UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended:   June 30, 2006

 

 

Or

 

 

o

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:   001-11954

VORNADO REALTY TRUST
(Exact name of registrant as specified in its charter)

Maryland

22-1657560

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification Number)

or organization)

 

 

 

888 Seventh Avenue, New York, New York

10019

(Address of principal executive offices)

(Zip Code)

 

 

(212) 894-7000
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x   Yes            o   No

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer.  See definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

x   Large Accelerated Filer            o   Accelerated Filer            o   Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o   Yes             x   No

As of June 30, 2006, 141,722,352 of the registrant’s common shares of beneficial interest are outstanding.

 

 




 

PART I.

 

 

 

Financial Information:

 

 

 

 

Item 1.

 

Financial Statements:

 

Page Number

 

 

 

 

Consolidated Balance Sheets (Unaudited) as of
June 30, 2006 and December 31, 2005

 

3

 

 

 

 

Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2006 and June 30, 2005

 

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2006 and June 30, 2005

 

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

35

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

 

36

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

72

 

 

Item 4.

 

Controls and Procedures

 

73

PART II.

 

 

 

Other Information:

 

 

 

 

Item 1.

 

Legal Proceedings

 

74

 

 

Item 1A.

 

Risk Factors

 

75

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

75

 

 

Item 3.

 

Defaults Upon Senior Securities

 

75

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

75

 

 

Item 5.

 

Other Information

 

75

 

 

Item 6.

 

Exhibits

 

75

Signatures

 

 

 

76

Exhibit Index

 

 

 

77

 

2




 

VORNADO REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Amounts in thousands, except share and per share amounts)

 

June 30,
2006

 

December 31,
2005

 

ASSETS

 

 

 

 

 

Real estate, at cost:

 

 

 

 

 

Land

 

$

2,474,745

 

$

2,337,878

 

Buildings and improvements

 

9,061,052

 

8,467,973

 

Development costs and construction in progress

 

222,770

 

235,347

 

Leasehold improvements and equipment

 

341,754

 

326,614

 

Total

 

12,100,321

 

11,367,812

 

Less accumulated depreciation and amortization

 

(1,813,894

)

(1,663,777

)

Real estate, net

 

10,286,427

 

9,704,035

 

Cash and cash equivalents

 

494,390

 

294,504

 

Escrow deposits and restricted cash

 

206,553

 

192,619

 

Marketable securities

 

218,332

 

276,146

 

Investments and advances to partially-owned entities, including
Alexander’s of $111,793 and $105,241

 

1,029,820

 

944,023

 

Investment in Toys “R” Us, including a $76,816 participation in a senior unsecured bank loan bridge facility in each period

 

463,701

 

425,830

 

Due from officers

 

23,845

 

23,790

 

Accounts receivable, net of allowance for doubtful accounts
of $15,531 and $16,907

 

193,992

 

238,351

 

Notes and mortgage loans receivable

 

603,198

 

363,565

 

Receivable arising from the straight-lining of rents, net of allowance of $2,595 and $6,051

 

409,211

 

375,547

 

Other assets

 

625,945

 

722,392

 

Assets related to discontinued operations

 

908

 

76,361

 

 

 

$

14,556,322

 

$

13,637,163

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Notes and mortgages payable

 

$

5,464,511

 

$

4,794,411

 

Senior unsecured notes

 

1,193,183

 

948,889

 

Exchangeable senior debentures

 

491,250

 

490,750

 

Americold Realty Trust revolving credit facility

 

3,936

 

9,076

 

Accounts payable and accrued expenses

 

390,420

 

476,523

 

Deferred credit

 

190,382

 

184,206

 

Other liabilities

 

165,883

 

148,506

 

Officers compensation payable

 

58,543

 

52,020

 

Liabilities related to discontinued operations

 

 

12,831

 

Total liabilities

 

7,958,108

 

7,117,212

 

Minority interest, including unitholders in the Operating Partnership

 

1,292,063

 

1,256,441

 

Commitments and contingencies

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares of beneficial interest: no par value per share; authorized 110,000,000 shares; issued and outstanding 34,117,667 and 34,169,572 shares

 

831,931

 

