment). Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation. See note (4) on page 55 for the elements of the New York segment’s EBITDA.
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, 2012 and 2011.
____________________
See notes on page 55.
53
Net Income and EBITDA by Segment for the Three Months Ended September 30, 2012 and 2011 - continued
54
Total retail properties
Net income attributable to noncontrolling interests in the Operating
Partnership, including unit distributions
56
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations and other gains and losses that affect comparability), from our New York, Washington, DC, Retail Properties and Merchandise Mart segments.
Region:
New York City metropolitan area
66%
64%
Washington, DC / Northern Virginia metropolitan area
25%
28%
Chicago
4%
3%
California
2%
Puerto Rico
Other geographies
1%
100%
57
Results of Operations – Three Months Ended September 30, 2012 Compared to September 30, 2011
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 $710,977,000 in the three months ended September 30, 2012, compared to $687,860,000 in the prior year’s quarter, an increase of $23,117,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions
3,910
2,507
1,403
Development (out of service)
(8,571)
(1,368)
(6,255)
(948)
(1,916)
Trade Shows
(1,509)
Amortization of acquired below-market
leases, net
(2,605)
(1,375)
(51)
(1,478)
299
Leasing activity (see page 49)
(1,360)
10,381
(10,591)
1,732
(2,122)
(760)
(12,051)
8,229
(15,494)
(694)
(3,631)
(461)
Tenant expense reimbursements:
Acquisitions/development
(6,604)
(2,926)
(588)
(3,090)
Operations
1,344
(1,035)
549
1,100
(480)
1,210
(5,260)
(3,961)
(39)
(1,990)
37,516
1,347
(302)
2,461
794
1,945
(19)
(356)
(4,521)
(3,462)
(874)
(188)
3,976
67
3,249
403
(62)
319
2,912
(1,556)
4,320
(86)
Total increase (decrease) in revenues
23,117
2,712
(11,213)
(2,488)
33,443
663
This increase in income is offset by an increase in development costs expensed in the quarter. See note (3) on page 59.
58
Results of Operations – Three Months Ended September 30, 2012 Compared to September 30, 2011 - continued
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $509,065,000 in the three months ended September 30, 2012, compared to $471,600,000 in the prior year’s quarter, an increase of $37,465,000. Below are the details of the increase (decrease) by segment:
Operating:
3,329
2,447
882
(4,117)
(1,414)
(2,211)
Non-reimbursable expenses, including
bad debt reserves
(4,167)
(2,183)
316
(996)
(1,304)
307
(119)
BMS expenses
1,295
5,122
4,745
1,508
(689)
(736)
294
6,168
1,292
(3,896)
(2,159)
245
Depreciation and amortization:
(2,415)
(183)
(687)
(1,545)
(185)
2,465
(1,834)
(667)
(203)
(2,600)
2,282
(2,521)
(2,212)
General and administrative:
Mark-to-market of deferred compensation
plan liability (1)
6,359
(3,738)
287
166
(5,086)
880
2,621
7,239
37,012
(1,218)
(1,558)
(35)
375
Total increase (decrease) in expenses
37,465
7,179
(1,063)
(6,128)
29,564
7,913
This increase in expense is entirely offset by a corresponding increase 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 lower payroll costs due to a reduction in workforce.
This increase in expense is offset by the increase in development revenue in the quarter. See note (1) on page 58.
59
Loss Applicable to Toys
In the three months ended September 30, 2012, we recognized a net loss of $8,585,000 from our investment in Toys, comprised of $10,956,000 for our 32.5% share of Toys’ net loss ($22,074,000 before our share of Toys’ income tax benefit) and $2,371,000 of management fees. In the three months ended September 30, 2011, we recognized a net loss of $9,304,000 from our investment in Toys, comprised of $11,638,000 for our 32.7% share of Toys’ net loss ($26,773,000 before our share of Toys’ income tax benefit) and $2,334,000 of management fees.
Income from Partially Owned Entities
Summarized below are the components of income (loss) from partially owned entities for the three months ended September 30, 2012 and 2011.
