Vornado Realty Trust

1 EXHIBIT INDEX ON PAGE 22 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 1997 ---------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _______________________ 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 or organization) 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, 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. [X] Yes [ ] No As of November 4, 1997 there were 67,124,704 common shares outstanding. Page 1 of 24

2 VORNADO REALTY TRUST INDEX Page Number ----------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996............................................................... 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and September 30, 1996................................. 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and September 30, 1996................................. 5 Notes to Consolidated Financial Statements...................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................... 13 PART II. OTHER INFORMATION: Item 1. Legal proceedings............................................................... 20 Item 6. Exhibits and Reports on Form 8-K................................................ 20 Signatures ................................................................................ 21 Exhibit Index ................................................................................ 22 Exhibit 11 ................................................................................ 23 Exhibit 27 ................................................................................ 24 ALL SHARE AND PER SHARE INFORMATION HAS BEEN ADJUSTED TO REFLECT THE 100% COMMON SHARE DIVIDEND PAID BY VORNADO ON OCTOBER 20, 1997. Page 2 of 24

3 PART I. FINANCIAL INFORMATION VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- ASSETS: Real estate, at cost: Land $ 251,528 $ 61,278 Buildings and improvements 970,628 327,485 Leasehold improvements and equipment 9,230 8,535 ---------- ---------- Total 1,231,386 397,298 Less accumulated depreciation and amortization (166,072) (151,049) ---------- ---------- Real estate, net 1,065,314 246,249 Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $32,265 and $17,036 58,367 89,696 Restricted cash 27,571 -- Marketable securities 31,277 27,549 Investment in and advances to Alexander's, Inc. 107,446 107,628 Investments in partnerships and joint ventures 58,177 -- Investment in and advances to management companies 13,250 5,193 Due from officers 8,664 8,634 Accounts receivable, net of allowance for doubtful accounts of $917 and $575 15,331 9,786 Officer's deferred compensation expense 4,170 22,917 Mortgage loans receivable 84,663 17,000 Receivable arising from the straight-lining of rents 21,999 17,052 Other assets 55,277 13,500 ---------- ---------- TOTAL ASSETS $1,551,506 $ 565,204 ========== ========= SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY: Notes and mortgages payable $ 772,156 $ 232,387 Due for U.S. treasury obligations -- 9,636 Accounts payable and accrued expenses 27,050 9,905 Deferred leasing fee income 10,461 8,373 Officer's deferred compensation payable 25,000 25,000 Other liabilities 3,526 3,646 ---------- --------- Total liabilities 838,193 288,947 ---------- --------- Minority interest of unitholders in the Operating Partnership 178,411 -- ---------- --------- Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest: no par value per share; authorized, 20,000,000 shares; liquidation preference $50.00 per share; issued, 5,750,000 shares 277,168 -- Common shares of beneficial interest: $.04 par value per share; authorized, 100,000,000 shares; issued, 53,120,954 and 53,095,360 shares in each period 2,116 2,088 Additional capital 358,249 357,830 Accumulated deficit (98,657) (77,574) ---------- --------- 538,876 282,344 Unrealized gain (loss) on securities available for sale 1,021 (998) Due from officers for purchase of common shares of beneficial interest (4,995) (5,089) ---------- --------- Total shareholders' equity 534,902 276,257 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,551,506 $ 565,204 ========== ========= See notes to consolidated financial statements. Page 3 of 24

4 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands except share amounts) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 Revenues: Property rentals $ 49,882 $ 21,927 $113,353 $ 65,084 Expense reimbursements 10,763 6,410 25,924 20,111 Other income (including fee income from related parties of $592 and $671 and $1,236 and $1,476) 1,223 726 2,550 1,723 -------- -------- -------- -------- Total revenues 61,868 29,063 141,827 86,918 -------- -------- -------- -------- Expenses: Operating 21,899 8,885 48,557 26,944 Depreciation and amortization 6,611 2,929 15,040 8,661 General and administrative 3,460 1,381 8,208 3,889 Amortization of officer's deferred compensation expense 6,249 - 18,747 - -------- -------- -------- -------- Total expenses 38,219 13,195 90,552 39,494 -------- -------- -------- -------- Operating income 23,649 15,868 51,275 47,424 Income (loss) applicable to Alexander's: Equity in income (loss) (40) (185) (47) (304) Depreciation (150) (157) (450) (472) Interest income on loan 1,534 1,708 4,683 5,167 Income from investment in management companies 398 344 918 1,723 Equity in net income of investees 271 - 553 - Interest income on mortgage loans receivable 3,403 661 7,708 1,911 Other interest and dividend income 2,351 728 9,125 2,501 Interest and debt expense (13,622) (4,208) (30,972) (12,623) Gain on marketable securities 332 180 911 654 Minority interest of unitholders in the Operating Partnership (2,500) - (4,600) - -------- ------------ ---------- ----------- Net Income 15,626 14,939 39,104 45,981 Preferred stock dividends (5,241) - (10,096) - -------- ------------ --------- ----------- Net Income applicable to common shares $ 10,385 $ 14,939 $ 29,008 $ 45,981 ======== ======== ========= ======== Net Income per common share $ .19 $ .31 $ .54 $ .94 ===== ===== ===== ===== Weighted average number of common shares and common share equivalents outstanding during period 53,963,054 49,107,516 53,627,027 48,996,190 Dividends per common share $ .32 $ .31 $ .96 $ .92 See notes to consolidated financial statements. Page 4 of 24

5 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 39,104 $ 45,981 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization (including debt issuance costs) 16,012 9,431 Amortization of officer's deferred compensation expense 18,747 -- Straight-lining of rental income (4,947) (1,912) Minority interest of unitholders in the Operating Partnership 4,600 -- Equity in loss of Alexander's, including depreciation of $450 and $471 497 776 Equity in net income of investees (553) -- Gain on marketable securities (911) (654) Changes in operating assets and liabilities (8,532) (3,725) --------- -------- Net cash provided by operating activities 64,017 49,897 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Mendik acquisition (263,790) -- Investment in mortgage loans receivable (67,663) (17,000) Investments in partnerships and joint ventures (19,912) -- Cash restricted for tenant improvements (27,571) -- Additions to real estate (288,383) (11,459) Purchases of securities available for sale (3,436) -- Proceeds from sale or maturity of securities available for sale -- 41,490 --------- -------- Net cash (used in) provided by investing activities (670,755) 13,031 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of preferred stock 276,000 -- Proceeds from borrowings 523,000 10,000 Repayments on borrowings (151,177) (781) Debt issuance costs (3,038) -- Repayment of borrowings on U.S. treasury obligations (9,636) (40,312) Proceeds from borrowings on U.S. treasury obligations -- 10,000 Dividends paid (60,187) (44,559) Exercise of stock options 447 5,366 --------- -------- Net cash provided by (used in) financing activities 575,409 (60,286) --------- -------- Net (decrease) increase in cash and cash equivalents (31,329) 2,642 Cash and cash equivalents at beginning of period 89,696 19,127 --------- -------- Cash and cash equivalents at end of period $ 58,367 $ 21,769 ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest $ 29,983 $ 11,853 ========= ======== NON-CASH TRANSACTIONS: Unrealized gain (loss) on securities available for sale $ 2,019 $ (173) ========= ======== The non-cash portion of the consideration for the Mendik acquisition of $392,272 is not reflected in cash flows from investing activities above. See notes to consolidated financial statements. Page 5 of 24

