EXHIBIT INDEX ON PAGE 161
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, 2002
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
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(Exact name of Registrant as specified in its charter)
MARYLAND 22-1657560
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
888 SEVENTH AVENUE, NEW YORK, NEW YORK 10019
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (212) 894-7000
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 Preferred Shares New York Stock Exchange
of beneficial interest, no par value
8.5% Series B Cumulative Redeemable Preferred Shares of New York Stock Exchange
beneficial interest, no par value
8.5% Series C Cumulative Redeemable Preferred Shares New York Stock Exchange
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES /X/ NO / /
Aggregate market value of the voting and non-voting common 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 June 28, 2002 was $3,767,558,000.
As of February 3, 2003, there were 108,665,797 of the registrant's common shares
of beneficial interest outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of Proxy Statement for Annual Meeting of Shareholders to be
held on May 28, 2003.
-1-
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I. 1. Business............................................................................... 4
2. Properties............................................................................. 25
3. Legal Proceedings...................................................................... 54
4. Submission of Matters to a Vote of Security Holders.................................... 55
Executive Officers of the Registrant................................................... 55
PART II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 56
6. Selected Consolidated Financial Data................................................... 57
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 59
7A. Quantitative and Qualitative Disclosures about Market Risk............................. 99
8. Financial Statements and Supplementary Data............................................ 100
9. Changes In and Disagreements With Independent Auditors on Accounting and Financial
Disclosure........................................................................... 147
PART III. 10. Directors and Executive Officers of the Registrant..................................... 147(1)
11. Executive Compensation................................................................. 147(1)
12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters.............................................................................. 147(1)
13. Certain Relationships and Related Transactions......................................... 148(1)
14. Controls and Procedures................................................................ 148
PART IV. 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 149
SIGNATURES................................................................................................... 150
CERTIFICATIONS............................................................................................... 151
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(1) 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, 2002, which
is incorporated by reference herein. Information relating to Executive
Officers of the Registrant appears on page 55 of this Annual Report on Form
10-K.
-2-
FORWARD LOOKING STATEMENTS
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"). Forward-looking statements are not guarantees
of performance. Our future results, financial condition and business may differ
materially from those expressed in these forward-looking statements. You can
find many of these statements by looking for words such as "believes",
"expects", "anticipates", "estimates", "intends", "plans" or similar expressions
in this annual report on Form 10-K. These forward-looking statements are subject
to numerous assumptions, risks and uncertainties. Many of the factors that will
determine these items are beyond our ability to control or predict. For further
discussion of these factors, see "Item 1. Business - Certain Factors That May
Adversely Affect the Company's Business and Operations" in this annual report on
Form 10-K.
For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. You are cautioned not to place undue reliance on our
forward-looking statements, which speak only as of the date of this annual
report on Form 10-K or the date of any document incorporated by reference. All
subsequent written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly any revisions to our
forward-looking statements to reflect events or circumstances after the date of
this Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Vornado Realty Trust is a fully-integrated real estate investment trust
("REIT"). Vornado conducts its business through Vornado Realty L.P., a Delaware
limited partnership (the "Operating Partnership"). Vornado is the sole general
partner of, and owned approximately 79% of the limited partnership interest in,
the Operating Partnership at February 3, 2003. 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 PROPERTIES ("OFFICE"):
(i) all or portions of 74 office properties aggregating
approximately 27.7 million square feet in the New York City metropolitan
area (primarily Manhattan) and in the Washington D.C. and Northern Virginia
area;
RETAIL PROPERTIES ("RETAIL"):
(ii) 62 retail properties in six states and Puerto Rico aggregating
approximately 12.5 million square feet, including 1.8 million square feet
built by tenants on land leased from the Company;
MERCHANDISE MART PROPERTIES:
(iii) 8.6 million square feet of showroom and office space,
including the 3.4 million square foot Merchandise Mart in Chicago;
TEMPERATURE CONTROLLED LOGISTICS:
(iv) a 60% interest in the Vornado Crescent Portland Partnership
that owns 88 cold storage warehouses nationwide with an aggregate of
approximately 441.5 million cubic feet of refrigerated space leased to
AmeriCold Logistics;
OTHER REAL ESTATE INVESTMENTS:
(v) 33.1% of the outstanding common stock of Alexander's, Inc.
("Alexander's");
(vi) the Hotel Pennsylvania in New York City consisting of a hotel
portion containing 1.0 million square feet with 1,700 rooms and a
commercial portion containing .4 million square feet of retail and office
space;
(vii) a 21.7% interest in The Newkirk Master Limited Partnership
which owns office, retail and industrial properties net leased primarily to
credit rated tenants, and various debt interests in such properties;
(viii) eight dry warehouse/industrial properties in New Jersey
containing approximately 2.0 million square feet; and
(ix) other investments, including interests in other real estate,
marketable securities and loans and notes receivable.
-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 and executing its operating strategies through:
- Maintaining a superior team of operating and investment
professionals and an entrepreneurial spirit;
- Investing in properties in select markets, such as New York City
and Washington, D.C., where the Company believes there is high
likelihood of capital appreciation;
- Acquiring quality properties at a discount to replacement cost
and where there is a significant potential for higher rents;
- Investing in retail properties in select under-stored locations
such as the New York City metropolitan area;
- 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;
- Developing/redeveloping the Company's existing properties to
increase returns and maximize value; and
- On occasion, providing specialty financing to real estate
companies.
The Company expects to finance its growth, acquisitions and investments
using internally generated funds, proceeds from possible asset sales and by
accessing the public and private capital markets.
2002 ACQUISITIONS
CHARLES E. SMITH COMMERCIAL REALTY L.P.
On January 1, 2002, the Company completed the combination of Charles E.
Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination,
Vornado owned a 34% interest in CESCR. The consideration for the remaining 66%
of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly
issued Vornado Operating Partnership units and approximately $1 billion of
debt (66% of CESCR's total debt). The purchase price paid by the Company was
determined based on the weighted average closing price of the equity issued
to CESCR unitholders for the period beginning two business days before and
two business days after the date the acquisition was agreed to and announced
on October 19, 2001. The Company also capitalized as part of the basis of the
assets acquired approximately $32,000,000 for third party acquisition related
costs, including advisory, legal and other professional fees that were
contemplated at the time of the acquisition. The operations of CESCR are
consolidated into the accounts of the Company beginning January 1, 2002.
Prior to this date the Company accounted for its 34% interest on the equity
method. See page 82 for unaudited pro forma financial information for the
year ended December 31, 2001.
CRYSTAL GATEWAY ONE
On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which was approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod, trustees of the Company, and members of their
families, in exchange for approximately 325,700 newly issued Vornado Operating
Partnership units (valued at $13,679,000) and the assumption of $58,500,000 of
debt. The building is located in the Crystal City complex in Arlington, Virginia
where the Company already owns 24 office buildings containing over 6.9 million
square feet, which it acquired on January 1, 2002, in connection with the
Company's acquisition of CESCR. The operations of Crystal Gateway One are
consolidated into the accounts of the Company from the date of acquisition.
-5-
LAS CATALINAS MALL
On September 23, 2002, the Company increased its interest in the Las
Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by
acquiring the 50% of the mall and 25% of the Kmart anchor store it did not
already own. The purchase price was $48,000,000, including $32,000,000 of
indebtedness. The Las Catalinas Mall, which opened in 1997, contains 492,000
square feet, including a 123,000 square foot Kmart and a 138,000 square foot
Sears owned by the tenant. Prior to September 23, 2002, the Company accounted
for its investment on the equity method. Subsequent to this date the operations
of Las Catalinas are consolidated into the accounts of the Company.
MONMOUTH MALL
On October 10, 2002, a joint venture in which the Company has a 50%
interest acquired the Monmouth Mall, an enclosed super regional shopping
center located in Eatontown, New Jersey containing approximately 1.5 million
square feet, including four department stores, three of which aggregating
731,000 square feet are owned by the tenants. The purchase price was
approximately $164,700,000, including transaction costs of $4,400,000. The
Company made a $7,000,000 common equity investment in the venture and
provided it with $23,500,000 of preferred equity yielding 14%. The venture
financed the purchase of the Mall with $135,000,000 of floating rate debt at
LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000,000, a three year
term and two one-year extension options. The Company accounts for its
investment on the equity method as the Company does not have unilateral
control over the joint venture.
Further details of the Company's acquisition activities are disclosed in
Part II. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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DEVELOPMENT AND REDEVELOPMENT PROJECTS
The following table sets forth certain information for
development/redevelopment projects: ($ in millions)
The Company's Share of
----------------------------------------
Actual/ Actual/ Costs Expended
Estimated Estimated in Year Ended Estimated
Completion Project December 31, Costs to
Date Cost 2002 Complete
------------ ----------- ---------------- -----------
COMPLETED IN 2002:
Office:
GreenPoint site adjacent to One Penn Plaza - redevelopment of
28,000 square feet of retail space................................ Spring 2002 $ 10.6 $ 5.5
175 Lexington Avenue - construction of a 45,000
square foot building containing approximately 41,000 square
feet of low income residential housing exchanged for 163,728
square feet of air rights......................................... Summer 2002 16.3 7.2
Retail:
435 Seventh Avenue - demolition of existing buildings and the
construction of 43,000 square feet of retail space leased to
Hennes & Mauritz.................................................. Fall 2002 21.7 15.0
Merchandise Mart:
Wells Kinzie Garage - Chicago (50% interest) - 244,000 square foot
parking garage (746 parking spaces) adjacent to 400 North
LaSalle........................................................... Spring 2002 11.1 4.1
Other:
Fort Lee, New Jersey (95% interest) - construction of a 41-story,
855,000 square foot high rise rental apartment complex
containing 538 apartments......................................... Spring 2002 126.9 12.2
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$ 186.6 $ 44.0
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IN PROCESS:
Office:
New York City:
640 Fifth Avenue - construction of additional 47,000 square feet of
office space and redevelopment of existing building............... Fall 2003 $ 60.6 $ 16.8 $ 43.8
CESCR:
Crystal City - construction of additional 57,000 square feet of
retail space...................................................... Fall 2004 42.0 2.2 39.8
Retail:
4 Union Square South - redevelopment of 230,000 square foot
building of which 48,000 square feet is leased to Whole Foods
and 26,000 square feet is leased to Forever 21.................... Fall 2003 46.0 2.4 43.6
Merchandise Mart:
400 North LaSalle, Chicago (85% interest) - construction of
378,000 square foot high rise rental apartment complex
containing 453 apartments......................................... Fall 2003 77.3 37.6 39.7
Other:
Penn Plaza Signage District - erection of up to 21 signs at various
locations in the Penn Plaza District.............................. Spring 2005 28.0 2.4 24.0
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$ 253.9 $ 61.4 $ 190.9
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In addition to the projects noted above, the Company is in the process of
redeveloping fifteen of its shopping centers, seven of which include locations
previously leased to Bradlees. The total cost of this redevelopment program,
which includes the demolition of existing buildings, site work and tenant
improvements, is estimated to be approximately $40 million. The Company is also
in the pre-development phase of a number of projects including: (i) retail space
in the Penn Plaza area and at 715 Lexington Avenue, (ii) repositioning of the
Hotel Pennsylvania and (iii) expansions of the Green Acres and Monmouth malls.
There can be no assurance that the above projects will be commenced or will
be successful.
The capital requirements of Alexander's and Temperature Controlled
Logistics are described in Item 2: Properties.
-7-
VORNADO OPERATING COMPANY ("VORNADO OPERATING")
The Company and Vornado Operating are parties to certain agreements
described below.
AGREEMENT WITH VORNADO OPERATING
The Company and Vornado Operating are parties to an Agreement pursuant to
which, among other things, (i) 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 (ii) 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 Agreement, the Company provides Vornado Operating with certain
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. For these services,
Vornado Operating compensates 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 reimburses the Company for certain costs
incurred and paid to third parties on behalf of Vornado Operating. Pursuant to
the Agreement, compensation for such services was approximately $330,000,
$371,000, and $330,000 for the years ended December 31, 2002, 2001, and 2000.
Vornado Operating and the Company each have the right to terminate the
Agreement if the other party is in material default of the 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 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 corresponding
positions with Vornado Operating.
TEMPERATURE CONTROLLED LOGISTICS BUSINESS
On March 11, 1999, the Vornado Crescent Portland Partnership in which the
Company has a 60% general partnership interest and Crescent Real Estate Equities
has a 40% general partnership interest, sold all of the non-real estate assets
of Temperature Controlled Logistics encompassing the operations of the
temperature controlled business to a new partnership ("AmeriCold Logistics")
owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc.
AmeriCold Logistics leases the underlying temperature controlled warehouses used
in this business from the Vornado Crescent Portland Partnership ("the Landlord")
which continues to own the real estate through its ownership of AmeriCold Realty
Trust. The leases, as amended, generally 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 revenue AmeriCold Logistics receives from its customers. The
contractual rent for 2002 was $150,000,000. The Landlord's share of annual
maintenance capital expenditures is $9,500,000. In accordance with the leases,
AmeriCold Logistics deferred payment of $32,248,000 of 2002 rent due to the
Landlord, of which the Company's share was $19,349,000. Based on the joint
venture's policy of recognizing rental income when earned and collection is
assured or cash is received, the joint venture did not recognize this rent in
the year ended December 31, 2002. At December 31, 2002, the Company's share of
the joint venture's total deferred rent receivable from the tenant is
$24,350,000. On December 31, 2001, the Landlord released the tenant from its
obligation to pay $39,812,000 of rent deferred in 2001 and 2000, of which the
Company's share was $23,887,000. This amount equaled the rent which was not
recognized as income by the joint venture and accordingly had no profit and loss
effect to the Company.
-8-
REVOLVING CREDIT AGREEMENT
Vornado Operating was granted a $75,000,000 unsecured revolving credit
facility from the Company which expires on December 31, 2004. Borrowings under
the revolving credit facility bear interest at LIBOR plus 3%. The Company
receives a commitment fee equal to 1% per annum on the average daily unused
portion of the facility. No amortization is required to be paid under the
revolving credit facility during its term. The revolving credit facility
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. As of December 31, 2002, $21,989,000
was outstanding under the revolving credit facility after the repayment of
$9,500,000 by Vornado Operating, primarily from its share of the proceeds from
the sale of AmeriCold's quarries to a new partnership owned 44% by the Company
and 56% by Crescent Real Estate Equities.
Vornado Operating has disclosed that in the aggregate its investments do
not, and for the foreseeable future are not expected to, generate sufficient
cash flow to pay all of its debts and expenses. Further, Vornado Operating
states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that
its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent
Real Estate Equities, will need to restructure the leases between the Landlord
and the Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility.
OTHER INVESTMENTS
The Company's other investments are comprised of:
($ in thousands except per share/unit amounts)
As of
December 31, 2002
-------------------
Other Real Estate Investments:
Carried at Equity:
Monmouth Mall Joint Venture (1).................................... $ 31,416
Starwood Ceruzzi Joint Venture (2)................................. 24,959
Prime Group Realty L.P (3)......................................... 23,408
Consolidated:
The Palisades Joint Venture (4).................................... 36,368
Student Housing (5)................................................ 5,881
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$ 122,032
=============
Marketable Securities, including $29,212 of Capital Trust, Inc.
("Capital Trust") preferred securities (6)............................ $ 42,525
=============
Notes and Mortgage Loans Receivable:
Dearborn Center (7)................................................ $ 23,392
Commonwealth Atlantic Properties, an affiliate of Lazard Freres
Real Estate Investors L.L.C. ("CAPI") (8)........................ 41,200
Vornado Operating (see page 8 for further details)................. 21,989
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$ 86,581
=============
The Company does not have direct or indirect control over its
unconsolidated partially-owned entities as the Company's joint venture
partners have shared Board/Management representation and authority,
substantive participating rights on all significant business decisions,
including acquisitions and dispositions of any real property assets,
financing, operating and capital budgets and the hiring of a Chief
Executive Officer and therefore does not consolidate their operations and
financial position and applies the equity method of accounting in
accordance with generally accepted accounting principles. The Company
includes its share of partially-owned entities debt in reporting its
exposure to a change in interest rates under Item 7A "Quantitative and
Qualitative Disclosures about Market Risk" and in its ratio of
debt-to-enterprise value as disclosed on page 101. See Note 4 -
"Investments in Partially-Owned Entities" to the consolidated financial
statements in this annual report on Form 10-K for details by investment.
----------
See notes on following page.
-9-
(1) MONMOUTH MALL JOINT VENTURE
On October 10, 2002, a joint venture in which the Company has a 50%
interest acquired the Monmouth Mall, an enclosed super regional
shopping center located in Eatontown, New Jersey containing
approximately 1.5 million square feet, including four department
stores, three of which aggregating 731,000 square feet are owned by
the tenants. The purchase price was approximately $164,700, including
transaction costs of $4,400. The Company made a $7,000 common equity
investment in the venture and provided it with $23,500 of preferred
equity yielding 14%. The venture financed the purchase of the Mall
with $135,000 of floating rate debt at LIBOR plus 2.05%, with a LIBOR
floor of 2.50% on $35,000, a three year term and two one-year
extension options.
(2) STARWOOD CERUZZI JOINT VENTURE
The Starwood Ceruzzi Joint Venture was formed in 2000 by the Company,
the 80% non-managing partner, and Starwood Ceruzzi, the 20% managing
partner (which has equal Board and Management representation), to
acquire fee and leasehold interests in properties formerly occupied by
Hechinger Inc., a home improvement retailer which was liquidated. In
the first quarter of 2000, the joint venture acquired two fee
interests containing 210,000 square feet and four leasehold interests
containing 400,000 square feet in properties located in Pennsylvania,
Virginia, Maryland and Ohio. Of the two fee interests acquired, one of
the fee interests was sold in March 2001 for $8,000, resulting in a
gain of $1,744 (of which the Company's share was $1,395) and the other
fee interest is available for sale or lease. One of the leasehold
interests was net leased to Home Depot in 2002. Two of the other three
properties were leased in 2002 to a supermarket tenant that has since
filed for bankruptcy protection and rejected the leases. As such, the
other three leasehold interests are currently vacant. The venture has
no debt.
(3) PRIME GROUP REALTY, L.P.
On April 30, 2002, the Company and Cadim, inc. ("Cadim") acquired
7,944,893 Prime Group Realty L.P. partnership units at a foreclosure
auction. The price paid for the units by application of a portion of
Primestone's indebtedness to the Company and Cadim was $8.35 per unit,
the April 30, 2002 closing price of shares of Prime Group Realty Trust
("PGE") on the New York Stock Exchange. On June 28, 2002, pursuant to
the terms of the participation agreement, the Company transferred
3,972,447 of the partnership units to Cadim.
In the second quarter of 2002, in accordance with foreclosure
accounting, the Company recorded a loss on the Primestone foreclosure
of $17,671 calculated based on (i) the acquisition price of the units
and (ii) its valuation of the amounts realizable under the guarantees
by affiliates of Primestone, as compared with the net carrying amount
of the investment at April 30, 2002. In the third quarter of 2002, the
Company recorded a $2,229 write-down on its investment based on costs
expended to realize the value of the guarantees. Further, in the
fourth quarter of 2002, the Company recorded a $15,857 write-down of
its investment consisting of (i) $14,857 to adjust the carrying amount
of the Prime Group units to $4.61 per unit, the closing price of PGE
shares on December 31, 2002 on the New York Stock Exchange and (ii)
$1,000 for estimated costs to realize the value of the guarantees. The
Company considered the decline in the value of the units which are
convertible into stock to be other than temporary as of December 31,
2002, based on the fact that the market value of the stock has been
less than its cost for more than six months, the severity of the
decline, market trends, the financial condition and near-term
prospects of Prime Group and other relevant factors.
At December 31, 2002, the Company's carrying amount of the investment
was $23,408, of which $18,313 represents the carrying amount of the
3,972,447 partnership units owned by the Company ($4.61 per unit),
$6,100 represents the amount expected to be realized under the
guarantees, partially offset by $1,005 representing the Company's
share of Prime Group Realty's net loss through September 30, 2002 (see
Note 4. Investments in and Advances to Partially-Owned Entities to the
consolidated financial statements in this Form 10-K). Prior to April
30, 2002, this investment was in the form of a loan and was included
in Notes and Mortgage Loans Receivable on the balance sheet.
At February 3, 2003, the closing price of PGE shares on the New York
Stock Exchange was $5.30 per share. The ultimate realization of the
Company's investment will depend upon the future performance of the
Chicago real estate market and the performance of PGE, as well as the
ultimate realizable value of the net assets supporting the guarantees
and the Company's ability to collect under the guarantees. In
addition, the Company will continue to monitor this investment to
determine whether additional write-downs are required based on (i)
declines in value of the shares of PGE (for which the partnership
units are exchangeable) which are "other than temporary" as used in
accounting literature and (ii) the amount expected to be realized
under the guarantees.
(4) THE PALISADES JOINT VENTURE
The Palisades Joint Venture was formed in 1999 to develop an 855,000
square foot high-rise residential tower in Fort Lee, New Jersey,
containing 538 apartments. The joint venture agreement provides for
the Company to contribute 95% of the equity and receive 75% of the net
profit after a 10% preferred return. The development of the Palisades
residential complex was substantially complete as of March 1, 2002.
Accordingly, the Company placed the property into service on March 1,
2002 and discontinued the capitalization of interest and other
property specific costs. As of December 31, 2002, the property, which
is now in the lease-up phase, is 55% occupied (298 of the 538 total
apartments have been leased).
(5) STUDENT HOUSING
In January 2000, the Company and its joint venture partner acquired a
252-unit student housing complex in Gainesville, Florida, for
approximately $27,000. The Company has a 90% interest in the joint
venture.
(6) CAPITAL TRUST PREFERRED SECURITIES
At December 31, 2002, the Company owns $30,000 of 8.25% step-up
convertible junior subordinated debentures which are convertible into
shares of Class A common stock of Capital Trust (NYSE:CT) at a
conversion price of $7.00 per share. The securities are redeemable by
Capital Trust, in whole or in part, on or after September 30, 2004.
Mr. Roth, the Chairman and Chief Executive Officer of Vornado Realty
Trust, is a member of the Board of Directors of Capital Trust,
nominated by the Company.
(7) DEARBORN CENTER
The Company's investment of $23,392 represents a 38.5% interest in
$60,758 funded of a $65,000 mezzanine loan to an entity whose sole
asset is Dearborn Center, a 1.5 million square foot high-rise office
tower under construction in Chicago. The entity is owned by Prime
Group Realty L.P. and another investor. The Company is a member of a
loan syndicate led by a money center bank. The proceeds of the loan
are being used to finance the construction, and are subordinate to a
$225,000 first mortgage. The loan is due January 21, 2004, three years
from the date of the initial draw, and provides for a 1 year extension
at the borrower's option (assuming net operating income at a specified
level and a cash reserve sufficient to fund interest for the extension
period). The loan bears interest at 12% per annum plus additional
interest ranging from a minimum of 9.5% to a maximum of 11.5%.
(8) CAPI
In March 1999, in connection with the Company's acquisition of land
under certain of the CESCR office properties from CAPI, the Company
made a $41,200 recourse loan to CAPI, which matures in June 2004.
Interest on the loan was 8.5% at December 31, 2002. The loan is
secured by approximately 1,100,000 of the Company's Series E-1
convertible preferred units issued to CAPI. Each Series E-1
convertible preferred unit is convertible into 1.1364 shares of the
Company's common shares.
-10-
FINANCING ACTIVITIES
On June 24, 2002, the Company completed an offering of $500,000,000
aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December 15th,
commencing December 15, 2002. The net proceeds of approximately $496,300,000,
were used to repay the mortgages on 350 North Orleans, Two Park Avenue, the
Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into
interest rate swaps that effectively converted the interest rate on the
$500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a
floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate
(2.15% at December 31, 2002).
On February 25, 2002, the Company sold 884,543 shares to a closed-end fund
and 514,200 shares to a unit investment trust based on the closing price of
$42.96 on the NYSE. The net proceeds to the Company were approximately
$57,042,000.
Further details of the Company's financing activities are disclosed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II of this annual report on Form 10-K.
At December 31, 2002, the ratio of debt-to-enterprise value (market equity
value plus debt less cash) was 45% based on debt of $4.966 billion, including
the Company's proportionate share of debt of partially-owned non-consolidated
entities. In the future, in connection with the Company's 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 without the vote of
shareholders.
The Company may seek to obtain funds through equity offerings, debt
financings or asset sales, 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 re-acquire its shares or
any other securities in the future.
-11-
ADJUSTED EBITDA BY SEGMENT AND REGION
The following table sets forth the percentage of the Company's Adjusted
EBITDA(1) by segment and region for the years ended December 31, 2002, 2001, and
2000. The pro forma column gives effect to the January 1, 2002 acquisition by
the Company of the remaining 66% interest in CESCR described previously, as if
it had occurred on January 1, 2001.
PERCENTAGE OF ADJUSTED EBITDA(1)
-----------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
2002 2001 2001 2000
-------- -------- -------- --------
Pro forma
SEGMENT
Office:
New York........................................... 33% 31% 38% 35%
CESCR.............................................. 29% 26% 10% 10%
---- ---- ---- ----
Total.............................................. 62% 57% 48% 45%
Retail................................................ 12% 12% 15% 16%
Merchandise Mart Properties........................... 12% 12% 14% 12%
Temperature Controlled Logistics...................... 8% 8% 10% 13%
Other................................................. 6% 11% 13% 14%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ===
REGION
New York City metropolitan area....................... 41% 42% 52% 50%
Washington, D.C./Northern Virginia metropolitan area.. 30% 26% 11% 12%
Chicago............................................... 11% 9% 11% 9%
Philadelphia metropolitan area........................ 1% --% 1% 3%
Puerto Rico........................................... 1% 1% 2% 2%
Other (2)............................................. 16% 22% 23% 24%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
----------
(1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on
sales of depreciable real estate, the effect of straight-lining of
rent escalations, the amortization of below market leases net of
above market leases and minority interest. Management considers
Adjusted EBITDA a supplemental measure for making decisions and
assessing the performance of its segments. Adjusted EBITDA is
presented as a measure of "operating performance" which enables the
reader to identify trends from period to period and may be used to
compare "same store" operating performance to other companies, as
well as providing a measure for determining funds available to
service debt. Adjusted EBITDA may not be comparable to similarly
titled measures employed by other companies.
(2) Other includes the Temperature Controlled Logistics segment which
has cold storage warehouses in 32 states. See page 44 for details.
ALEXANDER'S
The Company owns 33.1% 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 6 properties (see Item 2. Properties--Alexander's).
At December 31, 2002, the Company had loans receivable from Alexander's of
$119,000,000, including $24,000,000 drawn under the $50,000,000 line of credit
the Company granted to Alexander's on August 1, 2000. The maturity date of the
loan and the line of credit is the earlier of January 3, 2006 or the date the
Alexander's Lexington Avenue construction loan is repaid. The interest rate on
the loan and line of credit, which resets quarterly using the same spread to
treasuries as presently exists with a 3% floor for treasuries, is 12.48% at
December 31, 2002. The Company believes that although Alexander's has disclosed
that it does not have positive cash flow sufficient to repay this loan to the
Company currently, Alexander's will be able to repay the loan upon the
successful development and permanent financing of its Lexington Avenue
development project or through asset sales.
The Company manages, develops and leases the Alexander's properties under a
management and development agreement and a leasing agreement pursuant to which
the Company receives annual fees from Alexander's. Further, the Company has
agreed to guarantee, among other things, the lien free, timely completion of the
construction of Alexander's Lexington Avenue development project and funding of
project costs in excess of a stated budget, if not funded by Alexander's. These
agreements are described in Note 4 to the Company's consolidated financial
statements. See Item 2 - "Properties" for a description of Alexander's
properties and development and redevelopment projects.
Messrs. Roth, Fascitelli, Mandelbaum, West and Wight, directors of the
Company, are also directors of Alexander's. Mr. Roth is also Chief Executive
Officer of Alexander's and Mr. Fascitelli is also President of Alexander's.
Joseph Macnow, Executive Vice President - Finance and Administration and Chief
Financial Officer of the Company, is also Executive Vice President - Finance and
Administration and Chief Financial Officer of Alexander's.
Alexander's common stock is listed on the New York Stock Exchange under the
symbol "ALX".
-12-
INTERSTATE PROPERTIES
As of December 31, 2002, Interstate Properties and its partners owned
approximately 12.9% of the common shares of beneficial interest of the Company,
27.5% of Alexander's common stock and beneficial ownership of 7.9% of Vornado
Operating (17.0% assuming redemption of 447,017 units of Vornado Operating that
are redeemable for cash, or at Vornado Operating's election, common stock of
Vornado Operating). Interstate Properties is a general partnership in which
Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the 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 business segments - Office, Retail, Merchandise Mart
Properties, Temperature Controlled Logistics, and Other -- operate in highly
competitive environments. The Company has a large concentration of properties in
the New York City metropolitan area and in the Washington, D.C. and Northern
Virginia area. The Company competes with a large number of real estate property
owners and developers. Principal factors of competition are rent charged,
attractiveness of location and quality and breadth of services provided. The
Company's success depends upon, among other factors, trends of the national and
local economies, financial condition and operating results of current and
prospective tenants and customers, availability and cost of capital,
construction and renovation costs, taxes, governmental regulations, legislation
and population trends.
TENANTS WHICH ACCOUNTED FOR OVER 10% OF REVENUES
The U.S. Government provides a significant proportion of the Company's
revenues. In 2002, the U.S. Government accounted for 16.8% of the Office
segment's revenues, and 11.4% of the Company's total revenues. The loss of
this tenant would have a material adverse effect on the Office segment and
the Company's finances as a whole.
ENVIRONMENTAL REGULATIONS
The Company's operations and properties are subject to various federal,
state and local laws and regulations concerning the protection of the
environment including air and water quality, hazardous or toxic substances and
health and safety. Under certain of these environmental laws a current or
previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances released at a property. The owner or
operator may also 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 those parties because of the contamination. These laws often
impose liability without regard to whether the owner or operator knew of the
release of the substances or caused the release. The presence of contamination
or the failure to remediate contamination may impair the Company's ability to
sell or lease real estate or to borrow using the real estate as collateral.
Other laws and regulations govern indoor and outdoor air quality including those
that can require the abatement or removal of asbestos-containing materials in
the event of damage, demolition, renovation or remodeling and also govern
emissions of and exposure to asbestos fibers in the air. The maintenance and
removal of lead paint and certain electrical equipment containing
polychlorinated biphenyls (PCBs) and underground storage tanks are also
regulated by federal and state laws. The Company could incur fines for
environmental compliance and be held liable for the costs of remedial action
with respect to the foregoing regulated substances or tanks or related claims
arising out of environmental contamination or exposure at or from the Company's
properties.
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, identification of new
compliance concerns or undiscovered areas of contamination, changes in the
extent or known scope of contamination, discovery of additional sites, human
exposure to the contamination or changes in cleanup or compliance requirements
could result in significant costs to the Company.
-13-
INSURANCE
The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 did not expressly exclude coverage for hostile acts, except for acts of
war. Since September 11, 2001, insurance companies have for the most part
excluded terrorist acts from coverage in all risk policies. The Company has
generally been unable to obtain all risk insurance which includes coverage for
terrorist acts for policies it has renewed since September 11, 2001, for each of
its businesses. In 2002, the Company obtained $200,000,000 of separate aggregate
coverage for terrorist acts for each of its New York City Office, Washington,
D.C. Office, Retail and Merchandise Mart businesses and $60,000,000 for its
Temperature Controlled Logistics business. Therefore, the Company is at risk for
financial loss in excess of these limits for terrorist acts (as defined), which
loss could be material.
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. In the second quarter of 2002, the
Company received correspondence from four lenders regarding terrorism insurance
coverage, which the Company has responded to. In these letters the lenders took
the position that under the agreements governing the loans provided by these
lenders the Company was required to maintain terrorism insurance on the
properties securing the various loans. The aggregate amount of borrowings under
these loans as of December 31, 2002 was approximately $770.4 million, and there
was no additional borrowing capacity. Subsequently, the Company obtained an
aggregate of $360 million of separate coverage for "terrorist acts". To date,
one of the lenders has acknowledged to the Company that it will not raise any
further questions based on the Company's terrorism insurance coverage in place,
and the other three lenders have not raised any further questions regarding the
Company's insurance coverage. If lenders insist on greater coverage for these
risks, it could adversely affect the Company's ability to finance and/or
refinance its properties and to expand its portfolio.
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law. Under this new legislation, through 2004 (with a possible extension
through 2005), regulated insurers must offer coverage in their commercial
property and casualty policies (including existing policies) for losses
resulting from defined "acts of terrorism". As a result of the legislation, in
February 2003 the Company obtained $300 million of per occurrence coverage for
terrorist acts for its New York City Office, Washington, D.C. Office and
Merchandise Mart businesses, of which $240 million is for Certified Acts, as
defined in the legislation. The Company maintains $200 million and $60 million
of separate aggregate coverage that it had in 2002 for each of its Retail and
Temperature Controlled Logistics businesses (which has been renewed as of
January 1, 2003). The Company's current Retail property insurance carrier has
advised the Company that there will be an additional premium of approximately
$11,000 per month through the end of the policy term (June 30, 2003), for
"Acts of Terrorism" coverage, as defined in the new legislation and that the
situation may change upon renewal.
CERTAIN ACTIVITIES
Acquisitions and investments are not 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
As of December 31, 2002, the Company had approximately 1,422 employees
consisting of 276 in the Office Properties segment (including 193 as a result of
the CESCR acquisition), 58 in the Retail Properties segment, 476 in the
Merchandise Mart Properties segment, 417 at the Hotel Pennsylvania and 195
corporate staff. This does not include employees of partially-owned entities.
SEGMENT DATA
The Company operates in four business segments: Office Properties, Retail
Properties, Merchandise Mart Properties and Temperature Controlled Logistics.
The Company engages in no foreign operations. Information related to the
Company's business segments for the years 2002, 2001 and 2000 is set forth in
Note 17 to the Company's consolidated financial statements in this annual report
on Form 10-K.
-14-
The Company's principal executive offices are located at 888 Seventh
Avenue, New York, New York 10019; telephone (212) 894-7000.
INTERNET ACCESS
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well
as Reports on Forms 3, 4 and 5 regarding Officers, Trustees or 10% Beneficial
Owners of the Company, filed or furnished pursuant to Section 13(a), 15(d) or
16(a) of the Securities Exchange Act of 1934 are available free of charge
through the Company's website (www.vno.com) as soon as reasonably practicable
after the Company electronically files the material with, or furnishes it to,
the Securities and Exchange Commission.
CERTAIN FACTORS THAT MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS AND OPERATIONS
Set forth below are certain factors that may adversely affect the Company's
business and operations.
REAL ESTATE INVESTMENTS' VALUE AND INCOME FLUCTUATE DUE TO VARIOUS FACTORS.
THE VALUE OF REAL ESTATE FLUCTUATES DEPENDING ON CONDITIONS IN THE
GENERAL ECONOMY AND THE REAL ESTATE BUSINESS. THESE CONDITIONS MAY ALSO LIMIT
THE COMPANY'S REVENUES AND AVAILABLE CASH.
The factors that affect the value of the Company's real estate include,
among other things, national, regional and local economic conditions;
consequences of any armed conflict involving, or terrorist attack against, the
United States; the Company's ability to secure adequate insurance; local
conditions such as an oversupply of space or a reduction in demand for real
estate in the area; competition from other available space; whether tenants
consider a property attractive; the financial condition of the Company's
tenants, including the extent of tenant bankruptcies or defaults; whether the
Company is able to pass some or all of any increased operating costs it
experiences through to tenants; how well the Company manages its properties;
increased interest rates; increases in real estate taxes and other expenses;
decreases in market rental rates; the timing and costs associated with property
improvements and rentals; changes in taxation or zoning laws; government
regulations; availability of financing on acceptable terms or at all; potential
liability under environmental or other laws or regulations; and general
competitive factors.
The rents the Company receives and the occupancy levels at its properties
may decline as a result of adverse changes in any of these factors. If the
Company's rental revenues decline, it generally would expect to have less cash
available to distribute to its shareholders. In addition, some of the Company's
major expenses, including mortgage payments, real estate taxes and maintenance
costs, generally do not decline when the related rents decline. If rents decline
while costs remain the same, the Company's income and funds available for
distribution to its shareholders would decline.
THE COMPANY DEPENDS ON LEASING SPACE TO TENANTS ON ECONOMICALLY
FAVORABLE TERMS AND COLLECTING RENT FROM ITS TENANTS, WHO MAY NOT BE ABLE TO
PAY.
The Company's financial results depend on leasing space in its properties
to tenants on economically favorable terms. In addition, because substantially
all of the Company's income comes from rentals of real property, its income and
funds available for distribution to its shareholders will decrease if a
significant number of its tenants cannot pay their rent. If a tenant does not
pay its rent, the Company might not be able to enforce its rights as landlord
without delays and might incur substantial legal costs. For information
regarding the bankruptcy of the Company's tenants, see "--Bankruptcy of tenants
may decrease the Company's revenues and available cash" below.
-15-
BANKRUPTCY OF TENANTS MAY DECREASE THE COMPANY'S REVENUES AND AVAILABLE
CASH.
A number of companies, including some of the Company's tenants, have
declared bankruptcy in recent years, and other tenants may declare bankruptcy or
become insolvent in the future. If a major tenant declares bankruptcy or becomes
insolvent, the rental property where it leases space may have lower revenues and
operational difficulties, and, in the case of the Company's shopping centers,
the Company may have difficulty leasing the remainder of the affected property.
The Company's leases generally do not contain restrictions designed to ensure
the creditworthiness of its tenants. As a result, the bankruptcy or insolvency
of a major tenant could result in a lower level of funds from operations
available for distribution to the Company's shareholders.
U.S. Airways Group Inc. leases 296,000 square feet from the Company for
its headquarters in Washington, D.C. U.S. Airways has been adversely affected
by the downturn in air travel as a result of the terrorist attacks and
economic decline. On August 11, 2002, US Airways filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. Effective January 1, 2003, the
Company agreed to amend its lease with US Airways at Crystal City to (i)
reduce the tenant's space by 90,732 square feet to 205,600 square feet (ii)
reduce the annual escalated rent from $36.00 to $29.75 per square foot with
2.5% annual base rent escalations, (iii) provide the tenant with up to
$1,200,000 of tenant allowances and (iv) loan the tenant up to $1,000,000 at
9% per annum for additional tenant improvements which is to be repaid over
the lease term. This lease modification is subject to a confirmed plan of
reorganization by the Bankruptcy Court.
In February 2003, KoninKlijke Ahold NV, parent of Stop & Shop, announced
that it overstated its 2002 and 2001 earnings by at least $500 million and is
under investigation by the U.S. Justice Department and Securities and
Exchange Commission. See Item 2. Properties - Retail Segment - Former Bradlees
Leases for information about former Bradlees leases guaranteed by Stop &
Shop. The Company cannot predict what effect, if any, this situation may have
on Stop & Shop's ability to satisfy its obligation under the Bradlees
guarantees and rent for existing Stop & Shop leases aggregating approximately
$10.5 million per annum.
The risk that some of the Company's tenants may declare bankruptcy is
higher because of the September 11, 2001 terrorist attacks and the resulting
decline in the economy.
SOME OF THE COMPANY'S POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
For a discussion of risks related to the Company's insurance coverage, see
"Item 1. Business - Insurance."
THE COMPANY MAY ACQUIRE OR DEVELOP NEW PROPERTIES, AND THIS MAY CREATE
RISKS.
The Company may acquire or develop properties or acquire other real estate
companies when it believes that an acquisition or development is consistent with
its business strategies. The Company may not, however, succeed in consummating
desired acquisitions or in completing developments on time or within its budget.
The Company also might not succeed in leasing newly developed or acquired
properties at rents sufficient to cover their costs of acquisition or
development and operations.
The Company has experienced rapid growth in recent years, increasing its
total assets from approximately $565,000,000 at December 31, 1996 to
approximately $9 billion at December 31, 2002. This growth included the
acquisition of Charles E. Smith Commercial Realty L.P. on January 1, 2002, which
increased the Company's total assets as of that date by $2,506,000,000, of
which $1,758,000,000 (66%) is attributable to the acquisition of assets and
$748,000,000 (34%) is attributable to Charles E. Smith Commercial Realty L.P.
becoming a wholly owned subsidiary of the Operating Partnership and therefore
being consolidated rather than accounted for under the equity method. The
Company may not be able to maintain a similar rate of growth in the future or
manage its past and any future growth effectively. The Company's failure to
do so may have a material adverse effect on its financial condition and
results of operations. Difficulties in integrating acquisitions may prove
costly or time-consuming and could divert management's attention.
THE COMPANY MAY NOT BE PERMITTED TO DISPOSE OF CERTAIN PROPERTIES OR PAY
DOWN THE DEBT ASSOCIATED WITH THOSE PROPERTIES WHEN IT MIGHT OTHERWISE DESIRE TO
DO SO WITHOUT INCURRING ADDITIONAL COSTS.
As part of an acquisition of a property, the Company may agree with the
seller that it will not dispose of the acquired properties or reduce the
mortgage indebtedness on them for significant periods of time unless it pays
certain of the resulting tax costs of the seller. These agreements could result
in the Company holding on to properties that it would otherwise sell and not
paying down or refinancing indebtedness that it would otherwise pay down or
refinance.
-16-
IT MAY BE DIFFICULT TO BUY AND SELL REAL ESTATE QUICKLY, AND TRANSFER
RESTRICTIONS APPLY TO SOME OF THE COMPANY'S MORTGAGED PROPERTIES.
Equity real estate investments are relatively difficult to buy and sell
quickly. The Company therefore has limited ability to vary its portfolio
promptly in response to changes in economic or other conditions. Some of the
Company's properties are mortgaged to secure payment of indebtedness. If the
Company is unable to meet its mortgage payments, the lender could foreclose on
the properties and the Company could incur a loss. In addition, if the Company
wishes to dispose of one or more of the mortgaged properties, it might not be
able to obtain release of the lien on the mortgaged property. If a lender
forecloses on a mortgaged property or if a mortgage lien prevents the Company
from selling a property, its funds available for distribution to its
shareholders could decline. For information relating to the mortgages on the
Company's properties, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and the
notes to the Company's consolidated financial statements in this annual report
on Form 10-K.
A SIGNIFICANT PROPORTION OF THE COMPANY'S PROPERTIES ARE IN THE NEW YORK
CITY/NEW JERSEY AND WASHINGTON, D.C. METROPOLITAN AREAS AND ARE AFFECTED BY THE
ECONOMIC CYCLES AND RISKS INHERENT TO THOSE REGIONS.
During 2002, 71% of the Company's Adjusted EBITDA came from properties
located in New Jersey and the New York City and Washington, D.C. metropolitan
areas. The Company may continue to concentrate a significant portion of its
future acquisitions in New Jersey and the New York City and Washington, D.C.
metropolitan areas. Like other real estate markets, the real estate markets in
these areas have experienced economic downturns in the past, and the Company
cannot predict how the current economic conditions will impact these markets in
both the short and long term. Further declines in the economy or a decline in
the real estate markets in these areas could hurt the Company's financial
performance and the value of its properties. The factors affecting economic
conditions in these regions include: business layoffs or downsizing; industry
slowdowns; relocations of businesses; changing demographics; increased
telecommuting and use of alternative work places; financial performance and
productivity of the publishing, advertising, financial, technology, retail,
insurance and real estate industries; infrastructure quality; and any oversupply
of or reduced demand for real estate.
It is impossible for the Company to assess the future effects of the
current uncertain trends in the economic and investment climates of the New York
City/New Jersey and Washington, D.C. regions, and more generally of the United
States, on the real estate markets in these areas. If these conditions persist,
they may adversely affect the Company's businesses and future profitability.
ON JANUARY 1, 2002, THE COMPANY COMPLETED THE ACQUISITION OF THE 66%
INTEREST IN CHARLES E. SMITH COMMERCIAL REALTY L.P. THAT IT DID NOT PREVIOUSLY
OWN. THE TERMS OF THE MERGER RESTRICT THE COMPANY'S ABILITY TO SELL OR OTHERWISE
DISPOSE OF, OR TO FINANCE OR REFINANCE, THE PROPERTIES FORMERLY OWNED BY CHARLES
E. SMITH COMMERCIAL REALTY L.P., WHICH COULD RESULT IN THE COMPANY'S INABILITY
TO SELL THESE PROPERTIES AT AN OPPORTUNE TIME AND INCREASED COSTS TO THE
COMPANY.
The Company has agreed to restrictions on its ability to sell, finance,
refinance and, in some instances, pay down existing financing on the Charles E.
Smith Commercial Realty L.P. properties for a period of up to 20 years, under a
tax reporting and protection agreement that the Company entered into at the
closing of the merger. This agreement prohibits the Company from taking these
actions unless the Operating Partnership also pays the contributing partners
based on their tax liabilities as a result of the sale. These arrangements may
significantly reduce the Company's ability to sell, finance or repay
indebtedness secured by the subject properties or assets.
In addition, subject to limited exceptions, the Company is restricted from
selling or otherwise transferring or disposing of certain properties located in
the Crystal City area of Arlington, Virginia or an interest in its division that
manages the majority of its office properties in the Washington, D.C.
metropolitan area, which we refer to as the "Smith Division," for a period of 12
years with respect to certain properties located in the Crystal City area of
Arlington, Virginia or six years with respect to an interest in the Smith
Division. These restrictions, which currently cover approximately 13.0 million
square feet of space, could result in the Company's inability to sell these
properties or an interest in the Smith Division at an opportune time and
increased costs to the Company.
THE COMPANY MAY INCUR COSTS TO COMPLY WITH ENVIRONMENTAL LAWS.
For a discussion of risks related to the Company's compliance with
environmental laws, see "Item 1. Business - Environmental Regulations."
-17-
REAL ESTATE IS A COMPETITIVE BUSINESS.
For a discussion of risks related to competition in the real estate business,
see "Item 1. Business - Competition."
THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001 IN NEW YORK CITY AND THE
WASHINGTON, D.C. AREA MAY ADVERSELY AFFECT THE VALUE OF THE COMPANY'S PROPERTIES
AND ITS ABILITY TO GENERATE CASH FLOW.
THERE MAY BE A DECREASE IN DEMAND FOR SPACE IN LARGE METROPOLITAN AREAS
THAT ARE CONSIDERED AT RISK FOR FUTURE TERRORIST ATTACKS, AND THIS DECREASE MAY
REDUCE THE COMPANY'S REVENUES FROM PROPERTY RENTALS.
The Company has significant investments in large metropolitan areas,
including the New York/New Jersey, Washington, D.C. and Chicago metropolitan
areas. In the aftermath of the terrorist attacks, tenants in these areas may
choose to relocate their business to less populated, lower-profile areas of the
United States that are not as likely to be targets of future terrorist activity.
This in turn would trigger a decrease in the demand for space in these areas,
which could increase vacancies in the Company's properties and force it to lease
its properties on less favorable terms. As a result, the value of the Company's
properties and the level of its revenues could decline materially.
THE COMPANY'S INVESTMENT IN HOTEL PENNSYLVANIA IS DEPENDENT ON THE TRAVEL
INDUSTRY, AND THAT INVESTMENT HAS BEEN AND MAY CONTINUE TO BE IMPACTED SEVERELY
BY THE TERRORIST ATTACKS AND THE CURRENT ECONOMIC DOWNTURN.
The Company's investment in Hotel Pennsylvania is directly dependent on the
travel industry generally and the number of visitors to New York City in
particular. Since September 11, 2001, there has been a substantial decline in
travel and tourism generally, and in particular New York City. Accordingly,
there has been a significant reduction in occupancy at Hotel Pennsylvania. As a
result, revenues generated by this investment have been impacted severely by
that decline, and the Company expects this impact on revenues to continue.
ALL OF THE COMPANY'S TEMPERATURE CONTROLLED LOGISTICS WAREHOUSES ARE LEASED
TO ONE TENANT, AND THAT TENANT IS EXPERIENCING OPERATING DIFFICULTIES.
The Operating Partnership owns a 60% general partnership interest in a
partnership, which we refer to as the "Vornado Crescent Portland Partnership,"
that owns 88 cold storage warehouses nationwide with an aggregate of
approximately 441.5 million cubic feet of refrigerated, frozen and dry storage
space. The Vornado Crescent Portland Partnership sold all of the non-real estate
assets encompassing the operations of the temperature controlled business to a
new partnership named AmeriCold Logistics, owned 60% by Vornado Operating
Company, which we refer to as "Vornado Operating," and 40% by Crescent Operating
Inc. AmeriCold Logistics leases the underlying temperature controlled warehouses
used in this business from the Vornado Crescent Portland Partnership, which
continues to own the real estate. During 2002, AmeriCold Logistics generated
approximately 8% of the Company's Adjusted EBITDA. The leases, as amended,
generally 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 revenue AmeriCold
Logistics receives from its customers. The contractual rent for 2002 was
$150,000,000. The Landlord's share of annual maintenance capital expenditures is
$9,500,000. In accordance with the leases, AmeriCold Logistics deferred payment
of $32,248,000 of 2002 rent due to the Landlord, of which the Company's share
was $19,349,000. Based on the joint venture's policy of recognizing rental
income when earned and collection is assured or cash is received, the joint
venture did not recognize this rent in the year ended December 31, 2002. At
December 31, 2002, the Company's share of the joint venture's total deferred
rent receivable from the tenant is $24,350,000. On December 31, 2001, the
Landlord released the tenant from its obligation to pay $39,812,000 of rent
deferred in 2001 and 2000, of which the Company's share was $23,887,000. This
amount equaled the rent which was not recognized as income by the joint venture
and accordingly had no profit and loss effect to the Company.
-18-
To the extent that the operations of AmeriCold Logistics may affect its
ability to pay rent, including percentage rent due under the leases, the Company
indirectly bears the risks associated with AmeriCold Logistics' cold storage
business. The cold storage business is extremely competitive. Factors affecting
AmeriCold Logistics' ability to compete include, among others, (a) warehouse
locations, (b) customer mix and (c) availability, quality and price of
additional services.
THE COMPANY MAY NOT BE ABLE TO OBTAIN CAPITAL TO MAKE INVESTMENTS.
The Company depends primarily on external financing to fund the growth of
its business. This is because one of the requirements of the Internal Revenue
Code of 1986, as amended, for a REIT is that it distributes 90% of its net
taxable income, excluding net capital gains, to its shareholders. The Company's
access to debt or equity financing depends on banks' willingness to lend and on
conditions in the capital markets. The Company and other companies in the real
estate industry have experienced limited availability of bank loans and capital
markets financing from time to time. Although the Company believes that it will
be able to finance any investments it may wish to make in the foreseeable
future, financing other than what it already has available might not be
available on acceptable terms.
For information about the Company's available sources of funds, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the notes to the consolidated
financial statements in this annual report on Form 10-K.
THE COMPANY'S OWNERSHIP STRUCTURE AND RELATED-PARTY TRANSACTIONS MAY GIVE
RISE TO CONFLICTS OF INTEREST.
STEVEN ROTH AND INTERSTATE PROPERTIES MAY EXERCISE SUBSTANTIAL INFLUENCE
OVER THE COMPANY. THEY AND SOME OF THE COMPANY'S OTHER TRUSTEES AND OFFICERS
HAVE INTERESTS OR POSITIONS IN OTHER ENTITIES THAT MAY COMPETE WITH THE COMPANY.
As of December 31, 2002, Interstate Properties, a New Jersey general
partnership, and its partners owned approximately 12.9% of the common shares of
the Company and approximately 27.5% of the common stock of Alexander's, Inc. and
beneficially owned approximately 7.9% of the common stock of Vornado Operating
(approximately 17.0% assuming redemption of 447,017 units of Vornado Operating
L.P., the operating subsidiary of Vornado Operating, that are beneficially owned
by Interstate Properties and redeemable for common stock of Vornado Operating).
Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the three partners
of Interstate Properties. Mr. Roth is the Chairman of the Board and Chief
Executive Officer of the Company, the managing general partner of Interstate
Properties, the Chief Executive Officer and a director of Alexander's and the
Chairman of the Board and Chief Executive Officer of 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.
As of December 31, 2002, the Company owned 33.1% of the outstanding common
stock of Alexander's. Alexander's is a REIT engaged in leasing, managing,
developing and redeveloping properties, focusing primarily on the locations
where its department stores operated before they ceased operations in 1992.
Alexander's has six properties, which are located in the New York City
metropolitan area. Mr. Roth and Michael D. Fascitelli, the President and a
trustee of the Company, are directors of Alexander's. Messrs. Mandelbaum,
Richard R. West and Wight are trustees of the Company and are also directors of
Alexander's.
Because of these overlapping interests, Mr. Roth and Interstate Properties
may have substantial influence over the Company, Alexander's and Vornado
Operating and on the outcome of any matters submitted to the Company's,
Alexander's or Vornado Operating's shareholders for approval. In addition,
certain decisions concerning the Company's operations or financial structure may
present conflicts of interest among Messrs. Roth, Mandelbaum and Wight and
Interstate Properties and the Company's other shareholders. In addition, Mr.
Roth and Interstate Properties may in the future engage in a wide variety of
activities in the real estate business which may result in conflicts of interest
with respect to matters affecting the Company, Alexander's or Vornado Operating,
such as which of these entities or persons, if any, may take advantage of
potential business opportunities, the business focus of these entities, the
types of properties and geographic locations in which these entities make
investments, potential competition between business activities conducted, or
sought to be conducted, by the Company, Interstate Properties, Alexander's and
Vornado Operating, competition for properties and tenants, possible corporate
transactions such as acquisitions and other strategic decisions affecting the
future of these entities.
-19-
The Company currently manages and leases the real estate assets of
Interstate Properties under a management agreement for which the Company
receives an annual 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 60 days'
notice at the end of the term. The Company earned $1,655,000 and $1,450,000 of
management fees under the management agreement for the years ended December 31,
2001 and 2002. Because the Company and Interstate Properties are controlled by
the same persons, as described above, the terms of the management agreement and
any future agreements between the Company and Interstate Properties may not be
comparable to those the Company could have negotiated with an unaffiliated third
party.
THE COMPANY ENGAGES IN TRANSACTIONS WITH VORNADO OPERATING ON TERMS THAT
MAY OR MAY NOT BE COMPARABLE TO THOSE IT COULD NEGOTIATE WITH UNAFFILIATED THIRD
PARTIES.
In October 1998, Vornado Operating was spun off from the Company in order
to own assets that the Company could not itself own and conduct activities that
the Company could not itself conduct. In addition to being trustees of the
Company, 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 corresponding
positions with Vornado Operating.
The Operating Partnership entered into a $75,000,000 unsecured revolving
credit facility with Vornado Operating that expires on December 31, 2004.
Borrowings under the revolving credit agreement bear interest at LIBOR plus 3%.
The Operating Partnership receives an annual commitment fee equal to 1% on the
average daily unused portion of the facility. Vornado Operating is not required
to pay any amortization under the revolving credit agreement during its term.
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.
As of December 31, 2002, $21,989,000 was outstanding under the revolving credit
agreement.
The Operating Partnership and Vornado Operating are parties to an agreement
under which, among other things, (a) the Operating Partnership will offer
Vornado Operating, under certain circumstances, an opportunity to become the
lessee of certain real property owned now or in the future by the Operating
Partnership under mutually satisfactory lease terms and (b) Vornado Operating
will not make any real estate investment or other investments known as
REIT-qualified investments unless it first offers the Operating Partnership the
opportunity to make the investment and the Operating Partnership has rejected
that opportunity. Under this agreement, the Operating Partnership provides
Vornado Operating with administrative, corporate, accounting, financial,
insurance, legal, tax, data processing, human resources and operational
services. For these services, Vornado Operating compensates the Operating
Partnership in an amount determined in good faith by the Operating Partnership
as the amount an unaffiliated third party would charge Vornado Operating for
comparable services and reimburses the Operating Partnership for certain costs
incurred and paid to third parties on behalf of Vornado Operating. Under this
agreement, compensation for these services was approximately $330,000, $371,000
and $330,000 for the years ended December 31, 2000, 2001 and 2002. Vornado
Operating and the Operating Partnership each have the right to terminate this
agreement if the other party is in material default of the agreement or upon 90
days' written notice to the other party at any time after December 31, 2003. In
addition, the Operating Partnership has the right to terminate this agreement
upon a change in control of Vornado Operating.
Vornado Operating's restated certificate of incorporation specifies that
one of its corporate purposes is to perform this agreement and, for so long as
the agreement remains in effect, prohibits Vornado Operating from making any
real estate investment or other REIT-qualified investment without first offering
the opportunity to the Operating Partnership in the manner specified in this
agreement.
-20-
The Company and Vornado Operating may enter into additional transactions in
the future. Because the Company and Vornado Operating share common senior
management and because a majority of the Company's trustees also constitute the
majority of the directors of Vornado Operating, the terms of the foregoing
agreements and any future agreements between the Company and Vornado Operating
may not be comparable to those the Company could have negotiated with an
unaffiliated third party.
THERE MAY BE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ALEXANDER'S.
As of December 31, 2002, the Company owned 33.1% of the outstanding common
stock of Alexander's. Alexander's is a REIT engaged in leasing, managing,
developing and redeveloping properties, focusing primarily on the locations
where its department stores operated before they ceased operations in 1992.
Alexander's has six properties. Interstate Properties, which is further
described above, owned an additional 27.5% of the outstanding common stock of
Alexander's as of December 31, 2002. Mr. Roth, Chairman of the Board and Chief
Executive Officer of the Company, is Chief Executive Officer and a director of
Alexander's, and Mr. Fascitelli, President and a trustee of the Company, is
President and a director of Alexander's. Messrs. Mandelbaum, West and Wight,
trustees of the Company, are also directors of Alexander's. Alexander's common
stock is listed on the New York Stock Exchange under the symbol "ALX."
At December 31, 2002, the Operating Partnership had loans receivable from
Alexander's of $119,000,000 at an interest rate of 12.48%. These loans mature on
the earlier of January 3, 2006 or the date that Alexander's Lexington Avenue
construction loan is repaid in full. The Operating Partnership manages, develops
and leases the Alexander's properties under management and development
agreements and leasing agreements under which the Operating Partnership receives
annual fees from Alexander's. These agreements have a one-year term expiring in
March of each year, except that the Lexington Avenue management and development
agreements have a term lasting until substantial completion of development of
the Lexington Avenue property, and are all automatically renewable. Because the
Company and Alexander's share common senior management and because a majority of
the trustees of the Company also constitute the majority of the directors of
Alexander's, the terms of the foregoing agreements and any future agreements
between the Company and Alexander's may not be comparable to those the Company
could have negotiated with an unaffiliated third party.
For a description of Interstate Properties' ownership of the Company,
Vornado Operating and Alexander's, see "--Steven Roth and Interstate Properties
may exercise substantial influence over the Company. They and some of the
Company's other trustees and officers have interests or positions in other
entities that may compete with the Company" above.
ARCHSTONE-SMITH TRUST PROVIDES SERVICES TO THE COMPANY UNDER AGREEMENTS
THAT WERE NOT NEGOTIATED AT ARM'S LENGTH.
The Company has agreements with Archstone-Smith Trust under which the
Company leases office space to Archstone-Smith Trust and shares the cost of
certain office-related services with it that were not negotiated at arm's
length. These agreements were entered into by Charles E. Smith Commercial Realty
in 1997, before the Company's January 1, 2002 acquisition of Charles E. Smith
Commercial Realty, at a time when Mr. Smith and Mr. Kogod were in control of
both Charles E. Smith Commercial and the Charles E. Smith Residential Division
of Archstone-Smith. Mr. Smith and Mr. Kogod, who became members of the Company's
board of trustees on January 1, 2002, are also trustees and shareholders of
Archstone-Smith Trust.
THE COMPANY'S ORGANIZATIONAL AND FINANCIAL STRUCTURE GIVES RISE TO
OPERATIONAL AND FINANCIAL RISKS.
THE COMPANY DEPENDS ON ITS DIRECT AND INDIRECT SUBSIDIARIES' DIVIDENDS AND
DISTRIBUTIONS, AND THESE SUBSIDIARIES' CREDITORS AND PREFERRED SECURITY HOLDERS
ARE ENTITLED TO PAYMENT OF AMOUNTS PAYABLE TO THEM BY THE SUBSIDIARIES BEFORE
THE SUBSIDIARIES MAY PAY ANY DIVIDENDS OR DISTRIBUTIONS TO THE COMPANY.
Substantially all of the Company's assets consist of its partnership
interests in the Operating Partnership. The Operating Partnership holds
substantially all of its properties and assets through subsidiaries. The
Operating Partnership therefore depends for substantially all of its cash flow
on cash distributions to it by its subsidiaries, and the Company in turn depends
for substantially all of its cash flow on cash distributions to it by the
Operating Partnership. The creditors of each of the Company's direct and
indirect subsidiaries are entitled to payment of that subsidiary's obligations
to them, when due and payable, before distributions may be made by that
subsidiary to its equity holders. Thus, the Operating Partnership's ability to
-21-
make distributions to holders of units depends on its subsidiaries' ability
first to satisfy their obligations to their creditors and then to make
distributions to the Operating Partnership. Likewise, the Company's ability to
pay dividends to holders of common and preferred shares depends on the Operating
Partnership's ability first to satisfy its obligations to its creditors and make
distributions payable to holders of preferred units and then to make
distributions to the Company.
Furthermore, the holders of preferred units of the Operating Partnership
are entitled to receive preferred distributions before payment of distributions
to holders of common units of the Operating Partnership, including the Company.
Thus, the Company's ability to pay dividends to holders of its common shares
depends on the Operating Partnership's ability first to satisfy its obligations
to its creditors and make distributions payable to holders of preferred units
and then to make distributions to the Company. There are currently 17 series of
preferred units of the Operating Partnership not held by the Company that have
preference over its common shares. The total liquidation value of these 17
series of preferred units is approximately $1,494,061,000.
In addition, the Company may participate in any distribution of the assets
of any of its direct or indirect subsidiaries upon the liquidation,
reorganization or insolvency of the subsidiary, only after the claims of the
creditors, including trade creditors, and preferred security holders, if any, of
the subsidiary are satisfied.
THE COMPANY HAS INDEBTEDNESS, AND THIS INDEBTEDNESS MAY INCREASE.
As of December 31, 2002, the Company had approximately $4.966 billion in
total debt outstanding. The Company's ratio of total debt to total enterprise
value was 45%. When we say "enterprise value" in the preceding sentence, we mean
market equity value of the Company plus debt less cash. In the future, the
Company may incur additional debt, and thus increase its ratio of total debt to
total enterprise value, to finance acquisitions or property developments.
LOSS OF THE COMPANY'S KEY PERSONNEL COULD HARM ITS OPERATIONS.
The Company is dependent on the efforts of Steven Roth, the Chairman of the
Board of Trustees and Chief Executive Officer of the Company, and Michael D.
Fascitelli, the President of the Company. While the Company believes that it
could find replacements for these key personnel, the loss of their services
could harm its operations.
THE COMPANY MIGHT FAIL TO QUALIFY OR REMAIN QUALIFIED AS A REIT.
Although the Company believes that it will remain organized and will
continue to operate so as to qualify as a REIT for federal income tax purposes,
it might fail to remain qualified in this way. Qualification as a REIT for
federal income tax purposes is governed by highly technical and complex
provisions of the Internal Revenue Code for which there are only limited
judicial or administrative interpretations. The Company's qualification as a
REIT also depends on various facts and circumstances that are not entirely
within its control. In addition, legislation, new regulations, administrative
interpretations or court decisions might significantly change the tax laws with
respect to the requirements for qualification as a REIT or the federal income
tax consequences of qualification as a REIT.
If, with respect to any taxable year, the Company fails to maintain its
qualification as a REIT, it could not deduct distributions to shareholders in
computing its taxable income and would have to pay federal income tax on its
taxable income at regular corporate rates. The federal income tax payable would
include any applicable alternative minimum tax. If the Company had to pay
federal income tax, the amount of money available to distribute to shareholders
would be reduced for the year or years involved, and the Company would no longer
be required to distribute money to shareholders. In addition, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost, unless it was entitled
to relief under the relevant statutory provisions. Although the Company
currently intends to operate in a manner designed to allow it to qualify as a
REIT, future economic, market, legal, tax or other considerations may cause it
to revoke the REIT election.
THE COMPANY'S CHARTER DOCUMENTS AND APPLICABLE LAW MAY HINDER ANY
ATTEMPT TO ACQUIRE THE COMPANY.
Generally, for the Company to maintain its qualification as a REIT under
the Internal Revenue Code, not more than 50% in value of the outstanding shares
of beneficial interest of the Company may be owned, directly or indirectly, by
five or fewer individuals at any time during the last half of the Company's
taxable year. The Internal Revenue Code defines "individuals" for purposes of
the requirement described in the preceding sentence to include some types of
entities. Under the
-22-
Company's Amended and Restated Declaration of Trust, as amended, no person may
own more than 6.7% of the outstanding common shares or 9.9% of the outstanding
preferred shares, with some exceptions for persons who held common shares in
excess of the 6.7% limit before the Company adopted the limit and other persons
approved by the Company's Board of Trustees. These restrictions on
transferability and ownership may delay, deter or prevent a change in control of
the Company or other transaction that might involve a premium price or otherwise
be in the best interest of the shareholders. We refer to the Company's Amended
and Restated Declaration of Trust, as amended, as the "declaration of trust."
The Company's Board of Trustees is divided into three classes of trustees.
Trustees of each class are chosen for three-year staggered terms. Staggered
terms of trustees may reduce the possibility of a tender offer or an attempt to
change control of the Company, even though a tender offer or change in control
might be in the best interest of the Company's shareholders.
The Company's declaration of trust authorizes the Board of Trustees to,
cause the Company to issue additional authorized but unissued common shares or
preferred shares; classify or reclassify, in one or more series, any unissued
preferred shares; set the preferences, rights and other terms of any classified
or reclassified shares that the Company issues; and increase, without
shareholder approval, the number of shares of beneficial interest that the
Company may issue.