Equity in Net Income (Loss):
26.2%
55.0%
666 Fifth Avenue Office Condominium (acquired in
December 2011)
49.5%
25.0%
30.3%
West 57th Street Properties
50.0%
20.0%
Independence Plaza Partnership (mezzanine position)
51.0%
In the third quarter of 2012, we converted our 2,015,151 units in Verde Realty Operating Partnership into 2,015,151 common shares of Verde Realty ("Verde"). Pursuant to a merger agreement which was approved by Verde shareholders on September 14, 2012, we accepted an offer to receive cash of $13.85 per share, or $27,910 in the aggregate; accordingly, we recognized a $4,936 impairment loss in the third quarter.
60
Below are the components of the income from our Real Estate Fund for the three months ended September 30, 2012 and 2011.
Operating loss
Excludes management, leasing and development fees of $681 and $638 for the three months ended September 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and Other Investment Income (Loss), net
Interest and other investment income (loss), net (comprised primarily of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable and other interest and dividend income) was income of $10,523,000 in the three months ended September 30, 2012, compared to a loss of $30,011,000 in the prior year’s quarter, an increase of $40,534,000. This increase resulted from:
J.C. Penney derivative position ($4,344 mark-to-market gain in the current year's quarter, compared to
$37,537 mark-to-market loss in the prior year's quarter)
41,881
Dividends and interest on marketable securities in the prior year's quarter
(7,605)
Increase in the value of investments in our deferred compensation plan (offset by a corresponding
increase in the liability for plan assets in general and administrative expenses)
(101)
40,534
Interest and Debt Expense
Interest and debt expense was $120,770,000 in the three months ended September 30, 2012, compared to $131,998,000 in the prior year’s quarter, a decrease of $11,228,000. This decrease was primarily due to (i) $9,082,000 from the redemption of our exchangeable and convertible senior debentures in April 2012 and November 2011, respectively, (ii) $7,523,000 of capitalized interest in the current period, and (iii) $3,212,000 from the refinancing of 350 Park Avenue in January 2012 (of which $1,860,000 was due to a lower rate and $1,352,000 was due to a lower outstanding loan balance), partially offset by (iv) $5,045,000 from the issuance of $400,000,000 of senior unsecured notes in November 2011, and (v) $1,849,000 from the refinancing of 100 West 33rd Street in March 2012.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets
Net gain on disposition of wholly owned and partially owned assets was $1,298,000 in the three months ended September 30, 2011 and resulted primarily from the sale of residential condominiums.
Income Tax Expense
Income tax expense was $3,015,000 in the three months ended September 30, 2012, compared to $6,959,000 in the prior year’s quarter, a decrease of $3,944,000. This decrease resulted primarily from the true-up of estimated tax liabilities of our taxable REIT subsidiaries.
61
Income from Discontinued Operations
We have reclassified the revenues and expenses of the properties that were sold and that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements. The table below sets forth the combined results of assets related to discontinued operations for the three months ended September 30, 2012 and 2011.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $6,610,000 in the three months ended September 30, 2012, compared to $5,636,000 in the prior year’s quarter, an increase of $974,000. This increase resulted primarily from higher income allocated to the noncontrolling interests of our Real Estate Fund.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership, including Unit Distributions
Net income attributable to noncontrolling interests in the Operating Partnership, including unit distributions for the three months ended September 30, 2012 and 2011 is primarily comprised of allocations of income to redeemable noncontrolling interests of $14,837,000 and $2,797,000, respectively, and preferred unit distributions of the Operating Partnership of $1,403,000 and $4,028,000, respectively. The increase of $12,040,000 in allocations of income to redeemable noncontrolling interests resulted primarily from higher net income subject to allocation to unitholders. The decrease of $2,625,000 in preferred unit distributions of the Operating Partnership resulted from the redemption of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units in July 2012.
Preferred Share Dividends
Preferred share dividends were $20,613,000 in the three months ended September 30, 2012, compared to $17,627,000 in the prior year’s quarter, an increase of $2,986,000. This increase resulted from the issuance of $300,000,000 of 5.70% Series K cumulative redeemable preferred shares in July 2012, partially offset by redemption of $75,000,000 of 7.0% Series E cumulative redeemable preferred shares in August 2012.
