UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
September 30, 2016
Or
☐
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 ☑ No ☐
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 ☑ No ☐
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.
☑Large Accelerated Filer
☐ Accelerated Filer
☐ Non-Accelerated Filer (Do not check if smaller reporting company)
☐ 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 ☑ No ☐
As of September 30, 2016, 188,994,234 of the registrant’s common shares of beneficial interest are outstanding.
PART I.
Financial Information:
Page Number
Item 1.
Financial Statements:
Consolidated Balance Sheets (Unaudited) as of
September 30, 2016 and December 31, 2015
3
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 2016 and 2015
4
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three and Nine Months Ended September 30, 2016 and 2015
5
Consolidated Statements of Changes in Equity (Unaudited) for the
Nine Months Ended September 30, 2016 and 2015
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
35
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
36
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
77
Item 4.
Controls and Procedures
PART II.
Other Information:
Legal Proceedings
78
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
79
EXHIBIT INDEX
80
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except unit, share, and per share amounts)
December 31, 2015
ASSETS
Real estate, at cost:
Land
$
4,129,497
4,164,799
Buildings and improvements
12,654,086
12,582,671
Development costs and construction in progress
1,369,953
1,226,637
Leasehold improvements and equipment
114,026
116,030
Total
18,267,562
18,090,137
Less accumulated depreciation and amortization
(3,430,832)
(3,418,267)
Real estate, net
14,836,730
14,671,870
Cash and cash equivalents
1,352,697
1,835,707
Restricted cash
111,941
107,799
Marketable securities
198,165
150,997
Tenant and other receivables, net of allowance for doubtful accounts of $11,171 and $11,908
94,057
98,062
Investments in partially owned entities
1,497,925
1,550,422
Real estate fund investments
519,386
574,761
Receivable arising from the straight-lining of rents, net of allowance of $2,414 and $2,751
1,027,319
931,245
Deferred leasing costs, net of accumulated amortization of $234,330 and $218,239
462,179
480,421
Identified intangible assets, net of accumulated amortization of $201,164 and $187,360
201,450
227,901
Assets related to discontinued operations
5,546
37,020
Other assets
551,974
477,088
20,859,369
21,143,293
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
9,867,550
9,513,713
Senior unsecured notes, net
845,223
844,159
Unsecured revolving credit facilities
115,630
550,000
Unsecured term loan, net
371,835
183,138
Accounts payable and accrued expenses
461,234
443,955
Deferred revenue
301,017
346,119
Deferred compensation plan
118,359
117,475
Liabilities related to discontinued operations
3,284
12,470
Other liabilities
457,928
426,965
Total liabilities
12,542,060
12,437,994
Commitments and contingencies
-
Redeemable noncontrolling interests:
Class A units - 12,280,354 and 12,242,820 units outstanding
1,242,895
1,223,793
Series D cumulative redeemable preferred units - 177,101 units outstanding
5,428
Total redeemable noncontrolling interests
1,248,323
1,229,221
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 42,826,629 and 52,676,629 shares
1,038,111
1,276,954
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 188,994,234 and 188,576,853 shares
7,537
7,521
Additional capital
7,139,220
7,132,979
Earnings less than distributions
(1,951,411)
(1,766,780)
Accumulated other comprehensive income
82,374
46,921
Total Vornado shareholders' equity
6,315,831
6,697,595
Noncontrolling interests in consolidated subsidiaries
753,155
778,483
Total equity
7,068,986
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
For the Nine Months Ended
September 30,
2016
2015
REVENUES:
Property rentals
523,998
526,337
1,570,668
1,541,454
Tenant expense reimbursements
71,425
67,098
191,841
196,234
Fee and other income
37,774
34,161
105,433
112,998
Total revenues
633,197
627,596
1,867,942
1,850,686
EXPENSES:
Operating
260,826
256,561
762,313
753,744
Depreciation and amortization
138,968
141,920
423,238
402,999
General and administrative
40,442
36,157
134,710
133,838
Impairment loss and acquisition and transaction related costs
3,808
1,518
171,994
7,560
Total expenses
444,044
436,156
1,492,255
1,298,141
Operating income
189,153
191,440
375,687
552,545
Income (loss) from partially owned entities
4,127
(325)
529
(8,709)
Income from real estate fund investments
1,077
1,665
28,750
52,122
Interest and other investment income, net
6,508
3,160
20,262
19,618
Interest and debt expense
(98,365)
(95,344)
(304,430)
(279,110)
Net gain on disposition of wholly owned
and partially owned assets
103,037
160,225
104,897
Income before income taxes
102,500
203,633
281,023
441,363
Income tax (expense) benefit
(4,865)
(2,856)
(9,805)
84,245
Income from continuing operations
97,635
200,777
271,218
525,608
Income from discontinued operations
2,969
34,463
6,160
50,278
Net income
100,604
235,240
277,378
575,886
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(3,658)
(3,302)
(26,361)
(38,370)
Operating Partnership
(4,366)
(12,704)
(11,410)
(28,189)
Net income attributable to Vornado
92,580
219,234
239,607
509,327
Preferred share dividends
(19,047)
(20,364)
(59,774)
(60,213)
Preferred share issuance costs (Series J redemption)
(7,408)
NET INCOME attributable to common shareholders
66,125
198,870
172,425
449,114
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.34
0.88
2.13
Income from discontinued operations, net
0.01
0.17
0.03
0.25
Net income per common share
0.35
1.05
0.91
2.38
Weighted average shares outstanding
188,901
188,504
188,778
188,291
INCOME PER COMMON SHARE - DILUTED:
0.33
2.12
0.02
2.37
190,048
189,581
190,086
189,789
DIVIDENDS PER COMMON SHARE
0.63
1.89
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Increase (reduction) in unrealized net gain on
available-for-sale securities
3,685
(7,064)
42,798
(53,396)
Pro rata share of other comprehensive loss of
nonconsolidated subsidiaries
(915)
(114)
(1,537)
(1,148)
Increase (reduction) in value of interest rate swaps and other
7,689
(289)
(3,482)
1,788
Comprehensive income
111,063
227,773
315,157
523,130
Less comprehensive income attributable to noncontrolling interests
(8,665)
(15,559)
(40,097)
(63,477)
Comprehensive income attributable to Vornado
102,398
212,214
275,060
459,653
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 income attributable to
noncontrolling interests in
consolidated subsidiaries
26,361
Dividends on common shares
(356,863)
Dividends on preferred shares
Redemption of Series J
preferred shares
(9,850)
(238,842)
(246,250)
Common shares issued:
Upon redemption of Class A
units, at redemption value
293
12
28,114
28,126
Under employees' share
option plan
106
5,936
5,940
Under dividend reinvestment plan
1,080
Contributions:
19,699
Distributions:
(59,843)
(11,631)
Deferred compensation shares
and options
7
1
1,370
(186)
1,185
Increase in unrealized net gain on
Pro rata share of other
comprehensive loss of
Reduction in value of interest
rate swaps
Adjustments to carry redeemable
Class A units at redemption value
(30,260)
Redeemable noncontrolling interests'
share of above adjustments
(2,326)
(1)
(7)
86
Balance, September 30, 2016
42,827
188,994
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
38,370
Distribution of Urban Edge
Properties
(464,262)
(341)
(464,603)
(355,945)
437
17
46,676
46,693
198
14,197
(2,579)
11,626
11
1,068
51,725
(70,875)
(397)
Conversion of Series A preferred
shares to common shares
(41)
41
2,046
(359)
1,688
Reduction in unrealized net gain
on available-for-sale securities
Increase in value of interest
rate swap
1,783
295,713
3,082
700
(84)
621
Balance, September 30, 2015
52,678
1,276,985
188,541
7,519
7,232,766
(1,878,716)
43,593
762,354
7,444,501
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of deferred financing costs)
446,040
420,494
Real estate impairment losses
161,165
256
Net gain on disposition of wholly owned and partially owned assets
(160,225)
(104,897)
Straight-lining of rental income
(118,798)
(108,529)
Return of capital from real estate fund investments
71,888
91,036
Distributions of income from partially owned entities
58,692
51,650
Amortization of below-market leases, net
(41,676)
(45,918)
Other non-cash adjustments
33,971
35,190
Net realized and unrealized gains on real estate fund investments
(16,513)
(38,781)
Net gains on sale of real estate and other
(5,074)
(65,396)
Equity in net (income) loss of partially owned entities
(529)
7,961
Reversal of allowance for deferred tax assets
(90,030)
Changes in operating assets and liabilities:
(95,010)
Tenant and other receivables, net
(578)
1,892
Prepaid assets
(71,068)
(77,899)
(50,938)
(92,413)
6,530
(5,799)
(16,018)
(16,168)
Net cash provided by operating activities
574,247
443,525
Cash Flows from Investing Activities:
(426,641)
(339,586)
Additions to real estate
(261,971)
(207,845)
Proceeds from sales of real estate and related investments
138,034
375,850
(112,797)
(144,890)
Distributions of capital from partially owned entities
100,997
31,822
Acquisitions of real estate and other
(46,801)
(388,565)
Net deconsolidation of 7 West 34th Street
(42,000)
(24,796)
201,895
Investments in loans receivable and other
(11,700)
(25,845)
Purchases of marketable securities
(4,379)
Proceeds from sales and repayments of mortgage and mezzanine loans receivable and other
33
16,781
Net cash used in investing activities
(692,021)
(480,383)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Proceeds from borrowings
2,000,604
2,876,460
Repayments of borrowings
(1,591,554)
(2,539,677)
Dividends paid on common shares
Redemption of preferred shares
Distributions to noncontrolling interests
(95,055)
(93,738)
Dividends paid on preferred shares
(64,006)
Debt issuance and other costs
(30,846)
(37,467)
Contributions from noncontrolling interests
11,900
Proceeds received from exercise of employee share options
7,020
15,273
Repurchase of shares related to stock compensation agreements and related
tax withholdings and other
(4,900)
Cash included in the spin-off of Urban Edge Properties
(225,000)
Net cash used in financing activities
(365,236)
(373,482)
Net decrease in cash and cash equivalents
(483,010)
(410,340)
Cash and cash equivalents at beginning of period
1,198,477
Cash and cash equivalents at end of period
788,137
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $21,297 and $40,924
275,979
256,254
Cash payments for income taxes
7,602
7,640
Non-Cash Investing and Financing Activities:
Write-off of fully depreciated assets
(283,496)
(127,788)
Accrued capital expenditures included in accounts payable and accrued expenses
129,704
95,535
Change in unrealized net gain on securities available-for-sale
Adjustments to carry redeemable Class A units at redemption value
Decrease in assets and liabilities resulting from the deconsolidation of investments
that were previously consolidated
(122,047)
(290,418)
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)
Class A units in connection with acquisition
80,000
Financing assumed in acquisitions
62,000
Like-kind exchange of real estate:
Acquisitions
46,698
80,269
Dispositions
(29,639)
(213,621)
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 93.7% of the common limited partnership interest in, the Operating Partnership at September 30, 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 and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full year.
