Vornado Realty Trust

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1 As filed with the Securities and Exchange Commission on September 10, 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A Amendment No. 1 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) AUGUST 21, 1997 Commission File Number: 1-11954 VORNADO REALTY TRUST (Exact name of registrant as specified in its charter) MARYLAND 22-1657560 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number) PARK 80 WEST, PLAZA II, SADDLE BROOK, NEW JERSEY 07663 (Address of principal executive offices) (Zip Code) (201)587-1000 (Registrant's telephone number, including area code) N/A (Former Name or Former Address, if Changed Since Last Report) Page 1

2 This form 8-K/A amends Vornado Realty Trust's Form 8-K previously filed on August 29, 1997 to include certain required financial statements and proforma financial information. Item 1. Not Applicable. Item 2. Acquisition or Disposition of Assets. On August 21, 1997, Vornado Realty Trust, which owns 90.4% and is the sole general partner of Vornado Realty L.P., entered into an agreement with the owners of 90 Park Avenue, pursuant to which Vornado restructured the mortgage, took title to the land and obtained a 43 year lease on the building under which Vornado will manage the building and receive the building's cash flow. As part of the restructuring, the amount of the debt was adjusted from the face value of $193,000,000 to Vornado's May 1997 acquisition cost of $185,000,000, the maturity date of the debt was extended to August 31, 2022 and the interest rate was set at 7.5%. Vornado purchased the land from the borrower for $8,000,000, which was further applied to reduce the debt to $177,000,000. The remaining investment will be reclassified as real estate. 90 Park Avenue is an 875,000 square foot office building in Manhattan. These transactions were arrived at through arms-length negotiations and were consummated through a subsidiary of Vornado Realty L.P. Items 3-4. Not Applicable. Item 5. Other Events. On August 22, 1997, Vornado Realty Trust entered into an Agreement and Plan of Merger (the "Merger Agreement") among Vornado, Arbor Property Trust ("Arbor") and Trees Acquisition Subsidiary, Inc., ("Merger Sub"), a wholly-owned subsidiary of Vornado, pursuant to which Arbor is to be merged with and into Merger Sub. Holders of Arbor common shares of beneficial interest ("Arbor Common Shares") are to receive 0.121905 common shares of beneficial interest of Vornado per Arbor Common Share or, at the election of the holder of Arbor Common Shares, 0.153846 Series A Convertible Preferred Shares of Vornado per Arbor Common Share. The Merger Agreement provides that simultaneously with the consummation of the merger, Vornado Realty Trust will cause the Green Acres Mall, which is currently indirectly wholly owned by Arbor, to be owned directly or indirectly by Vornado Realty L.P. Item 6. Not Applicable. Page 2

3 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) - (b) There are filed herewith (a) the financial statements of Green Acres Mall and the Plaza at Green Acres ("Arbor") and the financial statements of 90 Park Avenue commencing on page 4 and (b) the Condensed Consolidated Pro forma Balance Sheet of Vornado Realty Trust as of June 30, 1997 and the Condensed Consolidated Pro forma Statement of Income of Vornado Realty Trust for the six months ended June 30, 1997 and the year ended December 31, 1996, commencing on page 14, prepared in connection with the restructuring of Vornado Realty Trust's real estate investment in 90 Park Avenue and its merger with Arbor Property Trust. The "Vornado/Mendik" column included in the pro forma statements of income for the year ended December 31, 1996 and the six months ended June 30, 1997 reflects the April 1997 acquisition of interests in all or a portion of seven Manhattan office buildings and a management company (the "Mendik Transaction") as if it had occurred on January 1, 1996. The pro forma financial information relating to this transaction was previously filed with the Securities and Exchange Commission. (c) Exhibits. - None Item 8. Not Applicable. Page 3

4 (a) Financial statements Page Reference --------- Green Acres Mall and the Plaza at Green Acres Independent Auditors' Report 5 Statement of Revenues and Certain Expenses for the year ended December 31, 1996 and the six months ended June 30, 1997 and 1996 6 Notes to Financial Statements 7 90 Park Avenue Independent Auditors' Report 10 Statements of Revenues and Certain Expenses for the year ended December 31, 1996 and the six months ended June 30, 1997 and 1996 11 Notes to Financial Statements 12 Page 4