Discount on Preferred Unit Redemption
In the three months ended September 30, 2012, we recognized a $11,700,000 discount from the redemption of all of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units, compared to a $5,000,000 discount in the prior year’s quarter from the redemption of Series D-11 cumulative redeemable preferred units.
62
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, 2012, compared to the three months ended September 30, 2011.
EBITDA for the three months ended September 30, 2012
Add-back: non-property level overhead
expenses included above
Less: EBITDA from acquisitions, dispositions
and other non-operating income or expenses
(13,236)
(128,541)
(17,346)
GAAP basis same store EBITDA for the three months
ended September 30, 2012
200,166
95,694
62,262
16,857
Less: Adjustments for straight-line rents,
amortization of below-market leases, net, and other
non-cash adjustments
(20,611)
(1,943)
(3,830)
171
Cash basis same store EBITDA for the three months
179,555
93,751
58,432
17,028
EBITDA for the three months ended September 30, 2011
(10,107)
(10,310)
(12,250)
(7,648)
ended September 30, 2011
199,628
102,799
62,177
17,006
(21,353)
454
(5,163)
501
178,275
103,253
57,014
17,507
Increase (decrease) in GAAP basis same store EBITDA for
the three months ended September 30, 2012 over the
three months ended September 30, 2011
538
(7,105)
Increase (decrease) in Cash basis same store EBITDA for
1,280
(9,502)
1,418
(479)
% increase (decrease) in GAAP basis same store EBITDA
% increase (decrease) in Cash basis same store EBITDA
Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2012 and 2011
Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment). Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation. See note (4) on page 66 for the elements of the New York segment’s EBITDA.
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, 2012 and 2011.
See notes on page 66.
64
Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2012 and 2011 - continued
___________________________
65
66
65%
63%
26%
29%
Results of Operations – Nine Months Ended September 30, 2012 Compared to September 30, 2011
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 $2,078,487,000 for the nine months ended September 30, 2012, compared to $2,050,828,000 in the prior year’s nine months, an increase of $27,659,000. Below are the details of the increase (decrease) by segment:
6,947
4,440
(21,774)
(4,528)
(16,385)
(861)
313
(5,059)
(9,453)
(9,397)
(904)
908
327
29,107
(25,985)
4,016
(3,953)
(2,858)
(28,699)
18,002
(37,990)
2,251
(9,012)
(1,950)
(9,182)
(3,923)
1,243
(3,815)
(2,687)
(4,476)
(3,137)
1,986
(3,196)
(1,286)
1,157
(13,658)
(7,060)
3,229
(7,011)
(1,530)
75,811
2,958
3,563
(605)
(494)
(126)
477
153
(428)
(160)
(168)
(11,306)
(8,842)
(2,757)
(215)
3,173
3,530
189
(570)
(34)
(5,795)
(5,238)
926
(454)
(222)
(807)
27,659
5,704
(33,835)
(5,214)
65,291
This increase in income is offset by an increase in development costs expensed in the period. See note (4) on page 70.
69
Results of Operations – Nine Months Ended September 30, 2012 Compared to September 30, 2011 - continued
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $1,483,575,000 for the nine months ended September 30, 2012, compared to $1,425,162,000 in the prior year’s nine months, an increase of $58,413,000. Below are the details of the increase (decrease) by segment:
2,567
2,607
2,647
(6,226)
(3,458)
(2,376)
(13,287)
(4,052)
(2,943)
(6,232)
1,735
(4,024)
2,418
3,023
7,504
9,470
2,583
(3,060)
(1,025)
(464)
(9,313)
12,391
1,712
(8,379)
(11,281)
(3,756)
13,542
(891)
15,162
(729)
4,251
(4,707)
730
(309)
13,594
3,360
10,455
(642)
plan liability(1)
3,765
(3,531)
1,571
353
(1,243)
(7,782)
3,570
(3,217)
3,884
75,490
(18,141)
(16,558)
(3,040)
58,413
764
12,520
(10,299)
54,117
1,311
Primarily from higher payroll costs and stock based compensation.
