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:
March 31, 2016
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 March 31, 2016, 188,771,002 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
March 31, 2016 and December 31, 2015
3
Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 2016 and 2015
4
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three Months Ended March 31, 2016 and 2015
5
Consolidated Statements of Changes in Equity (Unaudited) for the
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
30
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
58
Item 4.
Controls and Procedures
PART II.
Other Information:
Legal Proceedings
59
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
60
EXHIBIT INDEX
61
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
December 31, 2015
ASSETS
Real estate, at cost:
Land
$
4,164,796
4,164,799
Buildings and improvements
12,358,371
12,582,671
Development costs and construction in progress
1,305,849
1,226,637
Leasehold improvements and equipment
109,536
116,030
Total
17,938,552
18,090,137
Less accumulated depreciation and amortization
(3,352,986)
(3,418,267)
Real estate, net
14,585,566
14,671,870
Cash and cash equivalents
1,673,566
1,835,707
Restricted cash
109,147
107,799
Marketable securities
162,091
150,997
Tenant and other receivables, net of allowance for doubtful accounts of $11,200 and $11,908
97,345
98,062
Investments in partially owned entities
1,553,250
1,550,422
Real estate fund investments
566,696
574,761
Receivable arising from the straight-lining of rents, net of allowance of $2,539 and $2,751
973,709
931,245
Deferred leasing costs, net of accumulated amortization of $218,709 and $218,239
485,283
480,421
Identified intangible assets, net of accumulated amortization of $188,094 and $187,360
218,388
227,901
Assets related to discontinued operations
36,514
37,020
Other assets
411,819
477,088
20,873,374
21,143,293
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
9,844,242
9,513,713
Senior unsecured notes, net
844,514
844,159
Unsecured revolving credit facilities
-
550,000
Unsecured term loan, net
371,076
183,138
Accounts payable and accrued expenses
447,700
443,955
Deferred revenue
325,013
346,119
Deferred compensation plan
116,824
117,475
Liabilities related to discontinued operations
12,902
12,470
Other liabilities
433,863
426,965
Total liabilities
12,396,134
12,437,994
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 12,414,019 and 12,242,820 units outstanding
1,172,256
1,223,793
Series D cumulative redeemable preferred units - 177,101 units outstanding
5,428
Total redeemable noncontrolling interests
1,177,684
1,229,221
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 52,676,629 shares
1,276,954
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 188,771,002 and 188,576,853 shares
7,529
7,521
Additional capital
7,187,036
7,132,979
Earnings less than distributions
(1,999,994)
(1,766,780)
Accumulated other comprehensive income
53,399
46,921
Total Vornado shareholders' equity
6,524,924
6,697,595
Noncontrolling interests in consolidated subsidiaries
774,632
778,483
Total equity
7,299,556
7,476,078
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
For the Three Months Ended March 31,
2016
2015
REVENUES:
Property rentals
519,492
500,274
Tenant expense reimbursements
59,575
66,921
Fee and other income
33,970
39,607
Total revenues
613,037
606,802
EXPENSES:
Operating
256,349
254,493
Depreciation and amortization
142,957
124,122
General and administrative
48,704
58,492
Impairment loss and acquisition and transaction related costs
165,307
1,981
Total expenses
613,317
439,088
Operating (loss) income
(280)
167,714
Loss from partially owned entities
(4,240)
(2,743)
Income from real estate fund investments
11,284
24,089
Interest and other investment income, net
3,518
10,792
Interest and debt expense
(100,489)
(91,674)
Net gain on disposition of wholly owned and partially owned assets
714
1,860
(Loss) income before income taxes
(89,493)
110,038
Income tax expense
(2,831)
(971)
(Loss) income from continuing operations
(92,324)
109,067
Income from discontinued operations
716
16,179
Net (loss) income
(91,608)
125,246
Less net (income) loss attributable to noncontrolling interests in:
Consolidated subsidiaries
(9,678)
(15,882)
Operating Partnership
7,487
(5,287)
Net (loss) income attributable to Vornado
(93,799)
104,077
Preferred share dividends
(20,364)
(19,484)
NET (LOSS) INCOME attributable to common shareholders
(114,163)
84,593
(LOSS) INCOME PER COMMON SHARE - BASIC:
(Loss) income from continuing operations, net
(0.61)
0.37
Income from discontinued operations, net
0.08
Net (loss) income per common share
0.45
Weighted average shares outstanding
188,658
187,999
(LOSS) INCOME PER COMMON SHARE - DILUTED:
189,336
DIVIDENDS PER COMMON SHARE
0.63
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Increase (reduction) in unrealized net gain on available-for-sale securities
11,094
(21,332)
Pro rata share of other comprehensive income of nonconsolidated subsidiaries
157
Reduction in value of interest rate swaps and other
(4,195)
(771)
Comprehensive (loss) income
(84,703)
103,300
Less comprehensive income attributable to noncontrolling interests
(2,618)
(19,881)
Comprehensive (loss) income attributable to Vornado
(87,321)
83,419
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Non-
Accumulated
controlling
Earnings
Other
Interests in
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
Consolidated
Shares
Amount
Capital
Distributions
Income
Subsidiaries
Equity
Balance, December 31, 2015
52,677
188,577
Net loss attributable to Vornado
Net income attributable to
noncontrolling interests in
consolidated subsidiaries
9,678
Dividends on common shares
(118,867)
Dividends on preferred shares
Common shares issued:
Upon redemption of Class A
units, at redemption value
14,476
14,482
Under employees' share
option plan
26
1
2,165
2,166
Under dividend reinvestment plan
357
Distributions:
(13,487)
(152)
Deferred compensation shares
and options
7
535
(186)
350
Increase in unrealized net gain on
available-for-sale securities
Pro rata share of other
comprehensive income of
nonconsolidated subsidiaries
Reduction in value of interest
rate swaps
Adjustments to carry redeemable
Class A units at redemption value
36,524
Redeemable noncontrolling interests'
share of above adjustments
(427)
110
112
Balance, March 31, 2016
188,771
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
Balance, December 31, 2014
52,679
1,277,026
187,887
7,493
6,873,025
(1,505,385)
93,267
743,956
7,489,382
Net income attributable to Vornado
15,882
Distribution of Urban Edge
Properties
(464,262)
(341)
(464,603)
(118,447)
210
23,485
23,493
165
11,672
(2,579)
9,100
338
Contributions:
51,350
(52,882)
(125)
Conversion of Series A preferred
shares to common shares
(12)
12
1,324
(359)
966
Reduction in unrealized net gain
on available-for-sale securities
rate swap
(776)
25,349
1,288
(90)
(85)
Balance, March 31, 2015
1,277,014
188,273
7,509
6,935,205
(2,006,439)
72,609
757,750
7,043,648
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Real estate impairment losses
160,700
256
Depreciation and amortization (including amortization of deferred financing costs)
150,648
131,112
Straight-lining of rental income
(41,626)
(29,474)
Distributions of income from partially owned entities
29,860
15,874
Amortization of below-market leases, net
(17,507)
(12,754)
Other non-cash adjustments
15,248
15,865
Return of capital from real estate fund investments
14,676
72,208
Net realized and unrealized gains on real estate fund investments
(6,611)
(17,639)
4,240
2,405
(714)
(1,860)
Net gains on sale of real estate and other
(32,243)
Changes in operating assets and liabilities:
(95,022)
Tenant and other receivables, net
800
975
Prepaid assets
64,851
62,658
(20,113)
(13,093)
12,774
(12,691)
1,027
(17,307)
Net cash provided by operating activities
276,645
194,516
Cash Flows from Investing Activities:
(127,283)
(88,052)
Additions to real estate
(77,243)
(54,466)
(63,188)
(23,912)
Distributions of capital from partially owned entities
25,524
13,409
Proceeds from sales of real estate and related investments
2,867
334,725
(1,348)
1,282
Acquisitions of real estate and other
(938)
(49,878)
Proceeds from sales and repayments of mortgage and mezzanine loans receivable and other
11
16,763
Net cash (used in) provided by investing activities
(241,598)
149,871
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Repayments of borrowings