5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Arbor Property Trust: We have audited the statement of revenue and certain expenses of Green Acres Mall and The Plaza at Green Acres (the "Property"), described in Note 1, for the year ended December 31, 1996. This financial statement is the responsibility of the Property's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in a Form 8-K to be filed by Vornado Realty Trust, as described in Note 1, and is not intended to be a complete presentation of the Property's revenue and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenue and certain expenses of the Property for the year ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Philadelphia, Pa., September 4, 1997 Page 5

6 GREEN ACRES MALL AND THE PLAZA AT GREEN ACRES STATEMENTS OF REVENUE AND CERTAIN EXPENSES (in thousands) For the Six Months Ended For the June 30, Year Ended ------------------ December 31, 1997 1996 1996 ------- ------- ------------ (unaudited) REVENUE: Minimum and percentage rents $10,163 $ 9,988 $20,398 Operating expense reimbursements 7,619 7,098 15,294 Other income 984 605 1,924 ------- ------- ------- Total revenue 18,766 17,691 37,616 ------- ------- ------- CERTAIN EXPENSES: Maintenance, payroll and other operating expenses 2,758 3,286 6,647 Utilities 735 695 1,694 Real estate taxes 4,493 4,271 8,768 Provision for doubtful accounts 319 177 1,120 ------- ------- ------- Total certain expenses 8,305 8,429 18,229 ------- ------- ------- REVENUE IN EXCESS OF CERTAIN EXPENSES $10,461 $ 9,262 $19,387 ======= ======= ======= The accompanying notes are an integral part of these financial statements. Page 6

7 TENTATIVE & PRELIMINARY - 2 - GREEN ACRES MALL AND THE PLAZA AT GREEN ACRES NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES DECEMBER 31, 1996 1. BASIS OF PRESENTATION: The statements of revenue and certain expenses reflect the operations of Green Acres Mall and the Plaza at Green Acres (the "Property"), located in Nassau County, New York. The Property is expected to be acquired by an affiliate of Vornado Realty Trust (the "Company") from Arbor Property Trust in December, 1997. The Property has aggregate net rentable area of approximately 1.6 million square feet. These statements of revenue and certain expenses are to be included in a Form 8-K to be filed by the Company, as the above described transaction has been deemed significant pursuant to the rules and regulations of the Securities and Exchange Commission. The accounting records of the Property are maintained in accordance with generally accepted accounting principles. The accompanying financial statements exclude certain expenses such as interest, depreciation and amortization, professional fees, and other administrative costs not directly related to the future operations of the Property. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. The ultimate results could differ from those estimates. The statements of revenue and certain expenses for the six month periods ended June 30, 1997 and 1996 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for the fair presentation of these statements of revenue and certain expenses for the interim periods have been included. The results for such interim periods are not necessarily indicative of the results for an entire year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Minimum rental income is recognized from leases with scheduled rent increases on a straight-line basis over the lease term. Percentage rents and payments for taxes, insurance, utilities and maintenance by tenants are estimated and accrued. Page 7

8 - 3 - 3. UNUSUAL ITEMS In the six month period ended June 30, 1997, the Property reversed reserves established in prior years of approximately $279,000 and increased operating expense reimbursement revenue by this amount. The Property plans to reverse a similar amount of reserves in each of the two remaining in 1997. In the year ended December 31, 1996, the Property reduced accrued rent receivables by $530,000 as a result of certain leases which terminated, and recorded a corresponding charge to the provision for doubtful accounts. In the six month period ended June 30, 1996, the Property changed an estimate related to operating expense reimbursement revenue, resulting in a $480,000 decrease in revenue for this period. 4. LEASING ARRANGEMENTS The Property as Lessor The Property is leased to approximately 200 tenants, generally under non-cancelable operating leases. The leases generally provide for minimum rentals, plus percentage rental based upon the retail stores' sales volume. Percentage rentals were $1,803,000 for the year ended December 31, 1996 and were $841,000 (unaudited) and $853,000 (unaudited) for the six month periods ended June 30, 1997 and 1996 respectively. In addition, the tenants pay certain utility charges, and for most leases, reimburse their proportionate share of real estate taxes and common area expenses. Future minimum rentals under existing leases at December 31, 1996 are as follows: Years Ending December 31, Amount ------------------------- ------------- 1997 $ 17,211,000 1998 16,918,000 1999 16,727,000 2000 15,894,000 2001 14,498,000 Thereafter 82,009,000 ------------- $ 163,257,000 ============= As of December 31, 1996, sublease agreements have been signed with certain tenants of the Plaza at Green Acres, which generally provide for rentals based on a percentage of sales in addition to base rental. Sublease income of $35,752,000 will be received over the remaining terms of such subleases, and is included in the future minimum rentals table presented above. Such sublease income totaled $2,409,000 for the year ended December 31, 1996. Page 8

