Vornado Realty Trust

1 EXHIBIT INDEX ON PAGE 105 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 1998 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 (I.R.S. Employer incorporation or organization) Identification Number) Park 80 West, Plaza II, Saddle Brook, New Jersey 07663 - ------------------------------------------------ ---------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (201) 587-1000 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Shares of beneficial New York Stock Exchange interest, $.04 par value per share Series A Convertible New York Stock Exchange Preferred Shares of beneficial interest, no par value 8.5% Series B Cumulative New York Stock Exchange Redeemable Preferred Shares of beneficial interest, no par value Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting shares held by non-affiliates of the registrant, i.e. by persons other than officers and trustees of Vornado Realty Trust as reflected in the table in Item 12 of this Form 10-K, at March 4, 1999 was $2,290,892,000. As of March 4, 1999, there were 85,088,542 common shares of the registrant's shares of beneficial interest outstanding. Documents Incorporated by Reference ----------------------------------- Part III: Proxy Statement for Annual Meeting of Shareholders to be held on May 19, 1999. -1-

2 TABLE OF CONTENTS Item Page ---- ---- Part I. 1. Business................................................... 3 2. Properties................................................. 15 3. Legal Proceedings.......................................... 42 4. Submission of Matters to a Vote of Security Holders........ 42 Executive Officers of the Registrant....................... 42 Part II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................................... 43 6. Selected Consolidated Financial Data....................... 44 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 46 7A. Quantitative and Qualitative Disclosure about Market Risk.. 58 8. Financial Statements and Supplementary Data................ 59 9. Changes In and Disagreements With Independent Auditors' on Accounting and Financial Disclosure................... 59 Part III. 10. Directors and Executive Officers of the Registrant......... (1) 11. Executive Compensation..................................... (1) 12. Security Ownership of Certain Beneficial Owners and Management........................................... (1) 13. Certain Relationships and Related Transactions............. (1) Part IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 95 Signatures................................................................. 96 - ---------- (1) These items are omitted because the Registrant will file a definitive Proxy Statement pursuant to Regulation 14A involving the election of directors with the Securities and Exchange Commission not later than 120 days after December 31, 1998, which is incorporated by reference herein. Information relating to Executive Officers of the Registrant appears on page 42 of this Annual Report on Form 10-K. Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Certain factors could cause actual results to differ materially from those in the forward-looking statements. Factors that might cause such a material difference include, but are not limited to, (a) changes in the general economic climate, (b) local conditions such as an oversupply of space or a reduction in demand for real estate in the area, (c) conditions of tenants, (d) competition from other available space, (e) increased operating costs and interest expense, (f) the timing of and costs associated with property improvements, (g) changes in taxation or zoning laws, (h) government regulations, (i) failure of Vornado to continue to qualify as a REIT, (j) availability of financing on acceptable terms, (k) potential liability under environmental or other laws or regulations, (l) general competitive factors and (m) failure by Vornado, or by other companies with which it does business, to remediate possible Year 2000 problems in computer software or embedded technology. -2-

3 PART I Item 1. Business The Company Vornado Realty Trust is a fully-integrated real estate investment trust ("REIT"). In April 1997, Vornado transferred substantially all of its assets to Vornado Realty L.P., a Delaware limited partnership (the "Operating Partnership"). As a result, Vornado now conducts its business through the Operating Partnership. Vornado is the sole general partner of, and owned approximately 85% of the limited partnership common interest in, the Operating Partnership at March 17, 1999. All references to the "Company" and "Vornado" refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership. The Company currently owns directly or indirectly: Office Building Properties ("Office"): (i) all or portions of 21 office building properties in the New York City metropolitan area (primarily Manhattan) containing approximately 12.5 million square feet; (ii) a 34% limited partnership interest in Charles E. Smith Commercial Realty L.P. ("CESCR"), a limited partnership, which owns interests in and manages approximately 10.7 million square feet of office properties in Northern Virginia and Washington D.C., and manages an additional 14.6 million square feet of office and other commercial properties in the Washington, D.C. area; Retail Properties ("Retail"): (iii) 59 shopping center properties in seven states and Puerto Rico containing approximately 12.2 million square feet, including 1.4 million square feet built by tenants on land leased from the Company; Cold Storage Companies ("Cold Storage"): (iv) a 60% interest in partnerships that own 88 warehouse facilities nationwide with an aggregate of approximately 450 million cubic feet of refrigerated, frozen and dry storage space (excludes 13 additional warehouses containing approximately 80 million cubic feet managed by the Cold Storage Companies - see "Spin-off of Vornado Operating Company"); Merchandise Mart Properties: (v) the Merchandise Mart Properties portfolio containing approximately 6.7 million square feet, including the 3.4 million square foot Merchandise Mart in Chicago; Other Real Estate Investments: (vi) approximately 29.3% of the outstanding common stock of Alexander's, Inc. ("Alexander's"), which has eight properties in the New York City metropolitan area; (vii) an 80% interest in the Hotel Pennsylvania, a New York City hotel which contains 800,000 square feet of space with 1,700 rooms and 400,000 square feet of retail and office space; (viii) eight dry warehouse /industrial properties in New Jersey containing approximately 2.0 million square feet; and (ix) other real estate investments. -3-

4 Objectives and Strategy The Company's business objective is to maximize shareholder value. The Company intends to achieve its business objective by continuing to pursue its investment philosophy, making opportunistic investments and executing its operating strategies through: o Maintaining a superior team of operating and investment professionals and an opportunistic entrepreneurial spirit; o Investing in properties in the New York City metropolitan area and other selected markets where the Company believes there is high likelihood of capital appreciation; o Acquiring high quality properties at a discount to replacement cost and where there is a significant potential for higher rents; o Investing in retail properties in selected understored locations such as the New York City metropolitan area; o Investing in fully integrated operating companies that have a significant real estate component with qualified, experienced operating management and strong growth potential which can benefit from the Company's access to efficient capital; and o Developing and redeveloping the Company's existing properties to increase returns and maximize value. The Company expects to finance its growth, acquisitions and investments using internally generated funds, funds from possible asset sales and by accessing the public and private capital markets. -4-

5 Acquisitions and Investments Since January 1, 1998, the Company completed approximately $2.4 billion of real estate acquisitions or investments. The following table lists the acquisitions and investments by business segment: Total Consideration Location (in millions) -------- ------------- Office: One Penn Plaza...................................New York City $ 410 Charles E. Smith Commercial Realty, L.P.: Increase in investment to 34%................Northern Virginia and Washington, D.C. 242 Crystal City hotel land......................Crystal City, Virginia 8 770 Broadway.....................................New York City 149 150 East 58th Street.............................New York City 118 Mendik Real Estate Limited Partnership properties: Saxon Woods Corporate Center.................Harrison, New York 21 Two Park Avenue (remaining 60% interest)...................New York City 76 330 West 34th Street.........................New York City 9 888 Seventh Avenue...............................New York City 100 40 Fulton Street.................................New York City 55 570 Lexington - increase in investment to 50%....New York City 37 689 Fifth Avenue.................................New York City 33 Westport Corporate Office Park...................Westport, Connecticut 14 20 Broad Street..................................New York City 1 Retail: Las Catalinas Mall...............................Caguas, Puerto Rico 38 Cold Storage (60% interest): Freezer Services, Inc............................Midwestern section of the United States 80 Carmar Group.....................................Midwestern and Southwestern sections of the United States 95 Merchandise Mart Properties: The Merchandise Mart Properties..................Chicago & Washington, D.C. 630 Market Square Complex............................High Point, North Carolina 97 National Furniture Mart..........................High Point, North Carolina 18 Other Real Estate Investments: Hotel Pennsylvania - increase in investment to 80%.......................................New York City 70 Newkirk Joint Ventures (30% interest)............Various 108 ------- Total Acquisitions and Investments..... $ 2,409 ======= -5-

6 Office: One Penn Plaza In February 1998, the Company acquired a long-term leasehold interest in One Penn Plaza for approximately $410,000,000. One Penn Plaza is a 57 story Manhattan office building containing approximately 2,400,000 square feet and encompasses substantially the entire square block bounded by 33rd Street, 34th Street, Seventh Avenue and Eighth Avenue. Charles E. Smith Commercial Realty L.P. On March 4, 1999, the Company made an additional $242,000,000 investment in CESCR by contributing to CESCR the land under certain CESCR office properties in Crystal City, Arlington, Virginia and partnership interests in certain CESCR subsidiaries. The Company acquired these assets from Commonwealth Atlantic Properties, Inc. ("CAPI"), an affiliate of Lazard Freres Real Estate Investors L.L.C., immediately prior to the contribution to CESCR. Together with the Company's investment in CESCR made in 1997 and the units it reacquired on March 4, 1999 from Vornado Operating Company, the Company owns approximately 34% of CESCR's limited partnership units. In addition, the Company acquired from CAPI for $8,000,000 the land under a Marriott Hotel located in Crystal City. The purchase price was paid to CAPI by the Company issuing $250,000,000 of 6% Convertible Preferred Units of the Company's operating partnership. The Preferred Units are convertible at $44 per unit and the coupon increases to 6.50% over the next three years and then fixes at 6.75% in year eight. The Company will appoint one of three members to CESCR's Board of Managers, increasing under certain circumstances to two of four members in March 2002. In connection with these transactions, the Company made a five-year $41,000,000 loan to CAPI with interest at 8%, increasing to 9% ratably over the term. The loan is secured by approximately $55,000,000 of the Operating Partnership's units issued to CAPI as well as certain real estate assets. 770 Broadway In July 1998, the Company acquired 770 Broadway, a 1,016,000 square foot Manhattan office building, for approximately $149,000,000, including $18,000,000 of Operating Partnership Units. 150 East 58th Street In March 1998, the Company acquired 150 East 58th Street (the Architects and Design Center), a 39 story Manhattan office building, for approximately $118,000,000. The building contains approximately 550,000 square feet. Mendik Real Estate Limited Partnership Properties In November 1998, the Company completed the acquisition of certain properties from the Mendik Real Estate Limited Partnership ("Mendik RELP"). The acquired real estate assets include (i) a leasehold interest in the Saxon Woods Corporate Center located at 550/600 Mamaroneck Avenue, in Harrison, New York which contains approximately 234,000 square feet, (ii) the remaining 60% interest in an office building located at Two Park Avenue, in Manhattan which contains approximately 946,000 square feet (the Company already owned 40%) and (iii) a leasehold interest in an office building located at 330 West 34th Street, also in Manhattan, which contains approximately 628,000 square feet. The aggregate purchase price of approximately $106,000,000, consisted of $31,000,000 of cash, $29,000,000 of the Company's common shares and $46,000,000 of debt. -6-

7 888 Seventh Avenue and 40 Fulton Street In June 1998, the Company entered into an agreement to acquire the leasehold interest in 888 Seventh Avenue, a 46 story office building containing approximately 848,000 square feet located in midtown Manhattan, and simultaneously acquired 40 Fulton Street, a 29 story office building containing approximately 234,000 square feet located in downtown Manhattan. The aggregate consideration for both buildings was approximately $154,500,000. The acquisition of 888 Seventh Avenue was completed in January 1999. 570 Lexington Avenue - additional investment In April 1998, the Company increased its interest from 5.6% to approximately 50% in 570 Lexington Avenue, a 49 story office building located in midtown Manhattan containing approximately 433,000 square feet. The Company purchased the additional interest for approximately $37,200,000, including $4,900,000 of existing debt. 689 Fifth Avenue In August 1998, the Company acquired 689 Fifth Avenue, a 84,000 square foot Manhattan specialty building for approximately $33,000,000 from a partnership that included Bernard H. Mendik, a former trustee of the Company. Westport Corporate Office Park In January 1998, the Company acquired Westport Corporate Office Park ("Westport") from a limited partnership that included Bernard H. Mendik and David R. Greenbaum, the Chief Executive Officer of the Company's Mendik Division, as partners (Messrs. Mendik and Greenbaum and certain entities controlled by them are referred to herein as the "Mendik Group".) The purchase price was approximately $14,000,000 consisting of $6,000,000 of cash and an $8,000,000 mortgage loan for the two buildings which contain 120,000 square feet. 20 Broad Street In September 1997, the Company purchased, at a discount, a mortgage on a 460,000 square foot office building at 20 Broad Street in Manhattan for $27,000,000. In August 1998, the Company acquired a 60% interest in the leasehold from the Mendik Group for approximately $600,000 of Operating Partnership Units. In a related transaction, the Company sold a 40% interest in the mortgage to the other unrelated owner of the property for $10,800,000. The Mendik Group may also receive a future earn-out, capped at $4,400,000 in additional units, based on leasing activity through December 31, 2004. Retail: Las Catalinas Mall In October 1998, the Company completed the acquisition of Kmart Corporation's ("Kmart") 50% interest in the Las Catalinas Mall located in Caguas, Puerto Rico (adjacent to San Juan). In addition, the Company acquired 75% and the Company's partner in the Mall acquired 25% of Kmart's anchor store. The Company's purchase price of $38,000,000 was fully financed with 15 year debt. The Las Catalinas Mall, which opened in 1997, contains 489,000 square feet, including a 123,000 square foot Kmart store and a 146,000 square foot Sears store. Cold Storage: In June 1998, a partnership in which Vornado owns a 60% interest through a preferred stock affiliate acquired the assets of Freezer Services, Inc., consisting of nine cold storage warehouses in the central United States for approximately $133,000,000, including $107,000,000 in cash and $26,000,000 in indebtedness. The Company's share of this investment was $80,000,000. Additionally, in July 1998, the Carmar Group was acquired for approximately $158,000,000, including $144,000,000 in cash and $14,000,000 in indebtedness. The Company's share of this investment was $95,000,000. Carmar owned and operated five cold storage distribution warehouses in the midwest and southeast United States. -7-

8 Merchandise Mart Properties: The Merchandise Mart Properties In April 1998, the Company acquired a real estate portfolio from the Kennedy Family for approximately $630,000,000, consisting of $187,000,000 in cash, $116,000,000 in Operating Partnership Units, $77,000,000 in existing debt and $250,000,000 of newly issued debt. The acquired real estate assets consist of a portfolio of properties used for office, retail and trade showroom space which aggregate approximately 5.4 million square feet and include the Merchandise Mart in Chicago. The transaction also included the acquisition of Merchandise Mart Properties, Inc., which manages the properties and owns and operates certain trade shows. Market Square Complex In December 1998, the Company completed the acquisition of the 1.07 million square foot Market Square Complex of showrooms in High Point, North Carolina. The consideration was approximately $97,000,000, consisting of $46,000,000 in debt, $44,000,000 in Operating Partnership Units and 6.5% Preferred Operating Partnership Units convertible at $43.74 per unit and $7,000,000 of cash. The acquired real estate assets include the Market Square, Hamilton Market and Furniture Plaza showroom buildings and the High Point Holiday Inn hotel. In a second transaction, the Company acquired the 243,000 square foot National Furniture Mart, which is adjacent to the forementioned properties, in High Point. The price was approximately $17,700,000, consisting of $3,800,000 in cash and $13,900,000 in debt. Other Real Estate Investments: Hotel Pennslyvania - additional investment In May 1998, the Company acquired an additional 40% interest in the Hotel Pennsylvania increasing its ownership to 80%. The Company purchased the additional 40% interest from Hotel Properties Limited (one of its joint venture partners) for approximately $70,000,000, including $48,000,000 of existing debt. Newkirk Joint Ventures In July and September 1998, the Company invested an aggregate of $56,000,000 for a 30% share in joint ventures with affiliates of Apollo Real Estate Investment Fund III, L.P., collectively Newkirk Joint Ventures ("Newkirk"). Newkirk owns various equity and debt interests relating to 120 limited partnerships which own real estate primarily net leased to credit rated tenants. The Company has issued a $15,600,000 letter of credit in connection with these joint ventures. In March 1999, the Company and its joint venture partner completed an acquisition of additional equity interests in certain limited partnerships. The Company's additional investment of $52,435,000 consisted of $47,790,000 in Operating Partnership Units and $4,645,000 in cash. -8-

9 Development and Redevelopment Projects The Company is currently engaged in or considering certain multi-year development and redevelopment projects. These projects include: (i) construction of 119,000 square feet of residential condominiums in Manhattan (YMCA Development 80% interest), (ii) construction of an 800,000 square foot high-rise rental apartment complex in Fort Lee, New Jersey (75% interest), (iii) acquisitions, developments and expansions of Cold Storage distribution and production warehouses (60% interest), (iv) tenant improvements and refurbishment of 770 Broadway, (v) conversion of 38,000 square feet of office space to retail space at 640 Fifth Avenue, (vi) redevelopment of the Russian Tea Room restaurant building on 57th Street in Manhattan (50% interest), (vii) the conversion of office space at 689 Fifth Avenue to hotel space, (viii) the expansion of the Market Square Complex in High Point, North Carolina, (ix) the redevelopment of the site at 14th Street and Union Square (currently leased by Bradlees), which may include razing the existing building and developing a large multi-use building, (x) the refurbishment of the Hotel Pennsylvania, (xi) the redevelopment of the Company's Penn Station properties which may include creating new retail space, (xii) Alexander's (29.3% interest) redevelopment of its Paramus property into a 550,000 square foot shopping center, (xiii) Alexander's (29.3% interest) development of a large multi-use building at its 59th Street and Lexington Avenue site and (xiv) Alexander's (29.3% interest) renovation of its Kings Plaza Mall. There can be no assurance that all of the above projects will be commenced or ultimately completed. Spin-off of Vornado Operating Company General Vornado Operating Company, ("Vornado Operating") was incorporated on October 30, 1997, as a wholly owned subsidiary of the Company. In order to maintain its status as a REIT for federal income tax purposes, the Company is required to focus principally on investment in real estate assets. Accordingly, the Company is prevented from owning certain assets and conducting certain activities that would be inconsistent with its status as a REIT. Vornado Operating was formed to own assets that Vornado could not itself own and conduct activities that Vornado could not itself conduct. Vornado Operating is intended to function principally as an operating company, in contrast to the Company's principal focus on investment in real estate assets. Vornado Operating is able to do so because it is taxable as a regular "C" corporation rather than a REIT. Vornado Operating will seek to become the operator of businesses conducted at properties it leases from the Company, as contemplated by the Intercompany Agreement between the Company and Vornado Operating (the "Intercompany Agreement"), referred to below. Vornado Operating expects to rely exclusively on the Company to identify business opportunities and currently expects that those opportunities will relate in some manner to the Company and its real estate investments rather than to unrelated businesses. The Distribution On October 16, 1998, the Operating Partnership made a distribution (the "Distribution") of one share of common stock, par value $.01 per share (the "Common Stock"), of Vornado Operating for 20 units of limited partnership interest of the Operating Partnership (including units owned by the Company) held of record as of the close of business on October 9, 1998 and Vornado Realty Trust in turn made a distribution of the Common Stock it received to the holders of its common shares of beneficial interest. While no Common Stock was distributed in respect of the Company's $3.25 Series A Convertible Preferred Shares, the Company adjusted the Conversion Price to take into account the Distribution. Vornado Operating's Common Stock is listed on the American Stock Exchange under the symbol "VOO". -9-

10 Capital Contribution and Revolving Credit Agreement. The Company initially capitalized Vornado Operating with an equity contribution of $25,000,000 of cash. As part of its formation, Vornado Operating was granted a $75,000,000 unsecured five-year revolving credit facility from Vornado (the "Revolving Credit Agreement"). Borrowings under the Revolving Credit Agreement bear interest at a floating rate per annum equal to LIBOR plus 3%. Commencing January 1, 1999, Vornado Operating pays the Company a commitment fee equal to 1% per annum on the average daily unused portion of the facility. Amounts may be borrowed under the Revolving Credit Agreement, repaid and reborrowed from time to time on a revolving basis (so long as the principal amount outstanding at any time does not exceed $75,000,000). Only interest and commitment fees are payable under the Revolving Credit Agreement until it expires. The Revolving Credit Agreement prohibits Vornado Operating from incurring indebtedness to third parties (other than certain purchase money debt and certain other exceptions) and prohibits Vornado Operating from paying dividends. Debt under the Revolving Credit Agreement is recourse to Vornado Operating. Intercompany Agreement. The Company and Vornado Operating have entered into the Intercompany Agreement pursuant to which, among other things, (a) the Company will under certain circumstances offer Vornado Operating an opportunity to become the lessee of certain real property owned now or in the future by the Company (under mutually satisfactory lease terms) and (b) Vornado Operating will not make any real estate investment or other REIT-Qualified Investment unless it first offers the Company the opportunity to make such investment and the Company has rejected that opportunity. Under the Intercompany Agreement, the Company has agreed to provide Vornado Operating with certain administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. For these services, Vornado Operating will compensate the Company in an amount determined in good faith by the Company as the amount an unaffiliated third party would charge Vornado Operating for comparable services and will reimburse the Company for certain costs incurred and paid to third parties on behalf of Vornado Operating. For the period from October 16, 1998 (commencement date) to December 31, 1998, approximately $50,000 of compensation for such services was charged pursuant to the Intercompany Agreement. Vornado Operating and the Company each have the right to terminate the Intercompany Agreement if the other party is in material default of the Intercompany Agreement or upon 90 days written notice to the other party at any time after December 31, 2003. In addition, the Company has the right to terminate the Intercompany Agreement upon a change in control of Vornado Operating. Vornado Operating's Management. Messrs. Roth, Fascitelli, West and Wight are directors of Vornado Operating. Mr. Roth is also Chairman of the Board and Chief Executive Officer of Vornado Operating, Mr. Fascitelli is also President of Vornado Operating, and certain other members of the Company's senior management hold a corresponding position with Vornado Operating. -10-

11 The Cold Storage Companies On October 31, 1997, partnerships (the "Vornado/Crescent Partnerships") in which affiliates of the Company have a 60% interest and affiliates of Crescent Real Estate Equities Company have a 40% interest acquired each of AmeriCold Corporation ("Americold") and URS Logistics, Inc. ("URS"). In June 1998, the Vornado/Crescent Partnerships acquired the assets of Freezer Services, Inc. and in July 1998 acquired the Carmar Group (Americold, URS, Freezer Services, Inc. and the Carmar Group, collectively, the "Cold Storage Companies"). On March 12, 1999, the Vornado/Crescent Partnerships sold all of the non-real estate assets of the Cold Storage Companies encompassing the operations of the cold storage business for approximately $48,000,000 to a new partnership owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc. The new partnership leases the underlying cold storage warehouses used in this business from the Vornado/Crescent Partnerships which continue to own the real estate. The leases have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on customer revenues. The new partnership is required to pay for all costs arising from the operation, maintenance and repair of the properties as well as property capital expenditures in excess of $5,000,000 annually. Fixed base rent and percentage rent for the initial lease year is projected to be approximately $151 million. The new partnership has the right to defer a portion of the rent for up to three years beginning on March 12, 1999 to the extent that available cash, as defined in the leases, is insufficient to pay such rent. Disposition and Acquisition of Interest in CESCR On December 31, 1998, the Company sold approximately 1.7% of the outstanding partnership units of CESCR, (a Delaware limited partnership that owns interests in and manages approximately 10,700,000 square feet of office properties in Crystal City, Arlington, Virginia, a suburb of Washington, D.C., and manages an additional 14,600,000 square feet of office and other commercial properties in the Washington, D.C. area) to Vornado Operating Company for an aggregate purchase price of approximately $12,900,000, or $34 per unit (which is the price at which CESCR issued partnership units in October 1998 in connection with a significant "roll-up" transaction). The purchase price was funded out of Vornado Operating's working capital. After giving effect to this purchase, the Company owned approximately 9.6% of CESCR as of December 31, 1998. In connection with this purchase, the Company granted to Vornado Operating an option to require the Company to repurchase all of the CESCR units at the price at which Vornado Operating purchased the CESCR units, plus a cumulative return on such amount at a rate of 10% per annum. The option was exercised on March 4, 1999. Accordingly, the Company reacquired the CESCR units from Vornado Operating for $13,200,000. Financing Activities Corporate: In April 1998, the Company completed the sale of 10,000,000 common shares pursuant to an effective registration statement with net proceeds to the Company of approximately $401,000,000. Also in April 1998, the Company sold 1,132,420 common shares to a unit investment trust, which were valued for the purpose of the trust at $41.06 per share, resulting in net proceeds of approximately $44,000,000. In November and December of 1998, the Company sold an aggregate of $87,500,000 of 8.5% Series D-1 Cumulative Redeemable Preferred Units in the Operating Partnership to an institutional investor in a private placement, resulting in net proceeds of approximately $85,300,000. The perpetual Preferred Units may be called without penalty at the option of the Company commencing on November 12, 2003. On March 17, 1999, the Company completed the sale of 3 million 8.5% Series B Cumulative Redeemable Preferred Shares, at a price $25.00 per share, pursuant to an effective registration statement with net proceeds to the Company of approximately $72,200,000. Further on March 22, 1999, 400,000 shares were sold when the underwriters exercised their over-allotment option resulting in additional net proceeds to the Company of $9,700,000. The perpetual preferred shares may be called without penalty at the option of the Company commencing on March 17, 2004. -11-

12 Office: In June 1998, the Company completed a $275,000,000 refinancing of its One Penn Plaza office building and borrowed $170,000,000 pursuant thereto. In the third quarter of 1998, the Company borrowed the remaining $105,000,000. The debt matures in June 2002, is prepayable at anytime, and bears interest at LIBOR + 1.25% (currently 6.35%). This debt replaced the $93,000,000 bridge-mortgage loan financing put in place when the property was acquired. In February 1999, the Company completed a $165,000,000 refinancing of its Two Penn Plaza office building and prepaid the then existing $80,000,000 debt on the property. The new 5-year debt matures in February 2004 and bears interest at 7.08%. Retail: In February 1998, the Company completed a $160,000,000 refinancing of the Green Acres Mall and prepaid the then existing $118,000,000 debt on the property. The new 10-year debt matures in March 2008 and bears interest at 6.75%. Cold Storage: In April 1998, the Cold Storage Companies completed a $550,000,000 ten-year loan secured by 58 of its warehouses. The loan bears interest at 6.89%. The net proceeds from the loan together with working capital were used to repay $607,000,000 of bridge financing, which replaced high yield debt assumed at the date of acquisition. Merchandise Mart Properties: In June 1998, the Company repaid the $26,000,000 mortgage on 350 North Orleans Street, in Chicago. In November 1998, the terms of the $24,000,000 mortgage on the Washington Design Center were modified to adjust the interest rate from LIBOR + 3.00% to LIBOR + 1.35% (currently 6.45%) and to extend the maturity date from April 2000 to November 2000. In February 1999, the Company exercised its option to extend the maturity date on the $250,000,000 loan on its Chicago Merchandise Mart building from March 31, 1999 to September 30, 1999. In connection therewith, the Company paid a fee of 1/8%. At December 31, 1998, the ratio of debt-to-enterprise value (market equity value plus debt less cash) was 45% based on debt of $2.8 billion which included the Company's proportionate share of debt of partially-owned entities. Historically, the Company has maintained a lower debt-to-enterprise value ratio. In the future, in connection with its strategy for growth, this percentage may change. The Company's policy concerning the incurrence of debt may be reviewed and modified from time to time by the Company without the vote of shareholders. The Company may seek to obtain funds through equity offerings or debt financing, although there is no express policy with respect thereto. The Company may offer its shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire its shares or any other securities in the future. -12-

13 EBITDA By Segment and Region The following table sets forth the percentage of the Company's EBITDA(1) by segment and region on a pro forma basis for the year ended December 31, 1998 and on a historical basis for the years ended December 31, 1998 and 1997. The pro forma column gives effect to the acquisitions previously described and the financings attributable thereto, as if they had occurred on January 1, 1997. Prior to April 1997, the Company operated in one segment-retail real estate, primarily in the Northeast section of the United States. Percentage of EBITDA -------------------------------------- Pro Forma Historical ---------- -------------------------- Years Ended December 31, -------------------------------------- 1998 1998 1997 --------- --------- --------- Segment Office........................................ 46% 37% 38% Retail........................................ 21% 26% 57% Cold Storage.................................. 16% 20% 8% Merchandise Mart Properties................... 10% 9% -- Other......................................... 7% 8% (3)% --- --- ----- 100% 100% 100% === === ==== Region New York City metropolitan area............... 50% 54% 72% Washington D.C./Northeast Virginia............ 18% 7% 1% Chicago....................................... 5% 6% -- New Jersey.................................... 4% 5% 14% Puerto Rico................................... 2% 2% 4% Other (2)..................................... 21% 26% 9% --- --- ---- 100% 100% 100% === === ==== (1) EBITDA represents net income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of real estate and the effect of straight-lining of property rentals for rent escalations. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other includes the Cold Storage segment which has facilities in 33 states. See page 30 for details. -13-

14 Relationship with Alexander's The Company owns 29.3% of the outstanding shares of common stock of Alexander's. See "Interstate Properties" below for a description of Interstate's ownership of the Company and Alexander's. Alexander's has eight properties (see Item 2. Properties--Alexander's). In March 1995, the Company lent Alexander's $45,000,000. The loan, which was originally scheduled to mature in March 1998, has been renewed for two additional one year periods and currently matures in March 2000. The interest rate was reset in March 1999 from 13.87% per annum to 14.18% per annum. Management believes there are no indications of impairment as discussed in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan". The Company manages, develops and leases the Alexander's properties under a management and development agreement (the "Management Agreement") and a leasing agreement (the "Leasing Agreement") pursuant to which the Company receives annual fees from Alexander's. These Agreements have a one-year term expiring in March of each year and are automatically renewable. Alexander's common stock is listed on the New York Stock Exchange under the symbol "ALX". Interstate Properties As of December 31, 1998, Interstate Properties owned approximately 18.1% of the common shares of beneficial interest of the Company, 27.1% of Alexander's common stock and beneficial ownership of 14.8% of Vornado Operating. Interstate Properties is a general partnership in which Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are partners. Mr. Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties, and the Chief Executive Officer and a director of both Alexander's and Vornado Operating. Mr. Wight is a trustee of the Company and is also a director of both Alexander's and Vornado Operating. Mr. Mandelbaum is a trustee of the Company and is also a director of Alexander's. Competition The Company's four business segments, Office, Retail, Cold Storage and Merchandise Mart Properties, operate in highly competitive environments. The Company's success depends upon, among other factors, the trends of the national and local economies, the financial condition and operating results of current and prospective tenants and customers, the availability and cost of capital, construction and renovation costs, income tax laws, governmental regulations, legislation and population trends. The Company competes with a large number of real estate property owners. Principal factors of competition are rent charged, attractiveness of property and the quality and breadth of services provided. The Company has a large concentration of properties in the New York City metropolitan area, a highly competitive market. The economic condition of this market may be significantly influenced by supply and demand for space and the financial performance and productivity of the publishing, retail, pharmaceutical, insurance and finance industries. -14-

15 Environmental Regulations Under various Federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous or toxic substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by the parties in connection with the contamination. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such substances. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Other Federal, state and local laws, ordinances and regulations require abatement or removal of certain asbestos-containing materials in the event of demolition or certain renovations or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The operation and subsequent removal of certain underground storage tanks are also regulated by Federal and state laws. In connection with the ownership, operation and management of its properties, the Company could be held liable for the costs of remedial action with respect to such regulated substances or tanks or related claims. Each of the Company's properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental condition. However, there can be no assurance that the identification of new areas of contamination, change in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to the Company. Certain Activities Acquisitions and investments are not necessarily required to be based on specific allocation by type of property. The Company has historically held its properties for long-term investment; however, it is possible that properties in the portfolio may be sold in whole or in part, as circumstances warrant, from time to time. Further, the Company has not adopted a policy that limits the amount or percentage of assets which would be invested in a specific property. While the Company may seek the vote of its shareholders in connection with any particular material transaction, generally the Company's activities are reviewed and may be modified from time to time by its Board of Trustees without the vote of shareholders. Employees The Company has approximately 600 employees consisting of 88 in the Office Properties segment, 53 in the Retail Properties segment, 384 in the Merchandise Mart Properties segment and 75 in the corporate office. This does not include employees of partially-owned entities such as the 5,500 employees of the Cold Storage Companies and the 400 employees at the Hotel Pennsylvania. Segment Data The Company operates in four business segments: Office Properties, Retail Properties, Cold Storage and Merchandise Mart Properties. The Company engages in no foreign operations. The Company's principal executive offices are located at Park 80 West, Plaza II, Saddle Brook, New Jersey 07663; telephone (201) 587-1000. Item 2. Properties The Company currently owns, directly or indirectly, Office properties Retail properties, Cold Storage warehouses and the Merchandise Mart Properties. The Company also owns or has investments in dry warehouse and industrial buildings, Alexander's, Hotel Pennsylvania and Newkirk Joint Ventures. -15-

16 Office The Company's office properties consist of (i) all or a portion of 21 office buildings in the New York City metropolitan area (primarily Manhattan) containing approximately 12.5 million square feet (including 720,000 square feet of retail space and 5 garages containing 334,000 square feet) (collectively, the "New York City Office Properties") and (ii) a 34% interest in Charles E. Smith Commercial Realty, L.P. which owns interests in and manages approximately 10.7 million square feet of office properties in Northern Virginia and Washington D.C. (the "CESCR Office Properties"). The following data on pages 16 to 20 covers the New York City Office Properties. The CESCR Office Properties are described on page 21. New York City Office Properties: The following table sets forth the percentage of the New York City Office Properties revenue by tenant's industry: Industry Percentage -------- ---------- Publishing.................. 11.8% Finance..................... 9.5% Technology.................. 8.3% Retail...................... 8.1% Insurance................... 6.9% Legal....................... 6.7% Pharmaceuticals............. 5.3% Government.................. 5.1% Media and Entertainment..... 4.1% Service Contractors......... 3.2% Apparel..................... 3.2% Engineering................. 3.1% Bank Branches............... 2.6% Other....................... 22.1% The average lease term of a tenant's lease is approximately 12 years. Leases typically provide for step-ups in rent periodically over the term of the lease and pass through to tenants the tenant's share of increases in real estate taxes and operating expenses for a building over a base year. Electricity is provided to tenants on a submetered basis or included in rent based on surveys and adjusted for subsequent utility rate increases. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant's initial construction of its premises. None of the tenants in the office segment accounted for more than 10% of the Company's total revenue. Below is a listing of the New York City Office Properties tenants which accounted for 2% or more of the New York City Office Properties revenues in 1998: Percentage of the New (in thousands, except percentages) York City Office Square Feet 1998 Properties Tenant Leased Revenues Revenues -------------------------------------------------------------------------------- Sterling Winthrop Inc............ 429 $18,268 7% Times Mirror Company............. 519 16,056 6% The McGraw Hill Companies Inc................ 447 10,168 4% Mutual Life Insurance Co......... 264 8,259 3% Information Builders, Inc........ 252 6,052 2% Kmart Corporation................ 287 5,620 2% R.H. Macy & Co. Inc.............. 154 5,488 2% -16-