(909,617)
(907,431)
Proceeds from borrowings
887,500
800,000
Dividends paid on common shares
Distributions to noncontrolling interests
(21,474)
(60,287)
Dividends paid on preferred shares
Debt issuance and other costs
(16,704)
(5,076)
Proceeds received from exercise of employee share options
2,523
12,018
Repurchase of shares related to stock compensation agreements and related
tax withholdings and other
(185)
(2,939)
Cash included in the spin-off of Urban Edge Properties
(225,000)
Contributions from noncontrolling interests
Net cash used in financing activities
(197,188)
(475,296)
Net decrease in cash and cash equivalents
(162,141)
(130,909)
Cash and cash equivalents at beginning of period
1,198,477
Cash and cash equivalents at end of period
1,067,568
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $7,497 and $8,479
91,719
91,702
Cash payments for income taxes
2,193
2,175
Non-Cash Investing and Financing Activities:
Accrued capital expenditures included in accounts payable and accrued expenses
113,755
87,232
Adjustments to carry redeemable Class A units at redemption value
Write-off of fully depreciated assets
(187,419)
(18,790)
Non-cash distribution of Urban Edge Properties:
Assets
1,722,263
Liabilities
(1,482,660)
(239,603)
Transfer of interest in real estate to Pennsylvania Real Estate Investment Trust
(145,313)
Financing assumed in acquisitions
62,000
Like-kind exchange of real estate:
Acquisitions
57,722
Dispositions
(38,822)
Receipt of security deposits included in restricted cash and other liabilities
42,346
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and 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 93.6% of the common limited partnership interest in, the Operating Partnership at March 31, 2016. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and its consolidated subsidiaries, including the Operating Partnership. All inter-company amounts have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“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, 2015, 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 months ended March 31, 2016 are not necessarily indicative of the operating results for the full year.
3. Recently Issued Accounting Literature
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update ("ASU 2014-09") establishing Accounting Standards Codification (“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, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. Recently Issued Accounting Literature - continued
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 began after December 15, 2015. The adoption of this update as of January 1, 2016, did not have any impact on our consolidated financial statements.
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this update on January 1, 2016 resulted in the identification of additional VIEs, but did not have an impact on our consolidated financial statements other than additional disclosures (see Note 12 - Variable Interest Entities (“VIEs”)).
In January 2016, the FASB issued an update (“ASU 2016-01”) Recognition and Measurement of Financial Assets and Financial Liabilities to ASC Topic 825, Financial Instruments (“ASC 825”). ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In February 2016, the FASB issued (“ASU 2016-02”) Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued an update (“ASU 2016-09”) Improvements to Employee Share-Based Payment Accounting to ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.
4. Real Estate Fund Investments
We are the general partner and investment manager of Vornado Capital Partners Real Estate Fund (the “Fund”), which has an eight-year term and a three-year investment period that ended in July 2013. During the investment period, the Fund was our exclusive investment vehicle for all investments that fit within its investment parameters, as defined. The Fund is accounted for under ASC 946, Financial Services – Investment Companies (“ASC 946”) 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.
We are also the general partner and investment manager of Crowne Plaza Times Square Hotel Co-Investment (the “Co-Investment”), which owns a 24.7% interest in the Crowne Plaza Times Square Hotel. The Fund owns the remaining 75.3% interest. The Co-Investment is also accounted for under ASC 946. We consolidate the accounts of the Co-Investment into our consolidated financial statements, retaining the fair value basis of accounting.
At March 31, 2016, we had six real estate fund investments with an aggregate fair value of $566,696,000, or $200,549,000 in excess of cost, and had remaining unfunded commitments of $102,212,000, of which our share was $25,553,000. Below is a summary of income from the Fund and the Co-Investment for the three months ended March 31, 2016 and 2015.
Net investment income
4,673
6,450
Net realized gain on exited investments
24,705
Previously recorded unrealized gain on exited investment
(14,254)
(23,279)
Net unrealized gains on held investments
6,189
16,213
Less income attributable to noncontrolling interests
(5,973)
(13,539)
Income from real estate fund investments attributable to Vornado(1)
5,311
10,550
(1)
Excludes management, leasing and development fees of $760 and $704 for the three months ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015.
As of March 31, 2016
As of December 31, 2015
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
158,833
72,549
86,284
147,752
75,203
3,258
3,245
89,542
78,448
6. Investments in Partially Owned Entities
As of March 31, 2016, we own 1,654,068 Alexander’s common shares, representing a 32.4% interest in Alexander’s. We account for our investment in Alexander’s under the equity method. We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.
As of March 31, 2016, the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s March 31, 2016 closing share price of $380.55, was $629,456,000, or $501,192,000 in excess of the carrying amount on our consolidated balance sheet. As of March 31, 2016, 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 $40,162,000. 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.
Urban Edge Properties (“UE”) (NYSE: UE)
As of March 31, 2016, we own 5,717,184 UE operating partnership units, representing a 5.4% ownership interest in UE. We account for our investment in UE under the equity method and record our share of UE’s net income or loss on a one-quarter lag basis. During 2015, we provided transition services to UE, primarily for information technology, human resources, tax and financial planning. In 2016, we continue to provide UE information technology support. UE is providing us with leasing and property management services for (i) certain small retail properties that we plan to sell, and (ii) our affiliate, Alexander’s, Rego Park retail assets. As of March 31, 2016, the fair value of our investment in UE, based on UE’s March 31, 2016 closing share price of $25.84, was $147,732,000, or $121,505,000 in excess of the carrying amount on our consolidated balance sheet.
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
As of March 31, 2016, we own 6,250,000 PREIT operating partnership units, representing an 8.1% interest in PREIT. We account for our investment in PREIT under the equity method and record our share of PREIT’s net income or loss on a one-quarter lag basis. As of March 31, 2016, the fair value of our investment in PREIT, based on PREIT’s March 31, 2016 closing share price of $21.85, was $136,563,000, or $8,495,000 in excess of the carrying amount on our consolidated balance sheet. As of March 31, 2016, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $64,827,000. The majority of this basis difference resulted from the excess of the fair value of the PREIT operating units received over our share of the book value of PREIT’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of PREIT’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 PREIT’s net loss. The basis difference related to the land will be recognized upon disposition of our investment.
One Park Avenue
On March 7, 2016, we completed a $300,000,000 refinancing of our 55% owned joint venture, One Park Avenue, a 947,000 square foot Manhattan office building. The loan matures in March 2021 and is interest only at LIBOR plus 1.75% (2.19% at March 31, 2016). The property was previously encumbered by a 4.995%, $250,000,000 mortgage maturing in March 2016.