9 - 4 - Property as Lessee The Plaza at Green Acres (the "Plaza") is the lessee under a 30-year ground lease (with three six-year renewal options) in favor of an unrelated third party. In addition to specified rents, the Plaza lease requires the lessee to pay property taxes, insurance, operating expenses and additional rentals based on a percentage of revenues generated by the operations of the Plaza. No such additional rentals were paid in 1996. In accordance with generally accepted accounting principles, the portion of the lease related to the building is accounted for as a capital lease while the portion related to the land is accounted for as an operating lease. The following is a schedule of future minimum lease payments under this lease as of December 31, 1996: Capital Operating Lease Lease Component Component Total ----------- ----------- ----------- 1997 $ 702,000 $ 788,000 $ 1,490,000 1998 707,000 793,000 1,500,000 1999 707,000 793,000 1,500,000 2000 707,000 793,000 1,500,000 2001 707,000 793,000 1,500,000 Thereafter 26,610,000 29,890,000 56,500,000 ----------- ----------- ----------- $30,140,000 $33,850,000 $63,990,000 =========== =========== =========== For the year ended December 31, 1996, total rental expense for the operating lease portion of this lease was $724,000, and for the six month periods ended June 30, 1997 and 1996 such rentals were $309,000 (unaudited) and $363,000 (unaudited), respectively. Page 9

10 INDEPENDENT AUDITORS' REPORT To the Stockholders of Vornado Realty Trust We have audited the statement of revenues and certain expenses of Ninety Park Avenue, as described in Note 1 for the year ended December 31, 1996. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared in compliance with the rules and regulations of the Securities and Exchange Commission, and as described in Note 1, is not intended to be a complete presentation of Ninety Park Avenue's revenue and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the statement of revenues and certain expenses of Ninety Park Avenue as described in Note 1 for the year ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Parsippany, New Jersey September 11, 1997 Page 10

11 NINETY PARK AVENUE STATEMENTS OF REVENUES AND CERTAIN EXPENSES (in thousands) For the For the Six Months Ended Year ---------------------------- Ended June 30, 1997 June 30, 1996 December 31, 1996 ------------- ------------- ----------------- (unaudited) (unaudited) REVENUES: Base rent $12,418 $12,597 $25,173 Tenant recoveries 2,975 3,158 6,543 Other income 264 402 599 ------- ------- ------- Total Revenues 15,657 16,157 32,315 ------- ------- ------- CERTAIN EXPENSES: Real estate taxes 3,261 3,128 6,256 Repairs & maintenance 398 335 671 Cleaning 864 854 1,708 Professional fees 279 184 368 Utilities 1,163 1,399 2,799 Insurance 83 136 272 Management fee 53 53 105 Payroll 294 364 728 Administrative 25 111 222 ------- ------- ------- Total Certain Expenses 6,420 6,564 13,129 ------- ------- ------- REVENUES IN EXCESS OF CERTAIN EXPENSES $ 9,237 $ 9,593 $19,186 ======= ======= ======= See notes to Statements of Revenues and Certain Expenses. Page 11

12 NINETY PARK AVENUE NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES Note 1 - ORGANIZATION AND BASIS OF PRESENTATION Ninety Park Avenue is an office building located at 90 Park Avenue, New York, N.Y. (the "Property"). The Property was owned and operated by Carol Management Corporation ("CMC"), Howard Kaskel, Anita Kaskel, Roe and Carole Schragis as tenants-in-common. As of August 19, 1996, the owners each transferred their interests in the Property to wholly-owned Limited Liability Companies (LLCs). The new owners are SBK Realty Holdings LLC, Pine Real Estate LLC, Dolphin Realty LLC, and Tulip Holdings LLC. The statements of revenues and certain expenses reflect the operations of the Property. The Property has aggregate net rentable area of approximately 875,000 square feet (96% leased as of December 31, 1996.) The accounting records of the Property are maintained in accordance with generally accepted accounting principles. The accompanying financial statements exclude certain expenses such as interest, depreciation and amortization, certain professional fees, and other costs not directly related to the future operations of the Property. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. The ultimate results could differ from those estimates. The statements of revenues and certain expenses for the six month periods ended June 30, 1997 and 1996 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for the fair presentation of these statements of revenue and certain expenses for the interim periods have been included. The results for such interim periods are not necessarily indicative of the results for an entire year. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Rental income is recognized from leases with scheduled rent increases on a straight-line basis over the lease term. Differences between the straight-line rent and amounts currently due amounted to $234,000 for the year ended December 31, 1996, and $235,000 and $160,000 for the six month periods ended June 30, 1997 and 1996, respectively, and are included in base rent on the accompanying statements of revenues and certain expenses. Escalation rents based upon payments for taxes, insurance, utilities and maintenance by tenants are estimated and accrued. Page 12