The Board of Trustees could establish a series of preferred shares whose
terms could delay, deter or prevent a change in control of the Company or other
transaction that might involve a premium price or otherwise be in the best
interest of the Company's shareholders, although the Board of Trustees does not
now intend to establish a series of preferred shares of this kind. The Company's
declaration of trust and bylaws contain other provisions that may delay, deter
or prevent a change in control of the Company or other transaction that might
involve a premium price or otherwise be in the best interest of the
shareholders.
Under the Maryland General Corporation Law, as amended, which we refer to
as the "MGCL," as applicable to real estate investment trusts, certain "business
combinations," including certain mergers, consolidations, share exchanges and
asset transfers and certain issuances and reclassifications of equity
securities, between a Maryland real estate investment trust and any person who
beneficially owns ten percent or more of the voting power of the trust's shares
or an affiliate or an associate, as defined in the MGCL, of the trust who, at
any time within the two-year period before the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting shares of beneficial interest of the trust, which we refer to
as an "interested shareholder," or an affiliate of the interested shareholder
are prohibited for five years after the most recent date on which the interested
shareholder becomes an interested shareholder. After that five-year period, any
business combination of these kinds must be recommended by the board of trustees
of the trust and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of beneficial
interest of the trust and (b) two-thirds of the votes entitled to be cast by
holders of voting shares of the trust other than shares held by the interested
shareholder with whom, or with whose affiliate, the business combination is to
be effected, unless, among other conditions, the trust's common shareholders
receive a minimum price, as defined in the MGCL, for their shares and the
consideration is received in cash or in the same form as previously paid by the
interested shareholder for its common shares. The provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of trustees of the trust before the interested shareholder becomes an
interested shareholder, and a person is not an interested shareholder if the
board of trustees approved in advance the transaction by which the person
otherwise would have become an interested shareholder. In approving a
transaction, the board may provide that its approval is subject to compliance,
at or after the time of approval, with any terms and conditions determined by
the board. The Company's board has adopted a resolution exempting any business
combination between any trustee or officer of the Company, or their affiliates,
and the Company. As a result, the trustees and officers of the Company and their
affiliates may be able to enter into business combinations with the Company
which may not be in the best interest of shareholders. With respect to business
combinations with other persons, the business combination provisions of the MGCL
may have the effect of delaying, deferring or preventing a change in control of
the Company or other transaction that might involve a premium price or otherwise
be in the best interest of the shareholders. The business combination statute
may discourage others from trying to acquire control of the Company and increase
the difficulty of consummating any offer.
-23-
THE NUMBER OF SHARES OF THE COMPANY AND THE MARKET FOR THOSE SHARES GIVE
RISE TO VARIOUS RISKS.
THE COMPANY HAS MANY SHARES AVAILABLE FOR FUTURE SALE, WHICH COULD HURT THE
MARKET PRICE OF ITS SHARES.
As of February 3, 2003, 31,876,821 Company common shares were reserved for
issuance upon redemption of Operating Partnership units. Some of these shares
may be sold in the public market after registration under the Securities Act
under registration rights agreements between the Company and some holders of
units of the Operating Partnership. These shares may also be sold in the public
market under Rule 144 under the Securities Act or other available exemptions
from registration. In addition, the Company has reserved a number of common
shares for issuance under its employee benefit plans, and these common shares
will be available for sale from time to time. The Company has awarded shares of
restricted stock and granted options to purchase additional common shares to
some of its executive officers and employees. The Company cannot predict the
effect that future sales of its common shares, or the perception that sales of
common shares could occur, will have on the market prices for its common shares.
CHANGES IN MARKET CONDITIONS COULD HURT THE MARKET PRICE OF THE COMPANY'S
SHARES.
The value of the Company's shares depends on various market conditions,
which may change from time to time. Among the market conditions that may affect
the value of the Company's shares are the following: the extent of institutional
investor interest in the Company; the reputation of REITs generally and the
attractiveness of their equity securities in comparison to other equity
securities, including securities issued by other real estate companies, and
fixed income securities (including in connection with any possible change in the
taxation of dividends, as discussed below); the Company's financial condition
and performance; and general financial market conditions.
In particular, the President of the United States has proposed several
changes to the taxation of dividends, including an exclusion of certain
dividends from taxable income. While numerous changes to the proposal, including
its withdrawal, may occur before the proposal is enacted into law, it is likely
that most, if not all, dividends paid by REITs will not qualify for the proposed
exclusion and therefore will continue to be treated as taxable income. This may
adversely affect equity securities of REITs as compared to equity securities of
other issuers.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of companies.
INCREASED MARKET INTEREST RATES MAY HURT THE VALUE OF THE COMPANY'S
SHARES.
The Company believes that investors consider the distribution rate on REIT
shares, expressed as a percentage of the price of the shares, relative to market
interest rates as an important factor in deciding whether to buy or sell the
shares. If market interest rates go up, prospective purchasers of REIT shares
may expect a higher distribution rate. Higher interest rates would not, however,
result in more funds for the Company to distribute and, in fact, would likely
increase its borrowing costs and might decrease its funds available for
distribution. Thus, higher market interest rates could cause the market price of
the Company's shares to decline.
-24-
ITEM 2. PROPERTIES
The Company currently owns, directly or indirectly, Office properties,
Retail properties, Merchandise Mart properties and Temperature Controlled
Logistics refrigerated warehouses. The Company also owns or has investments in
Alexander's, Hotel Pennsylvania, The Newkirk Master Limited Partnership, and dry
warehouses and industrial buildings.
OFFICE SEGMENT
The Company currently owns all or a portion of 74 office properties
containing approximately 27.7 million square feet. Of these properties, 21
contain 14.3 million square feet and are located in the New York City
metropolitan area (primarily Manhattan) (the "New York City Office Properties")
and 53 contain 13.4 million square feet and are located in the Washington, D.C.
and Northern Virginia area (the "CESCR Office Properties"). Prior to January 1,
2002, the Company owned a 34% interest in CESCR. On January 1, 2002, the Company
acquired the remaining 66% interest.
The following data on pages 25 to 28 covers the New York City Office
Properties. The CESCR Office Properties are described on pages 29 to 32.
NEW YORK CITY OFFICE PROPERTIES:
The New York City Office Properties contain: (i) 13,164,000 square feet of
office space, (ii) 805,000 square feet of retail space and (iii) 332,000 square
feet of garage space (6 garages).
The following table sets forth the percentage of the New York City Office
Properties 2002 revenue by tenants' industry:
Industry Percentage
-------- --------------
Retail...................... 10%
Publishing.................. 9%
Government.................. 6%
Media and Entertainment..... 6%
Legal....................... 6%
Insurance................... 5%
Technology.................. 5%
Finance..................... 4%
Pharmaceuticals............. 4%
Service Contractors......... 4%
Apparel..................... 3%
Not-for-Profit.............. 3%
Advertising................. 3%
Bank Branches............... 3%
Other....................... 29%
---
100%
===
The Company's New York City Office property lease terms generally range
from five to seven years for smaller tenant spaces to as long as 20 years for
major tenants. 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 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 costs of its premises.
No tenant in the New York City office segment accounted for more than 10%
of the Company's total revenue. Below is a listing of tenants which accounted
for 2% or more of the New York City Office Properties revenues in 2002:
Percentage of New
York City Office Percentage
Square Feet 2002 Properties of Total
Tenant Leased Revenues Revenues Revenues
------ ------------- -------------- ------------------- ------------
VNU Inc................................ 515,000 $ 18,750,000 3.4% 1.3%
The McGraw-Hill Companies, Inc......... 518,000 18,714,000 3.3% 1.3%
Sterling Winthrop, Inc................. 429,000 18,453,000 3.3% 1.3%
Madison Square Garden L.P./Rainbow
Media Holdings, Inc.................. 283,000 14,442,000 2.6% 1.0%
-25-
The following tables set forth lease expirations for the office and retail
portions of the New York City Office Properties as of December 31, 2002, for
each of the next 10 years assuming that none of the tenants exercise their
renewal options.
OFFICE SPACE:
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
- ---- ----------------- ----------------- --------------------- --------------- -----------------
2003...................... 151 565,000 4.7% $ 20,581,000 $ 36.44
2004...................... 111 780,000 6.5% 26,916,000 34.49
2005...................... 104 625,000 5.2% 24,813,000 39.69
2006...................... 79 1,138,000 9.5% 39,291,000 34.51
2007...................... 73 849,000 7.1% 32,963,000 38.84
2008...................... 46 1,175,000(1) 9.8% 40,757,000 34.69
2009...................... 44 580,000 4.8% 21,980,000 37.91
2010...................... 37 1,328,000 11.1% 48,394,000 36.45
2011...................... 21 926,000 7.7% 44,851,000 48.43
2012...................... 17 849,000 7.1% 27,112,000 31.95
- ----------
(1) Excludes 492,000 square feet at 909 Third Avenue leased to the U.S. Post
Office. The annual escalated rent is $3,533,000 or $7.18 per square foot.
The U.S. Post Office has 6 five-year renewal options remaining.
RETAIL SPACE:
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
- ---- ----------------- ----------------- --------------------- --------------- -----------------
2003...................... 17 56,000 7.2% $ 4,440,000 $ 78.80
2004...................... 9 55,000 7.0% 6,448,000 117.77
2005...................... 6 30,000 3.8% 2,119,000 70.47
2006...................... 11 62,000 7.8% 2,849,000 46.30
2007...................... 4 10,000 1.2% 985,000 100.65
2008...................... 10 32,000 4.0% 1,600,000 50.60
2009...................... 7 23,000 2.9% 1,465,000 64.70
2010...................... 6 14,000 1.7% 2,249,000 164.15
2011...................... 3 9,000 1.1% 607,000 69.11
2012...................... 4 32,000 4.0% 951,000 30.05
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 five years.
Average Annual
As of Rentable Escalated Rent
December 31, Square Feet Occupancy Rate Per Square Foot
------------------------ ------------- ---------------- -----------------
2002.................. 14,304,000 95.9% $ 37.36
2001.................. 14,300,000 97.4% 35.53
2000.................. 14,396,000 96.3% 32.18
1999.................. 14,028,000 89.8% 30.16
1998.................. 12,437,000 91.0% 28.14
-26-
During 2002, 609,000 square feet of New York City office space was leased
at a weighted average initial rent per square foot of $44.70. The Company's
ownership interest in the leased square footage is 579,000 square feet at a
weighted average initial rent per square foot of $44.82, a 30.0% increase over
the weighted average escalated rent per square foot of $34.11 for the expiring
leases. Following is the detail by building:
2002 Leases
-------------------------------------
Average Initial
Rent Per Square
Location Square Feet Foot(1)
----------- --------------- ------------------
One Penn Plaza...................... 151,000 $ 48.73
Two Penn Plaza...................... 87,000 44.27
150 East 58th Street................ 58,000 46.77
595 Madison Avenue.................. 54,000 54.06
40 Fulton Street.................... 51,000 30.00
Eleven Penn Plaza................... 40,000 41.93
888 Seventh Avenue.................. 40,000 52.12
20 Broad Street (60%)............... 34,000 28.39
90 Park Avenue...................... 32,000 50.22
866 UN Plaza........................ 31,000 40.28
330 Madison Avenue (25%)............ 21,000 52.76
Paramus............................. 10,000 17.47
----------
Total.................................. 609,000 44.70
==========
Vornado's Ownership Interest........... 579,000 44.82
==========
----------
(1) Most leases include periodic step-ups in rent, which are not
reflected in the initial rent per square foot leased.
In addition to the office space noted above, the Company leased 48,000
square feet of retail space at a weighted average initial rent of $112.01 per
square foot. Further, the Company leased 140,000 square feet of garage space at
a weighted average initial rent per square foot of $19.02.
-27-
New York City Office Properties
The following table sets forth the New York City Office Properties owned by
the Company as of December 31, 2002:
APPROXIMATE
LEASABLE
BUILDING SQUARE PERCENT ENCUMBRANCES
LOCATION FEET LEASED (IN THOUSANDS)(2)
---------------------------------------- ------------------ ----------- -------------------
NEW YORK (Manhattan)
One Penn Plaza (1)....................... 2,509,000 96.7% $ 275,000
Two Penn Plaza........................... 1,525,000 95.4% 154,669
909 Third Avenue (1)..................... 1,305,000 96.2% 105,837
770 Broadway............................. 1,046,000 99.6% 83,314
Eleven Penn Plaza........................ 1,024,000 97.0% 50,383
Two Park Avenue.......................... 964,000 98.6% --
90 Park Avenue........................... 890,000 92.9% --
888 Seventh Avenue (1)................... 877,000 92.1% 105,000
330 West 34th Street (1)................. 637,000 99.9% --
1740 Broadway............................ 567,000 99.8% --
150 East 58th Street (1)................. 559,000 88.8% --
866 United Nations Plaza................. 391,000 98.1% 33,000
595 Madison (Fuller Building)............ 305,000 91.4% 70,345
640 Fifth Avenue......................... 268,000 99.4%(3) --
40 Fulton Street......................... 238,000 85.4% --
689 Fifth Avenue......................... 89,000 74.3% --
7 West 34th Street....................... 424,000 100.0% --
330 Madison Avenue (25% Interest)........ 784,000 88.8% 60,000
20 Broad Street (60% Interest) (1)....... 466,000 93.6% --
825 Seventh Avenue (50% Interest)........ 165,000 100.0% 23,315
NEW JERSEY
Paramus (1).............................. 128,000 91.7% --
------------- -------------
TOTAL OFFICE BUILDINGS....................... 15,161,000 95.6% $ 960,863
============= =============
VORNADO'S OWNERSHIP INTEREST................. 14,304,000 95.9% $ 904,206
============= =============
----------
(1) These properties are 100% ground leased with the exception
of 150 East 58th Street where less than 10% is ground leased.
(2) See Note 6 to the consolidated financial statements in
this annual report on Form 10-K for further details.
(3) Excludes portion of the building under development.
-28-
CHARLES E. SMITH COMMERCIAL REALTY ("CESCR") OFFICE PROPERTIES:
CESCR owns 53 office buildings in the Washington D.C. and Northern Virginia
area containing 13.4 million square feet. As of December 31, 2002, 45 percent of
CESCR's property portfolio is leased to various agencies of the U.S. government
(General Services Administration "GSA").
CESCR office leases are typically for three to five year terms, and may
provide for extension options at either pre-negotiated or market rates. Most
leases provide for annual rental escalations throughout the lease term, plus
recovery of increases in real estate taxes and certain property operating
expenses. Annual rental escalations are typically based upon either fixed
percentage increases or the consumer price index. Leases also typically provide
for tenant improvement allowances for all or a portion of the tenant's initial
construction costs of its premises.
The following table sets forth the percentage of CESCR's Office properties
2002 revenue by tenants' industry:
Industry Percentage
------------ --------------
United States Government ("GSA").......... 39%
Government Contractors.................... 26%
Transportation............................ 6%
Communication............................. 4%
Legal..................................... 4%
Retail.................................... 4%
Business Services......................... 4%
Real Estate............................... 2%
Trade Associations........................ 2%
Printing/Publishing....................... 1%
Health Services........................... 1%
Other..................................... 7%
-------
100%
=======
Below is a listing of tenants which accounted for 2% or more of the CESCR
Office properties revenues during 2002:
Percentage of
CESCR Office Percentage
Square Feet 2002 Properties of Total
Tenant Leased Revenues Revenues Revenues
------ ------------- --------------- -------------- -------------
GSA (115 separate leases)................... 5,934,000 $ 164,009,000 39.0% 11.4%
Science Applications International Corp..... 411,000 12,175,000 2.9% .8%
US Airways, Inc (1)......................... 296,000 10,721,000 2.5% .7%
----------
(1) On August 11, 2002, US Airways filed for protection under Chapter 11
of the U.S. Bankruptcy Code. Effective January 1, 2003, the Company
agreed to amend its lease with US Airways at Crystal City to (i)
reduce the tenant's space by 90,732 square feet to 205,600 square feet
(ii) reduce the annual escalated rent from $36.00 to $29.75 per square
foot with 2.5% annual base rent escalations, (iii) provide the tenant
with up to $1,200,000 of tenant allowances and (iv) loan the tenant up
to $1,000,000 at 9% per annum for additional tenant improvements which
is to be repaid over the lease term. This lease modification is
subject to a confirmed plan of reorganization by the Bankruptcy Court.
-29-
The following table sets forth as of December 31, 2002 CESCR 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
- ---- ----------------- ----------------- --------------------- --------------- -----------------
2003...................... 385 2,868,000(1) 22.9% $ 85,531,000 $ 29.82
2004...................... 223 3,147,000 25.1% 88,487,000 28.12
2005...................... 166 1,594,000 12.7% 46,441,000 29.14
2006...................... 117 1,290,000 10.3% 40,171,000 31.15
2007...................... 96 783,000 6.2% 23,339,000 29.81
2008...................... 33 577,000 4.6% 19,218,000 33.29
2009...................... 35 495,000 3.9% 12,258,000 24.78
2010...................... 30 264,000 2.1% 8,259,000 31.28
2011...................... 39 869,000 6.9% 25,559,000 29.40
2012...................... 21 500,000 4.0% 16,101,000 32.23
- ----------
(1) Of the square feet expiring in 2003, 626,000 square feet has been renewed
or is currently in negotiations to be renewed.
Included in the above table are U.S. Patent and Trademark Office leases
expiring from 2003 through 2006 as follows: 139,000 square feet in 2003,
1,179,000 square feet in 2004, 513,000 square feet in 2005 and 107,000 square
feet in 2006. The U.S. Patent and Trademark Office is scheduled to relocate its
offices beginning in the second half of 2004. The Company expects that all
leases expiring prior to March 2004 will be extended or renewed to 2004 or 2005.
The following table sets forth the occupancy rate and the average annual
escalated rent per square foot for the CESCR properties at the end of each of
the past five years:
Average Annual
As of Rentable Escalated Rent
December 31, Square Feet Occupancy Rate Per Square Foot
------------------------ ------------- ---------------- -----------------
2002.................. 13,395,000 93.6% $ 29.38
2001.................. 12,899,000 94.8% 28.59
2000.................. 12,495,000 97.9% 27.38
1999.................. 10,657,000 98.6% 26.46
1998.................. 10,657,000 97.8% 25.22
-30-
During 2002, CESCR leased 2,025,047 square feet of space at a weighted
average initial rent per square foot of $31.29, a 5.5% increase over the
weighted average escalated rent per square foot of $29.66 for the expiring
leases. Following is the detail by building and/or complex:
Average Initial Rent
Location Square Feet Per Square Foot(1)
-------------------- -------------------- -----------------------
1101 17th Street................. 16,610 $ 34.72
1730 M Street.................... 20,675 31.18
1140 Connecticut Avenue.......... 45,694 33.14
1150 17th Street................. 76,383 35.24
Crystal Mall..................... 430 24.23
Crystal Plaza.................... 82,624 29.38
Crystal Square................... 308,229 32.81
Crystal Gateway.................. 213,541 31.84
Crystal Park..................... 662,464 32.58
1919 South Eads Street........... 7,904 32.27
Skylines......................... 247,566 25.60
Arlington Plaza.................. 8,731 23.53
Democracy Plaza.................. 70,896 33.60
Courthouse Plaza................. 239,683 29.91
Reston Executive................. 1,677 26.35
Tysons Dulles.................... 5,749 27.27
Commerce Executive............... 9,061 26.69
Fairfax Square (20% interest).... 7,130 27.86
---------------
2,025,047 31.29
===============
----------
(1) Most leases include periodic step-ups in rent which are not
reflected in the initial rent per square foot leased.
The above table excludes 317,000 square feet leased at an average initial
rent of $29.21 that was vacant at the time of the Company's acquisition of CESCR
or had been vacant for more than 9 months.
CESCR manages an additional 5.1 million square feet of office and other
commercial properties in the Washington, D.C. area for third parties.
-31-
CESCR Office Properties
The following table sets forth the CESCR Office Properties as of December
31, 2002:
APPROXIMATE
LEASABLE
NUMBER OF BUILDING SQUARE PERCENT ENCUMBRANCES
Location/Complex BUILDINGS FEET LEASED (IN THOUSANDS)(2)
------------------ ----------- ----------------- --------- -------------------
Crystal Mall...................... 4 1,066,000 98.9% $ 65,877
Crystal Plaza..................... 7 1,226,000 99.2% 70,356
Crystal Square.................... 4 1,386,000 97.9% 195,048
Crystal Gateway................... 5 1,443,000 94.4% 208,118
Crystal Park...................... 5 2,160,000 97.0% 276,534
Arlington Plaza................... 1 173,000 86.5% 17,531
1919 S. Eads Street............... 1 96,000 87.6% 13,148
Skyline Place..................... 7 2,016,000 86.6% 139,900
One Skyline Tower................. 1 476,000 100.0% 65,764
Courthouse Plaza (1).............. 2 615,000 99.1% 80,062
1101 17th Street.................. 1 205,000 87.5% 27,248
1730 M Street (1)................. 1 189,000 92.1% 17,012
1140 Connecticut Avenue........... 1 175,000 91.5% 20,153
1150 17th Street.................. 1 225,000 95.6% 32,904
1750 Pennsylvania Avenue.......... 1 262,000 97.9% 49,794
Democracy Plaza I (1)............. 1 207,000 98.0% 27,640
Tysons Dulles..................... 3 473,000 89.6% 69,507
Commerce Executive................ 3 413,000 56.0% 53,307
Reston Executive.................. 3 484,000 93.5% 73,844
Fairfax Square (20% interest)..... 1 105,000 83.6% 13,780
----- ------------ --------------
TOTAL OFFICE BUILDINGS
(VORNADO'S INTEREST)........... 53 13,395,000 93.6% $ 1,517,527
===== ============ ==============
NOTES:
(1) These properties are 100% ground leased.
(2) See note 6 to the consolidated financial statements in this annual
report on Form 10-K for further details.
-32-
RETAIL SEGMENT
The Company owns 62 retail properties of which 51 are strip shopping
centers primarily located in the Northeast and Mid-Atlantic states, two are
regional malls located in San Juan, Puerto Rico, two are super-regional malls
located in Nassau County, Long Island, New York and in Monmouth County, New
Jersey and seven are retail sites located in Manhattan. The Company's strip
shopping centers and malls are generally located on major regional highways in
mature, densely populated areas. The Company believes these properties attract
consumers from a regional, rather than a neighborhood market place because of
their location on regional highways.
The Company's strip shopping centers which contain an aggregate of 9.3
million square feet, are substantially (over 80%) leased to large stores (over
20,000 square feet). Tenants include destination retailers such as discount
department stores, supermarkets, home improvement 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 malls are the Montehiedra Mall which contains
554,000 square feet and is anchored by Home Depot, Kmart and Marshalls and the
Las Catalinas Mall which contains 354,000 square feet and is anchored by Kmart
and Sears, which owns its store. On September 23, 2002, the Company increased
its interest in the Las Catalinas Mall to 100% by acquiring the 50% of the mall
and the 25% of Kmart's anchor store it did not already own.
The Green Acres Mall is a 1.6 million square foot super-regional mall
located in Long Island, New York. The Green Acres Mall is anchored by four major
department stores: three of which, Sears, Roebuck and Co., J.C. Penney Company,
Inc. and Federated Department Stores, Inc. ("Federated") doing business as
Macy's, are operating and the fourth, also leased to Federated (previously
occupied by Stern's), is currently dark, however, Federated continues to pay the
rent. The complex also includes The Plaza at Green Acres, a 188,000 square foot
strip shopping center which is anchored by National Wholesale Liquidators. The
Company has entered into a lease with Wal-Mart for the other anchor store at the
Plaza, which is subject to governmental approvals.
The Monmouth Mall, located in Eatontown, New Jersey was acquired on October
10, 2002, by a joint venture in which the Company has a 50% interest. The mall
is a super regional mall containing 1.5 million square feet and anchored by four
department store tenants (Macy's, Lord & Taylor, J.C. Penney's and Boscovs),
three of which own 731,000 square feet of the 1.5 million square feet.
The following table sets forth the percentage of the Retail Portfolio 2002
rentals by type of retailer:
Industry Percentage
----------------- ----------------
Discount Department Stores........ 11%
Supermarkets...................... 7%
Home Improvement.................. 7%
Family Apparel.................... 6%
Electronics stores................ 4%
Restaurants....................... 4%
Women's Apparel................... 3%
Other............................. 58%
---
100%
===
The Manhattan retail sites include six operating properties containing
127,000 square feet, including 43,000 square feet of new retail space at 435
Seventh Avenue leased to Hennes & Mauritz. The seventh property, 4 Union Square
South, is currently under development.
-33-
The following tables set forth the occupancy rate and the average annual
base rent per square foot for the retail properties at the end of each of the
past five years.
STRIP SHOPPING CENTERS:
Average Annual
Rentable Base Rent
As of December 31, Square Feet Occupancy Rate Per Square Foot
------------------- -------------- ---------------- -----------------
2002.............. 9,295,000 85.7% $ 11.11
2001.............. 9,008,000 89.0% 10.60
2000.............. 9,000,000 91.1% 10.72
1999.............. 8,212,000 91.0% 10.20
1998.............. 8,332,000 91.1% 9.87
REGIONAL AND SUPER REGIONAL MALLS:
Average Annual Base Rent
Per Square Foot
--------------------------
Rentable
As of December 31, Square Feet Occupancy Rate Mall Tenants Total
------------------- ------------- ---------------- -------------- ----------
2002.............. 2,875,000 95.4% $ 27.79 $ 17.15
2001.............. 2,293,000 98.7% 34.04 16.02
2000.............. 2,293,000 95.5% 32.05 14.84
1999.............. 2,293,000 95.5% 31.66 14.50
1998.............. 2,293,000 95.2% 29.40 13.90
The aggregate occupancy rate for the 12.5 million square feet of retail
properties at December 31, 2002 is 88.3%. The occupancy rate includes leases for
490,000 square feet at five locations (4%) which have not commenced at December
31, 2002. Three of these locations aggregating 268,000 square feet are ground
leased to Lowe's which plans to demolish the existing buildings and construct
its own stores at the sites and two locations containing 223,000 square feet are
leased to Wal-Mart, which plans to demolish an existing building and construct
its own store at one of the sites and occupy the existing store at the other
site. All of these redevelopment projects are subject to governmental approvals
and in some cases, the relocation of existing tenants.
The Company's shopping center lease terms range from 5 years or less in
some instances for smaller tenant spaces to as long as 25 years for major
tenants. Leases generally provide for additional rents based on a percentage of
tenants' sales and pass through to tenants of the tenants' 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 1% of
total shopping center revenues in 2002. None of the tenants in the Retail
Segment accounted for more than 10% of the Company's total revenues.
Below is a listing of tenants which accounted for 2% or more of the Retail
property revenues in 2002:
Percentage of
Square Feet 2002 Retail Properties Percentage of
Tenant Leased Revenues Revenues Total Revenues
------ ------------- ---------- ------------------- ----------------
Stop & Shop Companies, Inc.
(Stop & Shop)......................... 981,000 $ 12,772,000 9.7% .9%
The Home Depot, Inc....................... 630,000 6,987,000 5.3% .5%
The TJX Companies, Inc.................... 414,000 5,288,000 4.0% .4%
Kohl's.................................... 697,000 4,250,000 3.2% .3%
Wal-Mart/Sam's Wholesale.................. 959,000 3,593,000 2.7% .3%
Staples, Inc.............................. 222,000 3,427,000 2.6% .2%
Shop Rite................................. 381,000 3,329,000 2.5% .2%
Toys "R" Us/Kids "R" Us................... 287,000 2,697,000 2.1% .2%
-34-
FORMER BRADLEES LOCATIONS:
The Company previously leased 18 locations to Bradlees which closed all of
its stores in February 2001. The leases for four former Bradlees locations were
assigned by Bradlees to other retailers. The Company has re-leased nine of the
other former Bradlees locations; three to Kohl's, two each to Lowe's and Haynes
Furniture, and one each to Home Depot and Wal-Mart. Lowe's and Wal-Mart will
demolish the existing properties and construct their own stores, subject to the
receipt of various governmental approvals and the relocation of existing
tenants. Of the remaining five locations which are currently vacant, two of the
leases are guaranteed and the rent is being paid by Stop & Shop, a wholly-owned
subsidiary of KoninKlijke Ahold NV (formerly Royal Ahold NV), an international
food retailer. Stop & Shop remains contingently liable for rent at a number of
the former Bradlees locations for the term of the Bradlees leases.
Property rentals for the year ended December 31, 2002, include $5,000,000
of additional rent which, effective December 31, 2002, was re-allocated to the
former Bradlees locations in Marlton, Turnersville, Bensalem and Broomall and is
payable by Stop & Shop, pursuant to the Master Agreement and Guaranty dated
May 1, 1992. This amount is in addition to all other rent guaranteed at the
former Bradlees locations. On January 8, 2003, Stop & Shop filed a complaint
with the United States District Court claiming the Company has no right to
reallocate and therefore continue to collect the $5,000,000 of annual rent
from Stop & Shop because of the expiration of the East Brunswick, Jersey
City, Middletown, Union and Woodbridge leases to which the $5,000,000 of
additional rent was previously allocated. The additional rent provision of
the guaranty expires at the earliest in 2012. The Company intends to
vigorously contest Stop & Shop's position.
In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced
that it overstated its 2002 and 2001 earnings by at least $500 million and is
under investigation by the U.S. Justice Department and Securities and Exchange
Commission. The Company cannot predict what effect, if any, this situation may
have on Stop & Shop's ability to satisfy its obligation under the Bradlees
guarantees and rent for existing Stop & Shop leases aggregating approximately
$10.5 million per annum.
The following table sets forth as of December 31, 2002 lease expirations
for each of the next 10 years assuming that none of the tenants exercise their
renewal options.
Annual Rent of
Expiring Leases
Number of Square Feet Percentage of -----------------------------
Expiring of Expiring Total Leased Per Square
Year Leases Leases Square Feet Total Foot
---- ----------- ------------- --------------- ------------ -------------
2003................. 104 492,000 4.7% $ 9,050,000 $ 18.39
2004................. 88 650,000 6.2% 9,798,000 15.08
2005................. 120 568,000 5.4% 11,224,000 19.77
2006................. 84 873,000 8.4% 7,583,000 8.68
2007................. 117 867,000 8.3% 11,388,000 13.14
2008................. 58 469,000 4.5% 6,225,000 13.27
2009................. 51 409,000 3.9% 6,176,000 15.09
2010................. 31 381,000 3.7% 4,781,000 13.34
2011................. 33 712,000 6.8% 5,082,000 9.12
2012................. 14 350,000 3.4% 3,254,000 9.31
-35-
During 2002, approximately 902,000 square feet of retail space was leased
at a weighted average rent per square foot of $13.58, a 33.8% increase over the
weighted average rent per square foot of $10.15 for the expiring leases and
1,117,000 square feet of land was ground leased to retailers at a weighted
average rent per square foot of $6.69. Following is the detail by property:
2002 Leases
----------------------------------
Average
Initial Rent
Square Per Square
Location Feet Foot (1)
------------ ------------ ---------------
Space Leases:
Valley Stream....................... 171,000 $ 21.49
East Brunswick...................... 142,000 14.00
Hackensack.......................... 115,000 16.14
Levittown........................... 105,000 6.10
Middletown.......................... 101,000 10.29
Turnersville........................ 89,000 6.10
Dundalk............................. 40,000 6.09
Manalapan........................... 38,000 14.50
Hanover Conrans..................... 36,000 18.26
Newington........................... 19,000 12.25
Bricktown........................... 16,000 17.10
East Hanover........................ 10,000 9.96
Morris Plains....................... 7,000 25.57
North Bergen........................ 3,000 31.10
Towson.............................. 3,000 24.00
Allentown........................... 3,000 17.50
North Plainfield.................... 2,000 15.50
Cherry Hill......................... 2,000 12.73
--------
Total............................... 902,000 13.58
========
Land Leases:
Rochester........................... 205,000 3.08
Lancaster........................... 170,000 2.50
Jersey City (2)..................... 170,000 7.54
Dover (2)........................... 169,000 7.67
Union (2)........................... 159,000 15.15
Newington........................... 132,000 4.92
Chicopee (2)........................ 112,000 6.93
-----------
1,117,000 6.69
===========
----------
(1) Most leases include periodic step-ups in rent, which are not reflected
in the initial rent per square foot leased.
(2) Lowe's will demolish the existing buildings and construct its own
buildings in Jersey City, Dover and Union and Wal-Mart will demolish
the existing building and construct its own building in Chicopee.
These leases are expected to commence within the next 12 to 24 months
upon receipt of various governmental approvals, and the relocation of
existing tenants.
-36-
Retail Properties
The following table sets forth the Retail Properties as of December 31,
2002:
APPROXIMATE LEASABLE BUILDING
SQUARE FOOTAGE
-------------------------------
OWNED BY
OWNED/ TENANT ON LAND
LEASED BY LEASED FROM PERCENT ENCUMBRANCES
LOCATION COMPANY COMPANY LEASED (IN THOUSANDS)(2)
----------- ------------ ---------------- --------- -----------------
NEW JERSEY
Bordentown................ 179,000 -- 95.0% $ 8,111
Bricktown................. 260,000 3,000 95.7% 16,390
Cherry Hill............... 231,000 64,000 70.6% 15,075
Delran.................... 169,000 3,000 100.0% 6,461
Dover..................... 173,000 -- 98.7% 7,388
East Brunswick............ 221,000 10,000 100.0% 22,887
East Hanover I............ 271,000 -- 97.6% 20,579
East Hanover II........... 77,000 -- 99.2% 6,860
Hackensack................ 209,000 60,000 100.0% 25,144
Jersey City............... 222,000 3,000 95.7% 19,249
Kearny.................... 40,000 66,000 100.0% 3,758
Lawnside.................. 142,000 3,000 100.0% 10,651
Lodi...................... 171,000 -- 100.0% 9,439
Manalapan................. 196,000 2,000 57.2% 12,597
Marlton................... 174,000 7,000 86.6% 12,249
Middletown................ 180,000 52,000 91.9% 16,535
Monmouth Mall (50%
interest).............. 743,000 -- 96.3% 135,000
Morris Plains............. 176,000 1,000 100.0% 12,104
North Bergen.............. 7,000 55,000 100.0% 3,985
North Plainfield (1)...... 219,000 -- 89.9% 10,942
Totowa.................... 178,000 139,000 100.0% 29,694
Turnersville.............. 89,000 7,000 100.0% 4,108
Union..................... 263,000 -- 82.6% 33,722
Vineland.................. 143,000 5.6% --
Watchung.................. 50,000 116,000 98.2% 13,606
Woodbridge................ 231,000 4,000 50.9% 22,227
---------- ---------- ----------
Total New Jersey....... 5,014,000 595,000 90.1% 478,761
---------- ---------- ----------
NEW YORK
Manhattan:
1135 Third Avenue......... 25,000 -- 100.0% --
4 Union Square South
(in development)....... 230,000 -- --(4) --
424 Sixth Avenue.......... 10,000 -- 100.0% --
435 Seventh Avenue........ 43,000 -- 100.0% --
484 Eighth Avenue......... 14,000 -- 100.0% --
715 Lexington Avenue...... 32,000 -- 72.3%(4) --
825 Seventh Avenue........ 3,000 -- 100.0% --
Other:
Albany (Menands).......... 140,000 -- 74.0% 6,251
Buffalo (Amherst) (1)..... 185,000 112,000 81.1% 7,044
Freeport.................. 167,000 -- 100.0% 14,879
New Hyde Park (1)......... 101,000 -- 100.0% 7,510
North Syracuse............ 98,000 -- 100.0% --
Rochester................. -- 205,000 100.0% --
Rochester (Henrietta) (1) 148,000 -- 0.0% --
Valley Stream (Green
Acres) (1)............. 1,535,000 61,000 97.1% 150,717
---------- ---------- ----------
Total New York......... 2,731,000 378,000 89.8% 186,401
---------- ---------- ----------
PENNSYLVANIA
Allentown................. 267,000 354,000 98.1% 23,367
Bensalem.................. 118,000 8,000 98.4% 6,457
Bethlehem................. 159,000 -- 74.4% 4,087
Broomall.................. 147,000 22,000 100.0% 9,827
Glenolden................. 102,000 -- 10.1% 7,370
Lancaster................. 58,000 170,000 93.6% --
Levittown................. 105,000 -- 100.0% --
10th and Market
Streets, Philadelphia.. 271,000 -- 73.7% 9,001
Upper Moreland............ 122,000 -- 100.0% 6,986
York...................... 111,000 -- 24.6% 4,132
---------- ---------- ----------
Total Pennsylvania..... 1,460,000 554,000 84.3% 71,227
---------- ---------- ----------
-37-
APPROXIMATE LEASABLE BUILDING
SQUARE FOOTAGE
-------------------------------
OWNED BY
OWNED/ TENANT ON LAND
LEASED BY LEASED FROM PERCENT ENCUMBRANCES
LOCATION COMPANY COMPANY LEASED (IN THOUSANDS)(2)
----------- ------------ ---------------- --------- -----------------
MARYLAND
Baltimore (Belair Rd.) (3) -- -- -- --
Baltimore (Towson)........ 152,000 -- 79.3% 11,451
Baltimore (Dundalk)....... 181,000 3,000 81.9% 6,205
Glen Burnie............... 65,000 56,000 100.0% 5,893
Hagerstown................ 149,000 -- 35.5% 3,302
---------- ---------- ----------
Total Maryland......... 547,000 59,000 73.4% 26,851
---------- ---------- ----------
CONNECTICUT
Newington................. 43,000 140,000 100.0% 6,581
Waterbury................. 146,000 -- 64.8% --
---------- ---------- ----------
Total Connecticut...... 189,000 140,000 84.4% 6,581
---------- ---------- ----------
MASSACHUSETTS
Chicopee.................. 112,000 4,000 100.0% --
Milford (1)............... 83,000 -- 100.0% --
Springfield............... 8,000 117,000 100.0% 3,142
---------- ---------- ----------
Total Massachusetts.... 203,000 121,000 100.0% 3,142
---------- ---------- ----------
PUERTO RICO
(SAN JUAN)
Montehiedra Mall.......... 554,000 -- 91.8% 59,638
Las Catalinas Mall........ 354,000 -- 96.6% 67,692
---------- ---------- ----------
Total.................. 908,000 -- 93.6% 127,330
---------- ---------- ----------
Total Shopping Centers....... 11,052,000 1,847,000 88.8% $ 900,293
========== ========== ==========
VORNADO'S OWNERSHIP INTEREST. 10,681,000 1,847,000 88.3% $ 832,793
========== ========== ==========
(1) These properties are ground leased.
(2) See note 6 to the consolidated financial statements in this
annual report on Form 10-K for further details.
(3) On January 9, 2003, this property was sold for $4.5 million,
which resulted in a gain of $2.6 million to be recognized in the
first quarter of 2003.
(4) Under development.
-38-
MERCHANDISE MART SEGMENT
The Merchandise Mart Properties are a portfolio of 9 properties containing
an aggregate of 8.6 million square feet.
Below is a breakdown of square feet by location and use as of December 31,
2002.
Showroom
------------------------------------
Temporary
Total Office Total Permanent Trade Show Retail
---------- ----------- ----------- ----------- ------------ --------
Chicago, Illinois
Merchandise Mart............. 3,453,000 1,150,000 2,149,000 1,862,000 287,000 154,000
350 N. Orleans............... 1,149,000 862,000 287,000 287,000 -- --
33 N. Dearborn............... 326,000 314,000 -- -- -- 12,000
---------- ---------- ---------- ---------- -------- --------
Total Chicago, Illinois.......... 4,928,000 2,326,000 2,436,000 2,149,000 287,000 166,000
---------- ---------- ---------- ---------- -------- --------
HighPoint, North Carolina
Market Square Complex........ 1,747,000 -- 1,747,000 1,113,000 634,000 --
National Furniture Mart...... 259,000 -- 259,000 259,000 -- --
---------- ---------- ---------- ---------- -------- --------
Total HighPoint, North Carolina.. 2,006,000 -- 2,006,000 1,372,000 634,000 --
---------- ---------- ---------- ---------- -------- --------
L.A. Mart.................... 757,000 -- 757,000 757,000 -- --
---------- ---------- ---------- ---------- -------- --------
Total Los Angeles, California.... 757,000 -- 757,000 757,000 -- --
---------- ---------- ---------- ---------- -------- --------
Washington, D.C..................
Washington Design Center..... 387,000 58,000 329,000 329,000 -- --
Washington Office Center..... 396,000 360,000 -- -- -- 36,000
South Capitol
94,000 94,000 -- -- -- --
---------- ---------- ---------- ---------- -------- --------
Total Washington, D.C............ 877,000 512,000 329,000 329,000 -- 36,000
---------- ---------- ---------- ---------- -------- --------
Total Merchandise Mart Properties 8,568,000 2,838,000 5,528,000 4,607,000 921,000 202,000
========== ========== ========== ========== ======== ========
Occupancy rate................... 89.2% 95.2% 83.9%
========== ========== ========
OFFICE SPACE
The following table sets forth the percentage of the Merchandise Mart
Properties office revenues by tenants' industry during 2002:
Industry Percentage
-------- ---------------
Government........................ 33%
Service........................... 24%
Telecommunications................ 13%
Banking........................... 12%
Insurance......................... 10%
Pharmaceutical.................... 4%
Other............................. 4%
-39-
The average lease term ranges from three to five years for smaller tenants
to as long as 15 years for large tenants. Leases typically provide for step-ups
in rent periodically over the term of the lease and pass through to tenants the
tenants' 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 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 2002:
Percentage of Percentage of
Square Feet 2002 Segment Total Company
Tenant Leased Revenues Revenues Revenues
--------- ------------ ----------- --------------- ----------------
General Services Administration... 307,000 $ 10,247,000 4.8% .7%
Ameritech......................... 234,000 6,533,000 3.2% .5%
Bankers Life and Casualty 303,000 5,861,000 2.7% .4%
Bank of America................... 202,000 4,299,000 2.0% .3%
Chicago Transit Authority......... 251,000 4,247,000 2.0% .3%
On December 30, 2002, the Company entered into a lease modification
agreement with Bankers Life and Casualty ("Bankers") to (i) extend the term for
107,000 square feet from November 30, 2008 (the date it was scheduled to expire)
to November 30, 2018, (ii) maintain 70,000 square feet through November 30,
2008, (iii) surrender 83,000 square feet on March 1, 2003, (which the Company
has re-leased to RBC Mortgage Company for a 15-year term) and (iv) vacate the
remaining 43,000 square feet. Bankers is not part of the bankruptcy filing of
its parent company, Conseco.
On November 25, 2002, the Chicago Transit Authority notified the Company
that it is exercising its right to terminate its lease as of November 30, 2004,
which was scheduled to expire on November 30, 2007. In connection with the
termination, the Company received a payment of $794,000 in November 2002 and
will receive an additional $750,000 in 2004.
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 Annual
As of Rentable Escalated Rent
December 31, Square Feet Occupancy Rate Per Square Foot
--------------- ------------- ---------------- -----------------
2002........... 2,838,000 89.2% $ 24.00
2001........... 2,841,000 89.2% 23.84
2000........... 2,869,000 90.2% 23.52
1999........... 2,414,000 93.3% 20.12
1998........... 2,274,000 96.9% 19.68
-40-
The following table sets forth as of December 31, 2002 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
- ---- ----------------- ----------------- ------------------- ----------- -----------------
2003...................... 12 37,000 1.6% $ 953,000 $ 25.82
2004...................... 19 349,000 14.9% 7,043,000 20.15
2005...................... 17 176,000 7.5% 4,214,000 23.90
2006...................... 11 101,000 4.3% 2,492,000 24.75
2007...................... 14 223,000 9.5% 5,192,000 23.25
2008...................... 12 552,000 23.6% 11,716,000 21.22
2009...................... 5 276,000 11.8% 6,058,000 21.98
2010...................... 2 357,000 15.2% 11,893,000 33.36
2011...................... 1 193,000 8.3% 5,620,000 29.07
2012...................... 12 77,000 3.3% 1,851,000 23.93
During 2002, 164,000 square feet of office space was leased at a weighted
average initial rent per square foot of $26.97, an increase of 1.2% over the
weighted average escalated rent per square foot of $26.66 for the leases
expiring. Following is the detail by building:
2002 Leases
----------------------------------
Average Initial
Rent Per
Square Feet Square Foot (1)
------------- ------------------
33 North Dearborn Street.............. 80,000 $ 24.67
Washington Office Center.............. 56,000 31.11
Merchandise Mart...................... 14,000 17.42
Washington Design Center.............. 14,000 33.41
----------
Total............................... 164,000 26.97
==========
----------
(1) Most leases include periodic step-ups in rent, which are not reflected
in the initial rent per square foot leased.
SHOWROOM SPACE
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, gifts, carpet, residential furnishings, building
products, crafts, apparel and design industries. Merchandise Mart Properties own
and operate five of the leading furniture and gifts trade shows including the
contract furniture industry's largest annual trade show, NeoCon, which attracts
over 50,000 attendees each June and is hosted at the Merchandise Mart building
in Chicago. The Market Square Complex co-hosts the home furniture industry's
semi-annual (April and October) market weeks which occupy over 11,500,000 square
feet in the High Point, North Carolina region.
The following table sets forth the percentage of the Merchandise Mart
properties showroom revenues by tenants' industry during 2002:
Industry Percentage
---------- ------------
Residential Design......... 25%
Gift....................... 19%
Residential Furnishings.... 16%
Contract Furnishings....... 15%
Market Suites.............. 15%
Apparel.................... 4%
Casual Furniture........... 4%
Building Products.......... 2%
-41-
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
As of Rentable Escalated Rent
December 31, Square Feet Occupancy Rate Per Square Foot
--------------- ------------- ---------------- -----------------
2002............. 5,528,000 95.2% $ 21.46
2001............. 5,532,000 95.5% 22.26
2000............. 5,044,000 97.6% 22.85
1999............. 4,174,000 98.1% 21.29
1998............. 4,266,000 95.3% 21.97
The following table sets forth as of December 31, 2002 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
---- ----------------- ----------------- ------------------- ----------- -----------------
2003...................... 296 614,000 14.9% $ 14,073,000 $ 22.91
2004...................... 281 736,000 17.9% 14,757,000 20.04
2005...................... 254 690,000 16.8% 15,343,000 22.22
2006...................... 168 581,000 14.1% 13,593,000 23.41
2007...................... 158 768,000 18.7% 15,588,000 20.29
2008...................... 36 202,000 4.9% 5,693,000 28.18
2009...................... 37 161,000 3.9% 4,546,000 28.17
2010...................... 31 174,000 4.2% 4,826,000 27.82
2011...................... 20 121,000 3.0% 2,893,000 23.89
2012...................... 19 61,000 1.5% 1,204,000 19.66
In 2002, 911,000 square feet of showroom space was leased at a weighted
average initial rent per square foot of $18.99, a 2.0% increase over the
weighted average escalated rent per square foot of $18.63 for the leases
expiring. Following is the detail by building:
2002 Leases
---------------------------------
Average Initial
Rent Per
Square Feet Square Foot(1)
------------- -----------------
Market Square Complex.................... 430,000 $ 14.97
Merchandise Mart......................... 199,000 29.39
L.A. Mart................................ 233,000 16.01
Washington Design Center................. 25,000 29.05
350 North Orleans........................ 24,000 23.29
-------
Total.............................. 911,000 18.99
=======
----------
(1) Most leases include periodic step-ups in rent which are not reflected
in the initial rent per square foot leased.
RETAIL STORES
The Merchandise Mart Properties' portfolio also contains approximately
202,000 square feet of retail stores which was 83.9% occupied at December 31,
2002.
-42-
Merchandise Mart Properties:
The following table sets forth the Merchandise Mart Properties owned by the
Company as of December 31, 2002:
APPROXIMATE
LEASABLE
BUILDING PERCENT ENCUMBRANCES
LOCATION SQUARE FEET LEASED (IN THOUSANDS)(1)
----------------------------------------------- ------------- --------- -----------------
ILLINOIS
Merchandise Mart, Chicago.......................... 3,435,000 94.9% $ --
350 North Orleans, Chicago......................... 1,149,000 83.8% --
33 North Dearborn Street, Chicago.................. 325,000 88.2% 18,926
Other.............................................. 19,000 76.7% 25,821
------------- ----------
Total Illinois............................. 4,928,000 44,747
------------- ----------
WASHINGTON, D.C.
Washington Office Center........................... 396,000 98.7% 44,924
Washington Design Center........................... 388,000 96.4% 48,542
Other.............................................. 93,000 62.0% --
------------- ----------
Total Washington, D.C...................... 877,000 93,466
------------- ----------
HIGH POINT, NORTH CAROLINA
Market Square Complex.............................. 2,006,000 99.4% 115,206
CALIFORNIA
L.A. Mart.......................................... 757,000 86.7% --
------------- ----------
TOTAL MERCHANDISE MART PROPERTIES .................... 8,568,000 93.6% $ 253,419
============= ==========
----------
(1) See Note 6 to the consolidated financial statements in this
annual report on Form 10-K for further details.
-43-
TEMPERATURE CONTROLLED LOGISTICS SEGMENT
The Company has a 60% interest in Vornado Crescent Portland Partnership
("the Landlord") that owns 88 cold storage warehouses, through a wholly-owned
subsidiary (AmeriCold Realty Trust), with an aggregate of approximately 441.5
million cubic feet. AmeriCold Logistics leases all of the partnerships'
facilities. The Temperature Controlled Logistics segment is headquartered in
Atlanta, Georgia.
AmeriCold Logistics provides the food industry with refrigerated
warehousing and transportation management services. Refrigerated warehouses are
comprised of production, distribution and public facilities. Production
facilities typically serve one or a small number of customers, generally food
processors which are located nearby. These customers store large quantities of
processed or partially processed products in the facilities 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 generally services the
surrounding regional market. Public facilities generally serve the needs of
local and regional customers under short-term agreements. Food manufacturers and
processors use these facilities to store capacity overflow from their production
facilities or warehouses. 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. A breakdown of AmeriCold Logistics' largest customers during 2002
include:
% of 2002
Revenue
------------
H.J. Heinz & Co.......................... 16%
Con-Agra Foods, Inc...................... 11%
Philip Morris Companies, Inc............. 8%
Sara Lee Corp............................ 5%
Tyson Foods, Inc......................... 5%
General Mills............................ 4%
McCain Foods, Inc........................ 4%
J.R. Simplot............................. 3%
Flowers Industries, Inc.................. 3%
Farmland Industries, Inc................. 2%
Other.................................... 39%
------
100%
======
On December 31, 2002, AmeriCold Logistics sold its Carthage, Missouri and
Kansas City, Kansas quarries for $20,000,000 in cash (appraised value) to a
joint venture owned 44% by the Company and 56% by Crescent Real Estate Equities.
-44-
Temperature Controlled Logistics Properties
The following table sets forth certain information for the Temperature
Controlled Logistics properties as of December 31, 2002:
CUBIC FEET SQUARE FEET
PROPERTY (IN MILLIONS) (IN THOUSANDS)
----------------------- ------------- --------------
ALABAMA
Birmingham............... 2.0 85.6
Montgomery............... 2.5 142.0
Gadsden (1).............. 4.0 119.0
Albertville.............. 2.2 64.5
-------- --------
10.7 411.1
-------- --------
ARIZONA
Phoenix.................. 2.9 111.5
-------- ----------
ARKANSAS
Fort Smith............... 1.4 78.2
West Memphis............. 5.3 166.4
Texarkana................ 4.7 137.3
Russellville............. 5.6 164.7
Russellville............. 9.5 279.4
Springdale............... 6.6 194.1
-------- ----------
33.1 1,020.1
-------- ----------
CALIFORNIA
Ontario (1).............. 8.1 279.6
-------- ----------
Burbank.................. 0.8 33.3
Fullerton (1)............ 2.8 107.7
Pajaro (1)............... 1.4 53.8
Turlock.................. 2.5 108.4
Watsonville (1).......... 5.4 186.0
Turlock.................. 3.0 138.9
Ontario.................. 1.9 55.9
-------- ----------
17.8 684.0
-------- ----------
COLORADO
Denver................... 2.8 116.3
-------- ----------
FLORIDA
Tampa.................... 0.4 22.2
Plant City............... 0.8 30.8
Bartow................... 1.4 56.8
Tampa.................... 2.9 106.0
Tampa (1)................ 1.0 38.5
-------- ----------
6.5 254.3
-------- ----------
GEORGIA
Atlanta.................. 11.1 476.7
Atlanta.................. 2.9 157.1
Augusta.................. 1.1 48.3
Atlanta.................. 11.4 334.7
Atlanta.................. 5.0 125.7
Montezuma................ 4.2 175.8
Atlanta.................. 6.9 201.6
Thomasville.............. 6.9 202.9
-------- ----------
49.5 1,722.8
-------- ----------
IDAHO
Burley..................... 10.7 407.2
Nampa...................... 8.0 364.0
-------- ----------
18.7 771.2
-------- ----------
ILLINOIS
Rochelle................... 6.0 179.7
East Dubuque............... 5.6 215.4
-------- ----------
11.6 395.1
-------- ----------
INDIANA
Indianapolis............... 9.1 311.7
-------- ----------
IOWA
Fort Dodge................. 3.7 155.8
Bettendorf................. 8.8 336.0
-------- ----------
12.5 491.8
-------- ----------
KANSAS
Wichita.................... 2.8 126.3
Garden City................ 2.2 84.6
-------- ----------
5.0 210.9
-------- ----------
KENTUCKY
Sebree..................... 2.7 79.4
-------- ----------
MAINE
Portland................... 1.8 151.6
-------- ----------
MASSACHUSETTS
Gloucester................. 1.9 95.5
Gloucester................. 0.3 13.6
Gloucester................. 2.8 95.2
Gloucester................. 2.4 126.4
Boston..................... 3.1 218.0
-------- ----------
10.5 548.7
-------- ----------
MISSOURI
Marshall................... 4.8 160.8
Carthage................... 42.0 2,564.7
-------- ----------
46.8 2,725.5
-------- ----------
MISSISSIPPI
West Point................. 4.7 180.8
-------- ----------
NEBRASKA
Fremont.................... 2.2 84.6
Grand Island............... 2.2 105.0
-------- ----------
4.4 189.6
-------- ----------
NEW YORK
Syracuse................... 11.8 447.2
-------- ----------
-45-
CUBIC FEET SQUARE FEET
PROPERTY (IN MILLIONS) (IN THOUSANDS)
----------------------- ------------- --------------
NORTH CAROLINA
Charlotte................ 1.0 58.9
Charlotte................ 4.1 164.8
Tarboro.................. 4.9 147.4
-------- ----------
10.0 371.1
-------- ----------
OHIO
Massillon................ 5.5 163.2
-------- ----------
OKLAHOMA
Oklahoma City............ 0.7 64.1
Oklahoma City............ 1.4 74.1
-------- ----------
2.1 138.2
-------- ----------
OREGON
Hermiston................ 4.0 283.2
Milwaukee................ 4.7 196.6
Salem.................... 12.5 498.4
Woodburn................. 6.3 277.4
Brooks................... 4.8 184.6
Ontario.................. 8.1 238.2
-------- ----------
40.4 1,678.4
-------- ----------
PENNSYLVANIA
Leesport................. 5.8 168.9
Fogelsville.............. 21.6 683.9
-------- ----------
27.4 852.8
-------- ----------
SOUTH CAROLINA
Columbia................. 1.6 83.7
-------- ----------
SOUTH DAKOTA
Sioux Falls.............. 2.9 111.5
-------- ----------
TENNESSEE
Memphis.................. 5.6 246.2
Memphis.................. 0.5 36.8
Murfreesboro............. 4.5 106.4
-------- ----------
10.6 389.4
-------- ----------
TEXAS
Amarillo................. 3.2 123.1
Ft. Worth................ 3.4 102.0
-------- ----------
6.6 225.1
-------- ----------
UTAH
Clearfield............... 8.6 358.4
-------- ----------
VIRGINIA
Norfolk.................. 1.9 83.0
Strasburg................ 6.8 200.0
-------- ----------
8.7 283.0
-------- ----------
WASHINGTON
Burlington............... 4.7 194.0
Moses Lake............... 7.3 302.4
Walla Walla.............. 3.1 140.0
Connell.................. 5.7 235.2
Wallula.................. 1.2 40.0
Pasco.................... 6.7 209.0
-------- ----------
28.7 1,120.6
-------- ----------
WISCONSIN
Tomah...................... 4.6 161.0
Babcock.................... 3.4 111.1
Plover..................... 9.4 358.4
-------- ----------
17.4 630.5
-------- ----------
TOTAL TEMPERATURE
CONTROLLED LOGISTICS
PROPERTIES.................. 441.5 17,509.1
======== ==========
----------
(1) Leasehold interest
-46-
ALEXANDER'S PROPERTIES
The Company owns 33.1% of Alexander's outstanding common shares. The
following table shows the location, approximate size and leasing status of each
of the properties owned by Alexander's as of December 31, 2002.
APPROXIMATE
LEASABLE SQUARE
APPROXIMATE FOOTAGE/
AREA IN SQUARE NUMBER PERCENT
LOCATION FEET OR ACREAGE OF FLOORS LEASED
-------- ----------------- ----------------- --------
OPERATING PROPERTIES
NEW YORK:
Kings Plaza Regional Shopping
Center--Brooklyn...................... 24.3 acres 759,000/2 and 4(1)(2) 98%
Rego Park I--Queens..................... 4.8 acres 351,000/3(1) 100%
Flushing--Queens (3).................... 44,975 SF 177,000/4(1) 0%
NEW JERSEY:
Paramus--New Jersey..................... 30.3 acres --(4) 100%
---------
1,287,000
=========
DEVELOPMENT PROPERTIES
NEW YORK:
59th Street and Lexington Avenue--Manhattan
(see below)........................... 84,420 SF 1,297,000/55
Rego Park II--Queens.................... 6.6 acres --
- ----------
(1) Excludes parking garages.
(2) Excludes 339,000 square foot Macy's store, owned and operated by Federated
Department Stores, Inc.
(3) Leased by Alexander's through January 2027. Classified as an asset held
for sale by Alexander's at December 31, 2002.
(4) Ground leased to IKEA.
The development plans at Lexington Avenue consist of an approximately
1.3 million square foot multi-use building. The building will contain
approximately 154,000 net rentable square feet of retail (45,000 square feet
of which has been leased to Hennes & Mauritz), approximately 878,000 net
rentable square feet of office (695,000 square of which has been leased to
Bloomberg L.P.) and 248,000 square feet of residential condominium units
(through a taxable REIT subsidiary). Construction is expected to be completed
in 2004. On July 3, 2002 Alexander's finalized a $490,000,000 loan with HVB
Real Estate Capital (Hypo Vereinsbank) to finance the construction of the
Lexington Avenue property (the "Construction Loan"). The estimated
construction costs in excess of the construction loan of approximately
$140,000,000 will be provided by Alexander's. The Construction Loan has an
interest rate of LIBOR plus 2.5% (currently 3.94%) and a term of forty-two
months subject to two one-year extensions. Alexander's received an initial
funding of $55,500,000 under the Construction Loan of which $25,000,000 was
used to repay the Alexander's term loan to a bank in the amount of
$10,000,000 and a secured note in the amount of $15,000,000. Of the total
construction budget of approximately $630,000,000, $162,000,000 has been
spent to date and an additional $184,000,000 has been committed. Pursuant to
the Construction Loan, the Company has agreed to guarantee among other
things, the lien free, timely completion of the construction of the project
and funding of project costs in excess of a stated loan budget, if not funded
by Alexander's (the "Completion Guarantee"). The $6,300,000 estimated fee
payable by Alexander's to the Company for the Completion Guarantee is 1% of
construction costs (as defined). In addition, if the Company should advance
any funds under the Completion Guarantee in excess of the $26,000,000
currently available under the secured line of credit, interest on those
advances is at 15% per annum.
On August 30, 2002, Alexander's sold its Third Avenue property located in
the Bronx, New York. The 173,000 square foot property was sold for $15,000,000
resulting in a gain of $10,366,000, of which the Company's share was $3,524,000.
-47-
THE NEWKIRK MASTER LIMITED PARTNERSHIP
In 1998, the Company and affiliates of Apollo Real Estate Investment Fund
III, L.P. ("Apollo") formed a joint venture to acquire general and limited
partnership interests in the Newkirk real estate partnerships. Since its
formation, the joint venture has acquired equity interests in 91 partnerships
which own approximately 19.6 million square feet of real estate and first and
second mortgages secured by a portion of these properties. The Company owned a
30% interest in the joint venture with the balance owned by Apollo. On January
1, 2002, the Newkirk partnerships were merged into The Newkirk Master Limited
Partnership (the "MLP") to create a vehicle to enable the partners to have
greater access to capital and future investment opportunities. In connection
with the merger, the Company received limited partner interests in the MLP equal
to an approximate 21.1% interest and Apollo received limited partner interests
in the MLP equal to an approximate 54.5% interest. At December 31, 2002, the
Company has a 21.7% interest in the MLP and Apollo has a 55.9% interest.
Further, the joint venture is the general partner of the MLP.
Simultaneously, the MLP completed a $225,000,000 secured financing
collateralized by its interests in the entities that own the properties,
subject to the existing first and certain second mortgages on those
properties. The loan bears interest at LIBOR plus 5.5% with a LIBOR floor of
3% (8.5% at December 31, 2002) and matures on January 31, 2005, with two
one-year extension options. As a result of the financing, on February 6, 2002
the MLP repaid approximately $28,200,000 of existing joint venture debt and
distributed approximately $37,000,000 to the Company.
The Company's equity investment in the joint venture at December 31, 2002
was comprised of:
Investments in limited partnerships... $ 134,200,000
Mortgages and loans receivable........ 39,511,000
Other................................. 8,754,000
---------------
$ 182,465,000
===============
The Company's share of the joint venture debt was approximately
$312,679,000 at December 31, 2002.
The following table sets forth a summary of the real estate owned by the
MLP:
Number of
Properties Square Feet
-------------- --------------
Office............. 35 8,075,000
Retail............. 169 6,447,000
Other.............. 34 5,082,000
------- ------------
238 19,604,000
======= ============
As of December 31, 2002, the occupancy rate of the properties is 99.9%.
-48-
The primary lease terms range from 20 to 25 years from their original
commencement dates with rents, typically above market, which fully amortize the
first mortgage debt on the properties. In addition, tenants generally have
multiple renewal options, with rents, on average, below market.
Below is a listing of tenants which accounted for 2% or more of the MLP's
revenues in 2002:
Square
Feet 2002
Tenant Leased Revenues Percentage
------------------------ ----------- ------------- ------------
Raytheon........................... 2,286,000 $ 38,665,000 12.6%
Albertson's Inc.................... 2,763,000 27,060,000 8.8%
The Saint Paul Co.................. 530,000 25,410,000 8.3%
Kaiser Alum & Chemical Corp (1).... 911,000 23,794,000 7.8%
Honeywell.......................... 728,000 19,420,000 6.3%
Cummins Engine Company, Inc........ 390,000 14,405,000 4.7%
Federal Express.................... 592,000 13,546,000 4.4%
Owens-Illinois..................... 707,000 13,363,000 4.4%
Entergy Gulf States................ 490,000 12,089,000 3.9%
Stater Bros Markets................ 734,000 10,354,000 3.4%
----------
(1) On February 12, 2002, Kaiser Aluminum, which leases an office
building located in Oakland, California, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. To date, this lease has not
been assumed or rejected.