Mezzanine Loan – New York
On March 17, 2016, we entered into a joint venture, in which we own a 33.3% interest, which owns a $138,240,000 mezzanine loan. The interest rate is LIBOR plus 8.875% (9.32% at March 31, 2016) and the debt matures in November 2016, with two three-month extension options. At March 31, 2016, the joint venture has an $11,760,000 remaining commitment, of which our share is $3,920,000. The joint venture’s investment is subordinate to $350,000,000 of third party debt. We account for our investment in the joint venture under the equity method.
13
6. Investments in Partially Owned Entities – continued
Below are schedules summarizing our investments in, and income (loss) from, partially owned entities.
Percentage
Ownership at
Balance as of
Investments:
Partially owned office buildings (1)
Various
869,233
909,782
Alexander’s
32.4%
128,264
133,568
PREIT
8.1%
128,068
133,375
India real estate ventures
4.1%-36.5%
48,037
48,310
UE
5.4%
26,227
25,351
Other investments (2)
353,421
300,036
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue, 512 West 22nd Street and others.
(2)
Includes interests in Independence Plaza, 85 Tenth Avenue, Fashion Center Mall, 50-70 West 93rd Street, Toys "R" Us, Inc. (which has a carrying amount of zero) and others.
Our Share of Net Income (Loss):
Alexander's (see page 13 for details):
Equity in net income
6,937
5,594
Management, leasing and development fees
1,725
2,097
8,662
7,691
UE (see page 13 for details):
Equity in net earnings
876
Management fees
209
584
1,085
(14,249)
(9,296)
PREIT (see page 13 for details)
(4,288)
(686)
(109)
5,236
(1,613)
Includes interests in Independence Plaza, 85 Tenth Avenue, Fashion Center Mall, 50-70 West 93rd Street, Toys "R" Us, Inc. and others.
14
7. Dispositions
The tables below set forth the assets and liabilities related to discontinued operations at March 31, 2016 and December 31, 2015 and their combined results of operations and cash flows for the three months ended March 31, 2016 and 2015.
Assets related to discontinued operations:
29,517
29,561
6,997
7,459
Liabilities related to discontinued operations:
Income from discontinued operations:
1,182
20,296
466
13,373
6,923
Transaction related costs (primarily UE spin off)
(22,645)
Net gain on sale of lease position in Geary Street, CA
21,376
Net gains on sale of real estate
10,867
Impairment losses
(256)
Pretax income from discontinued operations
16,265
(86)
Cash flows related to discontinued operations:
Cash flows from operating activities
1,654
(36,672)
Cash flows from investing activities
310,069
15
8. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily above-market leases) and liabilities (primarily acquired below-market leases) as of March 31, 2016 and December 31, 2015.
Identified intangible assets:
Gross amount
406,482
415,261
Accumulated amortization
(188,094)
(187,360)
Net
Identified intangible liabilities (included in deferred revenue):
607,241
643,488
(307,858)
(325,340)
299,383
318,148
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $17,507,000 and $12,450,000 for the three months ended March 31, 2016 and 2015, 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, 2017 is as follows:
2017
44,463
2018
42,991
2019
30,973
2020
23,320
2021
18,263
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $7,793,000 and $6,185,000 for the three months ended March 31, 2016 and 2015, 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, 2017 is as follows:
24,427
20,063
15,779
12,345
10,957
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 $458,000 and $458,000 for the three months ended March 31, 2016 and 2015, respectively. Estimated annual amortization of these below-market leases, net of above-market leases, for each of the five succeeding years commencing January 1, 2017 is as follows:
1,832
16
9. Debt
On February 8, 2016, we completed a $700,000,000 refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.75%, (2.19% at March 31, 2016) which was swapped for four and a half years to a fixed rate of 2.56%. The Company realized net proceeds of approximately $330,000,000. The property was previously encumbered by a 5.65%, $353,000,000 mortgage which was to mature in March 2016.
On March 15, 2016, we notified the servicer of the $678,000,000 mortgage loan on the Skyline properties in Virginia that cash flow will be insufficient to service the debt and pay other property related costs and expenses and that we were not willing to fund additional cash shortfalls. Accordingly, at our request, the loan has been transferred to the special servicer. Consequently, based on our shortened estimated holding period for the underlying assets, we concluded that the excess of carrying amount over our estimate of fair value was not recoverable and recognized a $160,700,000 non-cash impairment loss in the first quarter of 2016.
The following is a summary of our debt:
Interest Rate at
Balance at
Mortgages Payable:
Fixed rate
4.04%
6,695,401
6,356,634
Variable rate
2.25%
3,259,067
3,258,204
3.46%
9,954,468
9,614,838
Deferred financing costs, net and other
(110,226)
(101,125)
Total, net
Unsecured Debt:
Senior unsecured notes
3.68%
850,000
(5,486)
(5,841)
Unsecured term loan
1.58%
375,000
187,500
(3,924)
(4,362)
1,215,590
1,577,297
17
10. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests on our consolidated balance sheets are comprised primarily of Class A Operating Partnership units 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, 2014
1,337,780
Net income
5,287
Other comprehensive loss
(1,288)
(7,280)
Redemption of Class A units for common shares, at redemption value
(23,493)
(25,349)
Other, net
19,133
Balance at March 31, 2015
1,304,790
Balance at December 31, 2015
Net loss
(7,487)
Other comprehensive income
427
(7,835)
(14,482)
(36,524)
14,364
Balance at March 31, 2016
As of March 31, 2016 and December 31, 2015, the aggregate redemption value of redeemable Class A units was $1,172,256,000 and $1,223,793,000, respectively.
Redeemable noncontrolling interests exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares. Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $50,561,000 as of March 31, 2016 and December 31, 2015. Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income.
18
11. Accumulated Other Comprehensive Income (“AOCI”)
The following tables set forth the changes in accumulated other comprehensive income by component.
Securities
Pro rata share of
Interest
available-
nonconsolidated
rate
for-sale
subsidiaries' OCI
swaps
For the Three Months Ended March 31, 2016
Balance as of December 31, 2015
(9,319)
(19,368)
(2,840)
OCI before reclassifications
6,478
Amounts reclassified from AOCI
Net current period OCI
Balance as of March 31, 2016
(9,313)
(23,563)
(3,267)
For the Three Months Ended March 31, 2015
Balance as of December 31, 2014
133,774
(8,992)
(25,803)
(5,712)
(20,658)
1,293
Balance as of March 31, 2015
112,442
(8,835)
(26,579)
(4,419)
12. Variable Interest Entities (“VIEs”)
At March 31, 2016 and December 31, 2015, we have several unconsolidated VIEs. 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 (see Note 6 – Investments in Partially Owned Entities). As of March 31, 2016 and December 31, 2015, the net carrying amounts of our investment in these entities were $361,921,000 and $379,939,000, respectively, and our maximum exposure to loss in these entities, is limited to our investments.
We adopted ASU 2015-02 on January 1, 2016 which resulted in the identification of several VIEs at March 31, 2016. Prior to the adoption of ASU 2015-02, these entities were consolidated under the voting interest model. Our most significant consolidated VIEs are our Operating Partnership, real estate fund investments, and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. We consolidate these entities because we control all significant business activities.