6 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION On April 15, 1997, Vornado Realty Trust ("Vornado") converted to an Umbrella Partnership REIT (UPREIT) by transferring all or substantially all of the interests in its properties and other assets to Vornado Realty L.P. (the "Operating Partnership"), of which Vornado owns 90.4% and is the sole general partner. As a result of such conversion, Vornado's activities are conducted through the Operating Partnership. 2. BASIS OF PRESENTATION The consolidated balance sheet as of September 30, 1997, the consolidated statements of income for the three and nine months ended September 30, 1997 and September 30, 1996 and the consolidated statements of changes in cash flows for the nine months ended September 30, 1997 and September 30, 1996 are unaudited. In the opinion of management, 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 generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Vornado's 1996 Annual Report to Shareholders. The results of operations for the period ended September 30, 1997 are not necessarily indicative of the operating results for the full year. The accompanying unaudited consolidated condensed financial statements include all the accounts of Vornado Realty Trust and its majority-owned subsidiary, Vornado Realty L.P. Properties which are wholly owned or controlled by Vornado Realty L.P. have been consolidated. All significant intercompany amounts have been eliminated. Equity interests in certain partnerships and joint ventures, which represent non-controlling ownership interests, are accounted for under the equity method of accounting as the Company exercises significant influence. These investments are recorded initially at cost and subsequently adjusted for net equity in income (loss) and cash contributions and distributions. All references to "Vornado" in this document refer to Vornado Realty Trust; all references to the "Operating Partnership" refer to Vornado Realty L.P. and all references to the "Company" refer to Vornado and its consolidated subsidiaries, including the Operating Partnership. 3. ACQUISITIONS MENDIK TRANSACTION Simultaneously with the formation of the Operating Partnership, Vornado consummated the acquisition of interests in all or a portion of seven Manhattan office buildings and a management company held by the Mendik Group (Bernard H. Mendik, David R. Greenbaum and certain entities controlled by them) and certain of its affiliates (the "Mendik Transaction"), which is operated as the Mendik Division. The Mendik properties include (i) wholly owned properties: Two Penn Plaza, Eleven Penn Plaza, 1740 Broadway and 866 U.N. Plaza and (ii) partially owned properties: Two Park Avenue (40% interest), 330 Madison Avenue (24.8% interest) and 570 Lexington Avenue (5.6% interest). The consideration for the transaction was approximately $656,000,000, including $264,000,000 in cash, $177,000,000 in the limited partnership units of the Operating Partnership issued to persons other than Vornado ("Minority Interests") and $215,000,000 in indebtedness. The acquisition was recorded under the purchase method of accounting. Page 6 of 24

7 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Vornado financed the cash portion of this transaction with the proceeds of a public offering completed on April 9, 1997, of 5,750,000 Series A Convertible Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share. The preferred shares bear a coupon of 6-1/2% and are convertible into common shares at $36-3/8 per share. The offering, net of expenses, generated approximately $276,000,000. PUERTO RICO TRANSACTIONS On April 18, 1997, the Company acquired The Montehiedra Town Center ("Montehiedra") located in San Juan, Puerto Rico, from Kmart for approximately $74,000,000, of which $63,000,000 was newly issued ten-year indebtedness. The Montehiedra shopping center, which opened in 1994, contains 525,000 square feet, including a 135,000 square foot Kmart store. In addition, the Company agreed to acquire Kmart's 50% interest in the Caguas Centrum Shopping Center, which is currently under construction, located in Caguas, Puerto Rico. The purchase price for Caguas Centrum Shopping Center is expected to be approximately $68,000,000 (of which $11,000,000 would be cash and $57,000,000 would be newly issued debt), including approximately $9,000,000 for the Kmart store, which the Company has the option to acquire. The acquisition is expected to close in 1998. 90 PARK AVENUE On May 7, 1997, the Company acquired a mortgage loan from a consortium of banks secured by a mortgage on the office building located at 90 Park Avenue, Manhattan, New York. On August 21, 1997, the Company entered into an agreement with the owners of 90 Park Avenue pursuant to which the Company restructured the mortgage, took title to the land and obtained a 43-year lease on the building under which the Company manages the building and receives 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 the 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%. The Company 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 has been classified as real estate. RIESE TRANSACTIONS On June 27, 1997, the Company acquired for approximately $26,000,000 four properties previously owned by affiliates of the Riese Organization. These properties are located in midtown Manhattan. The Company also made a $41,000,000 mortgage loan to Riese affiliates cross-collateralized by ten other Manhattan properties. This five-year increasing rate loan bears an initial interest rate of 9.75%. ARBOR PROPERTY TRUST On August 22, 1997, the Company entered into an Agreement and Plan of Merger among the Company, Arbor Property Trust ("Arbor") and Trees Acquisition Subsidiary, Inc. ("Merger Sub"), a wholly-owned subsidiary of the Operating Partnership, pursuant to which Arbor is to be merged with and into Merger Sub. Upon the merger becoming effective, each common share of beneficial interest of Arbor will be converted into the right to receive, and become exchangeable for, at the election of the holder, 0.243810 Common Shares or 0.153846 Series A Convertible Preferred Shares, each such Series A Preferred Share being convertible into 1.37456 Common Shares. The closing of this transaction is subject to the approval of Arbor's shareholders and certain other conditions; accordingly, there can be no assurance that the proposed transaction will ultimately be completed. A meeting of Arbor shareholders to vote on the merger is scheduled for December 4, 1997. Page 7 of 24