The following table sets forth lease expirations for each of the next 10
years, as of December 21, 2002, 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
- ---- ----------------- ----------------- ------------------- ----------- -----------------
2003...................... 3 158,000 0.8% $ 2,149,000 $ 13.60
2004...................... 6 280,000 1.4% 6,281,000 22.43
2005...................... 29 1,310,000 6.9% 7,935,000 6.06
2006...................... 31 2,420,000 12.8% 32,398,000 13.39
2007...................... 33 2,992,000 15.8% 38,021,000 12.07
2008...................... 101 7,797,000 41.2% 94,083,000 17.51
2009...................... 30 2,678,000 14.1% 72,195,000 26.96
2010...................... 1 821,000 4.3% 2,780,000 3.39
2011...................... 2 155,000 0.8% 2,177,000 14.05
2012...................... 2 325,000 1.7% 2,038,000 6.27
-49-
Newkirk Master Limited Partnership Properties
The following table sets forth The Newkirk Master Limited Partnership Properties
as of December 31, 2002:
APPROXIMATE LEASABLE
BUILDING SQUARE
LOCATION FOOTAGE
--------------------- --------------------
OFFICE:
ARKANSAS
Little Rock....... 36,000
Pine Bluff........ 27,000
------------
63,000
------------
CALIFORNIA
El Segundo (1).... 185,000
El Segundo (1).... 959,000
El Segundo (1).... 185,000
Oakland (1)....... 911,000
Walnut Creek (1).. 55,000
------------
2,295,000
------------
COLORADO
Colorado Springs.. 71,000
------------
FLORIDA
Orlando (1)....... 184,000
Orlando (1)....... 357,000
------------
541,000
------------
INDIANA
Columbus (1)...... 390,000
------------
MARYLAND
Baltimore (1)..... 530,000
------------
FLORIDA
Bridgeton (1)..... 54,000
------------
NEW JERSEY
Carteret.......... 96,000
Elizabeth (1)..... 30,000
Morris Township (1) 225,000
Morris Township (1) 50,000
Morris Township (1) 137,000
Morris Township... 141,000
Morristown (1).... 316,000
Plainsboro (1).... 2,000
------------
997,000
------------
NEVADA
Las Vegas......... 282,000
------------
OHIO
Miamisburg (1).... 61,000
Miamisburg (1).... 86,000
Toledo (1)........ 707,000
------------
854,000
------------
PENNSYLVANIA
Allentown......... 71,000
------------
TENNESSEE
Johnson City...... 64,000
Kingport.......... 43,000
Memphis (1)....... 521,000
------------
628,000
------------
TEXAS
Beaumont (1)...... 426,000
Beaumont (1)...... 50,000
Bedford (1)....... 207,000
Dallas (1)........ 185,000
Dallas............ 152,000
Garland (1)....... 279,000
------------
1,299,000
------------
------------
Total Office......... 8,075,000
------------
APPROXIMATE
LEASABLE BUILDING
LOCATION SQUARE FOOTAGE
--------------------- -----------------
RETAIL:
ALABAMA
Dothan (1)........ 54,000
Hunstville (1).... 60,000
Huntsville (1).... 58,000
Montgomery (1).... 56,000
Montgomery........ 66,000
Tuscaloosa (1).... 56,000
------------
350,000
------------
ARIZONA
Bisbee (1)........ 30,000
Tucson (1)........ 37,000
------------
67,000
------------
CALIFORNIA
Anaheim (1)....... 26,000
Barstow........... 30,000
Beaumont.......... 29,000
Calimesa.......... 29,000
Colton............ 73,000
Colton............ 26,000
Corona (1)........ 33,000
Corona (1)........ 9,000
Costa Mesa (1).... 18,000
Costa Mesa (1).... 17,000
Desert Hot Springs
(1).............. 29,000
Downey............ 39,000
Fontana........... 26,000
Garden Grove (1).. 26,000
Glen Avon Heights
(1).............. 42,000
Huntington Beach.. 44,000
Indio (1)......... 10,000
Lancaster......... 42,000
Livermore (1)..... 53,000
Lomita (1)........ 33,000
Mammoth Lakes (1). 44,000
Mojave (1)........ 34,000
Ontario (1)....... 24,000
Orange (1)........ 26,000
Pinole (1)........ 58,000
Pleasanton........ 175,000
Rancho Cucamonga.. 24,000
Rialto............ 29,000
Rubidoux.......... 39,000
San Bernadino..... 30,000
San Bernadino..... 40,000
San Diego (1)..... 226,000
Santa Ana (1)..... 26,000
Santa Monica...... 150,000
Santa Rosa (1).... 22,000
Simi Valley (1)... 40,000
Sunnymead......... 30,000
Ventura (1)....... 40,000
Westminster....... 26,000
Yucaipa........... 31,000
------------
1,748,000
------------
COLORADO
Aurora (1)........ 41,000
Aurora............ 29,000
Aurora............ 42,000
Aurora............ 24,000
Littleton......... 29,000
Littleton......... 39,000
------------
204,000
------------
-50-
APPROXIMATE LEASABLE
BUILDING SQUARE
LOCATION FOOTAGE
--------------------- --------------------
RETAIL-CONTINUED
FLORIDA
Bradenton (1)..... 60,000
Cape Coral........ 30,000
Casselberry (1)... 68,000
Gainsville........ 41,000
Largo............. 54,000
Largo............. 40,000
Largo............. 30,000
Orlando (1)....... 58,000
Pinellas Park..... 60,000
Port Richey (1)... 54,000
Stuart (1)........ 54,000
Tallahassee (1)... 54,000
Venice (1)........ 42,000
-----------
645,000
-----------
GEORGIA
Atlanta (1)....... 6,000
Atlanta (1)....... 4,000
Chamblee (1)...... 5,000
Cumming (1)....... 14,000
Duluth (1)........ 9,000
Forest Park (1)... 15,000
Jonesboro (1)..... 5,000
Stone Mountain (1) 6,000
-----------
64,000
-----------
IDAHO
Boise (1)......... 37,000
Boise (1)......... 43,000
-----------
80,000
-----------
ILLINOIS
Champaign......... 31,000
Freeport.......... 30,000
Rock Falls........ 28,000
-----------
89,000
-----------
INDIANA
Carmel (1)........ 39,000
Lawrence (1)...... 29,000
-----------
68,000
-----------
KENTUCKY
Louisville........ 10,000
Louisville........ 40,000
-----------
50,000
-----------
LOUISIANA
Baton Rouge....... 58,000
Minden............ 35,000
-----------
93,000
-----------
MONTANA
Billings (1)...... 41,000
Bozeman (1)....... 21,000
-----------
62,000
-----------
NORTH CAROLINA
Jacksonville...... 23,000
Jefferson (1)..... 23,000
Lexington (1)..... 23,000
-----------
69,000
-----------
NEBRASKA
Omaha............. 73,000
Omaha............. 66,000
Omaha............. 67,000
-----------
206,000
-----------
NEW JERSEY
Garwood (1)....... 52,000
-----------
NEW MEXICO
Albuquerque (1)... 35,000
Las Cruces (1).... 30,000
-----------
65,000
-----------
NEVADA
Las Vegas......... 38,000
Las Vegas (1)..... 60,000
-----------
98,000
-----------
APPROXIMATE
LEASABLE BUILDING
LOCATION SQUARE FOOTAGE
--------------------- -----------------
RETAIL-CONTINUED
NEW YORK
Portchester (1)... 59,000
------------
OHIO
Cincinnati (1).... 26,000
Columbus (1)...... 34,000
Franklin (1)...... 29,000
------------
89,000
------------
OKLAHOMA
Lawton (1)........ 31,000
Oklahoma City (1). 32,000
------------
63,000
------------
OREGON
Beaverton......... 42,000
Grants Pass (1)... 34,000
Portland.......... 42,000
Salem............. 52,000
------------
170,000
------------
PENNSYLVANIA
Doylestown........ 4,000
Lansdale.......... 4,000
Lima.............. 4,000
Philadelphia...... 50,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Philadelphia...... 4,000
Richboro.......... 4,000
Wayne............. 4,000
------------
106,000
------------
SOUTH CAROLINA
Moncks Corner (1). 23,000
------------
SOUTH DAKOTA
Sioux Falls (1)... 60,000
------------
TEXAS
Allen............. 41,000
Carrolton (1)..... 61,000
Dallas (1)........ 68,000
Ennis............. 44,000
Fort Worth (1).... 44,000
Garland (1)....... 40,000
Granbury (1)...... 35,000
Grand Prairie (1). 49,000
Greenville (1).... 48,000
Hillsboro (1)..... 35,000
Houston (1)....... 52,000
Huntsville........ 62,000
Lubbock (1)....... 54,000
Midland........... 60,000
Rockdale.......... 44,000
Rockwell.......... 43,000
Taylor............ 62,000
Texarkana (1)..... 46,000
Waxahachie........ 62,000
Woodville......... 44,000
------------
994,000
------------
UTAH
Bountiful (1)..... 50,000
Sandy (1)......... 42,000
------------
92,000
------------
VIRGINIA
Staunton (1)...... 23,000
------------
-51-
APPROXIMATE LEASABLE
BUILDING SQUARE
LOCATION FOOTAGE
--------------------- --------------------
RETAIL-CONTINUED
TENNESSEE
Chattanooga (1)... 42,000
Memphis (1)....... 75,000
Las Vegas (1)..... 38,000
Reno (1).......... 42,000
-----------
197,000
-----------
WASHINGTON
Bothell (1)....... 28,000
Edmonds (1)....... 35,000
Everett (1)....... 35,000
Federal Way....... 42,000
Graham (1)........ 45,000
Kent.............. 42,000
Milton (1)........ 45,000
Port Orchard (1).. 28,000
Redmond (1)....... 45,000
Spokane........... 42,000
Spokane (1)....... 39,000
Woodinville (1)... 30,000
-----------
456,000
-----------
WYOMING
Cheyenne.......... 12,000
Cheyenne (1)...... 31,000
Douglas........... 12,000
Evanston.......... 28,000
Evanston.......... 10,000
Torrington........ 12,000
-----------
105,000
-----------
-----------
Total Retail 6,447,000
-----------
APPROXIMATE
LEASABLE BUILDING
LOCATION SQUARE FOOTAGE
--------------------- -----------------
OTHER
ALABAMA
Florence (1)...... 42,000
-----------
ARIZONA
Flagstaff (1)..... 114,000
Flagstaff (1)..... 10,000
Sun City (1)...... 10,000
-----------
134,000
-----------
CALIFORNIA
Colton............ 668,000
Long Beach (1).... 478,000
Long Beach (1).... 201,000
Palo Alto (1)..... 123,000
-----------
1,470,000
-----------
COLORADO
Arvada (1)........ 10,000
Ft. Collins (1)... 10,000
Lakewood (1)...... 10,000
-----------
30,000
-----------
FLORIDA
Orlando (1)....... 205,000
-----------
MAINE
North Berwick..... 821,000
-----------
NEW MEXICO
Carlsbad (1)...... 10,000
-----------
NORTH CAROLINA
Charlotte (1)..... 34,000
Concord (1)....... 32,000
Mint Hill (1)..... 23,000
New Bern (1)...... 21,000
Thomasville (1)... 21,000
-----------
131,000
-----------
PENNSYLVANIA
New Kingston (1).. 430,000
-----------
SOUTH CAROLINA
N. Myrtle Beach (1) 37,000
-----------
TENNESSEE
Paris (1)......... 31,000
Franklin (1)...... 289,000
Memphis (1)....... 780,000
-----------
1,100,000
-----------
TEXAS
Lewisville........ 256,000
Corpus Christi (1) 10,000
El Paso (1)....... 10,000
Euless (1)........ 10,000
Lewisville (1).... 10,000
McAllen (1)....... 10,000
Victoria (1)...... 10,000
-----------
316,000
-----------
WISCONSIN
Windsor (1)....... 356,000
-----------
Total Other.......... 5,082,000
-----------
GRAND TOTAL.......... 19,604,000
===========
- ---------------
(1) leasehold interest.
-52-
HOTEL PENNSYLVANIA
The Hotel Pennsylvania is located in New York City on Seventh Avenue
opposite Madison Square Garden and consists of a hotel portion containing
1,000,000 square feet of hotel space with 1,700 rooms and a commercial portion
containing 400,000 square feet of retail and office space.
The Hotel is dependent on tourism and was severely impacted by the events
of September 11, 2001, accelerating a trend which began in the first quarter of
2001. The following table presents rental information for the Hotel:
Year Ended December 31,
-----------------------------------------------
2002 2001 2000 1999
--------- --------- --------- ---------
Average occupancy rate........ 65% 63% 76% 80%
Average daily rate............ $ 89 $ 110 $ 114 $ 105
Revenue per available room.... $ 58 $ 70 $ 87 $ 84
As of December 31, 2002, the property's retail and office space was 47% and
53% occupied compared to 56% and 61% as of December 2001. 25 tenants occupy the
retail and office space. Annual rent per square foot of retail and office space
in 2002 was $40 and $12 compared to $50 and $21 in 2001 and $45 and $17 in 2000.
DRY WAREHOUSE/INDUSTRIAL PROPERTIES
The Company's dry warehouse/industrial properties consist of eight
buildings in New Jersey containing approximately 2.0 million square feet. The
average term of a tenant's lease is three to five years.
The following table sets forth the occupancy rate and average annual rent
per square foot at the end of each of the past four years.
Average Annual
As of Occupancy Rent Per
December 31, Rate Square Foot
------------------ -------------- ----------------
2002............. 95% $ 3.81
2001............. 100% 3.67
2000............. 90% 3.52
1999............. 92% 3.37
In November 2002, the Company entered into an agreement to ground lease its
East Brunswick industrial property to Lowe's. Lowe's will demolish the existing
warehouse containing 326,000 square feet and construct its own retail store.
This lease is subject to various governmental approvals.
-53-
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, including in
respect of the matter referred to below, is not expected to have a material
adverse effect on the Company's financial position or results of operation.
Primestone
- ----------
As previously disclosed, Primestone filed an amended counterclaim against
the Company in Delaware Chancery Court on July 31, 2002, alleging, among other
things, that Vornado's April 30, 2002 foreclosure on the collateral pledged by
Primestone did not comply with the Uniform Commercial Code. On December 19,
2002, the Delaware Chancery Court dismissed all of Primestone's
counterclaims. On January 17, 2003, Primestone filed a notice of appeal. In
its brief filed on February 14, 2003, Primestone asked the Delaware Supreme
Court to reverse the Delaware Chancery court's decision that (1) Vornado's
foreclosure auction was held in a commercially reasonable manner, and (2)
Vornado did not tortiously interfere with Primestone business relations. This
litigation is continuing.
Primestone and several affiliates commenced an action against the Company
on May 3, 2002 in New York Supreme Court, alleging substantially the same causes
of action as in its amended counterclaim in the Delaware Chancery Court. On June
10, 2002, Vornado moved to dismiss this action. This litigation is continuing.
On May 9, 2002, five affiliates of Primestone asserted counterclaims in an
action which the Company had commenced against them on March 28, 2002 in New
York Supreme Court. The counterclaims are virtually identical to the claims
asserted in the May 3, 2002 action. On May 29, 2002, Vornado filed an answer
denying the essential allegations of the counterclaims. This litigation is
continuing.
Stop & Shop
- -----------
On January 8, 2003, Stop & Shop filed a complaint with the United States
District Court claiming the Company has no right to reallocate and therefore
continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to
the Master Agreement and Guaranty, because of the expiration of the East
Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the
$5,000,000 of additional rent was previously allocated. The additional rent
provision of the guaranty expires at the earliest in 2012. The Company intends
to vigorously contest Stop & Shop's position.
-54-
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, 2002.
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
NAME AGE DURING PAST FIVE YEARS WITH VORNADO UNLESS OTHERWISE STATED)
- ---- --- --------------------------------------------------------------------------------------
Steven Roth................ 61 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 1995 and a Director since 1989;
Chairman and CEO of Vornado Operating since 1998.
Michael D. Fascitelli...... 46 President and a Trustee since December 1996; President of Alexander's Inc. since
August 2000 and Director since December 1996; Director of Vornado Operating since
1998; 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.
Melvyn H. Blum............. 56 Executive Vice President--Development since January 2000; Senior Managing Director at
Tishman Speyer Properties in charge of its development activities in the United
States from July 1998 to January 2000; and Managing Director of Development and
Acquisitions at Tishman Speyer Properties prior to July 1998.
Michelle Felman............ 40 Executive Vice President--Acquisitions since September 2000; Independent Consultant
to Vornado from October 1997 to September 2000; Managing Director-Global Acquisitions
and Business Development of GE Capital from 1991 to July 1997.
David R. Greenbaum......... 51 President of the New York City Office Division since April 1997 (date of the
Company's acquisition); President of Mendik Realty (the predecessor to the New York
City Office Properties Division) from 1990 until April 1997.
Christopher Kennedy........ 39 President of the Merchandise Mart Division since September 2000; Executive Vice
President of the Merchandise Mart from April 1998 to September 2000; Executive Vice
President of Merchandise Mart Properties, Inc. from 1994 to April 1998.
Paul Larner................ 47 Executive Vice President -- Chief Administrative Officer and Secretary since
October 2002; Chief Operating Officer and Chief Financial Officer of Charles E. Smith
Commercial Realty, a division of Vornado Realty Trust from January 2002 (date
acquired by the Company) to October 2002; Chief Financial Officer of Charles E. Smith
Commercial Realty L.P. (the predecessor to Charles E. Smith Commercial Realty) from
October 1997 until January 2002.
Joseph Macnow.............. 57 Executive Vice President--Finance and Administration since January 1998 and Chief
Financial Officer since March 2001; Executive Vice President -- Finance and
Administration of Vornado Operating since 1998; Vice President-Chief Financial
Officer of the Company from 1985 to January 1998; Executive Vice President
and Chief Financial Officer of Alexander's, Inc. since August 1995.
Sandeep Mathrani........... 40 Executive Vice President--Retail Real Estate since March 2002; Executive Vice
President, Forest City Ratner from 1994 to February 2002.
Wendy Silverstein.......... 42 Executive Vice President--Capital Markets since April 1998; Senior Credit Officer of
Citicorp Real Estate and Citibank, N.A. from 1986 to 1998.
Robert H. Smith............ 74 Chairman of Charles E. Smith Commercial Realty, a division of Vornado Realty Trust,
and Trustee of the Company since January 2002 (date acquired by the Company);
Co-Chief Executive Officer and Co-Chairman of the Board of Charles E. Smith
Commercial Realty L.P. (the predecessor to Charles E. Smith Commercial Realty) prior
to January 2002.
-55-
PART II
ITEM 5. MARKET FOR THE 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 closing price ranges of the common shares and dividends paid per
share for the years ended December 31, 2002 and 2001 were as follows:
YEAR ENDED YEAR ENDED
QUARTER DECEMBER 31, 2002 DECEMBER 31, 2001
---------- ------------------------------------ -------------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
-------- -------- --------- --------- --------- ---------
1st........................ $ 44.90 $ 41.78 $ .66 $ 38.76 $ 34.57 $ .53
2nd........................ 47.10 43.02 .66 39.75 34.56 .53
3rd........................ 45.38 37.65 .66 41.60 37.95 .60
4th........................ 39.21 34.41 .68 41.65 37.60 .97*
- ---------------
* Comprised of a regular quarterly dividend of $.66 per share and a
special dividend of $.31 declared on December 18, 2001, which was
necessary to avoid the Company incurring an excise tax on
distributions of less than 85% of taxable income in the current
year.
On March 3, 2003, there were 1,750 holders of record of the Company's
common shares.
At December 31, 2002, the Company had a capital loss carryover of
approximately $73,000,000. The capital loss carryover is available to offset
future capital gains that would otherwise be required to be distributed as
dividends to shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
During 2002, 2001 and 2000 the Company issued 176,848, 6,002 and 2,357
common shares, respectively, upon the redemption of Class A units of the
Operating Partnership held by persons who received units in private placements
in earlier periods in exchange for their interests in limited partnerships that
owned real estate. The common shares were issued without registration under the
Securities Act of 1933 in reliance on Section 4(2) of that Act.
-56-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2002(2) 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(in thousands, except share and per share amounts)
OPERATING DATA
Revenues:
Rentals ............................................... $ 1,248,903 $ 841,999 $ 695,078 $ 591,270 $ 425,496
Expense reimbursements ................................ 159,978 133,114 120,056 96,842 74,737
Other income .......................................... 26,189 10,660 10,838 8,251 9,627
----------- ----------- ----------- ----------- -----------
Total Revenues 1,435,070 985,773 825,972 696,363 509,860
----------- ----------- ----------- ----------- -----------
Expenses:
Operating ............................................. 541,596 398,969 318,360 282,118 207,171
Depreciation and amortization ......................... 205,826 123,862 99,846 83,585 59,227
General and administrative ............................ 98,458 72,572 47,911 40,151 28,610
Amortization of officer's deferred
compensation expense ................................ 27,500 -- -- -- --
Costs of acquisitions and development
not consummated ..................................... 6,874 5,223 -- -- --
----------- ----------- ----------- ----------- -----------
Total Expenses ............................................. 880,254 600,626 466,117 405,854 295,008
----------- ----------- ----------- ----------- -----------
Operating Income ........................................... 554,816 385,147 359,855 290,509 214,852
Income applicable to Alexander's ........................... 29,653 25,718 17,363 11,772 3,123
Income from partially-owned entities ....................... 44,458 80,612 86,654 78,560 32,025
Interest and other investment income ....................... 31,685 54,385 32,926 18,359 24,074
Interest and debt expense .................................. (239,525) (173,076) (171,398) (141,683) (114,686)
Net (loss) gain on disposition of wholly-owned and
partially-owned assets other than real estate ........... (17,471) (8,070) -- -- 9,649
Minority interest:
Perpetual preferred unit distributions ................. (72,500) (70,705) (62,089) (19,254) (756)
Minority limited partnership earnings .................. (64,899) (39,138) (38,320) (33,904) (14,822)
Partially-owned entities ............................... (3,185) (2,520) (1,965) (1,840) (605)
----------- ----------- ----------- ----------- -----------
Income before gains on sales of real estate and cumulative
effect of change in accounting principle ................ 263,032 252,353 223,026 202,519 152,854
Gains on sale of real estate ............................... -- 15,495 10,965 -- --
Cumulative effect of change in accounting principle ........ (30,129) (4,110) -- -- --
----------- ----------- ----------- ----------- -----------
Net income ................................................. 232,903 263,738 233,991 202,519 152,854
Preferred share dividends .................................. (23,167) (36,505) (38,690) (33,438) (21,690)
----------- ----------- ----------- ----------- -----------
Net income applicable to common shares ..................... $ 209,736 $ 227,233 $ 195,301 $ 169,081 $ 131,164
=========== =========== =========== =========== ===========
Income per share--basic ................................. $ 1.98 $ 2.55 $ 2.26 $ 1.97 $ 1.62
Income per share--diluted ............................... $ 1.91 $ 2.47 $ 2.20 $ 1.94 $ 1.59
Cash dividends declared for common shares ............... $ 2.66 $ 2.63 $ 1.97 $ 1.80 $ 1.64
BALANCE SHEET DATA
Total assets ............................................ $ 9,018,179 $ 6,777,343 $ 6,403,210 $ 5,479,218 $ 4,425,779
Real estate, at cost .................................... 7,559,694 4,690,211 4,354,392 3,921,507 3,315,891
Accumulated depreciation ................................ 737,426 506,225 393,787 308,542 226,816
Debt .................................................... 4,071,320 2,477,173 2,688,308 2,048,804 2,051,000
Shareholders' equity .................................... 2,627,356 2,570,372 2,078,720 2,055,368 1,782,678
-57-
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
(in thousands) 2002(2) 2001(2)(3) 2000(3) 1999 1998
----------- ----------- ----------- ----------- ------------
OTHER DATA
Funds from operations(1):
Net income applicable to common shares .................. $ 209,736 $ 227,233 $ 195,301 $ 169,081 $ 131,164
Cumulative effect of change in
accounting principle .................................. 30,129 4,110 -- -- --
Depreciation and amortization of real
property .............................................. 195,808 119,568 97,744 82,216 58,277
Straight-lining of property rentals for rent
escalations ........................................... (27,295) (24,314) (28,893) (22,881) (14,531)
Amortization of below market leases, net ................ (12,634) -- -- -- --
Leasing fees received in excess of income
recognized ............................................ 1,318 1,954 1,259 1,705 1,339
Net gain on sale of real estate ......................... -- (12,445) (10,965) -- --
Net gain from insurance settlement and
condemnation proceedings .............................. -- (3,050) -- -- (9,649)
Appreciation/(depreciation) of securities
held in officer's deferred compensation trust ......... -- 3,023 4,765 (340) 340
Gains on sale of securities available for sale .......... -- -- -- (383) (898)
Proportionate share of adjustments to equity
in income of partially-owned entities
to arrive at funds from operations:
Temperature Controlled Logistics ...................... 36,500 34,531 35,565 31,400 41,988
Alexander's ........................................... (2,825) (5,980) 93 1,324 4,023
Partially-owned office buildings ...................... 2,847 1,913 2,926 50 3,561
Hotel Pennsylvania .................................... -- -- 5,779 4,866 4,083
Charles E. Smith Commercial Realty L.P. ............... -- 17,917 15,767 12,024 2,974
Other ................................................. 12,763 10,538 9,448 7,463 219
Minority interest in partially owned entities in
excess of preferential distributions .................. (45,324) (16,810) (16,445) (9,020) (3,991)
Dilutive effect of Series A Preferred Share
dividends ............................................. 6,150 19,505 21,689 16,268 --
----------- ----------- ----------- ----------- ------------
Funds from operations(1) ................................... $ 407,173 $ 377,693 $ 334,033 $ 293,773 $ 218,899
=========== =========== =========== ========== ============
Cash flow provided by (used in):
Operating activities .................................... $ 499,825 $ 387,685 $ 249,921 $ 176,895 $ 189,406
Investing activities .................................... (24,117) (79,722) (699,375) (494,204) (1,257,367)
Financing activities .................................... (533,092) (179,368) 473,813 262,131 879,815
- ----------
(1) Funds from operations does not represent cash generated from operating
activities in accordance with accounting principles generally accepted in
the United States of America 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 from this definition to
adjust primarily for (i) the effect of straight-lining of property rentals
for rent escalations and leasing fee income and (ii) the exclusion of
income arising from the amortization of below market leases net of above
market leases.
(2) Operating results for the year ended December 31, 2002, reflect the
Company's January 1, 2002 acquisition of the remaining 66% of Charles E.
Smith Commercial Realty L.P. ("CESCR") and the resulting consolidation of
CESCR's operations. See Supplemental Information, page 82 for condensed Pro
Forma Operating Results for the year ended December 31, 2001 giving effect
to the CESCR acquisition as if it had occurred on January 1, 2001.
(3) Funds from operations as previously reported for the year ended December
31, 2001 and 2000 have been revised to include income from the early
extinguishment of debt of $1,170 in 2001 and expense from the early
extinguishment of debt of $1,125 in 2000 because such items are no longer
treated as extraordinary items in accordance with Generally Accepted
Accounting Principles.
-58-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Index to Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Page
------
Overview........................................................................ 59
Critical Accounting Policies.................................................. 60
Results of Operations:
Years Ended December 31, 2002 and 2001.................................... 66
Years Ended December 31, 2001 and 2000.................................... 72
Supplemental Information:
Summary of Net Income and Adjusted EBITDA for the Three Months Ended
December 31, 2002 and 2001............................................. 78
Changes by segment in Adjusted EBITDA for the Three Months Ended
December 31, 2002 and 2001............................................. 80
Changes by segment in Adjusted EBITDA for the Three Months Ended
December 31, 2002 as compared to September 30, 2002.................... 80
Leasing Activity.......................................................... 81
Pro forma Operating Results - CESCR Acquisition........................... 82
Senior Unsecured Debt Covenant Compliance Ratios.......................... 82
Related Party Disclosure.................................................. 83
Liquidity and Capital Resources:
Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........... 86
Funds from Operations for the Years Ended December 31, 2002 and 2001...... 91
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a discussion of the Company's consolidated financial
statements for the years ended December 31, 2002, 2001 and 2000.
Operating results for the year ended December 31, 2002, reflect the
Company's January 1, 2002 acquisition of the remaining 66% of Charles E. Smith
Commercial Realty L.P. ("CESCR") and the resulting consolidation of CESCR's
operations. See Supplemental Information, page 82, for Condensed Pro Forma
Operating Results for the year ended December 31, 2001 giving effect to the
CESCR acquisition as if it had occurred on January 1, 2001.
-59-
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements 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. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the consolidated
financial statements. The summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 2 to
the consolidated financial statements in this annual report on Form 10-K.
REAL ESTATE
Real estate is carried at cost, net of accumulated depreciation and
amortization. As of December 31, 2002, the Company's carrying amount of its real
estate, net of accumulated depreciation is $6.8 billion. Maintenance and repairs
are charged to operations as incurred. Depreciation requires an estimate by
management of the useful life of each property as well as an allocation of the
costs associated with a property to its various components. If the Company does
not allocate these costs appropriately or incorrectly estimates the useful lives
of its real estate, depreciation expense may be misstated.
Upon acquisitions of real estate, the Company assesses the fair value of
acquired assets (including land, buildings, tenant improvements and acquired
above and below market leases and the origination cost of acquired in-place
leases in accordance with SFAS No. 141) and acquired liabilities, and allocate
purchase price based on these assessments. The Company assesses fair value
based on estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends, and market/economic conditions that may affect the
property. The Company's properties are reviewed for impairment if events or
circumstances change indicating that the carrying amount of the assets may not
be recoverable. If the Company incorrectly estimates the values at acquisition
or the undiscounted cash flows, initial allocations of purchase price and future
impairment charges may be different. The impact of the Company's estimates in
connection with acquisitions and future impairment analysis could be material to
the Company's financial statements.
NOTES AND MORTGAGE LOANS RECEIVABLE
The Company evaluates the collectibility of both interest and principal of
each of its notes and mortgage loans receivable ($86.6 million as of December
31, 2002) if circumstances warrant to determine whether it is impaired. If the
Company fails to identify that the investee or borrower are unable to perform,
the Company's bad debt expense may be different.
PARTIALLY-OWNED ENTITIES
The Company accounts for its investments in partially-owned entities
($997.7 million as of December 31, 2002) under the equity method when the
Company's ownership interest is more than 20% but less than 50% and the Company
does not exercise direct or indirect control. When partially-owned investments
are in partnership form, the 20% threshold may be reduced. Factors that the
Company considers in determining whether or not it exercises control include
substantive participating rights of partners on significant business decisions,
including dispositions and acquisitions of assets, financing and operating and
capital budgets, board and management representation and authority and other
contractual rights of its partners. To the extent that the Company is deemed to
control these entities, these entities would have to be consolidated and
therefore impact the balance sheet, operations and related ratios. On a periodic
basis the Company evaluates whether there are any indicators that the value of
the Company's investments in partially-owned entities are impaired. An
investment is impaired if management's estimate of the value of the investment
is less than the carrying amount. The ultimate realization of the Company's
investment in partially-owned entities is dependent on a number of factors
including the performance of the investee and market conditions. If the Company
determines that a decline in the value of its investee is other than temporary,
then an impairment charge would be recorded.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company periodically evaluates the collectibility of amounts due from
tenants and maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of tenants to make required payments under the
lease agreement. The Company also maintains an allowance for receivables arising
from the straight-lining of rents. This receivable arises from earnings
recognized in excess of amounts currently due under the lease agreements.
Management exercises judgment in establishing these allowances and considers
payment history and current credit status in developing these estimates. If
estimates differ from actual results this would impact reported results.
-60-
REVENUE RECOGNITION
The Company has the following revenue sources and revenue recognition
policies:
- Base Rents -- income arising from tenant leases. These rents are
recognized over the non-cancelable term of the related leases on
a straight-line basis which includes the effects of rent steps
and free rent abatements under the leases.
- Percentage Rents -- income arising from retail tenant leases
which are contingent upon the sales of the tenant exceeding a
defined threshold. These rents are recognized in accordance with
SAB 101, which states that this income is to be recognized only
after the contingency has been removed (i.e. sales thresholds
have been achieved).
- Hotel Revenues -- income arising from the operation of the Hotel
Pennsylvania which consists of rooms revenue, food and beverage
revenue, and banquet revenue. Income is recognized when rooms are
occupied. Food and beverage and banquet revenue are recognized
when the services have been rendered.
- Trade Show Revenues -- income arising from the operation of trade
shows, including rentals of booths. This revenue is recognized in
accordance with the booth rental contracts when the trade shows
have occurred.
- Expense Reimbursement Income -- income arising from tenant leases
which provide for the recovery of all or a portion of the
operating expenses and real estate taxes of the respective
property. This income is accrued in the same periods as the
expenses are incurred.
Before the Company recognizes revenue, it assesses among other things,
its collectibility. If the Company incorrectly determines the collectibility of
its revenue, its net income and assets could be overstated.
INCOME TAXES
The Company operates in a manner intended to enable it to continue to
qualify as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the
Internal Revenue Code of 1986, as amended. Under those sections, a REIT which
distributes at least 90% 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 intends to distribute to its shareholders 100% of its
taxable income. Therefore, no provision for Federal income taxes is required. If
the Company fails to distribute the required amount of income to its
shareholders, it would fail to qualify as a REIT and substantial adverse tax
consequences may result.
-61-
Below is a summary of Net income and Adjusted EBITDA(1) by segment for the
years ended December 31, 2002, 2001 and 2000. Prior to 2001, income from the
Company's preferred stock affiliates ("PSAs") was included in income from
partially-owned entities. On January 1, 2001, the Company acquired the common
stock of its PSAs and converted these entities to taxable REIT subsidiaries.
Accordingly, the Hotel portion of the Hotel Pennsylvania and the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the year ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities, as if
consolidated as of January 1, 2000 (see page 64 for the details of the
reclassifications by line item). In addition, the Company has revised Adjusted
EBITDA as previously reported for the year ended December 31, 2001 and 2000 to
include income from the early extinguishment of debt of $1,170,000 in 2001 and
expense from the early extinguishment of debt of $1,125,000 in 2000 because such
items are no longer treated as extraordinary items in accordance with Generally
Accepted Accounting Principles.
($ in thousands) December 31, 2002
------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- --------- ----------- -------- -----------
Rentals........................................... $ 1,248,903 $ 867,938 $ 127,561 $ 195,899 $ -- $ 57,505
Expense reimbursements............................ 159,978 89,890 51,750 14,754 -- 3,584
Other income...................................... 26,189 21,221 1,653 2,951 -- 364
----------- ----------- --------- ----------- -------- -----------
Total revenues.................................... 1,435,070 979,049 180,964 213,604 -- 61,453
----------- ----------- --------- ----------- -------- -----------
Operating expenses 541,596 343,723 65,455 86,022 -- 46,396
Depreciation and amortization 205,826 146,746 15,507 26,716 -- 16,857
General and administrative 98,458 34,346 5,036 20,382 -- 38,694
Costs of acquisitions and development
not consummated............................... 6,874 -- -- -- -- 6,874
Amortization of officer's deferred compensation
expense....................................... 27,500 -- -- -- -- 27,500
----------- ----------- --------- ----------- -------- -----------
Total expenses ................................... 880,254 524,815 85,998 133,120 -- 136,321
----------- ----------- --------- ----------- -------- -----------
Operating income 554,816 454,234 94,966 80,484 -- (74,868)
Income applicable to Alexander's.................. 29,653 -- -- -- -- 29,653
Income from partially-owned entities.............. 44,458 1,966 (687) (339) 9,707 33,811
Interest and other investment income 31,685 6,472 323 507 -- 24,383
Interest and debt expense (239,525) (141,044) (56,643) (22,948) -- (18,890)
Net (loss) gain on disposition of wholly-owned
and partially-owned assets other than real estate (17,471) -- -- 2,156 -- (19,627)
Minority interest................................. (140,584) (119,910) (13,736) (23,910) 2,093 14,879
----------- ----------- --------- ----------- -------- -----------
Income before gains on sale of real estate and
cumulative effect of change in accounting
principle....................................... 263,032 201,718 24,223 35,950 11,800 (10,659)
Gains on sale of real estate ..................... -- -- -- -- -- --
Cumulative effect of change in accounting
principle........................................ (30,129) -- -- -- (15,490) (14,639)
----------- ----------- --------- ----------- -------- -----------
Net income 232,903 201,718 24,223 35,950 (3,690) (25,298)
Cumulative effect of change in accounting
principle........................................ 30,129 -- -- -- 15,490 14,639
Interest and debt expense(3)...................... 302,009 139,157 58,409 23,461 25,617 55,365
Depreciation and amortization(3).................. 257,707 149,361 17,532 27,006 34,474 29,334
----------- ----------- --------- ----------- -------- -----------
EBITDA............................................ 822,748 490,236 100,164 86,417 71,891 74,040
Adjustments:
Minority interest 140,584 119,910 13,736 23,910 (2,093) (14,879)
Gains (losses) on sale of real estate(3).......... (1,405) -- -- -- 2,026 (3,431)
Straight-lining of rents(3) (29,837) (24,352) (1,863) (1,772) -- (1,850)
Amortization of below market leases, net ......... (12,634) (12,469) -- -- -- --
Other ............................................ 1,549 -- 860 323 -- 366
----------- ----------- --------- ----------- -------- -----------
Adjusted EBITDA(1)................................ $ 921,005 $ 573,325 $ 112,732 $ 108,878 $ 71,824 $ 54,246
=========== =========== ========= =========== ======== ===========
- ---------------
See Notes on page 65.
-62-
($ in thousands) December 31, 2001
------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- --------- ----------- ----------- -----------
Rentals .......................................... $ 841,999 $ 461,606 $ 121,023 $ 197,668 $ -- $ 61,702
Expense reimbursements ........................... 133,114 67,470 49,436 13,801 -- 2,407
Other income ..................................... 10,660 3,775 1,154 3,324 -- 2,407
----------- ----------- --------- ----------- ---------- -----------
Total revenues ................................... 985,773 532,851 171,613 214,793 -- 66,516
----------- ----------- --------- ----------- ---------- -----------
Operating expenses ............................... 398,969 217,581 56,547 83,107 -- 41,734
Depreciation and amortization .................... 123,862 71,425 14,767 25,397 -- 12,273
General and administrative ....................... 72,572 12,421 3,576 18,081 -- 38,494
Costs of acquisitions not
consummated ................................... 5,223 -- -- -- -- 5,223
----------- ----------- --------- ----------- ---------- -----------
Total expenses ................................... 600,626 301,427 74,890 126,585 -- 97,724
----------- ----------- --------- ----------- ---------- -----------
Operating income ................................. 385,147 231,424 96,723 88,208 -- (31,208)
Income applicable to
Alexander's ................................... 25,718 -- -- -- -- 25,718
Income from partially-owned
entities ...................................... 80,612 32,746 1,914 149 17,447(4) 28,356
Interest and other investment
income ........................................ 54,385 6,866 608 2,045 -- 44,866
Interest and debt expense ........................ (173,076) (54,667) (55,358) (33,354) -- (29,697)
Net (loss) gain on disposition
of wholly-owned and
partially-owned assets
other than real estate ........................ (8,070) -- -- 160 -- (8,230)
Minority interest ................................ (112,363) (55,932) (16,562) (15,650) (10,968) (13,251)
----------- ----------- --------- ----------- ---------- -----------
Income before gains on sales
of real estate and
cumulative effect of change
in accounting principle ....................... 252,353 160,437 27,325 41,558 6,479 16,554
Gains on sale of real estate ..................... 15,495 12,445 3,050 -- -- --
Cumulative effect of change in
accounting principle .......................... (4,110) -- -- -- -- (4,110)
----------- ----------- --------- ----------- ---------- -----------
Net income ....................................... 263,738 172,882 30,375 41,558 6,479 12,444
Cumulative effect of change in
accounting principle .......................... 4,110 -- -- -- -- 4,110
Interest and debt expense(3) ..................... 266,784 92,410 57,915 33,354 26,459 56,646
Depreciation and
amortization(3) ............................... 188,859 91,085 18,957 25,397 33,815 19,605
----------- ----------- --------- ----------- ---------- -----------
EBITDA ........................................... 723,491 356,377 107,247 100,309 66,753 92,805
Adjustments:
Gains on sale of real estate(3) .................. (21,793) (12,445) (3,050) -- -- (6,298)
Minority interest ................................ 112,363 55,932 16,562 15,650 10,968 13,251
Net gain on disposition of
wholly-owned and
partially-owned assets
other than real estate ........................ (160) -- -- (160) -- --
Straight-lining of rents(3) ...................... (26,134) (20,064) 727 (4,997) -- (1,800)
Other ............................................ (2,715) -- (2,337) -- 716 (1,094)
----------- ----------- --------- ----------- ----------- -----------
Adjusted EBITDA(1) ............................... $ 785,052 $ 379,800 $ 119,149 $ 110,802 $ 78,437 $ 96,864
=========== =========== ========= =========== ========== ===========
- ---------------
See Notes on page 65.
-63-
($in thousands) December 31, 2000 (after giving effect to consolidation of PSA's -
see reclassifications below )
---------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- --------- ----------- -------- -----------
Rentals ..................................... $ 788,469 $ 406,261 $ 129,902 $ 171,001 $ -- $ 81,305
Expense reimbursements ...................... 120,074 60,767 45,490 10,654 -- 3,163
Other income ................................ 17,608 5,499 2,395 4,661 -- 5,053
----------- ----------- --------- ----------- -------- -----------
Total revenues .............................. 926,151 472,527 177,787 186,316 -- 89,521
----------- ----------- --------- ----------- -------- -----------
Operating expenses .......................... 379,524 199,424 55,671 74,553 -- 49,876
Depreciation and amortization ............... 108,109 58,074 17,464 21,984 -- 10,587
General and administrative .................. 63,468 10,401 667 16,330 -- 36,070
----------- ----------- --------- ----------- -------- -----------
Total expenses .............................. 551,101 267,899 73,802 112,867 -- 96,533
----------- ----------- --------- ----------- -------- -----------
Operating income ............................ 375,050 204,628 103,985 73,449 -- (7,012)
Income applicable to Alexander's ............ 17,363 -- -- -- -- 17,363
Income from partially-owned
entities ................................. 79,694 29,210 667 -- 28,778(4) 21,039
Interest and other investment
income ................................... 33,798 6,162 -- 2,346 -- 25,290
Interest and debt expense ................... (180,505) (62,162) (54,305) (38,569) -- (25,469)
Minority interest ........................... (102,374) (46,917) (16,550) (12,660) (12,483) (13,764)
----------- ----------- --------- ----------- -------- -----------
Income before gains on sales of ............. 223,026 130,921 33,797 24,566 16,295 17,447
real estate
Gains on sales of real estate ............... 10,965 8,405 2,560 -- -- --
----------- ----------- --------- ----------- -------- -----------
Net income .................................. 233,991 139,326 36,357 24,566 16,295 17,447
Interest and debt expense(3) ................ 260,573 96,224 55,741 38,566 27,424 42,618
Depreciation and amortization(3) ............ 167,268 76,696 18,522 20,627 34,015 17,408
----------- ----------- --------- ----------- -------- -----------
EBITDA ...................................... 661,832 312,246 110,620 83,759 77,734 77,473
Adjustments:
Minority interest ........................... 102,374 46,917 16,550 12,660 12,483 13,764
Gains on sale of real estate(3) ............. (10,965) (8,405) (2,560) -- -- --
Straight-lining of rents(3) ................. (30,001) (19,733) (2,295) (5,919) (1,121) (933)
Other ....................................... 14,510 -- (1,654) 1,358 4,064(2) 10,742(5)
----------- ----------- --------- ----------- -------- -----------
Adjusted EBITDA(1) .......................... $ 737,750 $ 331,025 $ 120,661 $ 91,858 $ 93,160 $ 101,046
=========== =========== ========= =========== ======== ===========
- ----------
See Notes on page 65.
Prior to 2001, income from the Company's investments in preferred stock
affiliates ("PSAs") was included in income from partially-owned entities. On
January 1, 2001, the Company acquired the common stock of its PSAs and converted
these entities to taxable REIT subsidiaries. Accordingly, the operations of the
Hotel portion of the Hotel Pennsylvania and the operations of the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the year ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities, as of
January 1, 2000. The effect of these reclassifications in 2000 was as follows:
(i) reduction in equity in income of partially-owned entities $ (8,599,000)
(ii) increase in rental revenues 64,501,000
(iii) increase in other income 8,325,000
(iv) increase in operating expenses (41,233,000)
(v) increase in depreciation and amortization (6,906,000)
(vi) increase in general and administrative expenses (6,984,000)
(vii) increase in interest and debt expense (9,104,000)
----------------
(viii) net impact $ --
================
These reclassifications had no effect on reported Net Income or Adjusted
EBITDA for the year ended December 31, 2000 and no impact to any other year.
-64-
NOTES:
(1) Adjusted EBITDA represents income before interest, taxes, depreciation and
amortization, extraordinary or non-recurring items, gains or losses on
sales of depreciable real estate, the effect of straight-lining of rent
escalations, amortization of acquired below market leases net of above
market leases and minority interest. Management considers Adjusted EBITDA a
supplemental measure for making decisions and assessing the performance of
its segments. Adjusted EBITDA should not be considered a substitute for net
income or a substitute for cash flow as a measure of liquidity. Adjusted
EBITDA is presented as a measure of "operating performance" which enables
the reader to identify trends from period to period and may be used to
compare "same store" operating performance to other companies, as well as
providing a measure for determining funds available to service debt.
Adjusted EBITDA may not be comparable to similarly titled measures employed
by other companies. In addition, the Company has revised Adjusted EBITDA as
previously reported for the year ended December 31, 2001 and 2000 to
include income from the early extinguishment of debt of $1,170 in 2001 and
expense from the early extinguishment of debt of $1,125 in 2000 because
such items are no longer treated as Extraordinary Items in accordance with
Generally Accepted Accounting Principles.
(2) Adjusted EBITDA - Other is comprised of:
(amounts in thousands)
For the Year
Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Newkirk Master Limited Partnership:
Equity in income...................................................... $ 60,756 $ 54,695 $ 43,685
Interest and other income............................................. 8,795 8,700 7,300
Hotel Pennsylvania...................................................... 7,636 16,978 26,866
Alexander's............................................................. 34,381 19,362 18,330
Investment income and other............................................. 31,261 44,097 34,990
Corporate general and administrative expenses........................... (34,743) (33,515) (30,125)
Primestone foreclosure and impairment losses............................ (35,757) -- --
Amortization of Officer's deferred compensation expense................. (27,500) -- --
Write-off of 20 Times Square pre-development costs (2002) and World Trade --
Center acquisition costs (2001)..................................... (6,874) (5,223)
Net gain on sale of marketable securities............................... 12,346 -- --
Gain on transfer of mortgages........................................... 2,096 -- --
Net gain on sale of air rights.......................................... 1,688 -- --
Palisades............................................................... 161 -- --
After-tax net gain on sale of Park Laurel condominium units............. -- 15,657 --
Write-off of net investment in Russian Tea Room......................... -- (7,374) --
Write-off of investments in technology companies........................ -- (16,513) --
--------- --------- ---------
Total.......................................................... $ 54,246 $ 96,864 $ 101,046
========= ========= =========
(3) Interest and debt expense, depreciation and amortization, straight-lining
of rents and gains on sale of real estate included in the reconciliation of
net income to EBITDA or Adjusted EBITDA include amounts which are netted in
income from partially-owned entities.
(4) Excludes rent not recognized of $19,348, $15,281 and $9,787 for the years
ended December 31, 2002, 2001 and 2000.
(5) Includes the reversal of $1,266 and $4,765 of expenses in 2001 and 2000
representing the non-cash appreciation in value of shares held in a rabbi
trust in connection with a deferred compensation arrangement for the
Company's President.
The following table sets forth the percentage of the Company's Adjusted
EBITDA by segment for the years ended December 31, 2002, 2001 and 2000. The pro
forma column gives effect to the January 1, 2002 acquisition by the Company of
the remaining 66% interest in CESCR described previously as if it had occurred
on January 1, 2001.
PERCENTAGE OF ADJUSTED EBITDA
-----------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
2002 2001 2001 2000
--------- -------- --------- ---------
Office: (Pro forma)
New York City...................................... 33% 31% 38% 35%
CESCR.............................................. 29% 26% 10% 10%
---- ---- ---- ----
Total.............................................. 62% 57% 48% 45%
Retail................................................ 12% 12% 15% 16%
Merchandise Mart Properties........................... 12% 12% 14% 12%
Temperature Controlled Logistics...................... 8% 8% 10% 13%
Other................................................. 6% 11% 13% 14%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ===
-65-
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
REVENUES
The Company's revenues, which consist of property rentals, tenant expense
reimbursements, hotel revenues, trade shows revenues, amortization of above and
below market leases acquired under SFAS No. 141, and other income, were
$1,435,070,000 for the year ended December 31, 2002, compared to $985,773,000 in
the year ended December 31, 2001, an increase of $449,297,000 of which
$423,128,000 resulted from the acquisition of the remaining 66% of CESCR and the
resulting consolidation of its operations. Below are the details of the increase
(decrease) by segment:
(amounts in thousands)
Date of Merchandise
PROPERTY RENTALS: Acquisition Total Office Retail Mart Other
- ----------------- ----------- ----- ------ ------ ----------- -----
Acquisitions, dispositions and non same
store revenue:
CESCR (acquisition of remaining 66%
and consolidation vs. equity
method accounting
for 34%) .................................. January 2002 $ 393,506 $ 393,506 $ -- $ -- $ --
Palisades ................................... March 2002 4,109 -- -- -- 4,109
715 Lexington Avenue ........................ July 2001 976 -- 976 -- --
Las Catalinas (acquisition of
remaining 50% and consolidation
vs. equity method accounting for
50%) ...................................... September 2002 3,108 -- 3,108 -- --
435 Seventh Avenue (placed in service) ...... August 2002 2,541 -- 2,541 -- --
424 Sixth Avenue ............................ July 2002 320 -- 320 -- --
Properties taken out of service for
redevelopment ............................... (767) -- (767) -- --
Same Store:
Hotel activity .............................. (7,645)(1) -- -- -- (7,645)(1)
Trade Shows activity ........................ (3,908)(2) -- -- (3,908)(2) --
Leasing activity (3) ........................ 14,664 12,826 360 2,139 (661)
--------- --------- --------- --------- ---------
Total increase (decrease) in property
rentals ..................................... 406,904 406,332 6,538 (1,769) (4,197)
--------- --------- --------- --------- ---------
TENANT EXPENSE REIMBURSEMENTS:
Increase due to acquisitions ................... 15,319 14,398 921 -- --
Same Store ..................................... 11,545 8,022 1,393 953 1,177
---------- --------- --------- --------- ---------
Total increase (decrease) in tenant
expense reimbursements ...................... 26,864 22,420 2,314 953 1,177
--------- --------- --------- --------- ---------
OTHER INCOME:
Increase due to acquisitions ................... 15,379 15,224 11 -- 144
Same Store ..................................... 150 2,222 488 (373) (2,187)
--------- --------- --------- --------- ---------
Total increase (decrease) in other
income ...................................... 15,529 17,446 499 (373) (2,043)
--------- --------- --------- --------- ---------
Total increase (decrease) in
revenues .................................... $ 449,297 $ 446,198 $ 9,351 $ (1,189) (5,063)
========= ========= ========= ========= =========
- ---------------
(1) Average occupancy and REVPAR for the Hotel Pennsylvania were 65% and $58
for the year ended December 31, 2002 compared to 63% and $70 for the prior
year.
(2) Reflects a decrease of $3,580 resulting from the rescheduling of two trade
shows from the fourth quarter in which they were previously held to the
first quarter of 2003.
(3) See supplemental information on page 81, for details of leasing activity
and corresponding changes in occupancy.
-66-
EXPENSES
The Company's expenses were $880,254,000 for the year ended December 31,
2002, compared to $600,626,000 in the year ended December 31, 2001, an increase
of $279,628,000 of which $202,852,000 resulted from the acquisition of the
remaining 66% of CESCR and the resulting consolidation of its operations. Below
are the details of the increase by segment:
(amounts in thousands)
Merchandise
Total Office Retail Mart Other
--------- --------- --------- ----------- ---------
Operating:
Acquisitions:
CESCR (acquisition of remaining 66% and
consolidation vs. equity method accounting
for 34%) ............................................... $ 114,438 $ 114,438 $ -- $ -- $ --
Palisades ............................................... 5,158 -- -- -- 5,158
715 Lexington Avenue .................................... 588 -- 588 -- --
435 Seventh Avenue ...................................... 198 -- 198 -- --
424 Sixth Avenue ........................................ 50 -- 50 -- --
Las Catalinas (acquisition of remaining 50% and
consolidation vs. equity method accounting
for 50%) ............................................... 1,341 -- 1,341 -- --
Hotel activity .......................................... 503 -- -- -- 503
Trade Shows activity .................................... (2,108) -- -- (2,108)(3) --
Same store operations ................................... 22,459 11,704(1) 6,731(2) 5,023 (4) (999)
--------- -------- --------- --------- ---------
142,627 126,142 8,908 2,915 4,662
--------- -------- --------- --------- ---------
Depreciation and amortization:
Acquisitions ............................................ 71,435 67,470 1,015 -- 2,950
Same store operations ................................... 10,529 7,851 (275) 1,319 1,634
--------- -------- --------- --------- ---------
81,964 75,321 740 1,319 4,584
--------- -------- --------- --------- ---------
General and administrative:
Acquisitions .............................................. 20,944 20,944 -- -- --
Other expenses ............................................ 4,942 981 1,460 2,301(5) 200
--------- -------- --------- --------- ---------
Total increase (decrease) in general and
administrative ......................................... 25,886 21,925 1,460 2,301 200
--------- -------- --------- --------- ---------
Amortization of officer's deferred compensation
expense ................................................ 27,500 -- -- -- 27,500
--------- -------- --------- --------- ---------
Costs of acquisitions and development not
consummated ............................................ 1,651 -- -- -- 1,651(6)
--------- -------- --------- --------- ---------
$ 279,628 $ 223,388 $ 11,108 $ 6,535 $ 38,597
========= ========= ========= ========= =========
- ---------------
(1) Results primarily from (i) a $9,725 increase in insurance, security and
real estate taxes, largely reimbursed by tenants, and (ii) $2,639 for an
allowance for straight-line rent receivables.
(2) Results primarily from (i) increases in insurance costs which are
reimbursed by tenants, (ii) a $402 payment of Puerto Rico taxes related to
the prior year, (iii) $2,280 in bad debt allowances for accounts receivable
and receivables arising from the straight-lining of rents in 2002 and (iv)
lease termination fees and real estate tax refunds netted against expenses
in 2001, which aggregated $1,500.
(3) Results primarily from the rescheduling of two trade shows from the fourth
quarter in which they were previously held to the first quarter of 2003.
(4) Reflects (i) increased insurance costs of $1,366, (ii) a charge of $312
from the settlement of a 1998 utility assessment, and (iii) an increase in
real estate taxes of $1,725.
(5) Reflects a charge of $954 in connection with the termination of a contract
and the write-off of related deferred costs.
(6) Reflects a charge in 2002 of $6,874 for the write-off of pre-development
costs at the 20 Times Square project and a charge in 2001 of $5,223 in
connection with the World Trade Center acquisition not consummated.
INCOME APPLICABLE TO ALEXANDER'S
Income applicable to Alexander's (loan interest income, management,
leasing, development and commitment fees, and equity in income) was $29,653,000
in the year ended December 31, 2002, compared to $25,718,000 in the year ended
December 31, 2001, an increase of $3,935,000. This increase resulted from (i)
$6,915,000 of development and commitment fees in connection with Alexander's
Lexington Avenue development project, (ii) the Company's $3,524,000 share of
Alexander's gain on sale of its Third Avenue property, partially offset by (iii)
the Company's $6,298,000 share of Alexander's gain on the sale of its Fordham
Road property in the prior year.
-67-
INCOME FROM PARTIALLY-OWNED ENTITIES
In accordance with accounting principles generally accepted in the United
States of America, the Company reflects the income it receives from (i) entities
it owns less than 50% of and (ii) entities it owns more than 50% of, but which
have a partner who has shared board and management representation and authority
and substantive participating rights on all significant business decisions, on
the equity method of accounting resulting in such income appearing on one line
in the Company's consolidated statements of income. Below is the detail of
income from partially-owned entities by investment as well as the increase
(decrease) in income from partially-owned entities for the year ended December
31, 2002 as compared to the prior year:
(amounts in thousands) Temperature Newkirk Las
Controlled Joint Catalinas
Total CESCR(1) Logistics Venture Mall(2)
---------- ---------- ----------- ---------- ---------
YEAR ENDED
DECEMBER 31, 2002:
Revenues........................... $ 480,225 $ 117,663 $ 295,369 $ 10,671
Expenses:
Operating, general and
administrative................. (46,098) (7,904) (8,490) (3,102)
Depreciation..................... (106,287) (59,328) (34,010) (1,482)
Interest expense................. (180,431) (42,695) (121,219) (3,643)
Other, net....................... (12,505) (2,150) (9,790) (802)
---------- --------- ---------- ---------
Net income/(loss).................. $ 135,042 $ 5,586 $ 121,860 $ 1,642
========== ========= ========== =========
Vornado's interest................. 60% 22% 50%
Equity in net income/(loss)........ $ 29,872 $ 3,352 $ 26,500 $ 851
Interest and other income.......... 8,306 306 8,000 --
Fee income......................... 6,280 6,049 -- --
---------- --------- ---------- ---------
Income from partially-owned
entities........................ $ 44,458 $ --(1) $ 9,707 $ 34,500 $ 851
========== ========== ========= ========== =========
YEAR ENDED
DECEMBER 31, 2001:
Revenues........................... $ 747,902 $ 382,502 $ 126,957 $ 179,551 $ 14,377
Expenses:
Operating, general and
administrative................. (180,337) (135,133) (8,575) (13,630) (2,844)
Depreciation..................... (141,594) (53,936) (58,855) (20,352) (2,330)
Interest expense................. (236,996) (112,695) (44,988) (65,611) (5,705)
Other, net....................... 11,059 1,975 2,108 4,942 --
---------- ---------- --------- ---------- ---------
Net income......................... $ 200,034 $ 82,713 $ 16,647 $ 84,900 $ 3,498
========== ========== ========= ========== =========
Vornado's interest................. 34% 60% 30% 50%
Equity in net income/(loss)........ $ 67,679 $ 28,653 $ 9,988 $ 25,470 $ 1,749
Interest and other income.......... 7,579 -- 2,105 5,474 --
Fee income......................... 5,354 -- 5,354 -- --
---------- ---------- --------- ---------- ---------
Income from partially-owned
entities........................ $ 80,612 $ 28,653 $ 17,447 $ 30,944 $ 1,749
========== ========== ========= ========== =========
(DECREASE) INCREASE IN INCOME
FROM PARTIALLY-OWNED ENTITIES.... $ (36,154) $ (28,653)(1) $ (7,740) $ 3,556 $ (898)(2)
========== ========== ========= ========== =========
(amounts in thousands) Starwood Partially-
Ceruzzi Owned
Monmouth Joint Office
Mall (3) Venture Buildings Other
--------- --------- --------- ---------
YEAR ENDED
DECEMBER 31, 2002:
Revenues.................................... $ 5,760 $ 695 $ 50,205
Expenses:
Operating, general and administrative..... (2,510) (2,265) (21,827)
Depreciation.............................. (943) (1,430) (9,094)
Interest expense.......................... (1,520) -- (11,354)
Other, net................................ 48 (200) 389
--------- --------- ---------
Net income/(loss)........................... $ 835 $ (3,200) $ 8,319
========= ========= =========
Vornado's interest.......................... 50% 80% 24%
Equity in net income/(loss)................. $ 791(4) $ (2,560) $ 1,966 $ (1,028)
Interest and other income................... -- -- -- --
Fee income.................................. 231 -- -- --
--------- --------- --------- ---------
Income from partially-owned entities........ $ 1,022 $ (2,560) $ 1,966 $ (1,028)
========= ========= ========= =========
YEAR ENDED
DECEMBER 31, 2001:
Revenues.................................... $ 1,252 $ 43,263
Expenses:
Operating, general and administrative..... (820) (19,335)
Depreciation.............................. (501) (5,620)
Interest expense.......................... -- (7,997)
Other, net................................ 275 1,759
--------- ---------
Net income.................................. $ 206 $ 12,070
========= =========
Vornado's interest.......................... 80% 34%
Equity in net income/(loss)................. $ 165 $ 4,093 $ (2,439)
Interest and other income................... -- -- --
Fee income.................................. -- -- --
--------- --------- --------- ---------
Income from partially-owned entities........ $ -- $ 165 $ 4,093 $ (2,439)
========= ========= ========= =========
(DECREASE) INCREASE IN INCOME FROM
PARTIALLY-OWNED ENTITIES.................. $ 1,022(3) $ (2,725)(5) $ (2,127)(6) $ 1,411(7)
========= ========= ========= =========
- ----------
(1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did
not previously own. Accordingly, CESCR is consolidated as of January 1,
2002.
(2) On September 20, 2002, the Company acquired the remaining 50% of the Mall
and 25% of the Kmart anchor store that it did not previously own.
Accordingly, Las Catalinas is consolidated for the period from September
20, 2002 to December 31, 2002.
(3) On October 10, 2002, a joint venture, in which the Company has a 50%
interest, acquired the Monmouth Mall.
(4) Vornado's interest in the equity in net income of the Monmouth Mall
includes a preferred return of $748 for the year ended December 31, 2002.
(5) The prior year includes $1,394 for the Company's share of a gain on sale of
a property.
(6) The year ended December 31, 2002 excludes 570 Lexington Avenue which was
sold in May 2001.
(7) The prior year includes $2,000 for the Company's share of equity in loss of
its Russian Tea Room ("RTR") investment. In the third quarter of 2001, the
Company wrote-off its entire net investment in RTR based on the operating
losses and an assessment of the value of the real estate.
-68-
INTEREST AND OTHER INVESTMENT INCOME
Interest and other investment income (interest income on mortgage loans
receivable, other interest income and dividend income) was $31,685,000 for the
year ended December 31, 2002, compared to $54,385,000 in the year ended December
31, 2001, a decrease of $22,700,000. This decrease resulted primarily from a
decrease of (i) $12,347,000 due to the non-recognition of income on the mortgage
loan to Primestone, which was foreclosed on April 30, 2002, (ii) $4,626,000 due
to a lower yield on the investment of the proceeds received from the May 2002
repayment of the Company's loan to NorthStar Partnership L.P. (22% yield in
2001) and (iii) $2,269,000 due to the non-recognition of income on the loan to
Vornado Operating.
INTEREST AND DEBT EXPENSE
Interest and debt expense was $239,525,000 for the year ended December 31,
2002, compared to $173,076,000 in the year ended December 31, 2001, an increase
of $66,449,000. This increase was comprised of (i) $100,013,000 from the
acquisition of the remaining 66% of CESCR and the resulting consolidation of its
operations, partially offset by (ii) a $32,035,000 savings from a 202 basis
point reduction in weighted average interest rates of the Company's variable
rate debt and (iii) lower average outstanding debt balances.
NET (LOSS) GAIN ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER
THAN DEPRECIABLE REAL ESTATE
The following table sets forth the details of net gain on disposition of
wholly-owned and partially-owned assets other than depreciable real estate for
the years ended December 31, 2002 and 2001:
For the Year Ended
December 31,
(amounts in thousands) --------------------------
2002 2001
Wholly-owned Assets: ---------- ----------
Gain on transfer of mortgages........................................... $ 2,096 $ --
Gain on sale of Kinzie Park condominiums units.......................... 2,156 --
Net gain on sale of air rights.......................................... 1,688 --
Net gain on sale of marketable securities............................... 12,346 --
Primestone foreclosure and impairment losses............................ (35,757) --
Write-off of investments in technology companies........................ -- (16,513)
Partially-owned Assets:
After-tax net gain on sale of Park Laurel condominium units............. -- 15,657
Write-off of net investment in Russian Tea Room......................... -- (7,374)
Other................................................................... -- 160
---------- ----------
$ (17,471) $ (8,070)
========== ==========
GAIN ON TRANSFER OF MORTGAGES
In the year ended December 31, 2002, the Company recorded a net gain of
$2,096,000 resulting from payments to the Company by third parties that assumed
certain of the Company's mortgages. Under these transactions the Company paid to
the third parties that assumed the Company's obligations the outstanding amounts
due under the mortgages and the third parties paid the Company for the benefit
of assuming the mortgages. The Company has been released by the creditors
underlying these loans.
GAIN ON SALE OF KINZIE PARK CONDOMINIUM UNITS
The Company recognized a gain of $2,156,000 during 2002, from the sale of
residential condominiums in Chicago, Illinois.
NET GAIN ON SALE OF AIR RIGHTS
The Company recognized a net gain of $1,688,000 in the year ended December
31, 2002. See Note 3 to the consolidated financial statements in this annual
report on form 10-K for further details.
-69-
PRIMESTONE FORECLOSURE AND IMPAIRMENT LOSSES
On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. ("Primestone"). The Company received a 1% up-front fee
and was entitled to receive certain other fees aggregating approximately 3% upon
repayment of the loan. The loan bore interest at 16% per annum. Primestone
defaulted on the repayment of this loan on October 25, 2001. The loan was
subordinate to $37,957,000 of other debt of the borrower that liened the
Company's collateral. On October 31, 2001, the Company purchased the other debt
for its face amount. The loans were secured by 7,944,893 partnership units in
Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust
(NYSE:PGE) and the partnership units are exchangeable for the same number of
common shares of PGE. The loans are also guaranteed by affiliates of Primestone.
On November 19, 2001, the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000. The participation did not meet
the criteria for "sale accounting" under SFAS 140 because Cadim was not free to
pledge or exchange the assets. Accordingly, the Company was required to account
for this transaction as a borrowing secured by the loan, rather than as a sale
of the loan by classifying the participation as an "Other Liability" and
continuing to report the outstanding loan balance at 100% in "Notes and Mortgage
Loans Receivable" on the balance sheet. Under the terms of the participation
agreement, cash payments received shall be applied (i) first, to the
reimbursement of reimbursable out-of-pocket costs and expenses incurred in
connection with the servicing, administration or enforcement of the loans after
November 19, 2001, and then to interest and fees owed to the Company through
November 19, 2001, (ii) second, to the Company and Cadim, pro rata in proportion
to the amount of interest and fees owed following November 19, 2001 and (iii)
third, 50% to the Company and 50% to Cadim as recovery of principal.
On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership
units at a foreclosure auction. The price paid for the units by application of a
portion of Primestone's indebtedness to the Company and Cadim was $8.35 per
unit, the April 30, 2002 closing price of shares of PGE on the New York Stock
Exchange. On June 28, 2002, pursuant to the terms of the participation
agreement, the Company transferred 3,972,447 of the partnership units to Cadim.
In the second quarter, in accordance with foreclosure accounting, the
Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated
based on (i) the acquisition price of the units and (ii) its valuation of the
amounts realizable under the guarantees by affiliates of Primestone, as compared
with the net carrying amount of the investment at April 30, 2002. In the third
quarter of 2002, the Company recorded a $2,229,000 write-down on its investment
based on costs expended to realize the value of the guarantees. Further, in the
fourth quarter of 2002, the Company recorded a $15,857,000 write-down of its
investment in Prime Group consisting of (i) $14,857,000 to adjust the carrying
amount of the Prime Group units to $4.61 per unit, the closing price of PGE
shares on the New York Stock Exchange at December 31, 2002 and (ii)
$1,000,000 for estimated costs to realize the value of the guarantees. The
Company considered the decline in the value of the units which are
convertible into stock to be other than temporary as of December 31, 2002,
based on the fact that the market value of the stock has been less than its
cost for more than six months, the severity of the decline, market trends,
the financial condition and near-term prospects of Prime Group and other
relevant factors.
At December 31, 2002, the Company's carrying amount of the investment was
$23,908,000, of which $18,313,000 represents the carrying amount of the
3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100,000
represents the amount expected to be realized under the guarantees, partially
offset by $1,005,000 representing the Company's share of Prime Group Realty's
net loss through September 30, 2002 (see Note 4. Investments in and Advances to
Partially-Owned Entities).
At February 3, 2003, the closing price of PGE shares on the New York Stock
Exchange was $5.30 per share. The ultimate realization of the Company's
investment will depend upon the future performance of the Chicago real estate
market and the performance of PGE, as well as the ultimate realizable value of
the net assets supporting the guarantees and the Company's ability to collect
under the guarantees. In addition, the Company will continue to monitor this
investment to determine whether additional write-downs are required based on (i)
declines in value of the shares of PGE (for which the partnership units are
exchangeable) which are "other than temporary" as used in accounting literature
and (ii) the amount expected to be realized under the guarantees.
-70-
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Upon the adoption of SFAS No. 142 - Goodwill and Other Intangible Assets,
on January 1, 2002, the Company wrote-off all of the goodwill associated with
the Hotel Pennsylvania and the Temperature Controlled Logistics businesses
aggregating $30,129,000. This write-off was reflected as a cumulative effect of
a change in accounting principle in 2002.