17 The following table sets forth as of December 31, 1998 lease expirations for each of the next 10 years, assuming that none of the tenants exercise their renewal options. Annual Escalated Percentage of Rent of Expiring Leases Number of Square Feet of Total Leased -------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot - ---- --------------- --------------- ----------- ----- --------------- 1999...................... 187 793,000 6.4% $ 21,556,000 $ 27.18 2000...................... 106 396,000 3.2% 12,134,000 30.64 2001...................... 95 709,000 5.7% 20,456,000 28.85 2002...................... 86 768,000 6.2% 19,318,000 25.15 2003...................... 77 613,000 4.9% 18,263,000 29.79 2004...................... 60 820,000 6.6% 23,119,000 28.19 2005...................... 44 551,000 4.4% 14,788,000 26.84 2006...................... 51 765,000 6.2% 20,153,000 26.34 2007...................... 45 715,000 5.7% 21,571,000 30.17 2008...................... 58 1,109,000 8.9% 32,908,000 29.67 The following table sets forth the occupancy rate and the average annual escalated rent per square foot for the New York City Office properties at the end of each of the past two years. Average Annual As of Rentable Escalated Rent December 31, Square Feet Occupancy Rate Per Square Foot ------------ ----------- -------------- --------------- 1998.................. 12,437,000 91% $ 28.14 1997.................. 8,353,000 95% $ 27.09 As of March 1, 1999, the occupancy rate of the Company's New York City Office properties was 92%. Excluding 770 Broadway, which was acquired in July 1998, the occupancy rate was 96% at March 1, 1999 and 95% at December 31, 1998. -17-

18 In 1998, the New York City Office Properties leased 1,155,931 square feet at a weighted average initial rent per square foot of $35.03. Vornado's ownership interest is 820,975 square feet at a weighted average initial rent per square foot of $34.82. At December 31, 1997, the weighted average escalated rent per square foot for Vornado's interest in such properties was $28.69. Following is the detail by building: 1998 Leases -------------------- Average Average Annual The Company's Initial Escalated Rent Estimate at Rent Per Per Square Foot March 1, 1999 of Square Square Foot at December 31, Market Rents Per Location Feet (1) 1997 Square Foot - -------- --------- ----------- ---------------- ---------------- One Penn Plaza.......................... 176,496 $ 38.27 $ 25.33 $35.50 to $42.00 Two Penn Plaza.......................... 42,025 30.81 28.17 $35.00 to $39.00 Eleven Penn Plaza....................... 130,511 30.77 28.02 $32.00 to $35.00 Two Park Avenue......................... 137,422 33.01 23.56 $31.00 to $38.00 90 Park Avenue.......................... 99,710 39.13 36.52 $42.00 to $50.00 1740 Broadway........................... 22,865 43.35 34.90 $38.00 to $44.00 150 East 58th Street.................... 31,347 34.73 30.19 $30.00 to $40.00 866 United Nations Plaza................ 84,372 32.79 30.01 $33.00 40 Fulton Street........................ 4,993 30.00 26.35 $26.00 to $30.00 330 Madison Avenue...................... 160,412 42.56 34.41 $38.00 to $45.00 20 Broad Street......................... 19,494 30.00 27.24 $30.00 570 Lexington Avenue.................... 88,737 33.17 31.53 $38.00 to $48.00 825 Seventh Avenue...................... 157,547 29.46 12.63 $29.00 --------- Total................................. 1,155,931 35.03 28.62 ========= Vornado's ownership interest 820,975 34.82 28.69 ========= (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. -18-

19 New York City Office Properties The following table sets forth certain information for the New York City Office Properties owned by the Company as of December 31, 1998 or as of the date of acquisition for properties acquired thereafter. Annualized Year Approximate Annualized Escalated Originally Land Leasable Number Base Rent Rent Developed Area Building Square of per per Sq. Ft. Percent Location or Acquired (Sq. Ft.) Feet Tenants Sq. Ft. (1) (2) Leased (1) - --------------------------------------------------------------------------------------------------------------------------------- NEW YORK Manhattan One Penn Plaza (3) 1972 128,000 2,400,000 223 $ 26.88 $ 27.98 95% Two Penn Plaza 1968 117,000 1,508,000 68 27.23 27.80 97% 770 Broadway 1907 63,000 1,016,000 5 20.16 20.16 47% Eleven Penn Plaza 1923 56,000 956,000 72 26.13 26.75 97% Two Park Avenue 1928 44,000 946,000 48 22.97 23.54 97% 90 Park Avenue 1964 38,000 877,000 30 32.21 37.63 100% 888 Seventh Avenue 1969 32,000 848,000 61 29.98 30.08 94% 330 West 34th Street (3) 1925 46,000 628,000 12 12.56 12.65 100% Lease Principal Tenants Expiration/ (50,000 square feet or Option Encumbrances Location more) Expiration (thousands) - ---------------------------------------------------------------------------------------- NEW YORK Manhattan One Penn Plaza (3) BNY Financial Group 2004/2009 $ 275,000 Buck Consultants 2008 Cisco Systems 2005/2009 First Albany 2008/2013 Kmart Corporation 2016/2036 Metropolitan Life 2002 Miller Freeman Inc. 2011/2016 MWB Leasing 2006 Parsons Brinkerhoff 2008/2013 State of NY 2004 Stone & Webster 2008 Two Penn Plaza Compaq Computer 2003/2008 80,000(4) Forest Electric 2006/2011 Information Builders, Inc. 2013/2023 Madison Square Garden 2007/2017 McGraw Hill Co., Inc. 2020/2030 Ogden Services 2008 UHC Management 2001/2006 770 Broadway Chase Manhattan Bank 1999 -- J. Crew 2012/2017 Kmart 2016/2036 Eleven Penn Plaza Crowthers McCall 2010 53,901 Executive Office Network 2012 General Mills 2002 Times Mirror 2001 Two Park Avenue Herrick Feinstein 2010 65,000 Scheflin & Summerset 2006 Times Mirror Company 2010/2025 United Way 2013 90 Park Avenue Sterling Winthrop Inc. 2015/2035 -- 888 Seventh Avenue Golden Books 2013 55,000 The Limited 2014 330 West 34th Street (3) City of New York 2012 -- Master Garment 2002 Props for Today 2006 -19-

20 Annualized Year Approximate Annualized Escalated Originally Land Leasable Number Base Rent Rent Developed Area Building Square of per per Sq. Ft. Percent Location or Acquired (Sq. Ft.) Feet Tenants Sq. Ft. (1) (2) Leased (1) - --------------------------------------------------------------------------------------------------------------------------------- 1740 Broadway 1950 30,000 551,000 19 $ 31.06 $ 34.42 100% 150 East 58th Street 1969 21,000 548,000 125 29.90 30.99 92% 866 United Nations Plaza 1966 90,000 386,000 81 30.20 30.69 92% 640 Fifth Avenue 1950 22,000 249,000 13 25.24 29.62 81% 40 Fulton Street 1987 18,000 234,000 27 26.45 26.60 93% 689 Fifth Avenue 1925 6,000 84,000 7 55.22 55.65 68% 330 Madison Avenue 1963 33,000 771,000 47 34.47 35.42 93% (25% Ownership) 20 Broad Street (3) 1956 20,000 459,000 16 27.13 27.51 94% (60% Ownership) 570 Lexington Avenue 1930 16,000 433,000 45 31.36 31.69 82% (49.9% Ownership) 825 Seventh Avenue (50% Ownership) 1968 18,000 160,000 3 27.69 27.69 100% WESTCHESTER 550/600 Mamaroneck Avenue (3) 1971/1969 666,000 234,000 49 19.32 19.72 97% NEW JERSEY Paramus (3) 1987 148,000 118,000 27 16.89 16.95 65% CONNECTICUT Westport 1980 955,000 120,000 5 22.31 22.81 100% ----------- ------------ ------- Total Office Buildings 2,567,000 13,526,000 983 27.01 28.14 91% =========== ============ ======= Vornado's Ownership Interest 2,517,000 12,467,000 91% =========== ============ Lease Principal Tenants Expiration/ (50,000 square feet or Option Encumbrances Location more) Expiration (thousands) - ----------------------------------------------------------------------------------------- 1740 Broadway Mutual of New York 2016/2026 -- William Douglas McAdams 2007 150 East 58th Street 866 United Nations Plaza Fross & Zelnick 2009 $33,000 640 Fifth Avenue Bozell Jacobs Kenyon 2008/2013 -- 40 Fulton Street Pencom Systems 2007 -- 689 Fifth Avenue 330 Madison Avenue Bank Julius Baer 2005 60,000 (25% Ownership) BDO Seidman 2010/2015 20 Broad Street (3) N.Y. Stock Exchange 2003/2066 -- (60% Ownership) 570 Lexington Avenue 16,410 (49.9% Ownership) 825 Seventh Avenue International (50% Ownership) Merchandising Corp Young & 2013/2023 Rubicom 2008/2018 18,015 WESTCHESTER 550/600 Mamaroneck Avenue (3) 6,500 NEW JERSEY Paramus (3) 250 CONNECTICUT Westport Metropolitan Life Insurance 2001 8,000 --------- Total Office Buildings $ 671,076 ========= Vornado's Ownership Interest $ 608,847 ========= (1) Represents annualized monthly base rent excluding rent for leases which had not commenced as of December 31, 1998, which are included in percent leased. (2) Represents annualized monthly base rent for office properties including tenant pass--throughs of operating expenses (exclusive of tenant electricity costs) and real estate taxes. (3) 100% ground leased property. (4) At December 31, 1998, the property was encumbered by an $80,000,000 mortgage. In February 1999, the Company completed a $165,000,000 refinancing on the property and prepaid the then existing $80,000,000 mortgage. -20-

21 CESCR Office Properties: The following table sets forth certain information for the CESCR Office Properties (in which the Company has a 34% interest), as of December 31, 1998 or as of the date of acquisition for properties acquired thereafter. Year Originally Number Annualized Annualized Developed Number of Approximate Leasable of Base Rent per Escalated Rent Location or Acquired Buildings Building Square Feet Tenants Sq. Ft. (1) per Sq. Ft. (2) - ----------------------------------------------------------------------------------------------------------------------------------- Crystal Mall 1968 4 1,068,000 14 $ 24.17 $ 24.84 Crystal Plaza 1964-1969 6 1,223,000 127 21.42 21.54 Crystal Square 1974-1980 4 1,388,000 211 26.03 27.37 Crystal Gateway 1983-1987 4 1,081,000 107 26.85 27.53 Crystal Park 1984-1989 5 2,154,000 113 27.46 28.69 Arlington Plaza 1985 1 174,000 17 23.83 26.95 1919 S Eads Street 1990 1 93,000 7 26.69 27.38 Skyline Place 1973-1984 6 1,595,000 192 20.61 20.91 One Skyline Tower 1988 1 477,000 8 20.96 22.47 Courthouse Plaza 1988-1989 2 609,000 80 23.72 23.99 1101 17th Street 1963 1 204,000 55 27.50 28.40 1730 M Street 1963 1 190,000 49 22.77 24.34 1140 Connecticut Ave 1966 1 175,000 36 26.18 26.00 1150 17th Street 1970 1 226,000 43 26.15 26.42 ------ ----------------- --------- Total Charles E. Smith Properties 38 10,657,000 1,059 24.42 25.22 ====== ================= ========= Lease Expiration/ Percent Principal Tenants Option Encumbrances Location Leased (1) (50,000 square feet or more) Expiration (thousands) - --------------------------------------------------------------------------------------------------------------- Crystal Mall 100% General Services Administration 2001/2011 $ 64,835 General Services Administration 2001/2006 Crystal Plaza 100% General Services Administration 2004/2014 75,803 Crystal Square 97% Boeing 2002/2007 82,287 General Services Administration 2003/2008 Lockheed Martin 2003/2008 Oblon Spivak 2004/2009 Crystal Gateway 95% Analytical Services, Inc. 2001/2006 177,794 General Services Administration 1999 Lockheed Martin 2002/2005 Science Applications Int'l Corp. 2002 Crystal Park 95% CE Smith Headquarters 2004/2009 316,023 General Services Administration 2001/2011 Techmatics 2002/2007 US Airways Headquarters 2008/2018 Vitro Corp 2002/2007 Arlington Plaza 100% Georgetown University 2002/2007 18,455 Science Research Analysis Corp. 2001/2011 1919 S Eads Street 94% Vitro Corp 2001/2004 13,841 Skyline Place 99% BDM Federal, Inc. 2000/2003 126,346 Electronic Data Services 2000 Science Application Int'l Corp. 2003/2008 Science Research Analysis Corp. 2001 One Skyline Tower 100% General Services Administration 1999 & 2009 68,871 Science Research Analysis Corp. 2003/2008 Courthouse Plaza 100% Arlington County 2003/2008 83,645 KPMG-Peat Marwick 2000/2003 1101 17th Street 96% American Iron & Steel Institute 2001/2006 22,830 Cosmetic & Toiletry Assn 2000/2005 1730 M Street 98% General Services Administration 2002/2012 19,026 General Services Administration 1999/2004 League of Women Voters 2004/2009 1140 Connecticut Ave 93% Michaels & Wishner PC 2002/2007 22,876 The Investigative Group 2000/2005 1150 17th Street 97% American Enterprise Institute 2002/2012 9,804 Arthur Andersen LLP 1999/2004 ------------- Total Charles E. Smith Properties 98% $ 1,102,436 ============= (1) Represents annualized monthly base rent excluding rent for leases which had not commenced as of December 31, 1998, which are included in percent leased. (2) Represents annualized monthly base rent for office properties including tenant pass-throughs of operating expenses (exclusive of tenant electricity costs) and real estate taxes -21-

22 Retail The Company owns 59 shopping center properties of which 56 are strip shopping centers primarily located in the Northeast and Midatlantic states, two are regional centers located in San Juan, Puerto Rico and one, the Green Acres Mall, is a super-regional center located in Nassau County, Long Island, New York. The Company's shopping centers are generally located on major regional highways in mature densely populated areas. The Company believes its shopping centers attract consumers from a regional, rather than a neighborhood marketplace because of their location on regional highways. As of March 1, 1999, the occupancy rate of the retail properties was 93%. The following table sets forth the occupancy rate and the average annual base rent per square foot (excluding the Green Acres Mall) for the properties at the end of each of the past five years. Average Annual Rentable Base Rent Year End Square Feet Occupancy Rate Per Square Foot -------- ----------- -------------- --------------- 1998 10,625,000 92% $ 10.53 1997 10,550,000 91% 9.78 1996 10,019,000 90% 9.09 1995 9,913,000 91% 8.68 1994 9,501,000 94% 8.05 The average annual base rent per square foot at December 31, 1998 for the Green Acres Mall was $12.92 in total and $32.24 for mall tenants only. The Company's shopping center lease terms range from five years or less in some instances, for smaller tenant spaces to as long as thirty years for major tenants. Leases generally provide for additional rents based on a percentage of tenant's sales and pass through to tenants the tenant's share of all common area charges (including roof and structure in strip shopping centers, unless it is the tenant's direct responsibility), real estate taxes and insurance costs and certain capital expenditures. Percentage rent accounted for less than 2% of total shopping center revenues in 1998. None of the tenants in the Retail Segment accounted for more than 10% of the Company's total revenues. Below is a listing of the Retail tenants which accounted for 2% or more of the Retail property rentals in 1998: (in thousands, except percentages) Percentage of 1998 Retail Property Square Feet Property Rentals (excluding Tenant Leased Rentals reimbursements) ------ ------ ------- --------------- Bradlees, Inc. ("Bradlees") 1,300(1) $13,917(1) 11% The Home Depot, Inc. 409 4,922 4% Kmart Corporation 359 3,547 3% Staples, Inc. 214 2,868 2% The TJX Companies, Inc. 328 2,728 2% - ---------- (1) Excludes the 14th Street and Union Square Property currently leased to Bradlees- see below. In June 1995, Bradlees filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Bradlees emerged from bankruptcy in January 1999 when its plan of reorganization was confirmed. The Company withdrew its objection to Bradlees' proposed plan of reorganization after obtaining Bradlees' agreement that its lease of the Company's 14th Street and Union Square property would terminate in March 2000. The lease was scheduled to expire in October 2019, and contained an option to renew for an additional ten years. In addition, the rent under the lease was increased by $1,100,000 per annum to $3,400,000 per annum from January 1999 to the March 2000 termination date. In connection with the foregoing, the Company paid $11,000,000 to Bradlees. The Company is considering various alternatives for the redevelopment of this site. The Company currently leases 15 other locations to Bradlees. Of these locations, the leases for 14 are fully guaranteed by Stop & Shop Companies, Inc., a wholly-owned subsidiary of Royal Ahold NV, a leading international food retailer, and one is guaranteed as to 70% of the rent. -22-

23 The following table sets forth as of December 31, 1998 lease expirations for each of the next 10 years assuming that none of the tenants exercise their renewal options. Annual Base Rent of Expiring Leases Number of Square Feet of Percentage of Total --------------------------------- Year Expiring Leases Expiring Leases Leased Square Feet Total Per Square Foot - ---- --------------- --------------- ------------------ ----- --------------- 1999....................... 114 403,000 3.3% $ 5,344,000 $ 13.26 2000....................... 62 455,000 3.7% 5,352,000 11.76 2001....................... 74 471,000 3.9% 5,300,000 11.25 2002....................... 66 1,177,000 9.7% 12,870,000 10.93 2003....................... 50 503,000 4.1% 5,836,000 11.60 2004....................... 69 871,000 7.1% 8,426,000 9.67 2005....................... 80 581,000 4.8% 8,054,000 13.86 2006....................... 46 862,000 7.1% 6,089,000 7.06 2007....................... 42 587,000 4.8% 6,027,000 10.27 2008....................... 17 382,000 3.1% 2,904,000 7.60 The Company's strip shopping centers are substantially leased to large stores (over 20,000 square feet). Tenants include destination retailers such as discount department stores, supermarkets, home improvements stores, discount apparel stores, membership warehouse clubs and "category killers." Category killers are large stores which offer a complete selection of a category of items (e.g., toys, office supplies, etc.) at low prices, often in a warehouse format. Tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price. The Company's two regional shopping centers located in Montehiedra and Caguas, Puerto Rico, (both of which are in the San Juan area) contain 1,014,000 square feet of which the Company owns 727,000 square feet. The centers are anchored by four major stores: Sears, Roebuck and Co., Kmart (one in each of the centers) and a Builders Square Home Improvement store. The Green Acres Mall is a 1.6 million square foot super-regional enclosed shopping mall complex situated in Nassau County, Long Island, New York, approximately one mile east of the borough of Queens, 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 188,000 square foot strip shopping center which is anchored by Kmart and Waldbaums. -23-

24 Retail Properties The following table sets forth certain information for the Retail Properties as of December 31, 1998. Approximate Leasable Building Square Feet ------------------------------ Year Owned by Originally Land Owned/ Tenants Number Developed Area Leased by (Land Leased of Location or Acquired (Acres) Company from Company) Tenants - ---------------------------------------------------------------------------------------------------------------------------------- NEW JERSEY Bordentown 1958 31.2 179,000 -- 4 Bricktown 1968 23.9 260,000 3,000 20 Cherry Hill 1964 37.6 231,000 64,000 14 Delran 1972 17.5 168,000 4,000 6 Dover 1964 19.6 173,000 -- 14 East Brunswick 1957 19.2 216,000 10,000 6 East Hanover I 1962 24.6 271,000 -- 18 East Hanover II 1979 8.1 91,000 -- 10 Hackensack 1963 21.3 208,000 59,000 21 Jersey City 1965 16.7 223,000 3,000 13 Kearny 1959 35.3 42,000 62,000 4 Lawnside 1969 16.4 145,000 -- 3 Lease Annualized Principal Tenants Expiration/ Base Rent per Percent (30,000 square Option Encumbrances Location Sq. Ft. (1) Leased (1) feet or more) Expiration (thousands) - -------------------------------------------------------------------------------------------------------------------------------- NEW JERSEY Bordentown $ 6.63 100% Bradlees (2) 2001/2021 $ 3,276(7) Shop-Rite 2011/2016 Bricktown 10.57 100% Kohl's 2008/2028 9,919(7) Shop-Rite 2002/2017 Cherry Hill 9.25 96% Bradlees (2) 2006/2026 9,706(7) Drug Emporium 2002 Shop & Bag 2007/2017 Toys "R" Us 2012/2042 Delran 5.87 100% Sam's Wholesale 2011/2021 2,848(7) Dover 6.29 100% Ames 2017/2037 3,635(7) Shop-Rite 2012/2022 East Brunswick 13.10 100% Bradlees (2) 2003/2023 8,205(7) Shoppers World 2007/2012 T.J. Maxx 2004/2009 East Hanover I 10.85 98% Home Depot 2009/2019 11,066(7) Marshalls 2004/2009 Pathmark 2001/2024 Today's Man 2009/2014 East Hanover II 10.36 82% --- Hackensack 15.53 98% Bradlees (2) 2012/2017 -- Pathmark 2014/2034 Staples 2003/2013 Jersey City 12.35 100% Bradlees (2) 2002/2022 10,381(7) Shop-Rite 2008/2028 Kearny 13.49 68% Pathmark 2013/2033 -- Lawnside 10.50 100% Home Depot 2012/2027 5,708(7) Drug Emporium 2007 -24-

25 Approximate Leasable Building Square Feet ------------------------------ Year Owned by Originally Land Owned/ Tenants Number Developed Area Leased by (Land Leased of Location or Acquired (Acres) Company from Company) Tenants - ----------------------------------------------------------------------------------------------------------------------------------- Lodi 1975 8.7 130,000 -- 1 Manalapan 1971 26.3 194,000 2,000 7 Marlton 1973 27.8 173,000 7,000 10 Middletown 1963 22.7 180,000 52,000 22 Morris Plains 1985 27.0 172,000 1,000 19 North Bergen 1959 4.6 7,000 55,000 3 North Plainfield (3) 1989 28.7 217,000 -- 13 Totowa 1957 40.5 178,000 139,000 7 Turnersville 1974 23.3 89,000 7,000 3 Union 1962 24.1 257,000 -- 11 Vineland 1966 28.0 143,000 -- 3 Watchung 1959 53.8 50,000 116,000 6 Woodbridge 1959 19.7 233,000 3,000 10 NEW YORK 14th Street and Union Square, Manhattan 1993 0.8 232,000 -- 1 Albany (Menands) 1965 18.6 141,000 -- 2 Lease Annualized Principal Tenants Expiration/ Base Rent per Percent (30,000 square Option Encumbrances Location Sq. Ft. (1) Leased (1) feet or more) Expiration (thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Lodi $ 9.03 100% National Wholesale 2013/2023 $ 2,420(7) Liquidators Manalapan 9.13 100% Bradlees (2) 2002/2022 6,397(7) Grand Union 2012/2022 Marlton 8.54 100% Kohl's (2) 2011/2031 5,398(7) Shop-Rite 2004/2009 Middletown 12.51 98% Bradlees (2) 2002/2022 7,761(7) Grand Union 2009/2029 Morris Plains 11.61 100% Kohl's 2002/2023 6,600(7) Shop-Rite 2002 North Bergen 26.22 100% A & P 2012/2032 -- North Plainfield (3) 8.57 91% Kmart 2006/2016 3,109 Pathmark 2001/2011 Totowa 16.73 100% Bradlees (2) 2013/2028 15,646(7) Home Depot 2015/2025 Marshalls 2007/2012 Circuit City 2018/2038 Turnersville 5.98 100% Bradlees (2) 2011/2031 2,116(7) Union 17.77 99% Bradlees (2) 2002/2022 15,975(7) Toys "R" Us 2015 Cost Cutter Drug 2000 Vineland 4.16 17% 2,358(7) Watchung 17.50 97% B.J.'s Wholesale 2024 -- Woodbridge 13.69 91% Bradlees (2) 2002/2022 8,792(7) Foodtown 2007/2014 Syms 2000/2005 NEW YORK 14th Street and Union Square, Manhattan 9.92 100% Bradlees 2000 -- Albany (Menands) 6.35 100% Fleet Bank 2004/2014 -- Albany Public Mkts. (4) 2000 -25-

26 Approximate Leasable Building Square Feet ------------------------------ Year Owned by Originally Land Owned/ Tenants Number Developed Area Leased by (Land Leased of Location or Acquired (Acres) Company from Company) Tenants - ---------------------------------------------------------------------------------------------------------------------------------- Buffalo (Amherst) (3) 1968 22.7 185,000 112,000 10 Freeport 1981 12.5 167,000 -- 3 New Hyde Park (3) 1976 12.5 101,000 -- 1 North Syracuse (3) 1976 29.4 98,000 -- 1 Rochester (Henrietta ) (3) 1971 15.0 148,000 -- 1 Rochester 1966 18.4 176,000 -- 1 Valley Stream (Green Acres) (3) 1958 100.0 1,525,000 71,000 156 PENNSYLVANIA Allentown 1957 86.8 263,000 354,000 20 Bensalem 1972 23.2 119,000 7,000 10 Bethlehem 1966 23.0 157,000 3,000 13 Broomall 1966 21.0 146,000 22,000 5 Glenolden 1975 10.0 101,000 -- 3 Lancaster 1966 28.0 180,000 -- 7 Lease Annualized Principal Tenants Expiration/ Base Rent per Percent (30,000 square Option Encumbrances Location Sq. Ft. (1) Leased (1) feet or more) Expiration (thousands) - -------------------------------------------------------------------------------------------------------------------------------- Buffalo (Amherst) (3) $ 6.99 96% Circuit City 2017 $ 4,863(7) Media Play 2002/2017 MJ Design 2006/2017 Toys "R" Us 2013 T.J. Maxx 2004 Freeport 11.53 100% Home Depot 2011/2021 8,021(7) Cablevision 2004 New Hyde Park (3) 13.55 100% Mayfair Supermarkets 2019/2029 2,043(7) North Syracuse (3) 2.74 100% Reisman Properties 2014 -- Rochester (Henrietta ) (3) 5.86 47% Hechinger (4) 2005/2025 2,203 (7) Rochester 6.05 41% Hechinger (4) 2005/2025 2,832(7) Valley Stream (Green Acres) (3) (5) 94% Macy 2006/2036 165,574 Sterns 2007/2017 JC Penney 2012/2017 Sears 2023/2073 Home Depot (6) Kmart 2010/2038 Dime Savings Bank 2020 Greenpoint Bank 2009 PENNSYLVANIA Allentown 10.13 100% Hechinger 2011/2031 7,696(7) Shop-Rite 2011/2019 Burlington Coat 2017 Factory Wal*Mart 2024/2094 Sam's Wholesale 2024/2094 T.J. Maxx 2003/2008 Bensalem 5.84 95% Kohl's (2) 2011/2031 3,967(7) Bethlehem 5.41 81% Pathmark 2008/2033 -- Super Petz 2005/2015 Broomall 9.41 100% Bradlees (2) 2006/2026 3,260(7) Glenolden 10.73 100% Bradlees (2) 2012/2022 4,245(7) Lancaster 4.42 51% Weis Markets 2008/2018 2,312(7) -26-

27 Approximate Leasable Building Square Feet ------------------------------ Year Owned by Originally Land Owned/ Tenants Number Developed Area Leased by (Land Leased of Location or Acquired (Acres) Company from Company) Tenants - ---------------------------------------------------------------------------------------------------------------------------------- Levittown 1964 12.8 104,000 -- 1 10th and Market Streets, Philadelphia 1994 1.8 271,000 -- 5 Upper Moreland 1974 18.6 122,000 -- 1 York 1970 12.0 113,000 -- 3 MARYLAND Baltimore (Belair Rd.) 1962 16.0 206,000 -- 2 Baltimore (Towson) 1968 14.6 146,000 7,000 7 Baltimore (Dundalk) 1966 16.1 183,000 -- 17 Glen Burnie 1958 21.2 117,000 3,000 5 Hagerstown 1966 13.9 133,000 15,000 6 CONNECTICUT Newington 1965 19.2 134,000 45,000 4 Waterbury 1969 19.2 140,000 3,000 10 MASSACHUSETTS Chicopee 1969 15.4 112,000 3,000 2 Milford (3) 1976 14.7 83,000 -- 1 Springfield 1966 17.4 8,000 117,000 2 TEXAS Lewisville 1990 13.3 35,000 7,000 14 Mesquite 1990 5.5 71,000 -- 13 Dallas 1990 9.9 100,000 -- 9 Lease Annualized Principal Tenants Expiration/ Base Rent per Percent (30,000 square Option Encumbrances Location Sq. Ft. (1) Leased (1) feet or more) Expiration (thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Levittown 5.98 100% (2) 2006/2026 2,283(7) 10th and Market Streets, Philadelphia $ 9.36 77% Kmart 2010/2035 $ -- Upper Moreland 7.50 100% Sam's Wholesale 2010/2015 3,517(7) York 4.64 100% Builders Square 2009/2018 1,463(7) MARYLAND Baltimore (Belair Rd.) 5.95 65% Food Depot 2003 -- Baltimore (Towson) 9.64 100% Staples 2004 5,779(7) Cost Saver Supermarket 2000/2020 Drug Emporium 2004 Baltimore (Dundalk) 6.78 82% A & P 2002/2017 4,084(7) Ollie's 2003/2008 Glen Burnie 5.99 100% Weis Markets 2018/2053 2,299(7) Hagerstown 3.29 100% Big Lots 2002/2012 -- Pharmhouse 2008/2012 Weis Markets 2004/2009 CONNECTICUT Newington 6.86 100% (2) 2002/2022 3,042(7) The Wiz 2007/2027 Waterbury 6.33 100% Toys "R" Us 2010 3,889(7) Shaws Supermarkets 2003/2018 MASSACHUSETTS Chicopee 4.71 84% Bradlees (2) 2002/2022 1,999(7) Milford (3) 5.26 100% Bradlees (2) 2004/2009 -- Springfield 12.25 100% Wal*Mart 2018/2092 -- TEXAS Lewisville 14.52 84% Albertson's (6) 2055 764(7) Mesquite 15.25 98% 3,445(7) Dallas 10.13 83% Albertson's (6) 2055 1,987(7) -27-

28 Approximate Leasable Building Square Feet ------------------------------ Year Owned by Originally Land Owned/ Tenants Number Developed Area Leased by (Land Leased of Location or Acquired (Acres) Company from Company) Tenants - ----------------------------------------------------------------------------------------------------------------------------------- PUERTO RICO (SAN JUAN AREA) Montehiedra 1997 57.1 525,000 -- 96 Caguas (50% ownership of mall 1998 35.0 343,000 -- 105 stores and 75% ownership of Kmart store) ----------- ----------------- ---------------- -------- Total Shopping Centers 1,362.2 10,915,000 1,356,000 785 =========== ================= ================ ======== Vornado's Ownership Interest 1,346.6 10,774,000 1,356,000 =========== ================= ================ Lease Annualized Principal Tenants Expiration/ Base Rent per Percent (30,000 square Option Encumbrances Location Sq. Ft. (1) Leased (1) feet or more) Expiration (thousands) - --------------------------------------------------------------------------------------------------------------------------------- PUERTO RICO (SAN JUAN AREA) Montehiedra $ 16.02 100% Kmart 2022/2072 $ 62,180 Builders Square 2022/2072 Marshalls 2010/2025 Caribbean Theatres 2021/2026 Caguas (50% ownership of mall 25.86 92% Kmart stores and 75% ownership of Kmart Sears (6) 2064 70,941 store) ---------- Total Shopping Centers 10.53 93% $516,004 ========== Vornado's Ownership Interest 93% $480,534 ========== (1) Represents annualized monthly base rent excluding ground leases, storage rent and rent for leases which had not commenced as of December 31, 1998, which are included in percent leased. (2) These leases are either fully guaranteed by Stop & Shop, a wholly-owned subsidiary of Royal Ahold NV, or in the case of Totowa, guaranteed as to 70% of rent. (3) 100% ground and/or building leasehold interest; other than Green Acres, where approximately 10% of the ground is leased. (4) The tenant has ceased operations at these locations but continues to pay rent. (5) Annualized rent per square foot is $12.92 in total and $32.24 for the mall tenants only. (6) Square footage excludes anchor store which owns its land and building. (7) These encumbrances are cross collateralized under a mortgage in the amount of $227,000,000 at December 31, 1998. -28-

29 Cold Storage The Company has a 60% interest in the Vornado/Crescent Partnerships that currently own 88 refrigerated warehouses with an aggregate of approximately 450 million cubic feet (excludes 13 additional warehouses containing approximately 80 million cubic feet managed by the Cold Storage Companies doing business as AmeriCold Logistics). The Cold Storage segment is headquartered in Atlanta, Georgia. On March 12, 1999, the Vornado/Crescent Partnerships sold all of the non-real estate assets of AmeriCold Logistics encompassing the operations of the cold storage business for approximately $48,000,000 to a new partnership owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc. The new partnership leases the underlying cold storage warehouses used in this business from the Vornado/Crescent Partnerships which continue to own the real estate. The leases have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on customer revenues. The new partnership is required to pay for all costs arising from the operation, maintenance and repair of the properties as well as property capital expenditures in excess of $5,000,000 annually. Fixed base rent and percentage rent for the initial lease year is projected to be approximately $151 million. The new partnership has the right to defer a portion of the rent for up to three years beginning on March 12, 1999 to the extent that available cash, as defined in the lease, is insufficient to pay such rent. AmeriCold Logistics provides the frozen food industry with refrigerated warehousing and transportation management services. Refrigerated warehouses are comprised of production and distribution facilities. Production facilities typically serve one or a small number of customers, generally food processors, located nearby. These customers store large quantities of processed or partially processed products in the facility until they are shipped to the next stage of production or distribution. Distribution facilities primarily warehouse a wide variety of customers' finished products until future shipment to end-users. Each distribution facility primarily services the surrounding regional market. AmeriCold Logistics' transportation management services include freight routing, dispatching, freight rate negotiation, backhaul coordination, freight bill auditing, network flow management, order consolidation and distribution channel assessment. AmeriCold Logistics' temperature-controlled logistics expertise and access to both frozen food warehouses and distribution channels enable its customers to respond quickly and efficiently to time-sensitive orders from distributors and retailers. AmeriCold Logistics' customers consist primarily of national, regional and local frozen food manufacturers, distributors, retailers and food service organizations which include Con-Agra, Inc., Tyson Foods, H.J. Heinz & Co., McCain Foods, Pillsbury, Sara Lee, Phillip Morris, J.R. Simplot, Farmland Industries and Unilever. -29-