8 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Arbor is a single-property real estate investment trust organized as a business trust under the laws of the state of Delaware. Arbor, through its wholly-owned subsidiary Green Acres Mall, L.L.C., owns and operates the Green Acres Mall, a 1.7 million square foot super-regional enclosed shopping mall complex situated in southwestern Nassau County, Long Island, New York. The Green Acres Mall is anchored by four major department stores: Sears, Roebuck and Co., J.C. Penney Company, Inc., and Federated Department Stores, Inc., doing business as Stern's and as Macy's. The complex also includes The Plaza at Green Acres, a 179,000 square foot shopping center which is anchored by Kmart and Waldbaums. HOTEL PENNSYLVANIA INVESTMENT On September 24, 1997, the Company acquired a 40% interest in the Hotel Pennsylvania, which is located on Seventh Avenue opposite Madison Square Garden in Manhattan, New York. The property was acquired in a joint venture with Hotel Properties Limited and Planet Hollywood International, Inc. The venture intends to create a sports-themed hotel and entertainment complex. Under the joint venture agreement, Hotel Properties Limited and Planet Hollywood International, Inc. have 40% and 20% interests, respectively. The joint venture acquired the hotel for approximately $159,000,000, of which $120,000,000 was newly issued five-year financing. The Hotel Pennsylvania contains approximately 800,000 square feet of hotel space with 1,700 rooms and 400,000 square feet of retail and office space. The Company manages the site's retail and office space, and Hotel Properties manages the hotel. YMCA DEVELOPMENT On September 24, 1997, the Company entered into an agreement to acquire a portion of a property now occupied by the YMCA which overlooks Central Park and is located between West 63rd and 64th Streets in Manhattan, New York. Pursuant to the agreement, a preferred stock affiliate of Vornado will develop approximately 44,000 square feet for use by the YMCA and develop approximately 150,000 square feet for sale as residential condominiums. The agreement contemplates the negotiation and execution of additional related agreements. The purchase price for the property is approximately $8,400,000, and the Company estimates that development costs (including development of the YMCA facilities) will be approximately $55,000,000. The transaction is expected to close by the end of 1997; however, there can be no assurance that the proposed transaction will ultimately be completed. 20 BROAD STREET MORTGAGE On September 24, 1997, the Company purchased at a discount a mortgage on a 460,000 square foot office building at 20 Broad Street in Manhattan, New York from a bank for $27,000,000. The mortgage, which is in default, will yield approximately 12% on the purchase price. The property is leased to a number of tenants. The largest such tenant, the New York Stock Exchange, leases approximately 53% of the property. As part of the Mendik Transaction described above, the Company obtained an option to acquire from the Mendik Group its portion of the fee interest in this property. Page 8 of 24

9 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA INFORMATION The unaudited pro forma information set forth below presents the condensed statements of income for Vornado for the nine months ended September 30, 1997 and 1996 as if the following had occurred on January 1, 1996: (a) the Mendik Transaction, (b) the acquisitions, of or investments, in 90 Park Avenue, Arbor, Montehiedra, Riese and the Hotel Pennsylvania (each as described above) and (c) the acquisitions of, or investments, in Charles E. Smith Commercial Realty L.P. and the Cold Storage Companies and the sale of Common Shares and the use of proceeds therefrom (as described in Note 11 - "Subsequent Events"). Pro Forma Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 ------------------ ------------------ Revenues $226,864,000 $223,079,000 ============ ============ Net income $ 82,534,000 $ 78,742,000 Preferred stock dividends (15,233,000) (15,233,000) ------------ ------------ Net income applicable to common shares $ 67,301,000 $ 63,509,000 ============ ============ Net income per common share $.95 $.92 ==== ==== The pro forma results for the nine months ended September 30, 1997, include Mendik non-recurring lease cancellation income of $14,357,000, partially offset by related expenses of $2,776,000. This income and related expenses are not included in funds from operations as defined in Management's Discussion and Analysis of Financial Condition and Results of Operations (see page 16). 4. INVESTMENTS IN AND ADVANCES TO ALEXANDER'S (A RELATED PARTY): Below are summarized Statements of Operations of Alexander's: Nine Months Nine Months Ended Ended September 30, 1997 September 30, 1996 ------------------ ------------------ Revenues $ 18,775,000 $ 15,749,000 Expenses (10,158,000) (8,689,000) ------------ ------------- Operating income 8,617,000 7,060,000 Interest and debt expense (9,855,000) (10,393,000) Interest and other income, net 1,078,000 2,294,000 ------------ ------------- Net loss from continuing operations $ (160,000) $ (1,039,000) ============ ============= Vornado's 29.3% equity in loss $ (47,000) $ (304,000) ============ ============= The Company recognized leasing fee income under a leasing agreement (the "Leasing Agreement") with Alexander's of $173,000 and $157,000 for the three months ended September 30, 1997 and 1996 and $539,000 and $514,000 for the nine months ended September 30, 1997 and 1996. Subject to the payment of rents by Alexander's tenants, the Company is due $6,408,000 at September 30, 1997 under such agreement. The lease which the Company had previously negotiated with Caldor on behalf of Alexander's for its Fordham Road property was rejected in June 1997 in Caldor's bankruptcy proceedings, resulting in $1,254,000 of previously recorded leasing fees receivable and deferred leasing fee income being reversed in the quarter ended September 30, 1997. In addition to the leasing fees received by the Company, Vornado Management Corp. receives management fees from Alexander's (see Note 7). Page 9 of 24