MINORITY INTEREST
Minority interest was $140,584,000 for the year ended December 31, 2002
compared to $112,363,000 for the prior year, an increase of $28,221,000. This
increase is primarily due to operating partnership units issued in connection
with acquisitions.
ADJUSTED EBITDA
Below are the details of the changes by segment in Adjusted EBITDA.
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other
($in thousands) --------- --------- ---------- ----------- ----------- ---------
Year ended December 31, 2001.......... $ 785,052 $ 379,800 $ 119,149 $ 110,802 $ 78,437 $ 96,864
2002 Operations:
Same store operations(1)........... 1,811 18,165 (3,131)(3) (1,354)(5) (6,613)(6) (5,256)(7)
Acquisitions, dispositions and
non-recurring income and
expenses......................... 134,142 175,360 (3,286)(4) (570) -- (37,362)(8)
--------- --------- ---------- --------- ---------- ---------
Year ended December 31, 2002.......... $ 921,005 $ 573,325(2) $ 112,732 $ 108,878 $ 71,824 $ 54,246
========= ========= ========== ========= ========== =========
% increase (decrease) in same
store operations................. .2% 4.8%(2) (2.6%)(3) (1.2%)(5) (8.4%)(6) (5.4%)(7)
- ----------
(1) Represents operations which were owned for the same period in each year and
excludes non-recurring income and expenses.
(2) Adjusted EBITDA and the same store percentage increase was $303,368 and
5.0% for the New York City office portfolio and $269,957 and 4.1% for the
CESCR portfolio.
(3) Primarily due to lower occupancy and increases in allowances for bad debt
expense as a result of the K-Mart and other bankruptcies and the expiration
of the Stop & Shop guarantees of several former Bradlees locations. Average
occupancy for the year ended December 31, 2002 was 88.3% (84.0% excluding
leases which have not commenced as described in the following sentences) as
compared to 92% at December 31, 2001. The 88.3% occupancy rate includes
leases for 490,000 square feet at five locations which have not commenced
as of December 31, 2002. Three of these locations aggregating 268,000
square feet are ground leased to Lowe's which plans to demolish the
existing buildings and construct its own stores at the sites and two
locations containing 223,000 square feet are leased to Wal-Mart, which
plans to demolish an existing building and construct its own store at one
of the sites and occupy the existing store at the other site. All of these
redevelopment projects are subject to governmental approvals and in some
cases, the relocation of existing tenants.
(4) Primarily due to the Company's share of losses from the Starwood Ceruzzi
venture in 2002 of $1,416 (before depreciation) from properties placed in
service, as compared to a gain of $1,394 from the sale of one of the
venture's assets in 2001. Adjusted EBITDA aggregating $2,600 from the
acquisitions in the fourth quarter of 2002 of a 50% interest in the
Monmouth Mall and the remaining 50% interest in the Las Catalinas Mall the
Company did not previously own, was offset by lease termination fees and
other refunds in the fourth quarter of 2001.
(5) The net of a $1,685 or 1.5% same store increase in the core portfolio and a
$3,300 or a 66% decline at the LA Mart as a result of rent reductions and
increased marketing expenditures.
(6) The Company reflects its 60% share of Vornado Crescent Portland
Partnership's ("the Landlord") rental income it receives from AmeriCold
Logistics, its tenant, which leases the underlying temperature controlled
warehouses used in its business. The Company's joint venture does not
recognize rental income unless earned and collection is assured or cash is
received. The Company did not recognize its $19,349 share of the rent the
joint venture was due for the year ended December 31, 2002. The tenant has
advised the Landlord that (i) its revenue for the year ended December 31,
2002 from the warehouses it leases from the Landlord, is lower than last
year by .1%, and (ii) its gross profit before rent at these warehouses for
the corresponding period decreased by $614 (a .001% decrease). The decrease
in revenue is primarily attributable to a reduction in customer inventory
turns, a rate reduction with a significant customer and temporary plant
shut-downs. The decrease in gross profit is primarily attributable to
higher insurance and workers' compensation. In addition, the tenant's cash
requirements for capital expenditures, debt service and a non-recurring
pension funding were $8,293 higher in the current year than in the prior
year, which impacted the ability of the tenant to pay rent.
(7) The decrease in same store operations was primarily due to (i) a $14,973
reduction in investment income and (ii) a $9,342 reduction in operating
results at the Hotel Pennsylvania, partially offset by (iii) additional
development and commitment fees from Alexander's and (iv) income from the
Newkirk MLP. The reduction in investment income is primarily due to the
reinvestment of the proceeds received from the repayment of the Company's
$75,000 loan to NorthStar Partnership LP. in May 2002 at lower yields (1.5%
vs. 22%) and not recognizing income on the Company's foreclosed loan to
Primestone and outstanding loan to Vornado Operating. The Hotel
Pennsylvania's operating results reflect a reduction in average occupancy
and REVPAR to 65% and $58 for the year ended December 31, 2002, compared to
63% and $70 for the year ended December 31, 2001.
(8) Reflects net non-recurring items included in Adjusted EBITDA (see page 65
footnote 2 for details)
-71-
YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
REVENUES
The Company's revenues, which consist of property rentals, tenant expense
reimbursements and other income, were $985,773,000 in the year ended December
31, 2001 compared to $926,151,000 in the prior year, an increase of $59,622,000.
These increases by segment resulted from:
Date of Merchandise
($ in thousands) Acquisition Total Office Retail Mart Other
- ---------------- ----------- ----- ------ ------ ----------- -----
Property Rentals:
Acquisitions:
7 West 34th Street................. November 2000 $ 12,162 $ 12,162 $ -- $ -- $ --
33 North Dearborn Street........... September 2000 3,928 -- -- 3,928 --
L.A. Mart.......................... October 2000 8,622 -- -- 8,622 --
715 Lexington Avenue............... July 2001 861 -- 861 -- --
Plaza Suites on Main Street expansion September 2001 2,784 -- -- 2,784 --
Dispositions.......................... (8,343) (8,343)(1)
Hotel Activity........................ (18,234) -- -- -- (18,234)(3)
Trade Show Activity................... 4,490 -- -- 4,490 --
Leasing activity...................... 47,260 43,183 (1,397)(4) 6,843 (1,369)(2)
--------- -------- ------- ---------- --------
Total increase in property rentals.... 53,530 55,345 (8,879) 26,667 (19,603)
--------- -------- ------- ---------- --------
Tenant expense reimbursements:
Increase in tenant expense
reimbursements due to
acquisitions/dispositions......... 5,730 2,502 624 2,604 --
Other............................... 7,310 4,201 3,322 543 (756)
--------- -------- ------- ---------- --------
Total increase in tenant
expense reimbursements............ 13,040 6,703 3,946 3,147 (756)
--------- -------- ------- ---------- --------
Other income............................ (6,948) (1,724) (1,241) (1,337) (2,646)
--------- -------- ------- ---------- --------
Total increase in revenues.............. $ 59,622 $ 60,324 $ 6,174) $ 28,477 $(23,005)
========= ======== ======= ========== ========
- ----------
(1) Results primarily from the 14th Street and Union Square property being
taken out of service for redevelopment on February 9, 2001 and the sale of
the Company's Texas properties on March 2, 2000.
(2) Results primarily from the termination of the Sports Authority lease at the
Hotel Pennsylvania in January 2001.
(3) Average occupancy and REVPAR for the Hotel Pennsylvania were 63% and $70
for the year ended December 31, 2001 and 76% and $87 for the year ended
December 31, 2000.
(4) Reflects a decrease of $2,514 in property rentals arising from the
straight-lining of rent escalations.
See Supplemental Information on page 81 for details of leasing activity.
-72-
EXPENSES
The Company's expenses were $600,626,000 in the year ended December 31,
2001, compared to $551,101,000 in the prior year, an increase of $49,525,000.
This increase by segment resulted from:
($ in thousands)
Merchandise
Total Office Retail Mart Other
---------- ---------- ---------- ----------- ----------
Operating:
Acquisitions, dispositions and
non-recurring items ..................... $ 8,938 $ 5,115 $ (253) $ 6,199 $ (2,123)
Hotel activity ............................ (3,331)(1) -- -- -- (3,331)
Same store operations ..................... 13,838 13,042 1,129 2,355 (2,688)
---------- ---------- ---------- ---------- ----------
19,445 18,157 876 8,554 (8,142)
---------- ---------- ---------- ---------- ----------
Depreciation and amortization:
Acquisitions, dispositions and
non-recurring items ..................... 1,206 2,563 (2,859) 1,502 --
Hotel activity ............................ 1,121 -- -- -- 1,121
Same store operations ..................... 13,426 10,788 162 1,911 565
---------- ---------- ---------- ---------- ----------
15,753 13,351 (2,697) 3,413 1,686
General and Administrative:
Other expenses ............................ 8,815 2,020 2,909 1,751 2,135
Donations to Twin Towers Fund
and NYC Fireman's Fund .................. 1,250 -- -- -- 1,250
Hotel activity
(1,605) -- -- -- (1,605)
Appreciation in value of
Vornado shares and other
securities held in officer's
deferred compensation trust ............. 644 -- -- -- 644
---------- ---------- ---------- ---------- ----------
9,104 2,020 2,909 1,751 2,424
---------- ---------- ---------- ---------- ----------
Costs of acquisitions
and development not
consummated ............................. 5,223 -- -- -- 5,223
---------- ---------- ---------- ---------- ----------
$ 49,525 $ 33,528 $ 1,088 $ 13,718 $ 1,191
========== ========== ========== ========== ==========
- ----------
(1) Includes $1,900 for the collection of a receivable from a commercial tenant
of the Hotel in 2001 which was previously fully reserved.
INCOME APPLICABLE TO ALEXANDER'S
Income applicable to Alexander's (loan interest income, management, leasing
and development fees, and equity in income) was $25,718,000 in the year ended
December 31, 2001, compared to $17,363,000 in the prior year, an increase of
$8,355,000. This increase resulted primarily from the Company's share of
Alexander's gain on sale of its Fordham Road property on January 12, 2001.
-73-
INCOME FROM PARTIALLY-OWNED ENTITIES
In accordance with generally accepted accounting principles, the Company
reflects the income it receives from (i) entities it owns less than 50% of and
(ii) entities it owns more than 50% of, but which have a partner who has shared
board and management representation and authority and substantive participating
rights on all significant business decisions, on the equity method of accounting
resulting in such income appearing on one line in the Company's consolidated
statements of income. Below is the detail of income from partially-owned
entities by investment as well as the increase (decrease) in income from
partially-owned entities for the year ended December 31, 2001 as compared to the
prior year:
($ in thousands)
Temperature Newkirk Las
Controlled Joint Catalinas
Total CESCR Logistics Venture Mall
----------- ----------- ----------- ---------- -----------
YEAR ENDED
DECEMBER 31, 2001:
Revenues .................. $ 747,902 $ 382,502 $ 126,957 $ 179,551 $ 14,377
Expenses:
Operating, general and
administrative ....... (180,337) (135,133) (8,575) (13,630) (2,844)
Depreciation ............ (141,594) (53,936) (58,855) (20,352) (2,330)
Interest expense ........ (236,996) (112,695) (44,988) (65,611) (5,705)
Other, net .............. 6,181 1,975 2,108 4,942 --
----------- ----------- ----------- ----------- -----------
Net Income ................ $ 195,156 $ 82,713 $ 16,647 $ 84,900 $ 3,498
=========== =========== =========== =========== ===========
Vornado's interest ........ 34% 60% 30% 50%
Equity in net income ...... $ 67,679 $ 28,653 $ 9,988 $ 25,470 $ 1,749
Interest and other income . 7,579 -- 2,105 5,474 --
Fee income ................ 5,354 -- 5,354 -- --
----------- ----------- ----------- ----------- -----------
Income from partially-owned
entities ................ $ 80,612 $ 28,653 $ 17,447 $ 30,944 $ 1,749
=========== =========== =========== =========== ===========
YEAR ENDED
DECEMBER 31, 2000:
Revenues .................. $ 698,712 $ 344,084 $ 154,467 $ 143,272 $ 14,386
Expenses:
Operating, general and
administrative ....... (175,135) (129,367) (9,029) (10,652) (3,817)
Depreciation ............ (126,221) (42,998) (57,848) (14,786) (2,277)
Interest expense ........ (218,234) (98,565) (46,639) (58,284) (4,812)
----------- ----------- ----------- ----------- -----------
Other, net .............. 2,113 3,553 (3,667) 2,557
----------- ----------- ----------- ----------- -----------
Net Income ................ $ 181,235 $ 76,707 $ 37,284 $ 62,107 $ 3,480
=========== =========== =========== =========== ===========
Vornado's interest ........ 34% 60% 30% 50%
Equity in net income ...... $ 67,392 $ 25,724 $ 22,370 $ 18,632 $ 1,817
Interest and other income . 6,768 -- 874 5,894 --
Fee income ................ 5,534 -- 5,534 -- --
----------- ----------- ----------- ----------- -----------
Income from partially-owned
entities ................ $ 79,694 $ 25,724 $ 28,778 $ 24,526 $ 1,817
=========== =========== =========== =========== ===========
INCREASE (DECREASE) IN
INCOME FROM
PARTIALLY-OWNED ENTITIES. $ 918 $ 2,929 $ (11,331) $ 6,418 $ (68)
=========== =========== =========== =========== ===========
Starwood Partially-
Ceruzzi Owned
Joint Office
Venture Buildings Other
----------- ----------- -----------
YEAR ENDED
DECEMBER 31, 2001:
Revenues .................. $ 1,252 $ 43,263 $ --
Expenses:
Operating, general and
administrative ....... (820) (19,335) --
Depreciation ............ (501) (5,620) --
Interest expense ........ -- (7,997) --
Other, net .............. 275 1,759 (4,878)
----------- ----------- -----------
Net Income ................ $ 206 $ 12,070 $ (4,878)
=========== =========== ===========
Vornado's interest ........ 80% 34% 50%
Equity in net income ...... $ 165 $ 4,093 $ (2,439)
Interest and other income . -- -- --
Fee income ................ -- -- --
----------- ----------- -----------
Income from partially-owned
entities ................ $ 165 $ 4,093 $ (2,439)
=========== =========== ===========
YEAR ENDED
DECEMBER 31, 2000:
Revenues .................. $ 303 $ 42,200 $ --
Expenses:
Operating, general and
administrative ....... (1,740) (20,530) --
Depreciation ............ (153) (8,159) --
Interest expense ........ -- (9,934) --
----------- ----------- -----------
Other, net .............. -- 2,561 (2,891)
----------- ----------- -----------
Net Income ................ $ (1,590) $ 6,138 $ (2,891)
=========== =========== ===========
Vornado's interest ........ 80% 46% 98%
Equity in net income ...... $ (1,150) $ 2,832 $ (2,833)
Interest and other income . -- -- --
Fee income ................ -- -- --
----------- ----------- -----------
Income from partially-owned
entities ................ $ (1,150) $ 2,832 $ (2,833)
=========== =========== ===========
INCREASE (DECREASE) IN
INCOME FROM
PARTIALLY-OWNED ENTITIES. $ 1,315 $ 1,261 $ 394
=========== =========== ===========
-74-
INTEREST AND OTHER INVESTMENT INCOME
Interest and other investment income (interest income on mortgage loans
receivable, other interest income, dividend income and net gains on marketable
securities) was $54,385,000 for the year ended December 31, 2001, compared to
$33,798,000 in the prior year, an increase of $20,587,000. This increase
resulted primarily from the acquisition of NorthStar subordinated unsecured debt
(22% effective rate) on September 19, 2000 and a loan to Primestone Investment
Partners, L.P. on September 28, 2000 (20% effective rate).
On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. The Company received a 1% upfront fee and is entitled
to receive certain other fees aggregating approximately 3% upon repayment of the
loan. The loan bears interest at 16% per annum. Primestone Investment Partners,
L.P. defaulted on the repayment of this loan on October 25, 2001. The Company's
loan was subordinate to $37,957,000 of other debt of the borrower that liened
the Company's collateral. On October 31, 2001, the Company purchased the other
debt for its face amount. The loans are secured by 7,944,893 partnership units
in Prime Group Realty, L.P., the operating partnership of Prime Group Realty
Trust (NYSE:PGE), which units are exchangeable for the same number of shares of
PGE. The loans are also guaranteed by affiliates of the borrower. The Company
has commenced foreclosure proceedings with respect to the collateral.
On November 19, 2001 the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000. Under the terms of the
participation agreement, cash payments received shall be applied (i) first, to
the reimbursement of reimbursable out-of-pocket costs and expenses incurred in
connection with the servicing, administration or enforcement of the loans after
November 19, 2001, (ii) second, to the Company and Cadim pro rata in proportion
to the amount of interest and fees owed to them (all of such fees and interest
accrued through November 19, 2001 are for the account of Vornado and all of such
fees and interest accrued after November 19, 2001 accrue on a 50/50 basis to the
Company and Cadim) and (iii) third, 50% to the Company and 50% to Cadim. The
Company has agreed that in the event the Company acquires the collateral in a
foreclosure proceeding it will, upon the request of Cadim, deliver 50% of such
collateral to Cadim.
For financial reporting at December 31, 2002, purposes, the gross amount of
the loan, $106,768,000, is included in "Notes and mortgage loans receivable" and
Cadim's 50% participation, $50,000,000, is reflected in "Other liabilities". The
Company did not recognize income on these loans for the period from November 19,
2001 through December 31, 2001, and will not recognize income until such time
that cash is received or foreclosure proceedings have been consummated.
Included in interest and other investment income for the year ended
December 31, 2001, is $2,422,000 of interest income from the $31,424,000 note
receivable the Company has from Vornado Operating. Vornado Operating has only
one significant asset, its investment in AmeriCold Logistics and does not
generate positive cash flow sufficient to cover all of its expenses.
Accordingly, commencing January 1, 2002, the Company will no longer recognize
the interest income due on the $31,424,000 loan until Vornado Operating is cash
flow positive in an amount sufficient to fund the interest due to the Company.
INTEREST AND DEBT EXPENSE
Interest and debt expense was $173,076,000 for the year ended December 31,
2001, compared to $180,505,000 in the prior year, a decrease of $7,429,000. This
decrease resulted primarily from a $36,270,000 savings from a 289 basis point
reduction in weighted average interest rate on variable rate debt partially
offset by interest on higher average outstanding loan balances. Interest and
debt expense includes amortization of debt issuance costs of $8,458,000 and
$8,423,000 for the years ended December 31, 2001 and 2000.
-75-
NET LOSS ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER THAN
DEPRECIABLE REAL ESTATE
The following table sets forth the details of net loss on disposition of
wholly-owned and partially-owned assets other than depreciable real estate for
the year ended December 31, 2001 (no gains/losses in 2000):
($ in thousands)
WHOLLY-OWNED ASSETS:
Write-off of investments in technology companies.......... $ (16,513)
PARTIALLY-OWNED ASSETS:
After-tax net gain on sale of Park Laurel condominium units 15,657
Write-off of net investment in the Russian Tea Room ("RTR") (7,374)
Other...................................................... 160
-------------
$ (8,070)
=============
WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES
In the first quarter of 2001, the Company recorded a charge of
$4,723,000 resulting from the write-off of an equity investment in a
technology company. In the second quarter of 2001, the Company recorded an
additional charge of $13,561,000 resulting from the write-off of all of its
remaining equity investments in technology companies due to both the
deterioration of the financial condition of these companies and the lack of
acceptance by the market of certain of their products and services. In the
fourth quarter of 2001, the Company recorded $1,481,000 of income resulting
from the reversal of a deferred rent liability relating to the termination
of an agreement permitting one of the technology companies access to its
properties.
AFTER-TAX NET GAIN ON SALE OF PARK LAUREL CONDOMINIUM UNITS
In the third and fourth quarters of 2001, the Park Laurel Joint
Venture (69% interest owned by the Company) completed the sale of 52
condominium units of the total 53 units and received proceeds of
$139,548,000. The Company's share of the after tax net gain was $15,657,000
and is after a charge of $3,953,000 (net of tax benefit of $1,826,000) for
awards accrued under the venture's incentive compensation plan.
WRITE-OFF OF NET INVESTMENT IN RTR
In the third quarter of 2001, the Company wrote-off its entire net
investment of $7,374,000 in RTR based on the operating losses and an
assessment of the value of the real estate.
GAINS ON SALE OF REAL ESTATE
In September 1998, Atlantic City condemned the Company's property. In
the third quarter of 1998, the Company recorded a gain of $1,694,000, which
reflected the condemnation award of $3,100,000, net of the carrying value
of the property of $1,406,000. The Company appealed the amount and on June
27, 2001, was awarded an additional $3,050,000, which has been recorded as
a gain in the quarter ended June 30, 2001.
On August 6, 2001, the Company sold its leasehold interest in 550/600
Mamaroneck Avenue for $22,500,000, which approximated its net book value.
On May 17, 2001, the Company sold its 50% interest in 570 Lexington
Avenue for $60,000,000, resulting in a gain of $12,445,000.
During 2000, the Company sold (i) its three shopping centers located
in Texas for $25,750,000, resulting in a gain of $2,560,000 and (ii) its
Westport, Connecticut office property for $24,000,000, resulting in a gain
of $8,405,000.
-76-
OTHER
The Company recorded the cumulative effect of a change in accounting
principle of $4,110,000 in the first quarter of 2001. The Company had previously
marked-to-market changes in the value of stock purchase warrants through
accumulated other comprehensive loss. Under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, those changes are
recognized through earnings, and accordingly, the Company has reclassified
$4,110,000 from accumulated other comprehensive loss to the consolidated
statement of income as of January 1, 2001. Future changes in value of such
securities will be recorded through earnings.
Minority interest was $112,363,000 for the year ended December 31, 2001,
compared to $102,374,000 for the prior year, an increase of $9,989,000. This
increase is primarily due to an increase in perpetual preferred units
distributions for units issued in 2000 and 2001.
ADJUSTED EBITDA
Below are the details of the changes by segment in Adjusted EBITDA.
($ in thousands)
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other
---------- ---------- ---------- ---------- ----------- ---------
Year ended December 31, 2000 $ 737,750 $ 331,025 $ 120,661 $ 91,858 $ 93,160 $ 101,046
2001 Operations:
Same store operations(1)........ 32,485 37,731 3,305 7,508 (14,723)(3) (1,336)
Acquisitions, dispositions and
non-recurring income and
expenses...................... 14,817 11,044 (4,817) 11,436 -- (2,846)
---------- ---------- ---------- ---------- ----------- ---------
Year ended December 31, 2001 $ 785,052 $ 379,800(2) $ 119,149 $ 110,802 $ 78,437 $ 96,864(4)
========== ========== ========== ========== =========== =========
% increase (decrease) in same
store operations.............. 4.4% 11.4%(2) 2.7% 8.2% (15.8%)(3) (1.3%)(4)
========== ========== ========== ========== =========== =========
- ----------
(1) Represents operations which were owned for the same period in each year.
(2) Adjusted EBITDA and the same store percentage increase was $295,222 and
13.7% for the New York City office portfolio and $84,943 and 3.6% for the
CESCR portfolio.
(3) The tenant has reported that (i) its revenue for the year ended December
31, 2001 from the warehouses it leases from the Landlord, is lower than
last year by 4.2% and (ii) its gross profit before rent at these warehouses
for the corresponding period is lower than last year by $26,764 (a 14.4%
decline). This decrease is attributable to a reduction in total customer
inventory stored at the warehouses and customer inventory turns.
Based on the Landlord's policy of recognizing rental income when earned and
collection is assured or cash is received, the Company did not recognize
$15,281 and $8,606 of the rent it was due in the years ended December 31,
2001 and 2000. On December 31, 2001 the Landlord released the tenant from
its obligation to pay $39,812 of deferred rent of which the Company's share
was $23,887. This amount equals the rent which was not recognized as income
by the Company and accordingly had no profit and loss effect to the
Company.
(4) Included in "Other" is $2,422 of interest income from the $31,424 note
receivable the Company has from Vornado Operating. Vornado Operating has
only one significant asset, its investment in AmeriCold Logistics and does
not generate positive cash flow sufficient to cover all of its expenses.
Accordingly, commencing January 1, 2002, the Company no longer recognizes
interest income due on the $31,424 loan until Vornado Operating is cash
flow positive in an amount sufficient to fund the interest due to the
Company.
-77-
SUPPLEMENTAL INFORMATION
THREE MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Below is a summary of Net Income and Adjusted EBITDA by segment for the
three months ended December 31, 2002 and 2001.
For The Three Months Ended December 31, 2002
($ in thousands) -------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
------------ ----------- ---------- ------------ ------------- -----------
Rentals........................................ $ 317,475 $ 217,807 $ 35,033 $ 47,579 $ -- $ 17,056
Expense reimbursements......................... 41,540 21,500 14,561 4,885 -- 594
Other income................................... 7,816 6,640 558 554 -- 64
--------- --------- --------- --------- ---------- ---------
Total revenues................................. 366,831 245,947 50,152 53,018 -- 17,714
--------- --------- --------- --------- ---------- ---------
Operating expenses............................. 144,095 89,600 19,636 21,491 -- 13,368
Depreciation and amortization.................. 55,388 39,755 4,740 6,435 -- 4,458
General and administrative..................... 26,115 7,535 1,258 5,090 -- 12,232
Cost of acquisitions and development
not consummated.............................. 6,874 -- -- -- -- 6,874
Amortization of officer's deferred compensation
expense...................................... 6,875 -- -- -- -- 6,875
--------- --------- --------- --------- ---------- ---------
Total expenses................................. 239,347 136,890 25,634 33,016 -- 43,807
--------- --------- --------- --------- ---------- ---------
Operating income............................... 127,484 109,057 24,518 20,002 -- (26,093)
Income applicable to Alexander's............... 7,044 -- -- -- -- 7,044
Income from partially-owned entities........... 14,312 92 116 (119) 3,920(4) 10,303
Interest and other investment income........... 5,702 1,401 78 83 -- 4,140
Interest and debt expense...................... (60,595) (35,384) (15,499) (3,789) -- (5,923)
Net loss on disposition of wholly-owned and
partially-owned assets other than real
estate....................................... (16,295) -- -- -- -- (16,295)
Minority interest.............................. (32,773) (30,824) (3,661) (7,477) (1,558) 10,747
--------- --------- --------- --------- ---------- ---------
Net income..................................... 44,879 44,342 5,552 8,700 2,362 (16,077)
Cumulative effect of change in accounting
principle..................................... -- -- -- -- -- --
Interest and debt expense(3)................... 76,861 35,079 15,499 4,022 6,223 16,038
Depreciation and amortization(3)............... 69,250 41,020 5,202 6,725 8,832 7,471
--------- --------- --------- --------- ---------- ---------
EBITDA......................................... 190,990 120,441 26,253 19,447 17,417 7,432
Adjustments:
Minority interest.............................. 32,773 30,824 3,661 7,477 1,558 (10,747)
Straight-lining of rents net of a $4,071
allowance for uncollectible rents(3) ......... (2,357) (3,448) 481 1,065 -- (455)
Amortization of below market leases, net ...... (3,283) (3,118) (165) -- -- --
Other.......................................... (1,454) -- -- -- 103 (1,557)
--------- --------- --------- --------- ---------- ---------
Adjusted EBITDA(1)............................. $ 216,669 $ 144,699 $ 30,230 $ 27,989 $ 19,078 $ (5,327)
========= ========= ========= ========= ========== =========
----------
See notes on following page.
-78-
($ in thousands) For The Three Months Ended December 31, 2001
---------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- ----------- ----------- ----------- -----------
Rentals ....................................... $ 213,488 $ 117,107 $ 30,445 $ 52,151 $ 13,785
Expense reimbursements ........................ 30,263 11,327 14,147 3,635 -- 1,154
Other income .................................. 3,072 1,588 (488) 882 -- 1,090
----------- ----------- ----------- ----------- ----------- -----------
Total revenues ................................ 246,823 130,022 44,104 56,668 -- 16,029
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses ............................ 99,533 52,988 15,557 20,680 -- 10,308
Depreciation and amortization ................. 32,636 18,659 4,374 7,141 -- 2,462
General and administrative .................... 20,866 3,665 263 4,795 -- 12,143
Costs of acquisitions and development .........
not consummated ........................... 223 -- -- -- -- 223
----------- ----------- ----------- ----------- ----------- -----------
Total expenses ................................ 153,258 75,312 20,194 32,616 -- 25,136
----------- ----------- ----------- ----------- ----------- -----------
Operating income .............................. 93,565 54,710 23,910 24,052 -- (9,107)
Income applicable to Alexander's .............. 3,126 -- -- -- -- 3,126
Income from partially-owned entities .......... 18,538 8,057 (1,095) (70) 4,538(4) 7,108
Interest and other investment income .......... 10,454 1,100 88 268 -- 8,998
Interest and debt expense ..................... (36,633) (10,550) (13,983) (7,488) -- (4,612)
Net gain on disposition of wholly-owned and
partially-owned assets other than real estate 3,719 -- -- 160 -- 3,559
Minority interest ............................. (28,432) (13,997) (4,176) (4,240) (2,674) (3,345)
----------- ----------- ----------- ----------- ----------- -----------
Net income .................................... 64,337 39,320 4,744 12,682 1,864 5,727
Minority interest ............................. 28,432 13,997 4,176 4,240 2,674 3,345
Net gain on disposition of wholly-owned and
partially-owned assets other than real estate (160) -- -- (160) -- --
Interest and debt expense(3) .................. 64,180 20,663 14,592 7,488 6,261 15,176
Depreciation and amortization(3) .............. 52,386 24,012 5,066 7,141 8,604 7,563
Straight-lining of rents(3) ................... (3,458) (3,817) 1,871 (1,126) -- (386)
Other ......................................... (3,697) 218 -- -- 494 (4,409)
----------- ----------- ----------- ----------- ----------- -----------
Adjusted EBITDA(1) ............................ $ 202,020 $ 94,393 $ 30,449 $ 30,265 $ 19,897 $ 27,016
=========== =========== =========== =========== =========== ===========
- ----------
(1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on
sales of depreciable real estate, the effect of straight-lining of rent
escalations, amortization of acquired below market leases net of above
market leases and minority interest. Management considers Adjusted EBITDA a
supplemental measure for making decisions and assessing the performance of
its segments. Adjusted EBITDA is presented as a measure of "operating
performance" which enables the reader to identify trends from period to
period and may be used to compare "same store" operating performance to
other companies, as well as providing a measure for determining funds
available to service debt. Adjusted EBITDA may not be comparable to
similarly titled measures employed by other companies.
(2) Adjusted EBITDA - Other is comprised of:
($ in thousands) 2002 2001
--------- ---------
Newkirk Joint Ventures (30% interest):
Equity in income of limited partnerships...................... $ 14,827 $ 14,238
Interest and other income..................................... 2,124 4,155
Alexander's (33.1% interest).................................... 7,832 3,417
Hotel Pennsylvania.............................................. 3,015 2,671
Net gain on sale of condominium units........................... 30 1,788
Corporate general and administrative expenses................... (11,183) (12,143)
Investment income and other..................................... 6,288 12,890
Primestone impairment loss...................................... (15,857) --
Officer's deferred compensation................................. (6,875) --
Palisades....................................................... 1,346 --
Write-off of 20 Times Square pre-development costs.............. (6,874) --
--------- ---------
Total.................................................. $ (5,327) $ 27,016
========= =========
(3) Interest and debt expense, depreciation and amortization and
straight-lining of rents included in the reconciliation of net income to
EBITDA or Adjusted EBITDA reflects amounts which are netted in income from
partially-owned entities.
(4) Net of $6,987 and $7,630 of rent not recognized as income for the fourth
quarter of 2002 and 2001,
respectively.
-79-
Below are the details of the changes by segment in Adjusted EBITDA.
($ in thousands) Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other
--------- --------- ---------- ----------- ----------- --------
Three months ended
December 31, 2001......... $ 202,020 $ 94,393 $ 30,449 $ 30,265 $ 19,897 $ 27,016
2002 Operations:
Same store operations(1).. (4,899) 3,558 (1,519)(3) (1,794)(5) (819) (4,325)(6)
Acquisitions, dispositions
and non-recurring income
and expenses............ 19,548 46,748 1,300(4) (482) -- (28,018)(7)
--------- -------- ---------- --------- --------- --------
Three months ended
December 31, 2002......... $ 216,669 $ 144,699(2) $ 30,230 $ 27,989 $ 19,078 $ (5,327)
========= ========= ========== ========= ========= ========
% (decrease) increase in same
store operations........ (2.4%) 3.8%(2) (5.0%)(3) (5.9%)(5) (4.1%) (16.0%)
========= ========= ========== ========= ========== ========
- ----------
(1) Represents operations, which were owned for the same period in each year.
(2) Adjusted EBITDA and same store percentage increase was $75,303 and 3.8% for
the New York City office portfolio and $69,396 and 3.6% for the CESCR
portfolio.
(3) Primarily due to lower occupancy and increases in allowances for bad debt
expense as a result of the K-Mart and other bankruptcies and the expiration
of the Stop & Shop guarantees of several former Bradlees locations. Average
occupancy for the quarter ended December 31, 2002 was 86%, (82% excluding
leases which have not commenced) as compared to 92% at December 31, 2001.
(4) Primarily due to Adjusted EBITDA aggregating $2,600 from the acquisitions
in the fourth quarter of 2002 of a 50% interest in the Monmouth Mall and
the remaining 50% interest in the Las Catalinas Mall the Company did not
previously own, offset by lease termination fees and other refunds in the
fourth quarter of 2001.
(5) Primarily due to rescheduling of two trade shows from the fourth quarter of
2002 to the first quarter of 2003.
(6) Primarily due to the reinvestment of the proceeds received from the
repayment of the Company's $75,000 loan to NorthStar Partnership L.P. in
May 2002 at lower yields and from not recognizing income on the Company's
foreclosed loan to Primestone and loan to Vornado Operating.
(7) Reflects net non-recurring items included in Adjusted EBITDA.
In comparing the financial results of the Company's segments on a quarterly
basis, the following should be noted:
- The third quarter financial results of the Office and Merchandise Mart
segments have historically been impacted by higher net utility costs
than in each other quarter of the year;
- The fourth quarter financial results of the Retail segment have
historically been higher than the first three quarters due to the
recognition of percentage rental income in that quarter; and
- The second and fourth quarter financial results of the Merchandise
Mart segment have historically been higher than the first and third
quarters due to major trade shows occurring in those quarters.
Below are the details of the changes by segment in Adjusted EBITDA for the
three months ended December 31, 2002 compared to the three months ended
September 30, 2002:
($ in thousands) Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other
--------- ---------- -------- ----------- ----------- ----------
Three months ended
September 30, 2002........ $ 230,599 $ 140,248 $ 29,277 $ 23,424 $ 14,864 $ 22,786
2002 Operations:
Same store operations(1).. 10,537 5,851 (2,047) 3,331 (2) 4,214(3) (812)
Acquisitions, dispositions
and non-recurring income
and expenses............ (24,467) (1,400) 3,000 1,234 -- (27,301)
--------- ---------- -------- ---------- --------- ----------
Three months ended
December 31, 2002......... $ 216,669 $ 144,699 $ 30,230 $ 27,989 $ 19,078 $ (5,327)
========= ========== ======== ========== ========= ==========
% increase (decrease) in same
store operations........ 4.6% 4.2%(1) (7.0%) 14.2%(2) 28.4%(3) (3.6%)
========= ========== ======== ========== ========= ==========
- ----------
(1) Adjusted EBITDA and same store percentage increase was $75,303 and 6.1% for
the New York City office portfolio and $69,396 and 2.2% for the CESCR
portfolio.
(2) Reflects higher income due to timing of trade shows.
(3) Primarily due to seasonality of tenant's operations.
-80-
LEASING ACTIVITY
The following table sets forth certain information for the properties the
Company owns directly or indirectly, including leasing activity:
(square feet and cubic feet in thousands) Office Merchandise Mart
------------------- -------------------- Temperature
AS OF DECEMBER 31, 2002: New York Controlled
City CESCR Retail Office Showroom Logistics
-------- ------- -------- ------- ------- ---------
Square feet.............................. 14,304 13,395 12,528 2,838 5,528 17,509
Cubic feet............................... -- -- -- -- -- 441,500
Number of properties..................... 21 53 62 9 9 88
Occupancy rate........................... 95.9% 93.6% 88.3% 89.2% 95.2% 78.5%
Leasing Activity:
Quarter ended December 31, 2002:
Square feet........................ 138 516 890 63 121 --
Initial rent(1).................... $ 44.15 $ 30.21 $ 11.17 $ 30.20 $ 22.89 --
Rent per square foot on relet space:
Square feet....................... 124 419 776 63 121 --
Initial rent (1).................. $ 44.58 $ 30.79 $ 11.43 $ 30.20 $ 22.89 --
Prior escalated rent.............. $ 36.10 $ 29,22 $ 8.67 $ 31.85 $ 21.68 --
Percentage increase (decrease).... 23.5% 5.4% 31.8% (5.2%) 5.6% --
Rent per square foot on space
previously vacant:
Square feet....................... 14 97 114 -- -- --
Initial rent (1).................. $ 41.94 $ 31.01 $ 9.46 -- -- --
Year Ended December 31, 2002:
Square feet........................ 579 2,342 1,960 164 911 --
Initial rent(1).................... $ 44.82 $ 31.01 $ 9.73 $ 26.97 $ 18.99 --
Rent per square foot on relet space:
Square feet....................... 457 2,025 1,339 164 911 --
Initial Rent(1)................... $ 44.34 $ 31.29 $ 12.17 $ 26.97 $ 18.99 --
Prior escalated rent.............. $ 34.11 $ 29.66 $ 9.19 $ 26.66 $ 18.63 --
Percentage increase............... 30.0% 5.5% 32.4% 1.2% 2.0% --
Tenant improvements per square foot $ 39.00 $ 14.23 -- $ 18.74 $ 2.65 --
Leasing commissions per square foot $ 16.47 $ 3.39 -- $ 5.08 -- --
Rent per square foot on space
previously vacant:
Square feet....................... 122 317 621(2) -- -- --
Initial rent (1).................. $ 46.80 $ 29.21 $ 4.48 -- -- --
AS OF DECEMBER 31, 2001:
Square feet.............................. 14,300 4,386 11,301 2,841 5,532 17,695
Cubic feet............................... -- -- -- -- -- 445,200
Number of properties..................... 22 52 55 9 9 89
Occupancy rate........................... 97.4% 94.8% 92.0% 89.2% 95.5% 80.7%
AS OF DECEMBER 31, 2000:
Square feet.............................. 14,396 4,248 11,293 2,869 5,044 17,495
Cubic feet............................... -- -- -- -- -- 438,900
Number of properties..................... 22 51 55 9 9 88
Occupancy rate........................... 96.3% 97.9% 92.0% 90.2% 97.6% 82.0%
- ----------
(1) Most leases include periodic step-ups in rent, which are not reflected in
the initial rent per square foot leased.
(2) Ground leases.
In addition to the above, 48,000 square feet of retail space included in
the NYC office properties was leased at an initial rent of $112.01 per square
foot for the year ended December 31, 2002. Further, the Company leased 140,000
square feet of garage space at a weighted average initial rent per square foot
of $19.02.
-81-
PRO FORMA OPERATING RESULTS - CESCR ACQUISITION
Below is a summary of net income, Adjusted EBITDA and funds from operations
for the years ended December 31, 2002 and 2001, giving effect to the following
transactions as if they had occurred on January 1, 2001: (i) the acquisition of
the remaining 66% of CESCR on January 1, 2002 and (ii) the Company's November
21, 2001 sale of 9,775,000 common shares and the use of proceeds to repay
indebtedness.
Year Ended December 31,
----------------------------------
(amounts in thousands, 2001
except per share amounts) 2002 (Pro Forma)
------------- -------------
Revenues........................................................... $ 1,435,070 $ 1,384,933
============= =============
Net income......................................................... $ 232,903 $ 295,805
Preferred share dividends.......................................... (23,167) (36,505)
------------- -------------
Net income applicable to common shares............................. $ 209,736 $ 259,300
============= =============
Net income per common share - diluted.............................. $ 1.91 $ 2.55
============= =============
Adjusted EBITDA.................................................... $ 921,005 $ 949,613
============= =============
Funds from operations(1)........................................... $ 407,173 $ 427,426
============= =============
Shares used for determining funds from operations per share........ 112,600 109,494
============= =============
----------
(1) See page 91 for further details on funds from operations.
SENIOR UNSECURED DEBT COVENANT COMPLIANCE RATIOS
The following ratios as of and for the three months ended December 31,
2002, are computed pursuant to the covenants and definitions of the Company's
senior unsecured notes due 2007.
Actual Required
------ -----------------
Total Outstanding Debt/Total Assets....................... 48% Less than 60%
Secured Debt/Total Assets................................. 43% Less than 55%
Interest coverage (Annualized Combined EBITDA to Annualized
Interest Expense)....................................... 2.97 Greater than 1.50
Unencumbered Assets/ Unsecured Debt....................... 674% Greater than 150%
The covenants and definitions of the Company's senior unsecured notes due
2007 are described in Exhibit 4.2 to the quarterly report on Form 10-Q for the
three months ended September 30, 2002.
-82-
RELATED PARTIES
LOAN AND COMPENSATION AGREEMENTS
At December 31, 2002, the loan due from Mr. Roth, in accordance with his
employment arrangement, was $13,122,500 ($4,704,500 of which is shown as a
reduction in shareholders' equity). The loan bears interest at 4.49 % per annum
(based on the applicable Federal rate) and matures in January 2006. The Company
also provided Mr. Roth with the right to draw up to $15,000,000 of additional
loans on a revolving basis. Each additional loan will bear interest, payable
quarterly, at the applicable Federal rate on the date the loan is made and will
mature on the sixth anniversary of the loan.
On May 29, 2002, Mr. Roth replaced common shares of the Company securing
the Company's outstanding loan to Mr. Roth with options to purchase common
shares of the Company with a value of not less than two times the loan
amount. As a result of the decline in the value of the options, Mr. Roth
supplemented the collateral with cash and marketable securities.
At December 31, 2002, loans due from Mr. Fascitelli, in accordance with his
employment agreement, aggregated $8,600,000. The loans, which were scheduled to
mature in 2003, have been extended to 2006 in connection with the extension of
Mr. Fascitelli's employment agreement (discussed below) and bear interest,
payable quarterly at a weighted average interest rate of 3.97% (based on the
applicable Federal rate).
Pursuant to his 1996 employment agreement, Mr. Fascitelli became entitled
to a deferred payment consisting of $5 million in cash and a convertible
obligation payable November 30, 2001, at the Company's option, in either 919,540
Company common shares or the cash equivalent of their appreciated value, so long
as such appreciated value is not less than $20 million. The Company delivered
919,540 shares to a rabbi trust upon execution of the 1996 employment agreement.
The Company accounted for the stock compensation as a variable arrangement in
accordance with Plan B of EITF No. 97-14 "Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" as the
agreement permitted settlement in either cash or common shares. Following the
guidance in EITF 97-14, the Company recorded changes in fair value of its
compensation obligation with a corresponding increase in the liability
"Officer's Deferred Compensation". Effective as of June 7, 2001, the payment
date was deferred until November 30, 2004. Effective as of December 14, 2001,
the payment to Mr. Fascitelli was converted into an obligation to deliver a
fixed number of shares (919,540 shares), establishing a measurement date for the
Company's stock compensation obligation, accordingly the Company ceased
accounting for the Rabbi Trust under Plan B of the EITF and began Plan A
accounting. Under Plan A, the accumulated liability representing the value of
the shares on December 14, 2001, was reclassified as a component of
Shareholders' Equity as "Deferred compensation shares earned but not yet
delivered." In addition, future changes in the value of the shares are no longer
recognized as additional compensation expense. The fair value of this obligation
was $34,207,000 at December 31, 2002. The Company has reflected this liability
as Deferred Compensation Shares Not Yet Delivered in the Shareholders' Equity
section of the balance sheet. For the years ended December 31, 2001 and 2000,
the Company recognized approximately $4,744,000 and $3,733,000 of compensation
expense of which $2,612,000 and $1,968,000 represented the appreciation in value
of the shares in each period and $2,132,000 and $1,765,000 represented dividends
paid on the shares.
Effective January 1, 2002, the Company extended its employment agreement
with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant
to the extended employment agreement, Mr. Fascitelli is entitled to receive a
deferred payment on December 31, 2006 of 626,566 Vornado common shares which are
valued for compensation purposes at $27,500,000 (the value of the shares on
March 8, 2002, the date the extended employment agreement was executed). The
shares are held in a rabbi trust for the benefit of Mr. Fascitelli and vested
100% on December 31, 2002. The extended employment agreement does not permit
diversification, allows settlement of the deferred compensation obligation by
delivery of these shares only, and permits the deferred delivery of these
shares. The value of these shares was amortized ratably over the one year
vesting period as compensation expense.
Pursuant to the Company's annual compensation review in February 2002 with
Joseph Macnow, the Company's Chief Financial Officer, the Compensation Committee
approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable
federal rate of 4.65% per annum and due January 1, 2006. The loan, which was
funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002
exercise of options to purchase 225,000 shares of the Company's common stock.
The loan is collateralized by assets with a value of not less than two times the
loan amount. As a result of the decline in the value of the options, Mr. Macnow
supplemented the collateral with cash and marketable securities.
One other executive officer of the Company has a loan outstanding pursuant
to an employment agreement totaling $1,500,000 at December 31, 2002. The loan
matures in April 2005 and bears interest at the applicable Federal rate provided
(4.5% at December 31, 2002).
-83-
TRANSACTIONS WITH AFFILIATES AND OFFICERS AND TRUSTEES OF THE COMPANY
Alexander's
The Company owns 33.1% of Alexander's. Mr. Roth and Mr. Fascitelli are
Officers and Directors of Alexander's, the Company provides various services to
Alexander's in accordance with management, development and leasing agreements
and the Company has made loans to Alexander's aggregating $119,000,000 at
December 31, 2002. These agreements and the loans are described in Note 4 to the
Company's consolidated financial statements - Investments in Partially-Owned
Entities in this annual report on form 10-K.
The Company constructed a $16.3 million community facility and
low-income residential housing development (the "30th Street Venture"), in
order to receive 163,728 square feet of transferable development rights,
generally referred to as "air rights". The Company donated the building to a
charitable organization. The Company sold 106,796 square feet of these air
rights to third parties at an average price of $120 per square foot. An
additional 28,821 square feet of air rights was sold to Alexander's at a
price of $120 per square foot for use at Alexander's 59th Street development
project (the "59th Street Project"). In each case, the Company received cash
in exchange for air rights. The Company identified third party buyers for the
remaining 28,111 square feet of air rights related to the 30th Street
Venture. These third party buyers wanted to use the air rights for the
development of two projects located in the general area of 86th Street which
was not within the required geographical radius of the construction site nor
in the same Community Board as the low-income housing and community facility
project. The 30th Street Venture asked Alexander's to sell 28,111 square feet
of the air rights it already owned to the third party buyers (who could use
them) and the 30th Street Venture would replace them with 28,111 square feet
of air rights. In October 2002, the Company sold 28,111 square feet of air
rights to Alexander's for an aggregate sales price of $3,059,000 (an average
of $109 per square foot). Alexander's then sold an equal amount of air rights
to the third party buyers for an aggregate sales price of $3,339,000 (an
average of $119 per square foot).
Interstate Properties
The Company manages and leases the real estate assets of Interstate
Properties pursuant to a management agreement for which the Company receives an
annual 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, 2002, 2001 and 2000, $1,450,000, $1,655,000,
and $1,418,000 of management fees were earned by the Company pursuant to the
management agreement.
Building Maintenance Service Company ("BMS")
On January 1, 2003, the Company acquired BMS, a company which provides
cleaning and related services primarily to the Company's Manhattan office
properties, for $13,000,000 in cash from the estate of Bernard Mendik and
certain other individuals including Mr. Greenbaum, one of the Company's
executive officers. The Company paid BMS $53,024,000, $51,280,000, and
$47,493,000 for the years ended December 31, 2002, 2001 and 2000 for services
rendered at the Company's Manhattan office properties. Although the terms and
conditions of the contracts pursuant to which these services were provided were
not negotiated at arms length, the Company believes based upon comparable
amounts charged to other real estate companies that the terms and conditions of
the contracts were fair to the Company.
Vornado Operating Company and AmeriCold Logistics
In October 1998, Vornado Operating was spun off from the Company in order
to own assets that the Company could not itself own and conduct activities that
the Company could not itself conduct. The Company granted Vornado Operating a
$75,000,000 unsecured revolving credit facility which expires on December 31,
2004. Borrowings under the revolving credit facility bear interest at LIBOR plus
3%. The Company receives a commitment fee equal to 1% per annum on the average
daily unused portion of the facility. No amortization is required to be paid
under the revolving credit facility during its term. The revolving credit
facility 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. As of December 31, 2002,
$21,989,000 was outstanding under the revolving credit facility.
-84-
Vornado Operating has disclosed that in the aggregate its investments do
not, and for the foreseeable future are not expected to, generate sufficient
cash flow to pay all of its debts and expenses. Further, Vornado Operating
states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that
its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent
Real Estate Equities, will need to restructure the leases between the Landlord
and the Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility.
On December 31, 2002, the Company and Crescent Real Estate Equities formed
a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics, the Company's tenant at the cold storage
warehouses (Temperature Controlled Logistics), for $20,000,000 in cash
(appraised value). The Company contributed cash of $8,800,000 to the joint
venture representing its 44% interest. AmeriCold Logistics used the proceeds
from the sale to repay a portion of a loan to Vornado Operating. Vornado
Operating then repaid $9,500,000 of the amount outstanding under the Company's
revolving credit facility. On December 31, 2002, the joint venture purchased
$5,720,000 of trade receivables from AmeriCold at a 2% discount, of which the
Company's share was $2,464,000.
Other
The Company owns preferred securities in Capital Trust, Inc. ("Capital
Trust") totaling $29,212,000 at December 31, 2002. Mr. Roth, the Chairman and
Chief Executive Officer of Vornado Realty Trust, is a member of the Board of
Directors of Capital Trust nominated by the Company.
On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue
to the other venture partner, an entity controlled by the late Bernard Mendik, a
former trustee and executive officer of the Company, for $60,000,000, resulting
in a gain to the Company of $12,445,000. The sale was initiated by the Company's
partner and was based on a competitive bidding process handled by an independent
broker. The Company believes that the terms of the sale was at arm's length and
were fair to the Company.
During 2002 and 2001, the Company paid approximately $147,000 and $136,000
for legal services to a firm in which one of the Company's trustees is a member.
On January 1, 2001, the Company acquired the common stock of various
preferred stock affiliates which was owned by Officers and Trustees of the
Company and converted the affiliates to taxable REIT subsidiaries. The total
acquisition price was $5,155,000. The purchase price, which was the estimated
fair value, was determined by both independent appraisal and by reference to the
individuals' pro rata share of the earnings of the preferred stock affiliates
during the three-year period that these investments were held.
-85-
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
YEAR ENDED DECEMBER 31, 2002
Cash and cash equivalents were $208,200,000 at December 31, 2002, as
compared to $265,584,000 at December 31, 2001, a $57,384,000 decrease.
Cash flow provided by operating activities of $499,825,000 was primarily
comprised of (i) income of $323,447,000, (ii) adjustments for non-cash items of
$322,185,000, partially offset by (iii) the net change in operating assets and
liabilities of $38,239,000. The adjustments for non-cash items were comprised of
(i) a cumulative effect of change in accounting principle of $30,129,000, (ii)
amortization of Officer's deferred compensation expense of $27,500,000, (iii)
depreciation and amortization of $205,826,000, (iv) minority interest of
$140,584,000, (v) the write-off of $6,874,000 of 20 Times Square pre-development
costs, (vi) impairment losses on Primestone of $35,757,000, partially offset by
(vii) the effect of straight-lining of rental income of $36,478,000, (viii)
equity in net income of partially-owned entities and income applicable to
Alexander's of $74,111,000 and (ix) amortization of below market leases, net of
$12,634,000.
Net cash used in investing activities of $24,117,000 was comprised of
(i) recurring capital expenditures of $52,728,000, (ii) non-recurring capital
expenditures of $42,227,000, (iii) development and redevelopment expenditures
of $63,619,000, (iv) investment in notes and mortgages receivable of
$56,935,000, (v) investments in partially-owned entities of $100,882,000,
(vi) acquisitions of real estate of $23,665,000, (vii) cash restricted,
primarily mortgage escrows of $21,471,000 partially offset by proceeds from
(viii) distributions from partially-owned entities of $126,077,000, (ix)
repayments on notes receivable of $124,500,000 and (x) proceeds from the sale
of marketable securities of $87,896,000.
Net cash used in financing activities of $533,092,000 was primarily
comprised of (i) dividends paid on common shares of $314,419,000, (ii)
dividends paid on preferred shares of $23,167,000, (iii) distributions to
minority partners of $146,358,000, (iv) repayments of borrowings of
$731,238,000, (v) redemption of perpetual preferred units of $25,000,000,
partially offset by proceeds from (vi) the issuance of common shares of
$56,453,000, (vii) proceeds from borrowings of $628,335,000, of which
$499,280,000 was from the issuance of the Company's senior unsecured notes on
June 24, 2002, and (viii) the exercise of employee share options of
$26,272,000.
Below are the details of capital expenditures, leasing commissions and
development and redevelopment expenditures for the year ended December 31, 2002.
(amounts in thousands)
New York Merchandise
Capital Expenditures: Total City Office CESCR Retail Mart Other
--------- ----------- --------- --------- ----------- ---------
Expenditures to maintain the assets:
Recurring....................................... $ 27,881 $ 9,316 $ 13,686 $ 1,306 $ 2,669 $ 904
Non-recurring................................... 35,270 6,840 16,455 -- 11,975 --
--------- --------- --------- --------- --------- ---------
$ 63,151 $ 16,156 $ 30,141 $ 1,306 $ 14,644 $ 904
========= ========= ========= ========= ========= =========
Tenant improvements:
Recurring....................................... $ 24,847 $ 12,017 $ 5,842 $ 2,309 $ 4,679 --
Non-recurring................................... 6,957 2,293 4,664 -- -- --
--------- --------- --------- --------- --------- ---------
$ 31,804 $ 14,310 $ 10,506 $ 2,309 $ 4,679 --
========= ========= ========= ========= ========= =========
Leasing Commissions:
Recurring....................................... $ 14,345 $ 8,854 $ 4,416 $ 353 $ 614 $ 108
Non-recurring................................... 4,205 2,067 2,138 -- -- --
--------- --------- --------- --------- --------- ---------
$ 18,550 $ 10,921 $ 6,554 $ 353 $ 614 $ 108
========= ========= ========= ========= ========= =========
Total Capital Expenditures and Leasing Commissions:
Recurring....................................... $ 67,073 $ 30,187 $ 23,944 $ 3,968 $ 7,962 $ 1,012
Non-recurring................................... 46,432 11,200 23,257 -- 11,975 --
--------- --------- --------- --------- --------- ---------
$ 113,505 $ 41,387 $ 47,201 $ 3,968 $ 19,937 $ 1,012
========= ========= ========= ========= ========= =========
Development and Redevelopment Expenditures:
Palisades-Fort Lee, NJ......................... $ 16,750 $ -- $ -- $ -- $ -- $ 16,750
640 Fifth Avenue............................... 16,749 16,749 -- -- -- --
435 7th Avenue................................. 12,353 12,353 -- -- -- --
Other.......................................... 17,767 12,664 1,496 (596)(1) 1,529 2,674
--------- --------- --------- --------- --------- ---------
$ 63,619 $ 41,766 $ 1,496 $ (596) $ 1,529 $ 19,424
========= ========= ========= ========= ========= =========
- ----------
(1) Includes reimbursements from tenants for expenditures incurred in the prior
year.
-86-
Capital expenditures are categorized as follows:
Recurring -- capital improvements expended to maintain a property's
competitive position within the market and tenant improvements and
leasing commissions for costs to re-lease expiring leases or renew or
extend existing leases.
Non-recurring -- capital improvements completed in the year of
acquisition and the following two years which were planned at the time
of acquisition and tenant improvements and leasing commissions for space
which was vacant at the time of acquisition of a property.
Development and redevelopment expenditures include all hard and soft costs
associated with the development or redevelopment of a property, including tenant
improvements, leasing commissions and capitalized interest and operating costs
until the property is substantially complete and ready for its intended use.
ACQUISITIONS
Acquisitions of individual properties are recorded as acquisitions of real
estate assets. Acquisitions of businesses are accounted for under the purchase
method of accounting. The purchase price for property acquisitions and
businesses acquired is allocated to acquired assets and assumed liabilities
using their relative fair values as of the acquisition date based on valuations
and other studies. Initial valuations are subject to change until such
information is finalized no later than 12 months from the acquisition date.
CHARLES E. SMITH COMMERCIAL REALTY L.P.
On January 1, 2002, the Company completed the combination of Charles E.
Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the
combination, Vornado owned a 34% interest in CESCR. The consideration for the
remaining 66% of CESCR was approximately $1,600,000,000, consisting of 15.6
million newly issued Vornado Operating Partnership units and approximately
$1 billion of debt (66% of CESCR's total debt). The purchase price paid by
the Company was determined based on the weighted average closing price of the
equity issued to CESCR unitholders for the period beginning two business days
before and ending two business days after the date the acquisition was agreed
to and announced on October 19, 2001. The Company also capitalized as part of
the basis of the assets acquired approximately $32,000,000 for third party
acquisition related costs, including advisory, legal and other professional
fees that were contemplated at the time of the acquisition. The operations of
CESCR are consolidated into the accounts of the Company beginning January 1,
2002. Prior to this date the Company accounted for its 34% interest on the
equity method. See page 84 for unaudited pro forma financial information for
the year ended December 31, 2001.
CRYSTAL GATEWAY ONE
On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which is approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod and members of the Smith and Kogod families,
trustees of the Company, in exchange for approximately 325,700 newly issued
Vornado Operating Partnership units (valued at $13,679,000) and the assumption
of $58,500,000 of debt. The building is located in the Crystal City complex in
Arlington, Virginia where the Company already owns 24 office buildings
containing over 6.9 million square feet, which it acquired on January 1, 2002,
in connection with the Company's acquisition of CESCR. The operations of Crystal
Gateway One are consolidated into the accounts of the Company from the date of
acquisition.
BUILDING MAINTENANCE SERVICE COMPANY ("BMS")
On January 1, 2003, the Company acquired BMS, a company which provides
cleaning and related services primarily to the Company's Manhattan office
properties, for $13,000,000 in cash from the estate of Bernard Mendik and
certain other individuals including Mr. Greenbaum, one of the Company's
executive officers.
LAS CATALINAS MALL
On September 23, 2002, the Company increased its interest in the Las
Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by
acquiring the 50% of the mall and 25% of the Kmart anchor store it did not
already own. The purchase price was $48,000,000, including $32,000,000 of
indebtedness. The Las Catalinas Mall, which opened in 1997, contains 492,000
square feet, including a 123,000 square foot Kmart and a 138,000 square foot
Sears owned by the tenant.
-87-
MONMOUTH MALL
On October 10, 2002, a joint venture in which the Company has a 50%
interest, acquired the Monmouth Mall, an enclosed super regional shopping
center located in Eatontown, New Jersey containing approximately 1.5 million
square feet, including four department stores, three of which aggregating
731,000 square feet are owned by the tenants. The purchase price was
approximately $164,700,000, including transaction costs of $4,400,000. The
Company made a $7,000,000 common equity investment in the venture and
provided it with $23,500,000 of preferred equity yielding 14%. The venture
financed the purchase of the Mall with $135,000,000 of floating rate debt at
LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000,000, a three year
term and two one-year extension options. The Company's investment in the
Monmouth will be accounted for under the equity method as the Company does
not have unilateral control over the joint venture.
CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES
On December 31, 2002, the Company and Crescent Real Estate Equities formed
a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics', the Company's tenant at the cold storage
warehouses (Temperature Controlled Logistics) for $20,000,000 in cash (appraised
value). The Company contributed cash of $8,800,000 to the joint venture
representing its 44% interest.
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. 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 shares, 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.
-88-
YEAR ENDED DECEMBER 31, 2001
Cash flow provided by operating activities of $387,685,000 was primarily
comprised of (i) income of $263,738,000, (ii) adjustments for non-cash items of
$131,832,000, and (iii) the net change in operating assets and liabilities of
$19,374,000. The adjustments for non-cash items were primarily comprised of (i)
a cumulative effect of change in accounting principle of $4,110,000, (ii) the
write-off of the Company's remaining equity investments in technology companies
of $16,513,000, (iii) the write-off of its entire net investment of $7,374,000
in the Russian Tea Room, (iv) depreciation and amortization of $123,862,000, (v)
minority interest of $112,363,000, partially offset by (vi) the effect of
straight-lining of rental income of $27,230,000, and (vii) equity in net income
of partially-owned entities and income applicable to Alexander's of
$106,330,000.
Net cash used in investing activities of $79,722,000 was primarily
comprised of (i) recurring capital expenditures of $41,093,000, (ii)
non-recurring capital expenditures of $25,997,000, (iii) development and
redevelopment expenditures of $145,817,000, (iv) investment in notes and
mortgages receivable of $83,879,000, (v) investments in partially-owned entities
of $109,332,000, (vi) acquisitions of real estate of $11,574,000, offset by,
(vii) proceeds from the sale of real estate of $162,045,000, and (viii)
distributions from partially-owned entities of $114,218,000.
Net cash used in financing activities of $179,368,000 was primarily
comprised of (i) proceeds from borrowings of $554,115,000, (ii) proceeds from
the issuance of common shares of $377,193,000, (iii) proceeds from the issuance
of preferred units of $52,673,000, offset by, (iv) repayments of borrowings of
$835,257,000, (v) dividends paid on common shares of $201,813,000, (vi)
dividends paid on preferred shares of $35,547,000, and (vii) distributions to
minority partners of $98,544,000.
Below are the details of capital expenditures, leasing commissions and
development and redevelopment expenditures.
($ in thousands) Funded by the Company
---------------------------------------------------------
New York Merchandise CESCR
Capital Expenditures: Total City Office Retail Mart Other (34% Interest)
--------- ----------- --------- ----------- --------- --------------
Expenditures to maintain the assets:
Recurring....................................... $ 14,423 $ 7,684 $ 1,253 $ 5,287 $ 199 $ 3,121
Non-recurring................................... 20,751 13,635 -- 7,116 -- 6,678
--------- --------- --------- --------- --------- ---------
$ 35,174 $ 21,319 $ 1,253 $ 12,403 $ 199 $ 9,799
========= ========= ========= ========= ========= =========
Tenant Improvements:
Recurring....................................... $ 26,670 $ 21,452 $ 271 $ 4,858 $ 89 $ 5,979
Non-recurring................................... 5,246 5,246 -- -- -- 190
--------- --------- --------- --------- --------- ---------
$ 31,916 $ 26,698 $ 271 $ 4,858 $ 89 $ 6,169
========= ========= ========= ========= ========= =========
Leasing Commissions:
Recurring....................................... $ 19,536 $ 18,546 $ 336 $ 381 $ 273 $ 1,142
Non-recurring................................... 7,902 7,902 -- -- -- 28
--------- --------- --------- --------- --------- ---------
$ 27,438 $ 26,448 $ 336 $ 381 $ 273 $ 1,170
========= ========= ========= ========= ========= =========
Total Capital Expenditures and Leasing
Commissions:
Recurring....................................... $ 60,629 $ 47,682 $ 1,860 $ 10,526 $ 561 $ 10,242
Non-recurring................................... $ 33,899 $ 26,783 $ -- $ 7,116 $ -- $ 6,896
Development and Redevelopment Expenditures:
Palisades--Fort Lee, NJ........................ $ 66,173 $ -- $ -- $ -- $ 66,173 $ --
Market Square on Main Street................... 29,425 -- -- 29,425 -- --
Other.......................................... 50,219 25,703 6,378 4,350 13,788 14,067
--------- --------- --------- --------- --------- ---------
$ 145,817 $ 25,703 $ 6,378 $ 33,775 $ 79,961 $ 14,067
========= ========= ========= ========= ========= =========
-89-
YEAR ENDED DECEMBER 31, 2000
Cash flow provided by operating activities of $249,921,000 was primarily
comprised of (i) income of $233,991,000 and (ii) adjustments for non-cash items
of $66,557,000 offset by (iii) the net change in operating assets and
liabilities of $39,102,000 and (iv) the net gain on sale of real estate of
$10,965,000. The adjustments for non-cash items were primarily comprised of (i)
depreciation and amortization of $99,846,000 and (ii) minority interest of
$102,374,000, partially offset by (iii) the effect of straight-lining of rental
income of $32,206,000 and (iv) equity in net income of partially-owned entities
and income applicable to Alexander's of $104,017,000.
Net cash used in investing activities of $699,375,000 was primarily
comprised of (i) capital expenditures of $171,782,000, (ii) investment in notes
and mortgages receivable of $144,225,000, (iii) acquisitions of real estate of
$199,860,000, (iv) investments in partially-owned entities of $99,974,000, (v)
cash restricted of $183,788,000, of which $173,500,000 represents funds escrowed
in connection with a mortgage financing, partially offset by (vi) proceeds from
the sale of real estate of $47,945,000 and distributions from partially-owned
entities of $68,799,000. Below are the details of acquisitions of real estate,
investments in partially-owned entities, investments in notes and mortgages
receivable and capital expenditures.