We conduct our business through, and all of our assets and liabilities are held by, our Operating Partnership which is a VIE.
19
13. Fair Value Measurements
ASC 820 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) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units), and (v) interest rate swaps. The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy as of March 31, 2016 and December 31, 2015, 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)
59,640
57,184
Interest rate swap (included in other assets)
5,039
Total assets
850,650
221,731
623,880
Mandatorily redeemable instruments (included in other liabilities)
50,561
Interest rate swaps (included in other liabilities)
28,914
79,475
58,289
59,186
843,233
209,286
633,947
19,600
70,161
20
13. Fair Value Measurements – continued
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At March 31, 2016, we had six real estate fund investments with an aggregate fair value of $566,696,000, or $200,549,000 in excess of cost. These investments are classified as Level 3. We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period. The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 1.3 to 4.8 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, 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 real estate fund investments at March 31, 2016 and December 31, 2015.
Weighted Average
Range
(based on fair value of investments)
Unobservable Quantitative Input
Discount rates
12.0% to 14.9%
13.5%
13.6%
Terminal capitalization rates
4.8% to 6.1%
5.5%
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 real estate fund investments that are classified as Level 3, for the three months ended March 31, 2016 and 2015.
Beginning balance
513,973
Purchases
95,000
Dispositions / distributions
(14,676)
(72,186)
Net unrealized gains
Net realized gains
422
1,426
Ending balance
554,426
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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 months ended March 31, 2016 and 2015.
63,315
1,166
624
Sales
(1,372)
(438)
Realized and unrealized (loss) gain
(1,907)
1,335
111
64,836
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 required to be measured for impairment at March 31, 2016. There are no assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2015. The fair values of real estate assets required to be measured for impairment were 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.
Real estate assets (Skyline properties)
192,003
22
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), 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 unsecured revolving credit facilities and unsecured term loan are classified as Level 1. The fair value of our secured and unsecured debt is classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of March 31, 2016 and December 31, 2015.
Carrying
Fair
Value
Cash equivalents
1,445,442
1,445,000
1,295,980
1,296,000
Debt:
Mortgages payable
9,705,000
9,306,000
887,000
868,000
11,179,468
10,967,000
11,202,338
10,911,500
Excludes $119,636 of deferred financing costs, net and other.
14. Incentive Compensation
Our 2010 Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted shares, restricted Operating Partnership units and Out-Performance Plan awards to certain of our employees and officers. We account for all equity-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Equity-based compensation expense was $14,571,000 and $20,142,000 for the three months ended March 31, 2016 and 2015, respectively.
23
15. Fee and Other Income
The following table sets forth the details of fee and other income:
BMS cleaning fees
18,146
22,633
Management and leasing fees
4,799
4,192
Lease termination fees
3,747
Other income
8,620
9,035
Management and leasing fees include management fees from Interstate Properties, a related party, of $134,000 and $139,000 for the three months ended March 31, 2016 and 2015, respectively. The above table excludes fee income from partially owned entities, which is included in “loss from partially owned entities” (see Note 6 – Investments in Partially Owned Entities).
16. Interest and Other Investment Income, Net
The following table sets forth the details of interest and other investment income, net:
Dividends on marketable securities
3,215
3,203
Mark-to-market (loss) income of investments in our deferred compensation plan (1)
(1,938)
2,859
Interest on loans receivable
748
2,824
1,493
1,906
This (loss) income is entirely offset by the income (expense) resulting from the mark-to-market of the deferred compensation plan liability, which is included in "general and administrative" expense.
17. Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
Interest expense
100,295
95,328
Amortization of deferred financing costs
9,265
7,456
Capitalized interest and debt expense
(9,071)
(11,110)
100,489
91,674
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18. (Loss) Income Per Share
The following table provides a reconciliation of both net (loss) income and the number of common shares used in the computation of (i) basic (loss) income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted (loss) 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 awards.
Numerator:
(Loss) income from continuing operations, net of income attributable
to noncontrolling interests
(94,471)
88,848
Income from discontinued operations, net of income attributable to noncontrolling interests
672
15,229
Net (loss) income attributable to common shareholders
Earnings allocated to unvested participating securities
(16)
(19)
Numerator for basic and diluted (loss) income per share
(114,179)
84,574
Denominator:
Denominator for basic (loss) income per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,337
Denominator for diluted (loss) income per share – weighted average
shares and assumed conversions
(LOSS) INCOME PER COMMON SHARE – BASIC:
(LOSS) INCOME PER COMMON SHARE – DILUTED:
The effect of dilutive securities for the three months ended March 31, 2016 and 2015 excludes an aggregate of 13,281 and 11,488 weighted average common share equivalents, respectively, as their effect was anti-dilutive.
19. Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as flood and earthquake. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence and in the annual aggregate, subject to a deductible in the amount of 5% of the value of the affected property. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, and $2.0 billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by Terrorism Risk Insurance Program Reauthorization Act of 2015, which expires in December 2020.
25
19. Commitments and Contingencies - continued
Insurance - continued
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism including NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $2,400,000 per occurrence and 16% of the balance of a covered loss and the Federal government is responsible for the remaining 84% 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 March 31, 2016, the aggregate dollar amount of these guarantees and master leases is approximately $481,000,000.
At March 31, 2016, $32,540,000 of letters of credit were outstanding under one of our unsecured revolving credit facilities. Our unsecured 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 unsecured 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 March 31, 2016, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $80,000,000.
As of March 31, 2016, we have construction commitments aggregating approximately $810,700,000.
20. Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2016 and 2015.
New York
Washington, DC
410,825
128,012
74,200
269,595
256,565
87,157
141,230
(128,553)
(12,957)
(Loss) income from partially owned entities
(3,563)
(2,043)
1,366
1,115
2,345
(54,586)
(15,935)
(29,968)
Net gain on disposition of wholly owned and partially
owned assets
84,196
(146,473)
(27,216)
(959)
(264)
(1,608)
83,237
(146,737)
(28,824)
(28,108)
Less net (income) loss attributable to noncontrolling interests
(2,191)
(3,429)
1,238
79,808
(26,870)
Interest and debt expense(2)
126,120
71,198
19,406
35,516
Depreciation and amortization(2)
174,811
108,403
42,681
23,727
Income tax expense (2)
3,261
1,090
265
EBITDA(1)
210,393
260,499
(3)
(84,385)
(4)
34,279
(5)
399,513
133,968
73,321
252,760
92,997
93,331
Operating income (loss)
146,753
40,971
(20,010)
(5,663)
131
2,789
1,862
8,917
(45,351)
(18,160)
(28,163)
Income (loss) before income taxes
97,601
22,955
(10,518)
Income tax (expense) benefit
(943)
674
(702)
Income (loss) from continuing operations
96,658
23,629
(11,220)
4,959
Less net income attributable to noncontrolling interests
(21,169)
(1,506)
(19,663)
Net income (loss) attributable to Vornado
95,152
(14,704)
114,675
58,667
21,512
34,496
156,450
94,124
40,752
21,574
Income tax (benefit) expense(2)
(739)
1,002
(2,636)
895
374,463
248,945
83,257
42,261
See notes on the following pages.