10 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. DEBT On July 17, 1997, the Company obtained a $600,000,000 unsecured three-year revolving credit facility from a bank group led by Union Bank of Switzerland. The facility contains customary loan covenants including, among others, limits on total outstanding indebtedness; maximum loan to value ratios; minimum debt service coverage and minimum market capitalization requirements. Interest is at LIBOR plus .70% to 1.00% depending on the Company's senior debt rating. The credit facility has a competitive bid option program, which allows the Company to hold auctions among banks participating in the facility for short term borrowings of up to $300,000,000. The Company paid a fee of $1,800,000 at closing and will pay a commitment fee quarterly over the remaining term of the facility ranging from .15% to .20% on the full facility amount. Simultaneously with the closing, the Company borrowed $250,000,000 and used the proceeds, together with working capital, to repay a $400,000,000 term loan it had obtained in April 1997. At September 30, 1997, the Company had $310,000,000 outstanding under the facility at a blended rate of 6.50% (LIBOR plus .82%). On October 27, 1997, these borrowings were repaid with a portion of the proceeds from the sale of common shares. 6. MORTGAGE LOANS RECEIVABLE At September 30, 1997, the Company has $129,663,000 of Mortgage loans receivable, of which $45,000,000 is reflected as part of "Investment in and Advances to Alexander's, Inc." in the Consolidated Balance Sheets. At least annually, and more frequently if circumstances warrant, the Company evaluates the collectibility of both interest and principal of each of its loans to determine whether it is impaired. 7. MANAGEMENT COMPANIES As part of the Mendik Transaction, the Company acquired 100% of the non-voting preferred stock of the Mendik Management Company for $7,425,000. The Company previously assigned its management and development agreement (the "Management Agreement") with Alexander's to Vornado Management Corp. ("VMC"), an affiliate in which it also owns 100% of the non-voting preferred stock. The Company's preferred stock ownership entitles it to 95% of the economic benefits of the management companies through distributions. The Common Stock of the management companies is owned by officers and directors of Vornado. Below are summarized Statements of Operations of the management companies: For The Three Months Ended For The Nine Months Ended September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Management fees from: Alexander's $ 938,000 $ 1,037,000 $ 2,813,000 $4,405,000 Mendik properties 1,102,000 - 1,858,000 - ---------- ----------- ----------- ---------- 2,040,000 1,037,000 4,671,000 4,405,000 Expenses: General and administrative (1,623,000) (585,000) (3,749,000) (1,819,000) Interest, net (241,000) (74,000) (532,000) (216,000) ----------- ----------- ----------- ---------- Income before income taxes 176,000 378,000 390,000 2,370,000 Income taxes (70,000) (154,000) (158,000) (968,000) ----------- ----------- ----------- ---------- Net income 106,000 224,000 232,000 1,402,000 Preferred dividends (101,000) (213,000) (220,000) (1,332,000) ---------- --------- ----------- ---------- Net income available to common shareholders $ 5,000 $ 11,000 $ 12,000 $ 70,000 =========== =========== =========== ========== The management fee income from Alexander's in the nine months ended September 30, 1996, includes $1,343,000 of fees recorded in the first quarter of 1996 related to the completion of the redevelopment of Alexander's Rego Park I property. In addition to the preferred dividends the Company received, it also earned interest income on its loans to the management companies of $297,000 and $131,000 for the three months ended September 30, 1997 and 1996 and $698,000 and $391,000 for the nine months September 30, 1997 and 1996. Page 10 of 24

11 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. OTHER RELATED PARTY TRANSACTIONS The Company currently manages and leases the real estate assets of Interstate Properties pursuant to a management agreement. Management fees earned by the Company pursuant to the management agreement were $470,000 and $565,000 for the three months ended September 30, 1997 and 1996 and $847,000 and $1,112,000 for the nine months ended September 30, 1997 and 1996. The Mendik Group owns an entity which provides cleaning and related services and security services to office properties. The Company has entered into contracts with the Mendik Group to provide such services in the seven Manhattan office buildings acquired in the Mendik Transaction. Although the terms and conditions of the contracts pursuant to which these services are provided were not negotiated at arms length, the Company believes based upon comparable fees charged to other real estate companies, that the terms and conditions of such contracts are fair to the Company. The Company was charged fees in connection with these contracts of $3,292,000 for the three months ended September 30, 1997 and $5,899,000 for the period from April 15, 1997 to September 30, 1997. 9. MINORITY INTEREST The minority interest represents the 9.6% limited partnership interests in the Operating Partnership not owned by Vornado Realty Trust. These limited partnership interests are comprised of Class C, D and E Units distributed in connection with the Mendik Transaction. Holders of Class D and E Units are entitled to a preferential annual distribution rate of $2.015. Holders of Class C Units are entitled to a preferential annual distribution rate of $1.69. Class C Units will automatically convert to Class A Units when the distributions paid to holders of Class A Units equal $.4225 per quarter ($1.69 annually) for four consecutive quarters. Class D and E Units will automatically convert to Class A Units when the distributions paid to holders of Class A Units equal $.50375 per quarter ($2.015 annually) for four consecutive quarters. Generally, the value of each Class A Unit, equates to one common share of beneficial interest of Vornado. These per unit distribution rates have been adjusted to reflect a 2 for 1 split of the units effected in connection with Vornado's stock split on October 20, 1997. Preferential distributions aggregated $2,500,000 for the three months ended September 30, 1997 and $4,600,000 for the period from April 15, 1997 to September 30, 1997. Preferential distributions will aggregate $10,370,000 on an annual basis. 10. CONTINGENCIES In January 1997, two individual investors in Mendik Real Estate Limited Partnership ("RELP"), the publicly held limited partnership that indirectly owns a 60% interest in the Two Park Avenue Property, filed a purported class action against NY Real Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp., B&B Park Avenue, L.P. (an indirect subsidiary of the Operating Partnership which acquired the remaining 40% interest in Two Park Avenue) and Bernard H. Mendik in the Supreme Court of the State of New York, County of New York, on behalf of all persons holding limited partnership interests in RELP. The complaint alleges that, for reasons which include purported conflicts of interest, the defendants breached their fiduciary duty to the limited partners, that the then proposed transfer of the 40% interest in Two Park Avenue would result in a burden on the operation and management of Two Park Avenue and that the transfer of the 40% interest violates RELP's right of first refusal to purchase the interest being transferred and fails to provide limited partners in RELP with a comparable transfer opportunity. Shortly after the filing of the complaint, another limited partner represented by the same attorneys filed an essentially identical complaint in the same court. Both complaints seek unspecified damages, an accounting and a judgment requiring either the liquidation of RELP and the appointment of a receiver or an auction of Two Park Avenue. Discussions to settle the actions have been ongoing, but no settlement has been reached. In August 1997, a fourth limited partner, represented by separate counsel, commenced another purported class action in the same court by serving a complaint essentially identical to the complaints in the two previously commenced actions. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company. Page 11 of 24