13 Note 3 - RELATED PARTY TRANSACTIONS Doral Sports Training Center, an entity related to the Tenancy-In-Common, occupies space at Ninety Park Avenue on a month-to-month basis. Rental income from this affiliate for the year ended December 31, 1996 aggregated approximately $132,300. Note 4 - OPERATING LEASES The Tenancy-In-Common leases office space to various tenants with lease terms expiring in various years through 2015. Approximately 55% of total rental income was earned from one tenant in the building. The following is a schedule, by years, of the approximate minimum future rentals required under these operating leases as of December 31, 1996: Year Ending December 31, Amount ------------ ------------- 1997 $ 24,350,000 1998 24,559,000 1999 23,717,000 2000 22,405,000 2001 22,383,000 Thereafter 204,379,000 ------------- Total $ 321,793,000 ============= Page 13

14 (b) Pro forma financial information Page Reference --------- Condensed Consolidated Pro forma Balance Sheet as at June 30, 1997 15 Condensed Consolidated Pro forma Income Statement for the six months ended June 30, 1997 16 Condensed Consolidated Pro forma Income Statement for the year ended December 31, 1996 18 Notes to Condensed Consolidated Pro forma Financial Statements 20 Mendik Transaction Only Condensed Consolidated Pro forma Income Statement for the six months ended June 30, 1997 21 Notes to Condensed Consolidated Pro forma Income Statement for the six months ended June 30, 1997 23 Condensed Consolidated Pro forma Income Statement for the year ended December 31, 1996 24 Notes to Condensed Consolidated Pro forma Income Statement for the year ended December 31, 1996 26 The unaudited condensed consolidated pro forma financial information attached presents (i) the condensed consolidated pro forma statement of income for Vornado Realty Trust for the year ended December 31, 1996 and the six months ended June 30, 1997, as if the restructuring of the 90 Park Avenue mortgage and the $185,000,000 purchase price therefor and the merger with Arbor Property Trust had occurred on January 1, 1996 and (ii) the condensed consolidated pro forma balance sheet of Vornado Realty Trust as of June 30, 1997, as if the 90 Park Avenue and Arbor Property Trust transactions had occurred on June 30, 1997. The "Vornado/Mendik" column included in the pro forma statements of income for the year ended December 31, 1996 and the six months ended June 30, 1997 reflects the April 1997 acquisition of interests in all or a portion of seven Manhattan office buildings and a management company (the "Mendik Transaction") as if it had occurred on January 1, 1996. The pro forma financial information relating to this transaction was previously filed with the Securities and Exchange Commission. The unaudited condensed consolidated pro forma financial information is not necessarily indicative of what Vornado Realty Trust's actual results of operations or financial position would have been had these transactions been consummated on the dates indicated, nor does it purport to represent Vornado Realty Trust's results of operations or financial position for any future period. The results of operations for the period ended June 30, 1997 are not necessarily indicative of the operating results for the full year. The unaudited condensed consolidated pro forma financial information should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Vornado's consolidated financial statements and notes thereto included in Vornado's Annual Report on Form 10-K for the year ended December 31, 1996, as amended, and the Quarterly Report on Form 10-Q for the period ended June 30, 1997 and the financial statements of the significant entities involved in the Mendik Transaction previously included in the Company's Current Report on Form 8-K, dated March 12, 1997, as amended and the financial statements of 90 Park Avenue and Green Acres Mall and the Plaza at Green Acres included herein. In management's opinion, all adjustments necessary to reflect the transactions have been made. Page 14

