UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
June 30, 2014
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 June 30, 2014, 187,664,768 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
June 30, 2014 and December 31, 2013
3
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2014 and 2013
4
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three and Six Months Ended June 30, 2014 and 2013
5
Consolidated Statements of Changes in Equity (Unaudited) for the
Six Months Ended June 30, 2014 and 2013
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
33
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
34
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
73
Item 4.
Controls and Procedures
74
PART II.
Other Information:
Legal Proceedings
75
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
76
EXHIBIT INDEX
77
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
June 30,
December 31,
ASSETS
2014
2013
Real estate, at cost:
Land
$
4,051,053
4,068,306
Buildings and improvements
12,519,973
12,475,556
Development costs and construction in progress
1,550,084
1,353,121
Leasehold improvements and equipment
132,485
132,483
Total
18,253,595
18,029,466
Less accumulated depreciation and amortization
(3,527,372)
(3,381,457)
Real estate, net
14,726,223
14,648,009
Cash and cash equivalents
1,371,226
583,290
Restricted cash
160,353
262,440
Marketable securities
206,917
191,917
Tenant and other receivables, net of allowance for doubtful accounts of $21,521 and $21,869
118,217
115,862
Investments in partially owned entities
1,267,370
1,166,443
Investment in Toys "R" Us
26,309
83,224
Real Estate Fund investments
549,091
667,710
Mortgage and mezzanine loans receivable, net of allowance of $5,811 and $5,845
17,417
170,972
Receivable arising from the straight-lining of rents, net of allowance of $3,375 and $4,355
850,278
817,357
Deferred leasing and financing costs, net of accumulated amortization of $286,668 and $264,451
467,455
411,927
Identified intangible assets, net of accumulated amortization of $233,449 and $277,998
289,475
311,963
Assets related to discontinued operations
208,309
314,622
Other assets
478,139
351,488
20,736,779
20,097,224
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable
8,988,843
8,331,993
Senior unsecured notes
1,791,814
1,350,855
Revolving credit facility debt
88,138
295,870
Accounts payable and accrued expenses
452,641
422,276
Deferred revenue
501,384
529,048
Deferred compensation plan
111,858
116,515
Liabilities related to discontinued operations
-
13,950
Other liabilities
382,789
438,353
Total liabilities
12,317,467
11,498,860
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 11,430,318 and 11,292,038 units outstanding
1,219,958
1,002,620
Series D cumulative redeemable preferred unit - 1 unit outstanding
1,000
Total redeemable noncontrolling interests
1,220,958
1,003,620
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 52,678,939 and 52,682,807 shares
1,277,026
1,277,225
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 187,664,768 and 187,284,688 shares
7,484
7,469
Additional capital
6,949,663
7,143,840
Earnings less than distributions
(1,872,250)
(1,734,839)
Accumulated other comprehensive income
92,221
71,537
Total Vornado shareholders' equity
6,454,144
6,765,232
Noncontrolling interests in consolidated subsidiaries
744,210
829,512
Total equity
7,198,354
7,594,744
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
For the Three
For the Six
Months Ended June 30,
(Amounts in thousands, except per share amounts)
REVENUES:
Property rentals
540,124
534,074
1,068,224
1,067,867
Tenant expense reimbursements
76,202
72,291
162,792
148,255
Cleveland Medical Mart development project
16,990
29,133
Fee and other income
50,280
47,861
96,208
144,674
Total revenues
666,606
671,216
1,327,224
1,389,929
EXPENSES:
Operating
261,453
259,168
534,844
524,915
Depreciation and amortization
129,025
133,180
276,676
272,497
General and administrative
44,568
50,305
96,726
101,685
15,151
26,525
Impairment losses, acquisition and transaction related costs
4,083
3,350
25,867
3,951
Total expenses
439,129
461,154
934,113
929,573
Operating income
227,477
210,062
393,111
460,356
(Loss) applicable to Toys "R" Us
(57,591)
(36,861)
(55,744)
(35,102)
Income from partially owned entities
3,849
1,472
3,981
22,238
Income from Real Estate Fund
100,110
34,470
118,258
51,034
Interest and other investment income (loss), net
9,435
26,415
21,328
(22,660)
Interest and debt expense
(117,051)
(120,657)
(226,493)
(241,003)
Net gain (loss) on disposition of wholly owned and partially
owned assets
905
1,005
10,540
(35,719)
Income before income taxes
167,134
115,906
264,981
199,144
Income tax expense
(3,599)
(2,877)
(5,181)
(3,950)
Income from continuing operations
163,535
113,029
259,800
195,194
Income from discontinued operations
2,152
69,292
4,043
276,054
Net income
165,687
182,321
263,843
471,248
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(63,975)
(14,930)
(75,554)
(26,216)
Operating Partnership
(4,691)
(8,849)
(8,539)
(22,782)
Preferred unit distributions of the Operating Partnership
(13)
(348)
(25)
(1,134)
Net income attributable to Vornado
97,008
158,194
179,725
421,116
Preferred share dividends
(20,366)
(20,368)
(40,734)
(42,070)
Preferred unit and share redemptions
8,100
(1,130)
NET INCOME attributable to common shareholders
76,642
145,926
138,991
377,916
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.40
0.43
0.72
0.63
Income from discontinued operations, net
0.01
0.35
0.02
1.39
Net income per common share
0.41
0.78
0.74
2.02
Weighted average shares outstanding
187,527
186,931
187,418
186,842
INCOME PER COMMON SHARE - DILUTED:
0.62
2.01
188,617
187,720
188,431
187,627
DIVIDENDS PER COMMON SHARE
0.73
1.46
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Change in unrealized net gain on available-for-sale securities
1,878
20,348
15,003
169,138
Pro rata share of other comprehensive income (loss) of
nonconsolidated subsidiaries
14,163
(19,707)
5,877
(23,354)
Change in value of interest rate swap
(545)
12,037
1,065
14,560
Other
(2)
(3)
(1)
530
Comprehensive income
181,181
194,996
285,787
632,122
Less comprehensive income attributable to noncontrolling interests
(69,578)
(24,862)
(85,378)
(59,166)
Comprehensive income attributable to Vornado
111,603
170,134
200,409
572,956
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Non-
Accumulated
controlling
Earnings
Interests in
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
Consolidated
Shares
Amount
Capital
Distributions
Income (Loss)
Subsidiaries
Equity
Balance, December 31, 2012
51,185
1,240,278
186,735
7,440
7,195,438
(1,573,275)
(18,946)
1,053,209
7,904,144
Net income attributable to
noncontrolling interests in
consolidated subsidiaries
26,216
Dividends on common shares
(272,825)
Dividends on preferred shares
Issuance of Series L preferred shares
12,000
290,536
Redemption of Series F and Series H
preferred shares
(10,500)
(253,269)
Common shares issued:
Upon redemption of Class A
units, at redemption value
180
7
14,973
14,980
Under employees' share
option plan
62
3,564
3,567
Under dividend reinvestment plan
11
903
Contributions:
Real Estate Fund
18,781
15,186
Distributions:
(43,145)
(120,051)
Conversion of Series A preferred
shares to common shares
(90)
90
Deferred compensation shares
and options
4,786
(305)
4,481
Change in unrealized net gain
on available-for-sale securities
Pro rata share of other
comprehensive loss of
Adjustments to carry redeemable
Class A units at redemption value
(29,393)
Redeemable noncontrolling interests'
share of above adjustments
(9,034)
Deconsolidation of partially
owned entity
(165,427)
(3,154)
(34)
(2,683)
Balance, June 30, 2013
52,683
1,277,455
186,991
7,450
7,190,336
(1,471,643)
132,894
784,735
7,921,227
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - CONTINUED
Balance, December 31, 2013
187,285
75,554
(273,694)
199
19,763
19,771
159
9,200
9,206
9
919
5,297
(132,819)
(301)
Transfer of noncontrolling interest
in Real Estate Fund
(33,028)
(4)
(193)
193
1
3,383
(340)
3,044
Change in unrealized net gain on
available-for-sale securities
comprehensive income of
(227,338)
(1,260)
(6)
(297)
(2,368)
(5)
(2,677)
Balance, June 30, 2014
52,679
187,665
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six 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)
288,187
289,643
Return of capital from Real Estate Fund investments
140,920
56,664
Net realized and unrealized gains on Real Estate Fund investments
(111,227)
(47,109)
Equity in net loss of partially owned entities, including Toys “R” Us
51,763
12,864
Straight-lining of rental income
(33,413)
(32,730)
Distributions of income from partially owned entities
25,784
23,774
Amortization of below-market leases, net
(22,624)
(28,511)
Impairment losses
20,842
4,007
Other non-cash adjustments
20,546
42,339
Net (gain) loss on disposition of wholly owned and partially owned assets
(10,540)
35,719
Defeasance cost in connection with the refinancing of mortgage notes payable
5,589
Net gains on sale of real estate
(267,994)
Non-cash impairment loss on J.C. Penney common shares
39,487
Loss from the mark-to-market of J.C. Penney derivative position
13,475
Changes in operating assets and liabilities:
(2,666)
(30,893)
Accounts receivable, net
(2,355)
53,821
Prepaid assets
(138,884)
(104,149)
(43,842)
(35,570)
2,157
(50,690)
(6,437)
(595)
Net cash provided by operating activities
447,643
444,800
Cash Flows from Investing Activities:
(214,615)
(85,550)
Proceeds from sales of real estate and related investments
125,037
648,167
Additions to real estate
(105,116)
(113,060)
102,087
16,596
Proceeds from repayments of mortgage and mezzanine loans receivable and other
96,159
47,950
(62,894)
(59,472)
Acquisitions of real estate and other
(8,963)
(53,992)
Distributions of capital from partially owned entities
1,791
281,991
Proceeds from the sale of LNR
240,474
Proceeds from sales of marketable securities
160,715
Funding of J.C. Penney derivative collateral
(98,447)
Return of J.C. Penney derivative collateral
85,450
Investment in mortgage and mezzanine loans receivable
(137)
Net cash (used in) provided by investing activities
(66,514)
1,070,685
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Proceeds from borrowings
1,398,285
1,583,357
Repayments of borrowings
(313,444)
(2,800,441)
Dividends paid on common shares
Purchase of marketable securities in connection with the defeasance of mortgage
notes payable
(198,884)
Distributions to noncontrolling interests
(149,944)
(181,510)
Dividends paid on preferred shares
(40,737)
(42,451)
Debt issuance costs
(29,560)
(9,520)
Proceeds received from exercise of employee share options
10,125
4,470
Contributions from noncontrolling interests
33,967
Repurchase of shares related to stock compensation agreements and/or related
tax withholdings
(637)
(332)
Purchases of outstanding preferred units and shares
(299,400)
Proceeds from the issuance of preferred shares
Net cash provided by (used in) financing activities
406,807
(1,694,149)
Net increase (decrease) in cash and cash equivalents
787,936
(178,664)
Cash and cash equivalents at beginning of period
960,319
Cash and cash equivalents at end of period
781,655
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $30,182 and $17,492
214,239
235,588
Cash payments for income taxes
6,726
4,732
Non-Cash Investing and Financing Activities:
Marketable securities transferred in connection with the defeasance of mortgage
198,884
Defeasance of mortgage notes payable
(193,406)
Elimination of a mortgage and mezzanine loan asset and liability
59,375
Transfer of interest in Real Estate Fund to an unconsolidated joint venture
(58,564)
Transfer of noncontrolling interest in Real Estate Fund
Decrease in assets and liabilities resulting from the deconsolidation of Independence Plaza:
(852,166)
Notes and mortgages payable
(322,903)
Cash restricted for like kind exchange of real estate
(155,810)
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”). Vornado is the sole general partner of, and owned approximately 94.0% of the common limited partnership interest in the Operating Partnership at June 30, 2014. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
On April 11, 2014, we announced a plan to spin off our shopping center business, consisting of 80 strip centers, four malls and a warehouse park adjacent to our East Hanover strip center, into a new publicly traded REIT (“SpinCo”). The spin-off is expected to be effectuated through a pro rata distribution of SpinCo’s shares to Vornado common shareholders and Vornado Realty L.P. common unitholders, and is intended to be treated as tax-free for U.S. federal income tax purposes. On June 26, 2014, SpinCo filed its initial registration statement on Form 10 with the Securities and Exchange Commission (“SEC”). We expect the spin-off to be completed by the end of 2014, subject to certain conditions, including the SEC declaring SpinCo’s registration statement effective, filing and approval of SpinCo’s listing application with the NYSE, receipt of third party consents, and formal approval and declaration of the distribution by Vornado’s Board of Trustees. Vornado may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms. Vornado will retain, for disposition in the near term, 22 small retail assets which do not fit SpinCo’s strategy, and the Springfield Town Center, which is under contract for disposition (see Note 8 – Dispositions).