27
20. Segment Information – continued
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a 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 expense (benefit) in the reconciliation of net (loss) income to EBITDA includes our share of these items from partially owned entities.
The elements of "New York" EBITDA are summarized below.
Office(a)
152,729
154,309
Retail
93,323
81,305
Residential
6,350
5,050
Alexander's
11,569
10,407
Hotel Pennsylvania
(3,472)
(2,126)
Total New York
(a)
2015 includes $3,540 of EBITDA from 20 Broad Street which was sold in December 2015. Excluding this item, EBITDA was $150,769.
The elements of "Washington, DC" EBITDA are summarized below.
Office, excluding the Skyline properties (a)
61,988
67,385
Skyline properties
5,092
6,055
Skyline properties impairment loss
(160,700)
Total Office
(93,620)
73,440
9,235
9,817
Total Washington, DC
2015 includes $1,923 of EBITDA from 1750 Pennsylvania Avenue which was sold in September 2015. Excluding this item, EBITDA was $65,462.
28
Notes to preceding tabular information - continued:
The elements of "Other" EBITDA are summarized below.
Our share of real estate fund investments:
Income before net realized/unrealized gains
2,231
1,614
Net realized/unrealized gains on investments
1,561
5,548
Carried interest
1,519
3,388
theMART (including trade shows)
23,028
21,041
555 California Street
11,615
12,401
1,319
1,841
Other investments
12,322
6,759
53,595
52,592
Corporate general and administrative expenses(a) (b)
(30,606)
(35,942)
Investment income and other, net(a)
6,975
8,762
Acquisition and transaction related costs
(4,607)
(1,981)
UE and residual retail properties discontinued operations(c)
721
22,257
Net gain on sale of residential condominiums
Net income attributable to noncontrolling interests in the Operating Partnership
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $1,938 loss for the three months ended March 31, 2016 and $2,859 income for the three months ended March 31, 2015.
(b)
The three months ended March 31, 2015 includes a cumulative catch up of $4,542 from the acceleration of recognition of compensation expense related to the modification of the 2012-2014 Out-Performance Plans.
(c)
The three months ended March 30, 2015 includes $22,645 of transaction costs related to the spin-off of our strip shopping centers and malls.
29
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 March 31, 2016, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the three month periods ended March 31, 2016 and 2015. 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, 2015, 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 16, 2016, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2015 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
May 2, 2016
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. We also note the following forward-looking statements: in the case of our development and redevelopment projects, the estimated completion date, estimated project cost and cost to complete; and estimates of future capital expenditures, dividends to common and preferred shareholders and operating partnership distributions. 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, 2015. 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 months ended March 31, 2016. 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 months ended March 31, 2016 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 Index (“Office REIT”) and the MSCI US REIT Index (“MSCI”) for the following periods ended March 31, 2016:
Total Return(1)
Vornado
Office REIT
MSCI(2)
Three-month
(4.8%)
0.4%
6.3%
One-year
(13.4%)
(5.6%)
4.1%
Three-year
35.8%
24.1%
34.7%
Five-year
40.7%
40.9%
75.0%
Ten-year
58.1%
43.6%
87.6%
Past performance is not necessarily indicative of future performance.
Formerly known as the Morgan Stanley REIT Index.
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
· 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, sales prices, 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 global, 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, population and employment trends. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2015, for additional information regarding these factors.
32
Overview – continued
Quarter Ended March 31, 2016 Financial Results Summary
Net loss attributable to common shareholders for the quarter ended March 31, 2016 was $114,163,000, or $0.61 per diluted share, compared to net income attributable to common shareholders of $84,593,000, or $0.45 per diluted share, for the prior year’s quarter. Net loss for the quarter ended March 31, 2016 includes $165,053,000, of which $160,700,000 relates to the Skyline properties, of real estate impairment losses. Net income for the quarter ended March 31, 2015 includes $10,867,000 of net gains on sale of real estate. In addition, the quarters ended March 31, 2016 and 2015 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, increased net loss attributable to common shareholders for the quarter ended March 31, 2016 by $156,408,000, or $0.83 per diluted share, and increased net income attributable to common shareholders for the quarter ended March 31, 2015 by $23,057,000, or $0.12 per diluted share.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended March 31, 2016 was $203,137,000, or $1.07 per diluted share, compared to $220,084,000, or $1.16 per diluted share, for the prior year’s quarter. FFO for the quarters ended March 31, 2016 and 2015 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 for the quarter ended March 31, 2016 by $2,505,000, or $0.01 per diluted share, and increased FFO for the quarter ended March 31, 2015 by $17,163,000, or $0.09 per diluted share.
Items that affect comparability income (expense):
FFO from discontinued operations and sold properties
14,188
Toys FFO
500
1,454
2,721
(2,672)
18,242
Noncontrolling interests' share of above adjustments
167
(1,079)
Items that affect comparability, net
(2,505)
17,163
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 March 31, 2016 over the quarter ended March 31, 2015 and the trailing quarter ended December 31, 2015 are summarized below.
Same Store EBITDA:
March 31, 2016 vs. March 31, 2015
Same store EBITDA
5.5
%
(2.9
%)
Cash basis same store EBITDA
1.1
(3.1
March 31, 2016 vs. December 31, 2015
(0.1
(1.3
1.2
Excluding Hotel Pennsylvania, same store EBITDA increased by 6.0% and by 1.7% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA increased by 1.6% and by 4.4% 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.
33
2016 Investments
2016 Financings
On February 8, 2016, we completed a $700,000,000 refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.75%, (2.19% at March 31, 2016) which was swapped for four and a half years to a fixed rate of 2.56%. We realized net proceeds of approximately $330,000,000. The property was previously encumbered by a 5.65%, $353,000,000 mortgage which was to mature in March 2016.
Recently Issued Accounting Literature
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this update on January 1, 2016 resulted in the identification of additional VIEs, but did not have an impact on our consolidated financial statements other than additional disclosures.
34
Recently Issued Accounting Literature - continued
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, 2015 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2016.
35
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)
Office
Three Months Ended March 31, 2016
Total square feet leased
737
38
569
Our share of square feet leased:
552
563
Initial rent (1)
84.32
272.01
38.36
Weighted average lease term (years)
12.1
11.9
3.3
Second generation relet space:
Square feet
525
451
Cash basis:
84.15
229.26
38.62
Prior escalated rent
65.63
218.35
39.59
Percentage increase (decrease)
28.2%
5.0%
(2.5%)
GAAP basis:
Straight-line rent (2)
85.49
239.55
36.25
Prior straight-line rent
64.46
206.78
37.74
32.6%
15.8%
(3.9%)
Tenant improvements and leasing commissions:
Per square foot
82.59
122.08
9.93
Per square foot per annum
6.83
10.26
3.01
Percentage of initial rent
3.8%
7.8%
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.