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 (“ASC 606”). 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. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC 606, Deferral of the Effective Date, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an update (“ASU 2016-10”) to ASC 606, Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued an update (“ASU 2016-12”) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are currently evaluating the impact of the adoption of these ASUs on our consolidated financial statements.
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 14 - Variable Interest Entities).
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. 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 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.
In August 2016, the FASB issued an update (“ASU 2016-15”)Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this update is not expected to have a significant impact on our consolidated financial statements.
4. Acquisitions
On May 20, 2016, we contributed $19,650,000 for a 50.0% equity interest in a joint venture that will develop 606 Broadway, a 33,000 square foot office and retail building, located on Houston Street in Manhattan. The development cost of this project is estimated to be approximately $104,000,000. At closing, the joint venture obtained a $65,000,000 construction loan, of which approximately $22,500,000 was outstanding at September 30, 2016. The loan, which bears interest at LIBOR plus 3.00% (3.52% at September 30, 2016), matures in May 2019 with two one-year extension options. Because this joint venture is a VIE and we determined we are the primary beneficiary, we consolidate the accounts of this joint venture from the date of our investment.
5. 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. 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 the 24.7% interest in the Crowne Plaza Times Square Hotel not owned by the Fund. 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 September 30, 2016, we had six real estate fund investments with an aggregate fair value of $519,386,000, or $210,451,000 in excess of cost, and had remaining unfunded commitments of $117,907,000, of which our share was $34,422,000. Below is a summary of income from the Fund and the Co-Investment for the three and nine months ended September 30, 2016 and 2015.
Net investment income
5,841
5,116
12,237
13,716
Net unrealized (losses) gains on held investments
(4,764)
(2,544)
16,091
37,001
Net realized (losses) gains on exited investments
(907)
14,676
24,684
Previously recorded unrealized gain on exited investment
(14,254)
(23,279)
Less income attributable to noncontrolling interests
(270)
(42)
(15,088)
(29,453)
attributable to Vornado (1)
807
1,623
13,662
22,669
Excludes management, leasing and development fees of $804 and $678 for the three months ended September 30, 2016 and 2015, respectively, and $2,499 and $2,015 for the nine months ended September 30, 2016 and 2015, respectively, which are included as a component of "fee and other income" in our consolidated statements of income.
6. Marketable Securities
Below is a summary of our marketable securities portfolio as of September 30, 2016 and December 31, 2015.
As of September 30, 2016
As of December 31, 2015
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
190,230
72,549
117,681
147,752
75,203
7,935
4,379
3,556
3,245
76,928
121,237
78,448
7. Investments in Partially Owned Entities
As of September 30, 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 September 30, 2016, the market value (“fair value” pursuant to ASC Topic 820, Fair Value Measurements (“ASC 820”)) of our investment in Alexander’s, based on Alexander’s September 30, 2016 closing share price of $419.60, was $694,047,000, or $563,562,000 in excess of the carrying amount on our consolidated balance sheet. As of September 30, 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 $39,778,000. 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 September 30, 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 September 30, 2016, the fair value of our investment in UE, based on UE’s September 30, 2016 closing share price of $28.14, was $160,882,000, or $135,065,000 in excess of the carrying amount on our consolidated balance sheet.
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
As of September 30, 2016, we own 6,250,000 PREIT operating partnership units, representing an 8.0% 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 September 30, 2016, the fair value of our investment in PREIT, based on PREIT’s September 30, 2016 closing share price of $23.03, was $143,938,000, or $19,638,000 in excess of the carrying amount on our consolidated balance sheet. As of September 30, 2016, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $66,596,000. 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.
13
7. Investments in Partially Owned Entities – continued
One Park Avenue
On March 7, 2016, the joint venture, in which we have a 55% ownership interest, completed a $300,000,000 refinancing of 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% (2.28% at September 30, 2016). The property was previously encumbered by a 4.995%, $250,000,000 mortgage which matured 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 $146,004,000 mezzanine loan. The interest rate is LIBOR plus 8.875% (9.38% at September 30, 2016) and the debt matures in November 2016, with two three-month extension options. At September 30, 2016, the joint venture has a $3,996,000 remaining commitment, of which our share is $1,332,000. 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.
The Warner Building
On May 6, 2016, the joint venture, in which we have a 55% ownership interest, completed a $273,000,000 refinancing of The Warner Building, a 621,000 square foot Washington, DC office building. The loan matures in June 2023, has a fixed rate of 3.65%, is interest only for the first two years and amortizes based on a 30-year schedule beginning in year three. The property was previously encumbered by a 6.26%, $293,000,000 mortgage which matured in May 2016.
280 Park Avenue
On May 11, 2016, the joint venture, in which we have a 50% ownership interest, completed a $900,000,000 refinancing of 280 Park Avenue, a 1,250,000 square foot Manhattan office building. The three-year loan with four one-year extensions is interest only at LIBOR plus 2.00% (2.51% at September 30, 2016). The property was previously encumbered by a 6.35%, $721,000,000 mortgage which was scheduled to mature in June 2016.
7 West 34th Street
On May 16, 2016, we completed a $300,000,000 recourse financing of 7 West 34th Street, a 477,000 square foot Manhattan office building leased to Amazon. The ten-year loan is interest only at a fixed rate of 3.65% and matures in June 2026. Subsequently, on May 27, 2016, we sold a 47% ownership interest in this property and retained the remaining 53% interest. This transaction was based on a property value of approximately $561,000,000 or $1,176 per square foot. We received net proceeds of $127,382,000 from the sale and realized a net gain of $203,324,000, of which $159,511,000 was recognized in the second quarter and is included in “net gain on disposition of wholly owned and partially owned assets” in our consolidated statements of income. The remaining net gain of $43,813,000 has been deferred until our guarantee of payment of loan principal and interest is removed or the loan is repaid. We realized a net tax gain of $90,017,000. We continue to manage and lease the property. We share control over major decisions with our joint venture partner. Accordingly, this property is accounted for under the equity method from the date of sale.
50-70 West 93rd Street
On August 3, 2016, the joint venture, in which we have 49.9% ownership interest, completed an $80,000,000 refinancing of 50-70 West 93rd Street, a 326 unit Manhattan residential complex. The three-year loan with two one-year extensions is interest only at LIBOR plus 1.70% (2.22% at September 30, 2016). The property was previously encumbered by a $44,980,000 first mortgage at LIBOR plus 1.90% and an $18,481,000 second mortgage at LIBOR plus 1.65%, which were scheduled to mature in September 2016.
14
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
811,062
909,782
Alexander’s
32.4%
130,485
133,568
PREIT
8.0%
124,300
133,375
India real estate ventures
4.1%-36.5%
44,671
48,310
UE
5.4%
25,817
25,351
Other investments (2)
361,590
300,036
7 West 34th Street (3)
53.0%
(41,439)
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.
(3)
Our negative basis results from a $43,813 deferred gain from the sale of a 47.0% ownership interest in the property and is included in "other liabilities" on our consolidated balance sheet.
Our Share of Net Income (Loss):
Alexander's (see page 13 for details):
Equity in net income
6,891
5,716
20,640
16,757
Management, leasing and development fees
1,894
1,828
5,307
5,801
8,785
7,544
25,947
22,558
UE (see page 13 for details):
Equity in net earnings
1,949
934
3,896
1,338
Management fees
209
466
627
1,550
2,158
1,400
4,523
2,888
(9,157)
(2,039)
(35,868)
(14,573)
(917)
(1,704)
(3,537)
(18,380)
PREIT (see page 13 for details):
52
(3,481)
(4,763)
(3,845)
Other investments(3)
3,206
(2,045)
14,227
2,643
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 7 West 34th Street, 330 Madison Avenue, 512 West 22nd Street and others. We recognized our share of a write-off of a below market lease liability related to a tenant vacating at 650 Madison of $7,364 and $12,751 for the three and nine months ended September 30, 2015, respectively.
Includes $14,806 for our share of non-cash impairment losses.
Includes interests in Independence Plaza, 85 Tenth Avenue, Fashion Center Mall, 50-70 West 93rd Street, Toys "R" Us, Inc. and others.
15
8. Dispositions
Discontinued Operations
The tables below set forth the assets and liabilities related to discontinued operations at September 30, 2016 and December 31, 2015 and their combined results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015.