This increase in expense is offset by the increase in development revenue in the period. See note (1) on page 69.
Represents the buy-out of below-market leases in the prior year.
70
Income Applicable to Toys
In the nine months ended September 30, 2012, we recognized net income of $88,696,000 from our investment in Toys, comprised of $81,667,000 for our 32.5% share of Toys’ net income ($99,649,000 before our share of Toys’ income tax expense) and $7,029,000 of management fees. In the nine months ended September 30, 2011, we recognized net income of $80,794,000 from our investment in Toys, comprised of $74,135,000 for our 32.7% share of Toys’ net income ($104,049,000 before our share of Toys’ income tax expense) and $6,659,000 of management fees.
Summarized below are the components of income (loss) from partially owned entities for the nine months ended September 30, 2012 and 2011.
Lexington(1)
LNR (2)
Warner Building(3)
(acquired in June 2011)
2011 includes a $9,760 net gain resulting from Lexington's stock issuance.
2011 includes $8,977 for our share of a tax settlement gain and $6,020 of net gains from asset sales.
2011 includes $9,022 for our share of expense, primarily for straight-line reserves and the write-off of tenant improvements in connection with a tenant's bankruptcy at the Warner Building.
Below are the components of the income from our Real Estate Fund for the nine months ended September 30, 2012 and 2011.
Excludes management, leasing and development fees of $2,025 and $1,803 for the nine months ended September 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and other investment income (loss), net (comprised primarily of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable and other interest and dividend income) was a loss of $22,984,000 in the nine months ended September 30, 2012, compared to income of $95,086,000 in the prior year’s nine months, a decrease in income of $118,070,000. This decrease resulted from:
Mezzanine loan loss reversal and net gain on disposition in 2011
J.C. Penney derivative position ($53,343 mark-to-market loss in 2012, compared to a $27,136
mark-to-market loss in 2011)
(26,207)
Lower dividends and interest on marketable securities
(11,848)
(1,036)
(118,070)
Interest and debt expense was $377,600,000 in the nine months ended September 30, 2012, compared to $394,192,000 in the prior year’s nine months, a decrease of $16,592,000. This decrease was primarily due to (i) $19,175,000 from the redemption of our exchangeable and convertible senior debentures in April 2012 and November 2011, respectively, (ii) $8,871,000 from the refinancing of 350 Park Avenue in January 2012 (of which $5,414,000 was due to a lower rate and $3,457,000 was due to a lower outstanding loan balance), and (iii) $7,884,000 of capitalized interest, partially offset by (iv) $15,136,000 from the issuance of $400,000,000 of senior unsecured notes in November 2011 and (v) $4,331,000 from the refinancing of 100 West 33rd Street in March 2012.
Net gain on disposition of wholly owned and partially owned assets was $4,856,000 in the nine months ended September 30, 2012, compared to $7,975,000, in the prior year’s nine months and resulted primarily from the sale of marketable securities and residential condominiums.
Income tax expense was $17,319,000 in the nine months ended September 30, 2012, compared to $18,548,000 in the prior year’s nine months, a decrease of $1,229,000. This decrease resulted primarily from the true-up of estimated tax liabilities of our taxable REIT subsidiaries.
72
We have reclassified the revenues and expenses of the properties that were sold and that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements. The table below sets forth the combined results of assets related to discontinued operations for the nine months ended September 30, 2012 and 2011.
Net income attributable to noncontrolling interests in consolidated subsidiaries was $30,928,000 in the nine months ended September 30, 2012, compared to $20,643,000 in the prior year’s nine months, an increase of $10,285,000. This increase resulted primarily from a $9,323,000 increase in income allocated to the noncontrolling interests of our Real Estate Fund.
Net income attributable to noncontrolling interests in the Operating Partnership, including unit distributions for the nine months ended September 30, 2012 and 2011 is primarily comprised of allocations of income to redeemable noncontrolling interests of $31,445,000 and $36,385,000, respectively, and preferred unit distributions of the Operating Partnership of $9,150,000 and $10,979,000, respectively. The decrease of $4,940,000 in allocations of income to redeemable noncontrolling interests resulted primarily from lower net income subject to allocation to unitholders. The decrease of $1,829,000 in preferred unit distributions of the Operating Partnership resulted from the redemption of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units in July 2012.