15 CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET JUNE 30, 1997 (AMOUNTS IN THOUSANDS) HISTORICAL HISTORICAL ARBOR PROPERTY PRO FORMA COMPANY VORNADO TRUST ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ----------- ASSETS: Real estate, net $ 888,027 $ 141,898 $ 185,000 (A) $ 1,300,750 102,100 (B) (16,275)(B) Cash and cash equivalents 260,485 260,485 Investment in and advances to Alexander's, Inc. 108,100 108,100 Investment in partnerships 38,275 38,275 Investment in and advances to management companies 13,008 13,008 Officer's deferred compensation expense 10,419 10,419 Mortgage loans receivable 243,001 (185,000)(A) 58,001 Receivable arising from straight- lining of rents 19,619 19,619 Other assets 65,362 13,180 78,542 ----------- ----------- ----------- ----------- $ 1,646,296 $ 155,078 $ 85,825 $ 1,887,199 =========== =========== =========== =========== LIABILITIES: Notes and mortgages payable $ 862,883 $ 124,873 $ 987,756 Deferred leasing fee income 10,550 10,550 Officer's deferred compensation payable 25,000 25,000 Other liabilities 30,429 13,930 44,359 ----------- ----------- ----------- ----------- 928,862 138,803 -- 1,067,665 ----------- ----------- ----------- ----------- Minority interest of unitholders in the Operating Partnership 178,093 -- -- 178,093 ----------- ----------- ----------- ----------- EQUITY 539,341 16,275 102,100 (B) 641,441 (16,275)(B) ----------- ----------- ----------- ----------- $ 1,646,296 $ 155,078 $ 85,825 $ 1,887,199 =========== =========== =========== =========== Page 15

16 CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) VORNADO/ HISTORICAL HISTORICAL MENDIK ARBOR PROPERTY 90 PARK PRO FORMA COMPANY PRO FORMA(1) TRUST AVENUE ADJUSTMENTS PRO FORMA --------- --------- --------- --------- --------- REVENUES: Property rentals $ 100,174 $ 11,147 $ 12,418 $ 123,739 Expense reimbursements 18,069 7,619 2,975 28,663 Other income 1,892 264 2,156 --------- --------- --------- --------- 120,135 18,766 15,657 154,558 --------- --------- --------- --------- EXPENSES: Operating 39,463 8,305 6,420 54,188 Depreciation and amortization 13,479 $ 3,129 (C) 16,608 General and administrative 5,825 5,825 Amortization of officer's deferred compensation expense 12,498 12,498 --------- --------- --------- --------- --------- 71,265 8,305 6,420 3,129 89,119 --------- --------- --------- --------- --------- Operating income 48,870 10,461 9,237 (3,129) 65,439 Income applicable to Alexander's 2,842 2,842 Equity in net income of management companies 1,484 1,484 Equity in net income of investees 920 920 Interest income on mortgage loans receivable 4,305 (3,045)(D) 1,260 Interest and dividend income 7,673 7,673 Interest and debt expense (20,780) (4,410)(E) (29,745) (4,555)(F) Net gain on marketable securities 579 579 Minority interest of unitholders in the Operating Partnership (5,184) (5,184) --------- --------- --------- --------- --------- Net income 40,709 10,461 9,237 (15,139) 45,268 Preferred stock dividends (9,992) (9,992) --------- --------- --------- --------- --------- Net income applicable to common shares $ 30,717 $ 10,461 $ 9,237 $ (15,139) $ 35,276 ========= ========= ========= ========= ========= Net income per common share, based on 26,718,841 and 28,217,382 shares, respectively $ 1.14 $ 1.25 ========= ========= OTHER DATA: Funds from Operations ("FFO") (2): Net income applicable to common shares $ 30,717 $ 10,461 $ 9,237 $ (15,139) $ 35,276 Depreciation and amortization of real property 10,438 3,129 13,567 Straight-lining of property rentals for rent escalations (938) (225) (235) (1,398) Leasing fees received in excess of income recognized 2,383 2,383 Proportionate share of adjustments to income from equity investments to arrive at FFO 1,719 1,719 Non-recurring lease cancellation income and write-off of related costs (11,581) (11,581) --------- --------- --------- --------- --------- $ 32,738 $ 10,236 $ 9,002 $ (12,010) $ 39,966 ========= ========= ========= ========= ========= CASH FLOW PROVIDED BY (USED) IN: Operating activities $ 53,714 $ 9,424 $ 12,678 $ (12,010) $ 63,806 Investing activities $(964,103) $ -- $ -- $ -- $(964,103) Financing activities $ 975,383 $ -- $ -- $ -- $ 975,383 Page 16

17 - ---------- (1) See Condensed Consolidated Pro Forma Income Statement for the Six Months Ended June 30, 1997 on page 21. (2) Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a supplemental measure of Operating performance and along with cash flow from operating activities, financing activities, and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations may not be comparable to similarly titled measures employed by other REITs since a number of REITs, including the Company's, method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee income. Page 17