Assets related to discontinued operations:
2,642
29,561
2,904
7,459
Liabilities related to discontinued operations:
Income from discontinued operations:
676
2,589
2,805
24,868
1,279
1,254
16,672
570
1,310
1,551
8,196
Net gains on sale of real estate and a lease position
2,864
33,153
5,074
65,396
Impairment losses
(465)
(256)
UE spin-off transaction related costs
(22,972)
Pretax income from discontinued operations
50,364
Income tax expense
(86)
Cash flows related to discontinued operations:
Cash flows from operating activities
850
(34,490)
Cash flows from investing activities
2,785
348,697
16
9. 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 September 30, 2016 and December 31, 2015.
Identified intangible assets:
Gross amount
402,614
415,261
Accumulated amortization
(201,164)
(187,360)
Net
Identified intangible liabilities (included in deferred revenue):
587,157
643,488
(310,685)
(325,340)
276,472
318,148
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $11,868,000and $19,786,000 for the three months ended September 30, 2016 and 2015, respectively, and $41,676,000 and $45,614,000 for the nine months ended September 30, 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
45,591
2018
44,331
2019
32,168
2020
23,342
2021
18,159
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $6,918,000and $12,908,000 for the three months ended September 30, 2016 and 2015, respectively, and $22,777,000 and $24,402,000 for the nine months ended September 30, 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:
24,502
20,251
15,912
12,441
11,209
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 $458,000and $458,000 for the three months ended September 30, 2016 and 2015, respectively, and $1,374,000 and $1,374,000 for the nine months ended September 30, 2016 and 2015. 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
10. Debt
The following is a summary of our debt:
Interest Rate at
Balance at
Mortgages Payable:
Fixed rate
3.90%
6,685,606
6,356,634
Variable rate
2.34%
3,282,893
3,258,204
3.39%
9,968,499
9,614,838
Deferred financing costs, net and other
(100,949)
(101,125)
Total, net
Unsecured Debt:
Senior unsecured notes
3.68%
850,000
(4,777)
(5,841)
Unsecured term loan
1.67%
375,000
187,500
(3,165)
(4,362)
1.57%
1,332,688
1,577,297
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%, (2.28% at September 30, 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 scheduled to mature in March 2016.
On September 6, 2016, we completed a $675,000,000 refinancing of theMART, a 3,644,000 square foot commercial building in Chicago. The five-year loan is interest only and has a fixed rate of 2.70%. The Company realized net proceeds of approximately $124,000,000. The property was previously encumbered by a 5.57%, $550,000,000 mortgage which was scheduled to mature in December 2016.
Skyline Properties
On March 15, 2016, we notified the servicer of the $678,000,000 non-recourse 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 Company’s estimate of fair value was derived from a discounted cash flow model based upon market conditions and expectations of growth and utilized unobservable quantitative inputs including a capitalization rate of 8.0% and a discount rate of 8.2%. In the second quarter of 2016, cash flow became insufficient to service the debt and we ceased making debt service payments. Pursuant to the loan agreement, the loan is in default, causing the loan to be immediately due and payable, and is subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remains unpaid. For the three and nine months ended September 30, 2016, we accrued $2,632,000 and $5,343,000 of default interest expense, respectively. We continue to negotiate with the special servicer. There can be no assurance as to the timing or ultimate resolution of this matter.
18
11. 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
28,189
Other comprehensive loss
(3,082)
(22,502)
Redemption of Class A units for common shares, at redemption value
(46,693)
(295,713)
Issuance of Class A units
Issuance of Series D-17 preferred units
4,428
Other, net
31,478
Balance at September 30, 2015
1,113,885
Balance at December 31, 2015
11,410
Other comprehensive income
2,326
(23,582)
(28,126)
30,260
26,814
Balance at September 30, 2016
As of September 30, 2016 and December 31, 2015, the aggregate redemption value of redeemable Class A units was $1,242,895,000and $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 September 30, 2016 and December 31, 2015. Changes in the value from period to period, if any, are charged to “interest and debt expense” in our consolidated statements of income.
12. Shareholders’ Equity
On September 1, 2016, we redeemed all of the outstanding 6.875% Series J cumulative redeemable preferred shares at their redemption price of $25.00 per share, or $246,250,000 in the aggregate, plus accrued and unpaid dividends through the date of redemption. In connection therewith, we expensed $7,408,000 of issuance costs, which reduced net income attributable to common shareholders in the three months ended September 30, 2016. These costs had been initially recorded as a reduction of shareholders’ equity.
19
13. 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 September 30, 2016
Balance as of June 30, 2016
72,556
117,561
(9,941)
(30,538)
(4,526)
OCI before reclassifications
9,818
7,688
(640)
Amounts reclassified from AOCI
Net current period OCI
Balance as of September 30, 2016
121,246
(10,856)
(22,850)
(5,166)
For the Three Months Ended September 30, 2015
Balance as of June 30, 2015
50,613
87,442
(10,026)
(23,730)
(3,073)
(7,020)
(290)
448
Balance as of September 30, 2015
80,378
(10,140)
(24,020)
(2,625)
For the Nine Months Ended September 30, 2016
Balance as of December 31, 2015
(9,319)
(19,368)
(2,840)
35,453
For the Nine Months Ended September 30, 2015
Balance as of December 31, 2014
133,774
(8,992)
(25,803)
(5,712)
(49,674)
3,087
At September 30, 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 7 – Investments in Partially Owned Entities). As of September 30, 2016 and December 31, 2015, the net carrying amounts of our investment in these entities were $402,592,000 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 which, prior to the adoption of ASU 2015-02, 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.
20
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 September 30, 2016 and December 31, 2015, respectively.
Level 1
Level 2
Level 3
Deferred compensation plan assets (included in other assets)
61,444
56,915
Interest rate swap (included in other assets)
3,064
Total assets
838,974
259,609
576,301
Mandatorily redeemable instruments (included in other liabilities)
50,561
Interest rate swaps (included in other liabilities)
23,646
74,207
58,289
59,186
843,233
209,286
633,947
19,600
70,161
21
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At September 30, 2016, we had six real estate fund investments with an aggregate fair value of $519,386,000, or $210,451,000 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 1.0 to 4.3 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 September 30, 2016 and December 31, 2015.
Weighted Average
Range
(based on fair value of investments)
Unobservable Quantitative Input
Discount rates
12.0% to 14.9%
13.7%
13.6%
Terminal capitalization rates
4.7% to 5.8%
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 and nine months ended September 30, 2016 and 2015.
Beginning balance
524,150
565,976
513,973
Purchases
95,011
Dispositions / distributions
(8,029)
(71,888)
(91,450)
Net unrealized (losses) gains
Net realized (losses) gains
422
1,405
907
(526)
Ending balance
555,414
22
Deferred Compensation Plan Assets
Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The third-party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements.
The table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3, for the three and nine months ended September 30, 2016 and 2015.
60,140
67,668
63,315
1,251
2,153
3,523
8,384
Sales
(3,737)
(171)
(5,888)
(5,264)
Realized and unrealized (losses) gains
(1,055)
(1,466)
(743)
1,256
316
24
837
517
68,208
23
15. Fair Value Measurements – continued
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 September 30, 2016 and December 31, 2015.
Carrying
Fair
Value
Cash equivalents
1,003,149
1,003,000
1,295,980
1,296,000
Debt:
Mortgages payable
9,371,000
9,306,000
896,000
868,000
188,000
116,000
11,309,129
10,758,000
11,202,338
10,912,000
Excludes $108,891 and $111,328 of deferred financing costs, net and other as of September 30, 2016 and December 31, 2015, respectively.
16. 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. Equity-based compensation expense was $6,117,000 and $6,501,000 for the three months ended September 30, 2016 and 2015, respectively, and $27,903,000 and $33,328,000 for the nine months ended September 30, 2016 and 2015, respectively.
17. Fee and Other Income
The following table sets forth the details of fee and other income:
BMS cleaning fees
20,820
18,563
57,760
62,937
Management and leasing fees
6,644
4,045
16,047
12,511
Lease termination fees
2,118
1,517
7,722
8,157
Other income
8,192
10,036
23,904
29,393
Management and leasing fees include management fees from Interstate Properties, a related party, of $128,000 and $132,000 for the three months ended September 30, 2016 and 2015, and $390,000 and $403,000 for the nine months ended September 30, 2016 and 2015, respectively. The above table excludes fee income from partially owned entities, which is included in “income (loss) from partially owned entities” (see Note 7 – Investments in Partially Owned Entities).
18. Interest and Other Investment Income, Net
The following table sets forth the details of interest and other investment income, net:
Dividends on marketable securities
3,354
3,215
9,799
9,620
Interest on loans receivable
754
1,154
2,250
5,113
Mark-to-market income (loss) of investments in our
deferred compensation plan (1)
204
(2,577)
2,625
(327)
2,196
1,368
5,588
5,212
This income (loss) 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.
19. Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
Interest expense
98,210
113,485
302,940
305,110
Amortization of deferred financing costs
8,539
7,864
26,312
22,817
Capitalized interest and debt expense
(8,384)
(11,005)
(24,822)
(33,817)
Capitalized standby loan commitment termination fee
(220 Central Park South development project)
(15,000)
98,365
95,344
304,430
279,110
25
20. Income Per Share
The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options, restricted stock awards and Out-Performance Plan awards.