Preferred share dividends were $56,187,000 in the nine months ended September 30, 2012, compared to $47,743,000 in the prior year’s nine months, an increase of $8,444,000. This increase resulted from the issuance of $246,000,000 of 6.875% Series J cumulative redeemable preferred shares in April 2011 and $300,000,000 of 5.70% of Series K cumulative redeemable preferred shares in July 2012, partially offset by the redemption of $75,000,000 of 7.0% Series E cumulative redeemable preferred shares in August 2012.
In the nine months ended September 30, 2012, we recognized a $11,700,000 discount from the redemption of all of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units, compared to a $5,000,000 discount in the prior year’s nine months from the redemption of Series D-11 cumulative redeemable preferred units.
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, 2012, compared to the nine months ended September 30, 2011.
EBITDA for the nine months ended September 30, 2012
(39,254)
(140,744)
(54,537)
(86,904)
GAAP basis same store EBITDA for the nine months
592,762
293,496
184,866
61,459
(73,249)
(4,754)
(11,259)
(580)
Cash basis same store EBITDA for the nine months
519,513
288,742
173,607
60,879
EBITDA for the nine months ended September 30, 2011
(20,536)
(78,976)
(42,603)
(108,006)
579,315
315,457
185,939
59,783
(67,404)
(8,332)
(11,426)
1,261
511,911
307,125
174,513
61,044
the nine months ended September 30, 2012 over the
nine months ended September 30, 2011
13,447
(21,961)
(1,073)
1,676
7,602
(18,383)
(906)
SUPPLEMENTAL INFORMATION
Reconciliation of EBITDA to Same Store EBITDA - Three Months Ended September 30, 2012 vs. June 30, 2012
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, 2012, compared to the three months ended June 30, 2012.
Add-back: non-property level overhead expenses
included above
(9,119)
204,283
Less: Adjustments for straight-line rents, amortization of
below-market leases, net, and other non-cash adjustments
(24,728)
EBITDA for the three months ended June 30, 2012(1)
210,421
96,312
76,352
10,939
6,654
6,231
6,367
4,848
(8,239)
(4,743)
(20,543)
6,448
ended June 30, 2012
208,836
97,800
62,176
22,235
(30,345)
(1,883)
(4,313)
(83)
178,491
95,917
57,863
22,152
(Decrease) increase in GAAP basis same store EBITDA for
three months ended June 30, 2012
(4,553)
(2,106)
(5,378)
1,064
(2,166)
569
(5,124)
% (decrease) increase in GAAP basis same store EBITDA
Below is the reconciliation of net income to EBITDA for the three months ended June 30, 2012.
Net income attributable to Vornado for the three months
99,231
23,073
34,119
(8,888)
46,413
32,549
20,102
8,786
63,664
39,656
22,131
9,826
1,113
1,034
1,215
EBITDA for the three months ended June 30, 2012
75
Related Party Transactions
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. Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, dividends to shareholders, distributions to unitholders of the Operating Partnership, as well as acquisition and development costs. 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.
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. Capital requirements for development expenditures and acquisitions (excluding Fund acquisitions) may require funding from borrowings and/or equity offerings. Our Real Estate Fund has aggregate unfunded commitments of $314,371,000 for acquisitions, including $78,592,750 from us.
We may from time to time purchase or retire outstanding debt securities or redeem our equity 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.
Details of our 2012 Investing and Financing Activities are provided in the “Overview” of Management’s Discussion and Analysis of Financial Condition on page 45.
Cash Flows for the Nine Months Ended September 30, 2012
Our cash and cash equivalents were $465,884,000 at September 30, 2012, a $140,669,000 decrease over the balance at December 31, 2011. Our consolidated outstanding debt was $9,810,578,000 at September 30, 2012, a $258,725,000 decrease over the balance at December 31, 2011. As of September 30, 2012 and December 31, 2011, $600,000,000 and $138,000,000, respectively, was outstanding under our revolving credit facilities. During the remainder of 2012 and 2013, $19,427,000 and $1,130,353,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it using a portion of our $2,365,884,000 of available capacity (comprised of $465,884,000 of cash and cash equivalents and $1,900,000,000 of availability under our revolving credit facilities).