36
Square footage (in service) and Occupancy as of March 31, 2016:
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
New York:
20,187
17,141
96.4%
64
2,675
2,463
94.2%
Residential - 1,711 units
827
94.5%
Alexander's, including 312 residential units
2,419
784
93.6%
1,400
28,242
22,615
96.2%
Washington, DC:
Office, excluding the Skyline properties
49
12,978
10,620
90.6%
2,648
47.4%
57
15,626
13,268
81.9%
Residential - 2,414 units
2,597
2,455
96.8%
598
100.0%
18,821
16,321
84.8%
Other:
theMART
3,662
3,653
97.8%
1,736
1,215
93.3%
763
6,161
5,631
Total square feet at March 31, 2016
53,224
44,567
37
Square footage (in service) and Occupancy as of December 31, 2015:
properties
21,288
17,627
96.3%
63
2,641
2,418
94.1%
Alexander's, including 296 residential units
99.7%
29,309
23,056
13,136
10,781
90.0%
Skyline Properties
50.1%
15,784
13,429
82.1%
96.1%
597
18,978
16,481
3,658
3,649
98.5%
6,157
5,627
Total square feet at December 31, 2015
54,444
45,164
Washington, DC Segment
Comparable EBITDA for the three months ended March 31, 2016, was $5,019,000 behind the prior year's three months and consistent with our expected results for the first quarter. We expect that Washington’s 2016 comparable EBITDA will be approximately $7,000,000 to $11,000,000 lower than 2015, comprised of:
(i) core business being flat to $4,000,000 higher, offset by,
(ii) occupancy of Skyline properties declining further, decreasing EBITDA by approximately $6,500,000, and
(iii) 1726 M Street and 1150 17th Street being taken out of service (to prepare for the development in the future of a new Class A office building) decreasing EBITDA by approximately $4,500,000.
Of the 2,395,000 square feet subject to the effects of the Base Realignment and Closure (“BRAC”) statute, 348,000 square feet has been taken out of service for redevelopment and 1,452,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of March 31, 2016.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of March 31, 2016
37.36
1,442,000
969,000
389,000
84,000
Leases pending
39.39
10,000
Taken out of service for redevelopment
348,000
1,800,000
1,317,000
399,000
To Be Resolved:
Vacated as of March 31, 2016
34.78
595,000
119,000
412,000
64,000
Total square feet subject to BRAC
2,395,000
1,436,000
811,000
148,000
39
Net Income and EBITDA by Segment for the Three Months Ended March 31, 2016 and 2015
40
Net Income and EBITDA by Segment for the Three Months Ended March 31, 2016 and 2015 - continued
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.
41
Net loss (income) attributable to noncontrolling interests in the Operating Partnership
The three months ended March 31, 2015 includes $22,645 of transaction costs related to the spin-off of our strip shopping centers and malls.
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region, excluding discontinued operations and other items that affect comparability.
Region:
New York City metropolitan area
70%
68%
Washington, DC / Northern Virginia area
21%
23%
Chicago, IL
6%
San Francisco, CA
3%
100%
42
Results of Operations – Three Months Ended March 31, 2016 Compared to March 31, 2015
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $613,037,000 for the three months ended March 31, 2016, compared to $606,802,000 for the prior year’s three months, an increase of $6,235,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions, dispositions and other
753
3,335
(2,582)
Development and redevelopment
481
(56)
627
(2,482)
Trade shows
(653)
Same store operations
21,119
21,166
(1,641)
1,594
19,218
21,929
(4,279)
1,568
Tenant expense reimbursements:
(195)
(96)
(99)
587
577
(7,738)
(4,413)
(1,734)
(1,591)
(7,346)
(4,504)
(1,828)
(1,014)
Fee and other income:
(4,487)
(4,644)
607
117
379
(1,297)
(1,333)
(460)
(247)
(211)
(5,637)
(6,113)
151
325
Total increase (decrease) in revenues
6,235
11,312
(5,956)
879
Primarily from lease expirations in 2015.
Primarily from the termination of a third party cleaning arrangement in 2015.
43
Results of Operations – Three Months Ended March 31, 2016 Compared to March 31, 2015 - continued
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $613,317,000 for the three months ended March 31, 2016, compared to $439,088,000 for the prior year’s three months, an increase of $174,229,000. Below are the details of the increase (decrease) by segment:
Operating:
3,922
5,179
(1,257)
284
(32)
88
228
Non-reimbursable expenses, including bad debt
reserves
736
44
907
(215)
(1,162)
(230)
BMS expenses
(3,694)
(3,886)
192
2,000
4,503
(1,222)
(1,281)
1,856
4,646
(1,484)
(1,306)
Depreciation and amortization:
4,261
4,838
(577)
2,025
(242)
2,291
(24)
12,549
9,670
378
2,501
18,835
14,266
2,092
2,477
General and administrative:
Mark-to-market of deferred compensation plan
liability
(4,797)
(4,991)
(2,077)
2,260
(5,174)
(9,788)
(9,971)
Impairment loss and acquisition and transaction
related costs
163,326
(6)
2,626
Total increase (decrease) in expenses
174,229
16,835
163,568
(6,174)
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, net” on our consolidated statements of income.
Results primarily from (i) the three months ended March 31, 2015 including a cumulative catch up of $986 from the acceleration of recognition of compensation expense related to the modification of the 2012-2014 Out-Performance Plans and (ii) higher capitalized leasing payroll in 2016.
Results primarily from higher capitalized payroll in 2015.
Loss from Partially Owned Entities
Summarized below are the components of loss from partially owned entities for the three months ended March 31, 2016 and 2015.
Our Share of Net (Loss) Income:
Pennsylvania Real Estate Investment Trust ("PREIT")
Urban Edge Properties ("UE")
Income from Real Estate Fund Investments
Below are the components of the income from our real estate fund investments for the three months ended March 31, 2016 and 2015.
Income from real estate fund investments attributable to Vornado (1)
45
Interest and Other Investment Income, net
Interest and other investment income, net was $3,518,000 for the three months ended March 31, 2016, compared to $10,792,000 for the prior year’s three months, a decrease of $7,274,000. This decrease resulted primarily from a $4,797,000 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) and a $2,076,000 decrease in interest on loans receivable as a result of lower outstanding loan balances.
Interest and Debt Expense
Interest and debt expense was $100,489,000 for the three months ended March 31, 2016, compared to $91,674,000 for the prior year’s three months, an increase of $8,815,000. This increase was primarily due to (i) $6,697,000 of higher interest expense from the financings of the St. Regis Retail, 150 West 34th Street, 100 West 33rd Street, and the unsecured term loan, and (ii) $2,039,000 of lower capitalized interest.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets
For the three months ended March 31, 2016 and 2015, we recognized net gains from the sale of residential condominiums of $714,000 and $1,860,000, respectively.
Income Tax Expense
For the three months ended March 31, 2016 and 2015, we recognized income tax expense related to our taxable REIT subsidiaries of $2,831,000 and $971,000, respectively. The increase in expense resulted primarily from the three months ended March 31, 2015 including the reversal of $1,100,000 deferred tax liabilities related to our Washington, DC business.
46
Income from Discontinued Operations
We have reclassified the revenues and expenses of the UE portfolio and other retail 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 three months ended March 31, 2016 and 2015.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $9,678,000 for the three months ended March 31, 2016, compared to $15,882,000 for the prior year’s three months, a decrease of $6,204,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net Loss (Income) Attributable to Noncontrolling Interests in the Operating Partnership
Net loss attributable to noncontrolling interests in the Operating Partnership was $7,487,000 for the three months ended March 31, 2016, compared to income of $5,287,000 for the prior year’s three months, a decrease in income of $12,774,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred Share Dividends
Preferred share dividends were $20,364,000 for the three months ended March 31, 2016, compared to $19,484,000 for the prior year’s three months, an increase of $880,000.