Numerator:
Income from continuing operations, net of income
attributable to noncontrolling interests
89,793
186,833
233,826
462,040
Income from discontinued operations, net of income
2,787
32,401
5,781
47,287
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(13)
(18)
(43)
(56)
Numerator for basic income per share
66,112
198,852
172,382
449,058
Impact of assumed conversions:
Convertible preferred share dividends
69
Earnings allocated to Out-Performance Plan units
96
628
Numerator for diluted income per share
198,875
172,478
449,755
Denominator:
Denominator for basic income per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,147
1,032
1,067
1,187
Convertible preferred shares
45
46
Out-Performance Plan units
241
265
Denominator for diluted income per share – weighted average
shares and assumed conversions
INCOME PER COMMON SHARE – BASIC:
INCOME PER COMMON SHARE – DILUTED:
The effect of dilutive securities for the three months ended September 30, 2016 and 2015 excludes an aggregate of 12,315 and 11,871 weighted average common share equivalents, respectively, and 12,072 and 11,341 weighted average common share equivalents for the nine months ended September 30, 2016 and 2015, respectively, as their effect was anti-dilutive.
26
21. 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.
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.
Generally, our mortgage loans are non-recourse to us. However, in certain cases we have provided guarantees or master leased tenant space. These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans. As of September 30, 2016, the aggregate dollar amount of these guarantees and master leases is approximately $811,000,000.
At September 30, 2016, $38,882,000 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 September 30, 2016, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $66,000,000.
As of September 30, 2016, we have construction commitments aggregating approximately $687,000,000.
27
22. Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1)by segment for the three and nine months ended September 30, 2016 and 2015.
New York
Washington, DC
432,869
134,446
65,882
280,689
90,756
72,599
Operating income (loss)
152,180
43,690
(6,717)
(579)
(452)
5,158
1,355
49
5,104
(51,212)
(18,644)
(28,509)
Income (loss) before income taxes
101,744
24,643
(23,887)
(2,356)
(302)
(2,207)
Income (loss) from continuing operations
99,388
24,341
(26,094)
Net income (loss)
(23,125)
Less net income attributable to noncontrolling interests
(8,024)
(2,985)
(5,039)
Net income (loss) attributable to Vornado
96,403
(28,164)
Net income attributable to noncontrolling interests in the
4,366
Interest and debt expense(2)
122,979
66,314
20,991
35,674
Depreciation and amortization(2)
172,980
111,731
37,123
24,126
Income tax expense(2)
5,102
2,445
310
2,347
EBITDA(1)
398,007
276,893
82,765
(4)
38,349
(5)
See notes on pages 31 and 32.
28
22. Segment Information – continued
429,433
132,704
65,459
263,805
102,114
70,237
165,628
30,590
(4,778)
(Loss) income from partially owned entities
4,010
(1,909)
(2,426)
1,888
34
1,238
(50,480)
(16,580)
(28,284)
Net gain on disposition of wholly owned and partially
owned assets
102,404
633
121,046
114,539
(31,952)
(1,147)
(287)
(1,422)
119,899
114,252
(33,374)
1,089
(16,006)
(2,582)
(13,424)
117,317
(12,335)
12,704
118,977
64,653
20,010
34,314
174,209
99,206
48,132
26,871
Income tax expense (2)
3,043
1,214
294
1,535
528,167
282,390
182,688
63,089
29
1,269,464
389,926
208,552
818,419
436,427
237,409
451,045
(46,501)
(28,857)
(5,143)
(5,453)
11,125
3,684
141
16,437
(162,193)
(54,396)
(87,841)
159,511
714
446,904
(106,209)
(59,672)
(4,131)
(884)
(4,790)
442,773
(107,093)
(64,462)
(58,302)
(37,771)
(9,811)
(27,960)
432,962
(86,262)
376,898
208,683
63,038
105,177
521,143
331,448
119,109
70,586
13,067
4,424
2,780
5,863
1,162,125
977,517
77,834
106,774
1,243,208
401,528
205,950
766,863
293,772
237,506
476,345
107,756
(31,556)
1,523
(3,583)
(6,649)
5,642
60
13,916
(143,004)
(52,223)
(83,883)
2,493
340,506
154,414
(53,557)
Income tax benefit (expense)
(3,185)
(79)
87,509
337,321
154,335
33,952
84,230
(66,559)
(6,640)
(59,919)
330,681
24,311
348,725
184,377
62,413
101,935
493,904
288,897
136,687
68,320
Income tax (benefit) expense(2)
(85,349)
3,368
(1,856)
(86,861)
1,294,796
807,323
351,579
135,894
See notes on the following pages.
30
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We calculate EBITDA on an Operating Partnership basis which is before allocation to noncontrolling interests in the Operating Partnership. 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 income (loss) to EBITDA includes our share of these items from partially owned entities.
The elements of "New York" EBITDA are summarized below.
Office(a)
159,937
161,168
475,726
480,508
Retail(b)
95,274
97,604
284,212
265,060
Residential
6,214
5,495
18,901
16,254
Alexander's
11,506
10,502
34,880
31,150
Hotel Pennsylvania
3,962
7,621
4,287
14,351
818,006
Net gain on sale of 47% ownership interest
in 7 West 34th Street
Total New York
(a)
The three and nine months ended September 30, 2015 include $5,151 and $16,954, respectively, of EBITDA from sold properties and other. Excluding these items, EBITDA was $156,017 and $463,554, respectively. The nine months ended September 30, 2016 includes $2,935 of EBITDA from a sold property. Excluding this item, EBITDA was $472,791.
(b)
The three and nine months ended September 30, 2015 include $524 and $1,597, respectively, of EBITDA from a sold property. Excluding this item, EBITDA was $97,080 and $263,463, respectively. The nine months ended September 30, 2016 includes $185 of EBITDA from a sold property. Excluding this item, EBITDA was $284,027.
The elements of "Washington, DC" EBITDA are summarized below.
Office, excluding the Skyline properties (a)
67,073
63,879
191,646
199,757
Skyline properties
4,222
5,998
14,177
19,037
Skyline properties impairment loss
(160,700)
Net gain on sale of 1750 Pennsylvania Avenue
Total Office
71,295
172,281
45,123
321,198
11,470
10,407
32,711
30,381
Total Washington, DC
The three and nine months ended September 30, 2015 include $1,601 and $5,591, respectively, of EBITDA from a sold property. Excluding this item, EBITDA was $62,278 and $194,166, respectively.
31
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 and losses
2,552
2,594
6,309
6,879
Net realized/unrealized (losses) gains on investments
(2,118)
(922)
3,333
9,542
Carried interest
373
(49)
4,020
6,248
theMART (including trade shows)
21,696
19,044
70,689
62,229
555 California Street
11,405
13,005
35,137
38,237
836
2,585
2,229
Other investments
19,092
11,009
46,180
31,705
53,836
44,694
168,253
157,069
Corporate general and administrative expenses(a)(b)
(21,519)
(22,341)
(76,364)
(82,043)
Investment income and other, net(a)
6,871
5,952
19,317
21,275
Acquisition and transaction related costs
(3,808)
(1,518)
(11,319)
(7,560)
UE and residual retail properties discontinued operations(c)
2,516
6,173
26,313
Net gain on sale of Monmouth Mall
Net gain on sale of residential condominiums
Our share of impairment loss on India real estate ventures
(14,806)
Total Other
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $204 of income and $2,577 of loss for the three months ended September 30, 2016 and 2015, respectively, and $2,625 of income and $327 of loss for the nine months ended September 30, 2016 and 2015, respectively.
The nine months ended September 30, 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 nine months ended September 30, 2015 includes $22,972 of transaction costs related to the spin-off of our strip shopping centers and malls.
32
Subsequent to the issuance of our consolidated financial statements for the quarterly period ended June 30, 2016, we determined to correct our calculation of “Other" EBITDA as previously presented to add back net income attributable to the noncontrolling interest of the Operating Partnership in order to report “Other" EBITDA on an Operating Partnership basis, consistent with the manner that EBITDA is reported for the New York and Washington DC segments. This change results in an increase (decrease) in both “Other” EBITDA and “Total” EBITDA as follows:
Total EBITDA
Other EBITDA
attributable to
noncontrolling
interests in the
As reported
Partnership
As restated
For the year ended:
1,809,535
43,231
1,852,766
128,246
171,477
December 31, 2014
2,229,471
47,613
2,277,084
454,692
502,305
December 31, 2013
1,993,880
24,817
2,018,697
572,975
597,792
For the three months ended:
June 30, 2016
546,681
14,531
561,212
27,102
41,633
March 31, 2016
210,393
(7,487)
202,906
34,279
26,792
542,928
15,042
557,970
20,541
35,583
September 30, 2015
515,463
50,385
June 30, 2015
376,681
10,198
386,879
15,059
25,257
March 31, 2015
374,463
5,287
379,750
42,261
47,548
For the six months ended:
757,074
7,044
764,118
61,381
68,425
751,144
15,485
766,629
57,320
72,805
For the nine months ended:
1,266,607
107,705
23. Subsequent Event
On October 31, 2016, our Board of Trustees approved the tax-free spin-off of our Washington, DC business and we entered into a definitive agreement to merge it with the business and certain select assets of The JBG Companies (“JBG”), a Washington, DC real estate company. Steven Roth, our Chairman and Chief Executive Officer, will be Chairman of the Board of Trustees of the new combined company. Mitchell Schear, President of our Washington, DC business, will be a member of management’s Executive Committee and a Trustee of the new combined company.
The pro rata distribution to Vornado common shareholders and Vornado Realty L.P. common unitholders is intended to be treated as a tax-free spin-off for U.S. federal income tax purposes. It is expected to be made on a pro rata 1:2 basis.