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and its consolidated subsidiaries, including the Operating Partnership. 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 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, 2013, 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 six months ended June 30, 2014 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. Recently Issued Accounting Literature
In June 2013, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2013-08”) to Accounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies (“Topic 946”). ASU 2013-08 amends the guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. The adoption of this update as of January 1, 2014, did not have any impact on our real estate fund or our consolidated financial statements.
In April 2014, the FASB issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment. Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2014. We are currently evaluating the impact of ASU 2014-08 on our consolidated financial statements.
In May 2014, the FASB issued an update ("ASU 2014-09") establishing ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation. ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. We are currently evaluating the impact of the adoption of ASU 2014-12 on our consolidated financial statements.
4. Vornado Capital Partners Real Estate Fund (the “Fund”)
We are the general partner and investment manager of the Fund. 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 June 26, 2014, the Fund sold its 64.7% interest in One Park Avenue to a newly formed joint venture that we and an institutional investor own 55% and 45%, respectively (see Note 7 - Investments in Partially Owned Entities - One Park Avenue). This transaction was based on a property value of $560,000,000. From the inception of this investment through its disposition, the Fund realized a $75,069,000 net gain.
On June 24, 2014, the Fund and its 50% joint venture partner entered into an agreement to sell Georgetown Park, a 305,000 square foot retail property, for $272,500,000.
At June 30, 2014, the Fund had eight investments with an aggregate fair value of $549,091,000, or $189,571,000 in excess of cost, and had remaining unfunded commitments of $142,118,000, of which our share was $35,529,000. Below is a summary of income from the Fund for the three and six months ended June 30, 2014 and 2013.
For the Three Months
For the Six Months
Ended June 30,
Net investment income
3,052
877
7,031
3,925
Net realized gains on exited investments
75,069
Previously recorded unrealized gains on exited investments
(35,365)
(22,388)
Net unrealized gains on held investments
57,354
33,593
58,546
47,109
Less (income) attributable to noncontrolling interests
(61,780)
(14,359)
(72,629)
(23,899)
Income from Real Estate Fund attributable to Vornado (1)
38,330
20,111
45,629
27,135
___________________________________
(1) Excludes management, leasing and development fees of $745 and $827 for the three months ended June 30, 2014 and 2013, respectively, and $1,449 and $1,676 for the six months ended June 30, 2014 and 2013, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
5. Marketable Securities
Below is a summary of our marketable securities portfolio as of June 30, 2014 and December 31, 2013.
As of June 30, 2014
As of December 31, 2013
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
203,344
72,549
130,795
188,567
116,018
3,573
56
3,517
59
3,291
72,605
134,312
72,608
119,309
On March 4, 2013, we sold 10,000,000 J.C. Penney common shares at a price of $16.03 per share, or $160,300,000 in the aggregate, resulting in a net loss of $36,800,000, which is included in “net gain (loss) on disposition of wholly owned and partially owned assets” on our consolidated statements of income for the six months ended June 30, 2013.
12
6. Mortgage and Mezzanine Loans Receivable
In October 2012, we acquired a 25.0% participation in a mortgage and mezzanine loan on 701 Seventh Avenue. In March 2013, we transferred at par, the 25.0% participation in the mortgage loan to a third party, for $59,375,000 in cash. The transfer did not qualify for sale accounting given our continuing interest in the mezzanine loan. Accordingly, we continued to include the 25.0% participation in the mortgage loan in “mortgage and mezzanine loans receivable” and recorded a $59,375,000 liability in “other liabilities” on our consolidated balance sheet. In January 2014, the mortgage and mezzanine loans were repaid; accordingly, the $59,375,000 asset and liability were eliminated.
In March 2014, a $30,000,000 mezzanine loan that was scheduled to mature in January 2015 was repaid. In May 2014, a $25,000,000 mezzanine loan that was scheduled to mature in November 2014 was repaid.
As of June 30, 2014 and December 31, 2013, the carrying amount of mortgage and mezzanine loans receivable was $17,417,000 and $170,972,000, respectively. These loans have a weighted average interest rate of 9.1% and 11.0% at June 30, 2014 and December 31, 2013, respectively, and have maturities ranging from April 2015 to May 2016.
7. Investments in Partially Owned Entities
Toys “R” Us (“Toys”)
As of June 30, 2014, weown 32.6% of Toys. We account for our investment in Toys under the equity method and record our 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. The business of Toys is highly seasonal and substantially all of Toys’ net income is generated in its fourth quarter.
Below is a summary of Toys’ latest available financial information on a purchase accounting basis:
Balance as of
Balance Sheet:
May 3, 2014
November 2, 2013
Assets
10,358,000
11,756,000
Liabilities
9,130,000
10,437,000
Noncontrolling interests
83,000
75,000
Toys “R” Us, Inc. equity (1)
1,145,000
1,244,000
For the Three Months Ended
Income Statement:
May 4, 2013
2,479,000
2,408,000
7,746,000
8,178,000
Net income attributable to Toys
(194,000)
(119,000)
(111,000)
122,000
At June 30, 2014, the carrying amount of our investment in Toys is less than our share of Toys' equity by approximately $347,337. This basis difference results primarily from non-cash impairment losses aggregating $355,953 that we have recognized through June 30, 2014. We have allocated the basis difference primarily to Toys' real estate, which is being amortized over its remaining estimated useful life.
13
7. Investments in Partially Owned Entities – continued
As of June 30, 2014, 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 June 30, 2014, we have a $42,489,000 receivable from Alexander’s for fees under these agreements.
As of June 30, 2014, the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s June 30, 2014 closing share price of $369.47, was $611,128,000, or $444,124,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 2014, 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 $41,569,000. 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 depreciation 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.
Below is a summary of Alexander’s latest available financial information:
December 31, 2013
1,450,000
1,458,000
1,113,000
1,124,000
Stockholders' equity
337,000
334,000
For the Three Months Ended June 30,
For the Six Months Ended June 30,
50,000
47,000
99,000
96,000
Net income attributable to Alexander’s
17,000
13,000
32,000
27,000
LNR Property LLC (“LNR”)
In January 2013, we and the other equity holders of LNR entered into a definitive agreement to sell LNR for $1.053 billion, of which our share of the net proceeds was $240,474,000. The definitive agreement provided that LNR would not (i) make any cash distributions to the equity holders, including us, through the completion of the sale, which occurred on April 19, 2013, and (ii) take any of the following actions (among others) without the purchaser’s approval, the lending or advancing of any money, the acquisition of assets in excess of specified amounts, or the issuance of equity interests. Notwithstanding the terms of the definitive agreement, in accordance with GAAP, we recorded our pro rata share of LNR’s earnings on a one-quarter lag basis through the date of sale, which increased the carrying amount of our investment in LNR above our share of the net sales proceeds and resulted in us recognizing a $27,231,000 “other-than-temporary” impairment loss on our investment in the three months ended March 31, 2013.
One Park Avenue
On June 26, 2014, we invested an additional $22,700,000 to increase our ownership in One Park Avenue to 55.0% from 46.5% through a joint venture with an institutional investor, who increased his ownership interest to 45.0% (see Note 4 –Vornado Capital Partners Real Estate Fund). The transaction was based on a property value of $560,000,000. The property is encumbered by a $250,000,000 interest-only mortgage loan that bears interest at 4.995% and matures in March 2016. We account for our investment in the joint venture under the equity method because we share control over major decisions with our joint venture partner.
14
Below are schedules summarizing our investments in, and income from, partially owned entities.
Percentage
Ownership at
Investments:
Toys
32.6%
Alexander’s
32.4%
167,004
167,785
India real estate ventures
4.1%-36.5%
87,859
88,467
Partially owned office buildings (1)
Various
725,483
621,294
Other investments (2)
287,024
288,897
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.
Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others.
Our Share of Net Income (Loss):
Toys:
Equity in net earnings
(59,530)
(38,708)
15,666
39,834
Non-cash impairment losses (see page 13 for details)
(75,196)
(78,542)
Management fees
1,939
1,847
3,786
3,606
Alexander's:
Equity in net income
5,272
4,077
10,031
8,486
Management, leasing and development fees
1,622
1,674
3,248
3,341
6,894
5,751
13,279
11,827
(2,041)
(414)
(2,178)
(1,181)
990
(1,042)
(1,405)
(1,624)
(1,994)
(2,823)
(5,715)
(4,536)
Lexington (3)
n/a
(979)
LNR (see page 14 for details):
45,962
Impairment loss
(27,231)
18,731
In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale. The 2013 amount represents our share of Lexington's 2012 fourth quarter earnings which was recorded on a one-quarter lag basis.
15
Below is a summary of the debt of our partially owned entities as of June 30, 2014 and December 31, 2013, none of which is recourse to us.
Interest
100% of
Rate at
Partially Owned Entities’ Debt at
Maturity
Notes, loans and mortgages payable
2014-2021
6.90%
5,206,299
5,702,247
2015-2021
2.58%
1,034,289
1,049,959
India real estate ventures:
TCG Urban Infrastructure Holdings mortgages
payable
25.0%
2014-2026
13.21%
195,891
199,021
Partially owned office buildings(1)
2014-2023
5.70%
3,646,299
3,622,759
Other(2)
4.56%
1,703,586
1,709,509
Includes 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.
Includes Independence Plaza, Monmouth Mall, Fashion Center Mall, 50-70 West 93rd Street 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 $4,094,370,000 and $4,189,403,000 at June 30, 2014 and December 31, 2013, respectively.
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8. Dispositions
Discontinued Operations
On February 24, 2014, we completed the sale of Broadway Mall in Hicksville, Long Island, New York, for $94,000,000. The sale resulted in net proceeds of $92,174,000 after closing costs.
On July 8, 2014, we completed the sale of Beverly Connection, a 335,000 square foot power shopping center in Los Angeles, California, for $260,000,000, of which $239,000,000 was cash and $21,000,000 was 10-year mezzanine seller financing. The sale resulted in a net gain of approximately $44,000,000, which will be recognized in the third quarter of 2014.