($ in thousands)
Debt Value of Units
Acquisitions of Real Estate: Cash Assumed Issued Investment
--------- ---------- ------------- -------------
Student Housing Complex (90% Interest)................ $ 6,660 $ 17,640 $ -- $ 24,300
33 North Dearborn Street.............................. 16,000 19,000 -- 35,000
7 West 34th Street.................................... 128,000 -- -- 128,000
L.A. Mart............................................. 44,000 10,000 -- 54,000
Other................................................. 5,200 -- -- 5,200
--------- ---------- ------------- -------------
$ 199,860 $ 46,640 $ -- $ 246,500
========= ========== ============= =============
Investments in Partially-Owned Entities:
Vornado Ceruzzi Joint Venture (80% interest).......... $ 21,940 $ -- $ -- $ 21,940
Additional investment in Newkirk Joint Ventures....... 1,334 -- 9,192 10,526
Loan to Alexander's................................... 15,000 -- -- 15,000
Alexander's - increase in investment to 33% 3,400 -- -- 3,400
Funding of Development Expenditures:
Fort Lee (75% interest)............................. 10,400 -- -- 10,400
Park Laurel (80% interest).......................... 47,900 -- -- 47,900
--------- ---------- ------------- -------------
$ 99,974 $ -- $ 9,192 $ 109,166
========= ========== ============= =============
Investments in Notes and Mortgages receivable:
Loan to NorthStar Partnership L.P..................... $ 65,000 $ -- $ -- $ 65,000
Loan to Primestone Investment Partners, L.P........... 62,000 -- -- 62,000
Advances to Vornado Operating Company................. 15,251 -- -- 15,251
Other................................................. 1,974 -- -- 1,974
--------- ---------- ------------- -------------
$ 144,225 $ -- $ -- $ 144,225
========= ========== ============= =============
New York Merchandise
Capital expenditures: Total City Office Retail Mart Other
---------- ----------- -------- ----------- --------
Expenditures to maintain the assets....... $ 33,113 $ 15,661 $ 414 $ 11,437 $ 5,601
Tenant allowances......................... 60,850 51,017 3,307 6,301 225
---------- --------- -------- -------- --------
Total recurring capital expenditures..... 93,963 66,678 3,721 17,738 5,826
Redevelopment and development
expenditures............................ 63,348 40,124 3,600 19,624 --
Corporate................................. 14,471 -- -- -- 14,471
---------- --------- -------- -------- --------
$ 171,782 $ 106,802 $ 7,321 $ 37,362 $ 20,297
========== ========= ======== ======== ========
In addition to the expenditures noted above, the Company recorded leasing
commissions of $26,133,000 in the year ended December 31, 2000, of which
$24,333,000 was attributable to New York City Office properties, $647,000 was
attributable to Retail properties and $1,153,000 was attributable to Merchandise
Mart properties.
Net cash provided by financing activities of $473,813,000 was primarily
comprised of (i) proceeds from borrowings of $1,195,108,000, (ii) proceeds from
issuance of preferred units of $204,750,000, partially offset by, (iii)
repayments of borrowings of $633,655,000, (iv) dividends paid on common shares
of $168,688,000 (v) dividends paid on preferred shares of $35,815,000, and (vi)
distributions to minority partners of $80,397,000.
-90-
FUNDS FROM OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Funds from operations was $407,173,000 in the year ended December 31,
2002, compared to $377,693,000 in the prior year, an increase of $29,480,000.
Funds from operations includes certain items which affect comparability
totaling $41,216,000(1) and $12,903,000(1) for the years ended December 31,
2002 and 2001. Funds from operations before these items and after minority
interest was $448,389,000 in the year ended December 31, 2002, compared to
$390,596,000 in the prior year, a $57,793,000 increase over the prior year,
or a 1.5% increase on a per share basis.
The following table reconciles funds from operations and net income:
($ in thousands) For the Year Ended December 31,
--------------------------------
2002 2001
----------- -----------
Net income applicable to common shares................... $ 209,736 $ 227,233
Cumulative effect of a change in accounting principle.... 30,129 4,110
Depreciation and amortization of real property........... 195,808 119,568
Straight-lining of property rentals for
rent escalations, net of a $4,071 allowance in 2002. (27,295) (24,314)
Amortization of below market leases, net................. (12,634) --
Leasing fees received in excess of income
recognized.......................................... 1,318 1,954
Appreciation of securities held in officer's deferred
compensation trust.................................. -- 3,023
Net gain on sale of 570 Lexington Avenue through a
partially-owned entity.............................. -- (12,445)
Net gain from condemnation proceeding.................... -- (3,050)
Proportionate share of adjustments to equity
in net income of partially-owned entities
to arrive at funds from operations:
Depreciation and amortization of real property.. 51,881 65,588
Net gain on sales of real estate................ (3,431) (6,298)
Other........................................... 835 (371)
Minority interest in excess of preferential
distributions....................................... (45,324) (16,810)
----------- -----------
401,023 358,188
Series A preferred shares................................ 6,150 19,505
----------- -----------
Funds from operations--diluted (2)....................... 407,173 377,693
=========== ===========
The number of shares used for determining funds from operations per share is as
follows:
(in thousands) For the Year Ended December 31,
-------------------------------
2002 2001
--------- ---------
Weighted average shares used for determining
diluted income per share............................ 109,669 92,073
Series A preferred shares........................... 2,931 7,646
--------- ---------
Shares used for determining diluted
funds from operations per share (2)................. 112,600 99,719
========= =========
-91-
Funds from operations does not represent cash generated from operating
activities in accordance with accounting principles generally accepted in the
United States of America 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 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 from this
definition to adjust primarily for the (i) effect of straight-lining of property
rentals for rent escalations and leasing fee income and (ii) the exclusion of
income arising from the amortization of acquired below market leases, net of
above market leases.
(1) Certain items which affect comparability included in funds from
operations above are as follows:
For the Year Ended December 31,
-------------------------------
2002 2001
----------- ----------
Primestone foreclosure and impairment losses..... $ (35,757) $ --
Amortization of officer's deferred compensation.. (27,500) --
Gains on sale of marketable securities........... 12,346 --
Gain on sale of residential condominium units.... 2,156 15,657
Gains on transfer of mortgages................... 2,096 --
Gains on sale of air rights...................... 1,688 --
Write-off of investments in technology companies. -- (16,513)
Write-off of net investment in Russian Tea Room.. -- (7,374)
Donations to Twin Towers and NYC Fireman's Funds. -- (1,250)
Write-off of 20 Times Square pre-development
costs (2002) and World Trade Center
acquisition costs (2001)....................... (6,874) (5,223)
Minority interest................................ 10,629 1,800
----------- -----------
$ (41,216) $ (12,903)
=========== ===========
(2) Assuming all of the convertible units of the Operating Partnership were
converted to shares, the minority interest in partnership earnings would
not be deducted in calculating funds from operations and the shares used in
calculating funds from operations per share would be increased to reflect
the conversion. Funds from operations per share would not change. The
following table reconciles funds from operations as shown above, to the
Operating Partnership's funds from operations for the years ended December
31, 2002 and 2001:
($ in thousands) For the Year Ended December 31,
-------------------------------
2002 2001
--------- ---------
Funds from operations, as above.............. $ 407,173 $ 377,693
Addback of minority interest reflected as
equity in the Operating Partnership......... 105,001 52,678
--------- ---------
Operating Partnership funds from operations.. $ 512,174 $ 430,371
========= =========
The number of shares to be used for determining Operating Partnership funds
from operations per share is as follows:
(shares/units in thousands)
Shares used for determining diluted funds from
operations per share, as above.............. 112,600 99,719
Convertible units:
Non-Vornado owned Class A units.......... 21,269 6,140
Class D units............................ -- --
B-1 units................................ 822 822
B-2 units................................ 411 411
C-1 units................................ 855 855
E-1 units................................ 5,680 5,680
--------- ---------
Shares used for determining Operating
Partnership diluted funds from operations
per share................................... 141,637 113,627
========= =========
-92-
Below are the cash flows provided by (used in) operating, investing and
financing activities:
($ in thousands) For the Year Ended December 31,
---------------------------------
2002 2001
----------- -----------
Operating activities................. $ 499,825 $ 387,685
=========== ===========
Investing activities................. $ (24,117) $ (79,722)
=========== ===========
Financing activities................. $ (533,092) $ (179,368)
=========== ===========
CERTAIN FUTURE CASH REQUIREMENTS
For 2003, the Company has budgeted approximately $197.3 million for capital
expenditures (excluding acquisitions) and leasing commissions as follows:
Temperature
($ and square feet in thousands) New York CESCR Merchandise Controlled
Total Office Office Retail Mart Logistics Other
---------- --------- --------- ------ --------- ---------- -------
Expenditures to maintain
the assets.................. $ 71,900 $ 23,100 $ 21,800 $ -- $ 20,200 $ 5,700(1) $ 1,100(2)
========== ========= ========= ======== ========= ======== =======
Tenant improvements........... $ 98,195 $ 32,500 $ 40,300 $ 5,095 $ 20,300 $ -- $ --
========== ========= ========= ======== ========= ======== =======
Per square foot............ $ 38.33 16.36 $ 7.34 $ 15.32
========= ========= ======== =========
Leasing Commissions........... $ 27,221 $ 15,000 $ 9,100 $ 821 $ 2,300
========== ========= ========= ======== =========
Per square foot............ $ 17.69 $ 3.69 -- $ 1.74
========= ========= ======== =========
Total Capital Expenditures and
Leasing Commissions........... $ 197,316 $ 70,600 $ 71,200 $ 5,916 $ 42,800 $ 5,700 $ 1,100
========== ========= ========= ======== ========= ======== =======
Square feet leased............ 848 2,463 694 1,325
========= ========= ======== =========
- ----------
(1) Represents the Company's 60% share of the Vornado Crescent Portland
Partnership's obligation to fund $9,500 of capital expenditures per annum.
(2) Primarily for the Hotel Pennsylvania.
In addition to the capital expenditures reflected above, the Company is
currently engaged in certain development and redevelopment projects for which it
has budgeted approximately $230.9 million to be expended as outlined in the
"Development and Redevelopment Projects" section of Item 1--Business. The $230.9
million does not include amounts for other projects which are also included in
the "Development and Redevelopment Projects" section of Item 1 -Business, as no
budgets for them have been finalized. There can be no assurance that any of the
above projects will be ultimately completed, completed on time or completed for
the budgeted amount.
No cash requirements have been budgeted for the capital expenditures and
amortization of debt of Alexander's, The Newkirk MLP, or any other entity that
is partially owned by the Company. These investees are expected to fund their
own cash requirements.
-93-
FINANCING ACTIVITIES AND CONTRACTUAL OBLIGATIONS
Below is a schedule of the Company's contractual obligations and
commitments at December 31, 2002:
($ in thousands)
2 - 3 4 - 5
Contractual Cash Obligations: Total 1 Year Years Years Thereafter
----------- ----------- --------- ----------- -----------
Mortgages and Notes Payable....... $ 3,537,720(1) $ 449,526(1) $ 705,589 $ 550,321 $ 1,832,284
Senior Unsecured Notes due 2007... 533,600 -- -- 533,600 --
Unsecured Revolving Credit Facility -- -- -- -- --
Operating Leases.................. 1,029,171 15,347 29,285 29,559 954,980
----------- ----------- --------- ----------- -----------
Total Contractual Cash Obligations $ 5,100,491 $ 464,873 $ 734,874 $ 1,113,480 $ 2,787,264
=========== =========== ========= =========== ===========
Commitments:
Standby Letters of Credit......... $ 16,779 $ 16,779 $ -- $ -- $ --
Other Guarantees.................. -- -- -- -- --
----------- ----------- --------- ----------- -----------
Total Commitments............... $ 16,779 $ 16,779 $ -- $ -- $ --
=========== =========== ========= =========== ===========
----------
(1) Includes $153,659, which is offset by an equivalent amount of cash
held in a restricted mortgage escrow amount.
The Company is reviewing various alternatives for the repayment or
refinancing of debt coming due during 2003. The Company has $1 billion available
under its revolving credit facility which matures in July 2003 and a number of
properties which are unencumbered.
The Company's credit facility contains customary conditions precedent to
borrowing such as the bring down of customary representations and warranties as
well as compliance with financial covenants such as minimum interest coverage
and maximum debt to market capitalization. The facility provides for higher
interest rates in the event of a decline in the Company's ratings below
Baa3/BBB. This facility also contains customary events of default which could
give rise to acceleration and include such items as failure to pay interest or
principal and breaches of financial covenants such as maintenance of minimum
capitalization and minimum interest coverage.
The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 do not expressly exclude coverage for hostile acts, except for acts of war.
Since September 11, 2001, insurance companies have for the most part excluded
terrorist acts from coverage in all risk policies. The Company has generally
been unable to obtain all risk insurance which includes coverage for terrorist
acts for policies it has renewed since September 11, 2001, for each of its
businesses. In 2002, the Company obtained $200,000,000 of separate coverage for
terrorist acts for each of its New York City Office, Washington, D.C. Office,
Retail and Merchandise Mart businesses and $60,000,000 for its Temperature
Controlled Logistics business. Therefore, the Company is at risk for financial
loss in excess of these limits for terrorist acts (as defined), which loss could
be material.
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. The Company has received
correspondence from four lenders regarding terrorism insurance coverage, which
the Company has responded to. In these letters the lenders took the position
that under the agreements governing the loans provided by these lenders the
Company was required to maintain terrorism insurance on the properties securing
the various loans. The aggregate amount of borrowings under these loans as of
December 31, 2002 was approximately $770.4 million, and there was no additional
borrowing capacity. Subsequently, the Company obtained an aggregate of $360
million of separate coverage for "terrorist acts". To date, one of the lenders
has acknowledged to the Company that it will not raise any further questions
based on the Company's terrorism insurance coverage in place, and the other
three lenders have not raised any further questions regarding the Company's
insurance coverage. If lenders insist on greater coverage for these risks, it
could adversely affect the Company's ability to finance and/or refinance its
properties and to expand its portfolio.
-94-
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law. Under this new legislation, through 2004 (with a possible extension
through 2005), regulated insurers must offer coverage in their commercial
property and casualty policies (including existing policies) for losses
resulting from defined "acts of terrorism". The Company cannot currently
anticipate whether the scope and cost of such coverage will be commercially
reasonable. As a result of the legislation, in February 2003 the Company
obtained $300 million of per occurrence coverage for terrorist acts for its
New York City Office, Washington, D.C. Office and Merchandise Mart businesses,
of which $240 million is for Certified Acts, as defined in the legislation. The
Company maintains $200 million and $60 million of separate aggregate coverage
that it had in 2002 for each of its Retail and Temperature Controlled Logistics
businesses (which has been renewed as of January 1, 2003). The Company's current
Retail property insurance carrier has advised the Company that there will be an
additional premium of approximately $11,000 per month through the end of the
policy term (June 30, 2003) for "Acts of Terrorism" coverage, as defined in the
new legislation and that the situation may change upon renewal.
In addition, many of the Company's non-recourse mortgages contain debt
service covenants which if not satisfied could require cash collateral. These
covenants are not "ratings" related.
In conjunction with the closing of Alexander's Lexington Avenue
construction loan on July 3, 2002, the Company agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of all project costs in excess of a stated budget, as defined in the
loan agreement, if not funded by Alexander's.
CORPORATE
On June 24, 2002, the Company completed an offering of $500,000,000
aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December 15th,
commencing December 15, 2002. The net proceeds of approximately $496,300,000
were used to repay the mortgages on 350 North Orleans, Two Park Avenue, the
Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into
interest rate swaps that effectively converted the interest rate on the
$500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a
floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate
(2.5% if set on December 31, 2002).
On February 25, 2002, the Company sold 884,543 common shares to a
closed-end fund and 514,200 shares to a unit investment trust based on the
closing price of $42.96 on the NYSE. The net proceeds to the Company were
approximately $57,042,000.
The Company has an effective shelf registration under which the Company can
offer an aggregate of approximately $895,479,000 of equity securities and
Vornado Realty L.P. can offer an aggregate of $500,720,000 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.
-95-
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS NO. 141 - BUSINESS COMBINATIONS
SFAS No. 141 - BUSINESS COMBINATIONS requires companies to account for the
value of leases acquired and the costs of acquiring such leases separately
from the value of the real estate for all acquisitions subsequent to July 1,
2001. Accordingly, the Company has evaluated the leases in place for (i) the
remaining 66% of CESCR it did not previously own which it acquired on January
1, 2002, (ii) the remaining 50% of the Las Catalinas Mall it did not
previously own which it acquired on September 23, 2002 and (iii) a 50%
interest in the Monmouth Mall which it acquired on October 10, 2002; to
determine whether they were acquired at market, above market or below market.
The Company's evaluations were based on (i) the differences between
contractual rentals and the estimated market rents over the applicable lease
term discounted back to the date of acquisition utilizing a discount rate
adjusted for the credit risk associated with the respective tenants and (ii)
the estimated cost of acquiring such leases giving effect to the Company's
history of providing tenant improvements and paying leasing commissions.
As a result of its evaluations, as of December 31, 2002, the Company has
recorded a deferred credit of $48,430,000 representing the value of acquired
below market leases, deferred charges of $15,976,000 for the value of
acquired above market leases and $3,621,000 for origination costs. In
addition, in the year ended December 31, 2002 the Company has recognized
property rentals of $12,634,000 for the amortization of below market leases
net of above market leases, and depreciation expense of $1,214,000 for the
amortization of the lease origination costs and additional building
depreciation resulting from the reallocation of the purchase price of the
applicable properties.
SFAS NO. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead be
subject to periodic impairment testing. SFAS No. 142 provides specific guidance
for impairment testing of these assets and removes them from the scope of SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Company's
goodwill balance on December 31, 2001 of $30,129,000 consisted of $14,639,000
related to the Hotel Pennsylvania acquisition and $15,490,000 related to the
acquisition of the Temperature Controlled Logistics businesses.
Prior to January 1, 2002, the Company performed impairment testing in
accordance with SFAS 121. The Company reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of an asset may not
be recoverable. Given the decrease in the estimated market values and the
deteriorating performance of Hotel Pennsylvania and Temperature Controlled
Logistics, the Company performed a review for recoverability estimating the
future cash flows expected to result from the use of the assets and their
eventual disposition. As of December 31, 2001, the sum of the expected cash
flows (undiscounted and without interest charges) exceeded the carrying amounts
of goodwill, and therefore no impairments were recognized.
Upon adoption of SFAS 142 on January 1, 2002, the Company tested the
goodwill for impairment at the reporting level unit utilizing the prescribed
two-step method. The first step compared the fair value of the reporting unit
(determined based on a discounted cash flow approach) with its carrying amount.
As the carrying amount of the reporting unit exceeded its fair value, the second
step of the impairment test was performed to measure the impairment loss. The
second step compared the implied fair value of goodwill with the carrying amount
of the goodwill. As the carrying amounts of the goodwill exceeded the fair
values, on January 1, 2002 the Company wrote-off all of the goodwill of the
Hotel and the Temperature Controlled Logistics business as an impairment loss
totaling $30,129,000. The write-off has been reflected as a cumulative effect of
change in accounting principle on the income statement. Earnings allocable to
the minority interest has been reduced by their pro-rata share of the write-off
of goodwill.
Previously reported "Income before gains on sale of real estate and
cumulative effect of change in accounting principle" and "Net income applicable
to common shares" for the year ended December 31, 2001 would have been
approximately $972,000 higher, or $2.35 and $2.48 per diluted share, if such
goodwill was not amortized in the prior year.
-96-
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS AND SFAS NO. 144
- - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002).
SFAS No. 143 requires the recording of the fair value of a liability for an
asset retirement obligation in the period which it is incurred. SFAS No. 144
supersedes current accounting literature and now provides for a single
accounting model for long-lived assets to be disposed of by sale and requires
discontinued operations presentation for disposals of a "component" of an
entity. The adoption of these statements did not have a material effect on the
Company's financial statements; however under SFAS No. 144, if the Company were
to dispose of a material operating property, such property's results of
operations will have to be separately disclosed as discontinued operations in
the Company's financial statements.
SFAS NO. 145 - RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.
13, AND TECHNICAL CORRECTIONS
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44,
AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145
requires, among other things, (i) that the modification of a lease that results
in a change of the classification of the lease from capital to operating under
the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction
and (ii) the reporting of gains or losses from the early extinguishment of debt
as extraordinary items only if they met the criteria of Accounting Principles
Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS. The rescission of
SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is
effective for transactions occurring on or after May 15, 2002. The adoption of
this statement did not have a material effect on the Company's financial
statements.
SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
anticipate that the adoption of this statement will have a material effect on
the Company's financial statements.
SFAS NO. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123
On August 7, 2002, the Company announced that beginning January 1, 2003, it
will expense the cost of employee stock options in accordance with the SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued
SFAS No. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 to amend the transition and
disclosure provisions of SFAS No. 123. Specifically, SFAS No. 123, as amended,
would permit two additional transition methods for entities that adopt the fair
value method of accounting for stock based employee compensation. The Company
will adopt SFAS No. 123 prospectively by valuing and accounting for employee
stock options granted in 2003 and thereafter. The Company will utilize a
binomial valuation model and appropriate market assumptions to determine the
value of each grant. Stock-based compensation expense will be recognized on a
straight-line basis over the vesting period of the respective grants.
FASB Interpretation No. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS.
In November 2002, the FASB issued Interpretation No. 45 - GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. The initial recognition
and measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company believes that the adoption of this interpretation will not have a
material effect to the Company's financial statements.
-97-
FASB Interpretation No. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 - CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, which requires the consolidation of an entity by an
enterprise (i) if that enterprise, known as a "primary beneficiary", has a
variable interest that will absorb a majority of the entity's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur, or both and (ii) if the entity is a variable interest entity, as defined
by Interpretation No. 46. An entity is a variable interest entity if (a) the
total equity investment at risk in the entity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties or (b) the equity investors do not have the
characteristics of a controlling financial interest in the entity.
Interpretation No. 46 applies immediately to all variable interest entities
created after January 31, 2003. For variable interest entities created by public
companies before February 1, 2003, Interpretation No. 46 must be applied no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The initial determination of whether an entity is
a variable interest entity shall be made as of the date at which a primary
beneficiary becomes involved with the entity and reconsidered as of the date one
of three triggering events described by Interpretation No. 46 occur. The Company
does not believe that the adoption of this Interpretation will have a material
effect on its financial statements.
-98-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to fluctuations in market interest rates. Market
interest rates are highly sensitive to many factors, beyond the control of the
Company. Various financial vehicles exist which would allow management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings.
As of December 31, 2002 the Company has entered into an interest rate swap
described in footnote 1 to the table below. Management may engage in additional
hedging strategies in the future, depending on management's analysis of the
interest rate environment and the costs and risks of such strategies.
The Company's exposure to a change in interest rates on its wholly-owned
and partially-owned debt (all of which arises out of non-trading activity) is as
follows:
($ in thousands, except per share amounts)
2002 2001
--------------------------------------------- -------------------------------
Weighted Effect of 1% Weighted
December 31, Average Change In December 31, Average
Balance Interest Rate Base Rates Balance Interest Rate
------------ ------------- ------------ ------------ -------------
Wholly-owned debt:
Variable rate.................. $ 1,358,126(1) 2.69% $ 12,045(2) $ 1,182,605 3.39%
Fixed rate..................... 2,713,194 7.17% -- 1,294,568 7.53%
------------ ------------ ------------
$ 4,071,320 5.61% 12,045 $ 2,477,173
============ ------------ ============
Debt of partially-owned entities:
Variable rate.................. $ 131,100 4.54% 1,310(3) $ 85,516 5.63%
Fixed rate..................... 917,008 8.41% -- 1,234,019 8.29%
------------ ------------ ------------
$ 1,048,108 7.92% 1,310 $ 1,319,535
============ ------------ ============
Minority interest..................... (2,805)
------------
Total decrease in the
Company's annual net income......... $ 10,550
============
Per share-diluted................ $ .10
============
- ----------
(1) Includes $533,600 for the Company's senior unsecured notes due 2007, as the
Company entered into interest rate swap agreements that effectively
converted the interest rate from a fixed rate of 5.625% to a floating rate
of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate (2.18% if
set on December 31, 2002). In accordance with SFAS 133, as amended,
accounting for these swaps requires the Company to fair value the debt at
each reporting period. At December 31, 2002, the fair value adjustment was
$34,245, and is included in the balance of the senior unsecured notes
above.
(2) The effect of a 1% change in wholly-owned debt base rates shown above
excludes $153,659 of variable rate mortgage financing, cross-collateralized
by the Company's 770 Broadway and 595 Madison Avenue office properties, as
the proceeds are held in a restricted mortgage escrow account which bears
interest at the same rate as the loans.
(3) The effect of a 1% change in partially-owned debt base rates shown above is
calculated after including $45,229 representing the Company's 14.9% share
of Prime Group Realty L.P.'s ("PGE") outstanding variable rate debt as at
September 30, 2002. PGE has not filed its annual report on Form 10-K for
the year ended December 31, 2002, prior to the filing of this annual report
on Form 10-K.
The fair value of the Company's debt, 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, exceeds the
aggregate carrying amount by approximately $178,566,000 at December 31, 2002.
-99-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.................................................................................. 101
Consolidated Balance Sheets at December 31, 2002 and 2001..................................................... 102
Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 ...................... 103
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001, and 2000......... 104
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000................... 106
Notes to Consolidated Financial Statements.................................................................... 107
-100-
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have audited the accompanying consolidated balance sheets of Vornado
Realty Trust as of December 31, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. Our audits also included the
financial statement schedules listed in the Index at Item 15. 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
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.
As discussed in Note 2 to the consolidated financial statements, on
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets."
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 6, 2003
-101-
VORNADO REALTY TRUST
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2002 2001
----------- -----------
(Amounts in thousands, except share and per share amounts)
ASSETS
Real estate, at cost:
Land................................................................................. $ 1,491,808 $ 895,831
Buildings and improvements........................................................... 5,948,255 3,480,249
Development costs and construction in progress....................................... 51,965 258,357
Leasehold improvements and equipment................................................. 67,666 55,774
----------- -----------
Total........................................................................... 7,559,694 4,690,211
Less accumulated depreciation and amortization....................................... (737,426) (506,225)
----------- -----------
Real estate, net................................................................ 6,822,268 4,183,986
Cash and cash equivalents, including U.S. government obligations under
repurchase agreements of $33,393 and $15,235 ........................................ 208,200 265,584
Escrow deposits and restricted cash..................................................... 263,125 204,463
Marketable securities................................................................... 42,525 126,774
Investments and advances to partially-owned entities, including
Alexander's of $193,879 and $188,522 ................................................ 997,711 1,270,195
Due from officers....................................................................... 20,643 18,197
Accounts receivable, net of allowance for doubtful accounts
of $13,887 and $8,831................................................................ 65,754 47,406
Notes and mortgage loans receivable..................................................... 86,581 258,555
Receivable arising from the straight-lining of rents, net of allowance of $4,071 in 2002 240,449 202,754
Other assets............................................................................ 270,923 199,429
----------- -----------
$ 9,018,179 $ 6,777,343
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes and mortgages payable............................................................. $ 3,537,720 $ 2,477,173
Senior Unsecured Notes due 2007, at fair value ($34,245 in excess of
accreted note balance in 2002)....................................................... 533,600 --
Revolving credit facility............................................................... -- --
Accounts payable and accrued expenses................................................... 202,756 179,597
Officers compensation payable........................................................... 16,997 6,708
Deferred credit......................................................................... 59,362 11,940
Other liabilities....................................................................... 3,030 51,895
----------- -----------
Total liabilities.................................................................... 4,353,465 2,727,313
----------- -----------
Minority interest of unitholders in the Operating Partnership........................... 2,037,358 1,479,658
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred shares of beneficial interest:
no par value per share; authorized 70,000,000 shares;
Series A: liquidation preference $50.00 per share; issued and outstanding
1,450,623 and 5,520,435 shares................................................... 72,535 276,024
Series B: liquidation preference $25.00 per share; issued and outstanding
3,400,000 shares................................................................. 81,805 81,805
Series C: liquidation preference $25.00 per share; issued and outstanding
4,600,000 shares................................................................. 111,148 111,148
Common shares of beneficial interest: $.04 par value per share; authorized,
200,000,000 shares; issued and outstanding 108,629,736 and 99,035,023 shares....... 4,320 3,961
Additional capital................................................................... 2,481,414 2,162,512
Distributions in excess of net income................................................ (169,629) (95,647)
----------- -----------
2,581,593 2,539,803
Deferred compensation shares earned but not yet delivered............................ 66,660 38,253
Deferred compensation shares issued but not yet earned............................... (2,629) --
Accumulated other comprehensive loss................................................. (13,564) (2,980)
Due from officers for purchase of common shares of beneficial interest............... (4,704) (4,704)
----------- -----------
Total shareholders' equity...................................................... 2,627,356 2,570,372
----------- -----------
$ 9,018,179 $ 6,777,343
=========== ===========
See notes to consolidated financial statements.
-102-
VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
(Amounts in thousands, except per share amounts)
Revenues:
Rentals ................................................................. $ 1,248,903 $ 841,999 $ 695,078
Expense reimbursements .................................................. 159,978 133,114 120,056
Other income (including fee income from
related parties of $1,450, $1,655, and $1,418) ...................... 26,189 10,660 10,838
------------ ------------ ------------
Total revenues .............................................................. 1,435,070 985,773 825,972
------------ ------------ ------------
Expenses:
Operating ............................................................... 541,596 398,969 318,360
Depreciation and amortization ........................................... 205,826 123,862 99,846
General and administrative .............................................. 98,458 72,572 47,911
Amortization of officer's deferred compensation expense ................. 27,500 -- --
Costs of acquisitions and development not consummated ................... 6,874 5,223 --
------------ ------------ ------------
Total expenses .............................................................. 880,254 600,626 466,117
------------ ------------ ------------
Operating income ............................................................ 554,816 385,147 359,855
Income applicable to Alexander's ............................................ 29,653 25,718 17,363
Income from partially-owned entities ........................................ 44,458 80,612 86,654
Interest and other investment income ........................................ 31,685 54,385 32,926
Interest and debt expense (including amortization of deferred financing
costs of $8,339, $8,458, and $7,298) .................................... (239,525) (173,076) (171,398)
Net loss on disposition of wholly-owned and partially-owned assets other than
real estate ............................................................. (17,471) (8,070) --
Minority interest:
Perpetual preferred unit distributions .................................. (72,500) (70,705) (62,089)
Minority limited partnership earnings ................................... (64,899) (39,138) (38,320)
Partially-owned entities ................................................ (3,185) (2,520) (1,965)
------------ ------------ ------------
Income before gains on sale of real estate and cumulative effect of change in
accounting principle .................................................... 263,032 252,353 223,026
Gains on sale of real estate ................................................ -- 15,495 10,965
Cumulative effect of change in accounting principle ......................... (30,129) (4,110) --
------------ ------------ ------------
Net income .................................................................. 232,903 263,738 233,991
Preferred share dividends (including accretion of issuance
expenses of $958 in 2001 and $2,875 in 2000) ............................ (23,167) (36,505) (38,690)
------------ ------------ ------------
NET INCOME applicable to common shares ...................................... $ 209,736 $ 227,233 $ 195,301
============ ============ ============
INCOME PER COMMON SHARE - BASIC:
Income before gains on sale of real estate and cumulative
effect of change in accounting principle ............................ $ 2.26 $ 2.42 $ 2.14
Gains on sale of real estate .......................................... -- .17 .12
Cumulative effect of change in accounting
principle ........................................................... (.28) (.04) --
------------ ------------ ------------
Net income per common share ........................................... 1.98 2.55 2.26
============ ============ ============
INCOME PER COMMON SHARE - DILUTED:
Income before gains on sale of real estate and cumulative
effect of change in accounting principle ............................ $ 2.18 $ 2.34 $ 2.08
Gains on sale of real estate .......................................... -- .17 .12
Cumulative effect of change in accounting principle ................... (.27) (.04) --
------------ ------------ ------------
Net income per common share ........................................... $ 1.91 $ 2.47 $ 2.20
============ ============ ============
See notes to consolidated financial statements.
-103-
VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DISTRIBUTIONS
PREFERRED COMMON ADDITIONAL IN EXCESS OF
SHARES SHARES CAPITAL NET INCOME
----------- ----------- ----------- -------------
(Amounts in thousands, except per share amounts)
BALANCE JANUARY 1, 2000 ............................... $ 478,585 $ 3,453 $ 1,696,557 $ (116,979)
Net Income ............................................ -- -- -- 233,991
Dividends paid on Preferred Shares
Series A Preferred Shares
($3.25 per share) ................................. -- -- -- (21,689)
Series B Preferred Shares
($2.125 per share) ................................ -- -- -- (7,225)
Series C Preferred Shares
($2.125per share) ................................. -- -- -- (9,776)
Dividends paid on common shares
($1.97 per share) ................................... -- -- -- (168,688)
Common shares issued under
employees' share plan ............................... -- 15 9,913 --
Redemption of units for common shares ................. -- 3 1,789 --
Accretion of issuance expenses on
preferred shares .................................... 2,875 -- -- --
Common shares issued in connection
with dividend reinvestment plan ..................... -- 1 1,025 --
Change in unrealized net loss
on securities available for sale .................... -- -- -- --
Appreciation of securities held
in officer's deferred compensation
trust ............................................... -- -- -- --
Forgiveness of amount due
from officers ....................................... -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 ............................ 481,460 3,472 1,709,284 (90,366)
Net Income ............................................ -- -- -- 263,738
Dividends paid on Preferred Shares
Series A Preferred Shares
($3.25 per share) ................................. -- -- -- (19,505)
Series B Preferred Shares
($2.125 per share) ................................ -- -- -- (7,225)
Series C Preferred Shares
($2.125 per share) ................................ -- -- -- (9,775)
Dividends paid on common shares
($2.32 per share) ................................... -- -- -- (201,813)
Dividends payable on common shares
($.31 per share) .................................... -- -- -- (30,701)
Common shares issued, net of shelf
registration costs of $260 .......................... -- 391 376,542 --
Common shares issued under
employees' share plan ............................... -- 12 9,947 --
Conversion of Series A Preferred Shares
to common shares .................................... (13,441) 15 13,426 --
Redemption of units for common shares ................. -- 70 52,017 --
Accretion of issuance expenses on
preferred shares .................................... 958 -- -- --
Common shares issued in connection
with dividend reinvestment plan ..................... -- 1 1,296 --
Change in unrealized net loss
on securities available for sale .................... -- -- -- --
Deferred compensation shares earned
but not yet delivered ............................... -- -- -- --
Pension obligations
-- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 ............................ $ 468,977 $ 3,961 $ 2,162,512 $ (95,647)
=========== =========== =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
LOSS OTHER EQUITY INCOME
------------- ---------- -------------- -------------
(Amounts in thousands, except per share amounts)
BALANCE JANUARY 1, 2000 ............................... $ (1,448) $ (4,800) $ 2,055,368
Net Income ............................................ -- -- 233,991 $ 233,991
Dividends paid on Preferred Shares
Series A Preferred Shares
($3.25 per share) ................................. -- -- (21,689) --
Series B Preferred Shares
($2.125 per share) ................................ -- -- (7,225) --
Series C Preferred Shares
($2.125per share) ................................. -- -- (9,776) --
Dividends paid on common shares
($1.97 per share) ................................... -- -- (168,688) --
Common shares issued under
employees' share plan ............................... -- -- 9,928 --
Redemption of units for common shares ................. -- -- 1,792 --
Accretion of issuance expenses on
preferred shares .................................... -- -- 2,875 --
Common shares issued in connection
with dividend reinvestment plan ..................... -- -- 1,026 --
Change in unrealized net loss
on securities available for sale .................... (18,399) -- (18,399) (18,399)
Appreciation of securities held
in officer's deferred compensation
trust ............................................... (579) -- (579) (579)
Forgiveness of amount due
from officers ....................................... -- 96 96 --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 ............................ (20,426) (4,704) 2,078,720 $ 215,013
===========
Net Income ............................................ -- -- 263,738 $ 263,738
Dividends paid on Preferred Shares
Series A Preferred Shares
($3.25 per share) ................................. -- -- (19,505) --
Series B Preferred Shares
($2.125 per share) ................................ -- -- (7,225) --
Series C Preferred Shares
($2.125 per share) ................................ -- -- (9,775) --
Dividends paid on common shares
($2.32 per share) ................................... -- -- (201,813) --
Dividends payable on common shares
($.31 per share) .................................... -- -- (30,701) --
Common shares issued, net of shelf
registration costs of $260 .......................... -- -- 376,933 --
Common shares issued under
employees' share plan ............................... -- -- 9,959 --
Conversion of Series A Preferred Shares
to common shares .................................... -- -- -- --
Redemption of units for common shares ................. -- -- 52,087 --
Accretion of issuance expenses on
preferred shares .................................... -- -- 958 --
Common shares issued in connection
with dividend reinvestment plan ..................... -- -- 1,297 --
Change in unrealized net loss
on securities available for sale .................... 18,178 -- 18,178 18,178
Deferred compensation shares earned
but not yet delivered ............................... -- 38,253 38,253 --
Pension obligations ................................... (732) -- (732) (732)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 ............................ $ (2,980) $ 33,549 $ 2,570,372 $ 281,184
=========== =========== =========== ===========
See notes to consolidated financial statements.
-104-
VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DISTRIBUTIONS
PREFERRED COMMON ADDITIONAL IN EXCESS OF
SHARES SHARES CAPITAL NET INCOME
----------- ----------- ----------- -------------
(Amounts in thousands, except per share amounts)
BALANCE, DECEMBER 31, 2001 ............................ $ 468,977 $ 3,961 $ 2,162,512 $ (95,647)
Net Income ............................................ -- -- -- 232,903
Dividends paid on Preferred Shares
Series A Preferred Shares
($3.25 per share) ................................... -- -- -- (6,167)
Series B Preferred Shares
($2.125 per share) .................................. -- -- -- (7,225)
Series C Preferred Shares
($2.125 per share) .................................. -- -- -- (9,775)
Net proceeds from issuance of common
shares .............................................. -- 56 56,397 --
Conversion of Series A Preferred
shares to common shares ............................. (203,489) 225 203,264 --
Deferred compensation shares earned but not
yet delivered ...................................... -- 2 2,627 --
Dividends paid on common shares
($2.97 per share, including $.31
for 2001) ........................................... -- -- -- (314,419)
Reversal of dividends payable on common
shares in 2001 ($.31 per share) .................... -- -- -- 30,701
Common shares issued under
employees' share plan ............................... -- 36 24,349 --
Redemption of units for common shares ................. -- 38 30,380 --
Common shares issued in connection
with dividend reinvestment plan ..................... -- 2 1,885 --
Change in unrealized net loss
on securities available for sale .................... -- -- -- --
Other non-cash changes, primarily
pension obligations ................................. -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 ............................ $ 265,488 $ 4,320 $ 2,481,414 $ (169,629)
=========== =========== =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
LOSS OTHER EQUITY INCOME
------------- ---------- -------------- -------------
BALANCE, DECEMBER 31, 2001 ............................ $ (2,980) $ 33,549 $ 2,570,372 $ 281,184
===========
Net Income ............................................ -- -- 232,903 $ 232,903
Dividends paid on Preferred Shares
Series A Preferred Shares
($3.25 per share) ................................... -- -- (6,167) --
Series B Preferred Shares
($2.125 per share) .................................. -- -- (7,225) --
Series C Preferred Shares
($2.125 per share) .................................. -- -- (9,775) --
Net proceeds from issuance of common
shares .............................................. -- -- 56,453 --
Conversion of Series A Preferred
shares to common shares ............................. -- -- -- --
Deferred compensation shares .......................... -- 25,778 28,407 --
Dividends paid on common shares
($2.97 per share, including $.31
for 2001) ........................................... -- -- (314,419) --
Reversal of dividends payable on common
shares in 2001 ($.31 per share) .................... -- -- 30,701 --
Common shares issued under
employees' share plan ............................... -- -- 24,385 --
Redemption of units for common shares ................. -- -- 30,418 --
Common shares issued in connection
with dividend reinvestment plan ..................... -- -- 1,887 --
Change in unrealized net loss
on securities available for sale .................... (8,936) -- (8,936) (8,936)
Other non-cash changes, primarily
pension obligations ................................. (1,648) -- (1,648) (1,648)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 ............................ $ (13,564) $ 59,327 $ 2,627,356 $ 222,319
=========== =========== =========== ===========
See notes to consolidated financial statements.
-105-
VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 232,903 $ 263,738 $ 233,991
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle ............ 30,129 4,110 --
Minority interest .............................................. 140,584 112,363 102,374
Amortization of officer's deferred compensation ................ 27,500 -- --
Net loss on dispositions of wholly-owned and
partially-owned assets other than real estate ................ 17,471 8,070 --
Costs of acquisitions and development not consummated .......... 6,874 5,223 --
Gains on sale of real estate ................................... -- (15,495) (10,965)
Depreciation and amortization (including debt issuance costs) .. 205,826 123,862 99,846
Straight-lining of rental income ............................... (36,478) (27,230) (32,206)
Amortization of below market leases, net ....................... (12,634) -- --
Equity in income of Alexander's ................................ (29,653) (25,718) (17,363)
Equity in income of partially-owned entities ................... (44,458) (80,612) (86,654)
Changes in operating assets and liabilities .................... (38,239) 19,374 (39,102)
------------ ------------ ------------
Net cash provided by operating activities .............................. 499,825 387,685 249,921
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development costs and construction in progress ..................... (63,619) (145,817) (35,701)
Acquisitions of real estate and other .............................. (23,665) (11,574) (199,860)
Additions to real estate ........................................... (96,018) (67,090) (136,081)
Investments in partially-owned entities ............................ (100,882) (109,332) (99,974)
Proceeds from sale of real estate .................................. -- 162,045 47,945
Investments in notes and mortgage loans receivable ................. (56,935) (83,879) (144,225)
Repayment of notes and mortgage loans receivable ................... 124,500 64,206 5,222
Cash restricted, primarily mortgage escrows ........................ (21,471) 9,896 (183,788)
Distributions from partially-owned entities ........................ 126,077 114,218 68,799
Real estate deposits ............................................... -- -- 4,819
Purchases of marketable securities ................................. -- (14,325) (26,531)
Proceeds from sale or maturity of securities available for sale .... 87,896 1,930 --
------------ ------------ ------------
Net cash used in investing activities .................................. (24,117) (79,722) (699,375)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ........................................... 628,335 554,115 1,195,108
Repayments of borrowings ........................................... (731,238) (835,257) (633,655)
Costs of refinancing debt .......................................... (3,970) (3,394) (18,445)
Redemption of perpetual preferred units ............................ (25,000) -- --
Proceeds from issuance of preferred units .......................... -- 52,673 204,750
Proceeds from issuance of common shares ............................ 56,453 377,193 --
Dividends paid on common shares .................................... (314,419) (201,813) (168,688)
Dividends paid on preferred shares ................................. (23,167) (35,547) (35,815)
Distributions to minority partners ................................. (146,358) (98,594) (80,397)
Exercise of share options .......................................... 26,272 11,256 10,955
------------ ------------ ------------
Net cash (used in) provided by financing activities .................... (533,092) (179,368) 473,813
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................... (57,384) 128,595 24,359
Cash and cash equivalents at beginning of year ......................... 265,584 136,989 112,630
------------ ------------ ------------
Cash and cash equivalents at end of year ............................... $ 208,200 $ 265,584 $ 136,989
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest (including capitalized interest of
$6,677, $12,171 and $12,269) ..................................... $ 247,048 $ 171,166 $ 165,325
============ ============ ============
NON-CASH TRANSACTIONS:
Financing assumed in acquisitions .................................. $ 1,596,903 $ -- $ 46,640
Class A units issued in connection with acquisitions ............... 625,234 18,798 9,192
Unrealized (loss) gain on securities available for sale ............ 860 9,495 (18,399)
(Appreciation) depreciation of securities held in officer's deferred
compensation trust ............................................... -- (3,023) (579)
See notes to consolidated financial statements.
-106-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Vornado Realty Trust is a fully-integrated real estate investment trust
("REIT"). Vornado conducts its business through Vornado Realty L.P., ("the
Operating Partnership"). Vornado is the sole general partner of, and owned
approximately 79% of the common limited partnership interest in, the Operating
Partnership at February 3, 2003. 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 PROPERTIES ("OFFICE"):
(i) all or portions of 74 office properties aggregating approximately
27.7 million square feet in the New York City metropolitan area (primarily
Manhattan) and in the Washington D.C. and Northern Virginia area;
RETAIL PROPERTIES ("RETAIL"):
(ii) 62 retail properties in six states and Puerto Rico aggregating
approximately 12.5 million square feet, including 1.8 million square feet built
by tenants on land leased from the Company;
MERCHANDISE MART PROPERTIES:
(iii) 8.6 million square feet of showroom and office space, including the
3.4 million square foot Merchandise Mart in Chicago;
TEMPERATURE CONTROLLED LOGISTICS:
(iv) a 60% interest in the Vornado Crescent Portland Partnership that
owns 88 cold storage warehouses nationwide with an aggregate of approximately
441.5 million cubic feet of refrigerated space leased to AmeriCold Logistics;
OTHER REAL ESTATE INVESTMENTS:
(v) 33.1% of the outstanding common stock of Alexander's, Inc.
("Alexander's");
(vi) the Hotel Pennsylvania in New York City consisting of a hotel portion
containing 1.0 million square feet with 1,700 rooms and a commercial portion
containing .4 million square feet of retail and office space;
(vii) a 21.7% interest in The Newkirk Master Limited Partnership which
owns office, retail and industrial properties net leased primarily to credit
rated tenants, and various debt interests in such properties;
(viii) eight dry warehouse/industrial properties in New Jersey containing
approximately 2.0 million square feet; and
(ix) other investments, including interests in other real estate,
marketable securities and loans and notes receivable.
-107-
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 entities in which the Company has a 50% or
greater interest, provided that the Company exercises direct or indirect
control. All significant intercompany amounts have been eliminated. The Company
considers the guidance in APB 18, SOP 78-9 and EITF 96-16 in determining whether
it does or does not control joint ventures on a case-by-case basis, taking into
account board representation, management representation and authority and the
contractual and substantive participating rights of its partners/members. If the
approval of all of the partners/members is contractually required with respect
to major decisions, such as operating and capital budgets, the sale, exchange or
other disposition of any real property assets, the hiring of a Chief Executive
Officer, the commencement, compromise or settlement of any lawsuit, legal
proceeding or arbitration or the placement of any new or additional financing
secured by any assets of the joint venture, then the Company does not control
the venture and therefore will not consolidate the entity, despite the fact that
it may own 50% or more of the relevant entity. This is the case with respect to
Temperature Controlled Logistics, Monmouth Mall, 400 North LaSalle, MartParc
Orleans, MartParc Wells, 825 Seventh Avenue and Starwood Ceruzzi. If the Company
is able to unilaterally make major decisions for the partially owned entity and
owns an interest greater than 50%, the Company has control and therefore
consolidates the entity. The Company accounts for investments under the equity
method when the Company's ownership interest is more than 20% but less than 50%
and the Company does not exercise direct or indirect control. When
partially-owned investments are in partnership form, the 20% threshold may be
reduced. For all other investments, the Company uses the cost method. Equity
investments are recorded initially at cost and subsequently adjusted for the
Company's share of the net income or loss and cash contributions and
distributions to or from these entities.
Prior to January 1, 2001, the Company's equity interests in partially-owned
entities also included investments in preferred stock affiliates (corporations
in which the Company owned all of the preferred stock and none of the common
equity). Ownership of the preferred stock entitled the Company to substantially
all of the economic benefits in the preferred stock affiliates. On January 1,
2001, the Company acquired the common stock of the preferred stock affiliates,
which was owned by the Officers and Trustees of the Company, and converted them
to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel
Pennsylvania and the management companies (which provide services to the
Company's business segments and operate the Trade Show business of the
Merchandise Mart division) have been consolidated beginning January 1, 2001.
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.
RECLASSIFICATIONS: Certain prior year balances have been reclassified in
order to conform to current year presentation.
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. For
redevelopment of existing operating properties, the net book value of the
existing property under redevelopment plus the cost for the construction and
improvements incurred in connection with the redevelopment are capitalized to
the extent the capitalized costs of the property do not exceed the estimated
fair value of the redeveloped property when complete. If the cost of the
redeveloped property, including the undepreciated net book value of the property
carried forward, exceeds the estimated fair value of redeveloped property, the
excess is charged to expense. 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, which approximates the useful lives of the assets. Additions to real
estate include interest expense capitalized during construction of $6,677,000,
$12,171,000, and $12,269,000 for the years ended December 31, 2002, 2001, and
2000.
-108-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Upon acquisitions of real estate, the Company assesses the fair value of
acquired assets (including land, buildings, tenant improvements, acquired
above and below market leases and the origination cost of acquired in-place
leases in accordance with SFAS No. 141) and acquired liabilities, and
allocate purchase price based on these assessments. The Company assesses fair
value based on estimated cash flow projections that utilize appropriate
discount and capitalization rates and available market information. Estimates
of future cash flows are based on a number of factors including the
historical operating results, known trends, and market/economic conditions
that may affect the property. The Company's properties are reviewed for
impairment if events or circumstances change indicating that the carrying
amount of the assets may not be recoverable. If the Company incorrectly
estimates the values at acquisition or the undiscounted cash flows, initial
allocations of purchase price and future impairment charges may be different.
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 escrowed under loan agreements
and cash restricted in connection with an officer's deferred compensation
payable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company periodically evaluates the
collectibility of amounts due from tenants and maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of
tenants to make required payments under the lease agreement. The Company also
maintains an allowance for receivables arising from the straight-lining of
rents. This receivable arises from earnings recognized in excess of amounts
currently due under the lease agreements. Management exercises judgment in
establishing these allowances and considers payment history and current
credit status in developing these estimates.
MARKETABLE SECURITIES: The Company has classified debt and equity
securities which it intends to hold for an indefinite period of time
(including warrants to acquire equity securities) as securities available for
sale; equity securities it intends to buy and sell on a short term basis as
trading securities; and preferred stock investments as securities held to
maturity. Unrealized gains and losses on trading securities are included in
earnings. Unrealized gains and losses on securities available for sale are
included as a component of shareholders' equity and other comprehensive
income. Realized gains or losses on the sale of securities are recorded based
on specific identification. A portion of the Company's preferred stock
investments are redeemable and accounted for in accordance with EITF 99-20
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." Income is recognized
by applying the prospective method of adjusting the yield to maturity based
on an estimate of future cash flows. If the value of the investment based on
the present value of the future cash flows is less than the Company's
carrying amount, the investments will be written-down to fair value through
earnings. Investments in securities of non-publicly traded companies are
reported at cost, as they are not considered marketable under SFAS No. 115.
At December 31, 2002 and 2001, marketable securities had an aggregate cost
of $41,665,000 and $117,284,000 and an aggregate market value of $42,525,000 and
$126,774,000 (of which $0 and $13,888,000 represents trading securities;
$2,020,000 and $49,763,000 represents securities available for sale; and
$40,505,000 and $63,123,000 represent securities held to maturity). Gross
unrealized gains and losses were $860,000 and $0 at December 31, 2002, and
$14,738,000 and $5,243,000 at December 31, 2001.
NOTES AND MORTGAGE LOANS RECEIVABLE: The Company's policy is to record
mortgages and notes receivable at the stated principal amount less any discount
or premiums. The Company accretes or amortizes any discounts or premiums over
the life of the related loan receivable utilizing the effective interest method.
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 or, as a practical expedient, to the value
of the collateral if the loan is collateral dependent. Interest on impaired
loans is recognized on a cash basis.
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, which approximates the effective
interest rate method, in accordance with the terms of the agreements to which
they relate.
-109-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. The fair value of the Company's debt is approximately
$178,566,000 in excess of the aggregate carrying amount at December 31, 2002.
Such fair value estimates are not necessarily indicative of the amounts that
would be realized upon disposition of the Company's financial instruments.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Statement of Financial
Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES (SFAS 133), as amended and interpreted, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As required
by SFAS 133, the Company records all derivatives on the balance sheet at fair
value. The accounting for changes in the fair value of derivatives depends on
the intended use of the derivative and the resulting designation. Derivatives
used to hedge the exposure to changes in the fair value of an asset, liability,
or firm commitment attributable to a particular risk, such as interest rate
risk, are considered fair value hedges. Derivatives used to hedge the exposure
to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. The cumulative effect of
implementing SFAS No. 133 on January 1, 2001, was $4,110,000.
For derivatives designated as fair value hedges, changes in the fair value
of the derivative and the hedged item related to the hedged risk are recognized
in earnings. For derivatives designated as cash flow hedges, the effective
portion of changes in the fair value of the derivative is initially reported in
other comprehensive income (outside of earnings) and subsequently reclassified
to earnings when the hedged transaction affects earnings, and the ineffective
portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the effectiveness of each hedging relationship by
comparing the changes in fair value or cash flows of the derivative hedging
instrument with the changes in fair value or cash flows of the designated hedged
item or transaction. For derivatives not designated as hedges, changes in fair
value are recognized in earnings. Additionally, the Company does not use
derivatives for trading or speculative purposes and currently does not have any
derivatives that are not designated as hedges.
On June 27, 2002, the Company entered into interest rate swaps that
effectively converted the interest rate on the $500,000,000 senior unsecured
notes due 2007 from a fixed rate of 5.625% to a floating rate of LIBOR plus
..7725%, based upon the trailing 3 month LIBOR rate (2.18% at December 31,
2002). These swaps were designated and effective as fair value hedges, with a
fair value of $34,245,000 at December 31, 2002, which is included in Other
Assets on the Company's balance sheet. Accounting for these swaps also
requires the Company to recognize changes in the fair value of the debt
during each reporting period. At December 31, 2002, the fair value adjustment
of $34,245,000, based on the fair value of the swaps, is included in the
balance of the Senior Unsecured Notes. Because the hedging relationship
qualifies for the "short-cut" method, the hedge ineffectiveness on these fair
value hedges was recognized during 2002.
REVENUE RECOGNITION: The Company has the following revenue sources and
revenue recognition policies:
Base Rents -- income arising from tenant leases. These rents are recognized over
the non-cancelable term of the related leases on a straight-line basis which
includes the effects of rent steps and free rent abatements under the leases.
Percentage Rents -- income arising from retail tenant leases which are
contingent upon the sales of the tenant exceeding a defined threshold. These
rents are recognized in accordance with SAB 101, which states that this income
is to be recognized only after the contingency has been removed (i.e. sales
thresholds have been achieved).
Hotel Revenues -- income arising from the operation of the Hotel Pennsylvania
which consists of rooms revenue, food and beverage revenue, and banquet revenue.
Income is recognized when rooms are occupied. Food and beverage and banquet
revenue are recognized when the services have been rendered.
Trade Show Revenues -- income arising from the operation of trade shows,
including rentals of booths. This revenue is recognized in accordance with the
booth rental contracts when the trade shows have occurred.
Expense Reimbursement Income -- income arising from tenant leases which provide
for the recovery of all or a portion of the operating expenses and real estate
taxes of the respective property. This income is accrued in the same periods as
the expenses are incurred. Contingent rents are not recognized until realized.
-110-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 90% 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 will
distribute to its shareholders 100% of its taxable income and therefore, no
provision for Federal income taxes is required. Dividend distributions for the
years ended December 31, 2002, 2001 and 2000, were characterized for Federal
income tax purposes as ordinary income.
The Company owns stock in corporations that have elected to be treated for
Federal income tax purposes, as taxable REIT subsidiaries ("TRS"). The value of
the combined TRS stock cannot and does not exceed 20% of the value of the
Company's total assets. A TRS is taxable on its net income at regular corporate
tax rates. For the 2002 tax year, the total income tax is approximately
$1,430,000.
The following table reconciles net income to estimated taxable income for
the year ended December 31, 2002.
Net income applicable to common shares............................. $ 232,903,000
Depreciation and amortization...................................... 69,360,000
Straight-line rent adjustments..................................... (30,687,000)
Book to tax differences in earnings of partially-owned entities.... (21,958,000)
Amortization of officer's deferred compensation.................... 22,916,000
Primestone impairment loss ........................................ 15,071,000
Stock option expense............................................... (12,400,000)
Amortization of acquired below market leases, net of above market leases 10,528,000
Other.............................................................. (15,837,000)
-------------
Estimated taxable income........................................... $ 269,896,000
=============
The net basis of the Company's assets and liabilities for tax purposes
is approximately $2,822,000,000, lower than the amount reported for financial
statement purposes.
At December 31, 2002, the Company had a capital loss carryover of
approximately $73,000,000. The capital loss carryover is available to offset
future capital gains that would otherwise be required to be distributed as
dividends to shareholders.
AMOUNTS PER SHARE: Basic earnings per share is computed based on weighted
average shares outstanding. Diluted earnings per share considers the effect of
outstanding options, warrants and convertible or redeemable securities.
STOCK BASED COMPENSATION: In 2002 and prior years, the Company accounted
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. See Note 8 - Employees' Share
Option Plan for details of the Company's outstanding employee share options and
the related pro forma stock-based employee compensation cost. Effective January
1, 2003, the Company adopted SFAS No. 123 "Accounting for Stock Based
Compensation" as amended by SFAS No. 148 "Accounting for Stock - Based
Compensation - Transition and Disclosure." The Company will adopt SFAS No. 123
prospectively by valuing and accounting for employee stock options granted in
2003 and thereafter. The Company will utilize a binomial valuation model and
appropriate market assumptions to determine the value of each grant. Stock-based
compensation expense will be recognized on a straight-line basis over the
vesting period of the respective grants.
In addition to employee stock option grants, the Company has also granted
restricted shares to certain of its employees that vest over a three to five
year period. The Company records the value of each restricted share award as
stock-based compensation expense based on the Company's closing stock price on
the NYSE on the date of grant on a straight-line basis over the vesting period.
As of December 31, 2002, the Company has 250,927 restricted shares or rights to
receive restricted shares outstanding to employees of the Company, excluding
626,566 shares issued to the Company's President in connection with his
employment agreement. The Company recognized $1,868,000 of stock-based
compensation expense in 2002 for the portion of these shares that vested during
the year.
-111-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 141 - BUSINESS COMBINATIONS requires companies to account for the
value of leases acquired and the costs of acquiring such leases separately
from the value of the real estate for all acquisitions subsequent to July 1,
2001. Accordingly, the Company has evaluated the leases in place for (i) the
remaining 66% of CESCR it did not previously own which it acquired on January
1, 2002, (ii) the remaining 50% of the Las Catalinas Mall it did not
previously own which it acquired on September 23, 2002 and (iii) a 50%
interest in the Monmouth Mall which it acquired on October 10, 2002, to
determine whether they were acquired at market, above market or below market.
The Company's evaluations were based on (i) the differences between
contractual rentals and the estimated market rents over the applicable lease
term discounted back to the date of acquisition utilizing a discount rate
adjusted for the credit risk associated with the respective tenants and (ii)
the estimated cost of acquiring such leases giving effect to the Company's
history of providing tenant improvements and paying leasing commissions.
As a result of its evaluations, as of December 31, 2002, the Company has
recorded a deferred credit of $48,430,000 representing the value of acquired
below market leases, deferred charges of $15,976,000 for the value of
acquired above market leases and $3,621,000 for origination costs, of which
the tenant improvements are included in buildings and improvements. In
addition, in the year ended December 31, 2002 the Company has recognized
property rentals of $12,634,000 for the amortization of below market leases
net of above market leases and depreciation expense of $11,214,000 for the
amortization of the lease origination costs and additional building
depreciation resulting from the reallocation of the purchase price of the
applicable properties.
SFAS NO. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead be
subject to periodic impairment testing. SFAS No. 142 provides specific guidance
for impairment testing of these assets and removes them from the scope of SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Company's
goodwill balance on December 31, 2001 of $30,129,000 consisted of $14,639,000
related to the Hotel Pennsylvania acquisition and $15,490,000 related to the
acquisition of the Temperature Controlled Logistics businesses.
Prior to January 1, 2002, the Company performed impairment testing in
accordance with SFAS 121. The Company reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of an asset may not
be recoverable. Given the decrease in the estimated market values and the
deteriorating performance of Hotel Pennsylvania and Temperature Controlled
Logistics, the Company performed a review for recoverability estimating the
future cash flows expected to result from the use of the assets and their
eventual disposition. As of December 31, 2001, the sum of the expected cash
flows (undiscounted and without interest charges) exceeded the carrying amounts
of goodwill, and therefore no impairments were recognized.
Upon adoption of SFAS 142 on January 1, 2002, the Company tested the
goodwill for impairment at the reporting level unit utilizing the prescribed
two-step method. The first step compared the fair value of the reporting unit
(determined based on a discounted cash flow approach) with its carrying amount.
As the carrying amount of the reporting unit exceeded its fair value, the second
step of the impairment test was performed to measure the impairment loss. The
second step compared the implied fair value of goodwill with the carrying amount
of the goodwill. As the carrying amounts of the goodwill exceed the fair values,
on January 1, 2002 the Company wrote-off all of the goodwill of the Hotel and
the Temperature Controlled Logistics businesses as an impairment loss totaling
$30,129,000. The write-off has been reflected as a cumulative effect of change
in accounting principle on the income statement. Earnings allocable to the
minority interest have been reduced by their pro-rata share of the write-off of
goodwill.
Previously reported "Income before gains on sale of real estate and
cumulative effect of change in accounting principle" and "Net income applicable
to common shares" for the year ended December 31, 2001 would have been
approximately $972,000 higher, or $2.35 and $2.48 per share, if such goodwill
was not amortized in the prior year.
-112-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS AND SFAS NO. 144
- - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002).
SFAS No. 143 requires the recording of the fair value of a liability for an
asset retirement obligation in the period which it is incurred. SFAS No. 144
supersedes current accounting literature and now provides for a single
accounting model for long-lived assets to be disposed of by sale and requires
discontinued operations presentation for disposals of a "component" of an
entity. The adoption of these statements did not have a material effect on the
Company's financial statements; however under SFAS No. 144, if the Company were
to dispose of a material operating property, such property's results of
operations will have to be separately disclosed as discontinued operations in
the Company's financial statements.
SFAS NO. 145 - RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.
13, AND TECHNICAL CORRECTIONS
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44,
AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145
requires, among other things, (i) that the modification of a lease that results
in a change of the classification of the lease from capital to operating under
the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction
and (ii) the reporting of gains or losses from the early extinguishment of debt
as extraordinary items only if they met the criteria of Accounting Principles
Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS. The rescission of
SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is
effective for transactions occurring on or after May 15, 2002. The adoption of
this statement did not have a material effect on the Company's financial
statements.
SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
anticipate that the adoption of this statement will have a material effect on
the Company's financial statements.
SFAS NO. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123
On August 7, 2002, the Company announced that beginning January 1, 2003, it
will expense the cost of employee stock options in accordance with SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB
issued Statement No. 148 - Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123 to amend
the transition and disclosure provisions of SFAS No. 123. Specifically, SFAS
No. 123, as amended, would permit two additional transition methods for
entities that adopt the fair value method of accounting for stock based
employee compensation. The Company will adopt SFAS No. 123 prospectively by
valuing and accounting for employee stock options granted in 2003 and
thereafter. The Company will utilize a binomial valuation model and
appropriate market assumptions to determine the value of each grant.
Stock-based compensation expense will be recognized on a straight-line basis
over the vesting period of the respective grants.
FASB INTERPRETATION NO. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS
In November 2002, the FASB issued Interpretation No. 45 - GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. The initial recognition
and measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company believes that the adoption of this interpretation will not have a
material effect to the financial statements.
-113-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FASB INTERPRETATION NO. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 - CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, which requires the consolidation of an entity by an
enterprise (i) if that enterprise, known as a "primary beneficiary", has a
variable interest that will absorb a majority of the entity's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur, or both and (ii) if the entity is a variable interest entity, as defined
by Interpretation No. 46. An entity is a variable interest entity if (a) the
total equity investment at risk in the entity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties or (b) the equity investors do not have the
characteristics of a controlling financial interest in the entity.
Interpretation No. 46 applies immediately to all variable interest entities
created after January 31, 2003. For variable interest entities created by public
companies before February 1, 2003, Interpretation No. 46 must be applied no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The initial determination of whether an entity is
a variable interest entity shall be made as of the date at which a primary
beneficiary becomes involved with the entity and reconsidered as of the date one
of three triggering events described by Interpretation No. 46 occur. The Company
does not believe that the adoption of this Interpretation will have a material
effect on its financial statements.
-114-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS
The Company completed approximately $1,834,600,000 of real estate
acquisitions or investments in 2002 and $19,200,000 in 2001. These acquisitions
were consummated through subsidiaries or preferred stock affiliates of the
Company. Acquisitions of business 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 pro
forma effect of the individual acquisitions and in the aggregate other than
Charles E. Smith Commercial Realty, were not material to the Company's
historical results of operations.
Acquisitions of individual properties are recorded as acquisitions of real
estate assets. Acquisitions of businesses are accounted for under the purchase
method of accounting. The purchase price for property acquisitions and
businesses acquired is allocated to acquired assets and assumed liabilities
using their relative fair values as of the acquisition date based on valuations
and other studies. Initial valuations are subject to change until such
information is finalized no later than 12 months from the acquisition date.
OFFICE:
CHARLES E. SMITH COMMERCIAL REALTY INVESTMENT ("CESCR")
On January 1, 2002, the Company completed the combination of Charles E.
Smith Commercial Realty L.P. ("CESCR") with Vornado. CESCR has a dominant
market position in the Washington, D.C. and Northern Virginia area, owning
approximately 12.4 million square feet in 53 office properties as well as a
highly competent management team. In the Company's opinion, the assets were
acquired at below replacement cost and with below market leases. As a result
of the combination the Company will be in position to capitalize on the
favorable supply/demand characteristics of the Washington, D.C. office
markets. Prior to the combination, Vornado owned a 34% interest in CESCR. The
consideration for the remaining 66% of CESCR was approximately
$1,600,000,000, consisting of 15.6 million newly issued Vornado Operating
Partnership units and approximately $1 billion of debt (66% of CESCR's total
debt). The purchase price paid by the Company was determined based on the
weighted average closing price of the equity issued to CESCR unitholders for
the period beginning two business days before and ending two business days
after the date the acquisition was agreed to and announced on October 19,
2001. The Company also capitalized as part of the basis of the assets
acquired approximately $32,000,000 for third party acquisition related costs,
including advisory, legal and other professional fees that were contemplated
at the time of the acquisition.
The following table summarizes the estimated fair values of assets
acquired and liabilities assumed at January 1, 2002, the date of acquisition.