The initial Form 10 registration statement relating to the spin-off is expected to be filed with the SEC in the fourth quarter of 2016, and the distribution and combination are expected to be completed in the second quarter of 2017. The transactions are subject to certain conditions, including the SEC declaring the Form 10 registration statement effective, filing and approval of the new company’s listing application, receipt of regulatory approvals and third party consents by each of Vornado and JBG, and formal declaration of the distribution by our Board of Trustees. The transactions are not subject to a vote by Vornado shareholders. Our Board of Trustees has approved the transaction. JBG’s investors have consented to the transaction. There can be no assurance that this transaction will be completed.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of September 30, 2016, and the related consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2016 and 2015 and changes in equity and cash flows for the nine month periods ended September 30, 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
October 31, 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 and nine months ended September 30, 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 and nine months ended September 30, 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.
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 September 30, 2016:
Total Return(1)
Vornado
Office REIT
MSCI
Three-month
1.7%
3.2%
(1.5%)
Nine-month
3.3%
12.5%
11.9%
One-year
14.9%
20.6%
19.8%
Three-year
44.2%
42.9%
48.6%
Five-year
76.1%
88.1%
108.1%
Ten-year
48.7%
45.7%
82.8%
Past performance is not necessarily indicative of future performance.
We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:
· Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit
· Investing in properties in select markets, such as New York City, 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.
On October 31, 2016, our Board of Trustees approved the tax-free spin-off of our Washington, DC business and we entered into a definitive agreement to merge it with the business and certain select assets of The JBG Companies (“JBG”), a Washington, DC real estate company. See Note 23 – Subsequent Event in our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding this transaction.
37
Net income attributable to common shareholders for the quarter ended September 30, 2016 was $66,125,000, or $0.35 per diluted share, compared to $198,870,000, or $1.05 per diluted share, for the prior year’s quarter. The quarters ended September 30, 2016 and 2015 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the quarter ended September 30, 2016 by $8,552,000, or $0.04, and increased net income attributable to common shareholders for the quarter ended September 30, 2015 by $128,793,000, or $0.68 per diluted share.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended September 30, 2016 was $225,529,000, or $1.19 per diluted share, compared to $236,039,000, or $1.25 per diluted share, for the prior year’s quarter. FFO for the quarters ended September 30, 2016 and 2015 include certain items that impact FFO, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the quarter ended September 30, 2016 by $10,228,000, or $0.05 per diluted share, and increased FFO for the quarter ended September 30, 2015 by $6,636,000, or $0.04 per diluted share.
Net income attributable to common shareholders for the nine months ended September 30, 2016 was $172,425,000, or $0.91 per diluted share, compared to $449,114,000, or $2.37 per diluted share, for the nine months ended September 30, 2015. The nine months ended September 30, 2016 and 2015 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the nine months ended September 30, 2016 by $17,839,000, or $0.09 per diluted share, and increased net income attributable to common shareholders for the nine months ended September 30, 2015 by $229,269,000, or $1.21 per diluted share.
FFO for the nine months ended September 30, 2016 was $658,880,000, or $3.47 per diluted share, compared to $779,506,000, or $4.11 per diluted share, for the nine months ended September 30, 2015. FFO for the nine months ended September 30, 2016 and 2015 include certain items that impact FFO, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the nine months ended September 30, 2016 by $15,466,000, or $0.08 per diluted share, and increased FFO for the nine months ended September 30, 2015 by $109,539,000, or $0.58 per diluted share.
38
Items that impact net income attributable to common shareholders:
Net income from discontinued operations and sold properties
6,599
8,285
23,605
Default interest on Skyline properties mortgage loan
(2,632)
(5,343)
Net gains on sale of real estate and residential condominiums
2,522
136,190
163,066
153,430
(1,134)
(2,313)
(166,236)
(17,375)
Reversal of allowance for deferred tax assets (re: taxable
REIT subsidiary's ability to utilize NOLs)
90,030
(1,821)
1,333
(9,491)
137,137
(18,955)
243,463
Noncontrolling interests' share of above adjustments
939
(8,344)
1,116
(14,194)
Items that impact net income attributable to common shareholders, net
(8,552)
128,793
(17,839)
229,269
Items that impact FFO:
FFO from discontinued operations and sold properties
9,346
6,926
34,142
Our share of impairment loss on India real estate venture's
non-depreciable real estate
(4,502)
(10,879)
6,640
(16,430)
115,936
651
964
(6,397)
Items that impact FFO, net
(10,228)
6,636
(15,466)
109,539
39
Overview – continued
Same Store EBITDA
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 are summarized below.
Same store EBITDA % increase (decrease):
Three months ended September 30, 2016 vs. September 30, 2015
4.9
%
5.2
Nine months ended September 30, 2016 vs. September 30, 2015
5.7
0.7
Three months ended September 30, 2016 vs. June 30, 2016
(1.4
%)
1.2
Cash basis same store EBITDA % increase:
9.6
6.7
5.6
0.8
1.3
1.9
Excluding Hotel Pennsylvania, same store EBITDA increased by 6.5% and by 11.7% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA increased by 7.2% and by 7.3% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA decreased by 1.5% and increased by 1.2% 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.
2016 Investments
2016 Dispositions
On May 27, 2016, we sold a 47% ownership interest in 7 West 34th Street, a 477,000 square foot Manhattan office building leased to Amazon, and retained the remaining 53% interest. This transaction was based on a property value of approximately $561,000,000 or $1,176 per square foot. We received net proceeds of $127,382,000 from the sale and realized a net gain of $203,324,000, of which $159,511,000 was recognized in the second quarter and is included in “net gain on disposition of wholly owned and partially owned assets” in our consolidated statements of income. The remaining net gain of $43,813,000 has been deferred until our guarantee of payment of loan principal and interest is removed or the loan is repaid. We realized a net tax gain of $90,017,000. We continue to manage and lease the property. We share control over major decisions with our joint venture partner. Accordingly, this property is accounted for under the equity method from the date of sale.
40
2016 Financings
Secured Debt
On May 16, 2016, we completed a $300,000,000 recourse financing of 7 West 34th Street. The ten-year loan is interest only at a fixed rate of 3.65% and matures in June 2026.
Preferred Securities
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 (“ASC 606”). 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. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC 606, Deferral of the Effective Date, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an update (“ASU 2016-10”) to ASC 606, Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued an update (“ASU 2016-12”) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are currently evaluating the impact of the adoption of these ASUs 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.
42
Recently Issued Accounting Literature – continued
In August 2016, the FASB issued an update (“ASU 2016-15”) Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this update is not expected to have a significant impact on our consolidated financial statements.
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.
43
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
Retail
Three Months Ended September 30, 2016
Total square feet leased
335
177
Our share of square feet leased:
308
138
Initial rent(1)
68.11
338.50
40.62
Weighted average lease term (years)
6.5
8.4
5.0
Second generation relet space:
Square feet
278
92
GAAP basis:
Straight-line rent(2)
65.87
335.58
43.75
Prior straight-line rent
61.48
198.36
45.96
Percentage increase (decrease)
7.1%
69.2%
(4.8%)
Cash basis:
67.29
308.11
Prior escalated rent
63.39
200.80
48.75
6.2%
53.4%
(10.3%)
Tenant improvements and leasing commissions:
Per square foot
49.49
103.45
37.86
Per square foot per annum
7.61
12.32
7.57
Percentage of initial rent
11.2%
3.6%
18.6%
See notes on the following page.
44
Overview - continued
Leasing Activity – continued
New York Office
Long Island City
Manhattan
(Center Building)
Nine Months Ended September 30, 2016
1,330
285
101
1,098
1,109
1,039
79.23
40.10
206.71
40.05
9.9
5.8
9.0
4.1
1,024
62
800
78.72
38.68
208.06
37.92
64.12
28.69
166.36
39.67
22.8%
34.8%
25.1%
(4.4%)
78.79
198.28
40.80
66.50
30.53
174.08
42.93
18.5%
31.4%
13.9%
(5.0%)
72.47
18.47
105.45
18.55
7.32
3.18
11.72
4.52
9.2%
7.9%
5.7%
11.3%
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.
Square footage (in service) and Occupancy as of September 30, 2016
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
New York:
20,219
16,956
95.5%
70
2,697
2,476
96.7%
Residential - 1,690 units
1,559
826
96.0%
Alexander's, including 312 residential units
2,437
790
99.7%
28,312
22,448
95.8%
Washington, DC:
Office, excluding the Skyline properties
48
12,875
10,450
89.1%
2,649
47.2%
56
15,524
13,099
80.6%
Residential - 3,058 units
3,164
3,022
98.1%
330
100.0%
19,018
16,451
83.9%
Other:
theMART
3,665
3,656
98.2%
1,736
1,215
90.3%
784
6,185
5,655
Total square feet as of September 30, 2016
53,515
44,554
Square footage (in service) and Occupancy as of December 31, 2015
properties
21,288
17,412
96.3%
65
2,641
2,408
96.2%
Residential - 1,711 units
1,561
827
94.1%
Alexander's, including 296 residential units
2,419
29,309
22,831
96.4%
13,136
10,781
90.0%
2,648
50.1%
57
15,784
13,429
82.1%
Residential - 2,630 units
2,808
2,666
386
18,978
16,481
84.8%
3,658
3,649
98.5%
93.3%
763
6,157
5,627
Total square feet as of December 31, 2015
54,444
44,939
47
Washington, DC Segment
EBITDA, as adjusted for the nine months ended September 30, 2016, was $5,050,000 behind the prior year's nine months. We expect that Washington’s 2016 EBITDA, as adjusted, 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 1,466,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of September 30, 2016.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of September 30, 2016
37.39
1,456,000
983,000
389,000
84,000
Leases pending
39.39
10,000
Taken out of service for redevelopment
348,000
1,814,000
1,331,000
399,000
To be resolved:
Vacated as of September 30, 2016
34.63
581,000
105,000
412,000
64,000
Total square feet subject to BRAC
2,395,000
1,436,000
811,000
148,000
Net Income and EBITDA by Segment for the Three Months Ended September 30, 2016 and 2015
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended September 30, 2016 and 2015.