We have reclassified the revenues and expenses of the properties discussed above 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 consolidated financial statements. The net gains resulting from the sale of these properties are included in “income from discontinued operations” on our consolidated statements of income. The tables below set forth the assets and liabilities related to discontinued operations at June 30, 2014 and December 31, 2013 and their combined results of operations for the three and six months ended June 30, 2014 and 2013.
Assets Related to
Liabilities Related to
Discontinued Operations as of
Beverly Connection
208,458
Broadway Mall
106,164
3,923
19,311
12,206
45,301
1,771
13,191
7,321
33,234
6,120
4,885
12,067
(2,493)
(842)
(4,007)
Net gain on sale of Green Acres Mall
202,275
Net gains on sale of other real estate
65,665
65,719
On March 2, 2014, we entered into an agreement to transfer upon completion, the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to Pennsylvania Real Estate Investment Trust (NYSE: PEI) (“PREIT”) in exchange for $465,000,000 comprised of $340,000,000 of cash and $125,000,000 of PREIT operating partnership units. In connection therewith, we recorded a non-cash impairment loss of $20,000,000 in the first quarter of 2014, which is included in “impairment losses, acquisition and transaction related costs” on our consolidated statements of income. The redevelopment is expected to be completed in the fourth quarter of 2014 and the closing will be no later than March 31, 2015.
17
9. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily acquired in-place and above-market leases) and liabilities (primarily acquired below-market leases) as of June 30, 2014 and December 31, 2013.
Identified intangible assets:
Gross amount
522,924
589,961
Accumulated amortization
(233,449)
(277,998)
Net
Identified intangible liabilities (included in deferred revenue):
850,629
856,933
(380,356)
(360,398)
470,273
496,535
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $10,480,000 and $11,000,000 for the three months ended June 30, 2014 and 2013, respectively, and $22,162,000 and $27,177,000 for the six months ended June 30, 2014 and 2013, 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, 2015 is as follows:
2015
39,999
2016
38,377
2017
34,812
2018
33,330
2019
30,093
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $7,375,000 and $17,098,000 for the three months ended June 30, 2014 and 2013, respectively, and $16,700,000 and $42,311,000 for the six months ended June 30, 2014 and 2013, 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, 2015 is as follows:
23,159
20,223
16,826
12,446
11,539
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 $857,000 and $1,622,000 for the three months ended June 30, 2014 and 2013, respectively, and $1,714,000 and $2,723,000 for the six months ended June 30, 2014 and 2013, respectively. Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2015 is as follows:
3,430
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10. Debt
On January 31, 2014, we completed a $600,000,000 loan secured by our 220 Central Park South development site. The loan bears interest at LIBOR plus 2.75% (2.90% at June 30, 2014) and matures in January 2016, with three one-year extension options.
On April 16, 2014, we completed a $350,000,000 refinancing of 909 Third Avenue, a 1.3 million square foot Manhattan office building. The seven-year interest only loan bears interest at 3.91% and matures in May 2021. We realized net proceeds of approximately $145,000,000 after defeasing the existing 5.64%, $193,000,000 mortgage, defeasance cost and other closing costs.
On June 16, 2014, we completed a green bond public offering of $450,000,000 2.50% senior unsecured notes due June 30, 2019. The notes were sold at 99.619% of their face amount to yield 2.581%.
The following is a summary of our debt:
Interest Rate at
Balance at
Mortgages Payable:
Fixed rate
4.48%
7,623,049
7,563,133
Variable rate
2.31%
1,365,794
768,860
4.15%
Unsecured Debt:
4.88%
1.30%
4.71%
1,879,952
1,646,725
11. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests on our consolidated balance sheets are comprised primarily of Class A Operating Partnership units that are held by third parties and 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, 2012
944,152
23,916
Other comprehensive income
9,034
(17,541)
Redemption of Class A units for common shares, at redemption value
(14,980)
Adjustments to carry redeemable Class A units at redemption value
29,393
Redemption of Series D-15 redeemable units
(36,900)
Other, net
3,914
Balance at June 30, 2013
940,988
Balance at December 31, 2013
8,564
1,260
(16,824)
(19,771)
227,338
16,771
Balance at June 30, 2014
As of June 30, 2014 and December 31, 2013, the aggregate redemption value of redeemable Class A units was $1,219,958,000 and $1,002,620,000, respectively.
19
11. Redeemable Noncontrolling Interests - continued
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 as of June 30, 2014 and December 31, 2013.
12. Accumulated Other Comprehensive Income
The following tables set forth the changes in accumulated other comprehensive income (loss) by component.
For the Three Months Ended June 30, 2013
Securities
Pro rata share of
available-
nonconsolidated
rate
for-sale
subsidiaries' OCI
swap
Balance as of March 31, 2013
120,953
168,221
7,666
(47,542)
(7,392)
OCI before reclassifications
11,941
20,349
(738)
Amounts reclassified from AOCI
Net current period OCI
Balance as of June 30, 2013
188,570
(12,041)
(35,505)
(8,130)
For the Three Months Ended June 30, 2014
Balance as of March 31, 2014
77,626
132,434
(19,787)
(30,272)
(4,749)
14,595
(901)
Balance as of June 30, 2014
(5,624)
(30,817)
(5,650)
For the Six Months Ended June 30, 2013
Balance as of December 31, 2012
19,432
11,313
(50,065)
374
151,840
(8,504)
For the Six Months Ended June 30, 2014
Balance as of December 31, 2013
(11,501)
(31,882)
(4,389)
20,684
(1,261)
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13. Variable Interest Entities (“VIEs”)
We do not have any consolidated VIEs. At June 30, 2014, we have unconsolidated VIEs comprised of our investments in the entities that own One Park Avenue, Independence Plaza and the Warner Building, and at December 31, 2013, our unconsolidated VIEs comprised of our investments in the entities that own Independence Plaza and the Warner Building. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance. We account for our investment in these entities under the equity method. As of June 30, 2014, and December 31, 2013, the net carrying amounts of our investment in these entities were $286,863,000 and $152,929,000, respectively, and our maximum exposure to loss in these entities is limited to our investment.
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 on a Recurring Basis
Financial assets and liabilities that are measured at fair value on our consolidated balance sheets 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) interest rate swaps and (v) 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 June 30, 2014 and December 31, 2013, respectively.
Level 1
Level 2
Level 3
Real Estate Fund investments (75% of which is attributable to
noncontrolling interests)
Deferred compensation plan assets (included in other assets)
47,249
64,609
Total assets
867,866
254,166
613,700
Mandatorily redeemable instruments (included in other liabilities)
55,097
Interest rate swap (included in other liabilities)
30,817
85,914
47,733
68,782
976,142
239,650
736,492
31,882
86,979
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14. Fair Value Measurements – continued
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At June 30, 2014, our Real Estate Fund had eight investments with an aggregate fair value of $549,091,000, or $189,571,000 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 0.1 to 6.0 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 June 30, 2014.
Weighted Average
(based on fair
Unobservable Quantitative Input
Range
value of investments)
Discount rates
12.0% to 17.5%
14.5%
Terminal capitalization rates
5.0% to 6.2%
5.6%
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 six months ended June 30, 2014 and 2013.
Beginning balance
682,002
571,306
600,786
Purchases
2,544
17,225
2,667
30,893
Sales/Returns
(232,513)
(56,664)
Net unrealized gains
Net realized gains
Previously recorded unrealized gains
Ending balance
622,124
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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 that are classified as Level 3, for the three and six months ended June 30, 2014 and 2013.
67,627
65,010
62,631
7,915
440
9,559
3,147
Sales
(11,255)
(1,748)
(16,379)
(4,445)
Realized and unrealized (loss) gain
(198)
2,782
1,974
4,136
520
673
1,033
66,502
Fair Value Measurements on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consist primarily of real estate assets and our investment in Toys that were written-down to estimated fair value at December 31, 2013. The fair value of our real estate assets was determined using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity. In determining the fair value of our investment in Toys, we considered, among other inputs, a December 31, 2013 third-party valuation of Toys and Toys’ historical results, financial forecasts and business outlook. Our determination of the fair value of our investment in Toys included consideration of the following widely-used valuation methodologies: (i) market multiple methodology, that considered comparable publicly traded retail companies and a range of EBITDA multiples from 5.75x to 6.5x, (ii) comparable sales transactions methodology, that considered sales of retailers ranging in size from $150 million to $3 billion, (iii) a discounted cash flow methodology, that utilized five-year financial projections and assumed a terminal EBITDA multiple of 5.75x, a 10% discount rate and a 38% tax rate, and (iv) a Black-Scholes valuation analysis, that assumed one, two and three year time-to-expiration periods and 24% to 29% volatility factors. Generally, we consider a number of valuation techniques when measuring fair values but in certain circumstances, a single valuation technique may be appropriate. The tables below aggregate the fair values of these assets by their levels in the fair value hierarchy.
Real estate assets
354,351
437,575
23
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), mortgage and mezzanine loans receivable 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 cash equivalents and borrowings under our revolving credit facility is classified as Level 1, and the fair value of our mortgage and mezzanine loans receivable is classified as Level 3. 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 June 30, 2014 and December 31, 2013.
Carrying
Fair
Value
Cash equivalents
1,157,000
295,000
Mortgage and mezzanine loans receivable
171,000
1,174,417
1,174,000
465,972
466,000
Debt:
8,961,000
8,104,000
1,852,000
1,402,000
88,000
296,000
10,868,795
10,901,000
9,978,718
9,802,000
15. Incentive Compensation
Our 2010 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 awards to certain of our employees and officers. We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Stock-based compensation expense was $9,051,000 and $9,129,000 in the three months ended June 30, 2014 and 2013, respectively and $20,075,000 and $16,595,000 in the six months ended June 30, 2014 and 2013, respectively.
On January 10, 2014, the Compensation Committee approved the 2014 Outperformance Plan, a multi-year, performance-based equity compensation plan and related form of award agreement (the “2014 OPP”). Under the 2014 OPP, participants have the opportunity to earn compensation payable in the form of operating partnership units during a three-year performance measurement period, if and only if we outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to relative TSR. Awards under the 2014 OPP may be earned if we (i) achieve a TSR level greater than 7% per annum, or 21% over the three-year performance measurement period (the “Absolute Component”), and/or (ii) achieve a TSR above that of the SNL US REIT Index (the “Index”) over a three-year performance measurement period (the “Relative Component”). To the extent awards would be earned under the Absolute Component but we underperform the Index, such awards earned under the Absolute Component 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 be increased 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, such awards earned under the Relative Component would be reduced based on our absolute TSR, 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. Awards earned under the 2014 OPP vest 33% in year three, 33% in year four and 34% in year five. Dividends on awards earned accrue during the performance measurement period. In addition, our executive officers (for the purposes of Section 16 of the Exchange Act) are required to hold any earned OPP awards (or related equity) for at least one year following vesting.
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16. Fee and Other Income
The following table sets forth the details of fee and other income:
BMS cleaning fees
22,195
16,509
41,151
33,173
Signage revenue
8,873
8,347
18,191
14,828
Management and leasing fees
6,151
6,431
12,365
11,684
Lease termination fees (1)
4,545
7,041
8,338
67,009
Other income
8,516
9,533
16,163
17,980
The six months ended June 30, 2013, includes $59,599 of income pursuant to a settlement agreement with Stop & Shop.