18 CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) VORNADO/ HISTORICAL HISTORICAL MENDIK ARBOR PROPERTY 90 PARK PRO FORMA COMPANY PRO FORMA(1) TRUST AVENUE ADJUSTMENTS PRO FORMA --------- ------- ------- --------- --------- REVENUES: Property rentals $ 181,712 $22,322 $25,173 $ 229,207 Expense reimbursements 40,195 15,294 6,543 62,032 Other income 2,819 599 3,418 --------- ------- ------- --------- 224,726 37,616 32,315 294,657 --------- ------- ------- --------- EXPENSES: Operating 83,180 18,229 13,129 114,538 Depreciation and amortization 35,559 $ 6,257 (C) 41,816 General and administrative 8,162 8,162 Amortization of officer's deferred compensation expense 2,083 2,083 --------- ------- ------- --------- --------- 128,984 18,229 13,129 6,257 166,599 --------- ------- ------- --------- --------- Operating income 95,742 19,387 19,186 (6,257) 128,058 Income applicable to Alexander's 7,956 7,956 Equity in net income of management companies 3,326 3,326 Equity in net income of investees 3,418 3,418 Interest income on mortgage note receivable 2,579 2,579 Interest and dividend income 5,667 5,667 Interest and debt expense (31,708) (12,775)(E) (53,940) (9,457)(F) Net gain on marketable securities 913 913 Minority interest of unitholders in the Operating Partnership (10,372) (10,372) --------- ------- ------- --------- --------- Net income 77,521 19,387 19,186 (28,489) 87,605 Preferred stock dividends (19,800) (19,800) --------- ------- ------- --------- --------- Net income applicable to common shares $ 57,721 $19,387 $19,186 $ (28,489) $ 67,805 ========= ======= ======= ========= ========= Net income per common share, based on 24,603,442 and 26,101,983 shares, respectively $ 2.35 $ 2.60 ========= ========= OTHER DATA: Funds from Operations (2): Net income applicable to common shares $ 57,721 $19,387 $19,186 $ (28,489) $ 67,805 Depreciation and amortization of real property 34,553 6,257 40,810 Straight-lining of property rent escalations (11,530) (396) (234) (12,160) Leasing fees received in excess of income recognized 1,805 1,805 Proportionate share of adjustments to income from equity investments to arrive at FFO 17 17 --------- ------- ------- --------- --------- $ 82,566 $18,991 $18,952 $ (22,232) $ 98,277 ========= ======= ======= ========= ========= CASH FLOW PROVIDED BY (USED) IN: Operating activities $ 109,377 $22,551 $18,952 $ (15,975) $ 134,905 Investing activities $(321,988) $ -- $ -- $(185,000) $(506,988) Financing activities $ 243,457 $ -- $ -- $ 185,000 $ 428,457 Page 18

19 - ---------- (1) See Condensed Consolidated Pro Forma Income Statement for the Year Ended December 31, 1996 on page 24. (2) Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a supplemental measure of Operating performance and along with cash flow from operating activities, financing activities, and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations may not be comparable to similarly titled measures employed by other REITs since a number of REITs, including the Company's, method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee income. Page 19

20 NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ARBOR ACQUISITION: The Arbor acquisition will be recorded under "purchase accounting". The total purchase price is comprised of: Issuance of Vornado Realty Trust common shares $ 102,100 Debt 124,873 --------- $ 226,973 ========= The purchase cost has been allocated in the pro forma financial statements to real estate. The pro forma financial statements assume that Arbor shareholders elect to exchange their common shares entirely for common shares of Vornado Realty Trust. For purposes of comparison, if 50% of Arbor shareholders elect to receive Series A Convertible Preferred Shares of Vornado Realty Trust in lieu of common shares of Vornado Realty Trust, income applicable to common shares would be $33,739 and $64,732 or $ 1.23 and $ 2.55 per share for the six months ended June 30, 1997 and the year ended December 31, 1996, respectively. 90 PARK AVENUE: The restructuring of the 90 Park Avenue mortgage is reflected in the pro forma financial statements by reclassifying such investment as real estate. The Historical Vornado column in the Condensed Consolidated Pro Forma Balance Sheet includes the $185,000 purchase price for such mortgage as part of mortgage loans receivable. FOOTNOTES: (A) Reclassification of investment in 90 Park Avenue to real estate. (B) Assumed issuance of 1,498,541 common shares, with a fair value of $102,100 (based on an average price of $68.133 per share), in exchange for all of the common shares of Arbor. (C) Depreciation based on allocation of the Arbor purchase price and the reclassification of the 90 Park Avenue investment to real estate. (D) Elimination of interest income earned on mortgage loan receivable from 90 Park Avenue for the period from May 7, 1997 (date of acquisition) to June 30, 1997. (E) Reflects interest expense of $4,410 and $12,775 for the six months ended June 30, 1997 (January 1, 1997 to May 6, 1997) and for the year ended December 31, 1996, respectively, on the 90 Park Avenue investment of $185,000, based on an average interest rate of approximately 7.0%. (F) Reflects interest expense of $4,555 and $9,457 for the six months ended June 30, 1997 and for the year ended December 31, 1996, respectively, on Arbor debt. Page 20