47
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 March 31, 2016, compared to three months ended March 31, 2015.
EBITDA for the three months ended March 31, 2016
Add-back:
Non-property level overhead expenses included above
9,967
7,964
Less EBITDA from:
(11,173)
410
(34)
Properties taken out-of-service for redevelopment
(5,860)
733
Other non-operating income, net
1,563
160,535
Same store EBITDA for the three months ended March 31, 2016
255,406
84,813
EBITDA for the three months ended March 31, 2015
12,044
5,704
(338)
(3,346)
(1,982)
(5,009)
468
(10,173)
(129)
Same store EBITDA for the three months ended March 31, 2015
242,123
87,318
Increase (decrease) in same store EBITDA -
Three months ended March 31, 2016 vs. March 31, 2015
13,283
% increase (decrease) in same store EBITDA
(2.9%)
See notes on following page.
48
(1) The $13,283,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $9,740,000 and $3,209,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $1,346,000. The Office and Retail EBITDA increases resulted primarily from higher rents, including signage.
(2) Excluding Hotel Pennsylvania, same store EBITDA increased by 6.0%.
(3) The $2,505,000 decrease in Washington, DC same store EBITDA resulted primarily from lower rental revenue of $1,641,000 and higher net operating expenses of $512,000.
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
(44,983)
(5,864)
Cash basis same store EBITDA for the three months ended
210,423
78,949
(34,015)
March 31, 2015
208,108
81,477
Increase (decrease) in cash basis same store EBITDA -
2,315
(2,528)
% increase (decrease) in cash basis same store EBITDA
1.1%
(3.1%)
Excluding Hotel Pennsylvania, same store EBITDA increased by 1.7% on a cash basis.
SUPPLEMENTAL INFORMATION
Reconciliation of Net Income to EBITDA for the Three Months Ended December 31, 2015
Net income attributable to Vornado for the three months ended December 31, 2015
272,620
15,571
64,347
19,973
105,131
43,101
1,398
246
EBITDA for the three months ended December 31, 2015
443,496
78,891
Reconciliation of EBITDA to Same Store EBITDA – Three Months Ended March 31, 2016 Compared to December 31, 2015
(1,040)
(7,954)
263,445
6,788
7,553
(239)
Dispositions, including net gains on sale
(159,843)
(5,107)
830
(13,761)
(2,451)
Same store EBITDA for the three months ended December 31, 2015
271,334
84,864
Decrease in same store EBITDA -
Three months ended March 31, 2016 vs. December 31, 2015
(7,889)
(51)
% decrease in same store EBITDA
(0.1%)
Excluding Hotel Pennsylvania, same store EBITDA increased by 1.6%.
50
SUPPLEMENTAL INFORMATION – CONTINUED
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA – Three Months Ended March 31, 2016 Compared to December 31, 2015
(49,584)
213,861
(54,605)
(6,851)
216,729
78,013
(Decrease) increase in cash basis same store EBITDA -
(2,868)
936
% (decrease) increase in cash basis same store EBITDA
(1.3%)
1.2%
Excluding Hotel Pennsylvania, same store EBITDA increased by 4.4% on a cash basis.
51
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 Three Months Ended March 31, 2016
Our cash and cash equivalents were $1,673,566,000 at March 31, 2016, a $162,141,000 decrease from the balance at December 31, 2015. Our consolidated outstanding debt was $11,059,832,000 at March 31, 2016, a $31,178,000 decrease from the balance at December 31, 2015. As of March 31, 2016 and December 31, 2015, $0 and $550,000,000, respectively, was outstanding under our revolving credit facilities. During the remainder of 2016 and 2017, $708,603,000 and $363,842,000, 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 $276,645,000 was comprised of (i) net loss of $91,608,000, (ii) $264,378,000 of non-cash adjustments, which include depreciation and amortization expense, impairment losses, the effect of straight-lining of rental income, and loss from partially owned entities, (iii) distributions of income from partially owned entities of $29,860,000, (iv) return of capital from real estate fund investments of $14,676,000, and (v) the net change in operating assets and liabilities of $59,339,000.
Net cash used in investing activities of $241,598,000 was comprised of (i) $127,283,000 of development costs and construction in progress, (ii) $77,243,000 of additions to real estate, (iii) $63,188,000 of investments in partially owned entities, (iv) $1,348,000 of changes in restricted cash, and (v) $938,000 of acquisitions of real estate and other, partially offset by (vi) $25,524,000 of capital distributions from partially owned entities, (vii) $2,867,000 of proceeds from sales of real estate and related investments, and (viii) $11,000 of proceeds from sales and repayments of mortgage and mezzanine loans receivable and other.
Net cash used in financing activities of $197,188,000 was comprised of (i) $909,617,000 for the repayments of borrowings, (ii) $118,867,000 of dividends paid on common shares, (iii) $21,474,000 of distributions to noncontrolling interests, (iv) $20,364,000 of dividends paid on preferred shares, (v) $16,704,000 of debt issuance and other costs, and (vi) $185,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (vii) $887,500,000 of proceeds from borrowings, and (viii) $2,523,000 of proceeds received from the exercise of employee share options.
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.
52
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 three months ended March 31, 2016.
Expenditures to maintain assets
14,046
9,443
2,255
2,348
Tenant improvements
29,792
27,216
2,219
Leasing commissions
15,023
13,962
1,061
Non-recurring capital expenditures
8,004
5,498
2,241
Total capital expenditures and leasing commissions (accrual basis)
66,865
56,119
7,776
2,970
Adjustments to reconcile to cash basis:
Expenditures in the current year applicable to prior periods
50,564
39,550
9,533
1,481
Expenditures to be made in future periods for the current period
(23,182)
(24,146)
(5,323)
6,287
Total capital expenditures and leasing commissions (cash basis)
94,247
71,523
11,986
10,738
6.16
6.99
n/a
9.3%
7.5%
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 capitalized interest, debt and operating costs until the property is substantially completed and ready for its intended use. Our development project budgets below include initial leasing costs, which are reflected as non-recurring capital expenditures in the table above.
We are constructing a residential condominium tower containing 397,000 salable square feet on our 220 Central Park South development site. The incremental development cost of this project is approximately $1.3 billion, of which $361,000,000 has been expended as of March 31, 2016.
We are developing The Bartlett, a 699-unit residential project in Pentagon City, which is expected to be completed in 2016. The project will include a 40,000 square foot Whole Foods Market at the base of the building. The incremental development cost of this project is approximately $250,000,000, of which $191,000,000 has been expended as of March 31, 2016.
We are developing a 173,000 square foot Class-A office building, located along the western edge of the High Line at 512 West 22nd Street in the West Chelsea submarket of Manhattan (55% owned). The incremental development cost of this project is approximately $130,000,000, of which our share is $72,000,000. As of March 31, 2016, $15,000,000 has been expended, of which our share is $8,000,000.