Management and leasing fees include management fees from Interstate Properties, a related party, of $131,000 and $130,000 for the three months ended June 30, 2014 and 2013, respectively, and $265,000 and $333,000 for the six months ended June 30, 2014 and 2013, 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 interest and other investment income (loss):
Dividends and interest on marketable securities
3,198
2,770
6,304
5,540
Mark-to-market of investments in our deferred compensation plan (1)
2,380
2,492
6,780
5,938
Interest on mezzanine loans receivable
736
4,940
3,120
10,017
Income (loss) from the mark-to-market of J.C. Penney
derivative position
9,065
(13,475)
Income from prepayment penalties in connection with the
repayment of a mezzanine loan
5,267
(39,487)
3,121
1,881
5,124
3,540
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.
18. Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
Interest expense
125,484
125,136
243,736
248,363
Amortization of deferred financing costs
8,127
4,753
12,939
10,132
Capitalized interest
(16,560)
(9,232)
(30,182)
(17,492)
117,051
120,657
226,493
241,003
25
19. 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
94,980
92,569
175,916
160,555
Income from discontinued operations, net of income attributable
2,028
65,625
3,809
260,561
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(21)
(31)
(51)
(86)
Numerator for basic income per share
76,621
145,895
138,940
377,830
Impact of assumed conversions:
Convertible preferred share dividends
27
55
Numerator for diluted income per share
145,922
377,885
Denominator:
Denominator for basic income per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,090
742
1,013
737
Convertible preferred shares
47
48
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 in the three months ended June 30, 2014 and 2013 excludes an aggregate of 11,289 and 11,913 weighted average common share equivalents, respectively, and 11,304 and 11,911 weighted average common share equivalents in the six months ended June 30, 2014 and 2013, respectively, as their effect was anti-dilutive.
26
20. 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, 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. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, including terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2014.
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 NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the federal government with no direct exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $2,150,000 and 15% of the balance of a covered loss and the federal government is responsible for the remaining 85% of a covered loss. We are ultimately responsible for any loss 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 the future.
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
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 is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
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.
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 June 30, 2014, the aggregate dollar amount of these guarantees and master leases is approximately $360,000,000.
At June 30, 2014, $38,477,000 of letters of credit were outstanding under one of our revolving credit facilities. Our revolving 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 revolving 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.
As of June 30, 2014, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $114,000,000.
21. Subsequent Events
On July 9, 2014, we entered into an agreement, in partnership with Crown Acquisitions (“Crown”), to acquire the retail condominium of the St. Regis Hotel and the adjacent retail townhouse, for approximately $700,000,000. The property has 100 feet of frontage on Fifth Avenue on the Southeast corner of 55th Street. We will own between 67% and 80% of the venture, with Crown owning the balance. The final ownership percentages will be based on the amount of debt financing put on the property and Crown’s short-term option to invest additional capital. The purchase is expected to close in the fourth quarter of 2014, subject to customary closing conditions.
On July 16, 2014, we completed a $130,000,000 financing of Las Catalinas, a 494,000 square foot mall located in Caguas, Puerto Rico, in the San Juan area. The 10-year fixed rate loan bears interest at 4.43% and amortizes based on a 30-year schedule beginning in year six.
On July 23, 2014, a joint venture in which we are a 50% partner entered into a 99-year ground lease for 61 Ninth Avenue located on the Southwest corner of Ninth Avenue and 15th Street in Manhattan. The venture's current plans are to construct an office and retail building of approximately 130,000 square feet. Total development costs are currently estimated to be approximately $125,000,000.
On August 1, 2014, we acquired the land under our 715 Lexington Avenue retail property located on the Southeast corner of 58th Street and Lexington Avenue in Manhattan, for $63,000,000.
28
22. Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and six months ended June 30, 2014 and 2013.
Retail
New York
Washington, DC
Properties
385,534
134,826
82,807
63,439
230,812
87,352
48,053
72,912
Operating income (loss)
154,722
47,474
34,754
(9,473)
(Loss) income from partially owned
entities, including Toys
(53,742)
8,996
(2,248)
341
(3,240)
Interest and other investment
income, net
1,645
42
7,740
(49,070)
(18,660)
(9,292)
(40,029)
Net gain on disposition of wholly owned and
partially owned assets
Income (loss) before income taxes
116,293
26,608
25,811
56,013
(1,226)
(115)
(319)
(1,939)
Income (loss) from continuing operations
115,067
26,493
25,492
54,074
Income (loss) from discontinued operations
2,154
Net income (loss)
27,646
54,072
Less net income attributable to
noncontrolling interests
(68,679)
(3,108)
(65,550)
Net income (loss) attributable to Vornado
111,959
27,625
(11,478)
Interest and debt expense(2)
179,520
64,072
22,463
10,433
39,529
43,023
Depreciation and amortization(2)
173,443
74,007
35,806
15,803
27,686
20,141
Income tax (benefit) expense (2)
(574)
1,291
132
319
(4,435)
2,119
EBITDA(1)
449,397
251,329
84,894
54,180
5,189
53,805
375,700
134,317
80,446
80,753
233,733
85,782
47,038
94,601
141,967
48,535
33,408
(13,848)
(35,389)
4,226
(2,449)
423
(728)
income (loss), net
1,443
(49)
25,015
(42,648)
(27,854)
(11,517)
(38,638)
104,988
18,238
22,265
7,276
(961)
(805)
(749)
(362)
104,027
17,433
21,516
6,914
2,928
66,091
273
106,955
87,607
7,187
(24,127)
(1,381)
(22,733)
105,574
87,594
(15,546)
179,461
54,546
31,245
13,715
37,730
42,225
182,131
74,573
35,248
16,348
33,882
22,080
(22,366)
1,030
852
749
(25,697)
700
497,420
235,723
84,778
118,406
9,054
49,459
See notes on page 31.
29
22. Segment Information – continued
756,816
270,104
171,612
128,692
472,811
176,924
130,284
154,094
284,005
93,180
41,328
(25,402)
(51,763)
10,562
(3,514)
879
(3,946)
78
18,113
(91,909)
(38,007)
(18,509)
(78,068)
Net gain on disposition of wholly
owned and partially owned assets
205,778
51,737
23,715
39,495
Income tax (expense) benefit
(2,195)
84
(1,050)
(2,020)
203,583
51,821
22,665
37,475
3,868
175
26,533
37,650
(84,118)
(4,513)
(38)
(79,567)
199,070
26,495
(41,917)
350,472
122,140
45,261
20,784
78,078
84,209
369,782
161,594
71,956
41,131
54,610
40,491
Income tax expense (benefit)(2)
19,257
2,323
(57)
1,050
13,642
2,299
919,236
485,127
168,981
89,460
90,586
85,082
740,501
269,048
222,658
157,722
476,660
170,979
95,618
186,316
263,841
98,069
127,040
(28,594)
(12,864)
9,831
(4,542)
1,324
15,625
Interest and other investment (loss)
2,608
82
(25,352)
(83,079)
(56,104)
(21,803)
(80,017)
Net loss on disposition of wholly owned and
193,201
37,505
106,563
(103,023)
(1,233)
(1,183)
(785)
191,968
36,322
105,814
(103,808)
5,656
271,473
(1,075)
197,624
377,287
(104,883)
(50,132)
(2,962)
(109)
(47,061)
194,662
377,178
(151,944)
368,241
104,235
62,998
27,938
80,912
92,158
376,316
152,986
70,396
34,867
71,556
46,511
Income tax expense(2)
38,393
1,377
1,306
33,649
1,312
1,204,066
453,260
171,022
440,732
151,015
(11,963)
See notes on the following page.
30
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental non-GAAP financial 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 elements of "New York" EBITDA are summarized below.
Office
162,833
158,186
320,712
304,482
67,947
57,230
134,142
117,612
Alexander's
10,271
10,213
20,701
20,754
Hotel Pennsylvania
10,278
10,094
9,572
10,412
Total New York
The elements of "Washington, DC" EBITDA are summarized below.
Office, excluding the Skyline Properties
67,057
66,136
134,314
133,243
Skyline properties
7,073
7,543
13,572
15,705
Total Office
74,130
73,679
147,886
148,948
Residential
10,764
11,099
21,095
22,074
Total Washington, DC
The elements of "Retail Properties" EBITDA are summarized below.
Strip shopping centers(a)
40,056
101,529
81,377
204,890
Regional malls(b)
14,124
16,877
8,083
235,842
Total Retail properties
(a)
The three and six months ended June 30, 2013, includes a $33,058 net gain on sale of Philadelphia (Market Street) and a $32,169 net gain on sale of San Jose (The Plant). The six months ended June 30, 2013, includes $59,599 of income pursuant to a settlement agreement with Stop & Shop.
(b)
The six months ended June 30, 2014, includes a $20,000 non-cash impairment loss on the Springfield Town Center. The six months ended June 30, 2013, includes a $202,275 net gain on sale of Green Acres Mall.
31
Notes to preceding tabular information - continued:
The elements of "other" EBITDA are summarized below.
Our share of Real Estate Fund:
Income before net realized/unrealized gains
2,191
1,643
4,617
3,651
18,767
(8,841)
(5,597)
14,339
8,398
14,637
11,777
Carried interest
11,874
10,070
13,205
11,707
The Mart and trade shows
22,454
22,453
41,541
39,307
555 California Street
11,506
11,022
23,572
21,651
99
2,254
1,923
4,013
LNR(a)
20,443
Lexington(b)
6,931
Other investments
4,288
5,760
9,207
8,877
76,677
61,600
121,872
128,357
Corporate general and administrative expenses(c)
(23,022)
(24,831)
(49,004)
(47,587)
Investment income and other, net(c)
8,032
16,709
16,105
28,045
Acquisition and transaction related costs
(4,083)
(3,350)
(5,867)
(3,951)
Net gain on sale of residential condominiums and a land parcel
Severance costs (primarily reduction-in-force at The Mart)
(1,542)
(4,154)
Loss on sale of J.C. Penney common shares
(36,800)
Net income attributable to noncontrolling interests in
the Operating Partnership
On April 19, 2013, LNR was sold for $1.053 billion.
(c)
The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $2,380 and $2,492 for the three months ended June 30, 2014 and 2013, respectively, and $6,780 and $5,938 for the six months ended June 30, 2014 and 2013, respectively.
32
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 June 30, 2014, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013 and changes in equity and cash flows for the six-month periods ended June 30, 2014 and 2013. 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, 2013, 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 24, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2013 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
August 4, 2014
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, as amended, for the year ended December 31, 2013. 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 six months ended June 30, 2014. 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. The results of operations for the three and six months ended June 30, 2014 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.
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 FTSE NAREIT Office REIT Index (“Office REIT”) and the Morgan Stanley REIT Index (“RMS”) for the following periods ended June 30, 2014.
Total Return(1)
Vornado
Office REIT
RMS
Three-month
9.0%
5.9%
7.0%
Six-month
22.0%
17.8%
17.7%
One-year
33.0%
16.5%
13.4%
Three-year
28.3%
25.2%
39.9%
Five-year
184.6%
159.6%
191.3%
Ten-year
182.0%
113.1%
150.7%
(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.
On April 11, 2014, we announced a plan to spin off our shopping center business; consisting of 80 strip centers, four malls and a warehouse park adjacent to our East Hanover strip center, into a new publicly traded REIT (“SpinCo”). The spin-off is expected to be effectuated through a pro rata distribution of SpinCo’s shares to Vornado common shareholders and Vornado Realty L.P. common unitholders, and is intended to be treated as tax-free for U.S. federal income tax purposes. On June 26, 2014, SpinCo filed its initial registration statement on Form 10 with the Securities and Exchange Commission (“SEC”). We expect the spin-off to be completed by the end of 2014, subject to certain conditions, including the SEC declaring SpinCo’s registration statement effective, filing and approval of SpinCo’s listing application with the NYSE, receipt of third party consents, and formal approval and declaration of the distribution by Vornado’s Board of Trustees. Vornado may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms. Vornado will retain, for disposition in the near term, 22 small retail assets which do not fit SpinCo’s strategy, and the Springfield Town Center, which is under contract for disposition.