21 CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL MENDIK VORNADO/ HISTORICAL JANUARY 1, 1997 PRO FORMA MENDIK VORNADO TO APRIL 14, 1997 ADJUSTMENTS PRO FORMA --------- --------- --------- --------- REVENUES: Property rentals $ 63,471 $ 34,928 $ 1,775 (A) $ 100,174 Expense reimbursements 15,161 2,908 18,069 Other income 1,327 3,187 (2,622)(B) 1,892 --------- --------- --------- --------- 79,959 41,023 (847) 120,135 --------- --------- --------- --------- EXPENSES: Operating 26,658 12,805 39,463 Depreciation and amortization 8,429 4,682 368 (C) 13,479 General and administrative 4,748 2,684 (1,607)(B) 5,825 Amortization of officer's deferred compensation expense 12,498 12,498 --------- --------- --------- --------- 52,333 20,171 (1,239) 71,265 --------- --------- --------- --------- Operating income 27,626 20,852 392 48,870 Income applicable to Alexander's 2,842 2,842 Equity in net income of management companies 520 964 (B) 1,484 Equity in net income of investees 282 362 276 (D) 920 Interest income on mortgage loans receivable 4,305 4,305 Interest and dividend income 6,774 899 7,673 Interest and debt expense (17,350) (7,967) 4,537 (E) (20,780) Net gain on marketable securities 579 579 Minority interest of unitholders in the Operating Partnership (2,100) (3,084)(F) (5,184) --------- --------- --------- --------- Net income 23,478 14,146 3,085 40,709 Preferred stock dividends (4,855) (5,137)(G) (9,992) --------- --------- --------- --------- Net income applicable to common shares $ 18,623 $ 14,146 $ (2,052) $ 30,717 ========= ========= ========= ========= Net income per common share, based on 26,718,841 shares $ 0.70 $ 1.14 ========= ========= OTHER DATA: Funds from Operations (1): Net income applicable to common shares $ 18,623 $ 14,146 $ (2,052) $ 30,717 Depreciation and amortization of real property 7,857 2,581 368 10,438 Straight-lining of property rentals for rent escalations (2,567) 1,629 (1,775) (938) Leasing fees received in excess of income recognized 2,383 2,383 Proportionate share of adjustments to net income of investees to arrive at funds from operations 887 832 1,719 Non-recurring lease cancellation income and write-off of related costs (11,581) (11,581) --------- --------- --------- --------- $ 27,183 $ 7,607 $ (3,459) $ 32,738 ========= ========= ========= ========= CASH FLOW PROVIDED BY (USED) IN: Operating activities $ 50,989 $ (671) $ 3,396 $ 53,714 Investing activities $(629,813) $ (5,652) $(328,638) $(964,103) Financing activities $ 688,954 $ (3,858) $ 290,287 $ 975,383 Page 21

22 - ---------- (1) Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a supplemental measure of Operating performance and along with cash flow from operating activities, financing activities, and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations may not be comparable to similarly titled measures employed by other REITs since a number of REITs, including the Company's, method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee income. Page 22

23 NOTES TO CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (A) To adjust rentals for the period from January 1, 1997 to April 14, 1997 arising from the straight-lining of property rentals for rent escalations based on the remaining terms of the applicable leases. (B) To reflect adjustments required to record the Company's investment in the Mendik management company for the period from January 1, 1997 to April 14, 1997 under the equity method of accounting. (C) Increase in depreciation for the period from January 1, 1997 to April 14, 1997 due to allocation of purchase price. (D) Increase in equity in investees for the period from January 1, 1997 to April 14, 1997 due to net decrease in interest expense on refinanced debt. (E) Reflects decrease in interest expense and loan cost amortization for the period from January 1, 1997 to April 14, 1997 resulting from the reduction and refinancing of debt. (F) To reflect preferential distributions for the period from January 1, 1997 to April 14, 1997. (G) To reflect preferred stock dividends at a rate of 6.50% plus amortization of the underwriting discount for the period from January 1, 1997 to April 14, 1997 on the proportionate number of Series A Preferred Shares used to fund the acquisition. Page 23