30 Facilities The following table shows the location, size and type of facility for each of the Cold Storage properties as of December 31, 1998: Type Total Type Total Production(P)/ Cubic Production(P)/ Cubic Distribution(D)/ Owned/ Footage Distribution(D)/ Owned/ Footage Property Managed(M) Leased (in millions) Property Managed(M) Leased (in millions) -------- ---------- ------ ------------- -------- ---------- ------ ------------- GEORGIA PENNSYLVANIA Xavier Drive, SW D Owned 11.1 RD2, Orchard Lane D Owned 5.8 Atlanta, GA Leesport, PA Lakewood Avenue, SW D Owned 2.9 Mill Road D Owned 85% 21.6 Atlanta, GA Fogelsville, PA Leased 15% Laney-Walker Road P Owned 1.1 Dry M Managed 16.1 Augusta, GA 2600 Brodhead Road Bethlehem, PA Westgate Parkway D Owned 11.4 Refrigerated M Managed 7.3 Atlanta, GA 4000 Miller Circle North --- Bethlehem, PA Westgate Parkway D Owned 3.5 Atlanta, GA TOTAL PENNSYLVANIA 50.8 South Airport Drive P Owned 4.2 ---- Montezuma, GA TEXAS 10300 South East Third Street Owned 3.2 121 Roseway Drive P Owned 6.9 Amarillo, TX Thomasville, GA ---- TOTAL GEORGIA 41.1 200 Railhead Drive D Owned 3.4 ---- Ft. Worth, TX NORTH CAROLINA Dry M Managed 13.0 West 9th Street P Owned 1.0 1006 Railhead Drive Charlotte, NC Ft. Worth, TX Exchange Street P Owned 4.1 Charlotte, NC Refrigerated M Managed 7.6 1005 Railhead Drive --- Ft. Worth, TX Sara Lee Road P Leased 3.4 Tarboro, NC --- TOTAL TEXAS 27.2 TOTAL NORTH CAROLINA 8.5 ---- --- WASHINGTON South Walnut Burlington, WA P/D Owned 4.7 Wheeler Road P/D Owned 7.3 Moses Lake, WA 14th Avenue South P Owned 3.1 Walla Walla, WA -30-

31 Type Total Type Total Production(P)/ Cubic Production(P)/ Cubic Distribution(D)/ Owned/ Footage Distribution(D)/ Owned/ Footage Property Managed(M) Leased (in millions) Property Managed(M) Leased (in millions) -------- ---------- ------ ------------- -------- ---------- ------ ------------- SOUTH CAROLINA Industrial Way P Leased 6.7 Pasco, WA Shop Road P Owned 1.6 Columbia, SC West Juniper Street P Owned 5.7 ALABAMA Connell, WA West 25th Avenue P Owned 2.0 Dodd Road P/D Owned 1.2 Birmingham, AL Wallula, WA --- Newcomb Avenue P Leased 1.2 Montgomery, AL TOTAL WASHINGTON 28.7 ---- East Air Depot Road P Leased 4.0 VIRGINIA Gadsden, AL East Princess Anne Road P Owned 1.9 Railroad Avenue P Owned 2.2 Norfolk, VA Albertville, AL MASSACHUSETTS 4th Street, West M Managed 0.1 Birmingham, AL --- East Main Street P/D Owned 1.9 Gloucester, MA TOTAL ALABAMA 9.5 --- Railroad Avenue P/D Owned 0.3 KANSAS Gloucester, MA North Mead P Owned 2.8 Rogers Street P/D Owned 2.8 Wichita, KS Gloucester, MA 2007 West Mary Street P Owned 2.2 Rowe Square P/D Owned 2.4 Garden City, KS Gloucester, MA Inland Drive P/D Owned 35.2(1) Wildett Circle P/D Owned 3.1 Kansas City, KS ---- Boston, MA TOTAL KANSAS 40.2 Pleasant Street P/D Owned 4.7 ---- Watertown, MA --- MISSOURI TOTAL MASSACHUSETTS 15.2 ---- West Highway 20 P Owned 4.8 Marshall, MO UTAH No. 1 Civil War Road D Owned 33.1 South Street P/D Owned 8.6 Carthage, MO ---- Clearfield, UT TOTAL MISSOURI 37.9 ---- - ---------- (1) AmeriCold Logistics plans to cease warehousing operations at this facility in October 1999 which will have no effect on the rent being paid to the Vornado/Crescent Partnership because the cecessation of operations was contemplated at the time of the March 12, 1999 sale. -31-

32 Type Total Type Total Production(P)/ Cubic Production(P)/ Cubic Distribution(D)/ Owned/ Footage Distribution(D)/ Owned/ Footage Property Managed(M) Leased (in millions) Property Managed(M) Leased (in millions) -------- ---------- ------ ------------- -------- ---------- ------ ------------- IOWA ARKANSAS Maple Drive D Owned 3.7 Midland Boulevard P Owned 1.4 Fort Dodge, IA Fort Smith, AR State Street P/D Owned 8.8 Genoa Road P Owned 4.7 Bettendorf, IA --- Texarkana, AR TOTAL IOWA 12.5 South Airport Road D Owned 5.3 ---- West Memphis, AR TENNESSEE 300 El Mira P Owned 5.6 East Parkway South P Owned 5.6 Russellville, AR Memphis, TN Spottswood Avenue P Owned 0.5 203 Industrial Boulevard P Owned 9.5 Memphis, TN Russellville, AR Stephenson Drive P/D Owned 4.5 1200 N. Old Missouri Road P Owned 6.6 Murfreesboro, TN Springdale, AR --- Biffle Road P Managed 2.4 TOTAL ARKANAS 33.1 Newbern, TN --- ---- FLORIDA TOTAL TENNESSEE 13.0 ---- South Lois Avenue D Owned 0.4 Tampa, FL OREGON U.S. Highway 17 Bartow, FL P/D Owned 1.4 Westland Avenue P Owned 4.0 Hermiston, OR South Alexander Street P/D Owned 0.8 Plant City, FL S.E. McLoughlin Blvd. D Owned 4.7 50th Street P/D Owned 80% 3.9 Milwaukie, OR Tampa, FL Leased 20% Brooklake Road P Owned 4.8 Brooks, OR Port of Tampa D Owned 1.0 Tampa, FL --- Portland Road N.E. P/D Owned 12.5 TOTAL FLORIDA 7.5 Salem, OR --- Silverton Road P/D Owned 6.3 Woodburn, OR N.E. First Street P Leased 8.1 Ontario, OR --- TOTAL OREGON 40.4 ---- -32-

33 Type Total Type Total Production(P)/ Cubic Production(P)/ Cubic Distribution(D)/ Owned/ Footage Distribution(D)/ Owned/ Footage Property Managed(M) Leased (in millions) Property Managed(M) Leased (in millions) -------- ---------- ------ ------------- -------- ---------- ------ ------------- OKLAHOMA CALIFORNIA South Hudson P Owned 0.7 Malaga Place D Owned 24% 8.1 Oklahoma City, OK Ontario, CA Leased 76% Exchange Street P Owned 1.4 Santa Ana D Leased 1.9 Oklahoma City, OK --- Ontario, CA TOTAL OKLAHOMA 2.1 West Magnolia Boulevard P/D Owned 0.8 --- Burbank, CA MISSISSIPPI Jesse Street P/D Owned 2.7 751 West Churchill Road P Owned 4.7 Los Angeles, CA West Point, MS 5th Street P/D Owned 2.5 MAINE Turlock, CA Read Street P/D Owned 1.8 South Kilroy Road P/D Owned 3.0 Portland, ME Turlock, CA IDAHO Coil Avenue D Managed 4.5 U.S. Highway 30 P/D Owned 10.7 Wilmington, CA Burley, ID 751 North Vintage Street M Managed 0.5 Ontario, CA 4th Street North P Owned 8.0 Nampa, ID --- South Raymond Avenue P/D Leased 2.8 Fullerton, CA TOTAL IDAHO 18.7 ---- Salinas Road P/D Leased 1.4 ILLINOIS Pajaro, CA Americold Drive D Owned 6.0 West Riverside Drive P/D Owned 5.4 Rochelle, IL Watsonville, CA 18531 U.S. Route 20 West P Owned 5.6 Wanamaker Avenue M Managed 3.2 East Dubuque, IL --- Ontario, CA TOTAL ILLINOIS 11.6 Airport Drive M Managed 13.5 ---- Ontario, CA ---- NEW YORK TOTAL CALIFORNIA 50.3 ---- Farrell Road D Owned 11.8 WISCONSIN Syracuse, NY Route 2 P Owned 4.6 Tomah, WI INDIANA Arlington Avenue D Owned 9.1 110th Street P/D Owned 9.4 Indianapolis, IN Plover, WI --- TOTAL WISCONSIN 14.0 ---- -33-

34 Type Total Type Total Production(P)/ Cubic Production(P)/ Cubic Distribution(D)/ Owned/ Footage Distribution(D)/ Owned/ Footage Property Managed(M) Leased (in millions) Property Managed(M) Leased (in millions) -------- ---------- ------ ------------- -------- ---------- ------ ------------- NEBRASKA COLORADO 950 South Schneider P Owned 2.2 East 50th Street P/D Owned 52% 2.8 Street Denver, CO Fremont, NE Leased 48% East Roberts Street P/D Leased 2.2 North Washington Street P/D Leased 0.6 Grand Island, NE --- Denver, CO --- TOTAL COLORADO 3.4 TOTAL NEBRASKA 4.4 --- --- KENTUCKY SOUTH DAKOTA 1541 U.S. Highway 41 North P Owned 2.7 Sebree, KY 2300 East Rice Street P Owned 2.9 Sioux Falls, SD MINNESOTA Distribution Development M Managed 3.4 802 East Rice Street --- U.S. Highway 71 South M Managed 5.9 Sioux Falls, SD Park Rapids, MN TOTAL SOUTH DAKOTA 6.3 NEW JERSEY --- N. Mill road P Managed 2.7 ARIZONA Vineland, NJ 455 South 75th Avenue D Owned 2.9 Phoenix, AZ The above table is summarized as follows: Total Cubic Percent Number Feet of of Type of Property (in millions) Total Facilities ---------------- ------------- ----- ---------- Owned facilities.............. 406.7 90% 78 Leased facilities............. 43.2 10% 10 ----- --- --- 449.9 100% 88 === Managed facilities............ 80.2 13 ----- --- 530.1 101 ===== === -34-

35 Merchandise Mart Properties The Merchandise Mart Properties are a portfolio of seven properties containing an aggregate of approximately 6.7 million square feet. The properties are used for offices (34%), showrooms (63%) and retail stores (3%). The Company acquired these assets in separate transactions in 1998. In April 1998, the Company purchased four buildings containing approximately 5.4 million square feet from the Kennedy Family, including the 3.4 million square foot Merchandise Mart building in Chicago, the adjacent 350 North Orleans Street building, the Washington Office Center and the adjacent Washington Design Center. In December 1998, the Company purchased the 1.3 million square foot Market Square Complex and in a separate transaction purchased the National Furniture Mart in High Point, North Carolina. Office Space The following table sets forth the percentage of the Merchandise Mart Properties office revenues by tenant's industry: Industry Percentage -------- ---------- Government 40.4% Service 20.3% Telecommunications 16.2% Insurance 12.9% Pharmaceutical 4.9% Other 5.3% The average lease term of a tenant's lease is 10 years. Leases typically provide for step-ups in rent periodically over the term of the lease and pass through to tenants the tenant's share of increases in real estate taxes and operating expenses for a building over a base year. Electricity is provided to tenants on a submetered basis or included in rent based on surveys and adjusted for subsequent utility rate increases. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant's initial construction of its premises. None of the tenants in the Merchandise Mart Properties segment accounted for more than 10% of the Company's total revenue. Below is a listing of the Merchandise Mart Properties office tenants which accounted for 2% or more of the Merchandise Mart Properties' revenues in 1998: Percentage of Merchandise (in thousands, except percentages) Mart Square Feet 1998 Properties Tenant Leased Revenues Revenues ------ ------ -------- -------- General Services Administration 303 5,725 7% Bankers Life and Casualty 303 3,695 4% Ameritech 234 3,527 4% Chicago Transit Authority 244 3,179 4% CCC Information Services 144 2,541 3% -35-

36 As of March 1, 1999, the occupancy rate of the Merchandise Mart Properties' office space was 95%. The following table sets forth the occupancy rate and the average escalated rent per square foot for the Merchandise Mart Properties' office space at the end of each of the past five years. Average Escalated Rentable Rent Year End Square Feet Occupancy Rate Per Square Foot -------- ----------- -------------- --------------- 1998 2,274,000 95% $ 19.68 1997 2,160,000 91% 19.50 1996 2,026,000 88% 19.42 1995 2,028,000 85% 19.34 1994 2,043,000 83% 18.21 The following table sets forth as of December 31, 1998 office lease expirations for each of the next 10 years assuming that none of the tenants exercise their renewal options. Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased ----------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot - ---- --------------- --------------- ----------- ----- --------------- 1999.............. 18 52,000 2.4% $ 1,034,000 $ 19.88 2000.............. 14 335,000 15.2% 8,884,000 26.52 2001.............. 9 41,000 1.9% 937,000 22.85 2002.............. 9 37,000 1.7% 1,118,000 30.22 2003.............. 5 70,000 3.2% 1,594,000 22.77 2004.............. 1 29,000 1.3% 693,000 23.89 2005.............. 1 42,000 1.9% 1,060,000 25.23 2006.............. 4 32,000 1.5% 1,202,000 37.56 2007.............. 9 439,000 19.9% 7,802,000 17.77 2008.............. 10 441,000 20.0% 7,898,000 17.91 Showroom Space The Merchandise Mart Properties' showroom space aggregates 4,177,000 square feet of which 2,611,000 square feet is located in the Merchandise Mart building and 350 North Orleans in Chicago, 1,223,000 square feet is located in the Market Square Complex (including the National Furniture Mart) in High Point, North Carolina and 343,000 square feet is located in the Design Center in Washington, D.C. The showroom space consists of 2,850,000 square feet of permanent mart space (leased to manufacturers and distributors whose clients are retailers, specifiers and end users), 966,000 square feet of permanent design center space (leased to wholesalers whose principal clientele is interior designers), and 361,000 square feet of temporary market suite space (used for trade shows). The showrooms provide manufacturers and wholesalers with permanent and temporary space in which to display products for buyers, specifiers and end users. The showrooms are also used for hosting trade shows for the contract furniture, casual furniture, gift-ware, carpet, residential furnishings, crafts, and design industries. The Merchandise Mart Properties own and operate five of the leading furniture/gift-ware trade shows including the contract furniture industry's largest trade show, the NeoCon Show, which attracts over 50,000 attendees annually and is hosted at the Merchandise Mart building in Chicago. The Market Square Complex co-hosts the home furniture industry's semi-annual market weeks which occupy over 8,800,000 square feet in the High Point, North Carolina region. -36-

37 As of March 1, 1999 the occupancy rate of the Merchandise Mart Properties' showroom space was 95%. The following table sets forth the occupancy rate and the average escalated rent per square foot for this space at the end of each of the past five years. Average Annual Rentable Occupancy Escalated Rent Year End Square Feet Rate Per Square Foot -------- ----------- ---- --------------- 1998 4,177,000 95% $ 21.50 1997 2,817,000 93% 20.94 1996 2,825,000 88% 20.65 1995 2,953,000 75% 22.07 1994 2,906,000 73% 22.35 The following table sets forth as of December 31, 1998 showroom lease expirations for each of the next 10 years assuming that none of the tenants exercise their renewal options. Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased -------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot ---- --------------- --------------- ----------- ----- --------------- 1999................ 260 526,000 12.9% $ 8,200,000 $ 15.59 2000................ 277 651,000 16.0% 12,533,000 19.25 2001................ 230 620,000 15.3% 9,371,000 15.11 2002................ 129 377,000 9.3% 7,028,000 18.64 2003................ 128 473,000 11.6% 9,814,000 20.75 2004................ 35 244,000 6.0% 4,104,000 16.82 2005................ 21 146,000 3.6% 3,348,000 22.93 2006................ 27 134,000 3.3% 3,458,000 25.81 2007................ 25 163,000 4.0% 3,433,000 21.12 2008................ 29 157,000 3.9% 3,184,000 20.28 Retail Stores The Merchandise Mart Properties' portfolio also contains approximately 200,000 square feet of retail stores which were 66% occupied at March 1, 1999. Merchandise Mart in Chicago The Merchandise Mart in Chicago is a 25-story industry building. Built in 1930, the Merchandise Mart is one of the largest buildings in the nation, containing over 4,000,000 gross square feet of which approximately 3,440,000 square feet is rentable. -37-

38 As of March 1, 1999, the occupancy rate of the Merchandise Mart in Chicago was 96%. The following table sets forth the occupancy rate and the average escalated rent per square foot at the end of each of the past five years. Average Annual Escalated Rentable Rent Per Year Ended Square Feet Occupancy Rate Square Foot ---------- ----------- -------------- ----------- 1998 3,440,000 96% $ 21.50 1997 3,411,000 96% 20.94 1996 3,404,000 94% 20.65 1995 3,404,000 82% 22.07 1994 3,401,000 78% 22.35 The following table sets forth as of December 31, 1998 lease expirations at the Merchandise Mart in Chicago for each of the next 10 years assuming that none of the tenants exercise renewal options. Annual Escalated Rent of Expiring Leases Number of Square Feet of Percentage of Total --------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot - ---- --------------- --------------- ----------- ----- --------------- 1999........... 136 242,000 7.3% $ 4,997,000 $ 20.65 2000........... 136 385,000 11.6% 9,591,000 24.91 2001........... 100 196,000 5.9% 4,928,000 25.14 2002........... 70 197,000 6.0% 4,780,000 24.26 2003........... 84 311,000 9.4% 6,885,000 22.14 2004........... 33 173,000 5.2% 4,134,000 23.90 2005........... 20 182,000 5.5% 4,249,000 23.35 2006........... 29 139,000 4.2% 3,527,000 25.37 2007........... 29 459,000 13.9% 8,693,000 18.94 2008........... 19 503,000 15.2% 9,545,000 18.98 The aggregate undepreciated tax basis of depreciable real property at the Merchandise Mart in Chicago for Federal income tax purposes was approximately $165,000,000 as of December 31, 1998, and depreciation for such property is computed for Federal income tax purposes on the straight-line method over thirty-nine years. For the 1997 tax year, the tax rate in Chicago for commercial real estate is $8.84 for $100 assessed value which results in real estate taxes of $9,156,000 for the Merchandise Mart. -38-

39 Merchandise Mart Properties: The following table sets forth certain information for the Merchandise Mart Properties owned by the Company as of December 31, 1998. Year Approximate Originally Land Leaseable Number Annualized Annualized Developed Area Building Square of Base Rent per Escalated Rent Location or Acquired (Acres) Feet Tenants Sq. Ft.(1) per Sq. Ft. (2) - -------------------------------------------------------------------------------------------------------------------------------- ILLINOIS Merchandise Mart, Chicago 1930 6.7 3,440,000 743 $ 20.70 $ 21.59 350 North Orleans, Chicago 1977 4.3 1,117,000 328 17.83 18.04 WASHINGTON, D.C. Washington Office Center 1990 1.2 388,000 25 27.30 28.64 Washington Design Center 1919 1.2 387,000 76 23.05 23.31 Other 1.3 93,000 8 8.38 10.43 HIGH POINT, NORTH CAROLINA Market Square Complex 1902 - 1989 13.1 1,069,000 164 8.66 10.34 National Furniture Mart 1964 0.7 243,000 31 11.99 11.99 ------- ------------- -------- Total Merchandise Mart Properties 28.5 6,737,000 1,375 18.58 19.45 ======= ============= ======== Lease Expiration/ Percent Principal Tenants Option Encumbrances Location Leased(1) (50,000 square feet or more) Expiration/ (thousands) - ---------------------------------------------------------------------------------------------------------------- ILLINOIS Merchandise Mart, Chicago 97% Baker, Knapp & Tubbs 2007/2013 $ 250,000 Bankers Life & Casualty 2008/2018 CCC Information Services 2008/2018 Chicago Teachers Union 2005 Chicago Transit Authority 2007/2027 Holly Hunt 2003 Monsanto 2007 Office of the Special Deputy 2005 Steelcase 2007 350 North Orleans, Chicago 87% 21st Century Cable 2012/2022 -- Ameritech 2011/2021 Art Institute of Illinois 2009/2019 Bank of America 2008/2018 Chicago Transit Authority 2007/2017 Sports Channel 2007/2017 WASHINGTON, D.C. Washington Office Center 97% General Services Administration 2000/2010 50,878 Washington Design Center 96% 24,225 Other 87% -- HIGH POINT, NORTH CAROLINA Market Square Complex 99% Century Furniture Company 2004 45,302 La-Z-Boy 2004 National Furniture Mart 100% 13,831 ------------ Total Merchandise Mart Properties 95% $ 384,236 ============ (1) Represents annualized monthly base rent excluding rent for leases which had not commenced as of December 31, 1998, which are included in percent leased. (2) Represents annualized monthly base rent including tenant pass-throughs of operating expenses (exclusive of tenant electricity costs) and real estate taxes. -39-

40 Alexander's Properties The following table shows as of December 31, 1998 the location, approximate size and leasing status of each of the properties owned by Alexander's in which the Company has a 29.3% interest. Approximate Approximate Area in Leaseable Square Average Significant Lease Square Footage/ Annualized Tenant (30,000 Expiration/ Feet/ or Number Base Rent Percent square feet or Option Location Acreage of Floors Per Sq. Foot Leased more) Expiration - -------- ----------- ---------------- ------------ ------ --------------- ---------- Operating Properties New York: Kings Plaza Regional Shopping Center Brooklyn............................ 24.3 acres 289,000 $10.00 100% Sears 2023/2033 477,000 40.63 90% 110 mall tenants Various --------- 766,000/4(1)(2) 29.07 94% Rego Park--Queens..................... 4.8 acres 351,000/3(1) 28.76 100% Bed Bath & 2013 Beyond Circuit City 2021 Marshalls 2008/2021 Old Navy 2007/2021 Sears 2021 Fordham Road--Bronx................... 92,211 SF 303,000/5 -- -- Flushing--Queens (3).................. 44,975 SF 177,000/4(1) 16.74 100% Caldor(4) 2027 Third Avenue--Bronx................... 60,451 SF 173,000/4 5.00 100% An affiliate 2023 --------- of Conway 1,770,000 ========= Redevelopment Properties New York: Lexington Avenue- Manhattan........... 84,420 SF (5) Rego Park II--Queens.................. 6.6 acres -- New Jersey: Paramus, New Jersey................ 30.3 acres (6) - ---------- (1) Excludes parking garages. (2) Excludes 330,000 square foot Macy's store, owned and operated by Federated Department Stores, Inc. (3) Leased by the Company through January 2027. (4) Caldor announced that it is closing all of its stores and rejected this lease effective March 29, 1999. (5) Alexander's is razing the existing buildings and is evaluating redevelopment plans for this site which may involve developing a large multi-use building. (6) Alexander's has approvals to develop a shopping center at this site containing 550,000 square feet. -40-

41 Alexander's estimates that its capital expenditures for redevelopment projects at the above properties will include: (i) approximately $100,000,000 for the redevelopment of its Paramus property, (ii) approximately $30,000,000 to renovate the mall and $15,000,000 to renovate the Macy's store at its Kings Plaza Regional Shopping Center and (iii) more than $300,000,000 to develop its Lexington Avenue site. While Alexander's anticipates that financing will be available after tenants have been obtained for these redevelopment projects, there can be no assurance that such financing will be obtained, or if obtained, that such financings will be on terms that are acceptable to the Company. In addition, it is uncertain as to when these projects will commence. Hotel Pennsylvania The Company owns an 80% interest in the Hotel Pennsylvania, which is located on Seventh Avenue opposite Madison Square Garden in Manhattan, New York. The property is owned through a joint venture with Planet Hollywood International, Inc. The venture intends to refurbish the hotel. Under the terms of the mortgage on this property, in connection with the refurbishment, the Company is required to escrow $37,000,000 prior to September 30, 1999. 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 property's retail and office space, and manages the hotel with Hotel Properties Limited. The following table presents rental information for the hotel: Year Ended December 31, ------------------------- 1998 1997 ------ ------ Average occupancy rate....... 79% 78% Average daily rate........... $ 99 $ 93 As of December 31, 1998, the property's retail and office space was 86% and 55% occupied. 26 tenants occupy the retail and commercial space. Annual rent per square foot of retail and office space in 1998 were $41 and $16. Newkirk Joint Ventures In July and September 1998, the Company invested an aggregate of $56,000,000 for a 30% share in joint ventures with affiliates of Apollo Real Estate Investment Fund III, L.P., collectively Newkirk Joint Ventures ("Newkirk"). Newkirk owns various equity and debt interests relating to 120 limited partnerships which own real estate primarily net leased to credit rated tenants. The Company has issued letters of credit of $15,600,000 in connection with these joint ventures. In March 1999, the Company and its joint venture partner completed an acquisition of additional equity interests in certain limited partnerships. The Company's additional investment of $52,435,000 consisted of $47,790,000 in Operating Partnership Units and $4,645,000 in cash. Dry Warehouse/Industrial Properties The Company's dry warehouse/industrial properties consist of eight buildings containing approximately 2.0 million square feet. At December 31, 1998, the occupancy rate of the properties was 82%. The average term of a tenant's lease is three to five years. Average annual rent per square foot at December 31, 1998 was $3.19. Insurance The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties with policy specifications and insured limits customarily carried for similar properties. Management of the Company believes that the Company's insurance coverage conforms to industry norms. -41-

42 Item 3. Legal Proceedings The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on the Company's financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998. Executive Officers of the Registrant The following is a list of the names, ages, principal occupations and positions with Vornado of the executive officers of Vornado and the positions held by such officers during the past five years. All executive officers of Vornado have terms of office which run until the next succeeding meeting of the Board of Trustees of Vornado following the Annual Meeting of Shareholders unless they are removed sooner by the Board. Principal Occupation, Position and Office (current and during past five Name Age years with Vornado unless otherwise stated) - ---- --- ---------------------------------------------- Steven Roth............. 57 Chairman of the Board, Chief Executive Officer and Chairman of the Executive Committee of the Board; the Managing General Partner of Interstate Properties, an owner of shopping centers and an investor in securities and partnerships; Chief Executive Officer of Alexander's, Inc. since March 2, 1995 and a Director since 1989. Michael D. Fascitelli... 42 President and a Trustee since December 2, 1996; Director of Alexander's, Inc. since December 2, 1996; Partner at Goldman, Sachs & Co. in charge of its real estate practice from December 1992 to December 1996; and Vice President at Goldman, Sachs & Co., prior to December 1992. Joseph Macnow........... 53 Executive Vice President--Finance and Administration since January 1998; Vice President-Chief Financial Officer from 1985 to January 1998; Vice President--Chief Financial Officer of Alexander's, Inc. since August 1995 Irwin Goldberg.......... 54 Vice President--Chief Financial Officer since January 1998; Partner at Deloitte & Touche LLP from September 1978 to January 1998. David R. Greenbaum...... 47 Chief Executive Officer of the Mendik Division since April 15, 1997 (date of the Company's acquisition); President of Mendik Realty (the predecessor to the Mendik Division) from 1990 until April 15, 1997. Joseph Hakim............ 50 Chief Executive Officer of the Merchandise Mart Division since April 1, 1998 (date of the Company's acquisition); President and Chief Executive Officer of Merchandise Mart Properties, Inc., the main operating subsidiary of Joseph P. Kennedy Enterprises, Inc. (the predecessor to the Merchandise Mart Division) from 1992 to April 1, 1998 Daniel F. McNamara(1)... 52 Chief Executive Officer of the Cold Storage Division (AmeriCold Logistics) since October 1997 (the date of the Company's acquisition), Chief Executive Officer of URS Logistics, Inc. (one of the predecessors to the Cold Storage Division) from March 1996 to October 1997 and Executive Vice President and Chief Operating Officer of Value Rent-A-Car, a wholly owned subsidiary of Mitsubishi Motors prior to March 1996. Richard T. Rowan........ 52 Vice President-Retail Real Estate Division since January 1982. - ---------- (1) As of March 17, 1999, Mr. McNamara is an employee of the partnership which purchased the non-real estate assets of AmeriCold Logistics. -42-

43 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Vornado's common shares are traded on the New York Stock Exchange under the symbol "VNO". Quarterly price ranges of the common shares and dividends paid per share for the years ended December 31, 1998 and 1997 were as follows: Year Ended Year Ended December 31, 1998 December 31, 1997 ---------------------------- ------------------------------- Quarter High Low Dividends High Low Dividends ------- ---- --- --------- ---- --- --------- 1st ....... $49.81 $38.50 $ .40 $35.50 $25.38 $ .32 2nd ....... 44.00 36.38 .40 37.00 30.44 .32 3rd ....... 39.88 27.63 .40 44.25 32.13 .32 4th ....... 38.25 26.00 .44 47.38 40.63 .40 All share and per share information has been adjusted for a 2-for-1 share split in October 1997. The approximate number of record holders of common shares of Vornado at December 31, 1998, was 2,700. -43-

44 Item 6. Selected Consolidated Financial Data Year Ended December 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (in thousands, except share and per share amounts) Operating Data Revenues: Property rentals ................. $ 425,496 $ 168,321 $ 87,424 $ 80,429 $ 70,755 Expense reimbursements ........... 74,737 36,652 26,644 24,091 21,784 Other income ..................... 9,627 4,158 2,819 4,198 1,459 --------- --------- --------- --------- --------- Total Revenues ......................... 509,860 209,131 116,887 108,718 93,998 --------- --------- --------- --------- --------- Expenses: Operating ........................ 207,171 74,745 36,412 32,282 30,223 Depreciation and amortization .... 59,227 22,983 11,589 10,790 9,963 General and administrative ....... 28,610 13,580 5,167 6,687 6,495 Amortization of officer's deferred compensation expense ......... -- 22,917 2,083 -- -- --------- --------- --------- --------- --------- Total Expenses ......................... 295,008 134,225 55,251 49,759 46,681 --------- --------- --------- --------- --------- Operating Income ....................... 214,852 74,906 61,636 58,959 47,317 Income applicable to Alexander's ....... 3,123 7,873 7,956 3,954 -- Income from partially-owned entities ... 32,025 4,658 1,855 788 -- Interest and other investment income ... 24,074 23,767 6,643 5,733 8,132 Interest and debt expense .............. (114,686) (42,888) (16,726) (16,426) (14,209) Net gain from insurance settlement and condemnation proceedings ........ 9,649 -- -- -- -- Minority interest of unitholders in the Operating Partnership ............... (16,183) (7,293) -- -- -- --------- --------- --------- --------- --------- Net Income ............................. 152,854 61,023 61,364 53,008 41,240 Preferred stock dividends .............. (21,690) (15,549) -- -- -- --------- --------- --------- --------- --------- Net income applicable to common shares . $ 131,164 $ 45,474 $ 61,364 $ 53,008 $ 41,240 ========= ========= ========= ========= ========= Net income per share--basic(1) ...... $ 1.62 $ .83 $ 1.26 $ 1.13 $ .95 Net income per share--diluted(1) .... $ 1.59 $ .79 $ 1.25 $ 1.12 $ .94 Cash dividends declared for common shares ........................... $ 1.64 $ 1.36 $ 1.22 $ 1.12 $ 1.00 Year Ended December 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (in thousands, except share and per share amounts) Balance Sheet Data Total assets .................. $4,425,779 $2,524,089 $ 565,204 $ 491,496 $ 393,538 Real estate, at cost .......... 3,315,891 1,564,093 397,298 382,476 365,832 Accumulated depreciation ...... 226,816 173,434 151,049 139,495 128,705 Debt .......................... 2,051,000 956,654 232,387 233,353 234,160 Shareholders' equity .......... 1,782,678 1,313,762 276,257 194,274 116,688 -44-

45 Year Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (in thousands) Other Data Funds from operations(2): Net income applicable to common shares ....... $ 131,164 $ 45,474 $ 61,364 $ 53,008 $ 41,240 Depreciation and amortization of real ........ property ................................ 58,277 22,413 11,154 10,019 9,192 Straight-lining of property rentals for rent escalations ............................. (14,531) (3,359) (2,676) (2,569) (2,181) Leasing fees received in excess of income recognized .............................. 1,339 1,733 1,805 1,052 -- Net gain from insurance settlement and condemnation proceedings ................ (9,649) -- -- -- -- Minority interest in excess of preferential distributions .............. (3,991) -- -- -- -- Appreciation of securities held in officer's deferred compensation trust ............. 340 -- -- -- -- Losses (gains) on sale of securities available for sale ................................ (898) -- -- 360 (51) Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at funds from operations: Cold Storage Companies ....................... 41,988(3) 4,183 -- -- -- Alexander's .................................. 4,023 (2,471) (2,331) 539 -- Mendik partially-owned office buildings ...... 3,561 2,891 -- -- -- Hotel Pennsylvania ........................... 4,083 457 -- -- -- Charles E. Smith Commercial Realty L.P. ...... 2,974 1,298 -- -- -- Other ........................................ 219 -- -- -- -- ----------- ----------- ----------- ----------- --------- Funds from operations(4) ........................ $ 218,899 $ 72,619 $ 69,316 $ 62,409 $ 48,200 =========== =========== =========== =========== ========= Cash flow provided by (used in): Operating activities ......................... $ 189,406 $ 115,473 $ 70,703 $ 62,882 $ 46,948 Investing activities ......................... (1,257,367) (1,064,484) 14,912 (103,891) (15,434) Financing activities ......................... 879,815 1,215,269 (15,046) 36,577 (32,074) - ---------- (1) The earnings per share amounts prior to 1997 have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). For further discussion of earnings per share and the impact of SFAS 128, see the notes to the consolidated financial statements. All share and per share information has also been adjusted for a 2-for-1 share split in October 1997. (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, calculate funds from operations in a manner different from that used by the National Association of Real Estate Investment Trusts ("NAREIT"). Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary or non-recurring 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. (3) Includes adding back of (i) income taxes of $4,287 and related items which are considered non-recurring because of the expected conversion of Cold Storage Companies to REITs and (ii) non-recurring unification costs of $4,585. (4) The number of shares that should be used for determining funds from operations per share is the number used for diluted earnings per share. (See Note 15 of the Notes to Consolidated Financial Statements.) -45-