12 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. SUBSEQUENT EVENTS STOCK SPLIT On October 20, 1997, Vornado paid a 100% common share dividend to shareholders of record of Common Shares at the close of business on October 15, 1997. All share and per share information has been adjusted to reflect the split. SALE OF COMMON SHARES On October 27, 1997, Vornado completed the sale of 14,000,000 common shares at a price of $45.00 per share which, net of expenses, yielded approximately $598,740,000. On November 7, 1997, Vornado's underwriters exercised their over-allotment option in full and purchased an additional 2,100,000 shares at $45.00 per share. The net proceeds were used to repay $310,000,000 outstanding under Vornado's line of credit and to fund a portion of the purchase price of certain acquisitions noted below. CHARLES E. SMITH COMMERCIAL REALTY INVESTMENT On October 31, 1997, the Company acquired a 15% limited partnership interest in Charles E. Smith Commercial Realty L.P. for $60,000,000. Charles E. Smith Commercial Realty L.P. owns interests in and manages approximately 7.2 million square feet of office properties in Crystal City, Arlington, Virginia, a suburb of Washington, D.C., and manages an additional 14 million square feet of office and other commercial properties in the Washington D.C. area. COLD STORAGE On October 31, 1997, two partnerships in which preferred stock affiliates of Vornado have 60% interests and affiliates of Crescent Real Estate Equities Company have 40 % interests acquired Americold Corporation ("Americold") and URS Logistics, Inc. ("URS"). Americold and URS are cold storage and logistics warehouse companies. The consideration for these transactions totaled approximately $950,000,000, including $660,000,000 of indebtedness. ESTABLISHMENT OF NEW OPERATING COMPANY The Company is contemplating the establishment of a new taxable operating company to conduct certain activities that would not be permitted to be conducted by the Company as a REIT and is currently in the process of preparing a registration statement to be filed with the Securities and Exchange Commission with respect thereto. If such action takes place, the Operating Partnership would spin off pro rata to its partners, including Vornado, the shares of the new company, and Vornado would distribute pro rata to holders of its Common Shares the shares it receives. No assurance can be given concerning the timing of any such transactions, or whether such transaction will occur. Page 12 of 24

13 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, affect demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies and technology; risks of real estate development and acquisition; governmental actions and initiatives; and environmental/safety requirements. RESULTS OF OPERATIONS The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income were $61,868,000 in the quarter ended September 30, 1997, compared to $29,063,000 in the prior year's quarter, an increase of $32,805,000. Revenues were $141,827,000 for the nine months ended September 30, 1997 compared to $86,918,000 in the prior year's nine months, an increase of $54,909,000. These increases reflect revenues of $28,621,000 and $47,538,000 for the quarter and the nine months ended September 30, 1997 from properties acquired in 1997. Property rentals were $49,882,000 in the quarter ended September 30, 1997, compared to $21,927,000 in the prior year's quarter, an increase of $27,955,000. Property rentals were $113,353,000 for the nine months ended September 30, 1997 compared to $65,084,000 in the prior year's nine months, an increase of $48,269,000. The increases for the quarter and the nine months ended September 30, 1997, resulted from: Quarter Nine Months ------- ----------- 1997 Acquisitions: Mendik $19,780,000 $36,204,000 90 Park Avenue 3,382,000 3,382,000 Montehiedra shopping center 2,086,000 3,809,000 Riese 1,351,000 1,351,000 ----------- ----------- 26,599,000 44,746,000 1996 Acquisitions: 825 Seventh Avenue - 472,000 Shopping center leasing activity 822,000 1,707,000 Step-ups in shopping center leases 534,000 1,344,000 ----------- ----------- $27,955,000 $48,269,000 =========== =========== Tenant expense reimbursements, which consist of the tenant's pro-rata share of common area maintenance expenses (such as snow removal costs, landscaping and parking lot repairs) real estate taxes and insurance, were $10,763,000 in the quarter ended September 30, 1997, compared to $6,410,000 in the prior year's quarter, an increase of $4,353,000. Tenant expense reimbursements were $25,924,000 for the nine months ended September 30, 1997, compared to $20,111,000 in the prior year's nine months, an increase of $5,813,000. Of these increases for the quarter and nine months, respectively, (i) $2,686,000 and $4,758,000 resulted from properties acquired in the Mendik Transaction, (ii) $763,000 in each period resulted from the acquisition of 90 Park Avenue and (iii) $904,000 and $292,000 resulted from expenses passed through to tenants at the Company's other properties. Operating expenses were $21,899,000 in the quarter ended September 30, 1997, as compared to $ 8,885,000 in the prior year's quarter, an increase of $13,014,000. Operating expenses were $48,557,000 in the nine months ended September 30, 1997, compared to $26,944,000 in the prior year's nine months, an increase of $21,613,000. Of these increases for the quarter and nine months, respectively, (i) $11,018,000 and $19,887,000 resulted from properties acquired in the Mendik Transaction and (ii) $1,664,000 in each period resulted from the acquisition of 90 Park Avenue. Page 13 of 24

14 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Depreciation and amortization expense increased in 1997 as compared to 1996, primarily as a result of acquisitions. General and administrative expenses were $3,460,000 in the quarter ended September 30, 1997 compared to $1,381,000 in the prior year's quarter, an increase of $2,079,000. General and administrative expenses were $8,208,000 in the nine months ended September 30, 1997 compared to $3,889,000 in the prior year's nine months, an increase of $4,319,000. These increases resulted primarily from (i) Mendik division payroll and corporate office expenses of $997,000 and $1,464,000 for the quarter ended September 30, 1997 and the period from April 15, 1997 to September 30, 1997, (ii) cash compensation attributable to the employment of the Company's President and (iii) higher professional fees. The Company recognized an expense of $6,249,000 in the quarter ended September 30, 1997 and $18,747,000 in the nine months ended September 30, 1997 representing the amortization of the $25,000,000 deferred payment due to the Company's President. The balance of the deferred payment will be amortized in 1997. Income applicable to Alexander's (loan interest income, equity in income (loss) and depreciation) was $1,344,000 in the quarter ended September 30, 1997, compared to $1,366,000 in the prior year's quarter, a decrease of $22,000. Income applicable to Alexander's was $4,186,000 in the nine months ended September 30, 1997, compared to $4,391,000 in the prior year's nine months, a decrease of $205,000. These decreases resulted primarily from the reset of the interest rate on the loan to Alexander's from 16.43% to 15.60% in March 1997. Income from investment in management companies was $398,000 in the quarter ended September 30, 1997, compared to $344,000 in the prior year's quarter, an increase of $54,000. Income from investment in management companies was $918,000 in the nine months ended September 30, 1997, compared to $1,723,000 in the prior year's nine months, a decrease of $805,000. The increase in the current year's quarter resulted primarily from dividends from the Management Company acquired as part of the Mendik Transaction. The decrease in the current year's nine month period resulted primarily from additional fee income of $794,000 earned by VMC in the first quarter of the prior year relating to the substantial completion of the redevelopment of Alexander's Rego Park I property. Equity in net income of investees of $271,000 in the quarter ended September 30, 1997 and $553,000 in the nine months ended September 30, 1997, represents income primarily from investments in partnerships which own the partially owned properties acquired as part of the Mendik Transaction. Investment income (interest income on mortgage loans receivable, other interest and dividend income and net gains on marketable securities) was $6,086,000 for the quarter ended September 30, 1997, compared to $1,569,000 in the prior year's quarter, an increase of $4,517,000. Investment income was $17,744,000 for the nine months ended September 30, 1997, compared to $5,066,000 in the prior year's nine months, an increase of $12,678,000. Of these increases for the quarter and nine months, respectively, (i) $1,623,000 and $6,624,000 resulted primarily from income earned on the proceeds from the December 1996 public stock offering and the April 1997 term loan, (ii) $1,542,000 and $4,586,000 resulted from the Company's mortgage loan on 90 Park Avenue and (iii) $1,118,000 in each period resulted from the Company's mortgage loan in connection with the Riese transaction. Interest and debt expense was $13,622,000 for the quarter ended September 30, 1997, compared to $4,208,000 in the prior year's quarter, an increase of $9,414,000. Interest and debt expense was $30,972,000 for the nine months ended September 30, 1997, compared to $12,623,000 in the prior year's nine months, an increase of $18,349,000. Of these increases, (i) $4,869,000 and $10,003,000 resulted from borrowings under the Company's revolving credit facility and a term loan (ii) $3,134,000 and $5,896,000 resulted from debt on the Mendik properties and (iii) $1,411,000 and $2,450,000 resulted from borrowings related to the acquisition of the Montehiedra Town Center in April 1997. The minority interest unit holders in the Operating Partnership are entitled to preferential distributions which aggregated $2,500,000 for the quarter ended September 30, 1997 and $4,600,000 for the period from April 15, 1997 to September 30, 1997. The preferred stock dividends of $5,241,000 and $10,096,000 are for the quarter ended September 30, 1997 and the period from April 9, 1997 to September 30, 1997 and include amortization of expenses in connection therewith of $569,000 and $1,168,000. Page 14 of 24