Net Income and EBITDA by Segment for the Three Months Ended September 30, 2016 and 2015 - continued
We calculate EBITDA on an Operating Partnership basis which is before allocation to the noncontrolling interest of the Operating Partnership. 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 in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
For the Three Months Ended September 30,
2015 includes $5,151 of EBITDA from sold properties. Excluding these items, EBITDA was $156,017.
2015 includes $524 of EBITDA from a sold property. Excluding this item, EBITDA was $97,080.
2015 includes $1,601 of EBITDA from a sold property. Excluding this item, EBITDA was $62,278.
50
Net realized/unrealized losses on investments
Corporate general and administrative expenses(a)
UE and residual retail properties discontinued operations
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $204 of income and $2,577 of loss for the three months ended September 30, 2016 and 2015, respectively.
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region, excluding gains on sale of real estate, non-cash impairment losses and operations of sold properties.
Region:
New York City metropolitan area
70%
71%
Washington, DC / Northern Virginia area
21%
Chicago, IL
6%
5%
San Francisco, CA
3%
100%
51
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $633,197,000 for the three months ended September 30, 2016, compared to $627,596,000 for the prior year’s quarter, an increase of $5,601,000. Below are the details of the increase by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions, dispositions and other
(9,803)
(7,737)
(2,066)
Development and redevelopment
1,719
1,225
494
(3,932)
Trade shows
115
Same store operations
9,562
9,213
429
(80)
(2,339)
(2,456)
(412)
Tenant expense reimbursements:
(1,781)
(1,673)
(108)
329
(253)
582
5,779
1,132
(469)
4,327
3,443
771
113
Fee and other income:
2,256
1,983
273
2,599
111
2,304
184
601
1,222
(1,115)
(1,843)
(867)
194
(1,170)
3,613
2,449
1,383
(219)
Total increase in revenues
5,601
3,436
1,742
423
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative expenses, and acquisition and transaction related costs were $444,044,000 for the three months ended September 30, 2016, compared to $436,156,000 for the prior year’s quarter, an increase of $7,888,000. Below are the details of the increase (decrease) by segment:
Operating:
(2,140)
(1,071)
(1,069)
(37)
(449)
398
Non-reimbursable expenses, including
bad debt reserves
(1,550)
(1,165)
(354)
(31)
112
264
BMS expenses
1,497
1,240
257
6,119
6,325
812
(1,018)
4,265
5,455
(1,060)
(130)
Depreciation and amortization:
(1,241)
(846)
(395)
(11,714)
(11,515)
(199)
10,003
10,797
1,037
(1,831)
(2,952)
9,951
(10,873)
(2,030)
General and administrative:
Mark-to-market of deferred
compensation plan liability
2,781
1,504
1,478
575
(549)
4,285
2,232
2,290
Total increase (decrease) in expenses
7,888
16,884
(11,358)
2,362
This increase in expense is entirely offset by a corresponding increase in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment income, net” on our consolidated statements of income.
53
Summarized below are the components of income (loss) from partially owned entities for the three months ended September 30, 2016 and 2015.
Urban Edge Properties ("UE")
Pennsylvania Real Estate Investment Trust ("PREIT")
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 7 West 34th Street, 330 Madison Avenue, 512 West 22nd Street and others. In 2015, we recognized our $7,364 share of a write-off of a below market lease liability related to a tenant vacating at 650 Madison.
Below are the components of the income from our real estate fund investments for the three months ended September 30, 2016 and 2015.
Net unrealized losses on held investments
Net realized losses on exited investments
Income from real estate fund investments attributable to Vornado (1)
Excludes management, leasing and development fees of $804 and $678 for the three months ended September 30, 2016 and 2015, respectively, which are included as a component of "fee and other income" in our consolidated statements of income.
Interest and other investment income, net was $6,508,000 for the three months ended September 30, 2016, compared to $3,160,000 in the prior year’s quarter, an increase of $3,348,000. This increase resulted primarily from an increase 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).
Interest and debt expense was $98,365,000 for the three months ended September 30, 2016, compared to $95,344,000 in the prior year’s quarter, an increase of $3,021,000. This increase was primarily due to (i) $5,417,000 of higher interest expense from the financings of the St. Regis - retail, 150 West 34th Street, 100 West 33rd Street, and our $750,000,000 delayed draw term loan, (ii) $2,632,000 of accrued default interest on our Skyline properties mortgage loan, and (iii) $2,621,000 of lower capitalized interest, partially offset by (iv) $4,894,000 of interest savings from the financings of 888 Seventh Avenue and 770 Broadway, and (v) $1,804,000 of interest savings from the repayment of the Bowen Building loan.
54
Results of Operations – Three Months Ended September 30, 2016 Compared to September 30, 2015 - continued
For the three months ended September 30, 2015, we recognized a $103,037,000 net gain on disposition of wholly owned and partially owned assets primarily from the sale of 1750 Pennsylvania Avenue.
For the three months ended September 30, 2016, income tax expense was $4,865,000, compared to $2,856,000 for the prior year’s quarter, an increase of $2,009,000. This increase was primarily attributable to higher income from our taxable REIT subsidiaries.
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 September 30, 2016 and 2015.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $3,658,000 for the three months ended September 30, 2016, compared to $3,302,000 for the prior year’s quarter, an increase of $356,000.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership
Net income attributable to noncontrolling interests in the Operating Partnership was $4,366,000 for the three months ended September 30, 2016, compared to $12,704,000 for the prior year’s quarter, a decrease of $8,338,000. This decrease resulted primarily from higher net income subject to allocation to unitholders in the prior year’s quarter primarily due to the net gain of $102,404,000 on the sale of 1750 Pennsylvania Avenue.
Preferred share dividends were $19,047,000 for the three months ended September 30, 2016, compared to $20,364,000 for the prior year’s quarter, a decrease of $1,317,000. The decrease is primarily due to the redemption of the 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
In the three months ended September 30, 2016, we recognized a $7,408,000 expense in connection with the write-off of issuance costs upon the redemption all of the outstanding 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
55
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 September 30, 2016, compared to the three months ended September 30, 2015.
EBITDA for the three months ended September 30, 2016
Add-back:
Non-property level overhead expenses included above
9,783
6,858
Less EBITDA from:
(3,853)
(51)
Properties taken out of service for redevelopment
(6,691)
(1,581)
Other non-operating loss (income), net
748
(563)
Same store EBITDA for the three months ended September 30, 2016
276,829
87,474
EBITDA for the three months ended September 30, 2015
8,305
6,283
(712)
Dispositions, including net gains on sale
(5,399)
(104,005)
(5,632)
(427)
Other non-operating income, net
(15,121)
(1,415)
Same store EBITDA for the three months ended September 30, 2015
263,831
83,124
Increase in same store EBITDA -
12,998
4,350
% increase in same store EBITDA
4.9%
5.2%
See notes on the following page
(1) The $12,998,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $9,916,000 and $6,098,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $3,659,000. The Office and Retail EBITDA increases resulted primarily from higher rents, partially offset by higher operating expenses, net of reimbursements.
(2) Excluding Hotel Pennsylvania, same store EBITDA increased by 6.5%.
(3) The $4,350,000 increase in Washington, DC same store EBITDA resulted primarily from higher management and leasing fee income of $2,304,000, higher rental income of $1,074,000 and lower net operating expenses of $674,000.
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
(42,208)
(7,024)
Cash basis same store EBITDA for the three months ended
234,621
80,450
(49,749)
(7,743)
214,082
75,381
Increase in cash basis same store EBITDA -
20,539
5,069
% increase in cash basis same store EBITDA
9.6%
6.7%
Excluding Hotel Pennsylvania, same store EBITDA increased by 11.7% on a cash basis.
Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2016 and 2015
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the nine months ended September 30, 2016 and 2015.
58
Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2016 and 2015 - continued
Net gain on sale of 47% ownership interest in 7 West 34th Street
2016 and 2015 include $2,935 and $16,954, respectively, of EBITDA from sold properties and other. Excluding these items, EBITDA was $472,791 and $463,554, respectively.
2016 and 2015 include $185 and $1,597, respectively, of EBITDA from a sold property. Excluding this item, EBITDA was $284,027 and $263,463, respectively.
2015 includes $5,591 of EBITDA from a sold property. Excluding this item, EBITDA was $194,166.
59
Income before net realized/unrealized gains
Net realized/unrealized gains on investments
Corporate general and administrative expenses(a) (b)
The amounts in these captions (for this table only) excludes income from the mark-to-market of our deferred compensation plan of $2,625 of income and $327 of loss for the nine months ended September 30, 2016 and 2015, respectively.
22%
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $1,867,942,000 for the nine months ended September 30, 2016, compared to $1,850,686,000 for the prior year’s nine months, an increase of $17,256,000. Below are the details of the increase (decrease) by segment:
(19,687)
(12,124)
(7,563)
(150)
(757)
2,005
(10,626)
(661)
59,090
55,793
3,261
29,214
32,893
(8,284)
4,605
(2,761)
(2,506)
(255)
723
(542)
1,263
(2,355)
2,967
(1,946)
(3,376)
(4,393)
463
(2,743)
(2,113)
(5,177)
(5,619)
442
3,536
369
2,384
783
(435)
589
(5,489)
(2,439)
(1,890)
(1,160)
(7,565)
(7,100)
(575)
110
Total increase (decrease) in revenues
17,256
26,256
(11,602)
2,602
Primarily from the termination of a third party cleaning contract in 2015.