46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (All of the amounts presented are in thousands, except share amounts and percentages) Overview The Company's net income was $152,854 in the year ended December 31, 1998, as compared to $61,023 in the prior year, an increase of $91,831. EBITDA, as defined,(1) was $427,088 in the year ended December 31, 1998, as compared to $150,426 in the prior year, an increase of $276,662. The Company's net income was $61,364 and its EBITDA was $87,048 in the year ended December 31, 1996 when it operated in only one segment. Below is a summary of net income and EBITDA by segment for the years ended December 31, 1998 and 1997: December 31, 1998 ---------------------------------------------------------------------------------- Cold Merchandise Total Office Retail Storage Mart Other(2) --------- --------- --------- --------- ----------- --------- Total revenues ..................... $ 509,860 $ 247,499 $ 167,155 $ -- $ 86,521 $ 8,685 Total expenses ..................... 295,008 151,573 70,334 -- 50,761 22,340 --------- --------- --------- --------- --------- --------- Operating income ................... 214,852 95,926 96,821 -- 35,760 (13,655) Income applicable to Alexander's ... 3,123 -- -- -- -- 3,123 Income from partially-owned entities 32,025 10,854 258 15,191 (1,969) 7,691 Interest and other investment income 24,074 4,467 2,159 -- 639 16,809 Interest and debt expense .......... (114,686) (25,175) (32,249) -- (18,711) (38,551) Net gain from insurance settlement and condemnation proceeding ...... 9,649 -- -- -- -- 9,649 Minority interest .................. (16,183) (7,236) (5,853) (1,024) (2,070) -- --------- --------- --------- --------- --------- --------- Net income ......................... 152,854 78,836 61,136 14,167 13,649 (14,934) Minority interest .................. 16,183 7,236 5,853 1,024 2,070 -- Interest and debt expense (5) ...... 164,478 40,245 32,709 26,541 18,711 46,272 Depreciation and amortization (5) .. 104,299 39,246 15,520 33,117 9,899 6,517 Net gain from insurance Settlement and condemnation proceeding ...... (9,649) -- -- -- -- (9,649) Straight-lining of rents (5) ....... (16,132) (6,845) (3,203) -- (4,882) (1,202) Other .............................. 15,055 (79) -- 8,872(3) -- 6,262(4) --------- --------- --------- --------- --------- --------- EBITDA ............................. $ 427,088 $ 158,639 $ 112,015 83,721 $ 39,447 $ 33,266 ========= ========= ========= ========= ========= ========= December 31, 1997 ---------------------------------------------------------------------------------- Cold Merchandise Total Office Retail Storage Mart Other(2) --------- --------- --------- --------- ----------- --------- Total revenues ..................... $ 209,131 $ 80,846 $ 120,299 $ -- -- $ 7,986 Total expenses ..................... 134,225 50,186 46,204 -- -- 37,835 --------- --------- --------- --------- --------- --------- Operating income ................... 74,906 30,660 74,095 -- -- (29,849) Income applicable to Alexander's ... 7,873 -- -- -- 7,873 Income from partially-owned entities 4,658 1,015 $ 1,720 -- 1,923 Interest and other investment income 23,767 6,834 2,296 -- -- 14,637 Interest and debt expense .......... (42,888) (9,009) (19,893) -- -- (13,986) Net gain from insurance settlement and condemnation proceeding ... -- -- -- -- -- -- Minority interest .................. (7,293) (2,042) (4,303) -- -- (948) --------- --------- --------- --------- --------- --------- Net income ......................... 61,023 27,458 52,195 1,720 -- (20,350) Minority interest .................. 7,293 2,042 4,303 -- -- 948 Interest and debt expense (5) ...... 54,395 13,707 19,893 5,839 -- 14,956 Depreciation and amortization (5) .. 31,972 12,813 11,706 4,182 -- 3,271 Net gain from insurance Settlement and condemnation proceeding ... -- -- -- -- -- -- Straight-lining of rents (5) ....... (3,932) (645) (2,558) -- -- (729) Other .............................. (325) 1,303 970 17 -- (2,615) --------- --------- --------- --------- --------- --------- EBITDA ............................. $ 150,426 $ 56,678 $ 86,509 $ 11,758 -- $ (4,519) ========= ========= ========= ========= ========= ========= Footnotes 1-5 are explained on the following page. -46-

47 (1) EBITDA represents net income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of real estate and the effect of straight-lining of property rentals for rent escalations. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other includes (i) the operations of the Company's warehouse and industrial properties, (ii) investments in the Hotel Pennsylvania, Alexander's, and Newkirk Joint Ventures, (iii) corporate general and administrative expenses and (iv) unallocated investment income and interest and debt expense. (3) Includes adding back of (i) $4,287 of income taxes and related items, which are considered non-recurring because of the expected conversion of the Cold Storage Companies to REITS and (ii) non-recurring unification costs of $4,585. (4) Primarily represents the Company's equity in Alexander's loss from the write-off of the carrying value of Alexander's Lexington Avenue buildings. (5) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. -47-

48 Results of Operations Years Ended December 31, 1998 and December 31, 1997 Below are the details of the changes by segment in EBITDA. The change in the Cold Storage EBITDA is discussed in Income from partially-owned entities. Cold Merchandise Total Office Retail Storage Mart Other -------- -------- -------- -------- ----------- -------- Year ended December 31, 1997 $150,426 $ 56,678 $ 86,509 $ 11,758 $ -- $ (4,519)(1) 1998 Operations: Same store operations(2) 32,502 4,279 4,382 411 -- 23,430(1) Acquisitions 244,160 97,682 21,124 71,552 39,447 14,355 -------- -------- -------- -------- -------- -------- Year ended December 31, 1998 $427,088 $158,639 $112,015 $ 83,721 $ 39,447 $ 33,266 ======== ======== ======== ======== ======== ======== % increase in same store operations 5.5% 7.5% 5.1% 3.5% * 2.8%(1) * not applicable (1) EBITDA for "Other" and in "Total" for the year ended December 31, 1997 reflects the amortization of a deferred payment due to an officer of $22,917; the percentage increases in same store operations have been adjusted to exclude the increase in EBITDA in 1998 resulting therefrom. (2) Represents operations which were owned for the same period in each year. Revenues The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income were $509,860 in the year ended December 31, 1998, compared to $209,131 in the prior year, an increase of $300,729. These increases by segment resulted from: Date of Merchandise Acquisition Total Office Retail Mart Other ----------- ----- ------ ------ ---- ----- Property Rentals: Acquisitions: Mendik RELP December 1998 $ 4,126 $ 4,126 20 Broad Street August 1998 4,399 4,399 689 Fifth Avenue August 1998 1,333 1,333 770 Broadway July 1998 5,713 5,713 40 Fulton Street June 1998 3,561 3,561 Merchandise Mart Properties April 1998 82,509 $ 82,509 150 E. 58th Street March 1998 13,021 13,021 One Penn Plaza February 1998 53,991 53,991 Westport January 1998 2,355 2,355 Green Acres Mall December 1997 22,449 $ 22,449 640 Fifth Avenue December 1997 5,312 5,312 90 Park Avenue May 1997 9,251 9,251 Mendik April 1997 25,313 25,313 Montehiedra Shopping Center April 1997 2,935 2,935 ----------- --------- ---------- -------- 236,268 128,375 25,384 82,509 ----------- --------- ---------- -------- Leasing activity, including $1,740 of step-ups in Retail 20,907 16,508 4,106 $ 293 ----------- --------- ---------- -------- ------ Total increase in property rentals 257,175 144,883 29,490 82,509 293 ----------- --------- ---------- -------- ------ Tenant expense reimbursements: Increase in tenant expense reimbursements due to acquisitions 34,526 16,112 15,759 2,655 Other 3,559 2,292 1,373 (106) ----------- --------- ---------- -------- ------ Total increase in tenant expense reimbursements 38,085 18,404 17,132 2,655 (106) ----------- --------- ---------- -------- ------ Other income 5,469 3,366 234 1,357 512 ----------- --------- ---------- -------- ------ Total increase in revenues $ 300,729 $ 166,653 $ 46,856 $ 86,521 $ 699 =========== ========= ========== ======== ====== -48-

49 Expenses The Company's expenses were $295,008 in the year ended December 31, 1998, compared to $134,225 in the prior year, an increase of $160,783. These increases by segment resulted from: Merchandise Total Office Retail Mart Other ----- ------ ------ ---- ----- Operating: Acquisitions $ 121,297 $ 67,545 $ 15,339 $ 38,413 $ -- Same store operations 11,129 5,751 5,185 -- 193 --------- --------- --------- --------- --------- 132,426 73,296 20,524 38,413 193 --------- --------- --------- --------- --------- Depreciation and amortization: Acquisitions 35,586 22,630 3,057 9,899 -- Same store operations 658 47 549 -- 62 --------- --------- --------- --------- --------- 36,244 22,677 3,606 9,899 62 --------- --------- --------- --------- --------- General and administrative: 15,030(2) 5,414 --(1) 2,449 7,167(1) --------- --------- --------- --------- --------- Amortization of officer's deferred compensation expense (22,917) -- -- -- (22,917)(3) --------- --------- --------- --------- --------- $ 160,783 $ 101,387 $ 24,130 $ 50,761 $ (15,495) ========= ========= ========= ========= ========= (1) Retail general and administrative expenses are included in corporate expenses which are not allocated. (2) Of this increase: (i) $6,631 is attributable to acquisitions, (ii) $4,641 resulted from payroll, primarily for additional employees and corporate office expenses, and (iii) $3,758 resulted from professional fees. (3) The Company recognized an expense of $22,917 in the prior year representing the amortization of the deferred payment due to the Company's President, which was fully amortized at December 31, 1997. Income (loss) applicable to Alexander's (loan interest income, equity in income (loss) and depreciation) was $3,123 in the year ended December 31, 1998, compared to $7,873 in the prior year, a decrease of $4,750. This decrease resulted primarily from (i) the Company's equity in the write-off of the carrying value of Alexander's Lexington Avenue building, of $4,423, partially offset by (ii) income from the commencement of leases at Alexander's Rego Park and Kings Plaza store properties and (iii) income from Alexander's acquisition of the remaining 50% interest in the Kings Plaza Mall. Income from partially-owned entities was $32,025 in the year ended December 31, 1998, compared to $4,658 in the prior year, an increase of $27,367. This increase by segment resulted from: Date of Cold Merchandise Acquisitions: Acquisition Total Office Retail Storage Mart Other ----------- ----- ------ ------ ------- ---- ----- Cold Storage: Americold and URS October 1997 $7,137 $ -- $ -- $ 7,137 $ -- $ -- Freezer Services June 1998 3,218 -- -- 3,218 -- -- Carmar Group July 1998 2,960 -- -- 2,960 -- -- Charles E. Smith Commercial Realty L.P. October 1997 4,669 4,669 -- -- -- -- Hotel Pennsylvania September 1997 2,623 -- -- -- -- 2,623 Newkirk Joint Ventures July 1998 3,412 -- -- -- -- 3,412 Mendik partially-owned office buildings April 1997 2,852 2,852 -- -- -- -- Merchandise Mart Management Company April 1998 (1,969) -- -- -- (1,969) -- Caguas November 1998 258 -- 258 -- -- -- Other 2,207 2,318 -- 156 -- (267) ------- --------- ------- ---------- ------------ ---------- $27,367 $ 9,839 $ 258 $ 13,471 $ (1,969) $ 5,768 ======= ========= ======= ========== ============= ========= -49-

50 Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains on marketable securities) was $24,074 for the year ended December 31, 1998, compared to $23,767 in the prior year, an increase of $307. This increase resulted primarily from gains on the sale of marketable securities of $2,395, partially offset by a decrease in interest income due to lower average investments this year. Interest and debt expense was $114,686 for the year ended December 31, 1998, compared to $42,888 in the prior year, an increase of $71,798. This increase resulted primarily from debt in connection with acquisitions. In the third quarter of 1998, the Company recorded a net gain of $9,649, in connection with an insurance settlement and condemnation proceeding (see Note 11 to the Consolidated Financial Statements). The minority interest is comprised of: Year Ended December 31, ----------------------- 1998 1997* --------- ---------- Equity in earnings to unit holders in the Operating Partnership .. $15,532 $ 7,293 40% interest in 20 Broad Street ......... 651 -- ------- ------- $16,183 $ 7,293 ======= ======= * For the period from April 15, 1997 to December 31, 1997 The preferred stock dividends of $21,690 for the year ended December 31, 1998 and $15,549 for the period from April 15, 1997 to December 31, 1997 apply to the Company's $3.25 Series A Convertible Preferred Shares issued in April and December 1997 and include accretion of expenses of issuing them. Years Ended December 31, 1997 and December 31, 1996 The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income, were $209,131 in the year ended December 31, 1997, compared to $116,887 in the prior year, an increase of $92,244. This increase was primarily comprised of $90,520 of revenues from properties acquired in 1997. Property rentals were $168,321 in the year ended December 31, 1997, compared to $87,424 in the prior year, an increase of $80,897. This increase resulted from: 1997 Acquisitions: Mendik ......................................... $56,958 90 Park Avenue ................................. 9,874 Montehiedra shopping center .................... 6,386 Riese .......................................... 2,485 Green Acres Mall ............................... 937 ------- 76,640 Full year effect of a 1996 Acquisition .............. 472 Shopping center leasing activity .................... 1,907 Step-ups in shopping center leases .................. 1,878 ------- $80,897 ======= Tenant expense reimbursements were $36,652 in the year ended December 31, 1997, compared to $26,644 in the prior year, an increase of $10,008. This increase was primarily comprised of $11,320 of reimbursements from tenants at properties acquired in 1997, partially offset by a reduction in reimbursements at the Company's other properties due to lower expenses passed through to tenants. Operating expenses were $74,745 in the year ended December 31, 1997, as compared to $36,412 in the prior year, an increase of $38,333. This increase was primarily comprised of $39,645 of expenses from properties acquired in 1997, partially offset by lower snow removal costs and repairs and maintenance at the Company's other properties. -50-

51 Depreciation and amortization expense increased in 1997 as compared to 1996, primarily as a result of acquisitions. General and administrative expenses were $13,580 in the year ended December 31, 1997 compared to $5,167 in the prior year, an increase of $8,413. This increase resulted primarily from (i) Mendik Division payroll and corporate office expenses of $2,760, (ii) cash compensation attributable to the employment of the Company's President of $2,350 and (iii) professional fees of $1,641. The Company recognized expense of $22,917 in the year ended December 31, 1997 and $2,083 in the prior year representing the amortization of the $25,000 deferred payment due to the Company's President. Income applicable to Alexander's (loan interest income, equity in income and depreciation) was $7,873 in the year ended December 31, 1997, compared to $7,956 in the prior year, a decrease of $83. This decrease resulted primarily from a $327 reduction in loan interest income due to the reset of the interest rate on the loan, partially offset by an increase in equity in non-recurring income. Income from partially-owned entities was $4,658 in the year ended December 31, 1997, compared to $1,855 in the prior year, an increase of $2,803. This increase consists of: (i) $1,720 from the Cold Storage Companies, (ii) $424 from partially owned properties acquired as part of the Mendik Transaction, (iii) $1,055 from the Company's 40% interest in Hotel Pennsylvania and (iv) $85 from the Company's 15% interest in Charles E. Smith Commercial Realty L.P., partially offset by (v) lower management fee income. Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains on marketable securities) was $23,767 for the year ended December 31, 1997, compared to $6,643 in the prior year, an increase of $17,124. Of this increase, $9,047 resulted primarily from income earned on higher average investments (resulting from proceeds from stock offerings and temporary borrowings) and $7,901 resulted from investments in mortgage loans receivable. Interest and debt expense was $42,888 for the year ended December 31, 1997, compared to $16,726 in the prior year, an increase of $26,162. Of this increase, (i) $13,369 resulted from borrowings under the Company's revolving credit facility and a term loan, (ii) $9,009 resulted from debt on the properties acquired in the Mendik Transaction and (iii) $3,784 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 $7,293 for the year ended December 31, 1997. The preferred stock dividends of $15,549 apply to the 6.5% preferred shares issued in April 1997 and include accretion of expenses of issuing them of $1,918. The Company operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which distributes at least 95% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company has distributed to its shareholders an amount greater than its taxable income. Therefore, no provision for Federal income taxes is required. Liquidity and Capital Resources Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Years Ended December 31, 1998 Cash flows provided by operating activities of $189,406 was primarily comprised of (i) income of $143,205 (net income of $152,854 less net gain from insurance settlement and condemnation proceeding of $9,649), (ii) adjustments for non-cash items of $27,657, and (iii) the net change in operating assets and liabilities of $18,544. The adjustments for non-cash items are primarily comprised of (i) depreciation and amortization of $59,227 and (ii) minority interest of $16,183, partially offset by (iii) the effect of straight-lining of rental income of $17,561 and (iv) equity in net income of partially-owned entities of $32,025. Net cash used in investing activities of $1,257,367 was primarily comprised of (i) acquisitions of real estate of $896,800 (see detail below), (ii) investments in partially-owned entities of $308,000 (see detail below), (iii) capital expenditures of $68,085 (see detail below) and investments in securities of $73,513 (including purchase of Capital Trust Preferred Stock of $48,700), partially offset by (v) proceeds from the repayment of mortgage loans receivable of $57,600. -51-

52 Acquisitions of real estate and investments in partially-owned entities were comprised of: Value of shares or Assets Cash Debt Units Issued Acquired ---------- ---------- ------------ ---------- Real Estate: Merchandise Mart Properties $ 187,000 $ 327,000 $ 116,000 $ 630,000 One Penn Plaza Office Building 317,000 93,000 -- 410,000 770 Broadway Office Building 131,000 -- 18,000 149,000 150 East 58th Street Office Building 118,000 -- -- 118,000 40 Fulton Street Office Building 55,000 -- -- 55,000 689 Fifth Avenue Office Building 33,000 -- -- 33,000 Mendik RELP Properties 31,000 46,000 29,000 106,000 Market Square Complex 11,000 60,000 44,000 115,000 Other 13,800 -- -- 13,800 ---------- ---------- ---------- ---------- $ 896,800 $ 526,000 $ 207,000 $1,629,800 ========== ========== ========== ========== Investments in Partially-Owned Entities: Hotel Pennsylvania (acquisition of additional 40% interest increasing ownership to 80%) $ 22,000 $ 48,000 $ -- $ 70,000 570 Lexington Avenue Office Building (increased interest from 5.6% to approximately 50%) 32,300 4,900 -- 37,200 Acquisition of Freezer Services, Inc. (60% interest) 58,000 16,000 6,000 80,000 Reduction in Cold Storage Companies debt (60% interest) 44,000 -- -- 44,000 Acquisition of Carmar Group (60% interest) 86,400 8,400 -- 94,800 Investment in Newkirk Joint Ventures 56,000 -- -- 56,000 Las Catalinas Mall (50% interest) -- 38,000 -- 38,000 Other 9,300 -- -- 9,300 ---------- ---------- ---------- ---------- $ 308,000 $ 115,300 $ 6,000 $ 429,300 ========== ========== ========== ========== Capital expenditures were comprised of: New York Merchandise City Office Retail Mart Other Total ----------- ------ ---- ----- ----- Expenditures to maintain the assets ..... $ 4,975 $ 3,138 $ 5,273 $ 1,074 $14,460 Tenant allowances and leasing commissions 46,187 2,397 5,041 -- 53,625 ------- ------- ------- ------- ------- $51,162 $ 5,535 $10,314 $ 1,074 $68,085 ======= ======= ======= ======= ======= -52-

53 Net cash provided by financing activities of $879,815 was primarily comprised of (i) proceeds from borrowings of $1,427,821, (ii) proceeds from the issuance of common shares of $445,247 and (iii) proceeds from the issuance of preferred shares of $85,313, partially offset by (iv) repayment of borrowings of $883,475, (v) dividends paid on common shares of $154,440 and (vi) dividends paid on preferred shares of $18,816. Year Ended December 31, 1997 Cash flows provided by operating activities of $115,473 was comprised of (i) net income of $61,023, (ii) adjustments for non-cash items of $39,723 and (iii) the net change in operating assets and liabilities of $14,727. The adjustments for non-cash items are primarily comprised of (i) amortization of deferred officer's compensation expense of $22,917 and (ii) depreciation and amortization of $24,460. Net cash used in investing activities of $1,064,484 was primarily comprised of (i) acquisitions of real estate of $887,423 (see detail below), (ii) investments in mortgage loans receivable of $71,663 (see detail below), (iii) capital expenditures of $23,789, (iv) restricted cash for tenant improvements of $27,079 and (v) real estate deposits of $46,152. Acquisitions of real estate and investments in mortgage loans receivable are comprised of: Value of Shares or Debt Units Assets Cash Assumed Issued Acquired ---- ------- ------ -------- Real Estate: Mendik Transaction ........................ $ 263,790 $ 215,279 $ 177,000 $ 656,069 60% interest in Cold Storage Companies .... 243,846 376,800 -- 620,646 Green Acres Mall .......................... -- 125,000 102,015 227,015 90 Park Avenue office building ............ 185,000 -- -- 185,000 Montehiedra shopping center ............... 11,000 63,000 -- 74,000 40% interest in Hotel Pennsylvania ........ 17,487 48,000 -- 65,487 640 Fifth Ave. office building ............ 64,000 -- -- 64,000 15% interest in Charles E. Smith Commercial Realty L.P. ............................ 60,000 -- -- 60,000 Riese properties .......................... 26,000 -- -- 26,000 1135 Third Avenue and other ............... 16,300 -- -- 16,300 ---------- ---------- ---------- ---------- 887,423 828,079 279,015 1,994,517 ---------- ---------- ---------- ---------- Mortgage loans receivable: Riese properties .......................... 41,649 -- -- 41,649 20 Broad Street ........................... 27,000 -- -- 27,000 909 Third Ave. and other, net ............. 3,014 -- -- 3,014 ---------- ---------- ---------- ---------- 71,663 -- -- 71,663 ---------- ---------- ---------- ---------- Total Acquisitions ............................. $ 959,086 $ 828,079 $ 279,015 $2,066,180 ========== ========== ========== ========== Net cash provided by financing activities of $1,215,269 was primarily comprised of proceeds from (i) borrowings of $770,000 (ii) issuance of common shares of $688,672, and (iii) issuance of preferred shares of $276,000, partially offset by (iv) repayment of borrowings of $409,633, (v) dividends paid on common shares of $77,461, (vi) dividends paid on preferred shares of $15,549 and (vii) the repayment of borrowings on U.S. Treasury obligations of $9,636. -53-

54 Year Ended December 31, 1996 Cash flows provided by operating activities of $70,703 was comprised of (i) net income of $61,364 and (ii) adjustments for non-cash items of $9,972, less (iii) the net change in operating assets and liabilities of $633. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $12,586 and amortization of deferred officers compensation expense of $2,083, partially offset by the effect of straight-lining of rental income of $2,676 and equity in income from Alexander's of $1,108. The net change in "Leasing fees receivable" and "Deferred leasing fee income" included in item (iii) above reflects a decrease of $1,717 resulting from the rejection of a lease by an Alexander's tenant in March 1996 and an increase of $1,738 resulting from the releasing of a portion of this space. "Leasing fees receivable" of $2,500 were collected during this period. Net cash provided by investing activities of $14,912 was comprised of (i) proceeds from sale or maturity of securities available for sale of $46,734, partially offset by (ii) the Company's investment in a mortgage note receivable of $17,000 and (iii) capital expenditures of $14,822 (including $8,923 for the purchase of an office building). Net cash used in financing activities of $15,046 was primarily comprised of (i) dividends paid of $59,558, (ii) the net repayment of borrowings on U.S. Treasury obligations of $34,239, (iii) the net repayment on mortgages of $966, partially offset by (iv) net proceeds from the issuance of common shares of $73,060 and (v) the proceeds from the exercise of stock options of $6,657. Cash increased during the period from December 31, 1995 to December 31, 1996, from $19,127 to $89,696, primarily as the result of the issuance of common shares in the fourth quarter of 1996 as noted above. Funds from Operations for the Years Ended December 31, 1998 and 1997 Funds from operations were $218,899 in the year ended December 31, 1998, compared to $72,619 in the prior year, an increase of $146,280. Funds from operations for the year ended December 31, 1997 reflect amortization of the deferred payment due to the Company's President and related compensation of $25,397, compared to no such amortization in 1998. The following table reconciles funds from operations and net income: Year Ended December 31, ----------------------- 1998 1997 --------- --------- Net income applicable to common shares ................................. $ 131,164 $ 45,474 Depreciation and amortization of real property ......................... 58,277 22,413 Straight-lining of property rentals for rent escalations ............... (14,531) (3,359) Net gain from insurance settlement and condemnation proceedings ........ (9,649) -- Minority interest in excess of preferential distributions .............. (3,991) -- Appreciation of securities held in officer's deferred compensation trust 340 -- Gain on sale of securities available for sale .......................... (898) -- Leasing fees received in excess of income recognized ................... 1,339 1,733 Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at funds from operations ....... 56,848 6,358 --------- --------- Funds from operations .................................................. $ 218,899 $ 72,619 ========= ========= The number of shares that should be used for determining funds from operations per share is the number used for diluted earnings per share. (See Note 15 of Notes to Consolidated Financial Statements.) -54-

55 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 reported by other REITs since a number of REITs, including the Company, calculate funds from operations in a manner different from that used by the National Association of Real Estate Investment Trusts ("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. Below are the cash flows provided by (used in) operating, investing and financing activities: Year Ended December 31, --------------------------- 1998 1997 ----------- ----------- Operating activities $ 189,406 $ 115,473 =========== =========== Investing activities $(1,257,367) $(1,064,484) =========== =========== Financing activities $ 879,815 $ 1,215,269 =========== =========== Certain Cash Requirements In January 1999, the Company acquired the leasehold interest in 888 Seventh Avenue for approximately $100,000 including $55,000 of indebtedness. Further, in 1999, under the mortgage for the Hotel Pennsylvania, in connection with the redevelopment, the Company is required to escrow $37,000. The Company has budgeted approximately $39,805 for capital expenditures (excluding acquisitions) over the next year as follows: New York Merchandise City Office Retail Cold Storage Mart Total ----------- ------ ------------ ---- ----- Expenditures to maintain the assets $ 3,600 $ 2,480 $ 3,000(1) $ 3,000 $12,080 Tenant allowances and leasing commissions 22,175 2,000 -- 6,550 30,725 ------- ------- ------- ------- ------- $25,775 $ 4,480 $ 3,000 $ 9,550 $42,805 ======= ======= ======= ======= ======= - ---------- (1) Represents the Company's 60% share of the Vornado/Crescent Partnership's obligation to fund up to $5,000 of capital expenditures per annum. Tenant allowances and leasing commissions for the New York City Office properties approximate $21.00 per square foot for renewal space and $52.00 per square foot for vacant space. Historically, approximately two-thirds of existing tenants renew their leases. In addition to the capital expenditures reflected above, the Company is currently engaged in or considering certain multi-year development and redevelopment projects for which it has budgeted approximately $387 million as outlined in the "Development and Redevelopment Projects" section of Item 1--Business (Items (i) through (vi)). The $387 million does not include amounts for other projects which are also included in the "Development and Redevelopment Projects" section of Item 1--Business, as no budgets for them have been finalized. There can be no assurance that any of the above projects will be ultimately completed, completed on time or completed for the budgeted amount. No cash requirements have been budgeted for the capital expenditures and amortization of debt of CESCR, Newkirk or Alexander's, which are partially owned by the Company. These investees are expected to fund their own cash requirements. Newkirk and Alexander's are not expected to distribute any cash to the Company in 1999. In 1999, the Company expects to receive at a minimum, preferred distributions from CESCR of approximately $13.9 million (7,679,365 preferred units at $1.81 per unit) and common distributions of approximately $3.5 million (2,500,000 common units at $1.40 per unit - current dividend rate). The minimum preferred distribution rate increases by .25% each year for the next three years. -55-

56 In July 1997, the Company obtained a $600,000 unsecured three-year revolving credit facility. In February 1998, the facility was increased to $1,000,000. At December 31, 1998, the Company had approximately $687,250 outstanding under the facility. In February 1998, the Company completed a $160,000 refinancing of the Green Acres Mall and prepaid the then existing $118,000 debt on the property. The new 10-year debt matures in March 2008 and bears interest at 6.75%. In June 1998, the Company completed a $275,000 refinancing of its One Penn Plaza office building and borrowed $170,000 pursuant thereto. In the third quarter of 1998, the Company borrowed the remaining $105,000. The debt matures in June 2002, is prepayable at anytime, and bears interest at LIBOR + 1.25% (currently 6.35%). This debt replaced the $93,000 bridge-mortgage loan financing put in place when the property was acquired. In April 1998, the Cold Storage Companies completed a $550,000 ten-year loan secured by 58 of its warehouses. The loan bears interest at 6.89%. The net proceeds from the loan together with working capital were used to repay $607,000 of bridge financing, which replaced high yield debt assumed at the date of acquisition. In October 1998, the Company completed its spin-off of Vornado Operating Company, which the Company capitalized with an equity contribution of $25,000 of cash. In addition, Vornado entered into a $75,000 revolving credit agreement with Vornado Operating Company. On March 12, 1999 the Vornado/Crescent Partnerships sold all of the non-real estate assets of the Cold Storage Companies encompassing the operations of the cold storage business for approximately $48,000 to a new partnership owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc. In November and December of 1998, the Company sold an aggregate of $87,500 of 8.5% Series D-1 Cumulative Redeemable Preferred Units in the Operating Partnership to an institutional investor in a private placement, resulting in net proceeds of approximately $85,300. The perpetual Preferred Units may be called without penalty at the option of the Company commencing on November 12, 2003. In February 1999, the Company completed a $165,000 refinancing of its Two Penn Plaza office building and prepaid the then existing $80,000 debt on the property. The new 5-year debt matures in February 2004 and bears interest at 7.08%. In February 1999, the Company also exercised its option to extend the maturity date on the $250,000 loan on its Chicago Merchandise Mart building from March 31, 1999 to September 30, 1999. In connection therewith, the Company paid a fee of 1/8%. On March 17, 1999, the Company completed the sale of 3 million 8.5% Series B Cumulative Redeemable Preferred Shares, at a price $25.00 per share, pursuant to an effective registration statement with net proceeds to the Company of approximately $72,200. Further on March 22, 1999, 400,000 shares were sold when the underwriters exercised their over-allotment option resulting in additional net proceeds to the Company of $9,700. The perpetual preferred shares may be called without penalty at the option of the Company commencing on March 17, 2004. The Company has an effective shelf registration under which it can offer an aggregate of $1.5 billion of equity securities and an aggregate of $1.0 billion of debt securities. The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an on-going basis for more than the next twelve months; however, capital outlays for significant acquisitions will require funding from borrowings or equity offerings. -56-

57 Acquisition Activity As a result of acquisitions, the book value of the Company's assets have grown from $2,524,089 at December 31, 1997 to $4,425,779 at December 31, 1998. The Company's future success will be affected by its ability to integrate the assets and businesses it acquires and to effectively manage those assets and businesses. The Company currently expects to continue to grow at a relatively fast pace. However, its ability to do so will be dependent on a number of factors, including, among others, (a) the availability of reasonably priced assets that meet the Company's acquisition criteria and (b) the price of the Company's common stock, the rates at which the Company is able to borrow money and, more generally, the availability of financing on terms that, in the Company's view, make such acquisitions financially attractive. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Because the Company does not currently utilize derivatives or engage in significant hedging activities, management does not anticipate that implementation of this statement will have a material effect on the Company's financial statements. In April, 1998 the American Institute of Certified Public Accountants Issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities", (98-5) which is effective for the Company in the first quarter of 1999. The Company has no deferred organization costs or other deferred start-up costs as defined in 98-5, and therefore adoption of 98-5 will have no impact in the first quarter of 1999. Year 2000 Issues Year 2000 compliance programs and information systems modification were initiated by the Company in early 1998 to address the risk posed by the year 2000 issue. The Company developed a plan to address their affected informational (accounting, billing, payroll) and operational (refrigeration, HVAC, security, elevators, lighting, energy management) systems. The Company's plan also considers statements from outside vendors as to their year 2000 readiness. The Company and its partially-owned entities have completed their initial assessment, inventory and planning phases of their plan and have determined that the majority of their systems, including all mission critical systems are already year 2000 compliant. The Company anticipates that any issues encountered with informational or operational systems will be remediated. The Company expects that where appropriate, all mission critical systems will be tested by June 30, 1999. The cost of the Company's year 2000 plan was not material to 1998 operations and is not expected to be material to 1999 operations. The Company believes that its exposure may be the failure of third parties (i.e., energy providers) in meeting their commitments which may result in temporary business interruption at the Company's buildings, retail centers, mart properties, cold storage warehouses and other real estate related properties. The Company has contingency plans for its own day to day informational and operational systems and is in the process of updating these plans. Failure of third parties with which the Company conducts business to successfully respond to their year 2000 issues may have an adverse effect on the Company. Economic Conditions Substantially all of the Company's office, retail and permanent showroom leases contain step-ups in rent. Such rental increases are not designed to, and in many instances do not, approximate the cost of inflation, but do have the effect of mitigating the adverse impact of inflation. In addition, substantially all of the Company's leases contain provisions that require the tenant to reimburse the Company for the tenant's share of common area charges (including roof and structure in strip shopping centers, unless it is the tenant's direct responsibility) and real estate taxes or for increases of such expenses over a base amount, thus offsetting, in part, the effects of inflation on such expenses. Inflation did not have a material effect on the Company's results for the periods presented. -57-

58 Item 7A. Quantitative and Qualitative Disclosures about Market Risk At December 31, 1998, the Company has $1,426,777,000 of variable rate debt at a weighted average rate of 6.55% and $624,223,000 of fixed rate debt bearing interest at a weighted average rate of 7.00%. A one-percent increase in the base used to determine the interest rate of the variable rate debt would result in a $14,268,000 decrease in the Company's net income ($.18 per diluted share). The fair value of the Company's debt at December 31, 1998, based on discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt approximates its carrying value. In July 1998, the Company entered into an interest rate cap agreement to reduce the impact of changes in interest rates on its $275,000,000 One Penn Plaza loan. The agreement caps the Company's interest rate in the event that LIBOR increases above 8.5% through January 20, 2000 and 9% thereafter, until the termination date of the cap agreement on July 30, 2001 (the debt matures in June 2002). The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate cap agreement. However, the Company does not anticipate nonperformance by the counterparty. The fair value of the interest rate cap agreement at December 31, 1998 approximates its cost. -58-

59 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report............................................. 60 Consolidated Balance Sheets at December 31, 1998 and 1997................ 61 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996........................................................... 62 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996........................................ 63 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996........................................ 64 Notes to Consolidated Financial Statement................................. 65 Item 9. Changes In and Disagreements With Independent Auditors on Accounting and Financial Disclosure Not applicable. -59-

60 INDEPENDENT AUDITORS' REPORT Shareholders and Board of Trustees Vornado Realty Trust Saddle Brook, New Jersey We have audited the accompanying consolidated balance sheets of Vornado Realty Trust as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits 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 statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty Trust at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Parsippany, New Jersey March 24, 1999 -60-