Cash flows provided by operating activities of $510,646,000 was comprised of (i) net income of $602,648,000, (ii) return of capital from Real Estate Fund investments of $61,052,000, (iii) distributions of income from partially owned entities of $59,322,000, and (iv) $14,489,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities and net gains on sale of real estate, partially offset by (v) the net change in operating assets and liabilities of $226,865,000, including $163,307,000 related to Real Estate Fund investments.
Net cash provided by investing activities of $34,012,000 was comprised of (i) $408,856,000 of proceeds from sales of real estate and related investments, (ii) $89,850,000 from the return of the J.C. Penney derivative collateral, (iii) $58,460,000 of proceeds from the sale of marketable securities, (iv) $52,504,000 of proceeds from the sale of the Canadian Trade Shows, (v) $26,665,000 of capital distributions from partially owned entities, (vi) $13,123,000 of proceeds from the repayment of loan to officer, and (vii) $2,379,000 of proceeds from repayments of mezzanine loans, partially offset by (viii) $138,060,000 of additions to real estate, (ix) $121,117,000 for the funding of the J.C. Penney derivative collateral, (x) $116,264,000 of investments in partially owned entities, (xi) $106,502,000 of development costs and construction in progress, (xii) $73,069,000 of acquisitions of real estate and other, and (xiii) $62,813,000 of changes in restricted cash.
Net cash used in financing activities of $685,327,000 was comprised of (i) $2,070,295,000 for the repayments of borrowings, (ii) $384,353,000 of dividends paid on common shares, (iii) $243,300,000 for purchases of outstanding preferred units and shares, (iv) $80,994,000 of distributions to noncontrolling interests, (v) $54,034,000 of dividends paid on preferred shares, (vi) $30,034,000 for the repurchase of shares related to stock compensation agreements and related tax holdings, and (vii) $17,417,000 of debt issuance and other costs, partially offset by (viii) $1,773,000,000 of proceeds from borrowings, (ix) $291,144,000 of proceeds from the issuance of preferred shares, (x) $120,746,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (xi) $10,210,000 of proceeds from exercise of employee share options.
76
Liquidity and Capital Resources – continued
Capital Expenditures in the nine months ended September 30, 2012
Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions. Recurring capital expenditures 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 expenditures include expenditures to lease space that has been vacant for more than nine months and 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. Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the nine months ended September 30, 2012.
Expenditures to maintain assets
37,829
17,925
10,758
2,497
3,140
3,509
Tenant improvements
150,099
55,628
41,874
6,682
45,915
Leasing commissions
48,900
21,536
10,607
1,971
14,786
Non-recurring capital expenditures
5,227
4,240
987
Total capital expenditures and leasing
commissions (accrual basis)
242,055
99,329
63,239
11,150
63,841
4,496
Adjustments to reconcile to cash basis:
Expenditures in the current year
applicable to prior periods
74,087
35,008
11,811
6,868
15,905
4,495
Expenditures to be made in future
periods for the current period
(157,152)
(66,954)
(38,221)
(5,731)
(46,246)
commissions (cash basis)
158,990
67,383
36,829
12,287
33,500
8,991
Tenant improvements and leasing commissions:
Per square foot per annum
4.62
5.43
1.05
5.72 (1)
11.0%
8.5%
5.4%
Development and Redevelopment Expenditures in the nine months ended September 30, 2012
Development and redevelopment expenditures consist of 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 completed and ready for its intended use. Below is a summary of development and redevelopment expenditures incurred in the nine months ended September 30, 2012.