(Amounts in thousands)
Land, buildings and improvements... $1,681,000
Intangible deferred charges........ 36,000
Working capital.................... 41,000
----------
Total Assets Acquired.............. 1,758,000
----------
Mortgages and notes payable........ 1,023,000
Intangible deferred credit......... 62,000
Other liabilities.................. 34,000
----------
Total Liabilities Assumed.......... 1,119,000
----------
Net Assets Acquired................ $ 639,000
==========
The Company's estimate of the weighted average useful life of acquired
intangibles is approximately three years. This acquisition was recorded as a
business combination under the purchase method of accounting. The purchase
price was allocated to acquired assets and assumed liabilities using their
relative fair values as of January 1, 2002 based on valuations and other
studies. The operations of CESCR are consolidated into the accounts of the
Company beginning January 1, 2002. Prior to this date the Company accounted
for its 34% interest on the equity method.
The unaudited pro forma information set forth below presents the condensed
consolidated statements of income for the Company for the year ended December
31, 2001 as if the following transactions had occurred on January 1, 2001, (i)
the acquisition of CESCR described above and (ii) the Company's November 21,
2001 sale of 9,775,000 common shares and the use of proceeds to repay
indebtedness.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
For the Year Ended
December 31,
----------------------------
Pro Forma
2002 2001
------------ ------------
Revenues .......................................................... $ 1,435,070 $ 1,384,933
============ ============
Income before gains on sale of real estate and cumulative effect of
change in accounting principle .................................. $ 263,032 $ 284,420
Gains on sale of real estate ...................................... -- 15,495
Cumulative effect of change in accounting principle ............... (30,129) (4,110)
------------ ------------
Net income ........................................................ 232,903 295,805
Preferred share dividends ......................................... (23,167) (36,505)
------------ ------------
Net income applicable to common shares ............................ $ 209,736 $ 259,300
============ ============
Net income per common share - basic ............................... $ 1.98 $ 2.62
============ ============
Net income per common share - diluted ............................. $ 1.91 $ 2.55
============ ============
-115-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CRYSTAL GATEWAY ONE
On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which is approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod and members of the Smith and Kogod families,
trustees of the Company, in exchange for approximately 325,700 newly issued
Vornado Operating Partnership units (valued at $13,679,000) and the assumption
of $58,500,000 of debt. The building is located in the Crystal City complex in
Arlington, Virginia where the Company already owns 24 office buildings
containing over 6.9 million square feet, which it acquired on January 1, 2002,
in connection with the Company's acquisition of CESCR. The operations of Crystal
Gateway One are consolidated into the accounts of the Company from the date of
acquisition.
BUILDING MAINTENANCE SERVICE COMPANY
On January 1, 2003, the Company acquired the Building Maintenance Service
Company for $13,000,000 in cash, which provides cleaning and related services
and security services to office properties, including the Company's Manhattan
office properties. This company was previously owned by the estate of Bernard
Mendik and certain other individuals including Mr. Greenbaum, one of the
Company's executive officers. This acquisition was recorded as a business
combination under the purchase method of accounting.
RETAIL:
LAS CATALINAS MALL
On September 23, 2002, the Company increased its interest in the Las
Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by
acquiring the 50% of the mall and 25% of the Kmart anchor store it did not
already own. The purchase price was $48,000,000, of which $16,000,000 was paid
in cash and $32,000,000 was debt assumed. The Las Catalinas Mall, which opened
in 1997, contains 492,000 square feet, including a 123,000 square foot Kmart and
a 138,000 square foot Sears owned by the tenant. Prior to September 23, 2002,
the Company accounted for its investment on the equity method. Subsequent to
this date the operations of Las Catalinas are consolidated into the accounts of
the Company.
MONMOUTH MALL
On October 10, 2002, a joint venture in which the Company has a 50%
interest, acquired the Monmouth Mall, an enclosed super regional shopping
center located in Eatontown, New Jersey containing approximately 1.5 million
square feet, including four department stores, three of which aggregating
731,000 square feet are owned by the tenants. The purchase price was
approximately $164,700,000, including transaction costs of $4,400,000. The
Company made a $7,000,000 cash investment in the form of common equity to the
venture and provided it with cash of $23,500,000 representing preferred
equity yielding 14%. The venture financed the purchase of the Mall with
$135,000,000 of floating rate debt at LIBOR plus 2.05%, with a LIBOR floor of
2.50% on $35,000,000, a three year term and two one-year extension options.
The Company accounts for its investment on the equity method.
OTHER:
CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES
On December 31, 2002, the Company and Crescent Real Estate Equities formed
a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas
quarries from AmeriCold Logistics, the Company's tenant at the cold storage
warehouses (Temperature Controlled Logistics) facilities for $20,000,000 in cash
(appraised value). The Company contributed cash of $8,800,000 to the joint
venture representing its 44% interest. The Company accounts for its investment
in the venture on the equity method.
-116-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DISPOSITIONS:
The following table sets forth the details of sales, dispositions,
write-offs and other similar transactions for the years ended December 31, 2002,
2001 and 2000:
($ in thousands) 2002 2001 2000
---------- ---------- ----------
WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER THAN DEPRECIABLE
REAL ESTATE:
WHOLLY-OWNED ASSETS:
Gain on transfer of mortgages ..................................... $ 2,096 $ -- $ --
Net gain on sale of air rights .................................... 1,688 -- --
Gain on sale of Kinzie Park Condominium units ..................... 2,156 -- --
Net gain on sale of marketable securities ......................... 12,346 -- --
Primestone foreclosure and impairment losses ...................... (35,757) -- --
Write-off of investments in technology companies .................. -- (16,513) --
PARTIALLY-OWNED ASSETS:
After-tax net gain on sale of Park Laurel condominium units ....... -- 15,657 --
Write-off of net investment in the Russian Tea
Room ("RTR") ................................................... -- (7,374) --
Other .............................................................. -- 160 --
---------- ---------- ----------
Net loss on disposition of wholly-owned and partially-owned
assets other than real estate .................................. $ (17,471) $ (8,070) $ --
========== ========== ==========
NET GAINS ON SALE OF REAL ESTATE
Condemnation proceedings ........................................... $ -- $ 3,050 $ --
Sale of 570 Lexington Avenue ....................................... -- 12,445 --
Sale of other real estate .......................................... -- -- 10,965
---------- ---------- ----------
Net gain on sale of real estate .................................... $ -- $ 15,495 $ 10,965
========== ========== ==========
GAIN ON TRANSFER OF MORTGAGES
In the year ended December 31, 2002, the Company recorded a net gain of
approximately $2.1 million resulting from payments to the Company by third
parties that assumed certain of the Company's mortgages. Under these
transactions the Company paid to the third parties that assumed the Company's
obligations the outstanding amounts due under the mortgages and the third
parties paid the Company for the benefit of assuming the mortgages. The Company
has been released by the creditors underlying these loans.
NET GAIN ON SALE OF AIR RIGHTS
The Company constructed a $16.3 million community facility and
low-income residential housing development (the "30th Street Venture"), in
order to receive 163,728 square feet of transferable development rights,
generally referred to as "air rights". The Company donated the building to a
charitable organization. The Company sold 106,796 square feet of these air
rights to third parties at an average price of $120 per square foot. An
additional 28,821 square feet of air rights was sold to Alexander's at a
price of $120 per square foot for use at Alexander's 59th Street development
project (the "59th Street Project"). In each case, the Company received cash
in exchange for air rights. The Company identified third party buyers for the
remaining 28,111 square feet of air rights of the 30th Street Venture. These
third party buyers wanted to use the air rights for the development of two
projects located in the general area of 86th Street which was not within the
required geographical radius of the construction site nor in the same
Community Board as the low-income housing and community facility project. The
30th Street Venture asked Alexander's to sell 28,111 square feet of the air
rights it already owned to the third party buyers (who could use them) and
the 30th Street Venture would replace them with 28,111 square feet of air
rights. In October 2002, the Company sold 28,111 square feet of air rights to
Alexander's for an aggregate sales price of $3,059,000 (an average of $109
per square foot). Alexander's then sold an equal amount of air rights to the
third party buyers for an aggregate sales price of $3,339,000 (an average of
$119 per square foot).
-117-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
GAIN ON SALE OF KINZIE PARK CONDOMINIUM UNITS
The Company recognized a gain of $2,156,000 during 2002, from the sale of
residential condominiums in Chicago, Illinois.
PRIMESTONE FORECLOSURE AND IMPAIRMENT LOSSES
On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. ("Primestone"). The Company received a 1% up-front fee
and was entitled to receive certain other fees aggregating approximately 3% upon
repayment of the loan. The loan bore interest at 16% per annum. Primestone
defaulted on the repayment of this loan on October 25, 2001. The loan was
subordinate to $37,957,000 of other debt of the borrower that liened the
Company's collateral. On October 31, 2001, the Company purchased the other debt
for its face amount. The loans were secured by 7,944,893 partnership units in
Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust
(NYSE:PGE) and the partnership units are exchangeable for the same number of
common shares of PGE. The loans are also guaranteed by affiliates of Primestone.
On November 19, 2001, the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000. The participation did not meet
the criteria for "sale accounting" under SFAS 140 because Cadim was not free to
pledge or exchange the assets. Accordingly, the Company was required to account
for this transaction as a borrowing secured by the loan, rather than as a sale
of the loan by classifying the participation as an "Other Liability" and
continuing to report the outstanding loan balance at 100% in "Notes and Mortgage
Loans Receivable" on the balance sheet. Under the terms of the participation
agreement, cash payments received shall be applied (i) first, to the
reimbursement of reimbursable out-of-pocket costs and expenses incurred in
connection with the servicing, administration or enforcement of the loans after
November 19, 2001, and then to interest and fees owed to the Company through
November 19, 2001, (ii) second, to the Company and Cadim, pro rata in proportion
to the amount of interest and fees owed following November 19, 2001 and (iii)
third, 50% to the Company and 50% to Cadim as recovery of principal.
On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership
units at a foreclosure auction. The price paid for the units by application of a
portion of Primestone's indebtedness to the Company and Cadim was $8.35 per
unit, the April 30, 2002 closing price of shares of PGE on the New York Stock
Exchange. On June 28, 2002, pursuant to the terms of the participation
agreement, the Company transferred 3,972,447 of the partnership units to Cadim.
In the second quarter, in accordance with foreclosure accounting, the
Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated
based on (i) the acquisition price of the units and (ii) its valuation of the
amounts realizable under the guarantees by affiliates of Primestone, as compared
with the net carrying amount of the investment at April 30, 2002. In the third
quarter of 2002, the Company recorded a $2,229,000 write-down on its investment
based on costs expended to realize the value of the guarantees. Further, in the
fourth quarter of 2002, the Company recorded a $15,857,000 write-down of its
investment in Prime Group consisting of (i) $14,857,000 to adjust the carrying
amount of the Prime Group units to $4.61 per unit, the closing price of PGE
shares on December 31, 2002 on the New York Stock Exchange and (ii)
$1,000,000 for estimated costs to realize the value of the guarantees. The
Company considered the decline in the value of the units which are
convertible into stock to be other than temporary as of December 31, 2002,
based on the fact that the market value of the units which are convertible
into stock has been less than its cost for more than six months, the severity
of the decline, market trends, the financial condition and near-term
prospects of Prime Group and other relevant factors.
At December 31, 2002, the Company's carrying amount of the investment was
$23,408,000, of which $18,313,000 represents the carrying amount of the
3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100,000
represents the amount expected to be realized under the guarantees, offset by
$1,005,000 representing the Company's share of Prime Group Realty's net loss
through September 30, 2002 (see Note 4. Investments in and Advances to
Partially-Owned Entities). Prior to April 30, 2002, this investment was in the
form of a loan and was included in Notes and Mortgage Loans Receivable on the
balance sheet.
-118-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At February 3, 2003, the closing price of PGE shares on the New York Stock
Exchange was $5.30 per share. The ultimate realization of the Company's
investment will depend upon the future performance of the Chicago real estate
market and the performance of PGE, as well as the ultimate realizable value of
the net assets supporting the guarantees and the Company's ability to collect
under the guarantees. In addition, the Company will continue to monitor this
investment to determine whether additional write-downs are required based on (i)
declines in value of the shares of PGE (for which the partnership units are
exchangeable) which are "other than temporary" as used in accounting literature
and (ii) the amount expected to be realized under the guarantees.
WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES
In the first quarter of 2001, the Company recorded a charge of $4,723,000
resulting from the write-off of an equity investment in a technology company.
In the second quarter of 2001, the Company recorded an additional charge of
$13,561,000 resulting from the write-off of all of its remaining equity
investments in technology companies due to both the deterioration of the
financial condition of these companies and the lack of acceptance by the
market of certain of their products and services. In the fourth quarter of
2001, the Company recorded $1,481,000 of income resulting from the reversal
of a deferred liability relating to the termination of an agreement
permitting one of the technology companies access to its properties.
PARK LAUREL CONDOMINIUM PROJECT
In the third quarter of 2001, the Park Laurel joint venture (69% interest
owned by the Company) completed the sale of 52 condominium units of the total 53
units and received proceeds of $139,548,000. The Company's share of the after
tax net gain was $15,657,000. The Company's share of the after-tax net gain
reflects $3,953,000 (net of tax benefit of $1,826,000) awards accrued under the
venture's incentive compensation plan.
WRITE-OFF OF NET INVESTMENT IN RTR
In the third quarter of 2001, the Company wrote-off its entire net
investment of $7,374,000 in RTR based on the operating losses and an assessment
of the value of the real estate.
NET GAINS ON SALE OF REAL ESTATE:
On August 6, 2001, the Company sold its leasehold interest in 550/600
Mamaroneck Avenue for $22,500,000, which approximated book value.
In September 1998, Atlantic City condemned the Company's property. In the
third quarter of 1998, the Company recorded a gain of $1,694,000, which
reflected the condemnation award of $3,100,000, net of the carrying value of the
property of $1,406,000. The Company appealed the amount and on June 27, 2001,
was awarded an additional $3,050,000, which has been recorded as a gain in the
quarter ended June 30, 2001.
On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue
for $60,000,000, resulting in a gain of $12,445,000.
During 2000, the Company sold (i) its three shopping centers located in
Texas for $25,750,000, resulting in a gain of $2,560,000 and (ii) its Westport,
Connecticut office property for $24,000,000, resulting in a gain of $8,405,000.
-119-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVESTMENTS IN PARTIALLY-OWNED ENTITIES
The Company's investments in partially-owned entities and income recognized
from such investments is disclosed below. Summarized financial data is provided
for (i) investments in entities which exceed 10% of the Company's total assets
and (ii) investments in which the Company's share of partially-owned entities
pre-tax income exceeds 10% of the Company's net income.
BALANCE SHEET DATA:
($ in thousands)
COMPANY'S
INVESTMENT
PERCENTAGE -------------------------
OWNERSHIP 2002 2001
----------- ------- ------
INVESTMENTS:
Temperature Controlled
Logistics ................. 60% $ 448,295 474,862
Charles E. Smith
Commercial Realty L.P.(1) . 34% --(1) 347,263
Alexander's ................ 33.1% 193,879 188,522
Newkirk Joint
Ventures (2) .............. 21.7% 182,465 191,534
Partially - Owned
Office Buildings (4) ...... 34% 29,421 23,346
Starwood Ceruzzi
Joint Venture ............. 80% 24,959 25,791
Monmouth Mall(3) ........... 50% 31,416 --
Park Laurel ................ 80% 3,481 (4,745)(5)
Prime Group Realty, L.P. and
other guarantees .......... 14.9% 23,408 --
Other ...................... 60,387 23,622
----------- -----------
$ 997,711 1,270,195
=========== ===========
($ in thousands) 100% OF THESE ENTITIES
------------------------------------------------------------------------------------
TOTAL ASSETS TOTAL LIABILITIES TOTAL EQUITY
-------------------------- -------------------------- --------------------------
2002 2001 2002 2001 2002 2001
INVESTMENTS:
Temperature Controlled
Logistics ................. $ 1,347,382 1,379,212 $ 584,510 610,727 $ 731,240 $ 768,485
=========== =========== =========== =========== =========== ===========
Charles E. Smith
Commercial Realty L.P.(1) . (1) 1,308,297 (1) 1,503,057 (1) $ (307,584)
=========== =========== =========== =========== ===========
Alexander's ................ $ 664,770 583,339 $ 596,247 538,258 $ 68,665 $ 45,081
=========== =========== =========== =========== =========== ===========
Newkirk Joint
Ventures (2) .............. $ 1,472,349 722,293 $ 1,322,719 879,840 $ 20,385 $ (157,547)
=========== =========== =========== =========== =========== ===========
Partially - Owned
Office Buildings (4) ......
Starwood Ceruzzi
Joint Venture .............
Monmouth Mall(3) ...........
Park Laurel ................
Prime Group Realty, L.P. and
other guarantees ..........
Other ......................
---------------
(1) Vornado owned a 34% interest in CESCR in 2001. On January 1,
2002, the Company acquired the remaining 66% of CESCR. See Note
3 - "Acquisitions and Dispositions" for details of the
acquisition.
(2) The Company's investment in and advances to Newkirk Joint
Ventures is comprised of
December 31, 2002 December 31, 2001
----------------- -----------------
Investments in limited partnerships.. $ 134,200 $ 143,269
Mortgages and loans receivable....... 39,511 39,511
Other................................ 8,754 8,754
---------- ----------
Total................................ 182,465 191,534
========== ==========
On January 2, 2002, the Newkirk Joint Ventures' partnership
interests were merged into a master limited partnership (the
"MLP") in which the Company has a 21.7% interest. In
conjunction with the merger, the MLP completed a $225,000
mortgage financing collateralized by its properties, subject to
the existing first and certain second mortgages on those
properties. The loan bears interest at LIBOR plus 5.5% with a
LIBOR floor of 3% (8.5% at February 3, 2003) and matures on
January 31, 2005, with two one-year extension options. As a
result of the financing on February 6, 2002, the MLP repaid
approximately $28,200 of existing debt and distributed
approximately $37,000 to the Company. In 2003, the Company
expects to receive distributions of approximately $9,000 from
the Newkirk MLP.
(3) On October 10, 2002, a joint venture in which the Company owns
a 50% interest acquired the Monmouth Mall. See Note 3 -
"Acquisitions and Dispositions" for further details.
(4) As at December 31, 2002, includes a 20% interest in a property
which was part of the CESCR acquisition in January 2002.
(5) The credit balance at December 31, 2001, is a result of the
accrual of awards under the ventures incentive compensation
plan.
-120-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Below is a summary of the debt of partially owned entities as of December
31, 2002 and 2001, none of which is guaranteed by the Company. (Amounts in
thousands)
100% OF
PARTIALLY-OWNED ENTITIES DEBT
---------------------------------
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- -------------
Alexander's (33.1% interest) (see "Alexander's" on page 123 for further
details): Term loan:
Portion financed by the Company due on January 3, 2006 with interest
at 12.48%............................................................... $ 95,000 $ 95,000
Portion financed by a bank, due March 15, 2003, with interest at LIBOR +
1.85% (repaid on July 3, 2002).......................................... -- 10,000
Line of Credit financed by the Company, due on January 3, 2006 with interest at
12.48% (prepayable without penalty).......................................... 24,000 24,000
Lexington Avenue construction loan payable, due on January 3, 2006, plus two
one-year extensions, with interest at LIBOR plus 2.50% (3.88% at December 31,
2002)........................................................................ 55,500 --
Rego Park mortgage payable, due in June 2009, with interest at 7.25%............ 82,000 82,000
Kings Plaza Regional Shopping Center mortgage payable, due in June 2011,
with interest at 7.46% (prepayable with yield maintenance)................... 219,308 221,831
Paramus mortgage payable, due in October 2011, with interest at 5.92%
(prepayable without penalty)................................................. 68,000 68,000
Other notes and mortgages payable (repaid on July 3, 2002)...................... -- 15,000
Temperature Controlled Logistics (60% interest):
Mortgage notes payable collateralized by 58 temperature controlled
warehouses, due in May 2008, requires amortization based on a 25 year
term with interest at 6.94%
(prepayable with yield maintenance).......................................... 537,716 563,782
Other notes and mortgages payable............................................... 37,789 38,748
Newkirk Joint Ventures (21.7% interest):
Portion of first mortgages and contract rights, collateralized by the
partnerships' real estate, due from 2002 to 2024, with a weighted average
interest rate of 10.62% at December 31, 2002 (various prepayment rights)..... 1,432,438 1,336,989
Charles E. Smith Commercial Realty L.P. (34% interest in 2001):
29 mortgages payable............................................................ -- 1,470,057
Prime Group Realty L.P. (14.9% interest) (1):
24 mortgages payable............................................................ 868,374 --
Partially Owned Office Buildings:
330 Madison Avenue (25% interest) mortgage note payable, due in April 2008,
with interest at 6.52% (prepayable with yield maintenance)................... 60,000 60,000
Fairfax Square (20% interest) mortgage note payable due in August 2009, with
interest at 7.50%............................................................ 68,900 --
825 Seventh Avenue (50% interest) mortgage payable, due in October 2014, with
interest at 8.07% (prepayable with yield maintenance)........................ 23,295 23,552
Orleans Hubbard (50% interest) mortgage note payable, due in March 2009, with
interest at 7.03%............................................................ 9,961 --
Wells/Kinzie Garage (50% interest) mortgage note payable, due in May 2009, with
interest at 7.03%............................................................ 15,860 --
Monmouth Mall (50% interest):
Mortgage note payable, due in November 2005, with interest at LIBOR + 2.05%
(3.49% at December 31, 2002)................................................. 135,000 --
Las Catalinas Mall (50% interest):
Mortgage notes payable (2)................................................... -- 68,591
Russian Tea Room (50% interest) mortgages payable (3)............................... -- 13,000
Based on the Company's ownership interest in the partially-owned entities
above, the Company's share of the debt of these partially-owned entities was
$1,048,108,000 and $1,319,535,000 as of December 31, 2002 and 2001.
- ---------------
(1) Balance as of September 30, 2002, as Prime Group's annual report on Form
10-K for the year ended December 31, 2002, has not been filed prior to the
filing of this annual report on Form 10-K.
(2) The Company increased its interest in Las Catalinas to 100% on September
23, 2002. Accordingly, Las Catalinas is consolidated as of September 30,
2002.
(3) On November 18, 2002 the Russian Tea Room mortgage loans were repaid with
proceeds from the sale of the property.
-121-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME STATEMENT DATA:
COMPANY'S INCOME
FROM PARTIALLY OWNED
ENTITIES
-----------------------------------
2002 2001 2000
--------- --------- ---------
($ in thousands)
Alexander's:
Equity in income (1) ............. $ 7,556 $ 8,465 $ 1,105
Interest income (2) .............. 10,401 11,899 11,948
Development and guarantee fees (2) 6,915 -- --
Management and leasing fee income
(1) ............................ 4,781 5,354 4,310
--------- --------- ---------
$ 29,653 $ 25,718 $ 17,363
========= ========= =========
Temperature Controlled Logistics:
Equity in net income (loss) ...... $ 4,144 $ 12,093 $ 23,244
Management fees .................. 5,563 5,354 5,534
--------- --------- ---------
9,707 17,447 28,778
CESCR (3) ............................ -- 28,653 25,724
Newkirk MLP:
Equity in income ............... 26,499 25,470 18,632
Interest and other income ...... 8,001 5,474 5,894
Partially-Owned Office
Buildings (4) .................... 1,966 4,093 2,832
Monmouth Mall ........................ 1,022 -- --
Prime Group Realty LP (5) ............ (1,005) -- --
Other ................................ (1,732) (525) 4,794
--------- --------- ---------
$ 44,458 $ 80,612 $ 86,654
========= ========= =========
100% OF THESE ENTITIES
-----------------------------------------------------------------------
TOTAL REVENUES NET INCOME(LOSS)
---------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- ---------
($ in thousands)
Alexander's:
Equity in income (1) ............. $ 76,193 $ 69,343 $ 63,965 $ 23,584 $ 27,386 5,197
========= ========= ========= ========= ========= =========
Interest income (2) ..............
Development and guarantee fees (2)
Management and leasing fee income
(1) ............................
Temperature Controlled Logistics:
Equity in net income (loss) ...... $ 117,663 $ 126,957 $ 154,341 $ (20,231) $ 16,647 37,284
========= ========= ========= ========= ========= =========
Management fees ..................
CESCR (3) ............................ (3) $ 382,502 $ 344,084 (3) $ 82,713 76,707
========= ========= ========= =========
Newkirk MLP:
Equity in income ............... $ 295,369 $ 179,551 $ 121,860 $ 84,900
========= ========= ========= =========
Interest and other income ......
Partially-Owned Office
Buildings (4) ....................
Monmouth Mall ........................
Prime Group Realty LP (5) ............
Other ................................
- ---------------
(1) Equity in income in 2002 includes the Company's $3,524 share of Alexander's
gain on sale of its Third Avenue property. Equity in income in 2001
includes (i) the Company's $6,298 share of Alexander's gain on sale of its
Fordham Road property, (ii) a charge of $1,684 representing the Company's
share of abandoned development costs and (iii) $1,170 representing the
Company's share of Alexander's gain on the early extinguishment of debt on
its Fordham Road property. Management and leasing fee income include fees
of $350 and $520 paid to the Company in 2002 and 2001 in connection with
sales of real estate.
(2) Alexander's capitalizes the fees and interest charged by the Company.
Because the Company owns 33.1% of Alexander's, the Company recognizes 66.9%
of such amounts as income and the remainder is reflected as a reduction of
the Company's carrying amount of the investment in Alexander's.
(3) The Company owned a 34% interest in CESCR. On January 1, 2002, the Company
acquired the remaining 66% of CESCR it did not previously own. Accordingly,
CESCR is consolidated as of January 1, 2002.
(4) Represents the Company's interests in 330 Madison Avenue (24.8%), 825
Seventh Avenue (50%) and 570 Lexington Avenue (50%). On May 17, 2001, the
Company sold its 50% interest in 570 Lexington Avenue for $60,000,
resulting in a gain of $12,445 which is not included in income in the table
above.
(5) Represents the Company's share of net loss for the period from April 30,
2002 (date of acquisition) to September 30, 2002, which includes (i) a loss
of $357 from discontinued operations and (ii) a loss of $147 from the sale
of real estate. The Company's share of equity in income or loss for the
period from October 1, 2002 to December 31, 2002 will be recognized in
earnings in the quarter ended March 31, 2003, as the investee has not
released its earnings for the year ended December 31, 2002 prior to the
filing of the Company's annual report on Form 10-K.
-122-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ALEXANDER'S
OWNERSHIP
The Company owns 1,655,000 common shares or 33.1% of the outstanding common
stock of Alexander's at December 31, 2002. Alexander's is managed by and its
properties are leased and developed by the Company pursuant to management,
leasing and development agreements with one-year terms expiring in March of each
year, which are automatically renewable. In conjunction with the closing of the
Alexander's Lexington Avenue construction loan on July 3, 2002, these agreements
were revised to cover the Alexander's Lexington Avenue property separately.
Further, the Lexington Avenue management and development agreements were amended
to provide for a term lasting until substantial completion of the development of
the property, with automatic renewals, and for the payment of the development
fee upon the earlier of January 3, 2006, or the payment in full of the
construction loan encumbering the property. The Company is entitled to a
development fee estimated to be approximately $26,300,000, based on 6% of
construction costs, as defined, of which $7,667,000 has been recognized as
income during the year ended December 31, 2002.
DEBT
At December 31, 2002, the Company had loans receivable from Alexander's of
$119,000,000, including $24,000,000 drawn under the $50,000,000 line of credit
the Company granted to Alexander's on August 1, 2000. The maturity date of the
loan and the line of credit is the earlier of January 3, 2006 or the date the
Alexander's Lexington Avenue construction loan is repaid. The interest rate on
the loan and line of credit, which resets quarterly using the same spread to
treasuries as presently exists with a 3% floor for treasuries, is 12.48% at
December 31, 2002. The Company believes that although Alexander's has disclosed
that it does not have positive cash flow sufficient to repay this loan to the
Company currently, Alexander's will be able to repay the loan upon the
successful development and permanent financing of its Lexington Avenue
development project or through asset sales.
On July 3, 2002, Alexander's finalized a $490,000,000 loan with HVB Real
Estate Capital (HYPO Vereinsbank) to finance the construction of its
approximately 1.3 million square foot multi-use building at its 59th Street and
Lexington Avenue location. The estimated construction costs in excess of the
construction loan of approximately $140,000,000 will be provided by Alexander's.
The loan has an interest rate of LIBOR plus 2.5% and a term of forty-two months
plus two one-year extensions. Alexander's has received an initial funding of
$55,500,000 under the loan of which $25,000,000 was used to repay existing loans
and notes payable. Pursuant to this loan, Vornado has agreed to guarantee, among
other things, the lien free, timely completion of the construction of the
project and funding of project costs in excess of a stated budget, as defined in
the loan agreement, if not funded by Alexander's (the "Completion Guarantee").
The $6,300,000 estimated fee payable by Alexander's to the Company for the
Completion Guarantee is 1% of construction costs (as defined) and is payable at
the same time that the development fee is payable. In addition, if the Company
should advance any funds under the Completion Guarantee in excess of the
$26,000,000 currently available under the secured line of credit, interest on
those advances is at 15% per annum.
AGREEMENTS WITH ALEXANDER'S
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, and (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. 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 at the time the transactions which
gave rise to the commissions occurred. At December 31, 2002, $410,000 is due to
the Company under this agreement.
-123-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ALEXANDER'S
OTHER
The Company constructed a $16.3 million community facility and
low-income residential housing development (the "30th Street Venture"), in
order to receive 163,728 square feet of transferable development rights,
generally referred to as "air rights". The Company donated the building to a
charitable organization. The Company sold 106,796 square feet of these air
rights to third parties at an average price of $120 per square foot. An
additional 28,821 square feet of air rights was sold to Alexander's at a
price of $120 per square foot for use at Alexander's 59th Street development
project (the "59th Street Project"). In each case, the Company received cash
in exchange for air rights. The Company identified third party buyers for the
remaining 28,111 square feet of air rights related to the 30th Street
Venture. These third party buyers wanted to use the air rights for the
development of two projects located in the general area of 86th Street which
was not within the required geographical radius of the construction site nor
in the same Community Board as the low-income housing and community facility
project. The 30th Street Venture asked Alexander's to sell 28,111 square feet
of the air rights it already owned to the third party buyers (who could use
them) and the 30th Street Venture would replace them with 28,111 square feet
of air rights. In October 2002, the Company sold 28,111 square feet of air
rights to Alexander's for an aggregate sales price of $3,059,000 (an average
of $109 per square foot). Alexander's then sold an equal amount of air rights
to the third party buyers for an aggregate sales price of $3,339,000 (an
average of $119 per square foot).
On October 5, 2001, Alexander's entered into a ground lease for its
Paramus, N.J. property with IKEA Property, Inc. The lease has a 40-year term
with an option to purchase at the end of the 20th year for $75,000,000. Further,
Alexander's has obtained a $68,000,000 interest only, non-recourse mortgage loan
on the property from a third party lender. The interest rate on the debt is
5.92% with interest payable monthly until maturity in October 2011. The triple
net rent each year is the sum of $700,000 plus the amount of debt service on the
mortgage loan. If the purchase option is not exercised at the end of the 20th
year, the triple net rent for the last 20 years must include debt service
sufficient to fully amortize the $68,000,000 over the remaining 20 year lease
period.
On May 1, 2001 Alexander's entered into a lease agreement with Bloomberg
L.P., for approximately 695,000 square feet of office space. The initial term of
the lease is for 25 years, with one ten-year renewal option. Base annual net
rent is $34,529,000 in each of the first four years and $38,533,000 in the fifth
year with similar percentage increases each four years. There can be no
assurance that this project ultimately will be completed, completed on time or
completed for the budgeted amount. If the project is not completed on a timely
basis, the lease may be cancelled and significant penalties may apply.
On August 30, 2002, Alexander's sold its Third Avenue property, located in
the Bronx, New York, which resulted in a gain of $10,366,000. On January 12,
2001, Alexander's sold its Fordham Road property located in the Bronx, New York,
for $25,500,000, which resulted in a gain of $19,026,000. In addition,
Alexander's paid off the mortgage on its Fordham Road property at a discount,
which resulted in a gain from early extinguishment of debt of $3,534,000 in the
first quarter of 2001.
-124-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. NOTES AND MORTGAGE LOANS RECEIVABLE
LOAN TO COMMONWEALTH ATLANTIC PROPERTIES ("CAPI")
On March 4, 1999 the Company made an additional $242,000,000 investment in
Charles E. Smith Commercial Realty L.P. ("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., for $242,000,000, immediately
prior to the contribution to CESCR. In addition, the Company acquired from CAPI
for $8 million the land under a Marriott Hotel located in Crystal City. The
Company paid the $250,000,000 purchase price to CAPI by issuing 4,998,000 of the
Company's Series E-1 convertible preferred units. In connection with these
transactions, the Company agreed to make a five-year $41,200,000 loan to CAPI
with interest at 8%, increasing to 9% ratably over the term. The loan is secured
by approximately 1.1 million of the Company's Series E-1 convertible preferred
units issued to CAPI. Each Series E-1 convertible preferred unit is convertible
into 1.1364 of the Company's common shares.
LOAN TO VORNADO OPERATING COMPANY ("VORNADO OPERATING")
At December 31, 2002, the amount outstanding under the revolving credit
agreement with Vornado Operating was $21,989,000. Vornado Operating has
disclosed that in the aggregate its investments do not, and for the
foreseeable future are not expected to, generate sufficient cash flow to pay
all of its debts and expenses. Further, Vornado Operating states that its
only investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord,
a partnership 60% owned by the Company and 40% owned by Crescent Real Estate
Equities, will need to restructure the leases between the Landlord and the
Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility. The Company has assessed the
collectibility of this loan as of December 31, 2002 and determined that it is
not impaired.
DEARBORN CENTER MEZZANINE CONSTRUCTION LOAN
As of December 31, 2002, $60,758,000 is outstanding under the Dearborn
Center Mezzanine Construction Loan to a special purpose entity, of which
$23,392,000 has been funded by the Company, representing a 38.5% interest. The
special purpose entity's sole asset is Dearborn Center, a 1.5 million square
foot high-rise office tower under construction in Chicago. The entity is owned
by Prime Group Realty L.P. and another investor. The Company is a member of a
loan syndicate led by a money center bank. The proceeds of the loan are being
used to finance the construction, and are subordinate to a $225,000,000 first
mortgage. The loan is due January 21, 2004, three years from the date of the
initial draw, and provides for a 1-year extension at the borrower's option
(assuming net operating income at a specified level and a cash reserve
sufficient to fund interest for the extension period). The loan bears interest
at 12% per annum plus additional interest upon repayment ranging from a minimum
of 9.5% to 11.5%.
-125-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. DEBT
Following is a summary of the Company's debt:
(Amounts in thousands)
INTEREST RATE BALANCE AS OF
AS AT --------------------------------
MATURITY DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001
----------- ------------- -------------- -------------
Notes and Mortgages Payable:
Fixed Interest:
Office:
NYC Office:
Two Penn Plaza.......................... 03/04 7.08% $ 154,669 $ 157,697
888 Seventh Avenue (1).................. 02/06 6.63% 105,000 105,000
Eleven Penn Plaza....................... 05/07 8.39% 50,383 51,376
866 UN Plaza............................ 04/04 7.79% 33,000 33,000
CESCR Office (2):
Crystal Park 1-5........................ 07/06-08/13 6.66%-8.39% 264,441 (2)
Crystal Gateway 1-4 Crystal Square 5.... 07/12-01/25 6.75%-7.09% 215,978 (2)
Crystal Square 2, 3 and 4............... 10/10-11/14 7.08%-7.14% 146,081 (2)
Skyline Place........................... 08/06-12/09 6.6%-6.93 % 139,212 (2)
1101 17th , 1140 Connecticut, 1730 M &
1150 17th............................. 08/10 6.74% 97,318 (2)
Courthouse Plaza 1 and 2................ 01/08 7.05% 80,062 (2)
Crystal Gateway N., Arlington Plaza and
1919 S. Eads.......................... 11/07 6.77% 72,721 (2)
Reston Executive I, II & III............ 01/06 6.75% 73,844 (2)
Crystal Plaza 1-6....................... 10/04 6.65% 70,356 (2)
One Skyline Tower....................... 06/08 7.12% 65,764 (2)
Crystal Malls 1-4....................... 12/11 6.91% 65,877 (2)
1750 Pennsylvania Avenue................ 06/12 7.26% 49,794 (2)
One Democracy Plaza..................... 02/05 6.75% 27,640 (2)
Retail:
Cross collateralized mortgages payable on
42 shopping centers................... 03/10 7.93% 487,246 492,156
Green Acres Mall........................ 02/08 6.75% 150,717 152,894
Montehiedra Town Center................. 05/07 8.23% 59,638 60,359
Las Catalinas Mall (3).................. 11/13 6.97% 67,692 --
Merchandise Mart:
Market Square Complex (4)............... 07/11 7.95% 48,213 49,702
Washington Design Center (5)............ 10/11 6.95% 48,542 48,959
Washington Office Center................ 02/04 6.80% 44,924 46,572
Other................................... 10/10-06/13 7.52%-7.71% 18,703 18,951
Other:
Industrial Warehouses (6)............... 10/11 6.95% 49,423 50,000
Student Housing Complex................. 11/07 7.45% 19,019 19,243
Other................................... 08/21 9.90% 6,937 8,659
------------- ------------
Total Fixed Interest Notes and Mortgages
Payable.......................... 7.17% 2,713,194 1,294,568
------------- ------------
-126-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INTEREST RATE BALANCE AS OF
AS AT -------------------------------
SPREAD OVER DECEMBER 31, DECEMBER 31, DECEMBER 31,
(Amounts in thousands) MATURITY LIBOR 2002 2002 2001
---------- ----------- ------------- ------------- -------------
Notes and Mortgages Payable:
Variable Interest:
Office:
NYC Office:
One Penn Plaza (7)...................... 06/05 L+125 2.67% $ 275,000 $ 275,000
770 Broadway/595 Madison Avenue
cross-collateralized mortgage (8)..... 04/03 L+40 1.78% 153,659 123,500
909 Third Avenue........................ 08/03 L+165 3.09% 105,837 105,253
Two Park Avenue (9)..................... 03/03 L+145 -- -- 90,000
CESCR Office:
Tyson Dulles Plaza...................... 06/03 L+130 2.72% 69,507 (2)
Commerce Executive III, IV & V.......... 07/03 L+150 2.92% 53,307 (2)
Merchandise Mart:
Merchandise Mart (9).................... 10/02 L+150 -- -- 250,000
Furniture Plaza......................... 02/03 L+200 3.44% 48,290 43,524
33 North Dearborn Street................ 09/03 L+175 3.13% 18,926 19,000
350 North Orleans (9)................... 06/02 L+165 -- -- 70,000
Other................................... 01/03 Prime-50 3.75% -- 294
Other:
Palisades construction loan............. 02/04 L+185 3.17% 100,000 90,526
Hotel Pennsylvania...................... 10/02 L+160 -- -- 115,508
------------- ------------
Total Variable Interest Notes and
Mortgages Payable................ 3.07% 824,526 1,182,605
------------- ------------
Total Notes and Mortgages Payable........... $ 3,537,720 $ 2,477,173
============= ============
Senior unsecured debt due 2007 at fair value
($34,245 in excess of accreted note
balance) (9)............................. 06/07 L+77 2.15% $ 533,600 $ --
============= ============
Unsecured revolving credit facility......... 07/03 L+90 -- $ -- $ --
============= ============
- ---------------
(1) On January 11, 2001, the Company completed a $105,000 refinancing of its
888 Seventh Avenue office building. The loan bears interest at a fixed rate
of 6.63% and matures on February 1, 2006. A portion of the proceeds
received was used to repay the then existing mortgage of $55,000.
(2) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did
not previously own. Prior to January 1, 2002, the Company's share of
CESCR's debt was included in Investments in and Advances to Partially-Owned
Entities. In connection with the acquisition, CESCR's fixed rate debt of
$1,282,780 was fair valued at $1,317,428 under purchase accounting.
(3) On September 23, 2002, the Company acquired the 50% of the Mall and the 25%
of Kmart's anchor store it did not already own. Prior to this date, the
Company accounted for its investment on the equity method and the Company's
share of the debt was included in Investments in and Advances to
Partially-Owned Entities.
(4) On July 11, 2001, the Company completed a $50,000 refinancing of its Market
Square Complex. The loan bears interest at a fixed rate of 7.95% per annum
and matures in July 2011. The proceeds received were used to repay the then
existing mortgage of $49,000.
(5) On October 16, 2001, the Company completed a $49,000 refinancing of its
Washington Design Center property. The loan bears interest at a fixed rate
of 6.95% and matures on October 16, 2011. A portion of the proceeds
received was used to repay the then existing mortgage of $23,000.
(6) On September 20, 2001, the Company completed a $50,000 mortgage financing,
cross collateralized by its eight industrial warehouse properties. The loan
bears interest at a fixed rate of 6.95% per annum and matures on October 1,
2011.
(7) On June 21, 2002, one of the lenders purchased the other participant's
interest in the loan. At the same time, the loan was extended for one year,
with certain modifications including, (i) making the risk of a loss due to
terrorism (as defined) not covered by insurance recourse to the Company and
(ii) the granting of two 1-year renewal options to the Company.
(8) On April 1, 2002, the Company increased its mortgage financing cross
collateralized by its 770 Broadway/595 Madison Avenue properties by
$115,000. On July 15, 2002, the Company repaid $84,841 with proceeds
received from a third party which resulted in a gain on transfer of
mortgages of $2,096. The proceeds of the loan are in a restricted mortgage
escrow account which bears interest at the same rate as the loan, and at
December 31, 2002 totals $153,659.
(9) On June 24, 2002, the Company completed an offering of $500,000 aggregate
principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December
15th, commencing December 15, 2002. The notes were priced at 99.856% of
their face amount to yield 5.659%. The net proceeds of approximately
$496,300 were used to repay the mortgage payable on 350 North Orleans, Two
Park Avenue, the Merchandise Mart and Seven Skyline. On June 27, 2002, the
Company entered into interest rate swaps that effectively converted the
interest rate on the $500,000 senior unsecured notes due 2007 from a fixed
rate of 5.625% to a floating rate of LIBOR plus .7725%, based upon the
trailing 3 month LIBOR rate (2.15% if set on December 31, 2002). As a
result of the hedge accounting for the interest rate swap on the Company's
senior unsecured debt, the Company recorded a fair value adjustment of
$34,245, as of December 31, 2002 which is equal to the fair value of the
interest rate swap asset.
-127-
The net carrying amount of properties collateralizing the notes and
mortgages amounted to $4,938,012,000 at December 31, 2002. As at December 31,
2002, the principal repayments for the next five years and thereafter are as
follows:
($ in thousands)
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------------
2003........................................... $ 449,526(1)
2004........................................... 402,949
2005........................................... 302,640
2006........................................... 261,385
2007........................................... 822,536
Thereafter..................................... 1,832,284
---------------
(1) Includes $153,659 which is offset by an equivalent amount of
cash held in a restricted mortgage escrow account.
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its revolving
credit agreement and its senior unsecured notes due 2007, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. The Company has received
correspondence from four lenders regarding terrorism insurance coverage, to
which the Company has responded. In these letters the lenders took the position
that under the agreements governing the loans provided by these lenders the
Company was required to maintain terrorism insurance on the properties securing
the various loans. The aggregate amount of borrowings under these loans as of
December 31, 2002 was approximately $770.4 million, and there was no additional
borrowing capacity. Subsequently, the Company obtained an aggregate of $360
million of separate coverage for "terrorist acts". To date, one of the lenders
has acknowledged to the Company that it will not raise any further questions
based on the Company's terrorism insurance coverage in place, and the other
three lenders have not raised any further questions regarding the Company's
insurance coverage. If lenders insist on greater coverage for these risks, it
could adversely affect the Company's ability to finance and/or refinance its
properties and to expand its portfolio.
-128-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. SHAREHOLDERS' EQUITY
During the three years ended December 31, 2002, the Company sold 11,173,743
common shares. The following are the details of the sales.
SALE AND ISSUANCE OF COMMON SHARES
On February 25, 2002, the Company sold 1,398,743 common shares based on the
closing price of $42.96 on the NYSE. The net proceeds to the Company were
approximately $56,453,000.
On November 19, 2001, the Company sold 9,775,000 common shares pursuant to
an effective registration statement based on the closing price of $40.58 on the
NYSE. The net proceeds to the Company were approximately $377,200,000. In
connection therewith the Company repaid the $285,000,000 then outstanding under
its revolving credit facility.
$3.25 SERIES A PREFERRED SHARES OF BENEFICIAL INTEREST
Holders of Series A Preferred Shares of beneficial interest are
entitled to receive dividends in an amount equivalent to $3.25 per annum per
share. These dividends are cumulative and payable quarterly in arrears. The
Series A Preferred Shares are convertible at any time at the option of their
respective holders at a conversion rate of 1.38504 common shares per Series A
Preferred Share, subject to adjustment in certain circumstances. In addition,
upon the satisfaction of certain conditions the Company, at its option, may
redeem the $3.25 Series A Preferred Shares at a current conversion rate of
1.38504 common shares per Series A Preferred Share, subject to adjustment in
certain circumstances. At no time will the Series A Preferred Shares be
redeemable for cash.
SERIES B PREFERRED SHARES OF BENEFICIAL INTEREST
Holders of Series B Preferred Shares of beneficial interest are
entitled to receive dividends at an annual rate of 8.5% of the liquidation
preference, or $2.125 per Series B Preferred Share per annum. These dividends
are cumulative and payable quarterly in arrears. The Series B Preferred Shares
are not convertible into or exchangeable for any other property or any other
securities of the Company at the election of the holders. However, subject to
certain limitations relating to the source of funds used in connection with
any such redemption, on or after March 17, 2004 (or sooner under limited
circumstances), the Company, at its option, may redeem Series B Preferred
Shares at a redemption price of $25.00 per share, plus any accrued and unpaid
dividends through the date of redemption. The Series B Preferred Shares have
no maturity date and will remain outstanding indefinitely unless redeemed by
the Company.
SERIES C PREFERRED SHARES OF BENEFICIAL INTEREST
Holders of Series C Preferred Shares of beneficial interest are
entitled to receive dividends at an annual rate of 8.5% of the liquidation
preference, or $2.125 per Series C Preferred Share per annum. These dividends
are cumulative and payable quarterly in arrears. The Series C Preferred
Shares are not convertible into or exchangeable for any other property or any
other securities of the Company at the election of the holders. However,
subject to certain limitations relating to the source of funds used in
connection with any such redemption, on or after May 17, 2004 (or sooner
under limited circumstances), the Company, at its option, may redeem Series C
Preferred Shares at a redemption price of $25.00 per share, plus any accrued
and unpaid dividends through the date of redemption. The Series C Preferred
Shares have no maturity date and will remain outstanding indefinitely unless
redeemed by the Company.
-129-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. EMPLOYEES' SHARE OPTION PLAN
The Company grants various officers and employees 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. 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. As of December 31, 2002,
there were 250,927 restricted shares or rights to receive restricted shares
outstanding, excluding 626,566 shares issued to the Company's President in
connection with his employment agreement.
In 2002 and prior years, the Company accounted for stock-based compensation
using the intrinsic value method. Accordingly, no stock-based compensation was
recognized in the Company's financial statements for these years. 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, 2002, 2001, and 2000:
DECEMBER 31,
-------------------------------------------
2002 2001 2000
--------- --------- ---------
(Amounts in thousands, except share and per share amounts)
Net income applicable to common shares:
As reported................................................... $ 209,736 $ 227,233 $ 195,301
Stock-based compensation cost, net of minority interest....... 8,092 10,606 14,465
--------- --------- ---------
Pro-forma..................................................... $ 201,644 $ 216,627 $ 180,836
========= ========= =========
Net income per share applicable to common shares:
Basic:
As reported................................................. $ 1.98 $ 2.55 $ 2.26
Pro-forma................................................... 1.90 2.43 2.09
Diluted:
As reported................................................. $ 1.91 $ 2.47 $ 2.20
Pro forma................................................... 1.84 2.35 2.04
-130-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
an option-pricing model with the following weighted-average assumptions used for
grants in the periods ending December 31, 2002, 2001 and 2000.
DECEMBER 31,
------------------------------
2002 2001 2000
--------- --------- --------
Expected volatility................................................................. 17% 17% 17%
Expected life....................................................................... 5 years 5 years 5 years
Risk-free interest rate............................................................. 3.0% 4.38% 5.0%
Expected dividend yield............................................................. 6.0% 6.0% 6.0%
A summary of the Plan's status and changes during the years then ended, is
presented below:
2002 2001 2000
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ---------
Outstanding at January 1 ........... 15,453,100 $ 32.25 15,861,260 $ 32.25 11,472,352 $ 32.65
Granted ............................ 3,655,500 42.14 26,000 35.88 4,863,750 31.02
Exercised .......................... (114,181) 28.17 (314,965) 31.91 (377,440) 26.29
Cancelled .......................... (198,053) 39.64 (119,195) 34.12 (97,402) 34.86
----------- ---------- ------------ --------
Outstanding at December 31 ......... 18,796,366 34.60 15,453,100 32.25 15,861,260 32.26
=========== ========= ========== ========== ============ ========
Options exercisable at December 31 . 13,674,177 $ 33.00 11,334,124 7,272,878
=========== ========= ========== ============
Weighted-average fair value of
options granted during the year
ended December 31 (per option) . $ 3.06 $ 3.46 $ 2.98
=========== ========== ============
-131-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about options outstanding under
the Plan at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ---------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICE DECEMBER 31, 2002 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2002 EXERCISE PRICE
-------------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 0 - $12 26,308 0.1 Years $ 11.42 26,308 $ 11.42
$12 - $19 74,500 2.3 Years $ 17.89 74,500 $ 17.89
$19 - $24 3,500,000 3.9 Years $ 23.47 3,500,000 $ 23.47
$24 - $27 149,570 4.1 Years $ 26.28 149,570 $ 26.28
$27 - $32 4,969,502 6.7 Years $ 30.72 3,543,983 $ 30.70
$32 - $36 2,856,725 6.1 Years $ 33.68 2,772,740 $ 33.65
$36 - $40 211,170 4.8 Years $ 38.92 204,735 $ 39.00
$40 - $44 4,235,591 8.7 Years $ 42.26 664,341 $ 43.05
$44 - $46 2,508,000 5.0 Years $ 45.31 2,473,000 $ 45.31
$46 - $49 265,000 5.1 Years $ 48.41 265,000 $ 48.41
----------- -------------
$ 0 - $49 18,796,366 6.2 Years $ 34.60 13,674,177 $ 33.00
=========== =============
Shares available for future grant under the Plan at December 31, 2002 were
9,963,500 of which 2,500,000 are subject to shareholder approval.
9. RETIREMENT PLAN
In December 1997, benefits under the Company's Retirement Plan were frozen.
Prior to December 31, 1997, the Company's qualified 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,
--------------------------------------------
2002 2001 2000
-------- -------- --------
(Amounts in thousands, except percentages)
Interest cost on projected benefit obligation................. $ 587 $ 565 $ 567
Expected return on assets..................................... (235) (412) (374)
Net amortization and deferral................................. (56) 32 30
------- ------- -------
Net pension expense........................................... $ 296 $ 185 $ 223
======= ======= =======
Assumptions used in determining the net pension expense:
Discount rate................................................. 6.25% 7.25% 7.75%
Rate of increase in compensation levels....................... --* --* --*
Expected rate of return on assets............................. 7.00% 7.00% 7.00%
* Not applicable, as benefits under the Plan were frozen in December 1997.
-132-
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:
($ in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
--------- --------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 7,950 $ 7,530 $ 7,918
Interest cost 587 565 567
Benefit payments (970) (793) (637)
Experience loss/(gain) 1,451 648 (318)
--------- --------- ---------
Benefit obligation at end of year 9,018 7,950 7,530
--------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 6,056 5,732 5,284
Employer contribution 667 821 698
Benefit payments (970) (793) (637)
Actual return on assets 235 295 387
--------- --------- ---------
Fair value of plan assets at end of year 5,988 6,055 5,732
--------- --------- ---------
Funded status (3,030) (1,895) (1,798)
Unrecognized loss 3,517 2,011 1,279
--------- --------- ---------
NET AMOUNT RECOGNIZED $ 487 $ 116 $ (519)
========= ========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF:
Accrued benefit liability $ (3,030) $ (1,895) $ (1,798)
Accumulated other comprehensive loss 3,517 2,011 1,279
--------- --------- ---------
NET AMOUNT RECOGNIZED $ 487 $ 116 $ (519)
========= ========= =========
Plan assets are invested in U.S. government obligations and securities
backed by U.S. government guaranteed mortgages.
-133-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. LEASES
AS LESSOR:
The Company leases space to tenants in office buildings and shopping
centers 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, 2002, future
base rental revenue under non-cancelable 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
----------------------- --------------
2003................................................................ $ 1,078,251
2004................................................................ 980,075
2005................................................................ 856,829
2006................................................................ 755,350
2007................................................................ 679,393
Thereafter.......................................................... 3,427,665
These amounts do not include rentals based on tenants' sales. These
percentage rents approximated $1,832,000, $2,157,000, and $4,825,000 for the
years ended December 31, 2002, 2001, and 2000.
FORMER BRADLEES LOCATIONS
The Company previously leased 18 locations to Bradlees which closed all of
its stores in February 2001. The Company has re-leased nine of the former
Bradlees locations; three to Kohl's, two each to Lowe's and Haynes Furniture,
and one each to Home Depot and Wal-Mart. Lowe's and Wal-Mart will construct
their own stores, subject to the receipt of various governmental approvals and
the relocation of existing tenants. In addition, the leases for four other
former Bradlees locations were assigned by Bradlees to other retailers. Of the
remaining five locations which are currently vacant, two of the leases are
guaranteed and the rent is being paid by Stop & Shop, a wholly-owned subsidiary
of KoninKlijke Ahold NV (formerly Royal Ahold NV), an international food
retailer. Stop & Shop remains contingently liable for rent at a number of the
former Bradlees locations for the term of the Bradlees leases.
Property rentals for the year ended December 31, 2002, include $5,000,000
of additional rent which was re-allocated to the former Bradlees locations in
Marlton, Turnersville, Bensalem and Broomall and is payable by Stop & Shop,
pursuant to the Master Agreement and Guaranty, dated May 1, 1992. This amount
is in addition to all other rent guaranteed at the former Bradlees locations.
On January 8, 2003, Stop & Shop filed a complaint with the United States
District Court claiming the Company has no right to reallocate and therefore
continue to collect the $5,000,000 of annual rent from Stop & Shop because of
the expiration of the East Brunswick, Jersey City, Middletown, Union and
Woodbridge leases to which the $5,000,000 of additional rent was previously
allocated. The additional rent provision of the guaranty expires at the
earliest in 2012. The Company intends to vigorously contest Stop & Shop's
position.
In February 2003, KoninKlijke Ahold NV, parent of Stop & Shop, announced
that it overstated its 2002 and 2001 earnings by at least $500 million and is
under investigation by the U.S. Justice Department and Securities and
Exchange Commission. The Company cannot predict what effect, if any, this
situation involving KoninKlijke Ahold NV may have on Stop & Shop's ability to
satisfy its obligation under the Bradlees guarantees and rent for existing
Stop & Shop leases aggregating approximately $10,500,000 per annum.
-134-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Except for the U.S. Government, which accounted for 11.4% of the Company's
revenue, none of the Company's other tenants represented more than 10% of total
revenues for the year ended December 31, 2002.
AS LESSEE:
The Company is a tenant under operating leases for certain properties.
These leases will expire principally during the next thirty years. Future
minimum lease payments under operating leases at December 31, 2002, are as
follows:
($ in thousands)
YEAR ENDING DECEMBER 31: AMOUNT
------------------------ ----------
2003..................................................................... $ 15,347
2004..................................................................... 14,641
2005..................................................................... 14,644
2006..................................................................... 14,797
2007..................................................................... 14,762
Thereafter............................................................... 954,980
Rent expense was $17,157,000, $15,433,000, and $15,248,000 for the years
ended December 31, 2002, 2001, and 2000.
-135-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Company's $1,000,000,000 revolving credit
facility had a zero balance, and the Company utilized $9,112,000 of availability
under the facility for letters of credit and guarantees. In addition there were
$7,667,000 of other letters of credit outstanding.
In conjunction with the closing of Alexander's Lexington Avenue
construction loan on July 3, 2002, the Company agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of all project costs in excess of a stated budget, as defined in the
loan agreement, if not funded by Alexander's (see note 4 - Investments in and
Advances to Partially-Owned Entities).
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, changes in the
extent or known scope of contamination, the discovery of additional sites, or
changes in cleanup requirements would not result in significant costs to the
Company.
The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 do not expressly exclude coverage for hostile acts, except for acts of war.
Since September 11, 2001, insurance companies have for the most part excluded
terrorist acts from coverage in all risk policies. The Company has generally
been unable to obtain all risk insurance which includes coverage for terrorist
acts for policies it has renewed since September 11, 2001, for each of its
businesses. In 2002, the Company obtained $200,000,000 of separate coverage for
terrorist acts for each of its New York City Office, Washington, D.C. Office,
Retail and Merchandise Mart businesses and $60,000,000 for its Temperature
Controlled Logistics business. Therefore, the Company is at risk for financial
loss in excess of these limits for terrorist acts (as defined), which loss could
be material.
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. In the second quarter of 2002, the
Company received correspondence from four lenders regarding terrorism insurance
coverage, which the Company has responded to. In these letters the lenders took
the position that under the agreements governing the loans provided by these
lenders the Company was required to maintain terrorism insurance on the
properties securing the various loans. The aggregate amount of borrowings under
these loans as of December 31, 2002 was approximately $770.4 million, and there
was no additional borrowing capacity. Subsequently, the Company obtained an
aggregate of $360 million of separate coverage for "terrorist acts". To date,
one of the lenders has acknowledged to the Company that it will not raise any
further questions based on the Company's terrorism insurance coverage in place,
and the other three lenders have not raised any further questions regarding the
Company's insurance coverage. If lenders insist on greater coverage for these
risks, it could adversely affect the Company's ability to finance and/or
refinance its properties and to expand its portfolio.
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.
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. The
Company had $33,393,000 and $15,235,000 of cash invested in these agreements at
December 31, 2002 and 2001.
-136-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. RELATED PARTY TRANSACTIONS
LOAN AND COMPENSATION AGREEMENTS
On May 29, 2002, Mr. Roth replaced common shares of the Company securing
the Company's outstanding loan to Mr. Roth with options to purchase common
shares of the Company with a value of not less than two times the loan
amount. As a result of the decline in the value of the options, Mr. Roth
supplemented the collateral with cash and marketable securities.
At December 31, 2002, the loan due from Mr. Roth in accordance with his
employment arrangement was $13,122,500 ($4,704,500 of which is shown as a
reduction in shareholders' equity). The loan bears interest at 4.49 % per annum
(based on the applicable Federal rate) and matures in January 2006. The Company
also provided Mr. Roth with the right to draw up to $15,000,000 of additional
loans on a revolving basis. Each additional loan will bear interest, payable
quarterly, at the applicable Federal rate on the date the loan is made and will
mature on the sixth anniversary of the loan.
At December 31, 2002, loans due from Mr. Fascitelli, in accordance with his
employment agreement, aggregated $8,600,000. The loans which were scheduled to
mature in 2003 have been extended to 2006 in connection with the extension of
Mr. Fascitelli's employment agreement (discussed below), and bear interest,
payable quarterly at a weighted average interest rate of 3.97% (based on the
applicable Federal rate).
Pursuant to his 1996 employment agreement, Mr. Fascitelli became entitled
to a deferred payment consisting of $5 million in cash and a convertible
obligation payable November 30, 2001, at the Company's option, in either 919,540
Company common shares or the cash equivalent of their appreciated value, so long
as such appreciated value is not less than $20 million. The Company delivered
919,540 shares to a rabbi trust upon execution of the 1996 employment agreement.
The Company accounted for the stock compensation as a variable arrangement in
accordance with Plan B of EITF No. 97-14 "Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" as the
agreement permitted settlement in either cash or common shares. Following the
guidance in EITF 97-14, the Company recorded changes in fair value of its
compensation obligation with a corresponding increase in the liability
"Officer's Deferred Compensation". Effective as of June 7, 2001, the payment
date was deferred until November 30, 2004. Effective as of December 14, 2001,
the payment to Mr. Fascitelli was converted into an obligation to deliver a
fixed number of shares (919,540 shares) establishing a measurement date for the
Company's stock compensation obligation; accordingly the Company ceased
accounting for the Rabbi Trust under Plan B of the EITF and began Plan A
accounting. Under Plan A, the accumulated liability representing the value of
the shares on December 14, 2001, was reclassified as a component of
Shareholders' Equity as "Deferred compensation shares earned but not yet
delivered." In addition, future changes in the value of the shares are no longer
recognized as additional compensation expense. The fair value of this obligation
was $34,207,000 at December 31, 2002. The Company has reflected this liability
as Deferred Compensation Shares Not Yet Delivered in the Shareholders' Equity
section of the balance sheet. For the years ended December 31, 2001 and 2000,
the Company recognized approximately $4,744,000 and $3,733,000 of compensation
expense of which $2,612,000 and $1,968,000 represented the appreciation in value
of the shares in each period and $2,132,000 and $1,765,000 represented dividends
paid on the shares.
Effective January 1, 2002, the Company extended its employment agreement
with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant
to the extended employment agreement, Mr. Fascitelli is entitled to receive a
deferred payment on December 31, 2006 of 626,566 Vornado common shares which are
valued for compensation purposes at $27,500,000 (the value of the shares on
March 8, 2002, the date the extended employment agreement was executed). The
shares are being held in a rabbi trust for the benefit of Mr. Fascitelli and
vested 100% on December 31, 2002. The extended employment agreement does not
permit diversification, allows settlement of the deferred compensation
obligation by delivery of these shares only, and permits the deferred delivery
of these shares. The value of these shares is being amortized ratably over the
one year vesting period as compensation expense.
Pursuant to the Company's annual compensation review in February 2002 with
Joseph Macnow, the Company's Chief Financial Officer, the Compensation Committee
approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable
federal rate of 4.65% per annum and due January 1, 2006. The loan, which was
funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002
exercise of options to purchase 225,000 shares of the Company's common stock.
The loan is collateralized by assets with a value of not less than two times the
loan amount. As a result of the decline in the value of the options, Mr. Macnow
supplemented the collateral with cash and marketable securities.
-137-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
One other executive officer of the Company has a loan outstanding pursuant
to an employment agreement totaling $1,500,000 at December 31, 2002. The loan
matures in April 2005 and bears interest at the applicable Federal rate provided
(4.5% at December 31, 2002).
TRANSACTIONS WITH AFFILIATES AND OFFICERS AND TRUSTEES OF THE COMPANY
ALEXANDER'S
The Company owns 33.1% of Alexander's. Mr. Roth and Mr. Fascitelli are
Officers and Directors of Alexander's and the Company provides various services
to Alexander's in accordance with management and leasing agreements. See Note 4
"Investments in Partially-Owned Entities" for further details.
The Company constructed a $16.3 million community facility and low-income
residential housing development (the "30th Street Venture"), in order to receive
163,728 square feet of transferable development rights, generally referred to as
"air rights". The Company donated the building to a charitable organization. The
Company sold 106,796 square feet of these air rights to third parties at an
average price of $120 per square foot. An additional 28,821 square feet of air
rights was purchased by Alexander's at a price of $120 per square foot for use
at Alexander's 59th Street development project (the "59th Street Project"). In
each case, the Company received cash in exchange for air rights. The Company
identified third party buyers for the remaining 28,111 square feet of air rights
related to the 30th Street Venture. These third party buyers wanted to use the
air rights for the development of two projects located in the general area of
86th Street which was not within the required geographical radius of the
construction site nor in the same Community Board as the low-income housing and
community facility project. The 30th Street Venture asked Alexander's to sell
28,111 square feet of the air rights it already owned to the third party buyers
(who could use them) and the 30th Street Venture would replace them with 28,111
square feet of air rights. In October 2002, the Company sold 28,111 square feet
of air rights to Alexander's for an aggregate purchase price of $3,059,000 (an
average of $109 per square foot). Alexander's then sold an equal amount of air
rights to the third party buyers for an aggregate purchase price of $3,339,000
(an average of $119 per square foot).
INTERSTATE PROPERTIES
The Company currently manages and leases the real estate assets of
Interstate Properties pursuant to a management agreement for which the Company
receives an annual 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 arm's 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, 2002, 2001, and 2000, $1,450,000, $1,655,000,
and $1,418,000 of management fees were earned by the Company pursuant to the
management agreement.
BUILDING MAINTENANCE SERVICE COMPANY ("BMS")
On January 1, 2003, the Company acquired BMS, a company which provides
cleaning and related services primarily to the Company's Manhattan office
properties, for $13,000,000 in cash from the estate of Bernard Mendik and
certain other individuals including Mr. Greenbaum, an executive officer of the
Company. The Company paid BMS $53,024,000, $51,280,000, and $47,493,000 for the
years ended December 31, 2002, 2001 and 2000 for services rendered to the
Company's Manhattan office properties. Although the terms and conditions of the
contracts pursuant to which these services were provided were not negotiated at
arms length, the Company believes based upon comparable amounts charged to other
real estate companies that the terms and conditions of the contracts were fair
to the Company.
-138-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
VORNADO OPERATING COMPANY
In October 1998, Vornado Operating Company ("Vornado Operating") was spun
off from the Company in order to own assets that the Company could not itself
own and conduct activities that the Company could not itself conduct. The
Company granted Vornado Operating a $75,000,000 unsecured revolving credit
facility (the "Revolving Credit Agreement") which expires on December 31, 2004.
Borrowings under the Revolving Credit Agreement bear interest at LIBOR plus 3%.
The Company receives a commitment fee equal to 1% per annum on the average daily
unused portion of the facility. No amortization is required to be paid under the
Revolving Credit Agreement during its term. 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.
Vornado Operating has disclosed that in the aggregate its investments do
not, and for the foreseeable future are not expected to, generate sufficient
cash flow to pay all of its debts and expenses. Further, Vornado Operating
states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that
its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent
Real Estate Equities, will need to restructure the leases between the Landlord
and the Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale
and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado
Operating is expected to have a source to repay the debt under this facility,
which may be extended. Since January 1, 2002, the Company has not recognized
interest income on the debt under this facility.
CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES
On December 31, 2002, the Company and Crescent Real Estate Equities
formed a joint venture to acquire the Carthage, Missouri and Kansas City,
Kansas quarries from AmeriCold Logistics, the tenant of the Temperature
Controlled Logistics facilities for $20,000,000 in cash. The Company
contributed cash of $8,800,000 to the joint venture representing its 44%
interest. AmeriCold Logistics used the proceeds from the sale to repay a
portion of a loan to Vornado Operating. Vornado Operating then repaid
$9,500,000 of the amount outstanding under the Company's Revolving Credit
Facility. On December 31, 2002, the joint venture purchased $5,720,000 of
trade receivables from AmeriCold Logistics at a 2% discount, of which the
Company's share was $2,464,000.
OTHER
The Company owns preferred securities in Capital Trust, Inc. ("Capital
Trust") totaling $29,212,000 at December 31, 2002. Mr. Roth, the Chairman and
Chief Executive Officer of Vornado Realty Trust, is a member of the Board of
Directors of Capital Trust.
On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue
to the other venture partner, an entity controlled by the late Bernard Mendik, a
former trustee and executive officer of the Company, for $60,000,000, resulting
in a gain to the Company of $12,445,000. The sale was initiated by the Company's
partner and was based on a competitive bidding process handled by an independent
broker. The Company believes that the terms of the sale were at arm's length and
were fair to the Company.
During 2002 and 2001, the Company paid $147,000 and $136,000 for legal
services to a firm in which one of the Company's trustees is a member.
On January 1, 2001, the Company acquired the common stock of various
preferred stock affiliates which was owned by Officers and Trustees of the
Company and converted them to taxable REIT subsidiaries. The total acquisition
price was $5,155,000. The purchase price, which was the estimated fair value,
was determined by both independent appraisal and by reference to the
individuals' pro rata share of the earnings of the preferred stock affiliates
during the three-year period that these investments were held.
In connection with the Park Laurel condominium project, in 2001 the joint
venture accrued $5,779,000 of awards under the venture's incentive compensation
plan.
-139-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. MINORITY INTEREST
The minority interest represents limited partners', other than the Company,
interests in the Operating Partnership and are comprised of:
Outstanding Units at Preferred or
---------------------------- Per Unit Annual Conversion
December 31, December 31, Liquidation Distribution Rate Into
Unit Series 2002 2001 Preference Rate Class A Units
------------------ ------------ ------------ ----------- ------------ --------------
Common:
Class A (1)....................... 20,956,446 5,823,419 -- $ 2.72 N/A
Convertible Preferred:
5.0% B-1 Convertible Preferred.... 899,566 899,566 $ 50.00 $ 2.50 .914
8.0% B-2 Convertible Preferred.... 449,783 449,783 $ 50.00 $ 4.00 .914
6.5% C-1 Convertible Preferred.... 747,912 747,912 $ 50.00 $ 3.25 1.1431
6.5% E-1 Convertible Preferred.... 4,998,000 4,998,000 $ 50.00 $ 3.25(3) 1.1364
9.00% F-1 Preferred (4)........... 400,000 400,000 $ 25.00 $ 2.25 (5)
Perpetual Preferred: (6)
8.5% D-1 Cumulative
Redeemable Preferred............ 3,500,000 3,500,000 $ 25.00 $ 2.125 N/A
8.375% D-2 Cumulative Redeemable
Preferred....................... 549,336 549,336 $ 50.00 $ 4.1875 N/A
8.25% D-3 Cumulative Redeemable
Preferred....................... 8,000,000 8,000,000 $ 25.00 $ 2.0625 N/A
8.25% D-4 Cumulative Redeemable
Preferred....................... 5,000,000 5,000,000 $ 25.00 $ 2.0625 N/A
8.25% D-5 Cumulative Redeemable
Preferred....................... 6,480,000 7,480,000 $ 25.00 $ 2.0625 N/A
8.25% D-6 Cumulative Redeemable
Preferred....................... 840,000 840,000 $ 25.00 $ 2.0625 N/A
8.25% D-7 Cumulative Redeemable
Preferred....................... 7,200,000 7,200,000 $ 25.00 $ 2.0625 N/A
8.25% D-8 Cumulative Redeemable
Preferred....................... 360,000 360,000 $ 25.00 $ 2.0625 N/A
8.25% D-9 Cumulative Redeemable
Preferred....................... 1,800,000 1,800,000 $ 25.00 $ 2.0625 N/A
- ----------
(1) Class A units are redeemable at the option of the holder for common shares
of beneficial interest in Vornado, on a one-for-one basis, or at the
Company's option for cash.
(2) Class D units automatically converted into Class A units in the third
quarter of 2001. Prior to the conversion, the Class D unitholders
participated in distributions at an annual rate of $2.12, then pari passu
with the Class A units.
(3) Increases to $3.38 in March 2006.
(4) Issued in connection with the acquisition of a leasehold interest at 715
Lexington Avenue. Redeemable at the Company's option beginning January 2012
for Class A units.
(5) Holders have the right to require the Company to redeem the outstanding F-1
units for cash equal to the Liquidation Preference of $25.00 per share.
(6) Convertible at the option of the holder for an equivalent amount of the
Company's preferred shares and redeemable at the Company's option after the
5th anniversary of the date of issuance (ranging from December 1998 to
September 2001).
-140-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. INCOME PER SHARE
The following table sets forth the computation of basic and diluted income
per share:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
-------------- ----------- ------------
(Amounts in thousands, except per share amounts)
Numerator:
Income before gains on sale of real estate and cumulative
effect of change in accounting principle.................... $ 263,032 $ 252,353 $ 223,026
Gains on sale of real estate.................................. -- 15,495 10,965
Cumulative effect of change in accounting
principle................................................... (30,129) (4,110) --
-------------- ----------- ------------
Net income.................................................... 232,903 263,738 233,991
Preferred stock dividends..................................... (23,167) (36,505) (38,690)
-------------- ----------- ------------
Numerator for basic and diluted income per
share -- net income applicable to common shares................. $ 209,736 $ 227,233 $ 195,301
============== =========== ============
Denominator:
Denominator for basic income per share - weighted
average shares.............................................. 105,889 89,109 86,521
Effect of dilutive securities:
Employee stock options and restricted share awards.......... 3,780 2,964 2,171
-------------- ----------- ------------
Denominator for diluted income per share --
adjusted weighted average shares and
assumed conversions......................................... 109,669 92,073 88,692
============== =========== ============
INCOME PER COMMON SHARE -- BASIC:
Income before gains on sale of real estate and cumulative
effect of change in accounting principle.................. $ 2.26 $ 2.42 $ 2.14
Gains on sale of real estate................................ -- .17 .12
Cumulative effect of change in accounting
principle................................................. (.28) (.04) --
-------------- ----------- ------------
Net income per common share................................. $ 1.98 $ 2.55 $ 2.26
============== =========== ============
INCOME PER COMMON SHARE -- DILUTED:
Income before gains on sale of real estate and cumulative
effect of change in accounting principle.................. $ 2.18 $ 2.34 $ 2.08
Gains on sale of real estate................................ -- .17 .12
Cumulative effect of change in accounting
principle................................................ (.27) (.04) --
-------------- ----------- ------------
Net income per common share................................. $ 1.91 $ 2.47 $ 2.20
============== =========== ============
-141-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summary represents the results of operations for each quarter
in 2002, 2001 and 2000:
NET INCOME NET INCOME PER
APPLICABLE TO COMMON SHARE(1)
COMMON ----------------------
REVENUE SHARES BASIC DILUTED
---------- ------------- -------- -------
(Amounts in thousands, except share amounts)
2002
March 31............................................... $ 348,905(2) $ 45,637(2) $ .43(2) $ .41(2)
June 30................................................ 355,763(2) 65,184(2) .60(2) .58(2)
September 30........................................... 363,571(2) 59,481(2) .54(2) .53(2)
December 31............................................ 366,831 39,434 .37 .36
2001
March 31............................................... $ 242,610 $ 46,836 $ .54 $ .52
June 30................................................ 246,075 56,920 .65 .64
September 30........................................... 250,265 67,876 .76 .74
December 31............................................ 246,823 55,601 .59 .57
2000
March 31............................................... $ 195,279 $ 47,523 $ .55 $ .54
June 30................................................ 198,745 47,281 .55 .53
September 30........................................... 215,655 58,447 .68 .65
December 31............................................ 216,293 42,050 .48 .47
----------
(1) The total for the year may differ from the sum of the quarters as
a result of weighting.
(2) Restated to include the effect of SFAS 141 - Business
Combinations, for the amortization of above and below market
leases acquired in 2002. The effect of restatement on each of the
first three quarters on net income and net income per common share
was $940 or $.02 per diluted share.
16. COSTS OF ACQUISITIONS AND DEVELOPMENT NOT CONSUMMATED
The Company has a 70% interest in a joint venture to develop an office
tower over the Port Authority Bus Terminal in New York City. Current market
conditions have resulted in the joint venture writing off $9,700,000 in 2002,
representing all pre-development costs capitalized to date, of which the
Company's share is $6,874,000.
In 2001, the Company was unable to reach a final agreement with the Port
Authority of NY & NJ to conclude a net lease of the World Trade Center.
Accordingly, the Company wrote-off costs of $5,223,000 primarily associated with
the World Trade Center.
-142-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. SEGMENT INFORMATION
The Company has four business segments: Office, Retail, Merchandise Mart
Properties and Temperature Controlled Logistics. Prior to 2001, income from the
Company's preferred stock affiliates ("PSAs") was included in income from
partially-owned entities. On January 1, 2001, the Company acquired the common
stock of its PSAs and converted these entities to taxable REIT subsidiaries.
Accordingly, the Hotel portion of the Hotel Pennsylvania and the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the years ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities as if
consolidated as of January 1, 2000. In addition, the Company has revised
Adjusted EBITDA as previously reported for the year ended December 31, 2001 and
2000 to include income from the early extinguishment of debt of $1,170,000 in
2001 and expense from the early extinguishment of debt of $1,125,000 in 2000
because such items are no longer treated as extraordinary items in accordance
with Generally Accepted Accounting Principles.
($ in thousands) December 31, 2002
-----------------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- ---------- ----------- ----------- ----------
Rentals.............................. $ 1,248,903 $ 867,938 $ 127,561 $ 195,899 $ -- $ 57,505
Expense reimbursements............... 159,978 89,890 51,750 14,754 -- 3,584
Other income......................... 26,189 21,221 1,653 2,951 -- 364
----------- ----------- ---------- ---------- ---------- ----------
Total revenues....................... 1,435,070 979,049 180,964 213,604 -- 61,453
----------- ----------- ---------- ---------- ---------- ----------
Operating expenses................... 541,596 343,723 65,455 86,022 -- 46,396
Depreciation and amortization........ 205,826 146,746 15,507 26,716 -- 16,857
General and administrative........... 98,458 34,346 5,036 20,382 -- 38,694
Costs of acquisitions and
development not consummated....... 6,874 -- -- -- -- 6,874
Amortization of officers deferred
compensation expense.............. 27,500 -- -- -- -- 27,500
----------- ----------- ---------- ---------- ---------- ----------
Total expenses....................... 880,254 524,815 85,998 133,120 -- 136,321
----------- ----------- ---------- ---------- ---------- ----------
Operating income..................... 554,816 454,234 94,966 80,484 -- (74,868)
Income applicable to Alexander's..... 29,653 -- -- -- -- 29,653
Income from partially-owned
entities.......................... 44,458 1,966 (687) (339) 9,707 33,811
Interest and other investment
income............................ 31,685 6,472 323 507 -- 24,383
Interest and debt expense............ (239,525) (141,044) (56,643) (22,948) -- (18,890)
Net gain on disposition of
wholly-owned and
partially-owned assets other
than real estate.................. (17,471) -- -- 2,156 -- (19,627)
Minority interest.................... (140,584) (119,910) (13,736) (23,910) 2,093 14,879
----------- ----------- ---------- ---------- ---------- ----------
Income before gains on sale of
real estate and cumulative
effect of change in accounting
principle......................... 263,032 201,718 24,223 35,950 11,800 (10,659)
Gains on sale of real estate -- -- -- -- -- --
Cumulative effect of change in
accounting principle.............. (30,129) -- -- -- (15,490) (14,639)
----------- ----------- ---------- ---------- ---------- ----------
Net income........................... 232,903 201,718 24,223 35,950 (3,690) (25,298)
Cumulative effect of change in
accounting principle.............. 30,129 -- -- -- 15,490 14,639
Interest and debt expense(3)......... 302,009 139,157 58,409 23,461 25,617 55,365
Depreciation and amortization(3)..... 257,707 149,361 17,532 27,006 34,474 29,334
----------- ----------- ---------- ---------- ---------- ----------
EBITDA............................... 822,748 490,236 100,164 86,417 71,891 74,040
Adjustments:
Minority interest.................... 140,584 119,910 13,736 23,910 (2,093) (14,879)
Gains (losses) on sale of real
estate(3)......................... (1,405) -- -- -- 2,026 (3,431)
Straight-lining of rents(3) ......... (29,837) (24,352) (1,863) (1,772) -- (1,850)
Amortization of below market
leases, net....................... (12,634) (12,469) (165) -- -- --
Other 1,549 -- 860 323 -- 366
----------- ----------- ---------- ---------- ---------- ----------
Adjusted EBITDA(1) $ 921,005 $ 573,325 $ 112,732 $ 108,878 $ 71,824 $ 54,246
=========== =========== ========== ========== ========== ==========
6,822,268 5,012,626
Balance sheet data:
Real estate, net.................... $ 6,833,323 $ 5,024,205 $ 575,085 $ 891,701 $ -- $ 342,856
Investments and advances to
partially-owned entities.......... 997,711 29,421 56,375 42,497 448,295 421,123
Capital expenditures:
Acquisitions...................... 2,739,746 2,664,468 89,448 -- -- --
Other............................. 164,162 114,375 3,019 20,852 5,588 20,328
See notes on page 146
-143-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
($ in thousands) December 31, 2002
-----------------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- ---------- ----------- ----------- ----------
Rentals............................... $ 841,999 $ 461,606 $ 121,023 $ 197,668 $ -- $ 61,702
Expense reimbursements................ 133,114 67,470 49,436 13,801 -- 2,407
Other income.......................... 10,660 3,775 1,154 3,324 -- 2,407
----------- ----------- ---------- ---------- ---------- ----------
Total revenues........................ 985,773 532,851 171,613 214,793 -- 66,516
----------- ----------- ---------- ---------- ---------- ----------
Operating expenses.................... 398,969 217,581 56,547 83,107 -- 41,734
Depreciation and amortization......... 123,862 71,425 14,767 25,397 -- 12,273
General and administrative............ 72,572 12,421 3,576 18,081 -- 38,494
Costs of acquisitions and
development not consummated........ 5,223 -- -- -- -- 5,223
----------- ----------- ---------- ---------- ---------- ----------
Total expenses........................ 600,626 301,427 74,890 126,585 -- 97,724
----------- ----------- ---------- ---------- ---------- ----------
Operating income...................... 385,147 231,424 96,723 88,208 -- (31,208
Income applicable to Alexander's...... 25,718 -- -- -- -- 25,718
Income from partially-owned entities.. 80,612 32,746 1,914 149 17,447(4) 28,356
Interest and other investment income.. 54,385 6,866 608 2,045 -- 44,866
Interest and debt expense............. (173,076) (54,667 (55,358) (33,354 -- (29,697)
Net loss disposition of
wholly-owned and partially-owned
assets other than real estate...... (8,070) -- -- 160 -- (8,230)
Minority interest..................... (112,363) (55,932) (16,562) (15,650) (10,968) (13,251)
----------- ----------- ---------- ---------- ---------- ----------
Income before gains on sale of real
estate and cumulative effect of
change in accounting............... 252,353 160,437 27,325 41,558 6,479 16,554
Gains on sales of real estate 15,495 12,445 3,050 -- -- --
Cumulative effect of change in
accounting principle............... (4,110) -- -- -- -- (4,110)
----------- ----------- ---------- ---------- ---------- ----------
Net income............................ 263,738 172,882 30,375 41,558 6,479 12,444
Cumulative effect of change in
accounting principle............... 4,110 -- -- -- -- 4,110
Interest and debt expense(3).......... 266,784 92,410 57,915 33,354 26,459 56,646
Depreciation and amortization(3)...... 188,859 91,085 18,957 25,397 33,815 19,605
----------- ----------- ---------- ---------- ---------- ----------
EBITDA................................ 723,491 356,377 107,247 100,309 66,753 92,805
Adjustments:
Gains on sale of real estate(3)....... (21,793) (12,445) (3,050) -- -- (6,298)
Minority interest..................... 112,363 55,932 16,562 15,650 10,968 13,251
Net gain on disposition of
wholly-owned and partially-owned
assets other than real estate...... (160) -- -- (160) -- --
Straight-lining of rents(3)........... (26,134) (20,064) 727 (4,997) -- (1,800)
Other................................. (2,715) -- (2,337) -- 716 (1,094)
----------- ----------- ---------- ---------- ---------- ----------
Adjusted EBITDA(1).................... $ 785,052 $ 379,800 $ 119,149 $ 110,802 $ 78,437 $ 96,864
=========== =========== ========== ========== ========== ==========
Balance sheet data:
Real estate, net.................... $ 4,183,986 $ 2,446,534 $ 503,923 $ 911,067 $ -- $ 322,462
Investments and advances to
partially-owned entities.......... 1,270,195 374,371 28,213 9,764 474,862 382,985
Capital expenditures:
Acquisitions...................... 11,574 11,574 -- -- -- --
Other............................. 158,343 79,117 7,597 51,036 5,700 14,893
----------
See notes on page 146
-144-
($ in thousands) December 31, 2002
2000 (after giving effect to consolidation of PSAs)
-----------------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
----------- ----------- ---------- ----------- ----------- ----------
Rentals............................... $ 788,469 $ 406,261 $ 129,902 $ 171,001 $ -- $ 81,305
Expense reimbursements................ 120,074 60,767 45,490 10,654 -- 3,163
Other income.......................... 17,608 5,499 2,395 4,661 -- 5,053
----------- ----------- ---------- ---------- ---------- ----------
Total revenues........................ 926,151 472,527 177,787 186,316 -- 89,521
----------- ----------- ---------- ---------- ---------- ----------
Operating expenses.................... 379,524 199,424 55,671 74,553 -- 49,876
Depreciation and amortization......... 108,109 58,074 17,464 21,984 -- 10,587
General and administrative............ 63,468 10,401 667 16,330 -- 36,070
----------- ----------- ---------- ---------- ---------- ----------
Total expenses........................ 551,101 267,899 73,802 112,867 -- 96,533
----------- ----------- ---------- ---------- ---------- ----------
Operating income...................... 375,050 204,628 103,985 73,449 -- (7,012)
Income applicable to Alexander's...... 17,363 -- -- -- -- 17,363
Income from partially-owned
entities........................... 79,694 29,210 667 -- 28,778(4) 21,039
Interest and other investment
income............................. 33,798 6,162 -- 2,346 -- 25,290
Interest and debt expense............. (180,505) (62,162) (54,305) (38,569) -- (25,469)
Minority interest..................... (102,374) (46,917) (16,550) (12,660) (12,483) (13,764)
----------- ----------- ---------- ---------- ---------- ----------
Income before gains on sale of
real estate........................ 223,026 130,921 33,797 24,566 16,295 17,447
Gains on sale of real estate.......... 10,965 8,405 2,560 -- -- --
----------- ----------- ---------- ---------- ---------- ----------
Net income............................ 233,991 139,326 36,357 24,566 16,295 17,447
Interest and debt expense(3).......... 260,573 96,224 55,741 38,566 27,424 42,618
Depreciation and amortization(3)...... 167,268 76,696 18,522 20,627 34,015 17,408
----------- ----------- ---------- ---------- ---------- ----------
EBITDA................................ 661,832 312,246 110,620 83,759 77,734 77,473
Adjustments:
Minority interest..................... 102,374 46,917 16,550 12,660 12,483 13,764
Gains on sale of real estate(3)....... (10,965) (8,405) (2,560) -- -- --
Straight-lining of rents(3)........... (30,001) (19,733) (2,295) (5,919) (1,121) (933)
Other................................. 14,510 -- (1,654) 1,358 4,064(2) 10,742(5)
----------- ----------- ---------- ---------- ---------- ----------
Adjusted EBITDA(1).................... $ 737,750 $ 331,025 $ 120,661 $ 91,858 $ 93,160 $ 101,046
=========== =========== ========== ========== ========== ==========
Balance sheet data:
Real estate, net.................... $ 3,960,605 $ 2,388,393 $ 551,183 $ 862,003 $ -- $ 159,026
Investments and advances to
partially-owned entities.......... 1,459,211 394,089 31,660 41,670 469,613 522,179
Capital expenditures:
Acquisitions...................... 246,500 128,000 -- 89,000 -- 29,500
Other............................. 212,907 106,689 7,251 37,362 28,582 33,023
----------
See notes on following page.
-145-
VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTES:
(1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on sales
of depreciable real estate, the effect of straight-lining of rent
escalations, amortization of acquired above and below market leases and
minority interest. Management considers Adjusted EBITDA a supplemental
measure for making decisions and assessing the performance of its
segments. Adjusted EBITDA should not be considered a substitute for net
income or a substitute for cash flow as a measure of liquidity. Adjusted
EBITDA is presented as a measure of "operating performance" which enables
the reader to identify trends from period to period and may be used to
compare "same store" operating performance to other companies, as well as
providing a measure for determining funds available to service debt.
Adjusted EBITDA may not be comparable to similarly titled measures
employed by other companies.
(2) Adjusted EBITDA - Other is comprised of:
(Amounts in thousands)
For the Year
Ended December 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
Hotel Pennsylvania................................................. $ 7,636 $ 16,978 $ 26,866
Newkirk Joint Ventures:
Equity in income of limited partnerships......................... 60,756 54,695 43,685
Interest and other income........................................ 8,795 8,700 7,300
Alexander's........................................................ 34,381 19,362 18,330
Investment income and other........................................ 31,261 44,097 34,990
Unallocated general and administrative expenses.................... (34,743) (33,515) (30,125)
Primestone foreclosure and impairment loss......................... (35,757) -- --
Amortization of Officer's deferred compensation expense............ (27,500) -- --
Net gain on sale of marketable securities.......................... 12,346 -- --
Write-off of 20 Times Square pre-development costs (2002) and --
World Trade Center acquisition costs (2001).................... (6,874) (5,223)
Net gain on sale of air rights..................................... 1,688 -- --
Gain on transfer of mortgages...................................... 2,096 -- --
Palisades.......................................................... 161 -- --
After-tax net gain on sale of Park Laurel condominium units........ -- 15,657 --
Write-off of net investment in Russian Tea Room ("RTR")............ -- (7,374) --
Write-off of investments in technology companies................... -- (16,513) --
-------- -------- --------
Total..................................................... $ 54,246 $ 96,864 $101,046
======== ======== ========
(3) Interest and debt expense, depreciation and amortization,
straight-lining of rents and gains on sale of real estate included in
the reconciliation of net income to EBITDA or Adjusted EBITDA reflects
amounts which are netted in income from partially-owned entities.
(4) Excludes rent not recognized of $19,348, $15,281 and $9,787 for the
years ended December 31, 2002, 2001 and 2000.
(5) Includes the reversal of $1,266 and $4,765 of expenses in 2001 and 2000
representing the non-cash appreciation in the value of shares held in a
rabbi trust in connection with a deferred compensation arrangement for
the Company's President.
-146-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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 under the caption
"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, 2002, and such information is
incorporated herein by reference. Information relating to Executive Officers of
the Registrant appears at page 55 of this Annual Report on Form 10-K. Also
incorporated herein by reference is the information under the caption ("Other
Matters - 16(a) Beneficial Ownership") of the Proxy Statement.
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", under the captions "Executive Compensation" and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
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", under the caption
"Principal Security Holders" and such information is incorporated herein by
reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002, regarding
the Company's equity compensation plans.
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation
of outstanding options, outstanding options, plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in the second column)
------------- ----------------------- -------------------- ------------------------------
Equity compensation plans approved
by security holders............... 18,796,366 $ 34.60 9,963,500(1)
Equity compensation awards not
approved by security holders...... None(2) -- --
------------- --------- -------------
Total 18,796,366 $ 34.60 9,963,500
============= ========= =============
- ----------
(1) All of the shares remaining available for future issuance under plans
approved by the security holders may be issued as restricted stock
units or performance shares.
(2) Does not include common shares issuable in exchange for deferred stock
units pursuant to the compensation agreements described below under the
heading "Material Features of Equity Compensation Arrangements Not
Approved by Shareholders."
-147-
MATERIAL FEATURES OF EQUITY COMPENSATION ARRANGEMENTS NOT APPROVED BY
SHAREHOLDERS
The Company has awarded deferred stock units under individual arrangements
with two of its employees. Shareholder approval was not required for these
awards under the current rules of the New York Stock Exchange because the awards
were made as an inducement to these employees to enter into employment contracts
with the Company.
The Company awarded Sandeep Mathrani 23,798 deferred stock units pursuant
to an agreement dated as of March 4, 2002. Under this agreement, Mr. Mathrani's
deferred stock units vest over a three-year period and he is entitled to
dividend equivalent payments with regard to each vested unit. On March 4, 2005,
Mr. Mathrani will receive one common share for each of his deferred stock units,
subject to deferral at the election of Mr. Mathrani in accordance with the terms
of the agreement.
The Company awarded Melvyn Blum 148,148 deferred stock units pursuant to
an agreement dated as of December 29, 2000. Under this agreement, Mr. Blum's
deferred stock units vest over a five-year period and he is entitled to
dividend equivalent payments with regard to each vested unit. In addition,
Mr. Blum's agreement requires the Company to provide an effective
registration statement covering any common shares distributed to Mr. Blum.
Pursuant to an amendment to this agreement dated as of February 13, 2003, the
Company agreed to pay Mr. Blum an amount in cash equal to the market value of
88,889 common shares in respect of the deferred units that had vested under
his agreement as of such date. The amendment also provides that Mr. Blum will
receive one common share in respect of each remaining deferred stock unit on
the vesting date of such unit, subject to deferral at the election of Mr.
Blum in accordance with the terms of the agreement.
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", under the caption "Certain Relationships
and Related Transactions" and such information is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Annual Report on Form
10-K, an evaluation was carried out under the supervision and with the
participation of Vornado Realty Trust's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
-148-
PART IV
ITEM 15. 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.
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
-------------
II--Valuation and Qualifying Accounts--years ended December 31, 2002,
2001 and 2000................................................................ 153
III--Real Estate and Accumulated Depreciation as of December 31,2002............. 154
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 following exhibits listed on the Exhibit Index are filed with this
Annual Report on Form 10-K.
EXHIBIT NO.
10.32 Deferred Stock Agreement, dated December 29, 2000, between Vornado
Realty Trust and Melvyn Blum
10.59 First Amended and Restated Promissory Note from Michael D.
Fascitelli to Vornado Realty Trust, dated December 17, 2001
10.60 Promissory Note from Joseph Macnow to Vornado Realty Trust, dated
July 23, 2002
10.61 Amendment to Employment Agreement by and between Vornado Realty
Trust and Melvyn H. Blum, dated February 13, 2003
10.62 Amendment No. 1 to Deferred Stock Agreement by and between Vornado
Realty Trust and Melvyn H. Blum, dated February 13, 2003
12 Consolidated Ratios of Earnings to Fixed Charges and Combined Fixed
Charges and Preferred Share Dividend Requirement
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
(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 the Company did not file any
reports on Form 8-K.
-149-
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/ Joseph Macnow
-------------------------------------------------
Joseph Macnow, Executive Vice President -
Finance and Administration and
Chief Financial Officer
Date: March 7, 2003
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 7, 2003
------------------------------------------------------ Trustees (Principal Executive
(Steven Roth) Officer)
By: /s/ Michael D. Fascitelli President and Trustee March 7, 2003
------------------------------------------------------
(Michael D. Fascitelli)
By: /s/ Robert P. Kogod Trustee March 7, 2003
------------------------------------------------------
(Robert P. Kogod)
By: /s/ Joseph Macnow Executive Vice President - March 7, 2003
------------------------------------------------------ Finance and Administration and
(Joseph Macnow) Chief Financial Officer
(Principal Financial and
Accounting Officer)
By: /s/ David Mandelbaum Trustee March 7, 2003
------------------------------------------------------
(David Mandelbaum)
By: /s/ Stanley Simon Trustee March 7, 2003
------------------------------------------------------
(Stanley Simon)
By: /s/ Robert H. Smith Trustee March 7, 2003
------------------------------------------------------
(Robert H. Smith)
By: /s/ Ronald G. Targan Trustee March 7, 2003
------------------------------------------------------
(Ronald G. Targan)
By: /s/ Richard R. West Trustee March 7, 2003
------------------------------------------------------
(Richard R. West)
-150-
By: /s/ Russell B. Wight, Jr. Trustee March 7, 2003
------------------------------------------------------
(Russell B. Wight, Jr.)
-150-
CERTIFICATION
I, Steven Roth, certify that:
1. I have reviewed this annual report on Form 10-K of Vornado Realty Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 7, 2003
/s/ Steven Roth
---------------------------
Steven Roth,
Chief Executive Officer
-151-
CERTIFICATION
I, Joseph Macnow, certify that:
1. I have reviewed this annual report on Form 10-K of Vornado Realty
Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 7, 2003
/s/ Joseph Macnow
---------------------------
Joseph Macnow,
Chief Financial Officer
-152-
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN E
---------- ----------- ------------- ----------
ADDITIONS
BALANCE AT CHARGED UNCOLLECTIBLE BALANCE
BEGINNING AGAINST ACCOUNTS AT END
DESCRIPTION OF YEAR OPERATIONS WRITTEN-OFF OF YEAR
----------- ---------- ----------- ------------- ----------
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts........... $ 9,922 $ 11,634 $ (3,514) $ 18,042
=========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2001:
Allowance for doubtful accounts........... $ 9,343 $ 5,379 $ (5,891) $ 8,831
=========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts........... $ 7,292 $ 2,957 $ (906) $ 9,343
=========== =========== =========== ===========
-153-
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(AMOUNTS IN THOUSAND)
COLUMN A COLUMN B COLUMN C COLUMN D
----------------------------------------------------------------------------------------------
INITIAL COST TO COMPANY (1) COSTS
--------------------------- CAPITALIZED
SUBSEQUENT
BUILDINGS AND TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
---------------------- ------------ ---------- ------------- ----------------
Office Buildings
NEW YORK
Manhattan
One Penn Plaza $ 275,000 $ -- $ 412,169 $ 78,273
Two Penn Plaza 154,669 53,615 164,903 58,066
909 Third Avenue 105,837 -- 120,723 14,917
770 Broadway 83,314 52,898 95,686 74,295
Eleven Penn Plaza 50,383 40,333 85,259 22,398
Two Park Avenue -- 43,609 69,715 6,139
90 Park Avenue -- 8,000 175,890 13,938
888 Seventh Avenue 105,000 -- 117,269 32,614
330 West 34th Street -- -- 8,599 6,063
1740 Broadway -- 26,971 102,890 9,044
150 East 58th Street -- 39,303 80,216 12,603
866 United Nations Plaza 33,000 32,196 37,534 7,032
595 Madison (Fuller
Building) 70,345 62,731 62,888 7,441
640 Fifth Avenue -- 38,224 25,992 49,099
40 Fulton Street -- 15,732 26,388 3,235
689 Fifth Avenue -- 19,721 13,446 3,299
20 Broad Street -- -- 28,760 8,900
7 West 34th Street -- 34,595 93,703 1,018
------------ ---------- ------------- ----------------
Total New York 877,548 467,928 1,722,030 408,374
------------ ---------- ------------- ----------------
WASHINGTON, DC
Crystal Mall (4
buildings) $ 65,877 $ 49,664 $ 156,654 $ 789
Crystal Plaza (6
buildings) 70,356 57,213 131,206 2,612
Crystal Square (4
buildings) 195,983 64,817 218,330 7,909
Crystal Gateway (4
buildings) 149,839 47,594 177,373 3,079
Crystal Park (5
buildings) 264,440 100,935 409,920 3,819
Arlington Plaza 17,531 6,227 28,590 708
1919 S. Eads Street 13,148 3,979 18,610 208
Skyline Place (6
buildings) 139,212 41,986 221,869 5,281
Seven Skyline Place -- 10,292 58,351 1,950
One Skyline Tower 65,764 12,266 75,343 142
Courthouse Plaza (2
buildings) 80,062 -- 105,475 376
1101 17th Street 27,248 20,666 20,112 2,968
1730 M. Street 17,013 10,095 17,541 1,617
1140 Connecticut Avenue 20,153 19,017 13,184 3,107
1150 17th Street 32,904 23,359 24,876 3,345
1750 Penn Avenue 49,794 20,020 30,032 857
Democracy Plaza I 27,640 -- 33,628 751
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH LIFE ON WHICH
CARRIED AT CLOSE OF PERIOD DEPRECIATION
--------------------------------------- ACCUMULATED IN LATEST
BUILDINGS DEPRECIATION INCOME
AND AND DATE OF DATE STATEMENT
DESCRIPTION LAND IMPROVEMENTS TOTAL (2) AMORTIZATION CONSTRUCTION (3) ACQUIRED IS COMPUTED
------------------------ ----------- ------------ ---------- ------------ ---------------- -------- -------------
NEW YORK
Manhattan
One Penn Plaza $ -- $ 490,442 $ 490,442 $ 58,634 1972 1998 39 Years
Two Penn Plaza 52,689 223,895 276,584 35,354 1968 1997 39 Years
909 Third Avenue -- 135,640 135,640 13,107 1969 1999 39 Years
770 Broadway 52,898 169,981 222,879 18,537 1907 1998 39 Years
Eleven Penn Plaza 40,333 107,657 147,990 16,143 1923 1997 39 Years
Two Park Avenue 43,609 75,854 119,463 12,867 1928 1998 39 Years
90 Park Avenue 8,000 189,828 197,828 26,683 1964 1997 39 Years
888 Seventh Avenue -- 149,883 149,883 15,018 1980 1998 39 Years
330 West 34th Street -- 14,662 14,662 1,294 1925 1998 39 Years
1740 Broadway 26,971 111,934 138,905 17,138 1950 1997 39 Years
150 East 58th Street 39,303 92,819 132,122 10,952 1969 1998 39 Years
866 United Nations Plaza 32,196 44,566 76,762 7,723 1966 1997 39 Years
595 Madison (Fuller
Building) 62,731 70,329 133,060 5,400 1968 1999 39 Years
640 Fifth Avenue 38,224 75,091 113,315 9,112 1950 1997 39 Years
40 Fulton Street 15,732 29,623 45,355 4,019 1987 1998 39 Years
689 Fifth Avenue 19,721 16,745 36,466 1,617 1925 1998 39 Years
20 Broad Street -- 37,660 37,660 3,650 1956 1998 39 Years
7 West 34th Street 34,614 94,702 129,316 5,142 1901 2000 40 Years
----------- ------------ ---------- ------------
Total New York 467,021 2,131,311 2,598,332 262,390
----------- ------------ ---------- ------------
WASHINGTON, DC
Crystal Mall (4
buildings) $ 49,664 $ 157,443 $ 207,107 $ 7,182 1968 2002 10-40 Years
Crystal Plaza (6
buildings) 57,213 133,818 191,031 7,488 1964-1969 2002 10-40 Years
Crystal Square (4
buildings) 64,817 226,239 291,056 11,113 1974-1980 2002 10-40 Years
Crystal Gateway (4
buildings) 47,594 180,452 228,046 8,846 1983-1987 2002 10-40 Years
Crystal Park (5
buildings) 100,935 413,739 514,674 22,092 1984-1989 2002 10-40 Years
Arlington Plaza 6,227 29,298 35,525 1,307 1985 2002 10-40 Years
1919 S. Eads Street 3,979 18,818 22,797 983 1990 2002 10-40 Years
Skyline Place (6
buildings) 41,986 227,150 269,136 11,134 1973-1984 2002 10-40 Years
Seven Skyline Place 10,292 60,301 70,593 2,522 2001 2002 10-40 Years
One Skyline Tower 12,266 75,485 87,751 3,573 1988 2002 10-40 Years
Courthouse Plaza (2
buildings) -- 105,851 105,851 5,157 1988-1989 2002 10-40 Years
1101 17th Street 20,666 23,080 43,746 1,834 1963 2002 10-40 Years
1730 M. Street 10,095 19,158 29,253 1,648 1963 2002 10-40 Years
1140 Connecticut Avenue 19,017 16,291 35,308 1,435 1966 2002 10-40 Years
1150 17th Street 23,359 28,221 51,580 1,657 1970 2002 10-40 Years
1750 Penn Avenue 20,020 30,889 50,909 1,236 1964 2002 10-40 Years
Democracy Plaza I -- 34,379 34,379 1,651 1987 2002 10-40 Years
-154-
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(AMOUNTS IN THOUSAND)
COLUMN A COLUMN B COLUMN C COLUMN D
----------------------------------------------------------------------------------------------
INITIAL COST TO COMPANY (1) COSTS
--------------------------- CAPITALIZED
SUBSEQUENT
BUILDINGS AND TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
---------------------- ------------ ---------- ------------- ----------------
Tysons Dulles (3
buildings) 69,507 19,146 79,095 488
Commerce Executive
(3 buildings) 53,307 13,401 58,705 691
Reston Executive (3
buildings) 73,844 15,424 85,722 261
Crystal Gateway 1 58,279 15,826 53,884 37
Other -- -- 51,768 1,496
------------ ---------- ------------- ----------------
Total Washington, DC
Office Buildings 1,491,901 551,927 2,070,278 42,491
------------ ---------- ------------- ----------------
NEW JERSEY
Paramus -- -- 8,345 10,008
------------ ---------- ------------- ----------------
Total New Jersey -- -- 8,345 10,008
------------ ---------- ------------- ----------------
--
Total Office Buildings 2,369,449 1,019,855 3,800,653 460,873
------------ ---------- ------------- ----------------
Shopping Centers
NEW JERSEY
Bordentown 8,111 * 498 3,176 1,090
Bricktown 16,390 * 929 2,175 9,252
Cherry Hill 15,075 * 915 3,926 3,320
Delran 6,461 * 756 3,184 2,325
Dover 7,388 * 224 2,330 2,464
East Brunswick 22,887 * 319 3,236 6,215
East Hanover I 20,579 * 376 3,063 5,007
East Hanover II (4) 6,860 * 1,756 8,706 (152)
Hackensack 25,144 * 536 3,293 7,322
Jersey City 19,249 * 652 2,962 1,868
Kearny (4) 3,758 * 279 4,429 (278)
Lawnside 10,651 * 851 2,222 1,359
Lodi 9,439 * 245 9,339 110
Manalapan 12,597 * 725 2,447 5,212
Marlton 12,249 * 1,514 4,671 789
Middletown 16,535 * 283 1,508 3,938
Morris Plains 12,104 * 1,254 3,140 3,230
North Bergen (4) 3,985 * 510 3,390 (956)
North Plainfield 10,942 * 500 13,340 694
Totowa 29,694 * 1,097 5,359 10,964
Turnersville 4,108 * 900 2,132 65
Union 33,722 * 1,014 4,527 2,951
Vineland -- 290 1,594 1,281
Watchung (4) 13,606 * 451 2,347 6,865
Woodbridge 22,227 * 190 3,047 817
------------ ---------- ------------- ----------------
Total New Jersey 343,761 17,064 99,543 75,752
------------ ---------- ------------- ----------------
-155-
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH LIFE ON WHICH
CARRIED AT CLOSE OF PERIOD DEPRECIATION
--------------------------------------- ACCUMULATED IN LATEST
BUILDINGS DEPRECIATION INCOME
AND AND DATE OF DATE STATEMENT
DESCRIPTION LAND IMPROVEMENTS TOTAL (2) AMORTIZATION CONSTRUCTION (3) ACQUIRED IS COMPUTED
------------------------ ----------- ------------ ---------- ------------ ---------------- -------- -------------
Tysons Dulles (3
buildings) 19,146 79,583 98,729 3,522 1986-1990 2002 10-40 Years
Commerce Executive
(3 buildings) 13,401 59,396 72,797 2,728 1985-1989 2002 10-40 Years
Reston Executive (3
buildings) 15,422 85,983 101,407 3,526 1987-1989 2002 10-40 Years
Crystal Gateway 1 15,826 53,931 69,757 678 1981 2002 10-40 Years
Other -- 53,264 53,264 5,775
----------- ------------ ---------- ------------
Total Washington, DC
Office Buildings 551,840 2,112,769 2,664,696 107,087
----------- ------------ ---------- ------------
NEW JERSEY
Paramus -- 18,353 18,353 5,714 1967 1987 26-40 Years
----------- ------------ ---------- ------------
Total New Jersey -- 18,353 18,353 5,714
----------- ------------ ---------- ------------
Total Office Buildings 1,018,948 4,262,433 5,281,381 375,191
----------- ------------ ---------- ------------
Shopping Centers
NEW JERSEY
Bordentown 713 4,051 4,764 3,917 1958 1958 7-40 Years
Bricktown 929 11,427 12,356 6,123 1968 1968 22-40 Years
Cherry Hill 915 7,246 8,161 6,221 1964 1964 12-40 Years
Delran 756 5,509 6,265 3,555 1972 1972 16-40 Years
Dover 244 4,774 5,018 3,497 1964 1964 16-40 Years
East Brunswick 319 9,451 9,770 6,698 1957 1957 8-33 Years
East Hanover I 476 7,970 8,446 5,578 1962 1962 9-40 Years
East Hanover II (4) 2,195 8,115 10,310 672 1979 1998 40 Years
Hackensack 536 10,615 11,151 6,098 1963 1963 15-40 Years
Jersey City 652 4,830 5,482 4,252 1965 1965 11-40 Years
Kearny (4) 309 4,121 4,430 1,534 1938 1959 23-29 Years
Lawnside 851 3,581 4,432 2,599 1969 1969 17-40 Years
Lodi 245 9,449 9,694 766 1999 1975 40 Years
Manalapan 725 7,659 8,384 4,858 1971 1971 14-40 Years
Marlton 1,611 5,363 6,974 4,107 1973 1973 16-40 Years
Middletown 283 5,446 5,729 3,386 1963 1963 19-40 Years
Morris Plains 1,104 6,520 7,624 5,953 1961 1985 7-19 Years
North Bergen (4) 2,308 636 2,944 185 1993 1959 30 Years
North Plainfield 500 14,034 14,534 6,238 1955 1989 21-30 Years
Totowa 1,099 16,321 17,420 7,427 1957/1999 1957 19-40 Years
Turnersville 900 2,197 3,097 1,810 1974 1974 23-40 Years
Union 1,329 7,163 8,492 5,872 1962 1962 6-40 Years
Vineland 290 2,875 3,165 2,159 1966 1966 18-40 Years
Watchung (4) 4,178 5,485 9,663 1,484 1994 1959 27-30 Years
Woodbridge 319 3,735 4,054 3,291 1959 1959 11-40 Years
----------- ------------ ---------- ------------
Total New Jersey 23,786 168,573 192,359 98,280
----------- ------------ ---------- ------------
-156-
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(AMOUNTS IN THOUSAND)
COLUMN A COLUMN B COLUMN C COLUMN D
----------------------------------------------------------------------------------------------
INITIAL COST TO COMPANY (1) COSTS
--------------------------- CAPITALIZED
SUBSEQUENT
BUILDINGS AND TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
---------------------- ------------ ---------- ------------- ----------------
NEW YORK
Albany (Menands) 6,251 * 460 1,677 2,693
Buffalo (Amherst) 7,044 * 402 2,019 2,276
Freeport 14,879 * 1,231 3,273 2,886
New Hyde Park 7,510 * -- -- 122
North Syracuse -- -- -- 23
Rochester (Henrietta) -- -- 2,124 1,154
Rochester (4) -- 443 2,870 (929)
Valley Stream (Green
Acres) 157,654 140,069 99,586 6,475
715 Lexington Avenue -- -- 11,574 39
14th Street and Union
Square, Manhattan -- 12,566 4,044 20,512
424 6th Avenue -- 5,900 5,675 --
Riese -- 19,135 7,294 18,718
1135 Third Avenue -- 7,844 7,844 1
------------ ---------- ------------- ----------------
Total New York 193,338 188,050 147,980 53,970
------------ ---------- ------------- ----------------
PENNSYLVANIA
Allentown 23,367 * 70 3,446 10,195
Bensalem (4) 6,457 * 1,198 3,717 674
Bethlehem 4,087 * 278 1,806 3,920
Broomall 9,827 * 734 1,675 1,341
Glenolden 7,370 * 850 1,295 721
Lancaster (4) -- 606 2,312 555
Levittown -- 193 1,231 125
10th and Market
Streets, Philadelphia 9,001 * 933 3,230 6,537
Upper Moreland 6,986 * 683 2,497 565
York 4,132 * 421 1,700 1,270
------------ ---------- ------------- ----------------
Total Pennsylvania 71,227 5,966 22,909 25,903
------------ ---------- ------------- ----------------
MARYLAND
Baltimore (Belair Rd.) -- 785 1,333 3,401
Baltimore (Towson) 11,451 * 581 2,756 785
Baltimore (Dundalk) 6,205 * 667 1,710 3,264
Glen Burnie 5,893 * 462 1,741 1,459
Hagerstown 3,302 * 168 1,453 1,073
------------ ---------- ------------- ----------------
Total Maryland 26,851 2,663 8,993 9,982
------------ ---------- ------------- ----------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH LIFE ON WHICH
CARRIED AT CLOSE OF PERIOD DEPRECIATION
--------------------------------------- ACCUMULATED IN LATEST
BUILDINGS DEPRECIATION INCOME
AND AND DATE OF DATE STATEMENT
DESCRIPTION LAND IMPROVEMENTS TOTAL (2) AMORTIZATION CONSTRUCTION (3) ACQUIRED IS COMPUTED
------------------------ ----------- ------------ ---------- ------------ ---------------- -------- -------------
NEW YORK
Albany (Menands) 460 4,370 4,830 2,459 1965 1965 22-40 Years
Buffalo (Amherst) 636 4,061 4,697 3,088 1968 1968 13-40 Years
Freeport 1,231 6,159 7,390 3,478 1981 1981 15-40 Years
New Hyde Park -- 122 122 124 1970 1976 6-10 Years
North Syracuse -- 23 23 23 1967 1976 11-12 Years
Rochester (Henrietta) -- 3,278 3,278 2,415 1971 1971 15-40 Years
Rochester (4) 2,068 316 2,384 213 1966 1966 10-40 Years
Valley Stream (Green
Acres) 139,910 106,220 246,130 13,747 1956 1997 39-40 Years
715 Lexington Avenue -- 11,613 11,613 412 1923 2001 40 Years
14th Street and Union
Square, Manhattan 24,079 13,043 37,122 1,188 1965 1993 40 Years
424 6th Avenue 5,900 5,675 11,575 64 2002 40 Years
Riese 25,233 19,914 45,147 359 1923-1987 1997 39 Years
1135 Third Avenue 7,845 7,844 15,689 981 1997 39 Years
----------- ------------ ---------- ------------
Total New York 207,362 182,638 390,000 28,551
----------- ------------ ---------- ------------
PENNSYLVANIA
Allentown 334 13,377 13,711 6,772 1957 1957 20-42 Years
Bensalem (4) 2,727 2,862 5,589 1,364 1972/1999 1972 40 Years
Bethlehem 278 5,726 6,004 4,479 1966 1966 9-40 Years
Broomall 850 2,900 3,750 2,419 1966 1966 9-40 Years
Glenolden 850 2,016 2,866 1,278 1975 1975 18-40 Years
Lancaster (4) 3,043 430 3,473 367 1966 1966 12-40 Years
Levittown 183 1,366 1,549 1,293 1964 1964 7-40 Years
10th and Market
Streets, Philadelphia 933 9,767 10,700 2,164 1977 1994 27-30 Years
Upper Moreland 683 3,062 3,745 2,161 1974 1974 15-40 Years
York 409 2,982 3,391 2,042 1970 1970 15-40 Years
----------- ------------ ---------- ------------
Total Pennsylvania 10,290 44,488 54,778 24,339
----------- ------------ ---------- ------------
MARYLAND
Baltimore (Belair Rd.) 785 4,734 5,519 3,491 1962 1962 10-33 Years
Baltimore (Towson) 581 3,541 4,122 2,583 1968 1968 13-40 Years
Baltimore (Dundalk) 667 4,974 5,641 3,593 1966 1966 12-40 Years
Glen Burnie 462 3,200 3,662 2,065 1958 1958 16-23 Years
Hagerstown 168 2,526 2,694 1,681 1966 1966 9-40 Years
----------- ------------ ---------- ------------
Total Maryland 2,663 18,975 21,638 13,413
----------- ------------ ---------- ------------
-157-
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(AMOUNTS IN THOUSAND)
COLUMN A COLUMN B COLUMN C COLUMN D
----------------------------------------------------------------------------------------------
INITIAL COST TO COMPANY (1) COSTS
--------------------------- CAPITALIZED
SUBSEQUENT
BUILDINGS AND TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
---------------------- ------------ ---------- ------------- ----------------
CONNECTICUT
Newington (4) 6,581 * 502 1,581 1,606
Waterbury -- -- 2,103 1,669
------------ ---------- ------------- ----------------
Total Connecticut 6,581 502 3,684 3,275
------------ ---------- ------------- ----------------
MASSACHUSETTS
Chicopee -- 510 2,031 358
Springfield (4) 3,142 * 505 1,657 795
------------ ---------- ------------- ----------------
Total Massachusetts 3,142 1,015 3,688 1,153
------------ ---------- ------------- ----------------
PUERTO RICO (SAN JUAN)
Caguas 67,692 15,359 74,089 (147)
Montehiedra 59,638 9,182 66,701 1,033
------------ ---------- ------------- ----------------
Total Puerto Rico 127,330 24,541 140,790 886
------------ ---------- ------------- ----------------
Total Retail Properties 772,230 239,801 427,587 170,921
------------ ---------- ------------- ----------------
Merchandise Mart Properties
ILLINOIS
Merchandise Mart,
Chicago -- 64,528 319,146 36,487
350 North Orleans,
Chicago -- 14,238 67,008 24,632
33 North Dearborn,
Chicago 18,926 6,624 30,680 2,826
WASHINGTON D.C.
Washington Office Center 44,924 10,719 69,658 3,580
Washington Design Center 48,542 12,274 40,662 8,829
Other -- 9,175 6,273 37
NORTH CAROLINA
Market Square Complex,
High Point 102,100 11,969 85,478 69,285
National Furniture Mart,
High Point 13,106 1,069 16,761 596
CALIFORNIA
Gift and Furniture Mart,
Los Angeles -- 10,141 43,422 14,889
------------ ---------- ------------- ----------------
Total Merchandise Mart 227,598 140,737 679,088 161,161
------------ ---------- ------------- ----------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH LIFE ON WHICH
CARRIED AT CLOSE OF PERIOD DEPRECIATION
--------------------------------------- ACCUMULATED IN LATEST
BUILDINGS DEPRECIATION INCOME
AND AND DATE OF DATE STATEMENT
DESCRIPTION LAND IMPROVEMENTS TOTAL (2) AMORTIZATION CONSTRUCTION (3) ACQUIRED IS COMPUTED
------------------------ ----------- ------------ ---------- ------------ ---------------- -------- -------------
CONNECTICUT
Newington (4) 2,421 1,268 3,689 258 1965 1965 9-40 Years
Waterbury 667 3,105 3,772 2,098 1969 1969 21-40 Years
----------- ------------ ---------- ------------
Total Connecticut 3,088 4,373 7,461 2,356
----------- ------------ ---------- ------------
MASSACHUSETTS
Chicopee 510 2,389 2,899 2,004 1969 1969 13-40 Years
Springfield (4) 2,586 371 2,957 125 1993 1966 28-30 Years
----------- ------------ ---------- ------------
Total Massachusetts 3,096 2,760 5,856 2,129
----------- ------------ ---------- ------------
PUERTO RICO (SAN JUAN)
Caguas 15,359 73,942 89,301 6,172 1996 2002 15-39 Years
Montehiedra 9,182 67,734 76,916 9,735 1996 1997 40 Years
----------- ------------ ---------- ------------
Total Puerto Rico 24,541 141,676 166,217 15,907
----------- ------------ ---------- ------------
Total Retail Properties 274,826 563,483 838,309 184,975
----------- ------------ ---------- ------------
Merchandise Mart Properties
ILLINOIS
Merchandise Mart,
Chicago 64,535 355,626 420,161 43,299 1930 1998 40 Years
350 North Orleans,
Chicago 14,246 91,632 105,878 14,203 1977 1998 40 Years
33 North Dearborn,
Chicago 6,624 33,506 40,130 1,864 2000 40 Years
WASHINGTON D.C.
Washington Office Center 10,719 73,238 83,957 8,824 1990 1998 40 Years
Washington Design Center 12,274 49,491 61,765 6,718 1919 1998 40 Years
Other 9,175 6,310 15,485 749
NORTH CAROLINA
Market Square Complex,
High Point 14,010 152,722 166,732 12,839 1902-1989 1998 40 Years
National Furniture Mart,
High Point 1,069 17,357 18,426 1,869 1964 1998 40 Years
CALIFORNIA
Gift and Furniture Mart,
Los Angeles 10,141 58,311 68,452 3,083 2000 40 Years
----------- ------------ ---------- ------------
Total Merchandise Mart 142,793 838,193 980,986 93,448
----------- ------------ ---------- ------------
-158-
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(AMOUNTS IN THOUSAND
COLUMN A COLUMN B COLUMN C COLUMN D
----------------------------------------------------------------------------------------------
INITIAL COST TO COMPANY (1) COSTS
--------------------------- CAPITALIZED
SUBSEQUENT
BUILDINGS AND TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
---------------------- ------------ ---------- ------------- ----------------
Warehouse/Industrial
NEW JERSEY
East Brunswick 6,575 -- 4,772 3,146
East Hanover 27,232 576 7,752 7,479
Edison 4,343 705 2,839 1,753
Garfield 11,273 96 8,068 5,088
------------ ---------- ------------- ----------------
Total Warehouse/Industrial 49,423 1,377 23,431 17,466
------------ ---------- ------------- ----------------
Other Properties
NEW JERSEY
Palisades, Fort Lee 100,000 12,017 129,786 --
Montclair -- 66 470 330
------------ ---------- ------------- ----------------
Total New Jersey 100,000 12,083 130,256 330
------------ ---------- ------------- ----------------
NEW YORK
Hotel Pennsylvania -- 29,904 121,712 21,922
------------ ---------- ------------- ----------------
Total New York -- 29,904 121,712 21,922
------------ ---------- ------------- ----------------
FLORIDA
Student Housing Joint
Venture 19,019 3,722 21,095 565
------------ ---------- ------------- ----------------
Total Florida 19,019 3,722 21,095 565
------------ ---------- ------------- ----------------
Total Other Properties 119,019 45,709 273,063 22,817
------------ ---------- ------------- ----------------
Leasehold Improvements
Equipment and Other 75,155
----------------
TOTAL
DECEMBER 31, 2002 $ 3,537,719 $1,447,479 $ 5,203,822 $ 908,393
============ ========== ============= ================
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH LIFE ON WHICH
CARRIED AT CLOSE OF PERIOD DEPRECIATION
--------------------------------------- ACCUMULATED IN LATEST
BUILDINGS DEPRECIATION INCOME
AND AND DATE OF DATE STATEMENT
DESCRIPTION LAND IMPROVEMENTS TOTAL (2) AMORTIZATION CONSTRUCTION (3) ACQUIRED IS COMPUTED
------------------------ ----------- ------------ ---------- ------------ ---------------- -------- -------------
Warehouse/Industrial
NEW JERSEY
East Brunswick -- 7,918 7,918 5,040 1972 1972 18-40 Years
East Hanover 691 15,116 15,807 12,008 1963-1967 1963 7-40 Years
Edison 704 4,593 5,297 2,898 1954 1982 12-25 Years
Garfield 96 13,156 13,252 10,780 1942 1959 11-33 Years
----------- ------------ ---------- ------------
Total Warehouse/Industrial 1,491 40,783 42,274 30,726
----------- ------------ ---------- ------------
Other Properties
NEW JERSEY
Palisades, Fort Lee 12,017 129,786 141,803 2,704 2002 2002 40 Years
Montclair 66 800 866 574 1972 1972 4-15 Years
----------- ------------ ---------- ------------
Total New Jersey 12,083 130,586 142,669 3,278
----------- ------------ ---------- ------------
NEW YORK
Hotel Pennsylvania 29,904 143,634 173,538 21,080 1919 1997 39 Years
----------- ------------ ---------- ------------
Total New York 29,904 143,634 173,538 21,080
----------- ------------ ---------- ------------
FLORIDA
Student Housing Joint
Venture 3,763 21,619 25,382 1,625 1996-1997 2000 40 Years
----------- ------------ ---------- ------------
Total Florida 3,763 21,619 25,382 1,625
----------- ------------ ---------- ------------
Total Other Properties 45,750 295,839 341,589 25,983
----------- ------------ ---------- ------------
Leasehold Improvements
Equipment and Other 8,000 67,155 75,155 27,103 3-20 Years
----------- ------------ ---------- ------------
TOTAL
DECEMBER 31, 2002 $ 1,491,808 $ 6,067,886 $7,559,694 $ 737,426
=========== ============ ========== ============
- ----------
* These encumbrances are cross collateralized under a blanket mortgage in the
amount of $487,246 at December 31, 2002.
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 $2,822,000 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. 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
property is net of a $1,615 insurance recovery.
-159-
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,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------
REAL ESTATE
Balance at beginning of period.................... $ 4,690,211 $ 4,354,392 $ 3,921,507
Additions during the period:
Land............................................ 595,977 25,808 57,669
Buildings & improvements........................ 2,276,371 332,766 416,917
------------ ------------ ------------
7,562,559 4,712,966 4,396,093
Less: Asset sold and written-off.................. 2,865 22,755 41,701
------------ ------------ ------------
Balance at end of period.......................... $ 7,559,694 $ 4,690,211 $ 4,354,392
============ ============ ============
ACCUMULATED DEPRECIATION
Balance at beginning of period.................... $ 506,225 $ 393,787 $ 308,542
Additions charged to operating expenses........... 170,888 114,121 91,236
Additions due to acquisitions..................... 63,178 -- --
------------ ------------ ------------
740,291 507,908 399,778
Less: Accumulated depreciation on assets
sold and written-off............................ 2,865 1,683 5,991
------------ ------------ ------------
Balance at end of period.......................... $ 737,426 $ 506,225 $ 393,787
============ ============ ============
-160-
EXHIBIT INDEX
EXHIBIT
NO.
- -------
3.1 -- Amended and Restated Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on April 16, 1993 - Incorporated by reference to
Exhibit 3(a) of Vornado's Registration Statement on Form S-4 (File No. 33-60286), filed on
April 15, 1993................................................................................. *
3.2 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on May 23, 1996 - Incorporated by reference to
Exhibit 3.2 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File
No. 001-11954), filed on March 11, 2002........................................................ *
3.3 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on April 3, 1997 - Incorporated by reference to
Exhibit 3.3 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File
No. 1-11954), filed on March 11, 2002.......................................................... *
3.4 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on October 14, 1997 - Incorporated by reference to
Exhibit 3.2 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May
2, 2000........................................................................................ *
3.5 -- 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............................................................ *
3.6 . -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on November 24, 1999 - Incorporated by reference to
Exhibit 3.4 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on
May 2, 2000.................................................................................... *
3.7 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on April 20, 2000 - Incorporated by reference to
Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on
May 2, 2000.................................................................................... *
3.8 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of
Assessments and Taxation of Maryland on September 14, 2000 - Incorporated by reference to
Exhibit 4.6 of Vornado's Registration Statement on Form S-8 (File No. 333-68462), filed on
August 27, 2001................................................................................ *
3.9 Articles of Amendment of Declaration of Trust of Vornado dated May 31, 2002, as filed with the
Department of Assessments and Taxation of the State of Maryland on June 13, 2002 -
incorporated by reference to Exhibit 3.9 to Vornado Realty Trust's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954)............................. *
3.10 -- Articles of Amendment of Declaration of Trust of Vornado dated June 6, 2002, as filed with the
Department of Assessments and Taxation of the State of Maryland on June 13, 2002 -
incorporated by reference to Exhibit 3.10 to Vornado Realty Trust's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954)............................. *
- ----------
* Incorporated by reference.
-161-
EXHIBIT
NO.
- -------
3.11 -- 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.................................................................................. *
3.12 -- Articles Supplementary Classifying Vornado's $3.25 Series A Convertible Preferred Shares of
Beneficial Interest, as filed with the State Department of Assessments and Taxation of
Maryland on December 15, 1997 - Incorporated by reference to Exhibit 3.10 to Vornado's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March
31, 2002....................................................................................... *
3.13 -- 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............................................... *
3.14 -- Articles Supplementary Classifying Additional Series D-1 8.5% Preferred Shares of Beneficial
Interest, liquidation preference $25.00 per share, no par value - 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................................................ *
3.15 -- 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.................................................. *
3.16 -- Articles Supplementary Classifying Vornado's Series C 8.5% Cumulative Redeemable
Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value
- Incorporated by reference to Exhibit 3.7 of Vornado's Registration Statement on Form 8-A
(File No. 001-11954), filed on May 19, 1999.................................................... *
3.17 -- Articles Supplementary Classifying Vornado Realty Trust's Series D-2 8.375% Cumulative
Redeemable Preferred Shares, dated as of May 27, 1999, as filed with the State Department of
Assessments and Taxation of Maryland on May 27, 1999 - Incorporated by reference to Exhibit
3.1 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on
July 7, 1999................................................................................... *
3.18 -- Articles Supplementary Classifying Vornado's Series D-3 8.25% Cumulative Redeemable Preferred
Shares, dated September 3, 1999, as filed with the State Department of Assessments and
Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.1 of
Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on
October 25, 1999............................................................................... *
3.19 -- Articles Supplementary Classifying Vornado's Series D-4 8.25% Cumulative Redeemable Preferred
Shares, dated September 3, 1999, as filed with the State Department of Assessments and
Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.2 of
Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on
October 25, 1999............................................................................... *
- ----------
* Incorporated by reference.
-162-
EXHIBIT
NO.
- -------
3.20 -- Articles Supplementary Classifying Vornado's Series D-5 8.25% Cumulative Redeemable Preferred
Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K,
dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999....................... *
3.21 -- Articles Supplementary Classifying Vornado`s Series D-6 8.25% Cumulative Redeemable Preferred
Shares, dated May 1, 2000, as filed with the State Department of Assessments and Taxation of
Maryland on May 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report
on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed May 19, 2000........................ *
3.22 -- Articles Supplementary Classifying Vornado's Series D-7 8.25% Cumulative Redeemable Preferred
Shares, dated May 25, 2000, as filed with the State Department of Assessments and Taxation of
Maryland on June 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current
Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000............ *
3.23 -- Articles Supplementary Classifying Vornado's Series D-8 8.25% Cumulative Redeemable Preferred
Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K,
dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000........................ *
3.24 -- Articles Supplementary Classifying Vornado's Series D-9 8.75% Preferred Shares, dated September
21, 2001, as filed with the State Department of Assessments and Taxation of Maryland on
September 25, 2001 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on
Form 8-K (File No. 001-11954), filed on October 12, 2001....................................... *
3.25 -- Amended and Restated Bylaws of Vornado, as amended on March 2, 2000 - Incorporated by reference
to Exhibit 3.12 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 001-11954), filed on March 9, 2000................................................... *
3.26 -- Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated
as of October 20, 1997 (the "Partnership Agreement") - 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.............................................................................. *
3.27 -- Amendment to the Partnership Agreement, dated as of December 16, 1997-Incorporated by reference
to Exhibit 3.5 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 001-11954) filed on March 31, 1998................................................... *
3.28 -- Second Amendment to the Partnership Agreement, 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........................................................................ *
3.29 -- Third Amendment to the Partnership Agreement, 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............................................... *
3.30 -- Fourth Amendment to the Partnership Agreement, 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...................................................... *
3.31 -- Exhibit A to the Partnership Agreement, dated as of December 22, 1998 - 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................................................ *
- ----------
* Incorporated by reference.
-163-
EXHIBIT
NO.
- -------
3.32 -- Fifth Amendment to the Partnership Agreement, 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........................................................ *
3.33 -- Exhibit A to the Partnership Agreement, 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............................................................ *
3.34 -- Sixth Amendment to the Partnership Agreement, dated as of March 17, 1999 - Incorporated by
reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No.
001-11954), filed on July 7, 1999.............................................................. *
3.35 -- Seventh Amendment to the Partnership Agreement, dated as of May 20, 1999 - Incorporated by
reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No.
001-11954), filed on July 7, 1999.............................................................. *
3.36 -- Eighth Amendment to the Partnership Agreement, dated as of May 27, 1999 - Incorporated by
reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No.
001-11954), filed on July 7, 1999.............................................................. *
3.37 -- Ninth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by
reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed
on October 25, 1999............................................................................ *
3.38 -- Tenth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by
reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated September 3, 1999
(File No. 001-11954), filed on October 25, 1999................................................ *
3.39 -- Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999 - Incorporated by
reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 24, 1999
(File No. 001-11954), filed on December 23, 1999............................................... *
3.40 -- Twelfth Amendment to the Partnership Agreement, dated as of May 1, 2000 - Incorporated by
reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No.
001-11954), filed on May 19, 2000.............................................................. *
3.41 -- Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000 - Incorporated by
reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No.
001-11954), filed on June 16, 2000............................................................. *
3.42 -- Fourteenth Amendment to the Partnership Agreement, dated as of December 8, 2000 - Incorporated
by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated December 8, 2000
(File No. 001-11954), filed on December 28, 2000............................................... *
3.43 -- Fifteenth Amendment to the Partnership Agreement, dated as of December 15, 2000 - Incorporated by
reference to Exhibit 4.35 of Vornado Realty Trust's Registration Statement on Form S-8 (File
No. 333-68462), filed on August 27, 2001....................................................... *
- ----------
* Incorporated by reference.
-164-
EXHIBIT
NO.
- -------
3.44 -- Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001 - Incorporated by
reference to Exhibit 3.3 of Vornado Realty Trust's Current Report on Form 8-K (File No.