61 VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS December 31, --------------------------- 1998 1997 ----------- ----------- (amounts in thousands except share amounts) ASSETS Real estate, at cost: Land .......................................................................... $ 743,324 $ 436,274 Buildings and improvements .................................................... 2,561,383 1,118,334 Leasehold improvements and equipment .......................................... 11,184 9,485 ----------- ----------- Total ...................................................................... 3,315,891 1,564,093 Less accumulated depreciation and amortization ................................ (226,816) (173,434) ----------- ----------- Real estate, net ........................................................... 3,089,075 1,390,659 Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $56,500 and $8,775 ................................... 167,808 355,954 Restricted cash .................................................................. 44,195 27,079 Marketable securities ............................................................ 77,156 34,469 Investments and advances to partially-owned entities, including Alexander's of $104,038 and $108,752 .......................................... 827,840 482,787 Due from officers ................................................................ 17,165 8,625 Accounts receivable, net of allowance for doubtful accounts of $3,044 and $658 ............................................................ 35,517 16,663 Mortgage loans receivable ........................................................ 10,683 88,663 Receivable arising from the straight-lining of rents ............................. 49,711 24,127 Deposits in connection with real estate acquisitions ............................. 22,947 47,275 Other assets ..................................................................... 83,682 47,788 ----------- ----------- $ 4,425,779 $ 2,524,089 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes and mortgages payable ...................................................... $ 1,363,750 $ 586,654 Revolving credit facility ........................................................ 687,250 370,000 Accounts payable and accrued expenses ............................................ 109,925 36,538 Officer's compensation payable ................................................... 35,628 25,000 Deferred leasing fee income ...................................................... 10,051 9,927 Other liabilities ................................................................ 3,196 3,641 ----------- ----------- Total liabilities ................................................................ 2,209,800 1,031,760 ----------- ----------- Minority interest of unitholders in the Operating Partnership .................... 433,301 178,567 ----------- ----------- 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 ($289,462 in total); issued 5,789,239 and 5,789,315 shares ......................................... 282,758 279,884 Common shares of beneficial interest: $.04 par value per share; authorized, 100,000,000 shares; issued and outstanding, 85,076,542 and 72,164,654 shares .. 3,403 2,887 Additional capital ............................................................... 1,653,208 1,146,385 Accumulated deficit .............................................................. (132,837) (109,561) ----------- ----------- 1,806,532 1,319,595 Accumulated other comprehensive loss ............................................. (18,957) (840) Due from officers for purchase of common shares of beneficial interest ........... (4,897) (4,993) ----------- ----------- Total shareholders' equity ............................................ 1,782,678 1,313,762 ----------- ----------- $ 4,425,779 $ 2,524,089 =========== =========== See notes to consolidated financial statements. -61-

62 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, ------------------------------------- 1998 1997 1996 (amounts in thousands except per share amounts) Revenues: Property rentals ...................................... $ 425,496 $ 168,321 $ 87,424 Expense reimbursements ................................ 74,737 36,652 26,644 Other income (including fee income from related parties of $2,327, $1,752 and $2,569) ... 9,627 4,158 2,819 --------- --------- --------- Total revenues ............................................. 509,860 209,131 116,887 --------- --------- --------- Expenses: Operating ............................................. 207,171 74,745 36,412 Depreciation and amortization ......................... 59,227 22,983 11,589 General and administrative ............................ 28,610 13,580 5,167 Amortization of officer's deferred compensation expense -- 22,917 2,083 --------- --------- --------- Total expenses ............................................. 295,008 134,225 55,251 --------- --------- --------- Operating income ........................................... 214,852 74,906 61,636 Income applicable to Alexander's ........................... 3,123 7,873 7,956 Income from partially-owned entities ....................... 32,025 4,658 1,855 Interest and other investment income ....................... 24,074 23,767 6,643 Interest and debt expense .................................. (114,686) (42,888) (16,726) Net gain from insurance settlement and condemnation proceeding ............................... 9,649 -- -- Minority interest .......................................... (16,183) (7,293) -- --------- --------- --------- Net income ................................................. 152,854 61,023 61,364 Preferred stock dividends (including accretion of issuance expenses of $2,874 in 1998 and $1,918 in 1997) ........ (21,690) (15,549) -- --------- --------- --------- NET INCOME applicable to common shares ................ $ 131,164 $ 45,474 $ 61,364 ========= ========= ========= NET INCOME PER COMMON SHARE-BASIC .......................... $ 1.62 $ .83 $ 1.26 ========= ========= ========= NET INCOME PER COMMON SHARE-DILUTED ........................ $ 1.59 $ .79 $ 1.25 ========= ========= ========= See notes to consolidated financial statements. -62-

63 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Other Preferred Common Additional Accumulated Comprehensive Shares Shares Capital Deficit Income (Loss) ----------- ----------- ----------- ----------- ------------- (amounts in thousands except share amounts) Balance, January 1, 1996 .................... $ 970 $ 279,231 $ (79,380) $ (1,362)* Net Income .................................. -- -- 61,364 -- Net proceeds from issuance of common shares . 60 73,000 -- -- Dividends paid ($1.22 per share) ............ -- -- (59,558) -- Common shares issued under employees' share plans ................... 14 6,643 -- -- Change in unrealized gains on securities available for sale ......... -- -- -- 364 Forgiveness of amount due from officers ..... -- -- -- -- ----------- ----------- ----------- ----------- Balance, December 31, 1996 .................. 1,044 358,874 (77,574) (998) Net income .................................. -- -- 61,023 -- Dividends paid on preferred shares ($2.37 per share) ........................ -- -- (15,549) -- Net proceeds from issuance of preferred shares (including accretion of $1,918) ..................... $ 277,918 -- -- -- -- Two-for-one common share split .............. -- 1,044 (1,044) -- -- Net proceeds from issuance of common shares . -- 644 688,028 -- -- Shares issued in connection with Arbor acquisition ........................ 1,966 117 99,932 -- -- Dividends paid on common shares ($1.36 per share) ........................ -- -- -- (77,461) -- Common shares issued in connection with an employment agreement and employees' share plans ..... -- 38 595 -- -- Change in unrealized gains on securities available for sale ......... -- -- -- -- 158 Forgiveness of amount due from officers ..... -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 .................. 279,884 2,887 1,146,385 (109,561) (840) Net Income .................................. -- -- -- 152,854 -- Dividends paid on preferred shares ($2.37 per share) ........................ -- -- -- (21,690) -- Dividends paid on common shares ($1.64 per share) ........................ -- -- -- (131,110) -- Net proceeds from issuance of common shares ......................... -- 445 444,118 -- -- Common shares issued in connection with Mendik RELP properties acquisition ................... -- 34 29,029 -- -- Common shares issued under employees' share plan .................... -- 2 907 -- -- Conversion of units to common shares ........ -- 35 32,745 -- -- Capital contribution to Vornado Operating Company ................ -- -- -- (23,330) -- Accretion of issuance expenses on preferred shares ......................... 2,874 -- -- -- -- Common shares issued in connection with dividend reinvestment plan .......... -- -- 24 -- -- Change in unrealized (losses) on securities available for sale ......... -- -- -- -- (5,047) Appreciation of securities held in officer's deferred compensation trust . -- -- -- -- (10,464) Pension obligations ......................... -- -- -- -- (2,606) Forgiveness of amount due from Officers ............................ -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1998 .................. $ 282,758 $ 3,403 $ 1,653,208 $ (132,837) $ (18,957) =========== =========== =========== =========== =========== ___________ * Represents unrealized losses on securities available for sale. Due (to) from Shareholders' Comprehensive Officers Equity Income ----------- ------------- ------------- (amounts in thousands except share amounts) Balance, January 1, 1996 .................... $ (5,185) $ 194,274 Net Income .................................. -- 61,364 $ 61,364 Net proceeds from issuance of common shares . -- 73,060 -- Dividends paid ($1.22 per share) ............ -- (59,558) -- Common shares issued under employees' share plans ................... -- 6,657 -- Change in unrealized gains on securities available for sale ......... -- 364 364 Forgiveness of amount due from officers ..... 96 96 -- ----------- ----------- ----------- Balance, December 31, 1996 .................. (5,089) 276,257 $ 61,728 =========== Net income .................................. -- 61,023 $ 61,023 Dividends paid on preferred shares ($2.37 per share) ........................ -- (15,549) -- Net proceeds from issuance of preferred shares (including accretion of $1,918) ..................... -- 277,918 -- Two-for-one common share split .............. -- -- Net proceeds from issuance of common shares . -- 688,672 -- Shares issued in connection with Arbor acquisition ........................ -- 102,015 -- Dividends paid on common shares ($1.36 per share) ........................ -- (77,461) -- Common shares issued in connection with an employment agreement and employees' share plans ..... -- 633 -- Change in unrealized gains on securities available for sale ......... -- 158 158 Forgiveness of amount due from officers ..... 96 96 -- ----------- ----------- ----------- Balance, December 31, 1997 .................. (4,993) 1,313,762 $ 61,181 =========== Net Income .................................. -- 152,854 $ 152,854 Dividends paid on preferred shares ($2.37 per share) ........................ -- (21,690) -- Dividends paid on common shares ($1.64 per share) ........................ -- (131,110) -- Net proceeds from issuance of common shares ......................... -- 444,563 -- Common shares issued in connection with Mendik RELP properties acquisition ................... -- 29,063 -- Common shares issued under employees' share plan .................... -- 909 -- Conversion of units to common shares ........ -- 32,780 -- Capital contribution to Vornado Operating Company ................ -- (23,330) -- Accretion of issuance expenses on preferred shares ......................... -- 2,874 -- Common shares issued in connection with dividend reinvestment plan .......... -- 24 -- Change in unrealized (losses) on securities available for sale ......... -- (5,047) (5,047) Appreciation of securities held in officer's deferred compensation trust . -- (10,464) (10,464) Pension obligations ......................... -- (2,606) (2,606) Forgiveness of amount due from Officers ............................ 96 96 -- ----------- ----------- ----------- Balance, December 31, 1998 .................. $ (4,897) $ 1,782,678 $ 134,737 =========== =========== =========== See notes to consolidated financial statements. -63-

64 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (amounts in thousands) Cash Flows from Operating Activities Net income .................................................... $ 152,854 $ 61,023 $ 61,364 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization (including debt issuance costs) ................................................. 59,227 24,460 12,586 Amortization of officer's deferred compensation expense .... -- 22,917 2,083 Straight-lining of rental income ........................... (17,561) (7,075) (2,676) Minority interest .......................................... 16,183 7,293 -- Equity in loss (income) of Alexander's ..................... 3,363 (2,188) (1,108) Equity in income of partially-owned entities ............... (32,025) (4,658) -- Gain on marketable securities .............................. (1,530) (1,026) (913) Gain from insurance settlement and condemnation ............ (9,649) -- -- Changes in operating assets and liabilities ................... 18,544 14,727 (633) ----------- ----------- ----------- Net cash provided by operating activities .......................... 189,406 115,473 70,703 ----------- ----------- ----------- Cash Flows from Investing Activities: Acquisitions of real estate and other ......................... (896,800) (887,423) -- Investments in partially-owned entities ....................... (308,000) Investments in mortgage loans receivable ...................... (6,620) (71,663) (17,000) Repayment of mortgage loans receivable ........................ 57,600 -- -- Cash restricted for tenant improvements ....................... (14,716) (27,079) -- Additions to real estate ...................................... (68,085) (23,789) (14,822) Real estate deposits and other ................................ 26,988 (46,152) -- Purchases of securities available for sale .................... (73,513) (8,378) -- Proceeds from sale or maturity of securities available for sale 25,779 -- 46,734 ----------- ----------- ----------- Net cash (used in) provided by investing activities ................ (1,257,367) (1,064,484) 14,912 ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from borrowings ...................................... 1,427,821 770,000 10,000 Repayments on borrowings ...................................... (883,475) (409,633) (10,966) Costs of refinancing debt ..................................... (11,418) (3,038) -- Proceeds from issuance of common shares ....................... 445,247 688,672 73,060 Proceeds from issuance of preferred shares .................... -- 276,000 -- Proceeds from issuance of preferred units ..................... 85,313 -- -- Proceeds from borrowings on U.S. Treasury obligations ......... -- -- 10,000 Repayment of borrowings on U.S. Treasury obligations .......... -- (9,636) (44,239) Dividends paid on common shares ............................... (154,440) (77,461) (59,558) Dividends paid on preferred shares ............................ (18,816) (15,549) -- Distributions to minority shareholders ........................ (11,229) (4,719) -- Exercise of share options ..................................... 812 633 6,657 ----------- ----------- ----------- Net cash provided by (used in) financing activities ................ 879,815 1,215,269 (15,046) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents ............... (188,146) 266,258 70,569 Cash and cash equivalents at beginning of year ..................... 355,954 89,696 19,127 ----------- ----------- ----------- Cash and cash equivalents at end of year ........................... $ 167,808 $ 355,954 $ 89,696 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash payments for interest .................................... $ 111,089 $ 38,968 $ 15,695 =========== =========== =========== Non-Cash Transactions: Financing in connection with acquisitions ..................... $ 526,000 $ 403,279 $ -- Shares issued in connection with acquisitions ................. 29,000 102,015 -- Minority interest in connection with acquisitions ............. 184,000 177,000 -- Deferred officer's compensation expense and related liability . -- -- 25,000 Unrealized (loss) gain on securities available for sale ....... (5,047) 158 364 Appreciation of securities held in officer's deferred compensation trust ......................................... (10,464) -- -- See notes to consolidated financial statements. -64-

65 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Business Vornado Realty Trust is a fully-integrated real estate investment trust ("REIT"). In April 1997, Vornado transferred substantially all of its assets to Vornado Realty L.P., a Delaware limited partnership (the "Operating Partnership"). As a result, Vornado now conducts its business through, the Operating Partnership. Vornado is the sole general partner of, and owned approximately 85% of the limited partnership common interest in, the Operating Partnership at March 17, 1999. All references to the "Company" and "Vornado" refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership. The Company currently owns directly or indirectly: Office Building Properties ("Office"): (i) all or portions of 21 office building properties in the New York City metropolitan area (primarily Manhattan) containing approximately 12.5 million square feet; (ii) a 34% limited partnership interest in Charles E. Smith Commercial Realty L.P. ("CESCR"), a limited partnership, which owns interests in and manages approximately 10.7 million square feet of office properties in Northern Virginia and Washington D.C., and manages an additional 14.6 million square feet of office and other commercial properties in the Washington, D.C. area; Retail Properties ("Retail"): (iii) 59 shopping center properties in seven states and Puerto Rico containing approximately 12.2 million square feet, including 1.4 million square feet built by tenants on land leased from the Company; Cold Storage Companies ("Cold Storage"): (iv) a 60% interest in partnerships that own 88 warehouse facilities nationwide with an aggregate of approximately 450 million cubic feet of refrigerated, frozen and dry storage space; (excludes 13 additional warehouses containing approximately 30 million cubic feet managed by the Cold Storage Companies - see "Spin-off of Vornado Operating Company"); Merchandise Mart Properties: (v) the Merchandise Mart properties containing approximately 6.7 million square feet, including the 3.4 million square foot Merchandise Mart in Chicago; Other Real Estate Investments: (vi) approximately 29.3% of the outstanding common stock of Alexander's, Inc. ("Alexander's"), which has eight properties in the New York City metropolitan area; (vii) an 80% interest in the Hotel Pennsylvania, a New York City hotel which contains 800,000 square feet of space with 1,700 rooms and 400,000 square feet of retail and office space; (viii) eight dry warehouse/industrial properties in New Jersey containing approximately 2.0 million square feet; and (ix) other real estate and investments. -65-

66 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Spin-off of Vornado Operating Company General Vornado Operating Company ("Vornado Operating"), was incorporated on October 30, 1997, as a wholly owned subsidiary of the Company. In order to maintain its status as a REIT for federal income tax purposes, the Company is required to focus principally on investment in real estate assets. Accordingly, the Company is prevented from owning certain assets and conducting certain activities that would be inconsistent with its status as a REIT. Vornado Operating was formed to own assets that Vornado could not itself own and conduct activities that Vornado could not itself conduct. Vornado Operating is intended to function principally as an operating company, in contrast to the Company's principal focus on investment in real estate assets. Vornado Operating is able to do so because it is taxable as a regular "C" corporation rather than a REIT. Vornado Operating will seek to become the operator of businesses conducted at properties it leases from the Company, as contemplated by the Intercompany Agreement between the Company and Vornado Operating (the "Intercompany Agreement"), referred to below. Vornado Operating expects to rely exclusively on the Company to identify business opportunities and currently expects that those opportunities will relate in some manner to the Company and its real estate investments rather than to unrelated businesses. The Distribution On October 16, 1998, the Operating Partnership made a distribution (the "Distribution") of one share of common stock, par value $.01 per share (the "Common Stock"), of Vornado Operating for 20 units of limited partnership interest of the Operating Partnership (including units owned by the Company) held of record as of the close of business on October 9, 1998 and Vornado Realty Trust in turn made a distribution of the Common Stock it received to the holders of its common shares of beneficial interest. While no Common Stock was distributed in respect of the Company's $3.25 Series A Convertible Preferred Shares, the Company adjusted the Conversion Price to take into account the Distribution. Vornado Operating's Common Stock is listed on the American Stock Exchange under the symbol "VOO". Capital Contribution and Revolving Credit Agreement. The Company initially capitalized Vornado Operating with an equity contribution of $25,000,000 of cash. As part of its formation, Vornado Operating was granted a $75,000,000 unsecured five-year revolving credit facility from Vornado (the "Revolving Credit Agreement"). Borrowings under the Revolving Credit Agreement bear interest at a floating rate per annum equal to LIBOR plus 3%. Commencing January 1, 1999, Vornado Operating pays the Company a commitment fee equal to 1% per annum on the average daily unused portion of the facility. Amounts may be borrowed under the Revolving Credit Agreement, repaid and reborrowed from time to time on a revolving basis (so long as the principal amount outstanding at any time does not exceed $75,000,000). Only interest and commitment fees are payable under the Revolving Credit Agreement until it expires. The Revolving Credit Agreement prohibits Vornado Operating from incurring indebtedness to third parties (other than certain purchase money debt and certain other exceptions) and prohibits Vornado Operating from paying dividends. Debt under the Revolving Credit Agreement is recourse to Vornado Operating. Intercompany Agreement. The Company and Vornado Operating have entered into the Intercompany Agreement pursuant to which, among other things, (a) the Company will under certain circumstances offer Vornado Operating an opportunity to become the lessee of certain real property owned now or in the future by the Company (under mutually satisfactory lease terms) and (b) Vornado Operating will not make any real estate investment or other REIT-Qualified Investment unless it first offers the Company the opportunity to make such investment and the Company has rejected that opportunity. -66-

67 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the Intercompany Agreement, the Company has agreed to provide Vornado Operating with certain administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. For these services, Vornado Operating will compensate the Company in an amount determined in good faith by the Company as the amount an unaffiliated third party would charge Vornado Operating for comparable services and will reimburse the Company for certain costs incurred and paid to third parties on behalf of Vornado Operating. For the period from October 16, 1998 (commencement date) to December 31, 1998, approximately $50,000 of compensation for such services was charged pursuant to the Intercompany Agreement. Vornado Operating and the Company each have the right to terminate the Intercompany Agreement if the other party is in material default of the Intercompany Agreement or upon 90 days written notice to the other party at any time after December 31, 2003. In addition, the Company has the right to terminate the Intercompany Agreement upon a change in control of Vornado Operating. Vornado Operating's Management. Messrs. Roth, Fascitelli, West and Wight are directors of Vornado Operating. Mr. Roth is also Chairman of the Board and Chief Executive Officer of Vornado Operating, Mr. Fascitelli is also President of Vornado Operating, and certain other members of the Company's senior management hold a corresponding position with Vornado Operating. The Cold Storage Companies. On October 31, 1997, partnerships (the "Vornado/Crescent Partnerships") in which affiliates of the Company have a 60% interest and affiliates of Crescent Real Estate Equities Company have a 40% interest acquired each of Americold Corporation ("Americold") and URS Logistics, Inc. ("URS"). In June 1998, the Vornado/Crescent Partnerships acquired the assets of Freezer Services, Inc. and in July 1998 acquired the Carmar Group (Americold, URS, Freezer Services, Inc. and the Carmar Group, collectively, the "Cold Storage Companies"). On March 12, 1999, the Vornado/Crescent Partnerships sold all of the non-real estate assets of the Cold Storage Companies encompassing the operations of the cold storage business for approximately $48,000,000 to a new partnership owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc. The new partnership leases the underlying cold storage warehouses used in this business from the Vornado/Crescent Partnerships which continue to own the real estate. The leases have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on customer revenues. The new partnership is required to pay for all costs arising from the operation, maintenance and repair of the properties, as well as property capital expenditures in excess of $5,000,000 annually. Fixed base rent and percentage rent for the initial lease year is projected to be approximately $151 million. The new partnership has the right to defer a portion of the rent for up to three years beginning on March 12, 1999 to the extent that available cash, as defined in the leases, is insufficient to pay such rent. Disposition and Acquisition of Interest in CESCR On December 31, 1998, the Company sold approximately 1.7% of the outstanding partnership units of CESCR, (a Delaware limited partnership that owns interests in and manages approximately 10.7 million square feet of office properties in Crystal City, Arlington, Virginia, a suburb of Washington, D.C., and manages an additional 14.6 million square feet of office and other commercial properties in the Washington, D.C. area), to Vornado Operating Company, for an aggregate purchase price of approximately $12,900,000 or $34 per unit (which is the price at which CESCR issued partnership units in October 1998 in connection with a significant "roll-up" transaction). The purchase price was funded out of Vornado Operating's working capital. After giving effect to this purchase, the Company owned approximately 9.6% of CESCR as of December 31, 1998. In connection with this purchase, the Company granted to Vornado Operating an option to require the Company to repurchase all of the CESCR units at the price at which Vornado Operating purchased the CESCR units, plus a cumulative return on such amount at a rate of 10% per annum. The option was exercised on March 4, 1999. Accordingly, the Company reacquired the CESCR units from Vornado Operating for $13,200,000. -67-

68 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Summary of Significant Accounting Policies Basis of Presentation: The accompanying consolidated financial statements include the accounts of Vornado Realty Trust and its majority-owned subsidiary, Vornado Realty L.P. as well as interests acquired that individually (or in the aggregate with prior interests) exceed a 50% interest and the Company exercises unilateral control. All significant intercompany amounts have been eliminated. Equity interests in partially-owned entities include partnerships, joint ventures and preferred stock affiliates (corporations in which the Company owns all of the preferred stock and none of the common equity) and 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. Ownership of the preferred stock entitles the Company to substantially all of the economic benefits in the preferred stock affiliates. The common stock of the preferred stock affiliates is owned by Officers and Trustees of Vornado. Management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Real Estate: Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is provided on a straight-line basis over the assets estimated useful lives which range from 7 to 40 years. Tenant allowances are amortized on a straight-line basis over the lives of the related leases. The Company's properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of each such property into the foreseeable future on an undiscounted basis, to the carrying amount of such property. Such carrying amount would be adjusted, if necessary, to reflect an impairment in the value of the asset. Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Cash and cash equivalents does not include cash restricted for tenant improvements at the Company's Two Penn Plaza office building of $25,708,000 and cash restricted in connection with an officer's deferred compensation payable of $4,823,000. Marketable Securities: The Company has classified debt and equity securities which it intends to hold for an indefinite period of time as securities available for sale, equity securities it intends to buy and sell on a short term basis as trading securities and its preferred stock investment in Capital Trust as securities held to maturity. Unrealized gains and losses are included in earnings for trading securities and as a component of shareholder's equity and other comprehensive income for securities available for sale. Realized gains or losses on the sale of securities are recorded based on average cost. At December 31, 1998 and 1997, marketable securities had an aggregate cost of $83,043,000 and $34,950,000 and an aggregate market value of $77,156,000 and $34,469,000 (of which $6,826,000 and $7,583,000 represents trading securities). The securities held to maturity of $48,530,000 are reported at amortized cost. Gross unrealized gains and losses were $513,000 and $6,400,000 at December 31, 1998 and $1,583,000 and $2,064,000 at December 31, 1997. Mortgage Loans Receivable: The Company evaluates the collectibility of both interest and principal of each of its loans, if circumstances warrant, to determine whether it is impaired. A loan is considered to be impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the loss accrual is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan's effective interest rate. Interest on impaired loans is recognized on a cash basis. -68-

69 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Officers Compensation Payable: In July 1998, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board issued EITF 97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested" (EITF 97-14). EITF 97-14 applies to the Company's accounting treatment of the Officers Compensation Payable as reflected in the balance sheet. The transition guidance of EITF 97-14 required the Company to record a charge to equity of $10,464,000 which represents the appreciation in the value of the stock from the date the trust was established (at which time the price of the stock was $21.75 per share) to September 30, 1998 (at which time the price of the stock was $33.13 per share). In subsequent periods, appreciation in the stock's price above $33.13 will be recognized as compensation expense and if the price fluctuates between $33.13 and $21.75, equity would be adjusted. For the quarter ended December 31, 1998, approximately $340,000 was recognized as compensation expense as the price per share at December 31, 1998 was $33.50. Fair Value of Financial Instruments: All financial instruments of the Company are reflected in the accompanying consolidated balance sheets at amounts which, in management's estimation, based upon an interpretation of available market information and valuation methodologies (including discounted cash flow analyses with regard to fixed rate debt) are considered appropriate, and reasonably approximate their fair values. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of the Company's financial instruments. Deferred Charges: Direct financing costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis in accordance with the terms of the agreements to which they relate. Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases entered into after November 14, 1985, which provide for varying rents over the lease terms. Income Taxes: The Company operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which distributes at least 95% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company has distributed to shareholders an amount greater than its taxable income. Therefore, no provision for Federal income taxes is required. Dividend distributions for the year ended December 31, 1998, were characterized for Federal income tax purposes as ordinary income (81%), return of capital (17%) and capital gain (2%). The distributions for the tax years ended December 31, 1997 and 1996 were characterized for Federal income tax purposes as ordinary income. The net basis of the Company's assets and liabilities for tax purposes is approximately $920,000,000 lower than the amount reported for financial statement purposes. Amounts Per Share: Basic earnings per share is computed based on average shares outstanding. Diluted earnings per share considers the effect of options, warrants and convertible securities. All share and per share information has also been adjusted for a 2-for-1 stock split in October 1997. Stock Options: The Company accounts for stock-based compensation using the intrinsic value method. Under the intrinsic value method compensation cost is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the grant date. Accordingly, no compensation cost has been recognized for the Company's stock option plans. -69-

70 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Acquisitions The Company completed approximately $2.4 billion of real estate acquisitions or investments from January 1, 1998 through March, 1999 and $2.0 billion in 1997. These acquisitions were consummated through subsidiaries or preferred stock affiliates of the Company and were recorded under the purchase method of accounting. Related net assets and results of operations have been included in these financial statements since their respective dates of acquisition. The respective purchase costs were allocated to acquired assets and assumed liabilities using their relative fair values as of the closing dates, based on valuations and other studies certain of which are not yet complete. Accordingly, the initial valuations are subject to change as such information is finalized. The Company believes that any such change will not be significant since the allocations were principally to real estate. The following are the details of the acquisitions or investments by segment: Office: Mendik Transaction In April 1997, Vornado consummated the acquisition of interests in all or a portion of seven Manhattan office buildings and the management company held by Bernard H. Mendik, David R. Greenbaum and certain entities controlled by them (the "Mendik Group") and certain of their affiliates, which is operated as the Mendik Division. The properties acquired include (i) four wholly owned properties: Two Penn Plaza, Eleven Penn Plaza, 1740 Broadway and 866 U.N. Plaza and (ii) three 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 ("Minority Interests") and $215,000,000 in indebtedness. 90 Park Avenue In May 1997, the Company acquired a mortgage loan from a consortium of banks collateralized by an 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. This investment is classified as real estate. 20 Broad Street In September 1997, the Company purchased, at a discount, a mortgage on an office building at 20 Broad Street in Manhattan, New York for $27,000,000. The mortgage, which was in default, yielded approximately 12%. In August 1998, the Company acquired the Mendik Group's 60% interest in the leasehold for approximately $600,000 of Operating Partnership Units. In a related transaction, the Company sold a 40% interest in the mortgage to the other unrelated owner of the property for $10,800,000. The purchase from the Mendik Group includes a provision for a future earn-out, capped at $4,400,000 in additional units, based on leasing activity through December 31, 2004. Charles E. Smith Commercial Realty Investment ("CESCR") In October 1997, the Company acquired a 15% limited partnership interest in CESCR for $60,000,000. CESCR owns interests in and manages approximately 10.7 million square feet of office properties in Northern Virginia and Washington, D.C. and manages an additional 14.6 million square feet of office and other commercial properties in the Washington, D.C. area. In October 1998, CESCR issued partnership units in connection with a significant roll-up transaction reducing the Company's limited partnership interest to 11.3%. -70-

71 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) On December 31, 1998, the Company sold approximately 1.7% of the outstanding partnership units of CESCR to Vornado Operating for an aggregate price of approximately $12,900,000. In connection with this purchase, the Company granted Vornado Operating an option to require the Company to repurchase the units. The option was exercised on March 4, 1999. Accordingly, the Company reacquired the CESCR units from Vornado Operating for $13,200,000. On March 4, 1999 the Company made an additional $242,000,000 investment in CESCR by contributing to CESCR the land under certain CESCR office properties in Crystal City, Arlington, Virginia and partnership interests in certain CESCR subsidiaries. The Company acquired these assets from Commonwealth Atlantic Properties, Inc, ("CAPI"), an affiliate of Lazard Freres Real Estate Investors L.L.C., immediately prior to the contribution to CESCR. Together with the Company's investment in CESCR made in 1997 and the units it reacquired from Vornado Operating Company, Vornado now owns approximately 34% of CESCR's limited partnership units. In addition, the Company acquired from CAPI for $8,000,000 the land under a Marriott Hotel located in Crystal City. The purchase price was paid to CAPI by Vornado issuing $250,000,000 of 6% Convertible Preferred Units of the Company's operating partnership. The Preferred Units are convertible at $44 per unit and the coupon increases to 6.50% over the next three years and then fixes at 6.75% in year eight. The Company will appoint one of three members to CESCR's Board of Managers, increasing under certain circumstances to two of four members in March 2002. In connection with these transactions, the Company agreed to make a five-year $41,000,000 loan to CAPI with interest at 8%, increasing to 9% ratably over the term. The loan is secured by approximately $55,000,000 of the Company's units issued to CAPI as well as certain real estate assets. 640 Fifth Avenue In December 1997, the Company acquired 640 Fifth Avenue, a Manhattan office building located at the corner of 51st Street, for approximately $64,000,000. Westport Corporate Office Park In January 1998, the Company acquired the Westport Corporate Office Park from a limited partnership that included members of the Mendik Group. The purchase price was approximately $14,000,000 consisting of $6,000,000 of cash and an $8,000,000 mortgage loan for the two buildings. One Penn Plaza In February 1998, the Company acquired a long-term leasehold interest in One Penn Plaza, a Manhattan office building for approximately $410,000,000. 150 East 58th Street In March 1998, the Company acquired 150 East 58th Street (the "Architects and Design Center"), a Manhattan office building, for approximately $118,000,000. 570 Lexington Avenue - additional investment In April 1998, the Company increased its interest from 5.6% to approximately 50% in 570 Lexington Avenue, an office building located in midtown Manhattan. The Company purchased the additional interest for approximately $37,200,000, including $4,900,000 of existing debt. -71-

72 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 888 Seventh Avenue and 40 Fulton Street In June, 1998, the Company entered into an agreement to acquire the leasehold interest in 888 Seventh Avenue, a 46 story office building located in midtown Manhattan, and simultaneously acquired 40 Fulton Street, a 29 story office building located in downtown Manhattan. The aggregate consideration for both buildings is approximately $154,500,000. The acquisition of 888 Seventh Avenue was completed in January 1999. 770 Broadway In July 1998, the Company acquired 770 Broadway, a Manhattan office building, for approximately $149,000,000, including $18,000,000 of Operating Partnership Units. 689 Fifth Avenue In August 1998, the Company acquired 689 Fifth Avenue, a 84,000 square foot Manhattan specialty building for approximately $33,000,000 from a partnership that included Bernard H. Mendik, a former trustee of the Company. Mendik Real Estate Limited Partnership Properties In November 1998, the Company completed the acquisition of certain properties from the Mendik Real Estate Limited Partnership ("Mendik RELP"). The acquired real estate assets include (i) a leasehold interest in the Saxon Woods Corporate Center located at 550/600 Mamaroneck Avenue, in Harrison, New York, (ii) the remaining 60% interest in an office building located at Two Park Avenue, in Manhattan (the Company already owned 40%) and (iii) a leasehold interest in an office building located at 330 West 34th Street, also in Manhattan. The aggregate purchase price of approximately $106,000,000, consists of $31,000,000 of cash, $29,000,000 of the Company's common shares and $46,000,000 of debt. Retail: Montehiedra Town Center In April 1997, the Company acquired The Montehiedra Town Center ("Montehiedra"), a shopping center, located in San Juan, Puerto Rico, for approximately $74,000,000, of which $63,000,000 was newly issued ten-year indebtedness. Arbor Property Trust In December 1997, the Company acquired Arbor Property Trust ("Arbor") for approximately 2,936,000 common shares of beneficial interest of Vornado and 39,400 Series A Convertible Preferred Shares of Vornado. The approximate value of the transaction was $225,000,000, subject to property level debt of $125,000,000. Arbor was a single property real estate investment trust which owned the Green Acres Mall, a super-regional enclosed shopping mall complex situated in Nassau County, Long Island, New York, approximately one-mile east of the borough of Queens, New York. Las Catalinas Mall In October 1998, the Company completed the acquisition of Kmart Corporation's ("Kmart") 50% interest in the Las Catalinas Mall located in Caguas, Puerto Rico (adjacent to San Juan). In addition, the Company acquired 75% and the Company's partner in the Mall acquired 25% of Kmart's anchor store. The Company's purchase price of $38,000,000 was fully financed with 15 year debt. -72-