35
Overview – continued
Quarter Ended June 30, 2014 Financial Results Summary
Net income attributable to common shareholders for the quarter ended June 30, 2014 was $76,642,000, or $0.41 per diluted share, compared to $145,926,000, or $0.78 per diluted share for the quarter ended June 30, 2013. Net income for the quarter ended June 30, 2013 includes $65,665,000 of net gains on sale of real estate and $3,113,000 of real estate impairment losses. In addition, the quarters ended June 30, 2014 and 2013 include certain other 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, decreased net income attributable to common shareholders for the quarter ended June 30, 2014 by $60,467,000, or $0.32 per diluted share and increased net income attributable to common shareholders for the quarter ended June 30, 2013 by $41,721,000 or $0.22 per diluted share.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended June 30, 2014 was $216,547,000, or $1.15 per diluted share, compared to $235,348,000, or $1.25 per diluted share for the prior year’s quarter. FFO for the quarters ended June 30, 2014 and 2013 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, decreased FFO by $55,027,000, or $0.29 per diluted share for the quarter ended June 30, 2014, and $3,956,000, or $0.02 per diluted share for the quarter ended June 30, 2013.
Items that affect comparability income (expense):
Toys "R" Us Negative FFO
(51,862)
(25,088)
Defeasance cost in connection with the refinancing of 909 Third Avenue
(5,589)
FFO from discontinued operations
2,200
7,556
Net gain on sale of residential condominiums
Income from the mark-to-market of J.C. Penney derivative position
Preferred unit redemptions
(1,489)
(58,429)
(4,201)
Noncontrolling interests' share of above adjustments
3,402
245
Items that affect comparability, net
(55,027)
(3,956)
The percentage increase (decrease) in same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Cash basis same store EBITDA of our operating segments for the quarter ended June 30, 2014 over the quarter ended June 30, 2013 and the trailing quarter ended March 31, 2013 are summarized below.
Same Store EBITDA:
Retail Properties
June 30, 2014 vs. June 30, 2013
Same store EBITDA
5.2
%
(1.8
)
1.8
Cash basis same store EBITDA
6.9
(1.7
3.1
June 30, 2014 vs. March 31, 2014
6.4
1.1
6.2
(0.3
1.7
Excluding the Hotel Pennsylvania, same store EBITDA increased by 5.3% and by 7.2% on a cash basis.
Excluding the Hotel Pennsylvania, same store EBITDA increased by 1.7% and by 0.8% on a cash basis.
36
Six Months Ended June 30, 2014 Financial Results Summary
Net income attributable to common shareholders for the six months ended June 30, 2014 was $138,991,000, or $0.74 per diluted share, compared to $377,916,000, or $2.01 per diluted share for the six months ended June 30, 2013. Net income for the six months ended June 30, 2014 and 2013 include $20,842,000 and $8,277,000, respectively, of real estate impairment losses and the six months ended June 30, 2013 also includes $268,459,000 of net gains on sale of real estate. In addition, the six months ended June 30, 2014 and 2013 include certain items that affect comparability, which are listed in the table below. The aggregate of real estate impairment losses, net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the six months ended June 30, 2014 by $68,379,000, or $0.36 per diluted share, and increased net income attributable to common shareholders for the six months ended June 30, 2013 by $199,406,000, or $1.06 per diluted share.
FFO for the six months ended June 30, 2014 was $463,626,000, or $2.46 per diluted share, compared to $437,168,000, or $2.33 per diluted share for the six months ended June 30, 2013. FFO for the six months ended June 30, 2014 and 2013 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, decreased FFO by $35,003,000, or $0.19 per diluted share for the six months ended June 30, 2014 and $13,749,000, or $0.07 per diluted share for the six months ended June 30, 2013.
Toys "R" Us Negative FFO (including impairment losses of $75,196 and $78,542,
respectively)
(42,595)
(8,404)
Net gain on sale of residential condominiums and a land parcel in 2014
FFO from discontinued operations, including LNR in 2013
6,339
35,507
Losses from the mark-to-market, impairment and disposition of investment in J.C. Penney
(89,762)
Stop & Shop litigation settlement income
59,599
The Mart reduction-in-force and severance costs
(3,310)
(37,172)
(14,600)
2,169
851
(35,003)
(13,749)
The percentage increase (decrease) in same store EBITDA and Cash basis same store EBITDA of our operating segments for the six months ended June 30, 2014 over the six months ended June 30, 2013 is summarized below.
5.6
(2.2
%)
1.6
8.5
(0.5
2.3
Excluding the Hotel Pennsylvania, same store EBITDA increased by 6.0% and by 9.0% on a cash basis.
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.
37
2014 Acquisitions
On June 26, 2014, we invested an additional $22,700,000 to increase our ownership in One Park Avenue to 55.0% from 46.5% through a joint venture with an institutional investor, who increased his ownership interest to 45.0%. The transaction was based on a property value of $560,000,000. The property is encumbered by a $250,000,000 interest-only mortgage loan that bears interest at 4.995% and matures in March 2016.
2014 Dispositions
On February 24, 2014, we completed the sale of Broadway Mall in Hicksville, Long Island, New York for $94,000,000. The sale resulted in net proceeds of $92,174,000 after closing costs.
On March 2, 2014, we entered into an agreement to transfer upon completion, the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to Pennsylvania Real Estate Investment Trust (NYSE: PEI) (“PREIT”) in exchange for $465,000,000 comprised of $340,000,000 of cash and $125,000,000 of PREIT operating partnership units. The redevelopment is expected to be completed in the fourth quarter of 2014 and the closing will be no later than March 31, 2015.
2014 Financings
Vornado Capital Partners Real Estate Fund (the “Fund”)
On June 26, 2014, the Fund sold its 64.7% interest in One Park Avenue to a newly formed joint venture that we and an institutional investor own 55% and 45%, respectively. This transaction was based on a property value of $560,000,000. From the inception of this investment through its disposition, the Fund realized a $75,069,000 net gain.
38
Recently Issued Accounting Literature
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2013 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2014.
39
Overview - continued
Leasing Activity:
The leasing activity and related statistics in the table below are based on leases signed during the period and are not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Second generation relet space represents square footage that has not been vacant for more than nine months and tenant improvements and leasing commissions are based on our share of square feet leased during the period.
(Square feet in thousands)
Strips
Malls
Quarter Ended June 30, 2014
Total square feet leased
1,222
352
231
54
Our share of square feet leased:
1,034
336
51
Initial rent(1)
69.43
452.81
37.58
20.82
21.92
Weighted average lease term (years)
11.6
8.6
6.7
6.0
4.8
Second generation relet space:
Square feet
1,009
256
128
Cash basis:
69.07
468.05
38.29
24.68
19.00
Prior escalated rent
62.55
358.97
42.06
22.66
18.00
Percentage increase (decrease)
10.4%
30.4%
(9.0%)
8.9%
GAAP basis:
Straight-line rent (2)
69.14
534.56
37.64
24.78
Prior straight-line rent
58.07
340.11
39.20
21.74
19.1%
57.2%
(4.0%)
14.0%
Tenant improvements and leasing
commissions:
Per square foot
76.39
133.02
34.95
2.75
Per square foot per annum
6.59
15.47
5.22
0.46
Percentage of initial rent
9.5%
3.4%
13.9%
2.2%
Six Months Ended June 30, 2014:
709
464
79
1,840
678
72
66.34
338.77
40.27
19.48
25.25
11.2
10.7
7.7
5.1
1,574
467
335
53
67.72
357.64
40.19
20.84
22.26
60.53
270.65
42.62
19.73
21.11
11.9%
32.1%
(5.7%)
5.4%
67.01
406.90
38.63
21.18
22.68
56.46
269.43
38.80
19.01
21.04
18.7%
51.0%
(0.5%)
11.4%
7.8%
72.48
88.72
40.26
2.76
3.70
6.47
8.29
5.23
9.8%
2.4%
13.0%
2.9%
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.
Excludes (i) 165 square feet leased to WeWork that will be redeveloped into rental residential apartments (see page 67), and (ii) 57 square feet of retail space that was leased at an initial rent of $51.74 per square foot.
40
Square footage (in service) and Occupancy as of June 30, 2014:
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
New York:
19,852
16,626
97.3%
2,351
96.9%
2,178
706
99.4%
1,400
Residential - 1,655 units
1,523
762
97.1%
27,304
21,663
Washington, DC:
13,308
11,000
85.8%
Skyline Properties
2,652
58.5%
15,960
13,652
80.5%
Residential - 2,414 units
2,597
2,455
98.0%
381
100.0%
18,938
16,488
83.5%
Retail Properties:
Strip Shopping Centers
102
14,565
14,138
93.7%
Regional Malls
4,132
2,644
95.4%
18,697
16,782
94.0%
Other:
The Mart
3,578
3,569
94.4%
1,797
1,258
96.8%
Primarily Warehouses
971
45.6%
6,346
5,798
Total square feet at June 30, 2014
71,285
60,731
41
Square footage (in service) and Occupancy as of December 31, 2013:
properties
19,799
16,358
96.6%
2,389
2,166
97.4%
94.8%
27,289
21,392
13,581
11,151
85.4%
60.8%
16,233
13,803
80.7%
Residential - 2,405 units
2,588
2,446
96.3%
379
19,200
16,628
83.4%
103
14,616
14,237
94.3%
4,135
2,646
95.9%
18,751
16,883
94.6%
3,703
3,694
1,795
1,257
94.5%
6,469
5,922
Total square feet at December 31, 2013
71,709
60,825
Washington, DC Segment
We estimate that 2014 EBITDA from continuing operations will be between $10,000,000 and $15,000,000 lower than 2013 EBITDA, due to the effects of Base Realignment and Closure (“BRAC”) related move-outs and the sluggish leasing environment in the Washington, DC / Northern Virginia area. EBITDA from continuing operations for the six months ended June 30, 2014, was lower than the prior year’s six months by approximately $2,041,000, which was offset by an interest expense reduction of $9,471,000 from the restructuring of the Skyline properties mortgage loan in October 2013. As a result of this and other items, the overall earnings in the six months ended June 30, 2014 were higher than the prior year’s six months.
Of the 2,395,000 square feet subject to the effects of the BRAC statute, 393,000 square feet has been taken out of service for redevelopment and 927,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of June 30, 2014.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of June 30, 2014
37.79
815,000
468,000
281,000
66,000
Leases pending
39.01
112,000
98,000
14,000
Taken out of service for redevelopment
393,000
1,320,000
959,000
80,000
To Be Resolved:
Vacated as of June 30, 2014
37.65
781,000
392,000
323,000
Expiring in:
27.02
201,000
43.93
93,000
5,000
1,075,000
480,000
529,000
Total square feet subject to BRAC
2,395,000
1,439,000
810,000
146,000
43
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2014 and 2013
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended June 30, 2014 and 2013.
_____________________________
44
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2014 and 2013 - continued
Office(a)
Includes $2,494 from discontinued operations in the three months ended June 30, 2013. Excluding this item, EBITDA for the three months ended June 30, 2013 was $155,692.