15 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Nine Months Ended September 30, 1997 Cash flows provided by operating activities of $64,017,000 was comprised of (i) net income of $39,104,000 and (ii) adjustments for non-cash items of $33,445,000, partially offset by (iii) the net change in operating assets and liabilities of $8,532,000. The adjustments for non-cash items are primarily comprised of (i) amortization of deferred officer's compensation expense of $18,747,000, (ii) depreciation and amortization of $16,012,000, (iii) equity in loss of Alexander's of $497,000, and (iv) minority interest of $4,600,000, partially offset by (v) the effect of straight-lining of rental income of $4,947,000 and (vi) equity in net income of investees of $553,000. Net cash used in investing activities of $670,755,000 was primarily comprised of (i) expenditures of $263,790,000 in connection with the Mendik Transaction, (ii) investments in mortgage loans receivable of $67,663,000, (iii) capital expenditures and investments in partnerships and joint ventures of $308,295,000 (see details below) and (iv) restricted cash for tenant improvements of $27,571,000. Investments in mortgage loans receivable are comprised of (a) a loan to affiliates of the Riese Organization cross collateralized by ten Manhattan properties of $41,000,000 and (b) a mortgage on a 460,000 square foot office building at 20 Broad Street in Manhattan, New York purchased at a discount from a bank for $27,000,000. Capital expenditures and investments in partnerships and joint ventures are comprised of: Montehiedra shopping center $ 74,000,000 90 Park Avenue office building 185,000,000 Riese properties 26,000,000 40% interest in Hotel Pennsylvania 19,215,000 Other 4,080,000 -------------- $308,295,000 ============ Net cash provided by financing activities of $575,409,000 was primarily comprised of proceeds from (i) borrowings of $523,000,000, and (ii) issuance of preferred shares of $276,000,000, partially offset by (iii) repayment of borrowings of $151,177,000, (iv) dividends paid of $60,187,000 and (v) the repayment of borrowings on U.S. Treasury obligations of $9,636,000. Nine Months Ended September 30, 1996 Cash flows provided by operating activities of $49,897,000 was comprised of (i) net income of $45,981,000 and (ii) adjustments for non-cash items of $7,641,000, less (iii) the net change in operating assets and liabilities of $3,725,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $9,431,000, plus equity in income (loss) of Alexander's of $776,000, offset by the effect of straight-lining of rental income of $1,912,000. Further, during this period in connection with the rejection of a lease by an Alexander's tenant "Leasing fees and other receivables" decreased by $1,717,000 and "Deferred leasing fee income" correspondingly decreased. "Leasing fees and other receivables" of $1,592,000 were collected during this period. These amounts have been included in the net change in operating assets and liabilities shown in item (iii) above. Page 15 of 24

16 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash provided by investing activities of $13,031,000 was comprised of (i) proceeds from sale or maturity of securities available for sale of $41,490,000, offset by (ii) the Company's investment in a mortgage note receivable of $17,000,000 and (iii) capital expenditures of $11,459,000 (including $8,923,000 for the purchase of an office building). Net cash used in financing activities of $60,286,000 was primarily comprised of (i) the net repayment of borrowings on U.S. Treasury obligations of $30,312,000 and (ii) dividends paid of $44,559,000, offset by (iii) the proceeds from borrowings of $10,000,000. Funds from Operations for the Three and Nine Months Ended September 30, 1997 and 1996 Funds from operations were $17,056,000 in the quarter ended September 30, 1997, compared to $17,575,000 in the prior year's quarter, a decrease of $519,000 or 2.9%. Funds from operations were $43,789,000 in the nine months ended September 30, 1997, compared to $53,550,000 in the prior year's nine months, a decrease of $9,761,000 or 18.2%. Funds from operations for the three and nine months ended September 30, 1997 reflect amortization of the deferred payment due to the Company's President and related compensation of $6,854,000 and $20,516,000. The following table reconciles funds from operations and net income: For The Three Months Ended For The Nine Months Ended September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net income applicable to common shares $ 10,385,000 $ 14,939,000 $ 29,008,000 $ 45,981,000 Depreciation and amortization of real property 6,466,000 2,828,000 14,623,000 8,394,000 Straight-lining of property rentals for rent escalations (830,000) (635,000) (2,317,000) (1,912,000) Leasing fees received in excess of income recognized 480,000 468,000 1,333,000 1,358,000 Proportionate share of adjustments to Alexander's loss to arrive at funds from operations (100,000) (25,000) (73,000) (271,000) Proportionate share of adjustments to net income of investees to arrive at funds from operations 655,000 -- 1,215,000 -- ------------ ------------ ------------ ------------ Funds from operations $ 17,056,000 $ 17,575,000 $ 43,789,000 $ 53,550,000 ============ ============ ============ ============ 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 relevant supplemental measure of operating performance because it provides a basis for comparison among REITs; however, funds from operations may not be comparable to similarly titled measures reported by other REITs since 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 Page 16 of 24