Crystal Square 5
12,773
11,613
510 Fifth Avenue
10,203
9,881
Springfield Mall
8,801
Marriott Marquis Times Square - retail
and signage
5,970
5,539
Amherst, New York
3,439
1851 South Bell Street (1900 Crystal Drive)
2,840
Crystal Plaza 5
2,021
Poughkeepsie, New York
1,529
Crystal City Hotel
1,479
Green Acres Mall
1,205
29,209
9,581
6,216
5,540
7,852
106,502
37,367
25,329
35,934
As of September 30, 2012, the estimated costs to complete the above projects are approximately $707,000,000. In addition, we plan to redevelop our 220 Central Park South property into a new residential tower. The estimated cost of this project is approximately $425,000,000, which is expected to be substantially funded by project financing. There can be no assurance that these projects will commence, or, if commenced, be completed on schedule or within budget.
77
Cash Flows for the Nine Months Ended September 30, 2011
Our cash and cash equivalents were $585,183,000 at September 30, 2011, a $105,606,000 decrease over the balance at December 31, 2010. This decrease was primarily due to cash flows from financing activities, partially offset by cash flows from operating activities, as discussed below.
Cash flows provided by operating activities of $566,671,000 was comprised of (i) net income of $643,013,000 and (ii) distributions of income from partially owned entities of $75,612,000, partially offset by (iii) $7,148,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income and equity in net income of partially owned entities, and (iv) the net change in operating assets and liabilities of $144,806,000, including $97,785,000 related to Real Estate Fund investments.
Net cash used in investing activities of $1,675,000 was comprised of (i) $440,865,000 of investments in partially owned entities, (ii) $109,963,000 of additions to real estate, (iii) $52,816,000 of development costs and construction in progress, (iv) $44,215,000 of investments in mezzanine loans receivable and other, and (v) $33,850,000 for the funding of J.C. Penney derivative collateral, partially offset by (vi) $274,283,000 of capital distributions from partially owned entities, (vii) $135,762,000 of proceeds from sales of real estate and related investments, (viii) changes in restricted cash of $121,463,000, (ix) $100,525,000 of proceeds from sales and repayments of mezzanine loans, (x) $28,700,000 from the return of the J.C. Penney derivative collateral and (xi) $19,301,000 of proceeds from sales of marketable securities.
Net cash used in financing activities of $670,602,000 was comprised of (i) $2,666,610,000 for the repayments of borrowings, (ii) $381,382,000 of dividends paid on common shares, (iii) $77,330,000 of distributions to noncontrolling interests, (iv) $43,675,000 of dividends paid on preferred shares, (v) $28,614,000 of debt issuance and other costs, (vi) $28,000,000 for the purchase of outstanding preferred units and shares, and (vii) $747,000 for the repurchase of shares related to stock compensation agreements and related tax holdings, partially offset by (viii) $2,184,167,000 of proceeds from borrowings, (ix) $239,037,000 of proceeds from the issuance of Series J preferred shares, (x) $109,605,000 of contributions from noncontrolling interests and (xi) $22,947,000 of proceeds received from exercise of employee share options.
Capital Expenditures in the nine months ended September 30, 2011
31,347
12,355
8,760
4,168
3,495
2,569
82,537
48,105
18,671
4,734
10,705
23,762
16,567
4,182
1,315
1,575
123
17,044
15,195
1,849
154,690
92,222
31,613
10,217
15,775
4,863
69,717
32,564
11,363
8,268
11,993
5,529
(97,374)
(59,499)
(17,794)
(5,726)
(9,711)
(4,644)
127,033
65,287
25,182
12,759
18,057
5,748
3.59
5.16
4.38
0.65
3.53
8.6%
10.9%
10.6%
Development and Redevelopment Expenditures in the nine months ended September 30, 2011
17,145
3,443
2,367
1,897
North Bergen, New Jersey
1,746
1,556
Crystal Square
1,346
936
20,878
4,203
7,249
3,890
412
5,124
52,816
6,570
13,550
27,160
80
81
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 gain from sales of depreciated real estate assets, real estate impairment losses, 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 over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flows 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 18 – Income per Share, in the notes to our consolidated financial statements on page 31 of this Quarterly Report on Form 10-Q.