73 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Cold Storage In October 1997, two partnerships in which preferred stock affiliates of the Company have 60% interests and affiliates of Crescent Real Estate Equities Company have 40% interests acquired Americold Corporation ("Americold") and URS Logistics, Inc. ("URS") from affiliates of Kelso & Company, Inc. and other owners. Americold and URS are cold storage and logistics warehouse companies. The consideration for these transactions totaled approximately $1,000,000,000, including $628,000,000 of indebtedness. The Company's share of the purchase price was approximately $600,000,000. In June 1998, a partnership in which Vornado owns a 60% interest through a preferred stock affiliate acquired the assets of Freezer Services, Inc., consisting of nine cold storage warehouses in the central United States for approximately $133,000,000, including $107,000,000 in cash and $26,000,000 in indebtedness. The Company's share of this investment was $80,000,000. Additionally, in July 1998, the Carmar Group cold storage warehouse business was acquired for approximately $158,000,000, including $144,000,000 in cash and $14,000,000 in indebtedness. The Company's share of this investment was $95,000,000. Carmar owns and operates five cold storage distribution warehouses in the midwest and southeast United States. See "Subsequent Events". Merchandise Mart Properties: The Merchandise Mart Properties In April 1998, the Company acquired a real estate portfolio from the Kennedy Family for approximately $630,000,000, consisting of $187,000,000 in cash, $116,000,000 in Operating Partnership Units, $77,000,000 in existing debt and $250,000,000 of newly issued debt. The acquired real estate assets consist of a portfolio of properties used for office, retail and trade showroom space which aggregate approximately 5.4 million square feet and include the Merchandise Mart in Chicago. The transaction also included the acquisition of Merchandise Mart Properties, Inc., which manages the properties and owns and operates trade shows. Market Square Complex In December 1998, Vornado completed the acquisition of the 1.07 million square foot Market Square Complex of showrooms in High Point, North Carolina. The consideration was approximately $97,000,000 consisting of $46,000,000 in debt, $44,000,000 in Operating Partnership Units and 6.5% Preferred Operating Partnership Units convertible at $43.74 per unit and $7,000,000 of cash. The acquired real estate assets include the Market Square, Hamilton Market and Furniture Plaza showroom buildings and the High Point Holiday Inn hotel. In a second transaction, the Company acquired the 243,000 square foot National Furniture Mart, which is adjacent to the forementioned properties, in High Point. The price was approximately $17,700,000 consisting of $3,800,000 in cash and $13,900,000 in debt. Other Real Estate Investments: Riese Transaction In June 1997, the Company acquired four properties for approximately $26,000,000. The properties were 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. The mortgage loan which had a five-year term and an initial interest rate of 9.75% increasing annually, was repaid in May 1998. -73-

74 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Hotel Pennsylvania In September 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. from a group of partnerships. Under the joint venture agreement, Hotel Properties Limited and Planet Hollywood International, Inc. had 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 Company's share of the purchase price was approximately $64,000,000. In May 1998, the Company acquired an additional 40% interest in the Hotel Pennsylvania increasing its ownership to 80%. The Company purchased the additional 40% interest from Hotel Properties Limited (one of its joint venture partners) for approximately $70,000,000, including $48,000,000 of existing debt. The Company manages the property's retail and office space, and manages the hotel with Hotel Properties Limited. Newkirk Joint Ventures In July and September 1998, the Company invested an aggregate of $56,000,000 for a 30% share in joint ventures with affiliates of Apollo Real Estate Investment Fund III, L.P., collectively Newkirk Joint Ventures ("Newkirk"). Newkirk owns various equity and debt interests relating to 120 limited partnerships which own real estate primarily net leased to credit rated tenants. The Company has issued letters of credit of $15,600,000 in connection with these joint ventures. In March 1999, the Company and its joint venture partner completed an acquisition of additional equity interests in certain limited partnerships. The Company's additional investment of $52,435,000 consisted of $47,790,000 in Operating Partnership Units and $4,645,000 in cash. YMCA Development In September 1997, the Company and its joint venture partner entered into an agreement with the YMCA to develop a property now occupied by the YMCA. The property overlooks Central Park and is located between West 63rd and 64th Streets in Manhattan, New York. The transaction closed in February 1999. Pursuant to the agreement, the joint venture entity, of which the Company owns 80%, will develop a 40 story mixed-use complex. The YMCA will own and use approximately 94,000 square feet of the new building and the joint venture intends to sell the remaining 119,000 square foot portion of the building as residential condominiums. The project is expected to cost approximately $96,000,000 which will be funded by the Company and is expected to be completed in 2001. To date, the Company has expended approximately $6,400,000 in connection with this transaction, and has provided the YMCA with letters of credit totalling $7,750,000. The Company will receive a preferential return on its funds invested and the return of its funds invested prior to the other joint venture partner receiving any distribution. -74-

75 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Pro Forma Information The unaudited pro forma information set forth below presents (i) the condensed consolidated operating results for the Company for the years ended December 31, 1998 and 1997 as if (a) the acquisitions described above and the financings attributable thereto had occurred on January 1, 1997 and (ii) the condensed consolidated pro forma balance sheet data of the Company as of December 31, 1998, as if the acquisitions and financings subsequent to December 31, 1998 (See "Subsequent Events") had occurred on December 31, 1998. Condensed Pro Forma Consolidated Operating Results (unaudited) Pro Forma Year Ended December 31, --------------------------------- 1998 1997 --------- --------- (amounts in thousands except per share amounts) Revenues ...................................... $ 643,700 $ 602,900 ========= ========= Net income .................................... $ 172,400 $ 148,700 Preferred stock dividends ..................... (21,700) (20,700) --------- --------- Net income applicable to common shares ........ $ 150,700 $ 128,000 ========= ========= Net income per common share-basic ............. $ 1.77 $ 1.50 ========= ========= Net income per common share-diluted ........... $ 1.73 $ 1.47 ========= ========= Pro Forma revenues and net income applicable to common shares after giving effect only to the acquisitions and financings completed prior to December 31, 1998 were $611,965 and $125,381 for the year ended December 31, 1998 and $574,602 and $105,251 for the year ended December 31, 1997. The pro forma results for the year ended December 31, 1997, include non-recurring lease cancellation income of $14,350,000, partially offset by related expenses of $2,775,000. Condensed Pro Forma Consolidated Balance Sheet Data (Unaudited) (amounts in thousands): December 31, 1998 ---------- Total assets ............................................ $4,775,800 ========== Total liabilities ....................................... $2,309,800 Minority interest ....................................... 683,300 Total shareholders' equity .............................. 1,782,700 ---------- Total liabilities and shareholders' equity .............. $4,775,800 ========== -75-

76 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Investments in Partially-Owned Entities The Company's investments in partially-owned entities and income recognized from such investments is disclosed below. Summarized financial data is provided for (i) investments in entities which exceed 10% of the Company's total assets and (ii) investments in which the Company's share of partially-owned entities pre-tax income exceeds 10% of the Company's net income. Balance Sheet Data: Company's Investment Total Assets Total Debt Total Equity -------------------- ------------------------ -------------------- -------------------- 1998 1997 1998 1997 1998 1997 1998 1997 -------- -------- ---------- ---------- -------- -------- -------- -------- (amounts in thousands) Investments: Cold Storage Companies ..................... $459,172 $243,846 $1,743,212 $1,481,405 $642,714 $638,047 $737,344 $404,227 ========== ========== ======== ======== ======== ======== Alexander's ..................... 104,038 108,752 $ 317,043 $ 235,074 $277,113 $208,087 $ 6,974 $ 13,029 ========== ========== ======== ======== ======== ======== Charles E. Smith Commercial Realty L.P. ................... 49,151 60,437 Hotel Pennsylvania .............. 47,813 20,152 Newkirk Joint Ventures ................... 58,665 -- Mendik Partially- Owned Office Buildings ..................... 59,902 37,209 Vornado Management Corp., Mendik Management Company, Merchandise Mart Properties, Inc. and other .... 49,099 12,391 -------- -------- $827,840 $482,787 ======== ======== -76-

77 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Below is a summary of the debt of partially owned entities as of December 31, 1998, none of which is guaranteed by the Company. Amount of Partially-Owned Entities Debt (dollars in thousands) Cold Storage (60% owned by Vornado): Mortgage notes payable collateralized by 58 Cold Storage warehouses, due in 2008, requires amortization based on a 25 year term with interest at 6.89% (prepayable after May 2000 with yield maintenance)......................................................... 545,273 Other notes and mortgages payable................................................................ 97,441 Alexander's (29.3% owned by Vornado): Term loan secured by all of Alexander's assets except for the Kings Plaza Regional Shopping Center, due in 2000 with interest at a blended rate of 12.00%. The portion financed by Vornado ($45,000) bears interest at 14.18% (prepayable without penalty)............ 65,000 Kings Plaza Regional Shopping Center mortgage payable, due in 2001,with interest at LIBOR plus 1.25% (6.53% at December 31, 1998) (prepayable without penalty)........................... 90,000 Construction loan payable collateralized by Rego Park, due in 1999, with interest at LIBOR plus 1.00% (6.03% at December 31, 1998) (prepayable without penalty)..................... 75,000 Other notes and mortgages payable................................................................ 47,113 Charles E. Smith Commercial Realty L.P. (9.6% owned by Vornado (1)): 26 mortgages payable due from 1999 through 2015, with interest from 2.25% to 9.89% at December 31, 1998 (2 are prepayable without penalty, 2 are prepayable with a 1% penalty and 22 are prepayable with yield maintenance)................................................. 786,413 6 mortgages payable (partially owned properties) ..due from 1999 through 2013, with interest from 6.51% to 10.00% at December 31, 1998 (1 is prepayable without penalty and 5 are prepayable with yield maintenance) (2)............................... 156,463 Unsecured line of credit due in 1999, with interest at 6.77% at December 31, 1998 (prepayable without penalty)..................................... 26,000 Hotel Pennsylvania (80% owned by Vornado): Mortgage payable, due in 2002, with interest at LIBOR plus 1.60% (6.82% at December 31, 1998) (prepayable without penalty)........................................ 120,000 Mendik Partially Owned Office Buildings: 330 Madison Avenue (25% owned by Vornado) mortgage ..note payable, due in 2008, with interest at 6.52% (prepayable after May 2000 with yield maintenance)..................... 60,000 Other notes and mortgages payable (49.9% owned by Vornado)....................................... 34,425 Las Catalinas Mall mortgage notes payable, due in 2013 with interest at 6.97% (50% owned by Vornado) (prepayable after December 2002 with yield maintenance)................... 70,941 (1) On March 4, 1999, the Company increased its ownership interest to 34%. (2) As of March 4, 1999, CESCR's interest in these properties increased to approximately 100% and accordingly, CESCR's proportionate share of the applicable debt increased from $156,463 to $316,023. -77-

78 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Income Statement Data: Company's Income from Partially Owned Entities Total Revenues Net Income (loss) ------------------------------ ------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- -------- -------- -------- (amounts in thousands) Income Applicable to Alexander's ............... $ 3,123 $ 7,873 $ 7,956 $ 51,663 $ 25,369 $ 21,833 $ (6,055)* $ 7,466* $ 24,699* ======== ======== ======== ======== ======== ======== ======== ======== ======== Income from Other Partially- Owned Investments: Cold Storage Companies ...... $ 15,191 $ 1,720 $ -- $567,867 $ 78,699 $ -- $ 16,988 $ 90 $ -- ======== ======== ======== ======== ======== ======== Hotel Pennsylvania .......... 3,678 1,055 -- Newkirk Joint Ventures ...... 2,712 -- -- Charles E. Smith Commercial Realty L.P. ............... 4,754 85 -- Mendik Partially-Owned Office Buildings ................. 3,276 424 -- Vornado Management Corp., Mendik Management Company, Merchandise Mart Properties, Inc. and other 2,414 1,374 1,855 -------- -------- -------- $ 32,025 $ 4,658 $ 1,855 ======== ======== ======== - ---------- * 1998 net loss includes the write-off of the carrying value of the Lexington Avenue buildings of $15,096. 1997 net income includes income from the condemnation of a portion of a property of $8,914. 1996 income includes income from discontinued operations of $11,602 and a non-recurring gain of $14,372. Alexander's The Company owns 29.3% of the outstanding shares of common stock of Alexander's. In March 1995, the Company lent Alexander's $45,000,000. The loan, which was originally scheduled to mature in March 1998, has been renewed for two additional one year periods and currently matures in March 2000. The interest rate was reset in March 1999 from 13.87% per annum to 14.18% per annum. The investment in and loans and advances to Alexander's are comprised of: December 31, ----------------------------- 1998 1997 ------------ ------------ (amounts in thousands) Common stock, net of $2,196,000 and $1,596,000 of accumulated depreciation of buildings..................................... $ 53,157 $ 54,931 Loan receivable................................................. 45,000 45,000 Deferred loan origination income................................ -- (83) Leasing fees and other receivables.............................. 5,441 6,576 Equity in income................................................ 222 1,894 Deferred expenses............................................... 218 434 ------------ ------------ $ 104,038 $ 108,752 ============ ============ -78-

79 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Income applicable to Alexander's is comprised of : (amounts in thousands) Year Ended December 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Interest income .................. $ 5,395 $ 6,293 $ 6,848 Equity in (loss) income .......... (2,272) 1,580 1,108 ------- ------- ------- $ 3,123 $ 7,873 $ 7,956 ======= ======= ======= Alexander's is managed by and its properties are leased by the Company, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable. The annual management fee payable to the Company by Alexander's is equal to the sum of (i) $3,000,000, (ii) 3% of the gross income from the Kings Plaza Mall, plus (iii) 6% of development costs with minimum guaranteed fees of $750,000 per annum. The leasing agreement provides for the Company to generally receive a fee of (i) 3% of sales proceeds and (ii) 3% of lease rent for the first ten years of a lease term, 2% of lease rent for the eleventh through the twentieth years of a lease term and 1% of lease rent for the twenty-first through thirtieth year of a lease term. Subject to the payment of rents by Alexander's tenants, the Company is due $5,145,000 at December 31, 1998. Such amount is receivable annually in an amount not to exceed $2,500,000 until the present value of such installments (calculated at a discount rate of 9% per annum) equals the amount that would have been paid had it been paid on September 21, 1993, or at the time the transactions which gave rise to the commissions occurred, if later. As of December 31, 1998, Interstate Properties owned approximately 15.2% of the common shares of beneficial interest of the Company and 27.1% of Alexander's common stock. Interstate Properties is a general partnership in which Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are partners. Mr. Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties, and the Chief Executive Officer and a director of Alexander's, Messrs. Mandelbaum and Wight are trustees of the Company and are also directors of Alexander's. Cold Storage Investment represented a 60% interest in partnerships held by preferred stock affiliates. Income recognized from the Cold Storage Companies is comprised of: (amounts in thousands) Year Ended December 31, ----------------------- 1998 1997* ------- ------- 60% share of equity in net income ................................. $10,249 $ 1,000 Management fee (40% of 1% per annum of the Total Combined Assets (as defined)) .............................. 4,942 720 ------- ------- $15,191 $ 1,720 ======= ======= * Period from November 1, 1997 (date of acquisition) to December 31, 1997. See "Subsequent Events". -79-

80 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Mendik Partially-Owned Office Buildings These investments represented the Company's interests in the partially-owned properties included in the Mendik Transaction: Two Park Avenue (40% interest), 330 Madison Avenue (24.8% interest) and 570 Lexington Avenue (5.6% interest). In April 1998, the Company increased its interest in 570 Lexington Avenue to approximately 50%. Income for the year ended December 31, 1998 is comprised of equity in net income of 570 Lexington at 5.6% until the additional investment was made in April 1998, at which time equity in net income was recorded at approximately 50%. In November 1998, the Company acquired the remaining 60% interest in Two Park Avenue. Income for the year ended December 31, 1998 is comprised of equity in net income of Two Park Avenue until November, 1998 at which time, the property was accounted for on a consolidated basis for the remainder of 1998. Vornado Management Corp., Mendik Management Company and Merchandise Mart Properties Inc. These investments represent non-voting interest in preferred stock affiliates. Income is comprised of equity in the net income of these preferred stock affiliates. -80-

81 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Debt Following is a summary of the Company's debt: December 31, -------------------------- (amounts in thousands) 1998 1997 ---------- ---------- Notes and Mortgage Payable: Fixed Interest: Mortgage payable cross collateralized by an aggregate of 44 shopping centers and warehouse/industrial properties, due in 2000 with interest at 6.36% (prepayable with yield maintenance) ....................... $ 227,000 $ 227,000 Eleven Penn Plaza mortgage payable, due in 2007, requires amortization based on a 25 year term with interest at 8.39% (prepayable after 2003 with yield maintenance) ..................................................... 53,901 54,612 866 UN Plaza mortgage payable, due in 2004, with interest at 7.79% (prepayable without penalty) ................................................ 33,000 33,000 Monteheidra Town Center mortgage pass-through certificates, due in 2007 ($52,014) and 2009 ($10,167), requires amortization based on 30 year term with interest at 8.23% (prepayable after August 1999 with yield maintenance) .......................................................... 62,181 62,698 Washington Office Center mortgage payable, due in 2004, requires amortization based on a 25 year term with interest at 6.80% (prepayable with yield maintenance) ......................................... 50,878 -- Green Acres Mall and Plaza mortgage payable, due in 2008, requires amortization based on a 30 year term with interest at 6.75% (prepayable after May 2000 with yield maintenance) .......................... 158,575 -- Other mortgages payable ....................................................... 38,688 11,344 ---------- ---------- 624,223 388,654 Variable Interest: Two Penn Plaza mortgage payable, due in 2005, interest at LIBOR plus .63% (6.22% at December 31, 1998) (prepayable without penalty) .............. 80,000 80,000 Green Acres Mall and Plaza, collateralized notes, due on August 19, 1998, interest at LIBOR plus .78% (6.40% at December 31, 1997) .......................................................... -- 118,000 Merchandise Mart mortgage payable, due in September 1999, interest at LIBOR plus 1.35% (6.90% at December 31, 1998) (prepayable without penalty) ............................................................ 250,000 -- Washington Design Center mortgage payable, due in 2000, requires amortization based on a 25 year term with interest at LIBOR plus 1.35% (6.90% at December 31, 1998) (prepayable without penalty) ............. 24,225 -- Two Park Avenue mortgage payable, due in 2000, interest at LIBOR plus 1.50% (6.74% at December 31, 1998) (prepayable without penalty) ............. 65,000 -- One Penn Plaza mortgage payable, due in 2002, interest at LIBOR plus 1.25% (6.35% at December 31, 1998) (prepayable after June 1999 without penalty) .................................................................... 275,000 -- Eight individual notes or mortgages payable collateralized by the Market Square Complex with maturity dates ranging from 1999 through 2003 and interest rates ranging from 7.25% to 8.25% at December 31, 1998 ........................................................... 45,302 -- ---------- ---------- Total notes and mortgages payable ........................................... 1,363,750 586,654 Unsecured revolving credit facility, interest at LIBOR plus .89% (6.44% at December 31, 1998) (prepayable without penalty) ................................. 687,250 370,000 ---------- ---------- Total Debt ............................................................... $2,051,000 $ 956,654 ========== ========== -81-

82 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The net carrying value of properties collateralizing the notes and mortgages amounted to $2,114,246,000 at December 31, 1998. As at December 31, 1998, the maturities for the next five years and thereafter are as follows: (in thousands) Year Ending December 31, Amount ------------------------ ------ 1999 .................................................... $ 268,232 2000 .................................................... 1,010,014 2001 .................................................... 14,341 2002 .................................................... 275,840 2003 .................................................... 29,094 Thereafter............................................... 453,479 In July 1997, the Company obtained a $600,000,000 unsecured three-year revolving credit facility. In February 1998, the facility was increased to $1,000,000,000. The facility contains customary loan covenants including, among others, limits on total outstanding indebtedness; maximum loan to value ratio; 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 $500,000,000. The Company paid an origination fee in July 1997 of .30%, origination and amendment fees in February 1998 of .39% and pays a commitment fee quarterly over the remaining term of the facility ranging from .15% to .20% on the facility amount. In February 1998, the Company completed a $160,000,000 refinancing of the Green Acres Mall and prepaid the then existing $118,000,000 debt on the property. The new 10-year debt matures in March 2008, requires amortization based on a 30-year term, bears interest at 6.75% and may be defeased after 2001. In June 1998, the Company completed a $275,000,000 refinancing of its One Penn Plaza office building and borrowed $170,000,000 pursuant thereto. In the third quarter of 1998, the Company borrowed the remaining $105,000,000. the debt matures in June 2002, is prepayable at anytime, and bears interest at LIBOR + 1.25% (currently 6.35%). This debt replaced the $93,192,000 bridge-mortgage loan financing put in place when the property was acquired. The Company entered into an interest rate cap agreement to reduce the impact of changes in interest rates on this loan. The agreement caps the Company's interest rate in the event that LIBOR increases above 8.5% through January 20, 2000 and 9% thereafter, until the termination date of the cap agreement on July 30, 2001. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate cap agreement. However, the Company does not anticipate nonperformance by the counterparty. The fair value of the interest rate cap agreement at December 31, 1998 approximates its cost. In February 1999, the Company completed a $165,000,000 refinancing of its Two Penn Plaza office building and prepaid the then existing $80,000,000 debt on the property. The new 5-year debt matures in February 2004 and bears interest at 7.08%. 6. Shareholders' Equity In April 1998, the Company completed the sale of 10,000,000 common shares of beneficial interest, par value $.04 per share pursuant to an effective registration statement with net proceeds to the Company of approximately $401,000,000. On April 29, 1998, the Company sold 1,132,420 common shares to a unit investment trust, which were valued for the purpose of the trust at $41.06 per share, resulting in net proceeds of approximately $44,000,000. In connection with the acquisition of the Mendik RELP properties in November 1998, the Company issued 842,200 common shares with an approximate value of $29,063,000. During the year ended December 31, 1998, certain Operating Partnership limited partners converted their units into approximately 894,000 common shares. The value of these shares were approximately $32,780,000. -82-

83 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In September 1998, the Company implemented a dividend reinvestment plan which provides holders of record of common shares and the limited partners of the Operating Partnership the opportunity to automatically reinvest all or a portion of their cash distributions received on common shares and units of the Operating Partnership into common shares. During the year ended December 31, 1998, 706 shares were issued and proceeds of approximately $24,000 were received from dividend reinvestment. In April 1997, Vornado completed its public offering 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 $36.11 per share. The offering, net of expenses, generated approximately $276,000,000 which was used to fund the cash portion of the Mendik Transaction. In connection with the acquisition of Arbor in December 1997, the Company issued approximately 2,936,000 common shares and 39,400 Series A Convertible Preferred Shares of Beneficial Interest. The approximate value of the shares issued at the time of the acquisition was $102,000,000. Dividends on the preferred shares in 1998 and 1997 were approximately $21,690,000 and $15,549,000 (including accretion of expenses in connection with the offering of $2,874,000 and $1,918,000). On October 20, 1997, the Company paid a 100% common share dividend to shareholders. All share and per share information has been adjusted to reflect this two-for-one share split. In October 1997, Vornado sold 14,000,000 common shares and an additional 2,100,000 common shares in November 1997 when the underwriters exercised in full their over-allotment option. The shares were sold at a price of $45.00 per share which, net of expenses, yielded approximately $688,672,000. The net proceeds were used to repay $310,000,000 outstanding under the Company's line of credit and to fund a portion of the purchase price of certain acquisitions previously described. 7. Employees' Share Option Plan Under the Omnibus Share Plan (the "Plan"), various officers and employees have been granted incentive share options and non-qualified options to purchase common shares. Options granted are at prices equal to 100% of the market price of the Company's shares at the date of grant, 1,055,066 shares vest on a graduated basis, becoming fully vested 27 months after grant, 3,500,000 shares (granted in connection with Mr. Fascitelli's employment agreement) vest on a graduated basis becoming fully vested 60 months after grant and 4,169,250 shares vest on a graduated basis, becoming fully vested 36 months after grant. All options expire ten years after grant. The Plan also provides for the award of Stock Appreciation Rights, Performance Shares and Restricted Stock, as defined, none of which have been awarded as of December 31, 1998. -83-

84 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) If compensation cost for Plan awards had been determined based on fair value at the grant dates, net income and income per share would have been reduced to the pro-forma amounts below, for the years ended December 31, 1998, 1997 and 1996: December 31, -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (amounts in thousands, except share amounts) Net income applicable to common shares: As reported ................................... $ 131,164 $ 45,474 $ 61,364 Pro-forma ..................................... 117,938 38,416 60,613 Net income per share applicable to common shares: Basic: As reported ................................. $ 1.62 $ .83 $ 1.26 Pro-forma ................................... 1.46 .70 1.24 Diluted: As reported ................................. 1.59 .79 1.25 Pro forma ................................... 1.43 .67 1.23 The fair value of each option grant is estimated on the date of grant using the Binomial option-pricing model with the following weighted-average assumptions used for grants in the periods ending December 31, 1998, 1997 and 1996. December 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Expected volatility .............. 19% 25% 26% Expected life .................... 5 years 5 years 5 years Risk-free interest rate........... 4.6% 6.4% 5.6% Expected dividend yield........... 5.3% 3.4% 5.1% A summary of the Plan's status, and changes during the years then ended, is presented below: December 31, 1998 December 31, 1997 December 31, 1996 --------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- -------- ---------- -------- Outstanding at January 1 ............. 5,529,917 $ 24.43 4,139,386 $ 22.51 1,079,880 $12.27 Granted .............................. 3,436,250 44.99 1,521,500 29.99 3,741,500 23.14 Exercised ............................ (41,851) 21.95 (33,969) 18.69 (681,994) 9.75 Cancelled ............................ (200,000) 32.93 (97,000) 31.25 -- -- ---------- ---------- ---------- Outstanding at December 31 ........... 8,724,316 $ 32.35 5,529,917 $ 24.43 4,139,386 $22.51 ========== ========== ========== Options exercisable at December 31 ... 2,703,407 1,327,418 420,770 ========== ========== ========== Weighted-average fair value of options granted during the year ended December 31 (per option) ........... $ 5.33 $ 7.87 $ 4.75 ========== ========== ========== -84-

85 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table summarizes information about options outstanding under the Plan at December 31, 1998: Options Outstanding Options Exercisable ------------------------------------------------------- ----------------------------------- Number Outstanding Weighted-Average Number Range of December 31, Remaining Weighted-Average Exercisable at Weighted-Average Exercise Price 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price - --------------- ------------- ---------------- ---------------- ----------------- ---------------- $6 to $12 52,868 4.0 Years $11 52,868 $11 $17 to $19 536,769 6.1 Years 18 536,769 18 $23 3,500,000 7.9 Years 23 1,400,000 23 $26 289,929 8.1 Years 26 214,920 26 $30 764,800 8.2 Years 30 309,400 30 $32 to $36 195,500 8.5 Years 34 87,750 34 $38 to $40 241,500 9.4 Years 39 -- -- $41 to $44 132,700 9.2 Years 43 1,700 41 $45 2,745,250 9.1 Years 45 100,000 45 $48 265,000 9.1 Years 48 -- -- --------- --------- $6 to $48 8,724,316 8.3 Years $32 2,703,407 $24 ========= ========= Shares available for future grant under the Plan at December 31, 1998 were 4,103,382. In connection with the acquisition of Arbor in December 1997, the Company issued 60,000 options to a third party outside of the Plan parameters. These options were granted at $43.75 per share and immediately vested. No expense was incurred related to this issuance as it was accounted for as component of the acquisition price. 8. Retirement Plan In December 1997, benefits under the Plan were frozen. Prior to December 31, 1997, the Company's qualified retirement plan covered all full-time employees. The Plan provided annual pension benefits that were equal to 1% of the employee's annual compensation for each year of participation. The funding policy is in accordance with the minimum funding requirements of ERISA. Pension expense includes the following components: Year Ended December 31, ------------------------------- 1998 1997 1996 ----- ----- ----- (amounts in thousands, except percentages) Service cost--benefits earned during the period $ -- $ 115 $ 108 Interest cost on projected benefit obligation . 594 607 544 Actual return on assets ....................... (334) (494) (179) Net amortization and deferral ................. 51 347 (59) ----- ----- ----- Net pension expense ........................... $ 311 $ 575 $ 414 ===== ===== ===== Assumptions used in determining the net pension expense were: Discount rate ................................. 6 3/4% 7 1/4% 7 1/2% Rate of increase in compensation levels ....... --* 5 1/2% 5 1/2% Expected rate of return on assets ............. 7% 7% 8% * Not applicable, as benefits under the Plan were frozen in December 1997. -85-

86 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table sets forth the Plan's funded status and the amount recognized in the Company's balance sheet: December 31, --------------------- 1998 1997 ------- ------- (amounts in thousands) Actuarial present value of benefit obligations: Vested benefit obligation ......................... $ 8,853 $ 8,245 ======= ======= Accumulated benefit obligation .................... $ 8,952 $ 8,337 ======= ======= Projected benefit obligation ...................... $ 8,952 $ 8,337 Plan assets at fair value ......................... 5,551 4,901 ------- ------- Projected benefit obligation in excess of plan assets 3,401 3,436 Unrecognized net obligations ........................ (2,269) (1,086) Adjustment required to recognize minimum liability .. 2,269 1,086 ------- ------- Accrued pension costs ............................... $ 3,401 $ 3,436 ======= ======= Plan assets are invested in U.S. government obligations and securities backed by U.S. government guaranteed mortgages. 9. Leases As lessor: The Company leases space to tenants in shopping centers and office buildings under operating leases. Most of the leases provide for the payment of fixed base rentals payable monthly in advance. Shopping center leases provide for the pass-through to tenants of real estate taxes, insurance and maintenance. Office building leases generally require the tenants to reimburse the Company for operating costs and real estate taxes above their base year costs. Shopping center leases also provide for the payment by the lessee of additional rent based on a percentage of the tenants' sales. As of December 31, 1998, future base rental revenue under noncancellable operating leases, excluding rents for leases with an original term of less than one year and rents resulting from the exercise of renewal options, is as follows: (in thousands) Year Ending December 31: Amount ------------------------ ------ 1999.................................................... $ 474,990 2000.................................................... 454,327 2001.................................................... 422,600 2002.................................................... 394,066 2003.................................................... 354,323 Thereafter.............................................. 2,287,595 These amounts do not include rentals based on tenants' sales. These percentage rents approximated $2,493,000, $1,786,000 and $936,000 for the years ended December 31, 1998, 1997 and 1996. None of the Company's tenants represented more than 10% of the Company's total revenues for the year ended December 31, 1998. -86-

87 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As lessee: The Company is a tenant under operating leases for certain properties. These leases will expire principally during the next thirty years. Future minimum lease payments under operating leases at December 31, 1998, are as follows: (in thousands) Year Ending December 31: Amount ------------------------ ------ 1999......................................................... $ 9,297 2000......................................................... 6,359 2001......................................................... 6,503 2002......................................................... 6,081 2003......................................................... 5,586 Thereafter................................................... 122,700 Rent expense was $5,937,000, $2,001,000 and $1,465,000 for the years ended December 31, 1998, 1997 and 1996. 10. Contingencies At December 31, 1998, in addition to the $687,250,000 balance outstanding under the Company's revolving credit facility, the Company had utilized $100,165,000 of availability under the facility for letters of credit and guarantees primarily related to pending acquisitions. Each of the Company's properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, change in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to the Company. From time-to-time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness. There are various legal actions against the Company in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition, results of operations or cash flow. 11. Net Gain From Insurance Settlement and Condemnation Proceedings In April 1997, the Company's Lodi shopping center was destroyed by a fire. In the third quarter of 1998, the Company and its insurer agreed that the estimated cost to reconstruct the shopping center is approximately $9,012,000 and the Company recorded a gain of $7,955,000 (the agreed upon amount, net of the carrying value of the shopping center of $1,057,000). The insurance carrier had previously advanced $5,550,000 to the Company. The reconstruction of the shopping center is expected to be completed in 1999. On September 1, 1998, Atlantic City condemned the Company's vacant property. In the third quarter of 1998, the Company recorded a gain of $1,694,000, (which reflects the condemnation award of $3,100,000, net of the carrying value of the property of $1,406,000). The Company is contesting the amount of the award. -87-

88 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Repurchase Agreements The Company enters into agreements for the purchase and resale of U.S. government obligations for periods of up to one week. The obligations purchased under these agreements are held in safekeeping in the name of the Company by various money center banks. The Company has the right to demand additional collateral or return of these invested funds at any time the collateral value is less than 102% of the invested funds plus any accrued earnings thereon. 13. Other Related Party Transactions Pursuant to his employment contract, in December 1996 Mr. Fascitelli, the President of the Company, received a deferred payment consisting of $5,000,000 in cash and a $20,000,000 convertible obligation payable at the Company's option in 919,540 of its common shares or the cash equivalent of their appreciated value but not less than $20,000,000. Accordingly, cash of $5,000,000 and 919,540 common shares are being held in an irrevocable trust (the fair value of this obligation was $35,628,000 at December 31, 1998). During 1998, the Company made loans to Mr. Fascitelli aggregating $7,600,000 in accordance with the terms of his employment contract. The loans have a five-year term and bear interest, payable quarterly, at a weighted average rate of 5.16% (based on the mid-term applicable federal rate provided under the Internal Revenue Code). At December 31, 1998, the loans due from Mr. Roth, Mr. Rowan and Mr. Macnow in connection with their stock option exercises were $13,930,000 ($4,897,000 of which is shown as a reduction in shareholders' equity), $144,000 and $130,000, respectively. The loans bear interest at a rate equal to the broker call rate (6.50% at December 31, 1998) but not less than the minimum applicable federal rate provided under the Internal Revenue Code. Interest on the loan to Mr. Roth is payable quarterly. Mr. Roth's loan is due in December 2002. The Company has agreed on each January 1st (commencing January 1, 1997) to forgive one-fifth of the amounts due from Mr. Rowan and Mr. Macnow, provided that they remain employees of the Company. The Company currently manages and leases the real estate assets of Interstate Properties pursuant to a management agreement for which the Company receives a quarterly fee equal to 4% of base rent and percentage rent and certain other commissions. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on sixty days' notice at the end of the term. Although the management agreement was not negotiated at arms length, the Company believes based upon comparable fees charged by other real estate companies, that its terms are fair to the Company. For the years ended December 31, 1998, 1997 and 1996, $1,365,000 and $1,184,000 and $2,074,000 of management fees were earned by the Company pursuant to the management agreement. The Mendik Group owns an entity which provides cleaning and related services and security services to office properties, including the Company's Manhattan office properties. 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 $25,686,000 for the year ended December 31, 1998 and $9,965,000 for the period from April 15, 1997 (date of acquisition of the Mendik portfolio) to December 31, 1997. The common stock of the preferred stock affiliates which own interests in the Cold Storage Companies, Hotel Pennsylvania and related management companies is owned by Officers and Trustees of Vornado. -88-