61
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative expenses, and impairment loss and acquisition and transaction related costs were $1,492,255,000 for the nine months ended September 30, 2016, compared to $1,298,141,000 for the prior year’s nine months, an increase of $194,114,000. Below are the details of the increase (decrease) by segment:
599
4,009
(3,410)
(284)
(113)
(1,169)
998
Non-reimbursable expenses, including bad debt
reserves
147
(261)
600
(192)
673
(4,901)
(5,436)
535
12,521
17,261
(4,386)
8,569
15,274
(4,333)
(2,372)
6,663
(1,561)
(17,560)
(296)
(17,007)
(257)
32,697
30,596
1,237
864
20,239
36,963
(17,331)
607
Mark-to-market of deferred compensation plan
liability
2,952
(2,080)
(681)
3,619
(5,018)
872
Impairment loss and acquisition and transaction
related costs
164,434
160,700
(6)
3,734
194,114
51,556
142,655
(97)
Results primarily from (i) the nine months ended September 30, 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 lower capitalized payroll in 2016.
On March 15, 2016, we notified the servicer of the $678,000 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 non-cash impairment loss in the first quarter of 2016. The Company’s estimate of fair value was derived from a discounted cash flow model based upon market conditions and expectations of growth and utilized unobservable quantitative inputs including a capitalization rate of 8.0% and a discount rate of 8.2%. In the second quarter of 2016, cash flow became insufficient to service the debt and we ceased making debt service payments. Pursuant to the loan agreement, the loan is in default, causing the loan to be immediately due and payable, and is subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remains unpaid. For the three and nine months ended September 30, 2016, we accrued $2,632 and $5,343 of default interest expense, respectively. We continue to negotiate with the special servicer. There can be no assurance as to the timing or ultimate resolution of this matter.
Results of Operations – Nine Months Ended September 30, 2016 Compared to September 30, 2015 - continued
Summarized below are the components of income (loss) from partially owned entities for the nine months ended September 30, 2016 and 2015.
Our Share of Net (Loss) Income:
Other investments (3)
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 7 West 34th Street, 330 Madison Avenue, 512 West 22nd Street and others. In 2015, we recognized our $12,751 share of a write-off of a below market lease liability related to a tenant vacating at 650 Madison.
Below are the components of the income from our real estate fund investments for the nine months ended September 30, 2016 and 2015.
Net unrealized gains on held investments
Net realized gains on exited investments
Excludes management, leasing and development fees of $2,499 and $2,015 for the nine months ended September 30, 2016 and 2015, respectively, which are included as a component of "fee and other income" in our consolidated statements of income.
63
Interest and other investment income, net was $20,262,000 for the nine months ended September 30, 2016, compared to $19,618,000 for the prior year’s nine months, an increase of $644,000.
Interest and debt expense was $304,430,000 for the nine months ended September 30, 2016, compared to $279,110,000 for the prior year’s nine months, an increase of $25,320,000. This increase was primarily due to (i) $19,051,000 of higher interest expense from the financings of the St. Regis - retail, 150 West 34th Street, 100 West 33rd Street, and our $750,000,000 delayed draw term loan, (ii) $8,995,000 of lower capitalized interest, and (iii) $5,343,000 of accrued default interest on our Skyline properties mortgage loan, partially offset by (iv) $8,665,000 of interest savings from the financings of 888 Seventh Avenue and 770 Broadway, and (v) $2,373,000 of interest savings from the repayment of the Bowen Building loan.
For the nine months ended September 30, 2016, we recognized a $160,225,000 net gain on disposition of wholly owned and partially owned assets, primarily from the sale of a 47% ownership interest in 7 West 34th Street, compared to $104,897,000 for the prior year’s nine months, primarily from the sale of 1750 Pennsylvania Avenue.
For the nine months ended September 30, 2016, income tax expense was $9,805,000, compared to an income tax benefit of $84,245,000 for the prior year’s nine months, an increase in expense of $94,050,000. This increase in expense resulted primarily from the prior year reversal of $90,030,000 of valuation allowances against certain of our deferred tax assets, as we have concluded that it is more-likely-than-not that we will generate sufficient taxable income from the sale of 220 Central Park South residential condominium units to realize the deferred tax assets.
64
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 nine months ended September 30, 2016 and 2015.
Net income attributable to noncontrolling interests in consolidated subsidiaries was $26,361,000 for the nine months ended September 30, 2016, compared to $38,370,000 for the prior year’s nine months, a decrease of $12,009,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net income attributable to noncontrolling interests in the Operating Partnership was $11,410,000 for the nine months ended September 30, 2016, compared to $28,189,000 for the prior year’s nine months, a decrease of $16,779,000. This decrease resulted primarily from lower net income subject to allocation to unitholders. This decrease resulted primarily from higher net income subject to allocation to unitholders in the prior year’s quarter primarily due to the net gain of $102,404,000 on the sale of 1750 Pennsylvania Avenue.
Preferred share dividends were $59,774,000 for the nine months ended September 30, 2016, compared to $60,213,000 for the prior year’s nine months, a decrease of $439,000.
In the nine months ended September 30, 2016, we recognized a $7,408,000 expense in connection with the write-off of issuance costs upon redemption all of the outstanding 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the nine months ended September 30, 2016, compared to nine months ended September 30, 2015.
EBITDA for the nine months ended September 30, 2016
27,557
22,117
(22,650)
(159,392)
(32)
(19,945)
(1,589)
Other non-operating loss, net
6,778
159,837
Same store EBITDA for the nine months ended September 30, 2016
809,865
258,167
EBITDA for the nine months ended September 30, 2015
28,238
18,498
(2,600)
(12,531)
(108,055)
(16,244)
(2,434)
(38,218)
(3,296)
Same store EBITDA for the nine months ended September 30, 2015
765,968
256,292
43,897
1,875
0.7%
66
(1) The $43,897,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $31,454,000 and $19,867,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $10,064,000. The Office and Retail EBITDA increases resulted primarily from higher rents, partially offset by higher operating expenses, net of reimbursements.
(2) Excluding Hotel Pennsylvania, same store EBITDA increased by 7.2%.
(3) The $1,875,000 increase in Washington, DC same store EBITDA resulted primarily from higher management and leasing fee income of $2,384,000 and higher rental income of $1,594,000 partially offset by higher net operating expenses of $2,192,000.
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA
(133,094)
(20,555)
Cash basis same store EBITDA for the nine months ended
676,771
237,612
(124,959)
(20,477)
641,009
235,815
35,762
1,797
5.6%
0.8%
Excluding Hotel Pennsylvania, same store EBITDA increased by 7.3% on a cash basis.
67
SUPPLEMENTAL INFORMATION
Reconciliation of Net Income to EBITDA for the Three Months Ended June 30, 2016
Net income attributable to Vornado for the three months ended June 30, 2016
256,751
15,303
71,171
22,641
111,314
39,305
889
2,205
EBITDA for the three months ended June 30, 2016
440,125
79,454
(613)
(7,889)
1,053
279,176
7,807
7,295
(152)
(161,496)
(7,686)
(214)
4,547
(136)
Same store EBITDA for the three months ended June 30, 2016
283,145
86,406
(Decrease) increase in same store EBITDA -
(3,969)
% (decrease) increase in same store EBITDA
(1.4%)
1.2%
Excluding Hotel Pennsylvania, same store EBITDA decreased by 1.5%.
68
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA – Three Months Ended September 30, 2016 Compared to June 30, 2016
(42,989)
236,187
(49,984)
(7,459)
233,161
78,947
3,026
1,503
1.3%
1.9%
Excluding Hotel Pennsylvania, same store EBITDA increased by 1.2% on a cash basis.
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.
In the first quarter of 2016, we notified the servicer of the $678,000,000 non-recourse 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. In the second quarter of 2016, cash flow became insufficient to service the debt and we ceased making debt service payments. Pursuant to the loan agreement, the loan is in default, causing the loan to be immediately due and payable, and is subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remains unpaid. This loan is recourse only to the Skyline properties. Accordingly, this default has not had, nor is expected to have, any material impact on our current or future business operations, our ability to raise capital or our credit ratings. For the three and nine months ended September 30, 2016, we accrued $2,632,000 and $5,343,000 of default interest expense, respectively. We continue to negotiate with the special servicer. There can be no assurance as to the timing or ultimate resolution of this matter.
Cash Flows for the Nine Months Ended September 30, 2016
Our cash and cash equivalents were $1,352,697,000 at September 30, 2016, a $483,010,000 decrease from the balance at December 31, 2015. Our consolidated outstanding debt was $11,200,238,000 at September 30, 2016, a $109,228,000 increase from the balance at December 31, 2015. As of September 30, 2016 and December 31, 2015, $115,630,000 and $550,000,000, respectively, was outstanding under our revolving credit facilities. During the remainder of 2016 and 2017, $737,641,000 and $359,647,000, 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 $574,247,000 was comprised of (i) net income of $277,378,000, (ii) $298,361,000 of non-cash adjustments, which include depreciation and amortization expense, real estate impairment losses, net gain on the disposition of wholly owned and partially owned assets, the effect of straight-lining of rental income, net realized and unrealized gains on real estate fund investments, net gains on sale of real estate and other and equity in net income from partially owned entities, (iii) return of capital from real estate fund investments of $71,888,000, (iv) distributions of income from partially owned entities of $58,692,000, partially offset by (v) the net change in operating assets and liabilities of $132,072,000.