24 CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) VORNADO/ HISTORICAL HISTORICAL PRO FORMA MENDIK VORNADO MENDIK ADJUSTMENTS PRO FORMA --------- --------- --------- --------- REVENUES: Property rentals $ 87,424 $ 87,261 $ 7,071 (A) $ 181,712 (44)(B) Expense reimbursements 26,644 13,551 40,195 Other income 2,819 5,378 (5,378)(B) 2,819 --------- --------- --------- --------- 116,887 106,190 1,649 224,726 --------- --------- --------- --------- EXPENSES: Operating 36,412 46,691 (39)(B) 83,180 116 (F) Depreciation and amortization 11,589 14,133 (144)(B) 35,559 9,981 (D) General and administrative 5,167 6,783 (3,788)(B) 8,162 Amortization of officer's deferred compensation expense 2,083 2,083 --------- --------- --------- --------- 55,251 67,607 6,126 128,984 --------- --------- --------- --------- Operating income 61,636 38,583 (4,477) 95,742 Income applicable to Alexander's 7,956 7,956 Equity in net income of management companies 1,855 1,471 (B) 3,326 Equity in net income of investees 1,663 1,755 (G) 3,418 Interest income on mortgage note receivable 2,579 2,579 Interest and dividend income 3,151 2,536 (20)(B) 5,667 Interest and debt expense (16,726) (23,998) 9,016 (C) (31,708) Net gain on marketable securities 913 913 Minority interest of unitholders in the Operating Partnership -- -- (10,372)(H) (10,372) --------- --------- --------- --------- Net income 61,364 18,784 (2,627) 77,521 Preferred stock dividends -- -- (19,800)(E) (19,800) --------- --------- --------- --------- Net income applicable to common shares $ 61,364 $ 18,784 $ (22,427) $ 57,721 ========= ========= ========= ========= Net income per common share, based on 24,603,442 shares $ 2.49 $ 2.35 ========= ========= OTHER DATA: Funds from Operations (1): Net income applicable to common shares $ 61,364 $ 18,784 $ (22,427) $ 57,721 Depreciation and amortization of real 10,583 14,133 9,837 34,553 property Straight-lining of property rent escalations (2,676) (1,783) (7,071) (11,530) Leasing fees received in excess of income recognized 1,805 1,805 Proportionate share of adjustments to income from equity investments to arrive at FFO (1,760) 2,747 (970) 17 --------- --------- --------- --------- $ 69,316 $ 33,881 $ (20,631) $ 82,566 ========= ========= ========= ========= CASH FLOW PROVIDED BY (USED) IN: Operating activities $ 70,703 $ 29,267 $ 9,407 $ 109,377 Investing activities $ 14,912 $ (8,262) $(328,638) $(321,988) Financing activities $ (15,046) $ (11,706) $ 270,209 $ 243,457 Page 24

25 - ---------- (1) Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a supplemental measure of Operating performance and along with cash flow from operating activities, financing activities, and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations may not be comparable to similarly titled measures employed by other REITs since a number of REITs, including the Company's, method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee income. Page 25

26 NOTES TO CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31,1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (A) To adjust rentals arising from the straight-lining of property rentals for rent escalations based on the remaining terms of the applicable leases. (B) To reflect adjustments required to record the Company's investment in the Mendik management company under the equity method of accounting. (C) Reflects decrease in interest expense and loan cost amortization resulting from the reduction and refinancing of debt. (D) Increase in depreciation due to preliminary allocation of purchase price. (E) To reflect preferred stock dividends at a rate of 6.50% plus amortization of the underwriting discount on the proportionate number of Series A Preferred Shares used to fund the acquisition. (F) Increase in operating expenses due to contract changes. (G) Increase in equity in investees, due to net decrease in interest expense on refinanced debt. (H) To reflect preferential distributions. Page 26

27 VORNADO REALTY TRUST SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. VORNADO REALTY TRUST ---------------------- (Registrant) Date: September 10, 1997 /s/ Joseph Macnow ---------------------- JOSEPH MACNOW Vice President, Chief Financial Officer Page 27