89 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Minority Interest The minority interest represents limited partners, other than Vornado, interests in the Operating Partnership and are comprised of: Outstanding Preferred or Units at Per Unit Annual Conversion December 31, Liquidation Distribution Rate Into Unit Series 1998 Preference Rate Class A Units ----------- ------------ ----------- ------------- ------------- Class A ...................... 1,887,781 -- $ 1.76 (a) Class C ...................... 3,534,098 -- $ 1.69 (b) 1.0 (c) Class D ...................... 1,332,596 -- $ 2.015 1.0 (d) 5.0% B-1 Convertible Preferred 899,566 $50.00 $ 2.75 .914 8.0% B-2 Convertible Preferred 449,783 $50.00 $ 4.00 .914 6.5% C-1 Convertible Preferred 747,912 $50.00 $ 3.25 1.1431 8.5% D-1 Cumulative Redeemable Preferred .................. 3,500,000 $25.00 $ 2.125 (e) ---------- (a) Class A units are convertible into one common share of beneficial interest in Vornado or cash at Vornado's option. (b) Class C unit holders participated in distributions at an annual rate of $1.69, then pari passu with the Class A rate. (c) Mandatory conversion of Class C units occurs after four consecutive quarters of distributions of at least $.4225 per unit ($1.69 annually). (d) Mandatory conversion of Class D units occurs after four consecutive quarters of distributions of at least $.50375 per unit ($2.015 annually), then pari passu with the Class A rate. (e) Convertible into an equivalent Vornado 8.5% preferred share. -89-

90 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 15. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31, -------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (amounts in thousands, except per share amounts) Numerator: Net income ............................................... $ 152,854 $ 61,023 $ 61,364 Preferred stock dividends ................................ (21,690) (15,549) -- ------------ ------------ ------------ Numerator for basic and diluted earnings per share-- income applicable to common shares ..................... $ 131,164 $ 45,474 $ 61,364 ============ ============ ============ Denominator: Denominator for basic earnings per share--weighted average shares ................................................. 80,724,132 55,097,656 48,854,832 Effect of dilutive securities: Employee stock options ................................. 1,931,818 2,119,553 352,052 ------------ ------------ ------------ Denominator for diluted earnings per share--adjusted weighted average shares and assumed conversions ........ 82,655,950 57,217,209 49,206,884 ============ ============ ============ Net income per common share--basic ......................... $ 1.62 $ 0.83 $ 1.26 Net income per common share--diluted ....................... $ 1.59 $ 0.79 $ 1.25 16. Summary of Quarterly Results (Unaudited) The following summary represents the results of operations for each quarter in 1998 and 1997: Net Income Net Income Per Applicable to Common Share(1) Common ---------------------- Revenue Shares Basic Diluted -------- ------------- -------- --------- (amounts in thousands, except share amounts) 1998 March 31 .............................. $ 90,211 $ 26,064 $ .36 $ .35 June 30 ............................... 128,523 30,894 .38 .37 September 30 .......................... 140,672 39,659 .47 .46 December 31 ........................... 150,454 34,547 .41 .40 1997 March 31 .............................. $ 29,297 $ 9,690 $ .19 $ .18 June 30 ............................... 50,662 8,933 .17 .17 September 30 .......................... 61,868 10,385 .20 .19 December 31 ........................... 67,304 16,466 .26 .25 - ---------- (1) The total for the year may differ from the sum of the quarters as a result of weighting. -90-

91 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 17. Segment Information The Company has four business segments: Office, Retail, Cold Storage and Merchandise Mart Properties. Prior to April 1997, the Company operated in one segment-retail real estate, primarily in the Northeast section of the United States. Accordingly, selected financial information related to each segment is presented for 1998 and 1997 only. December 31, 1998 ------------------------------------------------------------------------------------- Cold Merchandise (amounts in thousands) Office Retail Storage Mart Other(2) Total ----------- --------- --------- ----------- --------- ------- Total revenues $ 247,499 $ 167,155 $ -- $ 86,521 $ 8,685 509,860 Total expenses 151,573 70,334 -- 50,761 22,340 295,008 ----------- --------- --------- --------- --------- ------- Operating income 95,926 96,821 -- 35,760 (13,655) 214,852 Income applicable to Alexander's -- -- -- -- 3,123 3,123 Income from partially-owned entities 10,854 258 15,191 (1,969) 7,691 32,025 Interest and other investment income 4,467 2,159 -- 639 16,809 24,074 Interest and debt expense (25,175) (32,249) -- (18,711) (38,551) (114,686) Net gain from insurance settlement and condemnation proceeding -- -- -- -- 9,649 9,649 Minority interest (7,236) (5,853) (1,024) (2,070) -- (16,183) ----------- --------- --------- --------- --------- ------- Net income 78,836 61,136 14,167 13,649 (14,934) 152,854 Minority interest 7,236 5,853 1,024 2,070 -- 16,183 Interest and debt expense(5) 40,245 32,709 26,541 18,711 46,272 164,478 Depreciation and amortization(5) 39,246 15,520 33,117 9,899 6,517 104,299 Net gain from insurance settlement and condemnation proceeding -- -- -- -- (9,649) (9,649) Straight-lining of rents(5) (6,845) (3,203) -- (4,882) (1,202) (16,132) Other (79) -- 8,872(3) -- 6,262(4) 15,055 ----------- --------- --------- --------- --------- ------- EBITDA(1) $ 158,639 $ 112,015 $ 83,721 $ 39,447 $ 33,266 $ 427,088 =========== ========= ========= ========= ========= =========== Balance sheet data: Real estate, net $ 1,777,919 $ 565,723 $ -- $ 729,485 $ 15,948 $ 3,089,075 Investments and advances to partially-owned entities 118,337 2,946 459,172 26,638 220,747 827,840 Capital expenditures: Acquisitions 923,000 38,000 175,000 745,000 178,000 2,059,000 Other 51,162 5,535 12,463 10,314 1,074 80,548 December 31, 1997 ------------------------------------------------------------------------------ Cold Merchandise Office Retail Storage Mart Other(2) Total --------- --------- -------- ----------- --------- ----------- Total revenues $ 80,846 $ 120,299 $ -- $ -- $ 7,986 $ 209,131 Total expenses 50,186 46,204 -- -- 37,835 134,225 --------- --------- -------- ------- --------- ----------- Operating income 30,660 74,095 -- -- (29,849) 74,906 Income applicable to Alexander's -- -- -- -- 7,873 7,873 Income from partially-owned entities 1,015 -- 1,720 -- 1,923 4,658 Interest and other investment income 6,834 2,296 -- -- 14,637 23,767 Interest and debt expense (9,009) (19,893) -- -- (13,986) (42,888) Net gain from insurance settlement and condemnation proceeding -- -- -- -- -- -- Minority interest (2,042) (4,303) -- -- (948) (7,293) --------- --------- -------- ------- --------- ----------- Net income 27,458 52,195 1,720 -- (20,350) 61,023 Minority interest 2,042 4,303 -- -- 948 7,293 Interest and debt expense(5) 13,707 19,893 5,839 -- 14,956 54,395 Depreciation and amortization(5) 12,813 11,706 4,182 -- 3,271 31,972 Net gain from insurance settlement and condemnation proceeding -- -- -- -- -- -- Straight-lining of rents(5) (645) (2,558) -- -- (729) (3,932) Other 1,303 970 17 -- (2,615) (325) --------- --------- -------- ------- --------- ----------- EBITDA(1) $ 56,678 $ 86,509 $ 11,758 $ -- $ (4,519) $ 150,426 ========= ========= ======== ======== ========= =========== Balance sheet data: Real estate, net $ 803,324 $ 564,214 $ -- $ -- $ 23,120 $ 1,390,659 Investments and advances to partially-owned entities 105,586 4,451 243,846 -- 128,904 482,787 Capital expenditures: Acquisitions 965,000 366,000 600,000 -- 64,000 1,995,000 Other 12,992 8,445 6,102 -- 2,352 29,891 - ---------- See footnotes 1-5 on the next page. -91-

92 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Notes to segment information: (1) EBITDA represents net income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of real estate and the effect of straight-lining of property rentals for rent escalations. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other includes (i) the operations of the Company's warehouse and industrial properties, (ii) investments in the Hotel Pennsylvania, Alexander's, and Newkirk Joint Ventures, (iii) corporate general and administrative expenses and (iv) unallocated investment income and interest and debt expense. (3) Includes adding back of (i) $4,287 of income taxes and related items, which are considered non-recurring because of the expected conversion of the Cold Storage Companies to REITS and (ii) non-recurring unification costs of $4,585. (4) Primarily represents the Company's equity in Alexander's loss from the write-off of the carrying value of Alexander's Lexington Avenue buildings. (5) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. 18. Subsequent Events Acquisition of 888 Seventh Avenue On January 12, 1999, the Company completed the acquisition of 888 Seventh Avenue, a 46 story Manhattan office building for approximately $100,000,000. Additional Investment in Newkirk In March 1999, the Company and its joint venture partner completed an acquisition of additional equity interests in certain limited partnerships. The Company's additional investment of $52,435,000 consisted of $47,790,000 in Operating Partnership Units and $4,645,000 in cash. Charles E. Smith Commercial Realty L.P. On March 4, 1999, the Company made an additional $242,000,000 investment in CESCR by contributing to CESCR the land under certain CESCR office properties in Crystal City, Arlington, Virginia and partnership interests in certain CESCR subsidiaries. The Company acquired these assets from Commonwealth Atlantic Properties, Inc. ("CAPI"), an affiliate of Lazard Freres Real Estate Investors L.L.C., immediately prior to the contribution to CESCR. Together with the Company's investment in CESCR made in 1997 and the units it reacquired on March 4, 1999 from Vornado Operating Company, the Company owns approximately 34% of CESCR's limited partnership units. In addition, the Company acquired from CAPI for $8,000,000 the land under a Marriott Hotel located in Crystal City. The purchase price was paid to CAPI by the Company issuing $250,000,000 of 6% Convertible Preferred Units of the Company's operating partnership. The Preferred Units are convertible at $44 per unit and the coupon increases to 6.50% over the next three years and then fixes at 6.75% in year eight. The Company will appoint one of three members to CESCR's Board of Managers, increasing under certain circumstances to two of four members in March 2002. In connection with these transactions, the Company made a five-year $41,000,000 loan to CAPI with interest at 8%, increasing to 9% ratably over the term. The loan is secured by approximately $55,000,000 of the Operating Partnership's units issued to CAPI as well as certain real estate assets. Offering of Preferred Shares On March 17, 1999, the Company completed the sale of 3 million 8.5% Series B Cumulative Redeemable Preferred Shares, at a price $25.00 per share, pursuant to an effective registration statement with net proceeds to the Company of approximately $72,200,000. Further on March 22, 1999, 400,000 shares were sold when the underwriters exercised their over-allotment option resulting in additional net proceeds to the Company of $9,700,000. The perpetual preferred shares may be called without penalty at the option of the Company commencing on March 17, 2004. -92-

93 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Sale of Non-Real Estate Assets of AmeriCold Logistics On March 12, 1999, the Vornado/Crescent Partnerships sold all of the non-real estate assets of the Cold Storage Companies encompassing the operations of the cold storage business for approximately $48,000,000 to a new partnership owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc. The new partnership leases the underlying cold storage warehouses used in this business from the Vornado/Crescent Partnerships which continue to own the real estate. The leases have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on customer revenues. The new partnership is required to pay for all costs arising from the operation, maintenance and repair of the properties, as well as property capital expenditures in excess of $5,000,000 annually. Fixed base rent and percentage rent for the initial lease year is projected to be approximately $151 million. The new partnership has the right to defer a portion of the rent for up to three years beginning on March 12, 1999 to the extent that available cash, as defined in the leases, is insufficient to pay such rent. -93-

94 PART III Item 10. Directors and Executive Officers of the Registrant Information relating to trustees of the Registrant will be contained in a definitive Proxy Statement involving the election of trustees which the Registrant will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after December 31, 1998, and such information is incorporated herein by reference. Information relating to Executive Officers of the Registrant appears at page 40 of this Annual Report on Form 10-K. Item 11. Executive Compensation Information relating to executive compensation will be contained in the Proxy Statement referred to above in Item 10, "Directors and Executive Officers of the Registrant", and such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information relating to security ownership of certain beneficial owners and management will be contained in the Proxy Statement referred to in Item 10, "Directors and Executive Officers of the Registrant", and such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information relating to certain relationships and related transactions will be contained in the Proxy Statement referred to in Item 10, "Directors and Executive Officers of the Registrant", and such information is incorporated herein by reference. -94-

95 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. The consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K. 2. Financial Statement Schedules. The following financial statement schedules should be read in conjunction with the financial statements included in Item 8 of this Annual Report on Form 10-K. Pages in this Annual Report on Form 10-K --------- Independent Auditors' Report II--Valuation and Qualifying Accounts--years ended December 31, 1998, 1997 and 1996........................... 97 III--Real Estate and Accumulated Depreciation as of December 31, 1998.......................................... 98 Schedules other than those listed above are omitted because they are not applicable or the information required is included in the consolidated financial statements or the notes thereto. The consolidated financial statements of Alexander's, Inc. for the year ended December 31, 1996 are hereby incorporated by reference to Item 14(a)1 of the 1996 Annual Report on Form 10-K of Alexander's, Inc. for the year ended December 31, 1996. 3. The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10-K. Exhibit No. - ----------- 12 Consolidated Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Share Dividend Requirements. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors to Incorporation by Reference. 27 Financial Data Schedule. (b) Reports on Form 8-K and Form 8-K/A During the last quarter of the period covered by this Annual Report on Form 10-K described below. Period Covered: (Date of Earliest Event Reported) Items Reported Date of Report - --------------- -------------- -------------- October 22, 1998 Court approval of Mendik RELP June 2, 1998 litigation settlement; resignation of Bernard H. Mendik November 30, 1998 Issuance of Series D-1 Preferred November 12, 1998 Units by Vornado Realty L.P. -95-

96 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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 By: /s/ Irwin Goldberg ------------------------------------- Irwin Goldberg, Vice President, Chief Financial Officer Date: March 24, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- By: /s/ Steven Roth Chairman of the Board of March 24, 1999 ------------------------------------ Trustees (Principal Executive (Steven Roth) Officer) By: /s/ Michael D. Fascitelli President and Trustee March 24, 1999 ------------------------------------ (Michael D. Fascitelli) By: /s/ Irwin Goldberg Vice President-- March 24, 1999 ------------------------------------ Chief Financial Officer (Irwin Goldberg) By: /s/ David Mandelbaum Trustee March 24, 1999 ------------------------------------ (David Mandelbaum) By: /s/ Stanley Simon Trustee March 24, 1999 ------------------------------------ (Stanley Simon) By: /s/ Ronald G. Targan Trustee March 24, 1999 ------------------------------------ (Ronald G. Targan) By: /s/ Russell B. Wight, Jr. Trustee March 24, 1999 ------------------------------------ (Russell B. Wight, Jr.) By: /s/ Richard R. West Trustee March 24, 1999 ------------------------------------ (Richard R. West) -96-

97 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E - ------------------------------------------- ------------- ----------------- ----------------------------------- ---------- Balance Additions Deductions Balance at Beginning Charged Against ------------------------------------ at End Description of Year Operations Description Amount of Year - ----------- ------------- ----------------- ------------------------ ------ ---------- (amounts in thousands) Year Ended December 31, 1998: Deducted from accounts receivable, allowance for doubtful accounts..... $658 $2,547 Uncollectible accounts $161 $ 3,044 ==== ====== written-off ==== ======= Year Ended December 31, 1997: Deducted from accounts receivable, allowance for doubtful accounts..... $575 $ 305 Uncollectible accounts $222 $ 658 ==== ====== written-off ==== ======= Year Ended December 31, 1996: Deducted from accounts receivable allowance for doubtful accounts..... $578 $ 211 Uncollectible accounts $214 $ 575 ==== ====== written-off ==== ======= -97-

98 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (amounts in thousands) - --------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D - --------------------------------------------------------------------------------------------------------------------- Initial cost to company(1) ---------------------------------------- Costs capitalized Buildings and subsequent Description Encumbrances Land improvements to acquisition --------------- --------------- --------------- -------------- Office Buildings New York One Penn Plaza Manhattan $ 275,000 $ -- $ 412,169 $ 3,539 Two Penn Plaza, Manhattan 80,000 53,615 164,903 38,131 770 Broadway Manhattan -- 52,898 95,686 3,605 Eleven Penn Plaza, Manhattan 53,901 40,333 85,259 5,816 Two Park Avenue Manhattan 65,000 44,050 69,715 -- 90 Park Avenue, Manhattan -- 8,000 175,890 4,624 330 West 34th Street Manhattan -- -- 8,599 -- 1740 Broadway, Manhattan -- 26,971 102,890 5,007 150 East 58th Street Manhattan -- 39,303 80,216 45 866 United Nations Plaza, Manhattan 33,000 32,196 37,534 2,543 640 Fifth Avenue, Manhattan -- 38,224 25,992 424 40 Fulton Street Manhattan -- 20,400 34,235 1,025 20 Broad Street Manhattan -- -- 28,760 55 689 Fifth Avenue Manhattan -- 19,721 13,446 10 550/600 Mamaroneck Avenue Westchester 6,500 -- 21,770 30 --------------- --------------- --------------- ------------- Total New York 513,401 375,711 1,357,064 64,854 --------------- --------------- --------------- ------------- - -------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN E COLUMN F COLUMN G - -------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period ------------------------------------------------- Accumulated depreciation Buildings and and Date of Description Land improvements Total(2) amortization construction(3) ----------- --------------- ------------ --------------- --------------- Office Buildings New York One Penn Plaza Manhattan $ -- $ 415,708 $ 415,708 $ 9,552 1972 Two Penn Plaza, Manhattan 53,615 203,034 256,649 8,240 1968 770 Broadway Manhattan 52,898 99,291 152,189 1,224 1907 Eleven Penn Plaza, Manhattan 40,333 91,075 131,408 3,940 1923 Two Park Avenue Manhattan 44,050 69,715 113,765 3,416 1928 90 Park Avenue, Manhattan 8,000 180,514 188,514 6,199 1964 330 West 34th Street Manhattan -- 8,599 8,599 28 1925 1740 Broadway, Manhattan 26,971 107,897 134,868 4,809 1950 150 East 58th Street Manhattan 39,303 80,261 119,564 1,679 1969 866 United Nations Plaza, Manhattan 32,196 40,077 72,273 1,693 1966 640 Fifth Avenue, Manhattan 38,224 26,416 64,640 695 1950 40 Fulton Street Manhattan 20,400 35,260 55,660 518 1987 20 Broad Street Manhattan -- 28,815 28,815 305 1956 689 Fifth Avenue Manhattan 19,721 13,456 33,177 129 1925 550/600 Mamaroneck Avenue Westchester -- 21,800 21,800 70 1971/1969 ----------- --------------- ------------ --------------- Total New York 375,711 1,421,918 1,797,629 42,497 ----------- --------------- ------------ --------------- - ------------------------------------------------------------------------- COLUMN A COLUMN H COLUMN I - ------------------------------------------------------------------------- Life on which depreciation in latest income Date statement Description Acquired is computed -------- -------------- Office Buildings New York One Penn Plaza Manhattan 1998 39 Years Two Penn Plaza, Manhattan 1997 39 Years 770 Broadway Manhattan 1998 39 Years Eleven Penn Plaza, Manhattan 1997 39 Years Two Park Avenue Manhattan 1998 39 Years 90 Park Avenue, Manhattan 1997 39 Years 330 West 34th Street Manhattan 1998 39 Years 1740 Broadway, Manhattan 1997 39 Years 150 East 58th Street Manhattan 1998 39 Years 866 United Nations Plaza, Manhattan 1997 39 Years 640 Fifth Avenue, Manhattan 1997 39 Years 40 Fulton Street Manhattan 1998 39 Years 20 Broad Street Manhattan 1998 39 Years 689 Fifth Avenue Manhattan 1998 39 Years 550/600 Mamaroneck Avenue Westchester 1998 39 Years Total New York -98-

99 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (amounts in thousands) - -------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D - -------------------------------------------------------------------------------------------------------------------- Initial cost to company(1) ---------------------------------------- Costs capitalized Buildings and subsequent Description Encumbrances Land improvements to acquisition --------------- --------------- --------------- -------------- Connecticut Westport 8,000 4,544 9,753 369 --------------- --------------- --------------- ------------- Total Connecticut 8,000 4,544 9,753 369 --------------- --------------- --------------- ------------- New Jersey Paramus 250 -- 8,345 2,927 --------------- --------------- --------------- ------------- Total New Jersey 250 -- 8,345 2,927 -- Total Office Buildings 521,651 380,255 1,375,162 68,150 --------------- --------------- --------------- ------------- Merchandise Mart Properties Illinois Merchandise Mart Chicago 250,000 64,528 319,146 4,653 Apparel Center Chicago -- 14,238 67,008 3,838 Washington D.C. Washington Office Center 50,878 10,721 69,658 134 Washington Design Center 24,225 12,276 40,662 1,660 Other 9,174 6,273 45 North Carolina Market Square Complex High Point 45,302 11,969 85,478 -- National Furniture Mart High Point 13,831 1,069 16,761 -- --------------- --------------- --------------- ------------- Total Merchandise Mart 384,236 123,975 604,986 10,330 --------------- --------------- --------------- ------------- - -------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN E COLUMN F COLUMN G - -------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period ------------------------------------------------- Accumulated depreciation Buildings and and Date of Description Land improvements Total(2) amortization construction(3) ----------- --------------- ------------ --------------- --------------- Connecticut Westport 4,544 10,122 14,666 234 1980 ----------- --------------- ------------ --------------- Total Connecticut 4,544 10,122 14,666 234 ----------- --------------- ------------ --------------- New Jersey Paramus -- 11,272 11,272 2,916 1967 ----------- --------------- ------------ --------------- Total New Jersey -- 11,272 11,272 2,916 --------------- Total Office Buildings 380,255 1,443,312 1,823,567 45,647 ----------- --------------- ------------ --------------- Merchandise Mart Properties Illinois Merchandise Mart Chicago 64,528 323,799 388,327 6,043 1930 Apparel Center Chicago 14,238 70,846 85,084 1,314 1977 Washington D.C. Washington Office Center 10,721 69,792 80,513 1,323 1990 Washington Design Center 12,276 42,322 54,598 801 1919 Other 9,174 6,318 15,492 118 North Carolina Market Square Complex High Point 11,969 85,478 97,447 180 1902 -- 1989 National Furniture Mart High Point 1,069 16,761 17,830 27 1964 -------- -------- -------- -------- Total Merchandise Mart 123,975 615,316 739,291 9,806 ----------- --------------- ------------ --------------- - ------------------------------------------------------------------------- COLUMN A COLUMN H COLUMN I - ------------------------------------------------------------------------- Life on which depreciation in latest income Date statement Description Acquired is computed -------- -------------- Connecticut Westport 1998 39 Years Total Connecticut New Jersey Paramus 1987 26 -- 40 Years Total New Jersey Total Office Buildings Merchandise Mart Properties Illinois Merchandise Mart Chicago 1998 40 Years Apparel Center Chicago 1998 40 Years Washington D.C. Washington Office Center 1998 40 Years Washington Design Center 1998 40 Years Other 1998 40 Years North Carolina Market Square Complex High Point 1998 40 Years National Furniture Mart High Point 1998 40 Years Total Merchandise Mart -99-

100 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (amounts in thousands) - -------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D - -------------------------------------------------------------------------------------------------------------------- Initial cost to company(1) ---------------------------------------- Costs capitalized Buildings and subsequent Description Encumbrances Land improvements to acquisition --------------- --------------- --------------- -------------- Shopping Centers New Jersey Bordentown 3,276* 498 3,176 1,113 Bricktown 9,919* 929 2,175 9,180 Cherry Hill 9,706* 915 3,926 3,304 Delran 2,848* 756 3,184 2,421 Dover 3,635* 224 2,330 2,575 East Brunswick 8,205* 319 3,236 6,638 East Hanover 11,066* 376 3,063 3,539 East Hanover (Conran's) -- 1,756 8,706 -- Hackensack -- 536 3,293 7,255 Jersey City 10,381* 652 2,962 1,798 Kearny (4) -- 279 4,429 (1,208) Lawnside 5,708* 851 2,222 1,412 Lodi (5) 2,420* 245 1,981 -- Manalapan 6,397* 725 2,447 4,945 Marlton 5,398* 1,514 4,671 605 Middletown 7,761* 283 1,508 3,944 Morris Plains 6,600* 1,254 3,140 3,317 North Bergen (4) -- 510 3,390 (955) North Plainfield 3,109 500 13,340 354 Totowa 15,646* 1,097 5,359 10,941 Turnersville 2,116* 900 2,132 66 Union 15,975* 1,014 4,527 1,908 Vineland 2,358* 290 1,594 1,253 Watchung (4) -- 451 2,347 6,871 Woodbridge 8,792* 190 3,047 711 --------------- --------------- --------------- ------------- Total New Jersey 141,316 17,064 92,185 71,987 --------------- --------------- --------------- ------------- New York 14th Street and Union Square, Manhattan -- 12,566 4,044 3,525 Albany (Menands) -- 460 1,677 2,756 Buffalo (Amherst) 4,863* 402 2,019 2,126 Freeport 8,021* 1,231 3,273 2,848 New Hyde Park 2,043* -- -- 126 North Syracuse -- -- -- 23 Rochester (Henrietta) 2,203* -- 2,124 1,156 Rochester 2,832* 443 2,870 596 - -------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN E COLUMN F COLUMN G - -------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period ------------------------------------------------- Accumulated depreciation Buildings and and Date of Description Land improvements Total(2) amortization construction(3) ----------- --------------- ------------ --------------- --------------- Shopping Centers New Jersey Bordentown 713 4,074 4,787 3,723 1958 Bricktown 929 11,355 12,284 4,669 1968 Cherry Hill 915 7,230 8,145 5,106 1964 Delran 756 5,605 6,361 2,900 1972 Dover 204 4,925 5,129 2,851 1964 East Brunswick 319 9,874 10,193 5,212 1957 East Hanover 477 6,501 6,978 4,431 1962 East Hanover (Conran's) 1,756 8,706 10,462 54 1979 Hackensack 536 10,548 11,084 4,585 1963 Jersey City 652 4,760 5,412 3,605 1965 Kearny (4) 290 3,210 3,500 1,088 1938 Lawnside 851 3,634 4,485 2,127 1969 Lodi (5) 245 1,981 2,226 -- 1998 Manalapan 725 7,392 8,117 3,741 1971 Marlton 1,611 5,179 6,790 3,722 1973 Middletown 283 5,452 5,735 2,713 1963 Morris Plains 1,104 6,607 7,711 4,474 1961 North Bergen (4) 2,309 636 2,945 100 1993 North Plainfield 500 13,694 14,194 4,384 1955 Totowa 1,163 16,234 17,397 5,687 1957 Turnersville 900 2,198 3,098 1,669 1974 Union 1,014 6,435 7,449 5,001 1962 Vineland 290 2,847 3,137 1,787 1966 Watchung (4) 4,200 5,469 9,669 742 1994 Woodbridge 220 3,728 3,948 2,895 1959 ----------- --------------- ------------ --------------- Total New Jersey 22,962 158,274 181,236 77,266 ----------- --------------- ------------ --------------- New York 14th Street and Union Square, Manhattan 12,581 7,554 20,135 800 1965 Albany (Menands) 460 4,433 4,893 1,979 1965 Buffalo (Amherst) 636 3,911 4,547 2,535 1968 Freeport 1,231 6,121 7,352 2,780 1981 New Hyde Park -- 126 126 123 1970 North Syracuse -- 23 23 23 1967 Rochester (Henrietta) -- 3,280 3,280 2,063 1971 Rochester 443 3,466 3,909 2,427 1966 - ---------------------------------------------------------------------------- COLUMN A COLUMN H COLUMN I - ---------------------------------------------------------------------------- Life on which depreciation in latest income Date statement Description Acquired is computed -------- -------------- Shopping Centers New Jersey Bordentown 1958 7 -- 40 Years Bricktown 1968 22 --40 Years Cherry Hill 1964 12 -- 40 Years Delran 1972 16 -- 40 Years Dover 1964 16 -- 40 Years East Brunswick 1957 8 -- 33 Years East Hanover 1962 9 --40 Years East Hanover (Conran's) 1998 40 Years Hackensack 1963 15 -- 40 Years Jersey City 1965 11 -- 40 Years Kearny (4) 1959 23 -- 29 Years Lawnside 1969 17 -- 40 Years Lodi (5) 1975 (5) Manalapan 1971 14 -- 40 Years Marlton 1973 16 -- 40 Years Middletown 1963 19 -- 40 Years Morris Plains 1985 7 -- 19 Years North Bergen (4) 1959 30 Years North Plainfield 1989 21 -- 30 Years Totowa 1957 19 -- 40 Years Turnersville 1974 23 -- 40 Years Union 1962 6 -- 40 Years Vineland 1966 18 --40 Years Watchung (4) 1959 27 -- 30 Years Woodbridge 1959 11 -- 40 Years Total New Jersey New York 14th Street and Union Square, Manhattan 1993 36 -- 39 Years Albany (Menands) 1965 22 -- 40 Years Buffalo (Amherst) 1968 13 -- 40 Years Freeport 1981 15 -- 40 Years New Hyde Park 1976 6 -- 10 Years North Syracuse 1976 11 -- 12 Years Rochester (Henrietta) 1971 15 -- 40 Years Rochester 1966 10 -- 40 Years -100-

101 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (amounts in thousands) - -------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D - -------------------------------------------------------------------------------------------------------------------- Initial cost to company(1) ---------------------------------------- Costs capitalized Buildings and subsequent Description Encumbrances Land improvements to acquisition --------------- --------------- --------------- -------------- Valley Stream (Green Acres) 165,574 138,691 99,586 1,653 --------------- --------------- --------------- ------------- Total New York 185,536 153,793 115,593 14,809 --------------- --------------- --------------- ------------- Pennsylvania Allentown 7,696* 70 3,446 10,183 Bensalem 3,967* 1,198 3,717 1,168 Bethlehem -- 278 1,806 3,873 Broomall 3,260* 734 1,675 1,630 Glenolden 4,245* 850 1,295 744 Lancaster 2,312* 606 2,312 2,643 Levittown 2,283* 193 1,231 132 10th and Market Streets, Philadelphia -- 933 3,230 5,426 Upper Moreland 3,517* 683 2,497 498 York 1,463* 421 1,700 1,248 --------------- --------------- --------------- ------------- Total Pennsylvania 28,743 5,966 22,909 27,545 --------------- --------------- --------------- ------------- Maryland Baltimore (Belair Rd.) -- 785 1,333 3,146 Baltimore (Towson) 5,779* 581 2,756 722 Baltimore (Dundalk) 4,084* 667 1,710 3,209 Glen Burnie 2,299* 462 1,741 1,281 Hagerstown -- 168 1,453 885 --------------- --------------- --------------- ------------- Total Maryland 12,162 2,663 8,993 9,243 --------------- --------------- --------------- ------------- Connecticut Newington 3,042* 502 1,581 600 Waterbury 3,889* -- 2,103 1,463 Total Connecticut 6,931 502 3,684 2,063 Massachusetts Chicopee 1,999* 510 2,031 358 Springfield (4) -- 505 1,657 826 --------------- --------------- --------------- ------------- Total Massachusetts 1,999 1,015 3,688 1,184 --------------- --------------- --------------- ------------- - ---------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN E COLUMN F COLUMN G - ---------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period ------------------------------------------------- Accumulated depreciation Buildings and and Date of Description Land improvements Total(2) amortization construction(3) ----------- --------------- ------------ --------------- --------------- Valley Stream (Green Acres) 140,069 99,861 239,930 2,706 1956 ----------- --------------- ------------ --------------- Total New York 155,420 128,775 284,195 15,436 ----------- --------------- ------------ --------------- Pennsylvania Allentown 334 13,365 13,699 4,967 1957 Bensalem 1,198 4,885 6,083 1,242 1972 Bethlehem 278 5,679 5,957 3,297 1966 Broomall 850 3,189 4,039 1,993 1966 Glenolden 850 2,039 2,889 1,055 1975 Lancaster 606 4,955 5,561 3,025 1966 Levittown 193 1,363 1,556 1,131 1964 10th and Market Streets, Philadelphia 933 8,656 9,589 857 1977 Upper Moreland 683 2,995 3,678 1,939 1974 York 421 2,948 3,369 1,715 1970 ----------- --------------- ------------ --------------- Total Pennsylvania 6,346 50,074 56,420 21,221 ----------- --------------- ------------ --------------- Maryland Baltimore (Belair Rd.) 785 4,479 5,264 2,977 1962 Baltimore (Towson) 581 3,478 4,059 2,140 1968 Baltimore (Dundalk) 667 4,919 5,586 2,723 1966 Glen Burnie 462 3,022 3,484 1,798 1958 Hagerstown 168 2,338 2,506 1,385 1966 ----------- --------------- ------------ --------------- Total Maryland 2,663 18,236 20,899 11,023 ----------- --------------- ------------ --------------- Connecticut Newington 502 2,181 2,683 1,554 1965 Waterbury 667 2,899 3,566 1,810 1969 Total Connecticut 1,169 5,080 6,249 3,364 Massachusetts Chicopee 510 2,389 2,899 1,796 1969 Springfield (4) 2,586 402 2,988 74 1993 ----------- --------------- ------------ --------------- Total Massachusetts 3,096 2,791 5,887 1,870 ----------- --------------- ------------ --------------- - ---------------------------------------------------------------------------- COLUMN A COLUMN H COLUMN I - ---------------------------------------------------------------------------- Life on which depreciation in latest income Date statement Description Acquired is computed -------- -------------- Valley Stream (Green Acres) 1997 39 -- 40 Years Total New York Pennsylvania Allentown 1957 20 -- 42 Years Bensalem 1972 40 Years Bethlehem 1966 9 -- 40 Years Broomall 1966 9 -- 40 Years Glenolden 1975 18 -- 40 Years Lancaster 1966 12 -- 40 Years Levittown 1964 7 -- 40 Years 10th and Market Streets, Philadelphia 1994 27 -- 30 Years Upper Moreland 1974 15 -- 40 Years York 1970 15 -- 40 Years Total Pennsylvania Maryland Baltimore (Belair Rd.) 1962 10 -- 33 Years Baltimore (Towson) 1968 13 -- 40 Years Baltimore (Dundalk) 1966 12 -- 40 Years Glen Burnie 1958 16 -- 33 Years Hagerstown 1966 9 -- 40 Years Total Maryland Connecticut Newington 1965 9 -- 40 Years Waterbury 1969 21 -- 40 Years Total Connecticut Massachusetts Chicopee 1969 13 -- 40 Years Springfield (4) 1966 28 -- 30 Years Total Massachusetts -101-