001-11954), filed on October 12, 2001.......................................................... *
3.45 -- Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001 -
Incorporated by reference to Exhibit 3.4 of Vornado Realty Trust's Current Report on Form 8-K
(File No. 001-11954), filed on October 12, 2001................................................ *
3.46 -- Eighteenth Amendment to the Partnership Agreement, dated as of January 1, 2002 - Incorporated by
reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on
March 18, 2002................................................................................. *
3.47 -- Nineteenth Amendment to the Partnership Agreement, dated as of July 1, 2002 - Incorporated by
reference to Exhibit 3.47 to Vornado Realty Trust's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 (File No. 001-11954)................................................. *
4.1 -- Instruments defining the rights of security holders (see Exhibits 3.1 through 3.24 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 Vornado's
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, no par value - Incorporated by reference to
Exhibit 4.2 of Vornado's 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, liquidation preference $25.00 per share, no par value - Incorporated
by reference to Exhibit 4.2 of Vornado's Registration Statement on Form 8-A (File No.
001-11954), filed on March 15, 1999............................................................ *
4.6 -- Specimen certificate evidencing Vornado's 8.5% Series C Cumulative Redeemable Preferred Shares
of Beneficial Interest, liquidation preferences $25.00 per share, no par value - Incorporated
by reference to Exhibit 4.2 of Vornado's Registration Statement on Form 8-A (File No.
001-11954), filed May 19, 1999................................................................. *
4.7 -- Indenture and Servicing Agreement, dated as of March 1, 2000, among Vornado, LaSalle Bank
National Association, ABN Amro Bank N.V. and Midland Loan Services, Inc. - Incorporated by
reference to Exhibit 10.48 of Vornado's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 1-11954), filed on March 9, 2000................................... *
4.8 -- Indenture, dated as of June 24, 2002, between Vornado Realty L.P. and The Bank of New York, as
Trustee - Incorporated by reference to Exhibit 4.1 to Vornado Realty L.P.'s Current Report on
Form 8-K dated June 19, 2002 (File No. 000-22685), filed on June 24, 2002...................... *
- ----------
* Incorporated by reference.
-165-
EXHIBIT
NO.
- -------
4.9 -- Officer's Certificate pursuant to Sections 102 and 301 of the Indenture, dated June 24, 2002 -
Incorporated by reference to Exhibit 4.2 to Vornado Realty Trust's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954), filed on August 7, 2002.... *
10.1 -- Vornado Realty Trust's 1993 Omnibus Share Plan, as amended - Incorporated by reference to
Exhibit 4.1 of Vornado Realty Trust's registration statement on Form S-8 (File No. 331-09159),
filed on July 30, 1996......................................................................... *
10.2 -- 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......................................................................... *
10.3 -- 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................................... *
10.4** -- 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.................. *
10.5** -- 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................. *
10.6** -- 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.................................. *
10.7 -- 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................................ *
10.8 -- 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................................ *
10.9 -- 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................................ *
10.10 -- 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.............................................................................. *
10.11 -- 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............................................................... *
- ----------
* Incorporated by reference.
** Management contract or compensatory plan.
-166-
EXHIBIT
NO.
- -------
10.12 -- 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.................... *
10.13 -- 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.................................................. *
10.14 -- 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.............................................................................. *
10.15 -- 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........................................................................ *
10.16 -- 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...................... *
10.17 -- 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..................................................... *
10.18 -- 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............ *
10.19 -- 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).... *
10.20 -- 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............. *
10.21 -- 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............. *
10.22 -- 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....................... *
10.23 -- 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............................................................................. *
- ----------
* Incorporated by reference.
-167-
EXHIBIT
NO.
- -------
10.24 -- 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.............. *
10.25 -- 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............................................................................... *
10.26 -- 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.................................................... *
10.27 -- Registration Rights Agreement, dated as of April 1, 1998, between Vornado and the Unit Holders
named herein - 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.................. *
10.28 -- Registration Rights Agreement, dated as of August 5, 1998, between Vornado and the Unit Holders
named therein - Incorporated by reference to Exhibit 10.1 of Vornado's Registration Statement
on Form S-3 (File No. 333-89667), filed on October 25, 1999.................................... *
10.29 -- Registration Rights Agreement, dated as of July 23, 1998, between Vornado and the Unit Holders
named therein - Incorporated by reference to Exhibit 10.2 of Vornado's Registration Statement
on Form S-3 (File No. 333-89667), filed on October 25, 1999.................................... *
10.30 -- Consolidated and Restated Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing, dated as of March 1, 2000, between Entities named therein (as Mortgagors) and
Vornado (as Mortgagee) - Incorporated by reference to Exhibit 10.47 of Vornado's Annual Report
on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9,
2000........................................................................................... *
10.31** -- Employment Agreement, dated January 22, 2000, between Vornado Realty Trust and Melvyn Blum -
Incorporated by reference to Exhibit 10.49 of Vornado's Annual Report on Form 10-K for the
period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000.................... *
10.32** -- Deferred Stock Agreement, dated December 29, 2000, between Vornado Realty Trust and Melvyn Blum
10.33 -- First Amended and Restated Promissory Note of Steven Roth, dated November 16, 1999 -
Incorporated by reference to Exhibit 10.50 of Vornado's Annual Report on Form 10-K for the
period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000.................... *
10.34 -- Letter agreement, dated November 16, 1999, between Steven Roth and Vornado Realty Trust -
Incorporated by reference to Exhibit 10.51 of Vornado's Annual Report on Form 10-K for the
period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000.................... *
- ----------
* Incorporated by reference.
** Management contract or compensatory plan.
-168-
EXHIBIT
NO.
- -------
10.35 -- Revolving Credit Agreement dated as of March 21, 2000 among Vornado Realty L.P., as borrower,
Vornado Realty Trust, as general partner, and UBS AG, as Bank - Incorporated by reference to
Vornado's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No.
001-11954) filed on May 5, 2000................................................................ *
10.36 -- Agreement and Plan of Merger, dated as of October 18, 2001, by and among Vornado Realty Trust,
Vornado Merger Sub L.P., Charles E. Smith Commercial Realty L.P., Charles E. Smith Commercial
Realty L.L.C., Robert H. Smith, individually, Robert P. Kogod, individually, and Charles E.
Smith Management, Inc. - Incorporated by reference to Exhibit 2.1 of Vornado Realty Trust's
Current Report on Form 8-K (File No. 001-11954), filed on January 16, 2002..................... *
10.37 -- Registration Rights Agreement, dated January 1, 2002, between Vornado Realty Trust and the
holders of the Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.1
of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002............ *
10.38 -- Registration Rights Agreement, dated January 1, 2002, between Vornado Realty Trust and the
holders of the Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2
of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002............ *
10.39 -- Tax Reporting and Protection Agreement, dated December 31, 2001, by and among Vornado, Vornado
Realty L.P., Charles E. Smith Commercial Realty L.P. and Charles E. Smith Commercial Realty
L.L.C. - Incorporated by reference to Exhibit 10.3 of Vornado's Current Report on Form 8-K
(File No. 1-11954), filed on March 18, 2002.................................................... *
10.40** -- Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002
- Incorporated by reference to Exhibit 10.7 to Vornado Realty Trust's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 (File No. 001-11954), filed on May 1, 2002........... *
10.41** -- First Amendment, dated October 31, 2002, to the Employment Agreement between Vornado Realty
Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit
99.6 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002.................... *
10.42** -- First Amendment, dated June 7, 2002, to the Convertible Units Agreement between Vornado Realty
Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Exhibit
99.3 to Schedule 13D filed by Michael D. Fascitelli on November 8, 2002........................ *
10.43** -- Second Amendment, dated October 31, 2002, to the Convertible Units Agreement between Vornado
Realty Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to
Exhibit 99.4 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002............ *
10.44** -- 2002 Units Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002
- Incorporated by reference to Exhibit 99.7 to the Schedule 13D filed by Michael D. Fascitelli
on November 8, 2002............................................................................ *
10.45** -- First Amendment, dated October 31, 2002, to the 2002 Units Agreement between Vornado Realty
Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to
Exhibit 99.8 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002............ *
- ----------
* Incorporated by reference.
** Management contract or compensatory plan.
-169-
EXHIBIT
NO.
- -------
10.46** -- First Amendment, dated October 31, 2002, to the Registration Agreement between Vornado Realty
Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Exhibit
99.9 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002.................... *
10.47** -- Trust Agreement between Vornado Realty Trust and Chase Manhattan Bank, dated December 2, 1996 -
Incorporated by reference to Exhibit 99.10 to the Schedule 13D filed by Michael D. Fascitelli
on November 8, 2002............................................................................ *
10.48** -- First Amendment, dated September 17, 2002, to the Trust Agreement between Vornado Realty Trust
and Chase Manhattan Bank, dated December 2, 1996 - Incorporated by reference to Exhibit 99.11
to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002......................... *
10.49 -- Amended and Restated Credit Agreement, dated July 3, 2002, between Alexander's Inc. and Vornado
Lending L.L.C. (evidencing a $50,000,000 line of credit facility) - Incorporated by reference
to Exhibit 10(i)(B)(3) of Alexander's Inc.'s quarterly report for the period ended June 30,
2002 (File No. 001-06064), filed on August 7, 2002............................................. *
10.50 -- Credit Agreement, dated July 3, 2002, between Alexander's and Vornado Lending L.L.C. (evidencing
a $35,000,000 loan) - Incorporated by reference to Exhibit 10(i)(B)(4) of Alexander's Inc.'s
quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7,
2002........................................................................................... *
10.51 -- Guaranty of Completion, dated as of July 3, 2002, executed by Vornado Realty L.P. for the
benefit of Bayerische Hypo- and Vereinsbank AG, New York Branch, as Agent for the Lenders -
Incorporated by reference to Exhibit 10(i)(C)(5) of Alexander's Inc.'s quarterly report for
the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002................... *
10.52 -- Reimbursement Agreement, dated as of July 3, 2002, by and between Alexander's, Inc., 731
Commercial LLC, 731 Residential LLC and Vornado Realty L.P. - Incorporated by reference to
Exhibit 10(i)(C)(8) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002
(File No. 001-06064), filed on August 7, 2002.................................................. *
10.53 -- Amendment to Real Estate Retention Agreement, dated as of July 3, 2002, by and between
Alexander's, Inc. and Vornado Realty L.P. - Incorporated by reference to Exhibit 10(i)(E)(3)
of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No.
001-06064), filed on August 7, 2002............................................................ *
10.54 -- 59th Street Real Estate Retention Agreement, dated as of July 3, 2002, by and between Vornado
Realty L.P., 731 Residential LLC and 731 Commercial LLC - Incorporated by reference to Exhibit
10(i)(E)(4) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File
No. 001-06064), filed on August 7, 2002........................................................ *
10.55 -- Amended and Restated Management and Development Agreement, dated as of July 3, 2002, by and
between Alexander's, Inc., the subsidiaries party thereto and Vornado Management Corp. -
Incorporated by reference to Exhibit 10(i)(F)(1) of Alexander's Inc.'s quarterly report for
the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002................... *
- ----------
* Incorporated by reference.
** Management contract or compensatory plan.
-170-
EXHIBIT
NO.
- -------
10.56 -- 59th Street Management and Development Agreement, dated as of July 3, 2002, by and between 731
Commercial LLC and Vornado Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(2)
of Alexander's Inc.'s quarterly report for the period ended June 30, 2002
(File No. 001-06064), filed on August 7, 2002.................................................. *
10.57 -- Amendment dated May 29, 2002, to the Stock Pledge Agreement between Vornado Realty Trust and
Steven Roth dated December 29, 1992 - Incorporated by reference to Exhibit 5 of Interstate
Properties' Schedule 13D dated May 29, 2002 (File No. 005-44144), filed on May 30, 2002........ *
10.58 -- Vornado Realty Trust's 2002 Omnibus Share Plan - Incorporated by reference to Exhibit 4.2 to
Vornado Registration Statement on Form S-3 (File No. 333-102216) filed December 26, 2002....... *
10.59** -- First Amended and Restated Promissory Note from Michael D Fascitelli to Vornado Realty Trust,
dated December 17, 2001
10.60** -- Promissory Note from Joseph Macnow to Vornado Realty Trust, dated July 23, 2002
10.61** -- Amendment to Employment Agreement by and between Vornado Realty Trust and Melvyn H. Blum, dated
February 13, 2003
10.62** -- Amendment No. 1 to Deferred Stock Agreement by and between Vornado Realty Trust and Melvyn H.
Blum, dated February 13, 2003
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
- ----------
* Incorporated by reference.
** Management contract or compensatory plan.
-171-
EXHIBIT 10.32
DEFERRED STOCK AGREEMENT
AGREEMENT, dated as of December 29, 2000, by and between Vornado
Realty Trust, a Maryland real estate investment trust (the "Company") and Melvyn
H. Blum (the "Executive"),
WHEREAS, the Executive and the Company desire to enter into an
agreement setting forth the terms under which the Executive will surrender
certain restricted stock granted to Executive pursuant to the Executive's
employment agreement, dated as of January 22, 2000, by and between the Company
and the Executive (the "Employment Agreement") in exchange for the Company's
promise to pay him stock in the future as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the Executive and the Company
agree as follows:
1. CANCELLATION OF RESTRICTED STOCK AND PAYMENT OF DEFERRED STOCK. The
Executive hereby surrenders all of his rights, title and interest to the 148,148
shares of the Company's common shares of beneficial interest (the "Stock")
granted to the Executive under Section 5(b) of the Employment Agreement. The
Company agrees to pay the Executive 148,148 shares of Stock, together with such
additional amounts as promised herein, at such time or times and subject to the
terms and conditions of this Agreement.
2. STOCK UNIT ACCOUNT. The Company shall credit to a bookkeeping
account (the "Account") maintained by the Company for the Executive's benefit
148,148 stock units, each of which shall be deemed to be the equivalent of one
share of Stock (the "Stock Units"). One-fifth of the Stock Units will vest on
January 22, 2001, and an additional one-fifth of the Stock Units shall vest on
each of the next four anniversaries of such date, provided that Executive
remains an employee of the Company on each such date. The Executive shall be
fully vested in all of the Stock Units in the event of the termination of his
employment by the Company without Cause or by the Executive for Good Reason (as
such terms are defined in the Employment Agreement).
The Company agrees that whenever any dividend is declared on the
Stock, it will pay to the Executive in cash, on the date such dividend is paid,
an amount per vested Stock Unit held in the Account as of the record date for
such dividend equal to the amount per share of Stock paid by the Company to the
holders of record of the Stock.
3. PAYMENT OF THE ACCOUNT. Except as otherwise provided in this
Agreement, the Company shall pay to the Executive on each of January 22, 2003,
January 22, 2004 and January 22, 2005 (each, a "Payment Date") that number of
shares of Stock which is equal to the number of vested Stock Units then credited
to his Account. Notwithstanding the foregoing, upon the Executive's termination
of employment by the Company for Cause (as defined in the Employment Agreement)
prior to January 22, 2005, the Company shall pay to the Executive that number of
shares of Stock which is equal to the number of vested Stock Units credited to
his Account, in a lump sum within 10 business days following such termination.
4. FORM OF PAYMENT. Payments pursuant to the first sentence of Section
3 shall be made by the Company in a lump sum to the Executive as soon as
practicable after the Payment Date, but in no case more than 10 business days
after the Payment Date. The Executive may elect to change (i) the form of
payment (to a lump sum or up to 10 equal annual installments) or (ii) the
Payment Date to a later (but not an earlier) Payment Date, provided that any
such election is made prior to the beginning of the year before the year in
which the Payment Date then in effect would occur.
The Company agrees that at no cost to the Executive it will have an
effective registration statement covering the number of shares of Stock equal to
the Stock Units credited to his Account no later than January 22, 2003 (either
separately in favor of the Executive, or covering the Executive and other
persons) and that it will keep such registration statement effective until all
such shares (i) have been sold or otherwise transferred by the Executive, (ii)
cease to become payable due to the forfeiture of Stock Units as a result of the
Executive's termination of employment or (iii) have become eligible for sale
pursuant to Rule 144(k) of the Securities Act of 1933 (or any similar provision
then in force).
5. BENEFICIARY. In the event of the Executive's death prior to the
payment with respect to all of the vested Stock Units credited to his Account,
the remaining payments shall be made to the last beneficiary designated in
writing which is received by the Company prior to the Executive's death or, if
no designated beneficiary survives the Executive, such payments shall be made in
a lump sum to the Executive's estate.
6. SOURCE OF PAYMENTS. The Executive's right to receive payment under
this Agreement shall be an unfunded entitlement and shall be an unsecured claim
against the general assets of the Company. The Executive has only the status of
a general unsecured creditor hereunder, and this Agreement constitutes only a
promise by the Company to pay the value of the Account on any required payment
due. The Company may withhold from any amounts payable under this Agreement such
Federal, state and local taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
2
7. NONTRANSFERABILITY. This Agreement shall not be assignable or
transferable by the Executive (otherwise than by will or the laws of descent and
distribution) or by the Company (other than to successors of the Company) and no
amounts deferred under this Agreement, or any rights therein, shall be subject
in any manner to any anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, levy, lien, attachment, garnishment, debt or other charge
or disposition of any kind.
8. NO RIGHT TO EMPLOYMENT. Nothing in this Agreement shall confer upon
Executive the right to remain in employment with the Company.
9. ENTIRE AGREEMENT. This Agreement and the Employment Agreement
contain all the understandings between the parties hereto pertaining to the
matters referred to herein, and supersede all undertakings and agreements,
whether oral or in writing, previously entered into by them with respect
thereto.
10. AMENDMENT OR MODIFICATION; WAIVER. No provision of this Agreement
may be amended, modified or waived unless such amendment or modification is
agreed to in writing, signed by the Executive and by a duly authorized officer
of the Company, and such waiver is set forth in writing and signed by the party
to be charged. No waiver by any party hereto of any breach by another party
hereto of any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of a similar or dissimilar condition or
provision at the same time, any prior time or any subsequent time.
11. NOTICES. Any notice to be given hereunder shall be in writing and
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To the Executive:
Melvyn H. Blum
One Central Park West
Apt. 27G
New York, New York 10023
To the Company:
3
Vornado Realty Trust
888 Seventh Avenue,
New York, New York 10019
Attention: Corporate Secretary
Any notice delivered personally or by courier under this Section 12
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
12. SEVERABILITY. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances, other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
13. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon each successor of the Company, and upon the Executive's
beneficiaries, legal representatives or estate, as the case may be.
14. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS
CONFLICT OF LAW PRINCIPLES.
16. HEADINGS. All descriptive headings of sections and paragraphs in
this Agreement are intended for convenience of reference only, and they form no
part of this Agreement and shall not affect its interpretation.
4
17. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
VORNADO REALTY TRUST
By: /s/ Irwin Goldberg
-----------------------
Irwin Goldberg
/s/ Melvyn H. Blum
-----------------------
Melvyn H. Blum
5
EXHIBIT 10.59
FIRST AMENDED AND RESTATED PROMISSORY NOTE
U.S. $8,600,000 DECEMBER 17, 2001
PARAMUS, NEW JERSEY
WHEREAS, Vornado Realty Trust (the "Company") is the holder of certain
promissory notes, dated March 2, 1998, April 30, 1998, December 31, 1998 and
October 25, 2000 (the "Existing Notes"), made by Michael D. Fascitelli (the
"Executive");
WHEREAS, the aggregate outstanding principal balance of the Existing
Notes is $8,600,000;
WHEREAS, the Company and Executive desire to amend and restate the
terms and conditions of the Existing Notes in their entirety, all in the manner
hereinafter set forth, and to replace the Existing Notes with this Note;
NOW THEREFORE, by Executive's execution and delivery, and the
Company's acceptance of delivery from Executive, of this Note, this Note is
deemed to amend and restate the Existing Notes in their entirety and the
Existing Notes are hereby amended and restated in their entirety so that the
terms, covenants, agreements, rights, obligations and conditions contained in
this Note shall supersede and control the terms, covenants, agreements, rights,
obligations and conditions of the Existing Notes, as follows:
1. PROMISE TO PAY, INTEREST, MATURITY, PAYMENTS
FOR VALUE RECEIVED, Executive, an individual residing at 25 East End
Avenue, New York, New York 10028, hereby promises to pay to the Company, a
Maryland real estate investment trust, or its order, at its offices located at
210 Route 4 East, Paramus, New Jersey 07652, the principal amount of EIGHT
MILLION SIX HUNDRED THOUSAND DOLLARS ($8,600,000.00). Interest shall accrue on
this Note at the rate of 3.97% per annum from and after the date set forth above
and accrued and unpaid interest shall be due and payable quarterly in arrears on
the tenth day following the payment of the Company's regular quarterly dividend
to its stockholders (or if no such dividend is paid, at the end of the then
current calendar quarter), until the outstanding principal amount of this Note
and all accrued interest hereon shall have been paid in full.
Interest due on this Note shall be calculated on the basis of a
365-day year for the actual number of days elapsed during the applicable period.
Any payment required to be made hereunder on a day which is not a business day
shall be due and owing on the first business day thereafter. The principal
amount hereof and all accrued and unpaid interest hereon shall be due and
payable on the Maturity Date (as defined below). For purposes of this Note, the
term "Maturity Date" shall mean the earliest of (i) the Date of Termination (as
defined in that certain Employment Agreement, dated as of December 2, 1996, by
and between Executive and the Company, as may be amended from time to time (the
"Employment Agreement")), (ii) December 31, 2006 or (iii) the date of the final
payment to Executive under the Convertible Units Agreement (as defined in the
Employment Agreement). Notwithstanding the foregoing,
under no circumstances shall the Aggregate Principal Amount (as defined below)
exceed an amount equal to one-half (1/2) of the sum of (x) product of (1) the
number of outstanding Convertible Units (as defined in the Employment Agreement)
and (2) the fair market value (as defined below) of one share of the common
shares of beneficial interest of the Company, par value $.04 per share (the
"Company Stock"), (y) the fair market value of 626,566 shares of Company Stock
and (z) the total "spread" on all of Executive's outstanding stock options to
purchase Company Stock (i.e. the positive difference between the aggregate fair
market value of the Company Stock underlying all of the Executive's outstanding
stock options to purchase Company Stock and the aggregate exercise price of such
options); in the event such Aggregate Principal Amount does exceed such amount
for 5 consecutive trading days, the excess shall be due and payable on 5 days'
prior written notice to Executive by the Company. For purposes of this Note, (1)
the term "Aggregate Principal Amount" shall mean, for any date, the aggregate
principal amount outstanding hereunder on such date together with the principal
amount outstanding on such date under each other note made hereafter by
Executive in favor of the Company and (2) the term "fair market value" on any
given date shall mean the average of the high and low trading prices of the
Company Stock on such date, as reported on the New York Stock Exchange composite
tape for such date. Executive shall have the right to prepay all or any portion
of the amounts evidenced by this Note at any time without premium or penalty;
PROVIDED, HOWEVER, such prepayment shall include all interest accrued and unpaid
hereunder as of the date of such prepayment.
2. EVENT OF DEFAULT
Failure by Executive to pay any sum due hereunder when due and payable
which has not been cured by Executive within 30 days following actual receipt of
written notice given by the Company shall constitute an event of default under
this Note and the Company may, at its sole option exercised by notice to
Executive, declare the entire outstanding principal balance hereof, together
with all unpaid interest accrued hereon, to be immediately due and payable in
full. Upon the occurrence of an event of default hereunder, the Company may
exercise all rights and remedies available to it hereunder or otherwise.
3. PREPAYMENT
Executive shall have the right to prepay all or any portion of the
amounts evidenced by this Note at any time without premium or penalty; PROVIDED,
HOWEVER, such prepayment shall include all interest accrued and unpaid hereunder
as of the date of such prepayment.
4. ENFORCEMENT EXPENSES
If this Note is collected by legal proceedings (including proceedings
in the probate or bankruptcy courts) then all costs and expenses of collection
or enforcement shall be added to the principal of, and be collectible as part
of, this Note.
2
5. SEPARABILITY
In case any one or more of the provisions of this Note shall be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
6. GOVERNING LAW
THIS NOTE IS MADE UNDER AND IS TO BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
ITS CHOICE-OF-LAW RULES.
7. HEADINGS
The Section headings in this Note are included herein for convenience
of reference only and shall not constitute a part of this Note for any other
purpose.
IN WITNESS WHEREOF, executive has caused this instrument to be duly
executed as of the date and year first above written.
/s/ Michael D. Fascitelli
-------------------------
Michael D. Fascitelli
VORNADO REALTY TRUST
By: /s/ Joseph Macnow
-----------------
3
EXHIBIT 10.60
PROMISSORY NOTE
$2,000,000.00 July 23, 2002
Paramus, New Jersey
FOR VALUE RECEIVED, JOSEPH MACNOW (the "EXECUTIVE") promises to pay to
the order of VORNADO REALTY TRUST (the "COMPANY"), at its office located at 210
Route 4 East, Paramus, New Jersey 07652, or such other place as designated in
writing by the holder hereof, the aggregate principal sum of TWO MILLION and
00/100 DOLLARS ($2,000,000.00) on June 30, 2007 ("MATURITY"), with interest on
the unpaid principal amount hereof from the date hereof until Maturity, payable
quarterly in arrears on the tenth (10th) day following payment of the Company's
regular quarterly dividend (or if no dividend is paid, at the end of the
applicable calendar quarter), at a rate per annum equal to 4.65%. If the
interest required to be paid under the terms of this Note shall at any time
exceed the rate of interest which the Company is permitted by law to charge in
the State of New Jersey, then the interest rate to be paid hereunder shall be
the maximum rate permitted by law.
1. DEFINITIONS
Capitalized terms used but not defined in this Note shall have the
respective meanings assigned to such terms in the Letter Agreement and the Loan
Documents, as such terms are defined below.
2. PREPAYMENT
This Note may be prepaid in whole or in part at any time without
penalty or premium.
3. COLLATERAL
This Note is secured by a letter agreement dated July 23, 2002 (the
"LETTER AGREEMENT"), any Additional Collateral (as defined in the Letter
Agreement) pledged by Executive and such other security or supporting documents
as are executed in conjunction with the Letter Agreement (the "LOAN DOCUMENTS").
The Company or any subsequent holder of this Note is entitled to all the
benefits provided for in the Loan Documents or referred to therein.
4. ENFORCEMENT EXPENSES
In the event Executive fails to pay any amounts due hereunder when
due, and this Note is collected by legal proceedings (including proceedings in
the probate or bankruptcy courts) Executive shall pay to the holder thereof, in
addition to such amounts due, all costs of collection or enforcement, including
reasonable attorneys fees and court costs which shall be added to the principal
of, and be collectible as part of, this Note.
5. WAIVER OF PRESENTMENT, OFFSET, COUNTERCLAIMS, DEFENSES
Executive, on behalf of himself and his successors and assigns, hereby
waives diligence, presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Note, and expressly agrees that this Note, or
any payment hereunder, may be extended from time to time and that the holder
hereof may accept security for this Note or release security for this Note, all
without in any way affecting the liability of Executive hereunder. In addition,
Executive, on behalf of himself and his successors and assigns, hereby expressly
acknowledges and aggress that he and they shall be unconditionally liable for
the repayment of all amounts due hereunder and, without limiting the foregoing,
Executive, on behalf of himself and his successors and assigns, hereby forever
expressly waives any claim or right of offset and any similar claim or right,
whether now existing or later acquired and whether granted by contract or by
law, against any amounts otherwise due him or them.
6. EVENT OF DEFAULT
Failure by Executive to pay any sum due hereunder when due and payable
which has not been cured by Executive within thirty (30) days following actual
receipt of written notice given by the Company, or the occurrence of an event of
default under any of the Loan Documents, shall constitute an event of default
under this Note and the Company may, at its sole option exercised by notice to
Executive, declare the entire outstanding principal balance hereof, together
with all unpaid interest accrued hereon, to be immediately due and payable in
full. Upon the occurrence of an event of default, the Company may exercise all
rights and remedies available to it in law or in equity.
7. HEADINGS
The Section headings in this Note are included herein for convenience
of reference only and shall not constitute a part of this Note for any other
purpose.
8. ENTIRE AGREEMENT
This Note, the Letter Agreement and the other Loan Documents
constitute the entire agreement between the Company and Executive with respect
to the subject matter hereof and all understandings, oral representations and
agreements heretofore or simultaneously had among the parties with respect to
the transaction governed by the Loan Documents are merged in, and are contained
in, such documents and instruments.
9. GOVERNING LAW AND CONSENT TO JURISDICTION
THIS NOTE AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW JERSEY, WITHOUT
REGARD TO THAT STATE'S RULES GOVERNING CONFLICTS OF LAWS. THE PARTIES HERETO
-2-
HEREBY SUBMIT TO JURISDICTION AND TO LAYING VENUE IN THE COUNTY OF BERGEN, STATE
OF NEW JERSEY.
10. WAIVER OF JURY TRIAL
The parties hereby agree not to elect a trial by jury of any issue
triable of right by jury, and waive any right to trial by jury fully to the
extent that any such right shall now or hereinafter exist with regard to this
Note, or any claim, counterclaim or other action arising in connection herewith
or therewith. This waiver of right of trial by jury is given knowingly and
voluntarily by each of the Company and Executive, and is intended to encompass
individually each instance and issue as to which the right to a trial by jury
would otherwise accrue. Each party is hereby authorized to file a copy of this
paragraph in any proceeding as conclusive evidence of this waiver by the other
party.
11. SEPARABILITY
In any case any provision herein shall be deemed to be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-3-
IN WITNESS WHEREOF, the Executive has caused this Note to be duly
executed as of the date written above.
JOSEPH MACNOW
/s/ Joseph Macnow
-----------------
State of New Jersey }
}ss.
Count of Bergen }
On the 23rd day of July, in the year 2002 before me, the undersigned,
a Notary Public in for said State personally appeared Joseph Macnow personally
known to me or proved to me on the basis of satisfactory evidence to be the
individual whose name is subscribed to the within instrument and acknowledged to
me that he executed the same in his capacity, and that by his signature on the
instrument, the individual or the person upon behalf of which the individual
acted, executed this instrument.
/s/ Deborah Anthony
-------------------
Notary Public
-4-
EXHIBIT 10.61
AMENDMENT TO
EMPLOYMENT AGREEMENT
AMENDMENT, dated as of February 13, 2003, by and between Vornado
Realty Trust, a Maryland real estate investment trust (the "Company") and Melvyn
H. Blum (the "Executive").
WHEREAS, the Executive and the Company entered into an employment
agreement as of January 24, 2000 (the "Employment Agreement");
WHEREAS, Section 14 of the Employment Agreement provides that the
Company and the Executive may amend the Employment Agreement at any time;
WHEREAS, the Company and the Executive deem it necessary to amend the
Employment Agreement;
NOW, THEREFORE, the parties agree that the Employment Agreement is
amended as follows, effective as of January 1, 2003:
1. Section 5(a) is amended by deleting the last sentence thereof and
substituting the following:
Employee will be eligible for grants of share options and
restricted stock on the same basis as other executive officers
of Employer of comparable seniority. For the avoidance of
doubt, the Executive hereby waives any rights to grants of
share options from Employer in fiscal years of the Employer
ending prior to January 1, 2003. The foregoing shall have no
effect on share options previously granted to the Executive by
the Employer in fiscal years ending prior to January 1, 2003.
2. Clause (a) of the first sentence of Section 8 is amended in its
entirety as follows:
(a) during the Period of Employment and the twelve (12) month
period following his termination of employment for any reason
other than pursuant to Section 7(c) hereof, Employee will not
engage in any business otherwise competitive with that of
Employer or any of its subsidiaries in the States of New
Jersey, New York, Pennsylvania, Maryland, Massachusetts and
Connecticut; provided that during the twelve (12) month period
following a termination of employment which occurs after the
expiration of the Period of Employment as a result of any
nonextension of the Period of Employment, the prohibition
contained in this clause (a) shall be limited to the Employee's
engaging in any way, directly or
indirectly, in the financing, acquisition, construction,
reconstruction, development, redevelopment or renovation of
any commercial office real estate property located within a
five block radius from the intersection of Fifty-ninth
Street and Lexington Avenue in the borough of Manhattan in
New York City, or any improvements thereon on behalf of any
public or non-public company; and
3. The first sentence of Section 7(g)(ii) is amended in its entirety
as follows:
In the event of a termination of the Period of Employment
and Employee's employment pursuant to Section 7(a) or 7(d)
hereof, Employee shall be fully vested in all share options
and restricted stock granted to the Employee by the
Employer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the first date above written.
VORNADO REALTY TRUST
By: /s/ Joseph Macnow
-----------------
Name: Joseph Macnow
Title: Executive Vice President
/s/ Melvyn H. Blum
------------------
Melvyn H. Blum
EXHIBIT 10.62
AMENDMENT NO. 1 TO
DEFERRED STOCK AGREEMENT
AMENDMENT NO. 1, dated as of February 13, 2003, by and between Vornado
Realty Trust, a Maryland real estate investment trust (the "Company") and Melvyn
H. Blum (the "Executive").
WHEREAS, the Executive and the Company entered into a deferred stock
agreement, dated as of December 29, 2000 (the "Deferred Stock Agreement")
wherein the parties set forth the terms under which the Company promised to pay
the Executive common shares of the Company on certain dates as set forth
therein;
WHEREAS, the Executive subsequently deferred his right to receive the
payment originally due on January 22, 2003 under Section 3 of the Deferred Stock
Agreement;
WHEREAS, Section 10 of the Deferred Stock Agreement provides that the
Company and the Executive may amend the Deferred Stock Agreement at any time;
WHEREAS, the Company and the Executive deem it necessary to amend the
Deferred Stock Agreement;
NOW, THEREFORE, the parties agree that the Deferred Stock Agreement is
amended in the following respects, effective as of January 22, 2003:
1. The second sentence of Section 2 is hereby deleted and replaced
in its entirety with the following:
One fifth of the Stock Units will vest on each of the following
dates: January 22, 2001, January 22, 2002, January 22, 2003, January
2, 2004 (or, if such date is not a business day, on the next
occurring business day) and January 2, 2005 (or, if such date is not
a business day, on the next occurring business day).
2. Section 3 is hereby deleted and replaced in its entirety with the
following:
PAYMENT OF THE ACCOUNT. As of February 13, 2003, the Company shall
pay to the Executive, within two (2) business days, that amount in
cash equal to the number of shares of Stock equal to the number of
vested Stock Units then credited to the Executive's Account
multiplied by the average of the high and low prices of a share of
Stock as reported on the New York Stock Exchange consolidated broad
tape on February 12, 2003 ($33.98). Except as otherwise provided in
this Agreement, on each of January 2, 2004 (or, if such date is not
a business day, on the next occurring business
day) and January 2, 2005 (or, if such date is not a business day, on
the next occurring business day) (each, a "Payment Date"), the
Company shall pay to Executive that number of shares of Stock which
is equal to the number of vested Stock Units then credited to his
Account. Notwithstanding the foregoing, upon the Executive's
termination of employment by the Company for Cause (as defined in
the Employment Agreement) prior to January 2, 2005 (or, if such date
is not a business day, prior to the next occurring business day),
the Company shall pay to the Executive that number of shares of
Stock which is equal to the number of vested Stock Units credited to
his Account, in a lump sum within 10 business days following such
termination.
3. Section 4 of the Deferred Stock Agreement is hereby deleted and
replaced in its entirety with the following:
FORM OF PAYMENT. Payments pursuant to the second sentence of Section
3 shall be made by the Company in a lump sum to the Executive as
soon as practicable after the Payment Date, but in no case more than
10 business days after the Payment Date. The Executive may elect to
change the form of payment (to a lump sum or up to 10 equal annual
installments), PROVIDED THAT any such election is made prior to the
beginning of the year before the year in which the Payment Date then
in effect would occur.
The Company agrees it will register under the Securities Act of 1933
those shares of Stock defined in Annex A hereto as Vornado
Registrable Securities on those terms and conditions set forth in
Annex A hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the first date above written.
VORNADO REALTY TRUST
By: /s/ Joseph Macnow
-----------------
Name: Joseph Macnow
Title: Executive Vice President
/s/ Melvyn H. Blum
-----------------
Melvyn H. Blum
Annex A
Registration Under the Securities Act
1. REGISTRATION FOR VORNADO REGISTRABLE SECURITIES UNDERLYING DEFERRED UNITS.
The Company agrees to file a registration statement on either Form S-3 or
Form S-8 providing for the registration of, and the sale on a continuous or
delayed basis by the Executive in accordance with the methods of
distribution specified by and consistent with the terms and provisions
hereof, of Vornado Registrable Securities pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), and/or any
similar rule that may be adopted by the Securities and Exchange Commission
(the "Commission"), and, if applicable, to use its commercially reasonable
efforts to cause such registration statement to be declared effective by
the Commission under the Securities Act not later than January 2, 2004, or
if not a business day, the first business day thereafter.
2. REGISTRATION PROCEDURES. In connection with the registration statement
contemplated hereby, the following provisions shall apply:
(a) The Company shall furnish to the Executive, prior to the filing thereof
with the Commission, a copy of such registration statement, and each
amendment thereto and each amendment or supplement, if any, to the
prospectus related thereto.
(b) The Company shall take such action as may be necessary so that (i) such
registration statement and any amendment thereto and any related prospectus
(and any amendment or supplement to such prospectus) (and each report or
other document incorporated therein by reference in each case) complies in
all material respects with the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the respective rules and
regulations thereunder, (ii) such registration statement and any amendment
thereto do not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
(iii) such prospectus forming part of the registration statement
contemplated hereby, and any amendment or supplement to such prospectus,
does not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements, in the light of
the circumstances under which they were made, not misleading.
(c) The Company shall advise the Executive:
(i) when such registration statement and any amendment thereto has
been filed with the Commission and when such registration statement or
any
post-effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or supplements to
such registration statement or the prospectus related thereto or for
additional information;
(iii) of the issuance by the Commission of any stop order suspending
effectiveness of such registration statement or the initiation of any
proceedings for that purpose; and
(iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the securities included in such
registration statement for sale in any jurisdiction or the initiation
of any proceeding for such purpose.
(d) The Company shall use its commercially reasonable efforts to prevent
the issuance, and if issued to obtain the withdrawal, of any order
suspending the effectiveness of such registration statement at the earliest
possible time.
(e) The Company shall furnish to the Executive, without charge, as many
copies of the prospectus related to such registration statement and any
amendment or supplement thereto as the Executive may reasonably request;
and the Company consents to the use of the prospectus and any amendment or
supplement thereto by the Executive in connection with the offering and
sale of the Vornado Registrable Securities covered by the prospectus and
any amendment or supplement thereto until the earlier of such time that (1)
such prospectus and any amendment or supplement thereto does not meet the
requirements set forth in Section 2(b)(iii) above and (2) the Vornado
Securities so covered cease be Vornado Registrable Securities.
(f) The Executive shall notify the Company in writing of his intention to
sell securities registered pursuant to any registration statement filed
pursuant to Paragraph 1 above not less than 10 business days prior to the
proposed Trade Date of any such sale. "Trade Date" shall mean the date the
Executive enters into any underwriting, agency or other purchase agreement
or understanding for the sale of, or otherwise agrees to sell, securities
registered pursuant to such registration statement. No such notification
shall obligate the Executive to consummate any such sale.
(g) The Company shall use its commercially reasonably efforts to take all
other steps necessary to effect the registration of the Vornado Registrable
Securities covered by such registration statement contemplated hereby.
3. EXPENSES. The Company agrees to pay all Vornado Registration Expenses in
connection with any registration pursuant to Paragraph 1 above.
4. INDEMNIFICATION.
(a) Upon the registration of the Vornado Registrable Securities pursuant to
the registration statement filed as contemplated by Paragraph 1 hereof, the
Company shall, and it hereby agrees to, indemnify and hold harmless the
Executive against any losses, claims, damages or liabilities to which the
Executive may become subject under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions (pending or
threatened) in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in such
registration statement under which such Vornado Registrable Securities were
registered under the Securities Act, or any prospectus related thereto or
furnished by the Company to the Executive, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, and the Company shall, and
it hereby agrees to, reimburse the Executive for any legal or other
expenses reasonably incurred by him in connection with investigating or
defending any such action or claim; PROVIDED, HOWEVER, that the Company
shall not be liable to the Executive in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or prospectus, or amendment or
supplement, in reliance upon and in conformity with any written information
(including without limitation, any questionnaire) furnished to the Company
by the Executive expressly for use therein.
(b) The Company may require, as a condition to filing the registration
statement contemplated by Paragraph 1 hereof, that the Company shall have
received an undertaking reasonably satisfactory to it from the Executive to
(i) indemnify and hold harmless the Company, its directors, officers who
sign such registration statement, each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, and any other holder of Stock that is
included in such registration statement against any losses, claims, damages
or liabilities to which the Company or such other persons may become
subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon an untrue statement or alleged untrue statement of a
material fact contained in such registration statement, or any prospectus
related thereto or furnished by the Company to any such holder or
underwriter, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished in writing to the Company by the Executive expressly
for use therein (including, without limitation, any questionnaire), and
(ii) reimburse
the Company for any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such action or
claim;
(c) Promptly after receipt by an indemnified party under Paragraph 4(a) or
(b) above of written notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party pursuant to the indemnification provisions of
or contemplated by this Paragraph 4, notify such indemnifying party in
writing of the commencement of such action; but the omission to so notify
the indemnifying party shall not relieve such indemnifying party from any
liability which it may have to any indemnified party other than under the
indemnification provisions of or contemplated by Paragraph 4(a) or (b)
above, and then only to the extent that the indemnifying party is actually
prejudiced thereby. In case any such action shall be brought against any
indemnified party and it shall notify an indemnifying party of the
commencement thereof, such indemnifying party shall be entitled to
participate therein and (unless the indemnified party reasonably concludes
that such representation would involve a conflict of interest), to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party),
and, after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, such indemnifying party
shall not be liable to such indemnified party for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by
such indemnified party, in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified
party is an actual or potential party to such action or claim) unless such
settlement, compromise or judgment (i) includes an unconditional release of
the indemnified party from all liability arising out of such action or
claim and (ii) does not include a statement as to, or an admission of,
fault, culpability or a failure to act, by or on behalf of any indemnified
party. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent.
5. DEFINITIONS.
(a) "Vornado Registrable Securities" shall mean the 59,259 shares of Stock,
and any securities into which such shares of Stock are exchanged or
reclassified, to be paid to the Executive in respect of Stock Units
pursuant to this agreement, as amended by Amendment No. 1; PROVIDED THAT
such shares of Stock shall cease to be Vornado Registrable Securities when
such shares of Stock (i) have been sold or otherwise transferred by the
Executive, whether pursuant to an effective
registration statement or otherwise, (ii) cease to become payable due to
the forfeiture of Stock Units as a result of the Executive's termination of
employment or (iii) have become eligible for sale pursuant to Rule 144(k)
(or any similar provision then in force) under the Securities Act.
(b) "Vornado Registration Expenses" means all expenses incident to the
Company's performance of or compliance with its obligations hereunder,
including without limitation, (i) all Commission registration and filing
fees and expenses, (ii) internal expenses (including, without limitation,
all salaries and expenses of the Company officers and employees performing
legal or accounting duties) and (iii) fees, disbursements and expenses of
counsel of the Company and the reasonable fees, disbursement and expenses
of counsel of the Executive. Notwithstanding the foregoing, the Executive
shall pay all agency fees and commissions and underwriting discounts and
commissions, if any, attributable to the sale of such Vornado Registered
Securities and the fees and disbursements of any counsel or other advisors
or experts retained by the Executive not otherwise paid by the Company
pursuant to Paragraph (b)(iii) hereof.
6. SUSPENSION. Notwithstanding anything contained herein, the Company may
delay the filing of any such registration statement or amendment or
supplement thereto if the Company in good faith has a valid business reason
for such delay, including without limitation, (i) that the filing of such
registration statement or amendment or supplement thereto would require the
Company to include therein material information that has not theretofore
been made public and which the Company is not then prepared to disclose or
(ii) that the offering and sale of Vornado Registrable Securities by the
Executive at such time will adversely affect any offering by the Company of
its securities then contemplated or pending.
EXHIBIT 12
VORNADO REALTY TRUST
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED
FIXED CHARGES AND PREFERRED SHARE DIVIDEND
REQUIREMENTS
DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
EARNINGS:
Net income applicable to common shareholders $ 209,736 $ 227,233 $ 195,301 $ 169,081 $ 131,164
Minority interest not reflected in fixed
charges below 44,462 19,021 16,668 14,428 3,732
Equity in income from certain
partially owned entities in excess
of distributions -- (28,360) (19,757) (16,391) (983)
Fixed Charges 371,210 319,624 312,021 227,459 152,217
--------- --------- --------- --------- ---------
Earnings $ 625,400 $ 537,518 $ 504,233 $ 394,577 $ 286,130
========= ========= ========= ========= =========
FIXED CHARGES:
Interest and debt expense $ 239,525 $ 173,076 $ 170,273 $ 141,683 $ 114,686
Capitalized interest 6,677 11,557 12,269 7,012 1,410
Preferred stock dividends 23,167 36,505 38,690 33,438 21,690
Preferred unit distributions reflected
in minority interest 96,122 93,342 85,706 40,570 12,452
1/3 of rent expense--interest factor 5,719 5,144 5,083 4,756 1,979
--------- --------- --------- --------- ---------
Total Fixed Charges $ 371,210 $ 319,624 $ 312,021 $ 227,459 $ 152,217
========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges 1.68 1.68 1.62 1.73 1.88
========= ========= ========= ========= =========
Rent Expense $ 17,157 $ 15,433 $ 15,248 $ 14,268 $ 5,937
========= ========= ========= ========= =========
EXHIBIT 21
VORNADO REALTY TRUST
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ ------------
14 West 64th Street Corporation New York
150 East 58th Street, L.L.C. New York
1740 Broadway Associates, L.P. Delaware
20 Broad Company, L.L.C. New York
20 Broad Lender, L.L.C. New York
201 East 66th Street Corp. New York
201 East 66th 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 General Partnership New York
40 East 14 Realty Associates, L.L.C. New York
40 Fulton Street, L.L.C. New York
401 Commercial Son, L.L.C. New York
401 Commercial, L.P. New York
401 General Partner, L.L.C. New York
401 Hotel General Partner, L.L.C. New York
401 Hotel REIT, L.L.C. Delaware
401 Hotel TRS, Inc. Delaware
401 Hotel, L.P. New York
527 West Kinzie, L.L.C. Illinois
689 Fifth Avenue, L.L.C. New York
7 West 34th Street, L.L.C. New York
715 Lexington Avenue, L.L.C. New York
770 Broadway Company, L.L.C. New York
825 Seventh Avenue Holding Corporation 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. Delaware
909 Third Avenue Assignee, L.L.C. New York
909 Third Company, L.P. New York
909 Third GP, L.L.C. Delaware
909 Third Mortgage Holder, L.L.C. Delaware
968 Third, L.L.C. New York
969 Third Avenue, L.L.C. New York
Allentown VF, L.L.C. Pennsylvania
Allentown VF, L.P. Pennsylvania
AmeriCold Corporation Oregon
AmeriCold Real Estate, L.P. Delaware
AmeriCold Realty, Inc. Delaware
Amherst II VF, L.L.C. New York
Amherst VF, L.L.C. New York
Arbor Property, L.P. Delaware
Atlantic City Holding, L.L.C. New Jersey
B&B Park Avenue, L.P. Delaware
Bensalem Holding Company, L.L.C. Pennsylvania
Bensalem Holding Company, L.P. Pennsylvania
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ ----------------
Pennsylvania
Bensalem VF, 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
Bethlehem VF, L.L.C. Pennsylvania
Bethlehem VF, L.P. Pennsylvania
BMS Facilities Group, L.L.C. Delaware
Bordentown II VF, L.L.C. New Jersey
Bordentown VF, L.L.C. New Jersey
Bricktown VF, L.L.C. New Jersey
Bridgeland Warehouses, L.L.C. New Jersey
Broomall VF, L.L.C. Pennsylvania
Broomall VF, L.P. Pennsylvania
Building Maintenance Service, L.L.C. Delaware
Canadian Craftshow LTD. Canada
Carmar Freezers Russellville, L.L.C. Delaware
Carmar Freezers-Thomasville, L.L.C. Missouri
Carmar Group, L.L.C. Delaware
Carmar Industries, L.L.C. Delaware
CESC 1101 17th Street Limited Partnership Maryland
CESC 1101 17th Street Manager, L.L.C. Delaware
CESC 1101 17th Street, L.L.C. Delaware
CESC 1140 Connecticut Avenue Limited Partnership District of Columbia
CESC 1140 Connecticut Avenue Manager, L.L.C. Delaware
CESC 1140 Connecticut Avenue, L.L.C. Delaware
CESC 1150 17th Street Limited Partnership District of Columbia
CESC 1150 17th Street Manager, L.L.C. Delaware
CESC 1150 17th Street, L.L.C. Delaware
CESC 1730 M Street, L.L.C. Delaware
CESC 1750 Pennsylvania Avenue, L.L.C. Delaware
CESC Commerce Executive Park, L.L.C. Delaware
CESC Construction TRS, Inc. Delaware
CESC Crystal City Holding L.L.C. Delaware
CESC Crystal City Land L.L.C. Delaware
CESC Crystal Square Four, L.L.C. Delaware
CESC Crystal/Rosslyn, L.L.C. Delaware
CESC District Holdings, L.L.C. Delaware
CESC Downtown Member, L.L.C. Delaware
CESC Fairfax Square Manager, L.L.C. Delaware
CESC Five Skyline Place, L.L.C. Delaware
CESC Four Skyline Place, L.L.C. Delaware
CESC Gateway Four L.L.C. Virginia
CESC Gateway One, L.L.C. Delaware
CESC Gateway Two Limited Partnership Virginia
CESC Gateway Two Manager, L.L.C. Virginia
CESC Gateway/Square Member, L.L.C. Delaware
CESC Gateway/Square, L.L.C. Delaware
CESC Mall Land, L.L.C. Virginia
CESC Mall, L.L.C. Virginia
CESC One Courthouse Plaza Holdings, L.L.C. Delaware
CESC One Courthouse Plaza, L.L.C. Delaware
CESC One Democracy Manager, L.L.C. Delaware
CESC One Democracy Plaza, L.P. Maryland
CESC One Skyline Place, L.L.C. Delaware
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ -------------
CESC One Skyline Tower, L.L.C. Delaware
CESC Park Five Land, L.L.C. Delaware
CESC Park Five Manager, L.L.C. Virginia
CESC Park Four Land, L.L.C. Delaware
CESC Park Four Manager, L.L.C. Virginia
CESC Park One Land, L.L.C. Delaware
CESC Park One Manager, L.L.C. Delaware
CESC Park Three Land, L.L.C. Delaware
CESC Park Three Manager, L.L.C. Virginia
CESC Park Two , L.L.C. Delaware
CESC Park Two Land, L.L.C. Delaware
CESC Park Two Manager L.L.C. Virginia
CESC Plaza Limited Partnership Virginia
CESC Plaza Manger, L.L.C. Virginia
CESC Plaza Parking, L.L.C. Delaware
CESC Realty Park Five, L.L.C. Virginia
CESC Realty Park Three, L.L.C. Virginia
CESC Reston Executive Center, L.L.C. Delaware
CESC Seven Skyline Place, L.L.C. Delaware
CESC Six Skyline Place, L.L.C. Delaware
CESC Square Four L.L.C. Virginia
CESC Square Four Land L.L.C. Delaware
CESC Square Land, L.L.C. Delaware
CESC Square, L.L.C. Virginia
CESC Three Skyline Place, L.L.C. Delaware
CESC Two Courthouse Plaza Limited Partnership Virginia
CESC Two Courthouse Plaza Manager, L.L.C. Delaware
CESC Two Skyline Place, L.L.C. Delaware
CESC Tysons Dulles Plaza, L.L.C. Delaware
CESC Water Park, L.L.C. Virginia
Charles E. Smith Commercial Realty, L.P. Delaware
Charles E. Smith Real Estate Services, L.P. Virginia
Cherry Hill VF, L.L.C. New Jersey
Chicopee Holding, L.L.C. Massachusetts
Conrans VF, L.L.C. New Jersey
Cumberland Holding, L.L.C. New Jersey
Darby Development Corp. Florida
Delran VF, L.L.C. New Jersey
Design Center Owner - DC, L.L.C. Delaware
Dover VF, L.L.C. New Jersey
DSAC, L.L.C. Texas
Dundalk, L.L.C. Maryland
Durham Leasing, L.L.C. New Jersey
East Brunswick VF, L.L.C. New Jersey
Eatontown Monmouth Mall (Junior Mezz), L.L.C. Delaware
Eatontown Monmouth Mall (Senior Mezz), L.L.C. Delaware
Eatontown Monmouth Mall, L.L.C. Delaware
Eleven Penn Plaza, L.L.C. New York
Fairfax Square Partners Delaware
Fifth Crystal Park Associates Limited Partnership Virginia
First Crystal Park Associates Limited Partnership Virginia
Fourth Crystal Park Associates Limited Partnership Virginia
Freeport VF, L.L.C. New York
Fuller Madison, L.L.C. New York
Gallery Market Holding Company, L.L.C. Pennsylvania
Gallery Market Holding Company, L.P. Pennsylvania
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ -------------
Gallery Market Properties Holding Company, L.L.C. Pennsylvania
Gallery Market Properties Holding Company, L.P. Pennsylvania
Glen Burnie VF, L.L.C. Maryland
Glenolden VF, L.L.C. Pennsylvania
Glenolden VF, L.P. Pennsylvania
Graybar Building, L.L.C. New York
Green Acres Mall, L.L.C. Delaware
Guard Management Service Corp. New York
Guillford Associates, L.L.C. Delaware
Hackensack VF, L.L.C. New Jersey
Hagerstown VF, L.L.C. Maryland
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
Hanover VF, L.L.C. New Jersey
Henrietta Holding, L.L.C. New York
Inland Quarries, L.L.C. Delaware
Interior Design Show, Inc. Canada
Jersey City VF, L.L.C. New Jersey
Kearny Holding VF, L.L.C. New Jersey
Kearny Leasing VF, L.L.C. New Jersey
L.A. Mart Properties, L.L.C. Delaware
Lancaster Leasing Company, L.L.C. Pennsylvania
Lancaster Leasing Company, L.P. Pennsylvania
Landthorp Enterprises, L.L.C. Delaware
Lawnside VF, L.L.C. New Jersey
Lewisville TC, L.L.C. Texas
Littleton Holding, L.L.C. New Jersey
Lodi II VF, L.L.C. New Jersey
Lodi VF, L.L.C. New Jersey
M 330 Associates, L.P. New York
M 393 Associates, L.L.C. New York
M/H Two Park Associates New York
Manalapan VF, L.L.C. New Jersey
Market Square - Furniture Plaza L.L.C. Delaware
Market Square - Main Street, L.L.C. Delaware
Market Square Group, L.L.C. Delaware
Market Square Hamilton Center, L.L.C. Delaware
Market Square II, L.L.C. Delaware
Market Square TRS, Inc. Delaware
Market Square, L.L.C. Delaware
Marlton VF, L.L.C. New Jersey
Marple Holding Company, L.L.C. Pennsylvania
Marple Holding Company, L.P. Pennsylvania
Mart Franchise Center, Inc. Illinois
Mart Franchise Venture, L.L.C. Delaware
Mart Parking, L.L.C. Delaware
Menands VF, L.L.C. New York
Merchandise Mart Enterprises, Inc. (Canada) Canada
Merchandise Mart Properties, Inc. Delaware
Merchandise Mart, L.L.C. Delaware
Mesquite TC, L.L.C. Texas
Middletown VF, L.L.C. New Jersey
MMPI/Highpoint Lease, L.L.C. Delaware
Monmouth Mall, L.L.C. Delaware
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ -------------
Montclair VF, L.L.C. New Jersey
Morris Plains Holding VF, L.L.C. New Jersey
Morris Plains Leasing VF, L.L.C. New Jersey
National Furniture Mart (NC), L.L.C. Delaware
National Hydrant, L.L.C. New York
New Bridgeland Warehouses, L.L.C. Delaware
New Hanover Holding, L.L.C. Delaware
New Hanover Industries, L.L.C. Delaware
New Hanover Leasing, L.L.C Delaware
New Hanover Public Warehousing, L.L.C. Delaware
New Hyde Park VF, L.L.C. New York
New Landthorp Enterprises, L.L.C. Delaware
New TG Hanover L.L.C. Delaware
New Towmed, L.L.C. Delaware
New Vornado/Saddle Brook, L.L.C. Delaware
New Woodbridge, L.L.C. New Jersey
Newington VF, L.L.C. Connecticut
NFM Corp. Delaware
NFM Partners, L.P. Delaware
Ninety Park Lender QRS, Inc. Delaware
Ninety Park Lender, L.L.C. New York
Ninety Park Manager, L.L.C. New York
Ninety Park Option, L.L.C. New York
Ninety Park Property, L.L.C. New York
North Bergen VF, L.L.C. New Jersey
North Dearborn, L.L.C. Delaware
North Plainfield VF, L.L.C. New Jersey
Office Acquisition Finance, L.L.C. Delaware
Office Center Owner (D.C.), L.L.C. Delaware
One Penn Plaza TRS, Inc. Delaware
One Penn Plaza, L.L.C. New York
Palisades A/V Company, L.L.C. New Jersey
Park Four Member, L.L.C. Delaware
Park One Member, L.L.C. Delaware
Philadelphia Holding Company, L.L.C. Pennsylvania
Philadelphia Holding Company, L.P. Pennsylvania
Philadelphia VF, L.L.C. Pennsylvania
Philadelphia VF, L.P. Pennsylvania
Pike Holding Company, L.L.C. Pennsylvania
Pike Holding Company, L.P. Pennsylvania
Powerspace & Services, Inc. New York
Rahway Leasing, L.L.C. New Jersey
RF Operations, L.L.C. Delaware
Rochester Holding, L.L.C. New York
Russian Tea Room Realty, L.L.C. New York
SMB Administration, L.L.C. Delaware
SMB Cleaning, L.L.C. Delaware
SMB Holding, L.L.C. Delaware
SMB Tenant Services Floaters, L.L.C. Delaware
SMB Tenant Services, L.L.C. Delaware
SMB Windows, L.L.C. Delaware
Smith Commercial Management, L.L.C. Virginia
South Capital, L.L.C. Delaware
Springfield Member VF, L.L.C. Delaware
Springfield VF, L.L.C. Massachusetts
T 53 Condominium, L.L.C. New York
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ -------------
T.G. Hanover, L.L.C. New Jersey
TGSI, L.L.C. Maryland
The Park Laurel Condominium New York
The Second Rochester Holding, L.L.C. New York
Third Crystal Park Associates Limited Partnership Virginia
Totowa VF, L.L.C. New Jersey
Towmed Housing, L.L.C. Delaware
Towmed Intermediate, L.L.C. Delaware
Towson VF, L.L.C. Maryland
Trees Acquisition Subsidiary, Inc. Delaware
Turnersville VF, L.L.C. New Jersey
Two Guys From Harrison Holding Co., L.L.C. Pennsylvania
Two Guys From Harrison Holding Co., L.P. Pennsylvania
Two Guys From Harrison N.Y. (DE), L.L.C. Delaware
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
Union Square East, L.L.C. New York
Union VF, L.L.C. New Jersey
Upper Moreland Holding Company, L.L.C. Pennsylvania
Upper Moreland Holding Company, L.P. Pennsylvania
Upper Moreland VF, L.L.C. Pennsylvania
Upper Moreland VF, L.P. Pennsylvania
URS Real Estate, L.P. Delaware
URS Realty, Inc. Delaware
VBL Company, L.L.C. New York
VC Carthage, L.L.C. Delaware
VC Freezer Amarillo, L.P. Delaware
VC Freezer Babcock, L.L.C. Delaware
VC Freezer Bartow, L.L.C. Delaware
VC Freezer Fort Worth, L.L.C. Delaware
VC Freezer Fremont, L.L.C. Delaware
VC Freezer Garden City, L.L.C. Delaware
VC Freezer Kentucky, L.L.C. Delaware
VC Freezer Massillon, L.L.C. Delaware
VC Freezer Omaha Amarillo, L.L.C. Delaware
VC Freezer Ontario, 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 Freezer Strasburg, L.L.C. Delaware
VC Freezer Texarkana, L.L.C. Delaware
VC Missouri Holdings, L.L.C. Delaware
VC Missouri Real Estate Holdings, L.L.C. Delaware
VC Omaha Holdings, L.L.C. Delaware
VC Omaha Real Estate Holdings, L.L.C. Delaware
VFC Connecticut Holding, L.L.C. Delaware
VFC Massachusetts Holding, L.L.C. Delaware
VFC New Jersey Holding, L.L.C. Delaware
VFC Pennsylvania Holding, L.L.C. Delaware
VFC Pennsylvania Holding, L.P. Delaware
VNK Corp. Delaware
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ -------------
VNO 424 Sixth Avenue, L.L.C. Delaware
VNO 63rd Street, L.L.C. New York
VNO Hotel, L.L.C. Delaware
Vornado - Westport, L.L.C. Connecticut
Vornado 1740 Broadway, L.L.C. New York
Vornado 175 Lex, Inc. Delaware
Vornado 330 West 34th Street, L.L.C. New York
Vornado 401 Commercial, L.L.C. New York
Vornado 550-600 Mamaroneck, L.P. 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 Ballantrae Holdings, Inc. Delaware
Vornado Caguas GP, Inc. Delaware
Vornado Caguas GP, L.L.C. Delaware
Vornado Caguas Holding, L.L.C. Delaware
Vornado Caguas Holding, L.P. Delaware
Vornado Caguas, L.L.C. Delaware
Vornado Caguas, L.P. Delaware
Vornado CAPI, L.L.C. Delaware
Vornado Carthage and KC Quarries TRS, Inc. Delaware
Vornado Catalinas GP, Inc. Delaware
Vornado Catalinas GP, L.L.C. Delaware
Vornado Catalinas Holding, L.L.C. Delaware
Vornado Catalinas Holding, L.P. Delaware
Vornado Catalinas, L.L.C. Delaware
Vornado Catalinas, L.P. Delaware
Vornado CCA Gainesville, L.L.C. Delaware
Vornado CESCR Gen-Par, L.L.C. Delaware
Vornado CESCR Holdings, L.L.C. Delaware
Vornado CESCR II, L.L.C. Delaware
Vornado CESCR, L.L.C. Delaware
Vornado Communications, L.L.C. Delaware
Vornado Crescent Carthage and KC Quarry, L.L.C. Delaware
Vornado Crescent Portland Partnership Delaware
Vornado Crystal Park Loan, L.L.C. Delaware
Vornado Finance GP, L.L.C. Delaware
Vornado Finance SPE, Inc. Delaware
Vornado Finance, L.L.C. Delaware
Vornado Finance, L.P. Delaware
Vornado Fort Lee, L.L.C. New Jersey
Vornado Green Acres Acquisition, L.L.C. Delaware
Vornado Green Acres Delaware, L.L.C. Delaware
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 Corp. New York
Vornado Investments Corporation Delaware
Vornado Investments, L.L.C. Delaware
Vornado Lending Corp. New Jersey
Vornado Lending, L.L.C. New Jersey
Vornado M 330, L.L.C. New York
Vornado M 393 QRS, Inc. New York
Vornado M 393, L.L.C. New York
STATE OF
NAME OF SUBSIDIARY ORGANIZATION
- ------------------ -------------
Vornado Mamaroneck, L.L.C. New York
Vornado Management Corp. New Jersey
Vornado Merger Sub, L.P. Delaware
Vornado MH, L.L.C. New York
Vornado MLP GP, L.L.C. Delaware
Vornado Monmouth Mall, L.L.C. 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 OP, L.L.C. Delaware
Vornado Montehiedra OP, L.P. Delaware
Vornado Montehiedra, Inc. Delaware
Vornado New York RR One, L.L.C. New York
Vornado Newkirk, L.L.C. Delaware
Vornado NK Loan, L.L.C. Massachusetts
Vornado Office Management, L.L.C. New York
Vornado Office, Inc. New York
Vornado PS, L.L.C. Delaware
Vornado Realty, L.L.C. Delaware
Vornado Realty, L.P. Delaware
Vornado RR Midtown, L.L.C. New York
Vornado RTR, Inc. Delaware
Vornado SC Properties, L.L.C. Delaware
Vornado Title, L.L.C. Delaware
Vornado TSQ, L.L.C. Delaware
Vornado Two Park Holding, L.L.C. Delaware
Vornado Two Penn Plaza, L.L.C. New York
Vornado/Tea Room, L.L.C. New York
VRT Development Rights, L.L.C. New York
VRT Massachusetts Holding, L.L.C. Delaware
VRT New Jersey Holding, L.L.C. Delaware
Washington CESC TRS, Inc. Delaware
Washington Design Center DC, L.L.C. Delaware
Washington Design Center Subsidiary, L.L.C. Delaware
Washington Mart TRS, Inc. Delaware
Washington Office Center DC, L.L.C. Delaware
Watchung VF, L.L.C. New Jersey
Wayne VF, L.L.C. New Jersey
Wells Kinzie, L.L.C. Delaware
West Windsor Holding Corporation New Jersey
West Windsor Holding, L.L.C. New Jersey
Woodbridge VF, L.L.C. New Jersey
York Holding Company, L.L.C. Pennsylvania
York Holding Company, L.P. Pennsylvania
York VF, L.L.C. Pennsylvania
York VF, L.P. Pennsylvania
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of our report dated March 6, 2003, which report includes an
explanatory paragraph relating to the Company's adoption of SFAS No. 142
"GOODWILL AND OTHER INTANGIBLE ASSETS" on January 1, 2002, appearing in this
Annual Report on Form 10-K of Vornado Realty Trust for the year ended
December 31, 2002:
Vornado Realty Trust:
Registration Statement No. 333-68462 on Form S-3
Amendment No. 1 to Registration Statement No. 333-36080 on Form S-3
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
Registration Statement No. 333-76327 on Form S-3
Amendment No. 1 to Registration Statement No. 333-89667 on Form S-3
Registration Statement No. 333-81497 on Form S-8
Registration Statement No. 333-102216 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 7, 2003