Net cash used in investing activities of $692,021,000 was primarily comprised of (i) $426,641,000 of development costs and construction in progress, (ii) $261,971,000 of additions to real estate, (iii) $112,797,000 of investments in partially owned entities, (iv) $46,801,000 of acquisitions of real estate and other, (v) $42,000,000 due to the net deconsolidation of 7 West 34th Street, (vi) $24,796,000 of changes in restricted cash, (vii) $11,700,000 of investments in loans receivable and other and (viii) $4,379,000 in purchases of marketable securities, partially offset by (ix) $138,034,000 of proceeds from sales of real estate and related investments and (x) $100,997,000 of capital distributions from partially owned entities.
Net cash used in financing activities of $365,236,000 was comprised of (i) $1,591,554,000 for the repayments of borrowings, (ii) $356,863,000 of dividends paid on common shares, (iii) $246,250,000 for the redemption of preferred shares, (iv) $95,055,000 of distributions to noncontrolling interests, (v) $64,006,000 of dividends paid on preferred shares, (vi) $30,846,000 of debt issuance and other costs, and (vii) $186,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (viii) $2,000,604,000 of proceeds from borrowings, (ix) $11,900,000 of contributions from noncontrolling interests and (x) $7,020,000 of proceeds received from the exercise of employee share options.
Liquidity and Capital Resources – continued
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.
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the nine months ended September 30, 2016.
Expenditures to maintain assets
68,381
39,001
14,080
15,300
Tenant improvements
62,556
48,175
8,638
5,743
Leasing commissions
30,462
26,214
2,943
1,305
Non-recurring capital expenditures
27,503
20,224
6,052
1,227
Total capital expenditures and leasing commissions (accrual basis)
188,902
133,614
31,713
23,575
Adjustments to reconcile to cash basis:
Expenditures in the current year applicable to prior periods
199,260
100,542
64,174
34,544
Expenditures to be made in future periods for the current period
(80,348)
(63,919)
(13,550)
(2,879)
Total capital expenditures and leasing commissions (cash basis)
307,814
170,237
82,337
55,240
6.42
7.02
n/a
10.2%
8.9%
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 estimated to be approximately $1.3 billion, of which $534,920,000 has been expended as of September 30, 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 estimated to be approximately $250,000,000, of which $219,153,000 has been expended as of September 30, 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 (55.0% owned). The incremental development cost of this project is estimated to be approximately $130,000,000, of which our share is $72,000,000. As of September 30, 2016, $24,284,000 has been expended, of which our share is $13,356,000.
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 estimated to be approximately $150,000,000, of which our share is $68,000,000. As of September 30, 2016, $26,169,000 has been expended, of which our share is $11,802,000.
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We are developing 606 Broadway, a 33,000 square foot office and retail building, located on Houston Street in Manhattan (50.0% owned). The venture’s incremental development cost of this project is estimated to be approximately $60,000,000, of which our share is $30,000,000. As of September 30, 2016, $16,382,000 has been expended, of which our share is $8,191,000.
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 estimated to be 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.
Below is a summary of development and redevelopment expenditures incurred in the nine months ended September 30, 2016. These expenditures include interest of $24,822,000, payroll of $9,475,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $45,316,000, that were capitalized in connection with the development and redevelopment of these projects.
220 Central Park South
213,170
The Bartlett
62,093
90 Park Avenue
28,288
640 Fifth Avenue
23,415
21,613
2221 South Clark Street (residential conversion)
14,408
Penn Plaza
10,195
Wayne Towne Center
7,910
330 West 34th Street
3,968
41,581
8,165
31,754
1,662
426,641
74,031
108,255
244,355
72
Our cash and cash equivalents were $788,137,000 at September 30, 2015, a $410,340,000 decrease over the balance at December 31, 2014. The decrease is primarily due to cash flows from investing and financing activities, partially offset by cash flows from operating activities, as discussed below.
Cash flows provided by operating activities of $443,525,000 was comprised of (i) net income of $575,886,000, (ii) return of capital from real estate fund investments of $91,036,000, (iii) distributions of income from partially owned entities of $51,650,000, and (iv) $10,350,000 of non-cash adjustments, which include depreciation and amortization expense, the reversal of allowance for deferred tax assets, the effect of straight-lining of rental income, equity in net loss from partially owned entities, real estate impairment losses, and net gain on disposition of wholly owned and partially owned assets, partially offset by (v) the net change in operating assets and liabilities of $285,397,000 (including the acquisition of real estate fund investments of $95,010,000).
Net cash used in investing activities of $480,383,000 was comprised of (i) $388,565,000 of acquisitions of real estate and other, (ii) $339,586,000 of development costs and construction in progress, (iii) $207,845,000 of additions to real estate, (iv) $144,890,000 of investments in partially owned entities, and (v) $25,845,000 of investments in loans receivable and other, partially offset by (vi) $375,850,000 of proceeds from sales of real estate and related investments, (vii) $201,895,000 of changes in restricted cash, (viii) $31,822,000 of capital distributions from partially owned entities, and (ix) $16,781,000 of proceeds from sales and repayments of mortgage and mezzanine loans receivable and other.
Net cash used in financing activities of $373,482,000 was comprised of (i) $2,539,677,000 for the repayments of borrowings, (ii) $355,945,000 of dividends paid on common shares, (iii) $225,000,000 of distributions in connection with the spin-off of UE, (iv) $93,738,000 of distributions to noncontrolling interests, (v) $60,213,000 of dividends paid on preferred shares, (vi) $37,467,000 of debt issuance costs, and (vii) $4,900,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings, partially offset by (viii) $2,876,460,000 of proceeds from borrowings, (ix) $51,725,000 of contributions from noncontrolling interests, and (x) $15,273,000 of proceeds received from the exercise of employee share options.
73
Capital Expenditures for the Nine Months Ended September 30, 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 nine months ended September 30, 2015.
76,461
41,796
14,722
19,943
128,271
50,702
45,837
31,732
40,661
26,909
5,792
7,960
101,517
67,623
32,762
346,910
187,030
99,113
60,767
100,704
50,013
27,029
23,662
(196,872)
(99,269)
(70,128)
(27,475)
250,742
137,774
56,014
56,954
9.13
11.81
6.68
17.0%
Below is a summary of development and redevelopment expenditures incurred in the nine months ended September 30, 2015. These expenditures include interest of $48,817,000, payroll of $3,557,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $68,003,000, that were capitalized in connection with the development and redevelopment of these projects.
98,680
72,309
25,707
20,430
Marriott Marquis Times Square - retail and signage
19,069
17,827
14,478
11,603
11,003
251 18th Street
4,863
S. Clark Street/12th Street
3,120
608 Fifth Avenue
2,527
37,970
4,932
17,969
15,069
339,586
95,271
112,739
131,576
74
75
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 net income and should not be considered an alternative to net income as a performance 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 20 – Income per Share, in our consolidated financial statements on page 26 of this Quarterly Report on Form 10-Q.
FFO for the Three and Nine Months Ended September 30, 2016 and 2015
FFO attributable to common shareholders plus assumed conversions was $225,529,000, or $1.19 per diluted share for the three months ended September 30, 2016, compared to $236,039,000, or $1.25 per diluted share, for the prior year’s three months. FFO attributable to common shareholders plus assumed conversions was $658,880,000, or $3.47 per diluted share for the nine months ended September 30, 2016, compared to $779,506,000, or $4.11 per diluted share, for the prior year’s nine months. Details of certain adjustments to FFO are discussed in the financial results summary of our “Overview”.
Reconciliation of our net income to FFO:
Per diluted share
FFO adjustments:
Depreciation and amortization of real property
130,892
134,623
398,231
382,175
Net gains on sale of real estate
(135,557)
(161,721)
(146,424)
Proportionate share of adjustments to equity in net income (loss) of
partially owned entities to arrive at FFO:
40,281
38,131
117,635
106,685
(2,522)
(2,841)
(4,513)
1,134
2,313
5,536
12,617
169,785
39,510
517,540
350,796
(10,403)
(2,364)
(31,872)
(20,473)
FFO adjustments, net
159,382
37,146
485,668
330,323
FFO attributable to common shareholders
225,507
236,016
658,093
779,437
722
FFO attributable to common shareholders plus assumed conversions
225,529
236,039
658,880
779,506
1.19
1.25
3.47
4.11
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
242
Denominator for FFO per diluted share
190,090
190,129
189,524
76
We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:
Weighted
Effect of 1%
Average
Change In
December 31,
Balance
Interest Rate
Base Rates
Consolidated debt:
3,773,523
2.25%
37,735
3,995,704
2.00%
7,535,606
3.88%
7,206,634
4.21%
3.34%
3.42%
Pro rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys "R" Us, Inc.
1,122,472
11,225
485,160
1.97%
Variable rate – Toys "R" Us, Inc.
1,046,564
6.36%
10,466
1,164,893
6.61%
Fixed rate (including $700,962 and $661,513
of Toys "R" Us, Inc. debt in 2016 and 2015)
2,496,406
6.13%
2,782,025
6.37%
4,665,442
5.27%
21,691
4,432,078
5.95%
Noncontrolling interests’ share of above
(3,643)
Total change in annual net income
55,783
Per share-diluted
0.29
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of September 30, 2016, we have an interest rate swap on a $414,000,000 mortgage loan on Two Penn Plaza that swapped the rate from LIBOR plus 1.65% (2.17% at September 30, 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% (2.12% at September 30, 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% (2.28% at September 30, 2016) to a fixed rate of 2.56% through September 2020.
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of September 30, 2016, the estimated fair value of our consolidated debt was $10,758,000,000.
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 September 30, 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: October 31, 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