Includes discontinued operations and other gains and losses that affect comparability, aggregating $2,275 and $66,703 for the three months ended June 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $37,781 and $34,826, respectively.
Includes discontinued operations and other gains and losses that affect comparability, aggregating $(73) and $2,373 for the three months ended June 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $14,197 and $14,504, respectively.
45
Corporate general and administrative expenses(a)
Investment income and other, net(a)
Severance costs (primarily reduction in force at The Mart)
Net income attributable to noncontrolling interests in the Operating Partnership
The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $2,380 and $2,492 for the three months ended June 30, 2014 and 2013, respectively.
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations, other gains and losses that affect comparability and our Toys and Other Segments).
Region:
New York City metropolitan area
75%
74%
Washington, DC / Northern Virginia metropolitan area
23%
24%
Puerto Rico
1%
2%
Other geographies
100%
46
Results of Operations – Three Months Ended June 30, 2014 Compared to June 30, 2013
Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $666,606,000 in the three months ended June 30, 2014, compared to $671,216,000 in the prior year’s quarter, a decrease of $4,610,000. This decrease was primarily attributable to income in the prior year of $16,990,000 related to the Cleveland Medical Mart development project and $9,601,000 from the deconsolidation of Independence Plaza. Excluding these items, revenues increased by $21,981,000 from the prior year’s quarter. Below are the details of the (decrease) increase by segment:
(Decrease) increase due to:
Property rentals:
Acquisitions and other
8,255
8,068
1,011
(112)
(712)
Deconsolidation of Independence Plaza
(9,601)
Properties placed into / taken out of
service for redevelopment
(3,565)
(918)
(449)
(16)
(2,182)
505
Trade Shows
Same store operations
10,542
7,767
(1,213)
1,407
2,581
6,050
5,821
(651)
1,279
(399)
Tenant expense reimbursements:
(690)
(105)
(11)
(473)
(101)
(514)
(179)
5,313
3,110
(664)
1,641
1,226
3,911
2,491
(673)
1,147
946
Cleveland Medical Mart development
project
(16,990)
Fee and other income:
5,686
5,945
(259)
526
(280)
(35)
(470)
66
Lease termination fees
(2,496)
(2,743)
1,067
(622)
(1,017)
(2,171)
1,236
67
(149)
2,419
1,522
1,833
(65)
(871)
Total (decrease) increase in revenues
(4,610)
9,834
509
2,361
(17,314)
Due to completion of the project. This decrease in revenue is substantially offset by a decrease in development costs expensed in the period. See note (3) on page 48.
Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2 ) on page 48.
Results of Operations – Three Months Ended June 30, 2014 Compared to June 30, 2013 - continued
Expenses
Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $439,129,000 in the three months ended June 30, 2014, compared to $461,154,000 in the prior year’s quarter, a decrease of $22,025,000. This decrease was primarily attributable to expense in the prior year of $15,151,000 related to the Cleveland Medical Mart development project and $10,139,000 from the deconsolidation of Independence Plaza. Excluding these items, expenses increased by $3,265,000 from the prior year’s quarter. Below are the details of the (decrease) increase by segment:
Operating:
(661)
(37)
(36)
(617)
(3,826)
(4,064)
(1,772)
(390)
(1,583)
Non-reimbursable expenses, including
bad debt reserves
(1,248)
(448)
(825)
400
(560)
BMS expenses
3,845
4,381
(536)
8,399
4,495
947
1,982
975
2,285
3,259
591
731
(2,296)
Depreciation and amortization:
2,218
2,225
(6,313)
2,854
3,576
(122)
158
(758)
(2,914)
(4,771)
1,249
1,188
(580)
(4,155)
(5,283)
1,127
1,343
(1,342)
General and administrative:
Mark-to-market of deferred
compensation plan liability (1)
Severance costs (primarily reduction
in force at The Mart)
(897)
(148)
(1,059)
(1,979)
(5,737)
(3,633)
(15,151)
733
Total (decrease) increase in expenses
(22,025)
(2,921)
1,570
1,015
(21,689)
This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment income (loss), net” on our consolidated statements of income.
Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 47.
Due to the completion of the project. This decrease in expense is offset by the decrease in development revenue in the period. See note (1) on page 47.
(Loss) Applicable to Toys
In the three months ended June 30, 2014, we recognized a net loss of $57,591,000 from our investment in Toys, comprised of $59,530,000 for our share of Toys’ net loss, partially offset by $1,939,000 of management fees earned and received.
In the three months ended June 30, 2013, we recognized a net loss of $36,861,000 from our investment in Toys, comprised of $38,708,000 for our share of Toys’ net loss, partially offset by $1,847,000 of management fees earned and received.
Income from Partially Owned Entities
Summarized below are the components of income (loss) from partially owned entities for the three months ended June 30, 2014 and 2013.
Equity in Net Income (Loss):
Below are the components of the income from our Real Estate Fund for the three months ended June 30, 2014 and 2013.
Excludes management, leasing and development fees of $745 and $827 for the three months ended June 30, 2014 and 2013, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
49
Interest and Other Investment Income (Loss), net
Interest and other investment income (loss), net was $9,435,000 in the three months ended June 30, 2014, compared to $26,415,000 in the prior year’s quarter, a decrease of $16,980,000. This decrease resulted from:
J.C. Penney derivative position mark-to-market gain in 2013
(9,065)
Income from prepayment penalties in connection with the repayment of a mezzanine loan
(5,267)
Lower interest on mezzanine loans receivable in the current year
(4,204)
Decrease in the value of investments in our deferred compensation plan (offset by a corresponding
decrease in the liability for plan assets in general and administrative expenses)
1,668
(16,980)
Interest and Debt Expense
Interest and debt expense was $117,051,000 in the three months ended June 30, 2014, compared to $120,657,000 in the prior year’s quarter, a decrease of $3,606,000. This decrease was primarily due to (i) $7,328,000 of higher capitalized interest in the current year’s quarter and (ii) $6,542,000 of interest savings from the restructuring of the Skyline properties mortgage loan in October 2013, partially offset by (iii) $5,589,000 of defeasance cost in connection with the refinancing of 909 Third Avenue and (iv) $3,306,000 of interest expense from the $600,000,000 financing of our 220 Central Park South development site in January 2014.
Net Gain (Loss) on Disposition of Wholly Owned and Partially Owned Assets
In the three months ended June 30, 2014 and 2013, we recognized gains of $905,000 and $1,005,000, respectively, from the sale of residential condominiums.
Income Tax Expense
Income tax expense was $3,599,000 in the three months ended June 30, 2014, compared to $2,877,000 in the prior year’s quarter, an increase of $722,000. This increase was primarily attributable to higher income from our taxable REIT subsidiaries.
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 June 30, 2014 and 2013.
50
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $63,975,000 in the three months ended June 30, 2014, compared to $14,930,000 in the prior year’s quarter, an increase of $49,045,000. This increase resulted primarily from $47,421,000 of higher net income allocated to the noncontrolling interests of our Real Estate Fund.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership
Net income attributable to noncontrolling interests in the Operating Partnership was $4,691,000 in the three months ended June 30, 2014, compared to $8,849,000 in the prior year’s quarter, a decrease of $4,158,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred Unit Distributions of the Operating Partnership
Preferred unit distributions of the Operating Partnership were $13,000 in the three months ended June 30, 2014, compared to $348,000 in the prior year’s quarter, a decrease of $335,000. This decrease resulted from the redemption of the 6.875% Series D-15 cumulative redeemable preferred units in May 2013.
Preferred Share Dividends
Preferred share dividends were $20,366,000 in the three months ended June 30, 2014, compared to $20,368,000 in the prior year’s quarter, a decrease of $2,000.
Preferred Unit and Share Redemptions
In the three months ended June 30, 2013, we recognized $8,100,000 of income in connection with the redemption of all of the 6.875% Series D-15 cumulative redeemable preferred units.
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 also present same store EBITDA on 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 reconciliations of EBITDA to same store EBITDA for each of our segments for the three months ended June 30, 2014, compared to the three months ended June 30, 2013.
EBITDA for the three months ended June 30, 2014
Add-back:
Non-property level overhead expenses included above
6,646
6,572
4,110
Less EBITDA from:
Acquisitions
(8,088)
Dispositions, including net gains on sale
(2,226)
Properties taken out-of-service for redevelopment
(6,093)
(606)
(531)
Other non-operating (income) expense
(1,884)
(1,661)
(2,243)
Same store EBITDA for the three months ended June 30, 2014
241,910
89,199
53,290
EBITDA for the three months ended June 30, 2013
6,720
5,169
(228)
(2,609)
(69,190)
(4,882)
(1,123)
(5,487)
449
(1,844)
Same store EBITDA for the three months ended June 30, 2013
230,060
90,824
52,362
Increase (decrease) in same store EBITDA -
Three months ended June 30, 2014 vs. June 30, 2013(1)
11,850
(1,625)
928
% increase (decrease) in same store EBITDA
5.2%
(1.8%)
1.8%
See notes on following page
52
Notes to preceding tabular information
The $11,850,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail of $7,646,000 and $3,981,000, respectively. The Office increase resulted primarily from higher (i) rental revenue of $4,797,000 (primarily due to an increase in average same store occupancy). The Retail increase resulted primarily from higher rental revenue of $2,970,000 (primarily due to an increase in average same store occupancy).
The $1,625,000 decrease in Washington, DC same store EBITDA resulted primarily from lower rental revenue of $1,213,000, primarily due to higher amortization of rent abatements, partially offset by an increase in billed rents.
The $928,000 increase in Retail Properties same store EBITDA resulted primarily from increase in rental revenue of $1,407,000, primarily due to an increase in average annual rents per square foot and same store occupancy.
Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA
Less: Adjustments for straight line rents, amortization of acquired
below-market leases, net, and other non-cash adjustments
(26,640)
(2,462)
(1,758)
Cash basis same store EBITDA for the three months ended
215,270
86,737
51,532
(28,635)
(2,597)
June 30, 2013
201,425
88,227
49,994
Increase (decrease) in Cash basis same store EBITDA -
Three months ended June 30, 2014 vs. June 30, 2013
13,845
(1,490)
1,538
% increase (decrease) in Cash basis same store EBITDA
6.9%
(1.7%)
3.1%
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2014 and 2013
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the six months ended June 30, 2014 and 2013.
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2014 and 2013 - continued
Includes $4,839 from discontinued operations in the six months ended June 30, 2013. Excluding this item, EBITDA for the six months ended June 30, 2013 was $299,643.
Includes discontinued operations and other gains and losses that affect comparability, aggregating $5,161 and $133,476 for the six months ended June 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $76,216 and $71,414, respectively.
Includes discontinued operations and other gains and losses that affect comparability, aggregating $(19,839) and $207,192 for the six months ended June 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $27,922 and $28,650, respectively.
The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $6,780 and $5,938 for the six months ended June 30, 2014 and 2013, respectively.