FFO for the Three and Nine Months Ended September 30, 2012 and 2011
FFO attributable to common shareholders plus assumed conversions was $251,019,000, or $1.34 per diluted share for the three months ended September 30, 2012, compared to $195,125,000, or $1.05 per diluted share, for the prior year’s quarter. FFO attributable to common shareholders plus assumed conversions was $767,347,000, or $4.07 per diluted share for the nine months ended September 30, 2012, compared to $951,054,000, or $4.96 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 Months
For The Nine Months
Reconciliation of our net income to FFO:
Depreciation and amortization of real property
118,717
128,811
377,338
377,458
(131,088)
Real estate impairment losses
Proportionate share of adjustments to equity in net income
of Toys, to arrive at FFO:
16,905
17,947
50,706
52,844
(491)
8,394
Income tax effect of above adjustments
(5,917)
(6,280)
(20,765)
(18,320)
Proportionate share of adjustments to equity in net income of
partially owned entities, excluding Toys, to arrive at FFO:
22,750
27,541
65,810
73,743
(3,591)
(7,360)
(1,613)
(10,468)
(18,197)
(27,224)
FFO
259,904
207,722
803,919
974,033
FFO attributable to common shareholders
250,991
195,095
759,432
931,290
Interest on 3.88% exchangeable senior debentures
7,830
19,670
FFO attributable to common shareholders plus assumed conversions
251,019
195,125
767,347
951,054
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
3.88% exchangeable senior debentures
2,279
5,736
Denominator for FFO per diluted share
186,119
188,678
191,775
4.07
4.96
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:
Weighted
Effect of 1%
Average
Change In
Consolidated debt:
Balance
Interest Rate
Base Rates
Variable rate
2,221,239
2.21%
22,212
1,881,948
2.35%
Fixed rate
7,589,339
5.45%
8,187,355
5.55%
4.72%
4.95%
Pro-rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys
368,747
2.66%
3,687
284,372
2.85%
Variable rate – Toys
638,646
5.95%
6,386
706,301
4.83%
Fixed rate (including $1,124,610 and
$1,270,029 of Toys debt in 2012 and 2011)
3,041,715
6.97%
3,208,472
6.96%
4,049,108
6.42%
10,073
4,199,145
6.32%
Noncontrolling interests’ share of above
(2,002)
Total change in annual net income
30,283
Per share-diluted
0.16
Excludes $21.6 billion for our 26.2% 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.
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, 2012, we have one interest rate cap with a principal amount of $60,000,000 and an interest rate of 2.36%. This cap is based on a notional amount of $60,000,000 and caps LIBOR at a rate of 7.00%. In addition, we have one interest rate swap on a $425,000,000 mortgage loan that swapped the rate from LIBOR plus 2.00% (2.21% at September 30, 2012) to a fixed rate of 5.13% for the remaining seven-year term of the loan.
As of September 30, 2012, we have investments in mezzanine loans with an aggregate carrying amount of $54,793,000 that are based on variable interest rates which partially mitigate our exposure to a change in interest rates on our variable rate debt.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt. As of September 30, 2012, the estimated fair value of our consolidated debt was $9,976,000,000.
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, 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 investment income or expense in any given period. In the three and nine months ended September 30, 2012, we recognized income of $4,344,000 and a loss of $53,343,000 from derivative instruments, compared to losses of $37,537,000 and $27,136,000, respectively, for the three and nine months ended September 30, 2011.
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, 2012, 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, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of 2012, we issued 4,436 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, 2011, and such information is incorporated by reference herein.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On October 30, 2012, Mr. Anthony W. Deering resigned from our Board of Trustees for personal reasons, effective as of December 31, 2012. Mr. Deering stated that he had no disagreements with Vornado, its Board of Trustees or its management.
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.
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 1, 2012
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 No.
3.3
Articles Supplementary, 5.70% Series K Cumulative Redeemable Preferred Shares of
*
Beneficial Interest, liquidation preference $25.00 per share, no par value – Incorporated by
reference to Exhibit 3.5 to Vornado Realty Trust’s Registration Statement on Form 8-A
(File No. 001-11954), filed on July 18, 2012
3.48
Forty-Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership,
dated as of July 18, 2012 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s
Current Report on Form 8-K (File No. 001-34482), filed on July 18, 2012
15.1
Letter regarding Unaudited Interim Financial
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
______________________________
Incorporated by reference