102 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (amounts in thousands) - --------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D - --------------------------------------------------------------------------------------------------------------------- Initial cost to company(1) ---------------------------------------- Costs capitalized Buildings and subsequent Description Encumbrances Land improvements to acquisition --------------- --------------- --------------- -------------- Texas Dallas Lewisville 764* 2,433 2,271 676 Mesquite 3,445* 3,414 4,704 1,233 Skillman 1,987* 3,714 6,891 1,067 --------------- --------------- --------------- ------------- Total Texas 6,196 9,561 13,866 2,976 --------------- --------------- --------------- ------------- Puerto Rico (San Juan) Montehiedra 62,180 9,182 66,701 215 --------------- --------------- --------------- ------------- Total Shopping Centers 445,063 199,746 327,619 130,022 --------------- --------------- --------------- ------------- Warehouse/Industrial New Jersey East Brunswick -- -- 4,772 2,867 East Hanover 8,210* 576 7,752 7,227 Edison 2,455* 705 2,839 1,241 Garfield -- 96 8,068 4,788 --------------- --------------- --------------- ------------- Total Warehouse/ Industrial 10,665 1,377 23,431 16,123 --------------- --------------- --------------- ------------- Other Properties New Jersey Montclair -- 66 470 330 Rahway -- -- -- 25 --------------- --------------- --------------- ------------- Total New Jersey -- 66 470 355 --------------- --------------- --------------- ------------- - ---------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN E COLUMN F COLUMN G - ---------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period ------------------------------------------------- Accumulated depreciation Buildings and and Date of Description Land improvements Total(2) amortization construction(3) ----------- --------------- ------------ --------------- --------------- Texas Dallas Lewisville 2,469 2,911 5,380 830 1989 Mesquite 3,395 5,956 9,351 1,659 1988 Skillman 3,714 7,958 11,672 2,177 1988 ----------- --------------- ------------ --------------- Total Texas 9,578 16,825 26,403 4,666 ----------- --------------- ------------ --------------- Puerto Rico (San Juan) Montehiedra 9,182 66,916 76,098 2,913 1996 ----------- --------------- ------------ --------------- Total Shopping Centers 210,416 446,971 657,387 137,759 ----------- --------------- ------------ --------------- Warehouse/Industrial New Jersey East Brunswick 7,639 7,639 4,126 1972 East Hanover 691 14,864 15,555 9,604 1963 -- 1967 Edison 704 4,081 4,785 2,153 1954 Garfield 97 12,855 12,952 9,098 1942 ----------- --------------- ------------ --------------- Total Warehouse/ Industrial 1,492 39,439 40,931 24,981 ----------- --------------- ------------ --------------- Other Properties New Jersey Montclair 66 800 866 522 1972 Rahway -- 25 25 25 1972 ----------- --------------- ------------ --------------- Total New Jersey 66 825 891 547 ----------- --------------- ------------ --------------- - ------------------------------------------------------------------------- COLUMN A COLUMN H COLUMN I - ------------------------------------------------------------------------- Life on which depreciation in latest income Date statement Description Acquired is computed -------- -------------- Texas Dallas Lewisville 1990 25 -- 30 Years Mesquite 1990 24 -- 30 Years Skillman 1990 26 -- 30 Years Total Texas Puerto Rico (San Juan) Montehiedra 1997 40 Years Total Shopping Centers Warehouse/Industrial New Jersey East Brunswick 1972 18 -- 40 Years East Hanover 1963 7 -- 40 Years Edison 1982 12 -- 25 Years Garfield 1959 11 -- 33 Years Total Warehouse/ Industrial Other Properties New Jersey Montclair 1972 4 -- 15 Years Rahway 1972 14 Years Total New Jersey -102-

103 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (amounts in thousands) - -------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D - -------------------------------------------------------------------------------------------------------------------- Initial cost to company(1) ---------------------------------------- Costs capitalized Buildings and subsequent Description Encumbrances Land improvements to acquisition --------------- --------------- --------------- -------------- New York 1135 Third Avenue -- 7,844 7,844 -- Riese -- 19,277 7,348 20 --------------- --------------- --------------- ------------- Total New York -- 27,121 15,192 20 --------------- --------------- --------------- ------------- Total Other Properties -- 27,187 15,662 375 --------------- --------------- --------------- ------------- Leasehold Improvements and Equipment 11,491 TOTAL -- DECEMBER 31, 1998 $ 1,361,615 $ 732,540 $ 2,346,860 $236,491 =============== =============== =============== ============= - ---------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN E COLUMN F COLUMN G - ---------------------------------------------------------------------------------------------------------------------------------- Gross amount at which carried at close of period ------------------------------------------------- Accumulated depreciation Buildings and and Date of Description Land improvements Total(2) amortization construction(3) ----------- --------------- ------------ --------------- --------------- New York 1135 Third Avenue 7,844 7,844 15,688 196 Riese 19,276 7,369 26,645 283 1911--1987 ----------- --------------- ------------ --------------- Total New York 27,120 15,213 42,333 479 ----------- --------------- ------------ --------------- Total Other Properties 27,186 16,038 43,224 1,026 ----------- --------------- ------------ --------------- Leasehold Improvements and Equipment 11,491 11,491 7,597 TOTAL -- DECEMBER 31, 1998 $ 743,324 $ 2,572,567 $ 3,315,891 $ 226,816 =========== =============== ============ =============== - -------------------------------------------------------------------------- COLUMN A COLUMN H COLUMN I - -------------------------------------------------------------------------- Life on which depreciation in latest income Date statement Description Acquired is computed -------- -------------- New York 1135 Third Avenue 1997 40 Years Riese 1997 39 Years Total New York Total Other Properties Leasehold Improvements and Equipment 3 -- 20 Years TOTAL -- DECEMBER 31, 1998 * These encumbrances are cross collateralized under a blanket mortgage in the amount of $227,000,000 at December 31, 1998. Notes: 1) Initial cost is cost as of January 30, 1982 (the date on which Vornado commenced real estate operations) unless acquired subsequent to that date -- see Column H. 2) The net basis of the company's assets and liabilities for tax purposes is approximately $920,000,000 lower than the amount reported for financial statement purposes. 3) Date of original construction -- many properties have had substantial renovation or additional construction -- see Column D. 4) Buildings on these properties were demolished in 1993.As a result, the cost of the buildings and improvements, net of accumulated depreciation, were transferred to land. In addition, the cost of the land in Kearny is net of a $1,615,000 insurance recovery. 5) Building was destroyed by fire and is being rebuilt. -103-

104 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (amounts in thousands) The following is a reconciliation of real estate assets and accumulated depreciation: Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Real Estate Balance at beginning of period ................................ $1,564,093 $ 397,298 $ 382,476 Additions during the period: Land ........................................................ 308,261 374,996 -- Buildings & improvements .................................... 1,464,595 792,397 14,822 ---------- ---------- ---------- 3,336,949 1,564,691 397,298 Less: Cost of assets written-off .............................. 21,058 598 -- ---------- ---------- ---------- Balance at end of period ...................................... $3,315,891 $1,564,093 $ 397,298 ========== ========== ========== Accumulated Depreciation Balance at beginning of period ................................ $ 173,434 $ 151,049 $ 139,495 Additions charged to operating expenses ....................... 59,227 22,983 11,589 ---------- ---------- ---------- 232,661 174,032 151,084 Less: Accumulated depreciation on assets written-off ................................................... 5,845 598 35 ---------- ---------- ---------- Balance at end of period ......................................... $ 226,816 $ 173,434 $ 151,049 ========== ========== ========== -104-

105 EXHIBIT INDEX Exhibit No. - ------- 3.1 -- Amended and Restated Declaration of Trust of Vornado, amended April 3, 1997 - Incorporated by reference to Exhibit 3.1 of Vornado's Registration Statement on Form S-8 (File No. 333-29011), filed on June 12, 1997..................................................* 3.2 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 22, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated April 22, 1998 (File No. 001-11954), filed on April 28, 1998.........................* 3.3 -- Articles Supplementary Classifying Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 4.1 of Vornado's Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997..........................* 3.4 -- Articles Supplementary Classifying Vornado's Series D-1 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, no par value (the "Series D-1 Preferred Shares") - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (file No. 001-11954), filed on November 30, 1998........................................................* 3.5 -- Articles Supplementary Classifying Additional Series D-1 Preferred Shares - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999...........................* 3.6 -- Articles Supplementary classifying 8.5% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999............................................................* 3.7 -- By-laws of Vornado, as amended on April 28, 1997 - Incorporated by reference to Exhibit 3(b) of Vornado's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 001-11954), filed on May 14, 1997...........................................* 3.8 -- Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of October 20, 1997 - Incorporated by reference to Exhibit 3.4 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 filed on March 31, 1998 (the "1997 10-K")...............................................* 3.9 -- Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of December 16, 1997--Incorporated by reference to Exhibit 3.5 of the 1997 10-K............................................................* - ---------------------- * Incorporated by reference -105-

106 Exhibit No. - ------- 3.10 -- Second Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of April 1, 1998 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998.........................................* 3.11 -- Third Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of November 12, 1998 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998..........................* 3.12 -- Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of November 30, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 1, 1998 (File No. 001-11954), filed on February 9, 1999.......................* 3.13 -- Exhibit A, dated as of December 22, 1998, to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999.................* 3.14 -- Fifth Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of March 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999.........................* 3.15 -- Exhibit A to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of March 11, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999.............................* 4.1 -- Instruments defining the rights of security holders (see Exhibits 3.1 through 3.15 of this Annual Report on Form 10-K) 4.2 -- Indenture dated as of November 24, 1993 between Vornado Finance Corp. and Bankers Trust Company, as Trustee - Incorporated by reference to Vornado's current Report on Form 8-K dated November 24, 1993 (File No. 001-11954), filed December 1, 1993...........* 4.3 -- Specimen certificate representing Vornado's Common Shares of Beneficial Interest, par value $0.04 per share - Incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Registration Statement on Form S-3 (File No. 33-62395), filed on October 26, 1995............................................................* 4.4 -- Specimen certificate representing Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 4.2 of Vornado's - -------------------------- *Incorporated by reference -106-

107 Exhibit No. - ------- Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997..............................* 4.5 -- Specimen certificate evidencing Vornado's Series B 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest-Incorporated by reference to Exhibit 4.2 of Vornado's registration Statement on Form 8-A (File No. 001-11954), on March 15, 1999.................* 10.1 -- Second Amendment, dated as of June 12, 1997, to Vornado's 1993 Omnibus Share Plan, as amended - Incorporated by reference to Vornado's Registration Statement on Form S-8 (File No. 333-29011) filed on June 12, 1997.....................* 10.2 -- Master Agreement and Guaranty, between Vornado, Inc. and Bradlees New Jersey, Inc. dated as of May 1, 1992 - Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for quarter ended March 31, 1992 (File No. 001-11954), filed May 8, 1992...................................* 10.3** -- Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated as of November 24, 1993 made by each of the entities listed therein, as mortgagors to Vornado Finance Corp., as mortgagee - Incorporated by reference to Vornado's Current Report on Form 8-K dated November 24, 1993 (File No. 001-11954), filed December 1, 1993............................................................* 10.4** -- 1985 Stock Option Plan as amended - Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for quarter ended May 2, 1987 (File No. 001-11954), filed June 9, 1987............................................................* 10.5** -- Form of Stock Option Agreement for use in connection with incentive stock options issued pursuant to Vornado, Inc. 1985 Stock Option Plan - Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for quarter ended October 26, 1985 (File No. 001-11954), filed December 9, 1985...............* 10.6** -- Form of Stock Option Agreement for use in connection with incentive stock options issued pursuant to Vornado, Inc. 1985 Stock Option Plan--Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for quarter ended May 2, 1987 (File No. 001-11954), filed June 9, 1987........................* 10.7** -- Form of Stock Option Agreement for use in connection with incentive stock options issued pursuant to Vornado, Inc. 1985 Stock Option Plan--Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for quarter ended October 26, 1985 (File No. 001-11954), filed December 9, 1985...............* 10.8** -- Employment Agreement between Vornado Realty Trust and Joseph Macnow dated January 1, 1998 - Incorporated by reference to Exhibit 10.7 of Vornado's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 001-11954), filed November 12, 1998............................................................* 10.9** -- Employment Agreement between Vornado Realty Trust and Richard Rowan dated January 1, 1998 - Incorporated by reference to Exhibit 10.8 of Vornado's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 001-11954), filed November 12, 1998............................................................* 10.10** -- Employment Agreement between Vornado Realty Trust and Irwin Goldberg, dated December 11, 1997-Incorporated by reference to Exhibit 10.10 of Vornado's Annual Report on Form 10-K/A for the year ended December 31,1997 (File No. 001-11954), Filed on April 14, 1998........................................................* 10.11** -- Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli dated December 2, 1996 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 001-11954), filed March 13, 1997..................................................* - ---------------------- * Incorporated by reference ** Management contract or compensatory plan -107-

108 Exhibit No. - ------- 10.12 -- Promissory Notes from Steven Roth to Vornado, Inc. dated December 29, 1992 and January 15, 1993 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993...............................................* 10.13 -- Registration Rights Agreement between Vornado, Inc. and Steven Roth Dated December 29, 1992 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993...............................................* 10.14 -- Stock Pledge Agreement between Vornado, Inc. and Steven Roth dated December 29, 1992 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993............................................................* 10.15 -- Promissory Note from Steven Roth to Vornado Realty Trust dated April 15, 1993 and June 17, 1993 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-11954), filed March 24, 1994..................................................* 10.16 -- Promissory Note from Richard Rowan to Vornado Realty Trust - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-11954), filed March 24, 1994................................* 10.17 -- Promissory Note from Joseph Macnow to Vornado Realty Trust - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-11954), filed March 24, 1994................................* 10.18 -- Management Agreement between Interstate Properties and Vornado, Inc. dated July 13, 1992 -Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993............................................................* 10.19 -- Real Estate Retention Agreement between Vornado, Inc., Keen Realty Consultants, Inc. and Alexander's, Inc., dated as of July 20, 1992 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993..............* 10.20 -- Amendment to Real Estate Retention Agreement dated February 6, 1995 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001-11954), filed March 23, 1995.................* 10.21 -- Stipulation between Keen Realty Consultants Inc. and Vornado Realty Trust re: Alexander's Retention Agreement - Incorporated by reference to Vornado's annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-11954), filed March 24, 1994................................* 10.22 -- Stock Purchase Agreement, dated February 6, 1995, among Vornado Realty Trust and Citibank, N.A. Incorporated by reference to Vornado's Current Report on Form 8-K dated February 6, 1995 (File No. 001-11954), filed February 21, 1995............................................................* 10.23 -- Management and Development Agreement, dated as of February 6, 1995 - Incorporated by reference to Vornado's Current Report on Form 8-K dated February 6, 1995 (File No. 001-11954), filed February 21, 1995.............................* 10.24 -- Standstill and Corporate Governance Agreement, dated as of February 6, 1995 - Incorporated by reference to Vornado's Current Report on Form 8-K dated February 6, 1995 (File No. 001-11954), filed February 21, 1995.............................* - ---------------------- * Incorporated by reference -108-

109 Exhibit No. - ------- 10.25 -- Credit Agreement, dated as of March 15, 1995, among Alexander's Inc., as borrower, and Vornado Lending Corp., as lender - Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001 - 11954), filed March 23, 1995....................................* 10.26 -- Subordination and Intercreditor Agreement, dated as of March 15, 1995 among Vornado Lending Corp., Vornado Realty Trust and First Fidelity Bank, National Association - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001-11954), filed March 23, 1995................................* 10.27 -- Revolving Credit Agreement dated as of February 27, 1995 among Vornado Realty Trust, as borrower, and Union Bank of Switzerland, as Bank and Administrative Agent - Incorporated by reference to Exhibit 10(F)9 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001-11954), filed March 23, 1995................................* 10.28 -- Form of Intercompany Agreement between Vornado Realty L.P. and Vornado Operating, Inc. -Incorporated by reference to Exhibit 10.1 of Amendment No. 1 to Vornado Operating, Inc.'s Registration Statement on Form S-11 (File No. 333-40701), filed on January 23, 1998.......................................* 10.29 -- Form of Revolving Credit Agreement between Vornado Realty L.P. and Vornado Operating, Inc., together with related form of Note - Incorporated by reference to Exhibit 10.2 of Amendment No. 1 to Vornado Operating, Inc.'s Registration Statement on Form S-11 (File No.333-40701)......................* 10.30 -- Amended and Restated Revolving Credit Agreement, dated as of February 23, 1998, between Vornado Realty L.P., as Borrower, Vornado Realty Trust, as General Partner and Union Bank of Switzerland (New York Branch), as Bank, the other banks signatory hereto, each as a bank, Union Bank of Switzerland (New York Branch), as Administrative Agent and Citicorp Real Estate, Inc., The Chase Manhattan Bank and Nationsbank, as Syndication Agents - Incorporated by reference to Exhibit 10.29 of the 1997 10-K.....................* 10.31 -- Registration Rights Agreement, dated as of April 15, 1997, between Vornado Realty Trust and the holders of Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997.............................* 10.32 -- Noncompetition Agreement, dated as of April 15, 1997, by and among Vornado Realty Trust, the Mendik Company, L.P., and Bernard H. Mendik - Incorporated by reference to Exhibit 10.3 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997.........................................* 10.33 -- Employment Agreement, dated as of April 15, 1997, by and among Vornado Realty Trust, The Mendik Company, L.P. and David R. Greenbaum - Incorporated by reference to Exhibit 10.4 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997.............................* 10.34 -- Agreement, dated September 28, 1997, between Atlanta Parent Incorporated, Portland Parent Incorporated and Crescent Real Estate Equities, Limited Partnership - Incorporated by reference to Exhibit 99.6 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 8, 1997.................................................* 10.35 -- Contribution Agreement between Vornado Realty Trust, Vornado Realty L.P. and The Contributors Signatory - thereto - Merchandise Mart Properties, Inc. (DE) and Merchandise Mart Enterprises, Inc. Incorporated by reference to Exhibit 10.34 of Vornado's Annual Report on Form 10-K/A for the year ended December 31, 1997 (File No. 001-11954), Filed on April 8, 1998..........................* 10.36 -- Sale Agreement executed November 18, 1997, and effective December 19, 1997, between MidCity Associates, a New York partnership, as Seller, and One Penn Plaza LLC, a New York Limited liability company; as purchaser. Incorporated by reference to Exhibit 10.35 of Vornado's Annual Report on Form 10-K/A for the Year ended December 31, 1997 (File No.001-11954), Filed on April 8, 1998...* - ---------------------- * Incorporated by reference -109-

110 Exhibit No. ------- 10.37 -- Promissory Notes from Michael D. Fascitelli to Vornado Realty Trust dated March 2, 1998 and April 30, 1998. Incorporated by reference to Exhibit 10.37 of Vornado's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 001-11954), filed May 13, 1998...............................................* 10.38 -- Credit Agreement dated as of June 22, 1998 among One Penn Plaza, LLC, as Borrower, The Lenders Party Hereto, The Chase Manhattan Bank, as Administrative Agent Incorporated by reference to Exhibit 10 of Vornado's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 001-11954), filed August 13, 1998.............................................................* 10.39 -- Registration Rights Agreement, dated as of April 1, 1998, between Vornado and the Unit Holders named therein - Incorporated by reference to Exhibit 10.2 of Amendment No. 1 to Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on May 6, 1998......................................................* 10.40 -- Underwriting Agreement, dated April 9, 1998, among Vornado, Vornado Realty L.P. and Goldman, Sachs & Co. - Incorporated by reference to Exhibit 1.1 of Vornado's Current Report on Form 8-K, dated April 9, 1998 (file No. 001-11954), filed on April 16, 1998...............* 10.41 -- Pricing Agreement, dated April 9, 1998, between Vornado and Goldman, Sachs & Co. - Incorporated by reference to Exhibit 1.2 of Vornado's current report on Form 8-K, dated April 9, 1998 (File No. 001-11954), filed on April 16, 1998..............................* 10.42 -- Underwriting Agreement, dated April 23, 1998, among Vornado, Vornado Realty L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated - Incorporated by reference to Exhibit 1.1 of Vornado's Current Report on Form 8-K, dated April 22, 1998 (File No. 001-11954), filed on April 28, 1998..........................* 10.43 -- Underwriting Agreement, dated March 12, 1999, among Vornado, Vornado Realty L.P., Merrill Lynch, Pierce, Fenner & Smith Incorporated - Incorporated by reference to Exhibit 1.1. of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999..........................* 12 -- Consolidated Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Share 111 Dividend Requirements..........111 13 -- Not applicable 16 -- Not applicable 18 -- Not applicable 19 -- Not applicable 21 -- Subsidiaries of the Registrant.................................112 22 -- Not applicable 23 -- Consent of independent auditors................................117 25 -- Not applicable 27 -- Financial Data Schedule........................................118 29 -- Not applicable - ---------------------- * Incorporated by reference -110-

1 EXHIBIT 12 VORNADO REALTY TRUST CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDEND REQUIREMENTS December 31, ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Income from continuing operations before income taxes $ 131,164 $ 45,474 $ 61,364 $ 53,008 $ 41,240 Fixed charges 139,765 59,104 17,214 17,333 16,229 --------- --------- --------- --------- --------- Income from continuing operations before income taxes and fixed charges $ 270,929 $ 104,578 $ 78,578 $ 70,341 $ 57,469 ========= ========= ========= ========= ========= Fixed charges: Interest and debt expense $ 114,686 $ 42,888 $ 16,726 $ 16,426 $ 14,209 Preferred stock dividends 21,690 15,549 -- -- -- 1/3 of rent expense-- interest factor 1,979 667 488 465 438 --------- --------- --------- --------- --------- 138,355 59,104 17,214 16,891 14,647 Capitalized interest 1,410 -- -- 442 1,582 --------- --------- --------- --------- --------- $ 139,765 $ 59,104 $17,214 $ 17,333 $ 16,229 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges 1.94 1.76 4.56 4.06 3.54 Note: For purposes of this calculation, earnings before fixed charges consist of earnings before income taxes plus fixed charges. Fixed charges consist of interest expense on all indebtedness (including amortization of deferred debt issuance costs) preferred stock dividends and the portion of operating lease rental expense that is representative of the interest factor (deemed to be one third of operating lease rentals). Rent Expense $ 5,937 $ 2,001 $ 1,465 $ 1,395 $ 1,313 ========= ========= ========= ========= ========= -111-

1 EXHIBIT 21 VORNADO REALTY TRUST SUBSIDIARIES OF THE REGISTRANT State of Name of Subsidiary Organization - ------------------ ------------ 14 West 64th Street Corp. New York 150 East 58th Street L.L.C. New York 1740 Broadway Associates L.P. Delaware 20 Broad Lender L.L.C. New York 201 East 66th Street Corp. New York 201 East 66th Street L.L.C. New York 314 West 40th Street L.L.C. New York 330 Madison Company L.L.C. New York 350 North Orleans L.L.C. Delaware 40 East 14 Realty Associates L.L.C. New York 40 Fulton Street L.L.C. New York 401 Commercial Son, L.L.C. Delaware 401 Commercial, L.P. Delaware 401 General Partner, L.L.C. Delaware 401 Hotel General Partner, L.L.C. Delaware 401 Hotel, L.P. Delaware 527 West Kinzie L.L.C. Delaware 570 Lexington Associates, L.P. New York 570 Lexington Company, L.P. New York 689 5th Avenue L.L.C. Delaware 770 Broadway Company L.L.C. New York 825 Seventh Avenue Holding L.L.C. New York 866 U.N. Plaza Associates L.L.C. New York 888 Seventh Avenue L.L.C. New York 909 Third Avenue Assignee L.L.C. New York AmeriCold Corporation Oregon AmeriCold Logistics II L.L.C. Delaware AmeriCold Logistics L.L.C Delaware AmeriCold Real Estate, L.P. Delaware AmeriCold Realty, Inc. Delaware Americold Services Corporation Delaware Amherst Holding L.L.C. New York Amherst Industries L.L.C. New York Arbor Property, L.P. Delaware Atlanta Parent, Inc. Delaware Atlantic City Holding L.L.C. New Jersey B&B Park Avenue L.P. Delaware BBE GP Corporation Delaware Bensalem Holding Company L.L.C. Pennsylvania Bensalem Holding Company L.P. Pennsylvania Bethlehem Holding Company L.L.C. Pennsylvania Bethlehem Holding Company L.P. Pennsylvania Bethlehem Properties Holding Company L.L.C. Pennsylvania Bethlehem Properties Holding Company L.P. Pennsylvania Bordentown Holding L.L.C. New Jersey -112-

2 State of Name of Subsidiary Organization - ------------------ ------------ Brentwood Development L.L.C. New York Bridgeland Warehouses L.L.C. New Jersey Camden Holding L.L.C. New Jersey Carmar Freezers Russellville, L.L.C. Missouri Carmar Group, Inc. Missouri Carmar Industries, L.L.C. Missouri Charles E. Smith Commercial Realty L.P. Delaware Chicopee Holding L.L.C. Massachusetts Clementon Holding L.L.C. New Jersey Cumberland Holding L.L.C. New Jersey Darby Development Corp. Florida Delran Holding L.L.C. New Jersey Design Center Owner (D.C.) L.L.C. Delaware Dover Holding L.L.C. New Jersey DSAC L.L.C. Texas DUN L.L.C. Maryland Durham Leasing L.L.C. New Jersey EH L.L.C. Maryland Eleven Penn Plaza L.L.C. New York Evesham Holding L.L.C. New Jersey Gallery Market Holding Company L.L.C. Pennsylvania Gallery Market Holding Company L.P. Pennsylvania Gallery Market Properties Holding Company L.L.C. Pennsylvania Gallery Market Properties Holding Company L.P. Pennsylvania GBSPI L.L.C. Maryland Graybar Building L.L.C. New York Green Acres Mall, L.L.C. Delaware Hackbridge L.L.C. New Jersey Hanover Conran's Plaza L.L.C. New Jersey Hanover Holding L.L.C. New Jersey Hanover Industries L.L.C. New Jersey Hanover Leasing L.L.C. New Jersey Hanover Public Warehousing L.L.C. New Jersey Henrietta Holding L.L.C. New York HHC L.L.C. Maryland Jersey City Leasing L.L.C. New Jersey Kearny Holding L.L.C. New Jersey Kearny Leasing L.L.C. New Jersey Lancaster Leasing Company L.L.C. Pennsylvania Lancaster Leasing Company L.P. Pennsylvania Landthorp Enterprises L.L.C. Delaware Lawnside Holding L.L.C. New Jersey Lawnwhite Holding L.L.C. New Jersey Lewisville Centre L.P. Texas Lewisville TC L.L.C. Texas Littleton Holding L.L.C. New Jersey Lodi Industries L.L.C. New Jersey Lodi Leasing L.L.C. New Jersey M 330 Associates, L.P. New York M 393 Associates L.L.C. New York Manalapan Industries L.L.C. New Jersey Market Square L.L.C. Illinois Marple Holding Company L.L.C. Pennsylvania Marple Holding Company L.P. Pennsylvania Mart Franchise Center, Inc. Delaware Mart Franchise Venture, L.L.C. Delaware -113-

3 State of Name of Subsidiary Organization - ------------------ ------------ Menands Holding L.L.C. New York Mendik Management Company Inc. New York Merchandise Mart Enterprises, Inc. Delaware Merchandise Mart L.L.C. Delaware Merchandise Mart Properties, Inc. Delaware Merchandise Mart Properties, Inc. (DE) Delaware Mesquite - Texas Crossing L.P. Texas Mesquite TC L.L.C. Texas Middletown Holding L.L.C. New Jersey Montclair Holding L.L.C. New Jersey Morris Plains Leasing L.L.C. New Jersey MRC Management L.L.C. New York National Hydrant L.L.C. New York New Hanover L.L.C. New Jersey New Woodbridge L.L.C. New Jersey Newington Connecticut Holding L.L.C. Connecticut Ninety Park Lender LLC New York Ninety Park Lender QRS, Inc. Delaware Ninety Park Manager LLC New York Ninety Park Option LLC New York Ninety Park Property LLC New York North Bergen Stores L.L.C. New Jersey North Plainfield Holding L.L.C. New Jersey Office Center Owner (D.C.) L.L.C. Delaware One Penn Plaza LLC New York Philadelphia Holding Company L.L.C. Pennsylvania Philadelphia Holding Company L.P. Pennsylvania Phillipsburg Holding L.L.C. New Jersey Pike Holding Company L.L.C. Pennsylvania Pike Holding Company L.P. Pennsylvania Portland Parent, Inc. Delaware Rahway Leasing L.L.C. New Jersey Rochester Holding L.L.C. New York Russia Fund, L.L.C. Delaware Skillman Abrams Crossing L.P. Texas South Capital L.L.C. Delaware Springfield Holding L.L.C. Massachusetts Star Universal L.L.C. New Jersey Stardial GP Corporation Delaware T.G. Hanover L.L.C. New Jersey T53 Condominium L.L.C. New York TGSI L.L.C. Maryland The Second Lawnside L.L.C. New Jersey The Second Rochester Holding L.L.C. New York Trees Acquisition Subsidiary, Inc. Delaware Turnersville Holding L.L.C. New Jersey Two Guys From Harrison Holding Co. L.P. Pennsylvania Two Guys From Harrison Holding Co. LLC Pennsylvania Two Guys From Harrison L.L.C. New Jersey Two Guys From Harrison N.Y. L.L.C. New York Two Guys Mass. L.L.C. Massachusetts Two Guys-Connecticut Holding L.L.C. Connecticut Two Park Company New York Two Penn Plaza REIT, Inc. New York Unado L.L.C. New Jersey Unifreeze Services Partnership Delaware -114-

4 State of Name of Subsidiary Organization - ------------------ ------------ Upper Moreland Holding Company L.L.C. Pennsylvania Upper Moreland Holding Company L.P. Pennsylvania URS Logistics, Inc. Delaware URS Real Estate, L.P. Delaware URS Realty, Inc. Delaware VC Carthage, L.L.C. Delaware VC Freezer Amarillo, L.P. Delaware VC Freezer Fremont. L.L.C. Delaware VC Freezer Garden City, L.L.C. Delaware VC Freezer Omaha Amarillo, L.L.C. Delaware VC Freezer Phoenix, L.L.C. Delaware VC Freezer Russelville, L.L.C. Delaware VC Freezer Sioux Falls, L.L.C. Delaware VC Freezer Springdale, L.L.C. Delaware VC Logistics, L.L.C. Delaware VC Missouri Holdings, L.L.C. Delaware VC Missouri Real Estate Holding, L.L.C. Delaware VC Omaha Holdings, L.L.C. Delaware VC Omaha Real Estate Holdings, L.L.C. Delaware VC Omaha Texas, L.L.C. Delaware VC Superior, L.L.C. Delaware VC Texas, L.P. Delaware VFC Connecticut Holding L.L.C. Delaware VFC Massachusetts Holding L.L.C. Delaware VFC New Jersey Holding L.L.C. Delaware VNK Corp Massachusetts Vornado - Westport L.L.C. Connecticut Vornado 1740 Broadway L.L.C. New York Vornado 330 West 34th Street L.L.C. Delaware Vornado 401 Commercial L.L.C. New York Vornado 401 Commercial Son L.L.C. New York Vornado 401 Hotel, Inc. New York Vornado 550/600 Mamoroneck L.P. Delaware Vornado 570 Lexington L.L.C. New York Vornado 63rd Street, Inc. New York Vornado 640 Fifth Avenue L.L.C. New York Vornado 90 Park Avenue L.L.C. New York Vornado 90 Park QRS, Inc. New York Vornado B&B L.L.C. New York Vornado CAPI L.L.C. Delaware Vornado Catalinas GP Inc. Delaware Vornado Center Building L.L.C. New York Vornado CESCR Holdings L.L.C. Delaware Vornado CESCR II L.L.C. Delaware Vornado CESCR L.L.C. Delaware Vornado Crescent Atlanta Partnership Delaware Vornado Crescent Holding L.P. Delaware Vornado Crescent Logistics Operating Partnership Delaware Vornado Crescent Omaha Partnership Delaware Vornado Crescent Portland Partnership Delaware Vornado Deer Park L.L.C. New York Vornado Finance GP L.L.C. Delaware Vornado Finance L.P. Delaware Vornado Finance SPE, Inc. Delaware Vornado Green Acres Acquisition L.L.C. Delaware Vornado Green Acres Delaware L.L.C. Delaware -115-

5 State of Name of Subsidiary Organization - ------------------ ------------ Vornado Green Acres Funding L.L.C. Delaware Vornado Green Acres Holdings L.L.C. Delaware Vornado Green Acres SPE Managing Member, Inc. Delaware Vornado Investment Corporation New York Vornado Investments L.L.C. Delaware Vornado Lending L.L.C. New Jersey Vornado M 330 L.L.C. New York Vornado M 393 L.L.C. New York Vornado M 393 QRS, Inc. New York Vornado M/H L.L.C. Delaware Vornado Mamaroneck L.L.C. Delaware Vornado Management Corp. New Jersey Vornado Montehiedra Acquisition L.L.C. Delaware Vornado Montehiedra Acquisition L.P. Delaware Vornado Montehiedra Holding II L.P. Delaware Vornado Montehiedra Holding L.L.C. Delaware Vornado Montehiedra Holding L.P. Delaware Vornado Montehiedra Inc. Delaware Vornado Montehiedra OP L.L.C. Delaware Vornado Montehiedra OP L.P. Delaware Vornado New York RR One L.L.C. New York Vornado Newkirk L.L.C. Massachusetts Vornado NK Loan L.L.C. Massachusetts Vornado Omaha Holdings, Inc. Delaware Vornado Realty L.L.C. Delaware Vornado Realty L.P. Delaware Vornado RR Midtown L.L.C. New York Vornado Two Park Holdings L.L.C. Delaware Vornado Two Penn Plaza L.L.C. New York Vornado/Team Room L.L.C. New York VR Retail Holdings LLC New York VRT Massachusetts Holding L.L.C. Delaware VRT New Jersey Holding L.L.C. Delaware Washington Design Center L.L.C. Delaware Washington Office Center L.L.C. Delaware Watchung Holding L.L.C. New Jersey West Windsor Holding L.L.C. New Jersey Whitehorse Lawnside L.L.C. New Jersey York Holding Company L.L.C. Pennsylvania York Holding Company L.P. Pennsylvania -116-

1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following Registration Statements of our report dated March 24, 1999 appearing in this Annual Report on Form 10-K of Vornado Realty Trust for the year ended December 31, 1998: Vornado Realty Trust: Registration Statement No. 333-64015 on Form S-3 Amendment No. 1 to Registration Statement No. 333-50095 on Form S-3 Registration Statement No. 333-52573 on Form S-8 Registration Statement No. 333-29011 on Form S-8 Registration Statement No. 333-09159 on Form S-8 Vornado Realty Trust and Vornado Realty L.P. (Joint Registration Statements): Amendment No. 4 to Registration Statement No. 333-40787 on Form S-3 Amendment No. 4 to Registration Statement No. 333-29013 on Form S-3 DELOITTE & TOUCHE LLP Parsippany, New Jersey March 24, 1999 117

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 167,808 77,156 35,517 3,044 0 0 3,315,891 226,816 4,425,779 0 2,051,000 0 282,758 3,403 1,496,517 4,425,779 0 509,860 0 207,171 87,837 2,547 114,686 152,854 0 152,854 0 0 0 131,164 1.62 1.59