73%
Results of Operations – Six Months Ended June 30, 2014 Compared to June 30, 2013
Revenues
Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $1,327,224,000 for the six months ended June 30, 2014, compared to $1,389,929,000 in the prior year’s six months, a decrease of $62,705,000. This decrease was primarily attributable to income in the prior year of $59,599,000 pursuant to a settlement agreement with Stop & Shop, $29,133,000 related to the Cleveland Medical Mart development project and $23,992,000 from the deconsolidation of Independence Plaza. Excluding these items, revenues increased by $50,019,000 from the prior year’s six months. Below are the details of the (decrease) increase by segment:
8,351
10,330
544
(1,048)
(1,475)
(23,992)
(6,641)
(1,935)
(666)
260
(4,300)
211
811
21,617
17,055
(4,052)
2,260
6,354
357
1,669
(4,174)
1,390
(679)
(82)
(32)
(225)
(1,262)
(1,073)
123
(355)
16,478
6,910
765
7,060
1,743
14,537
5,497
726
7,151
1,163
(29,133)
7,978
8,881
(903)
3,363
681
967
(251)
(27)
(8)
(58,671)
(1,925)
3,195
(59,581)
(360)
(1,817)
(2,137)
1,560
(61)
(1,179)
(48,466)
9,149
4,504
(59,669)
(2,450)
(62,705)
16,315
1,056
(51,046)
(29,030)
Due to the completion of the project. This decrease in revenue is substantially offset by a decrease in development costs expensed in the period. See note (3) on page 58.
Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 58.
Results primarily from $59,599 of income recognized in the first quarter of 2013 pursuant to a settlement agreement with Stop & Shop.
57
Results of Operations – Six Months Ended June 30, 2014 Compared to June 30, 2013 - continued
Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $934,113,000 for the six months ended June 30, 2014, compared to $929,573,000 in the prior year’s six months, an increase of $4,540,000. Excluding expenses of $20,000,000 for a non-cash impairment loss on the Springfield Town Center in 2014, $26,525,000 related to the Cleveland Medical Mart development project in 2013 and $25,899,000 from the deconsolidation of Independence Plaza, expenses increased by $36,964,000 from the prior year’s six months. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
(1,228)
325
(133)
(1,383)
(9,592)
(7,568)
(3,462)
(180)
(3,395)
(2,547)
(973)
1,208
215
3,961
5,128
(1,167)
25,480
10,985
3,630
7,854
3,011
9,929
3,843
3,413
6,365
(3,692)
4,408
4,528
(16,307)
24,018
17,392
(151)
8,313
(1,536)
(7,940)
(12,686)
2,189
1,915
642
4,179
(7,073)
2,038
10,119
(905)
842
(1,647)
(619)
494
(1,818)
296
(4,959)
(3,016)
(26,525)
Impairment losses, acquisition and
transaction related costs
21,916
20,000
1,916
Total increase (decrease) in expenses
4,540
(3,849)
34,666
(32,222)
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.
Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 57.
Due to the completion of the project. This decrease in expense is offset by the decrease in development revenue in the period. See note (1) on page 57.
Represents a non-cash impairment loss on the Springfield Town Center.
58
In the six months ended June 30, 2014, we recognized a net loss of $55,744,000 from our investment in Toys, comprised of (i) $15,666,000 for our share of Toys’ equity in earnings, (ii) $3,786,000 of management fees earned and received, offset by (iii) a $75,196,000 non-cash impairment loss.
In the six months ended June 30, 2013, we recognized a net loss of $35,102,000 from our investment in Toys, comprised of (i) $39,834,000 for our share of Toys’ equity in earnings, (ii) $3,606,000 of management fees earned and received, offset by (iii) a $78,542,000 non-cash impairment loss.
Summarized below are the components of income (loss) from partially owned entities for the six months ended June 30, 2014 and 2013.
Lexington(3)
LNR (4)
Below are the components of the income from our Real Estate Fund for the six months ended June 30, 2014 and 2013.
Excludes management, leasing and development fees of $1,449 and $1,676 for the six months ended June 30, 2014 and 2013, 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 was income of $21,328,000 in the six months ended June 30, 2014, compared to a loss of $22,660,000 in the prior year’s six months, an increase in income of $43,988,000. This increase resulted from:
Losses from the mark-to-market and impairment of investment in J.C. Penney in 2013
52,962
(6,897)
Income from prepayment penalties in connection with the repayment of a mezzanine loan in 2013
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)
Higher dividends and interest on marketable securities
764
1,584
43,988
Interest and debt expense was $226,493,000 in the six months ended June 30, 2014, compared to $241,003,000 in the prior year’s six months, a decrease of $14,510,000. This decrease was primarily due to (i) $12,690,000 of higher capitalized interest in the current year’s six months and (ii) $12,004,000 of interest savings from the restructuring of the Skyline properties mortgage loan in October 2013, partially offset by (iii) $5,589,000 of defeasance cost in connection with the refinancing of 909 Third Avenue and (iv) $5,423,000 of interest expense from the $600,000,000 financing of our 220 Central Park South development site in January 2014.
In the six months ended June 30, 2014, we recognized a $10,540,000 gain on disposition of wholly owned and partially owned assets, primarily from the sale of residential condominiums and a land parcel, compared to a $35,719,000 loss in the prior year’s six months, primarily from the sale of 10,000,000 J.C. Penney common shares.
Income tax expense was $5,181,000 in the six months ended June 30, 2014, compared to $3,950,000 in the prior year’s six months, an increase of $1,231,000. This increase was primarily attributable to higher income from our taxable REIT subsidiaries.
60
We have reclassified the revenues and expenses of the properties that were sold or 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 six months ended June 30, 2014 and 2013.
Net gains on sales of other real estate
Net income attributable to noncontrolling interests in consolidated subsidiaries was $75,554,000 in the six months ended June 30, 2014, compared to $26,216,000 in the prior year’s six months, an increase of $49,338,000. This increase resulted primarily from $48,730,000 of higher net income allocated to the noncontrolling interests of our Real Estate Fund.
Net income attributable to noncontrolling interests in the Operating Partnership was $8,539,000 in the six months ended June 30, 2014, compared to $22,782,000 in the prior year’s six months, a decrease of $14,243,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred unit distributions of the Operating Partnership were $25,000 in the six months ended June 30, 2014, compared to $1,134,000 in the prior year’s six months, a decrease of $1,109,000. This decrease resulted from the redemption of the 6.875% Series D-15 cumulative redeemable preferred units in May 2013.
Preferred share dividends were $40,734,000 in the six months ended June 30, 2014, compared to $42,070,000 in the prior year’s six months, a decrease of $1,336,000. This decrease resulted primarily from the redemption of the 6.75% Series F and Series H preferred shares in February 2013.
In the six months ended June 30, 2013, we recognized $1,130,000 of expense in connection with preferred unit and share redemptions, comprised of $9,230,000 of expense from the redemption of the 6.75% Series F and Series H cumulative redeemable preferred shares in February 2013, partially offset by $8,100,000 of income from the redemption of all the 6.875% Series D-15 cumulative redeemable preferred units in May 2013.
61
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 also present same store EBITDA on 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 reconciliations of EBITDA to same store EBITDA for each of our segments for the six months ended June 30, 2014, compared to six months ended June 30, 2013.
EBITDA for the six months ended June 30, 2014
14,438
14,019
8,766
(15,573)
(5,335)
(11,398)
(1,878)
(1,135)
(3,299)
(3,688)
13,869
Same store EBITDA for the six months ended June 30, 2014
469,295
177,434
105,625
EBITDA for the six months ended June 30, 2013
15,057
13,525
10,584
(5,041)
(281,029)
(9,322)
(3,046)
(276)
Other non-operating income
(9,510)
(18)
(66,012)
Same store EBITDA for the six months ended June 30, 2013
444,216
181,483
103,999
Six months ended June 30, 2014 vs. June 30, 2013(1)
25,079
(4,049)
1,626
(2.2%)
1.6%
See notes on following page.
The $25,079,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail of $19,057,000 and $6,879,000, respectively. The Office increase resulted primarily from higher (i) rental revenue of $12,582,000 (primarily due to an increase in average same store occupancy), and (ii) cleaning fees and signage revenue of $5,877,000. The Retail increase resulted primarily from higher rental revenue of $4,694,000, (primarily due to an increase in average same store occupancy).
The $4,049,000 decrease in Washington, DC same store EBITDA resulted primarily from lower rental revenue of $4,052,000, primarily due to a decrease in occupancy at our Skyline properties and an increase in amortization of rent abatements.
The $1,626,000 increase in Retail Properties same store EBITDA resulted primarily from increase in rental revenue of $2,260,000, primarily due to an increase in average same store occupancy.
(51,527)
(3,664)
(3,406)
Cash basis same store EBITDA for the six months ended
417,768
173,770
102,219
(59,269)
(6,763)
(4,058)
384,947
174,720
99,941
Six months ended June 30, 2014 vs. June 30, 2013
32,821
(950)
2,278
8.5%
2.3%
63
SUPPLEMENTAL INFORMATION
Reconciliation of Net Income (Loss) to EBITDA for the Three Months Ended March 31, 2014
Net income (loss) attributable to Vornado for the three months ended
March 31, 2014
87,111
25,328
58,068
22,798
10,351
87,587
36,150
Income tax expense (benefit)
1,032
(189)
EBITDA for the three months ended March 31, 2014
233,798
84,087
35,280
Reconciliation of EBITDA to Same Store EBITDA – Three Months Ended June 30, 2014 compared to March 31, 2014
249,998
7,792
7,447
4,656
(3,109)
(5,305)
(1,272)
(604)
(1,290)
(2,027)
16,112
Same store EBITDA for the three months ended March 31, 2014
234,995
88,235
52,335
Increase in same store EBITDA -
Three months ended June 30, 2014 vs. March 31, 2014
964
955
% increase in same store EBITDA
6.4%
1.1%
64
SUPPLEMENTAL INFORMATION – CONTINUED
Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA – Three Months Ended June 30, 2014 Compared to March 31, 2014
(30,646)
219,352
(28,381)
(1,200)
(1,648)
206,614
87,035
50,687
12,738
(298)
845
6.2%
(0.3%)
1.7%
65
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 may require funding from borrowings and/or equity offerings.
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.
Cash Flows for the Six Months Ended June 30, 2014
Our cash and cash equivalents were $1,371,226,000 at June 30, 2014, a $787,936,000 increase over the balance at December 31, 2013. Our consolidated outstanding debt was $10,868,795,000 at June 30, 2014, an $890,077,000 increase over the balance at December 31, 2013. As of June 30, 2014 and December 31, 2013, $88,138,000 and $295,870,000, respectively, was outstanding under our revolving credit facilities. During the remainder of 2014 and 2015, $19,736,000 and $745,775,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.
Cash flows provided by operating activities of $447,643,000 was comprised of (i) net income of $263,843,000, (ii) $209,123,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net loss of partially owned entities and impairment losses on real estate, (iii) return of capital from real estate fund investment of $140,920,000 and (iv) distributions of income from partially owned entities of $25,784,000, partially offset by (v) the net change in operating assets and liabilities of $192,027,000, including $2,666,000 related to Real Estate Fund investments.
Net cash used in investing activities of $66,514,000 was comprised of (i) $214,615,000 of development costs and construction in progress, (ii) $105,116,000 of additions to real estate, (iii) $62,894,000 of investments in partially owned entities, (iv) $8,963,000 of acquisition of real estate, partially offset by (v) $125,037,000 of proceeds from sales of real estate and related investments, (vi) $102,087,000 of changes in restricted cash, (vii) $96,159,000 of proceeds from repayments of mortgages and mezzanine loans receivable and other and (viii) $1,791,000 of capital distributions from partially owned entities.