17 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee income. Below are the cash flows provided by (used in) operating, investing and financing activities: For The Three Months Ended For The Nine Months Ended September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Operating activities $ 13,028,000 $ 16,121,000 $ 64,017,000 $ 49,897,000 ============= ============ ============= ============ Investing activities $ (40,942,000) $ (129,000) $(670,755,000) $ 13,031,000 ============= ============ ============= ============ Financing activities $(113,545,000) $(10,971,000) $ 575,409,000 $(60,286,000) ============= ============ ============= ============ The Company has budgeted approximately $25,000,000 for capital expenditures over the next year of which $21,000,000 is for tenant improvements at its office properties and $4,000,000 is for tenant improvements and renovations at its shopping center properties. In addition, the Company expects to invest approximately $55,000,000 in connection with its YMCA Development and approximately $25,000,000 in connection with its portion of the Hotel Pennsylvania investment (see below). In December 1996, Michael D. Fascitelli became the President of Vornado and was elected to the Vornado Board. Mr. Fascitelli signed a five year employment contract under which, in addition to his annual salary, he received a deferred payment consisting of $5,000,000 in cash and a $20,000,000 convertible obligation payable at Vornado's option in 919,540 of its Common Shares or the cash equivalent of their appreciated value. Accordingly, cash of $5,000,000 and 919,540 Common Shares are being held in an irrevocable trust. The deferred payment obligation to Mr. Fascitelli vests as of December 2, 1997. Further, Mr. Fascitelli was granted options for 3,500,000 Common Shares of Vornado. On April 15, 1997, Vornado consummated the acquisition, through an operating partnership, of interests in all or a portion of seven Manhattan office buildings and a management company held by the Mendik Group and certain of its affiliates. Simultaneously with the closing of this transaction, and in connection therewith, Vornado converted to an Umbrella Partnership REIT (UPREIT) by transferring (by contribution, merger or otherwise) all or substantially all of the interests in its properties and other assets to Vornado Realty L.P. (the "Operating Partnership"), of which Vornado is the sole general partner. As a result of such conversion, Vornado's activities are conducted through the Operating Partnership. The consideration for the Mendik transaction was approximately $656,000,000, including $264,000,000 in cash, $177,000,000 in the limited partnership units of the Operating Partnership and $215,000,000 in indebtedness. Vornado financed the cash portion of this transaction with the proceeds of a public offering completed on April 9, 1997, of 5,750,000 Series A Convertible Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share. The preferred shares bear a coupon of 6-1/2% and are convertible into common shares at $36-3/8 per share. The offering, net of expenses, generated approximately $276,000,000. Below is a summary of other transactions affecting the Company's liquidity: ARBOR PROPERTY TRUST On August 22, 1997, the Company entered into an Agreement and Plan of Merger among the Company, Arbor Property Trust ("Arbor") and Trees Acquisition Subsidiary, Inc. ("Merger Sub"), a wholly-owned subsidiary Page 17 of 24

18 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of the Operating Partnership, pursuant to which Arbor is to be merged with and into Merger Sub. Upon the merger becoming effective, each common share of beneficial interest of Arbor will be converted into the right to receive, and become exchangeable for, at the election of the holder, 0.243810 Common Shares or 0.153846 Series A Convertible Preferred Shares, each such Series A Preferred Share being convertible into 1.37456 Common Shares. The closing of this transaction is subject to the approval of Arbor's shareholders and certain other conditions; accordingly, there can be no assurance that the proposed transaction will ultimately be completed. A meeting of Arbor shareholders to vote on the merger is scheduled for December 4, 1997. Arbor is a single-property real estate investment trust organized as a business trust under the laws of the state of Delaware. Arbor, through its wholly-owned subsidiary Green Acres Mall, L.L.C., owns and operates the Green Acres Mall, a 1.7 million square foot super-regional enclosed shopping mall complex situated in southwestern Nassau County, Long Island, New York. The Green Acres Mall is anchored by four major department stores: Sears, Roebuck and Co., J.C. Penney Company, Inc., and Federated Department Stores, Inc., doing business as Stern's and as Macy's. The complex also includes The Plaza at Green Acres, a 179,000 square foot shopping center which is anchored by Kmart and Waldbaums. HOTEL PENNSYLVANIA INVESTMENT On September 24, 1997, the Company acquired a 40% interest in the Hotel Pennsylvania, which is located on Seventh Avenue opposite Madison Square Garden in Manhattan, New York. The property was acquired in a joint venture with Hotel Properties Limited and Planet Hollywood International, Inc. The venture intends to create a sports-themed hotel and entertainment complex. Under the joint venture agreement, Hotel Properties Limited and Planet Hollywood International, Inc. have 40% and 20% interests, respectively. The joint venture acquired the hotel for approximately $159,000,000, of which $120,000,000 was newly issued five-year financing. The Hotel Pennsylvania contains approximately 800,000 square feet of hotel space with 1,700 rooms and 400,000 square feet of retail and office space. The Company manages the site's retail and office space, and Hotel Properties manages the hotel. YMCA DEVELOPMENT On September 24, 1997, the Company entered into an agreement to acquire a portion of a property now occupied by the YMCA which overlooks Central Park and is located between West 63rd and 64th Streets in Manhattan, New York. Pursuant to the agreement, a preferred stock affiliate of Vornado will develop approximately 44,000 square feet for use by the YMCA and develop approximately 150,000 square feet for sale as residential condominiums. The agreement contemplates the negotiation and execution of additional related agreements. The purchase price for the property is approximately $8,400,000, and the Company estimates that development costs (including development of the YMCA facilities) will be approximately $55,000,000. The transaction is expected to close by the end of 1997; however, there can be no assurance that the proposed transaction will ultimately be completed. 20 BROAD STREET MORTGAGE On September 24, 1997, the Company purchased at a discount a mortgage on a 460,000 square foot office building at 20 Broad Street in Manhattan, New York from a bank for $27,000,000. The mortgage, which is in default, will yield approximately 12% on the purchase price. The property is leased to a number of tenants. The largest such tenant, the New York Stock Exchange, leases approximately 53% of the property. As part of the Mendik Transaction described above, the Company obtained an option to acquire from the Mendik Group its portion of the fee interest in this property. CHARLES E. SMITH COMMERCIAL REALTY INVESTMENT On October 31, 1997, the Company acquired a 15% limited partnership interest in Charles E. Smith Commercial Realty L.P. for $60,000,000. Charles E. Smith Commercial Realty L.P. owns interests in and manages approximately 7.2 million square feet of office properties in Crystal City, Arlington, Virginia, a suburb of Washington, D.C., and manages an additional 14 million square feet of office and other commercial properties in the Washington D.C. area. Page 18 of 24