We are developing 61 Ninth Avenue, located on the Southwest corner of Ninth Avenue and 15th Street in the West Chelsea submarket of Manhattan. In February 2016, the venture purchased an adjacent five story loft building and air rights in exchange for a 10% common and preferred equity interest in the venture valued at $19,400,000, which reduced our ownership interest to 45.1% from 50.1%. The venture’s current plans are to construct an office building, with retail at the base, of approximately 167,000 square feet. The incremental development cost of this project is approximately $150,000,000, of which our share is $68,000,000. As of March 31, 2016, $15,000,000 has been expended, of which our share is $7,000,000.
We plan to demolish two adjacent Washington, DC office properties, 1726 M Street and 1150 17th Street in 2016 and replace them in the future with a new 335,000 square foot Class A office building, to be addressed 1700 M Street. The incremental development cost of the project is approximately $170,000,000.
We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including the Penn Plaza District, and in Washington, including Crystal City, 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.
53
Development and Redevelopment Expenditures - continued
Below is a summary of development and redevelopment expenditures incurred in the three months ended March 31, 2016. These expenditures include interest of $9,071,000, payroll of $3,166,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $27,514,000, that were capitalized in connection with the development and redevelopment of these projects.
220 Central Park South
55,291
The Bartlett
25,911
640 Fifth Avenue
9,755
2221 South Clark Street (residential conversion)
9,310
90 Park Avenue
6,635
Wayne Towne Center
3,777
Penn Plaza
2,744
330 West 34th Street
1,790
12,070
2,406
4,829
4,835
127,283
23,330
40,050
63,903
Cash Flows for the Three Months Ended March 31, 2015
Our cash and cash equivalents were $1,067,568,000 at March 31, 2015, a $130,909,000 decrease from the balance at December 31, 2014. The decrease is primarily due to cash flows from operating and investing activities, partially offset by cash flows from financing activities, as discussed below.
Cash flows provided by operating activities of $194,516,000 was comprised of (i) net income of $125,246,000, (ii) return of capital from real estate fund investments of $72,208,000, (iii) $55,668,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, loss from partially owned entities and impairment losses on real estate, and (iv) distributions of income from partially owned entities of $15,874,000, partially offset by (v) the net change in operating assets and liabilities of $74,480,000 (including the acquisition of real estate fund investments of $95,022,000).
Net cash provided by investing activities of $149,871,000 was comprised of (i) $334,725,000 of proceeds from sales of real estate and related investments, (ii) $16,763,000 of proceeds from sales and repayments of mortgage and mezzanine loans receivable and other, (iii) $13,409,000 of capital distributions from partially owned entities, and (iv) $1,282,000 of changes in restricted cash, partially offset by (v) $88,052,000 of development costs and construction in progress, (vi) $54,466,000 of additions to real estate, (vii) $49,878,000 of acquisitions of real estate and other, and (viii) $23,912,000 of investments in partially owned entities.
Net cash used in financing activities of $475,296,000 was comprised of (i) $907,431,000 for the repayments of borrowings, (ii) $225,000,000 of distributions in connection with the spin-off of Urban Edge Properties, (iii) $118,447,000 of dividends paid on common shares, (iv) $60,287,000 of distributions to noncontrolling interests, (v) $19,484,000 of dividends paid on preferred shares, (vi) $5,076,000 of debt issuance and other costs, and (vii) $2,939,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (viii) $800,000,000 of proceeds from borrowings, (ix) $51,350,000 of contributions from noncontrolling interests, and (x) $12,018,000 of proceeds received from the exercise of employee share options.
54
Capital Expenditures in the three months ended March 31, 2015
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 three months ended March 31, 2015.
20,935
12,810
1,986
6,139
50,900
9,762
37,011
4,127
8,281
3,744
3,748
789
35,987
19,774
16,129
84
116,103
46,090
58,874
11,139
40,209
26,220
6,924
7,065
(88,136)
(28,594)
(54,612)
(4,930)
68,176
43,716
11,186
13,274
8.04
8.95
7.60
15.2%
10.8%
21.7%
Development and Redevelopment Expenditures in the three months ended March 31, 2015
Below is a summary of development and redevelopment expenditures incurred in the three months ended March 31, 2015. These expenditures include interest of $11,110,000, payroll of $1,026,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $29,134,000, that were capitalized in connection with the development and redevelopment of these projects.
20,277
Springfield Town Center
14,478
13,791
11,902
Marriott Marquis Times Square - retail and signage
10,651
5,173
2,362
1,163
1,127
7,128
2,254
4,628
88,052
31,143
19,546
37,363
55
56
Funds From Operations (“FFO”)
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets 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 18 – Income per Share, in our consolidated financial statements on page 25 of this Quarterly Report on Form 10-Q.
FFO for the Three Months Ended March 31, 2016 and 2015
FFO attributable to common shareholders plus assumed conversions was $203,137,000, or $1.07 per diluted share for the three months ended March 31, 2016, compared to $220,084,000, or $1.16 per diluted share, for the prior year’s three months. Details of certain items that affect comparability are discussed in the financial results summary of our “Overview”.
Reconciliation of our net (loss) income to FFO:
Depreciation and amortization of real property
134,121
118,256
(10,867)
Proportionate share of adjustments to equity in net loss of partially owned entities to arrive at FFO:
39,046
36,272
4,353
(20,942)
(8,448)
FFO attributable to Vornado
223,479
239,546
FFO attributable to common shareholders
203,115
220,062
Convertible preferred share dividends
FFO attributable to common shareholders plus assumed conversions
203,137
220,084
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
964
Convertible preferred shares
Denominator for FFO per diluted share
189,664
189,381
FFO attributable to common shareholders plus assumed conversions per diluted share
1.07
1.16
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%
March 31,
Average
Change In
December 31,
Balance
Interest Rate
Base Rates
Consolidated debt:
3,634,067
2.18%
36,341
3,995,704
2.00%
7,545,401
4.00%
7,206,634
4.21%
3.41%
3.42%
Pro rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys "R" Us, Inc.
673,469
2.13%
6,735
485,160
1.97%
Variable rate – Toys "R" Us, Inc.
830,907
7.43%
8,309
1,164,893
6.61%
Fixed rate (including $702,402 and $661,513
of Toys "R" Us, Inc. debt in 2016 and 2015)
2,662,008
6.63%
2,782,025
6.37%
4,166,384
6.06%
15,044
4,432,078
5.95%
Noncontrolling interests’ share of above
(3,186)
Total change in annual net income
48,199
Per share-diluted
0.25
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 March 31, 2016, we have an interest rate swap on a $416,000,000 mortgage loan on Two Penn Plaza that swapped the rate from LIBOR plus 1.65% (2.09% at March 31, 2016) to a fixed rate of 4.78% through March 2018 and an interest swap on a $375,000,000 mortgage loan on 888 Seventh Avenue that swapped the rate from LIBOR plus 1.60% (2.04% at March 31, 2016) to a fixed rate of 3.15% through December 2020.
In connection with the $700,000,000 refinancing of 770 Broadway, we entered into an interest rate swap from LIBOR plus 1.75% (2.19% at March 31, 2016) to a fixed rate of 2.56% through September 2020.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of March 31, 2016, the estimated fair value of our consolidated debt was $10,967,000,000.
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 March 31, 2016, 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, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
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: May 2, 2016
By:
/s/ Stephen W. Theriot
Stephen W. Theriot, Chief Financial Officer (duly authorized officer and principal financial and accounting officer)
Exhibit No.
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