Net cash provided by financing activities of $406,807,000 was comprised of (i) $1,398,285,000 of proceeds from borrowings, (ii) $10,125,000 of proceeds received from the exercise of employee share options and (iii) $5,297,000 of contributions from noncontrolling interests, partially offset by (iv) $313,444,000 for the repayments of borrowings, (v) $273,694,000 of dividends paid on common shares, (vi) purchase of marketable securities in connection with defeasance of mortgage notes payable of $198,884,000, (vii) $149,944,000 of distributions to noncontrolling interests, (viii) $40,737,000 of dividends paid on preferred shares, (ix) $29,560,000 of debt issuance costs and (x) $637,000 for the repurchase of shares related to stock compensation agreements and/or related tax withholdings.
Capital Expenditures
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 improvements 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 of a property.
Liquidity and Capital Resources – continued
Capital Expenditures - continued
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 six months ended June 30, 2014.
Expenditures to maintain assets
34,110
20,896
4,761
1,490
6,963
Tenant improvements
114,133
89,525
11,180
1,126
12,302
Leasing commissions
50,624
44,171
2,806
419
3,228
Non-recurring capital expenditures
17,761
2,904
12,435
2,422
Total capital expenditures and leasing
commissions (accrual basis)
216,628
157,496
31,182
3,035
24,915
Adjustments to reconcile to cash basis:
Expenditures in the current year
applicable to prior periods
67,908
26,568
30,957
3,148
7,235
Expenditures to be made in future
periods for the current period
(143,636)
(108,232)
(22,927)
(1,545)
(10,932)
commissions (cash basis)
140,900
75,832
39,212
4,638
21,218
Tenant improvements and leasing commissions:
5.63
6.50
0.49
10.1%
9.1%
Development and Redevelopment Expenditures
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.
On March 2, 2014, we entered into an agreement to transfer upon completion, the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to Pennsylvania Real Estate Investment Trust (NYSE: PEI) (“PREIT’) in exchange for $465,000,000 comprised of $340,000,000 of cash and $125,000,000 of PREIT operating partnership units. The incremental development cost of this project is approximately $250,000,000, of which $166,500,000 has been expended as of June 30, 2014. The redevelopment is expected to be completed in the fourth quarter of 2014. The closing will be no later than March 31, 2015.
We are in the process of redeveloping and substantially expanding the existing retail space at the Marriott Marquis Times Square Hotel, including converting the below grade parking garage into retail and creating a six-story, 300 foot wide block front, dynamic LED sign, all of which is expected to be completed by the end of 2014. Upon completion of the redevelopment, the retail space will include 20,000 square feet on grade and 20,000 square feet below grade. The incremental development cost of this project is approximately $210,000,000, of which $98,800,000 has been expended as of June 30, 2014.
We plan to construct a residential condominium tower containing 472,000 zoning square feet on our 220 Central Park South development site. The incremental development cost of this project is approximately $1.0 billion. In January 2014, we completed a $600,000,000 loan secured by this site.
We plan to develop a 699-unit residential project in Pentagon City (Metropolitan Park 4&5), which is expected to be completed in 2016. The project will include a 37,000 square foot Whole Foods Market at the base of the building. The incremental development cost of this project is approximately $250,000,000.
We plan to redevelop an existing 165,000 square foot office building in Crystal City (2221 S. Clark Street), which we have leased to WeWork, into approximately 250 rental residential units. The incremental development cost of this project is approximately $40,000,000. The redevelopment is expected to be completed in the second half of 2015.
Development and Redevelopment Expenditures - continued
Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2014. These expenditures include interest of $30,182,000, payroll of $4,175,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $27,907,000, that were capitalized in connection with the development and redevelopment of these projects.
Springfield Town Center
54,743
Marriott Marquis Times Square - retail and signage
38,659
220 Central Park South
27,372
330 West 34th Street
21,816
608 Fifth Avenue
15,809
Metropolitan Park 4 & 5
10,873
7 West 34th Street
7,243
Wayne Towne Center
5,228
32,872
13,866
13,438
3,370
2,198
214,615
97,393
24,311
63,341
29,570
In addition to the development and redevelopment projects above, we are in the process of repositioning and re-tenanting 280 Park Avenue (49.5% owned). Our share of the incremental development cost of this project is approximately $62,000,000, of which $34,700,000 was expended prior to 2014, and $13,900,000 has been expended in 2014.
We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including the Hotel Pennsylvania and in Washington, including 1900 Crystal Drive, Rosslyn and Pentagon City.
There can be no assurance that any of our development or redevelopment projects will commence, or if commenced, be completed, or completed on schedule or within budget.
68
Cash Flows for the Six Months Ended June 30, 2013
Our cash and cash equivalents were $781,655,000 at June 30, 2013, a $178,664,000 decrease over the balance at December 31, 2012. This decrease is primarily due to cash flows from financing activities, partially offset by cash flows from operating and investing activities, as discussed below.
Cash flows provided by operating activities of $444,800,000 was comprised of (i) net income of $471,248,000, (ii) $61,190,000 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, (iii) return of capital from Real Estate Fund investments of $56,664,000, and (iv) distributions of income from partially owned entities of $23,774,000, partially offset by (v) the net change in operating assets and liabilities of $168,076,000, including $30,893,000 related to Real Estate Fund investments.
Net cash provided by investing activities of $1,070,685,000 was comprised of (i) $648,167,000 of proceeds from sales of real estate and related investments, (ii) $281,991,000 of capital distributions from partially owned entities, (iii) $240,474,000 from the sale of LNR, (iv) $160,715,000 of proceeds from the sale of marketable securities, (v) $85,450,000 from the return of the J.C. Penney derivative collateral, (vi) 47,950,000 of proceeds from repayments of mortgage and mezzanine loans receivable and other, and (vii) $16,596,000 of changes in restricted cash, partially offset by (viii) $113,060,000 of additions to real estate, (ix) $98,447,000 for the funding of the J.C. Penney derivative collateral, (x) $85,550,000 of development costs and construction in progress, (xi) $59,472,000 of investments in partially owned entities, (xii) $53,992,000 of acquisitions of real estate, and (xiii) 137,000 of investment in mortgage and mezzanine loans receivable and other.
Net cash used in financing activities of $1,694,149,000 was comprised of (i) $2,800,441,000 for the repayments of borrowings, (ii) $299,400,000 for purchases of outstanding preferred units and shares, (iii) $272,825,000 of dividends paid on common shares, (iv) $181,510,000 of distributions to noncontrolling interests, (v) $42,451,000 of dividends paid on preferred shares, (vi) $9,520,000 of debt issuance costs, and (vii) $332,000 for the repurchase of shares related to stock compensation agreements and/or related tax withholdings, partially offset by (viii) $1,583,357,000 of proceeds from borrowings, (ix) $290,536,000 of proceeds from the issuance of preferred shares, (x) $33,967,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (xi) $4,470,000 of proceeds from the exercise of employee share options.
69
Capital Expenditures in the six months ended June 30, 2013
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 six months ended June 30, 2013.
23,035
4,814
1,855
6,247
86,797
55,834
17,373
5,558
30,654
24,840
3,479
1,339
996
2,163
142,649
92,956
25,666
11,226
12,801
71,961
24,978
17,393
4,576
25,014
(77,870)
(50,081)
(18,297)
(200)
136,740
67,853
24,762
6,510
37,615
4.14
5.08
6.98
1.23
9.6%
16.7%
Development and Redevelopment Expenditures in the six months ended June 30, 2013
Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2013. These expenditures include interest of $17,492,000, payroll of $1,905,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $9,375,000, that were capitalized in connection with the development and redevelopment of these projects.
24,707
10,556
1290 Avenue of the Americas
8,723
5,907
1540 Broadway
4,355
LED Signage
3,685
1851 South Bell Street (1900 Crystal Drive)
2,685
North Plainfield, New Jersey
2,045
22,887
3,639
11,481
5,489
85,550
14,166
32,241
12,834
70
71
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 non-GAAP financial measures 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 Note 19 – Income per Share, in our consolidated financial statements on page 26 of this Quarterly Report on Form 10-Q.
FFO for the Three and Six Months Ended June 30, 2014 and 2013
FFO attributable to common shareholders plus assumed conversions was $216,547,000, or $1.15 per diluted share for the three months ended June 30, 2014, compared to $235,348,000, or $1.25 per diluted share, for the prior year’s quarter. FFO attributable to common shareholders plus assumed conversions was $463,626,000, or $2.46 per diluted share for the six months ended June 30, 2014, compared to $437,168,000, or $2.33 per diluted share, for the prior year’s six months. Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”
For The Three Months
For The Six Months
Reconciliation of our net income to FFO:
Depreciation and amortization of real property
121,402
126,728
263,971
259,241
(65,665)
Real estate impairment losses
2,493
Proportionate share of adjustments to equity in net income of
Toys, to arrive at FFO:
8,814
17,480
20,229
36,805
620
4,270
Income tax effect of above adjustments
(3,085)
(6,326)
(7,080)
(14,376)
partially owned entities, excluding Toys, to arrive at FFO:
21,312
19,486
46,583
41,316
(465)
(8,561)
(5,421)
(19,960)
(3,607)
FFO
236,890
247,589
504,310
480,313
FFO attributable to common shareholders
216,524
235,321
463,576
437,113
FFO attributable to common shareholders plus assumed conversions
216,547
235,348
463,626
437,168
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
Denominator for FFO per diluted share
188,659
188,475
per diluted share
1.15
1.25
2.46
2.33
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
1,453,932
2.25%
14,539
1,064,730
2.01%
9,414,863
8,913,988
4.73%
4.25%
4.44%
Prorata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys
303,673
1.75%
3,037
196,240
2.09%
Variable rate – Toys
1,017,031
5.81%
10,170
1,179,001
5.45%
Fixed rate (including $682,822 and
$682,484 of Toys debt in 2014 and 2013)
2,773,666
6.47%
2,814,162
6.46%
4,094,370
5.95%
13,207
4,189,403
5.97%
Noncontrolling interests’ share of above
(1,619)
Total change in annual net income
26,127
Per share-diluted
0.14
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of June 30, 2014, we have an interest rate cap with a notional amount of $60,000,000 that caps LIBOR at a rate of 7.00%. In addition, we have an interest rate swap on a $425,000,000 mortgage loan that swapped the rate from LIBOR plus 2.00% (2.15% at June 30, 2014) to a fixed rate of 5.13% for the remaining four-year term of the loan.
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 June 30, 2014, the estimated fair value of our consolidated debt was $10,901,000,000.
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 June 30, 2014, 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, as amended, for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2014, we issued 13,026 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, as amended, for the year ended December 31, 2013, 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
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: August 4, 2014
By:
/s/ Stephen W. Theriot
Stephen W. Theriot, Chief Financial Officer (duly authorized officer and principal financial and accounting officer)
Exhibit No.
10.52
**
Employment agreement between Vornado Realty Trust and Michael J. Franco dated
*
January 10, 2014. Incorporated by reference to Exhibit 10.52 to Vornado Realty Trust’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (File No. 001-11954),
filed on May 5, 2014
10.53
Form of Vornado Realty Trust 2014 Outperformance Plan Award Agreement. Incorporated
by reference to Exhibit 10.53 to Vornado Realty Trust’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2014 (File No. 001-11954), filed on May 5, 2014
15.1
Letter regarding Unaudited Interim Financial Information
31.1
Rule 13a-14 (a) Certification of the Chief Executive Officer
31.2
Rule 13a-14 (a) Certification of the Chief Financial Officer
32.1
Section 1350 Certification of the Chief Executive Officer
32.2
Section 1350 Certification of the Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
______________________________
Incorporated by reference
Management contract or compensation agreement