19 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COLD STORAGE On October 31, 1997, two partnerships in which preferred stock affiliates of Vornado have 60% interests and affiliates of Crescent Real Estate Equities Company have 40% interests acquired Americold Corporation ("Americold") and URS Logistics, Inc. ("URS"). Americold and URS are cold storage and logistics warehouse companies. The consideration for these transactions totaled approximately $950,000,000, including $660,000,000 of indebtedness. SALE OF COMMON SHARES On October 27, 1997, Vornado completed the sale of 14,000,000 common shares at a price of $45.00 per share which, net of expenses, yielded approximately $598,740,000. On November 7, 1997, Vornado's underwriters exercised their over-allotment option in full and purchased an additional 2,100,000 shares at $45.00 per share. The net proceeds were used to repay $310,000,000 outstanding under Vornado's line of credit and will be used to fund a portion of the purchase price of certain acquisitions noted above. On July 17, 1997, the Company obtained a $600,000,000 unsecured three-year revolving credit facility from a bank group led by Union Bank of Switzerland. Simultaneously with the closing, the Company borrowed $250,000,000 and used the proceeds, together with working capital, to repay a $400,000,000 term loan it had obtained in April 1997. At September 30, 1997, the Company had $310,000,000 outstanding under the facility at a blended rate of 6.50% (LIBOR plus .82%). On October 27, 1997, these borrowings were repaid with a portion of the proceeds from the sale of common shares. The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an ongoing basis for more than the next twelve months; however, capital outlays for significant acquisitions may require funding from borrowings or equity offerings. RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board adopted Statement No. 128, "Earnings Per Share". The statement is effective for fiscal years ending after December 15, 1997. The Company believes that this pronouncement will not have a material effect on its net income per share. Page 19 of 24

20 VORNADO REALTY TRUST PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In January 1997, two individual investors in Mendik Real Estate Limited Partnership ("RELP"), the publicly held limited partnership that indirectly owns a 60% interest in the Two Park Avenue Property, filed a purported class action against NY Real Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp., B&B Park Avenue, L.P. (an indirect subsidiary of the Operating Partnership which acquired the remaining 40% interest in Two Park Avenue) and Bernard H. Mendik in the Supreme Court of the State of New York, County of New York, on behalf of all persons holding limited partnership interests in RELP. The complaint alleges that, for reasons which include purported conflicts of interest, the defendants breached their fiduciary duty to the limited partners, that the then proposed transfer of the 40% interest in Two Park Avenue would result in a burden on the operation and management of Two Park Avenue and that the transfer of the 40% interest violates RELP's right of first refusal to purchase the interest being transferred and fails to provide limited partners in RELP with a comparable transfer opportunity. Shortly after the filing of the complaint, another limited partner represented by the same attorneys filed an essentially identical complaint in the same court. Both complaints seek unspecified damages, an accounting and a judgment requiring either the liquidation of RELP and the appointment of a receiver or an auction of Two Park Avenue. Discussions to settle the actions have been ongoing, but no settlement has been reached. In August 1997, a fourth limited partner, represented by separate counsel, commenced another purported class action in the same court by serving a complaint essentially identical to the complaints in the two previously commenced actions. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The following exhibits are filed with this Quarterly Report on Form 10-Q. 11 Statement Re Computation of Per Share Earnings. 27 Financial Data Schedule. (b) Reports on Form 8-K During the quarter ended September 30, 1997, Vornado Realty Trust filed the reports on Form 8-K described below: Date of Report (Date of Earliest Event Reported) Item Reported Date Filed --------------- ------------- ---------- June 27, 1997 Acquisition of properties from July 8, 1997 affiliates of the Riese Organization. August 21, 1997 Acquisition of 90 Park Avenue August 29, 1997 Other events - pending merger with Arbor Property Trust August 21, 1997 Financial statements and pro forma September 11, 1997 financial information in connection with the acquisition of 90 Park Avenue and the pending merger with Arbor Property Trust. Page 20 of 24

21 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 thereunto duly authorized. VORNADO REALTY TRUST ---------------------------------------- (Registrant) Date: November 6, 1997 /s/ Joseph Macnow ---------------------------------------- JOSEPH MACNOW Vice President - Chief Financial Officer and Chief Accounting Officer Page 21 of 24

22 VORNADO REALTY TRUST EXHIBIT INDEX PAGE NUMBER IN SEQUENTIAL EXHIBIT NO. NUMBERING ----------- --------- 11 Statement Re Computation of Per Share Earnings. 23 27 Financial Data Schedule. 24 Page 22 of 24

1 EXHIBIT 11 VORNADO REALTY TRUST STATEMENT RE COMPUTATION OF PER SHARE EARNINGS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ---- ---- ---- ---- Weighted average number of common shares outstanding 52,873,509 48,908,786 52,411,062 48,677,798 Common share equivalents for options after applying treasury stock method 1,089,545 198,730 1,215,965 318,392 ---------- ---------- ---------- ---------- Weighted average number of common shares and common share equivalents outstanding 53,963,054 49,107,516 53,627,027 48,996,190 ========== ========== ========== ========== Net income applicable to common shares $10,385,000 $14,939,000 $29,008,000 $45,981,000 =========== =========== =========== =========== Net income per common share $ .19 $ .31 $ .54 $ .94 ===== ===== ===== ===== Page 23 of 24

5 This schedule contains summary financial information extracted from the Company's unaudited financial statements for the nine months ended September 30, 1997 and is qualified in its entirety by reference to such financial statements.

9-MOS DEC-31-1997 SEP-30-1997 58,367 31,277 15,331 917 0 0 1,231,386 166,072 1,551,506 0 772,156 277,168 0 2,116 255,618 1,551,506 0 141,827 0 48,557 23,248 0 30,972 29,008 0 29,008 0 0 0 29,008 $.54 $.54