834,527

 

Common shares of beneficial interest: $.04 par value per share; authorized, 200,000,000 shares; issued and outstanding 141,722,352 and 141,153,430 shares

 

5,709

 

5,675

 

Additional capital

 

4,270,822

 

4,243,465

 

Earnings in excess of distributions

 

160,320

 

103,061

 

 

 

5,268,782

 

5,186,728

 

Common shares issued to officer’s trust

 

(65,753

)

(65,753

)

Deferred compensation shares earned but not yet delivered

 

68,285

 

69,547

 

Deferred compensation shares issued but not yet earned

 

(10,309

)

(10,418

)

Accumulated other comprehensive income

 

45,146

 

83,406

 

Total shareholders’ equity

 

5,306,151

 

5,263,510

 

 

 

$

14,556,322

 

$

13,637,163

 

 

 

See notes to consolidated financial statements.

3




 

VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 

 

For The Three Months
Ended June 30,

 

For The Six Months
Ended June 30,

 

(Amounts in thousands, except per share amounts)

 

2006

 

2005

 

2006

 

2005

 

REVENUES:

 

 

 

 

 

 

 

 

 

Property rentals

 

$

393,476

 

$

341,091

 

$

761,579

 

$

675,477

 

Temperature Controlled Logistics

 

187,047

 

178,891

 

382,897

 

360,116

 

Tenant expense reimbursements

 

60,920

 

49,917

 

122,647

 

99,726

 

Fee and other income

 

21,589

 

21,576

 

43,246

 

51,405

 

Total revenues

 

663,032

 

591,475

 

1,310,369

 

1,186,724

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Operating

 

319,851

 

282,430

 

651,766

 

578,256

 

Depreciation and amortization

 

98,880

 

83,234

 

189,185

 

160,522

 

General and administrative

 

52,563

 

45,796

 

98,427

 

86,455

 

Total expenses

 

471,294

 

411,460

 

939,378

 

825,233

 

Operating income

 

191,738

 

180,015

 

370,991

 

361,491

 

Income applicable to Alexander’s

 

14,750

 

13,030

 

11,155

 

38,416

 

(Loss) income applicable to Toys “R” Us

 

(7,884

)

 

44,876

 

 

Income from partially-owned entities

 

14,635

 

6,598

 

20,686

 

15,820

 

Interest and other investment income

 

16,623

 

69,923

 

39,098

 

171,121

 

Interest and debt expense

 

(120,822

)

(83,414

)

(224,716

)

(160,918

)

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate

 

56,947

 

 

57,495

 

3,488

 

Minority interest of partially-owned entities

 

3,118

 

1,127

 

2,844

 

1,730

 

Income from continuing operations

 

169,105

 

187,279

 

322,429

 

431,148

 

Income from discontinued operations

 

16,762

 

32,930

 

33,497

 

34,616

 

Income before allocation to limited partners

 

185,867

 

220,209

 

355,926

 

465,764

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

(23,975

)

(33,198

)

(51,170

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

(15,152

)

(10,347

)

(33,693

)

Net income

 

163,169

 

181,082

 

312,381

 

380,901

 

Preferred share dividends

 

(14,404

)

(8,385

)

(28,811

)

(20,771

)

NET INCOME applicable to common shares

 

$

148,765

 

$

172,697

 

$

283,570

 

$

360,130

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE — BASIC:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.93

 

$

1.08

 

$

1.77

 

$

2.52

 

Income from discontinued operations

 

0.12

 

0.25

 

0.24

 

0.27

 

Net income per common share

 

$

1.05

 

$

1.33

 

$

2.01

 

$

2.79

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE — DILUTED:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.88

 

$

1.02

 

$

1.68

 

$

2.38

 

Income from discontinued operations

 

0.11

 

0.23

 

0.22

 

0.25

 

Net income per common share

 

$

0.99

 

$

1.25

 

$

1.90

 

$

2.63

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER COMMON SHARE

 

$

0.80

 

$

0.76

 

$

1.60

 

$

1.52

 

See notes to consolidated financial statements.

4




 

VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

 

 

For The Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

312,381

 

$

380,901

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization (including amortization of debt issuance costs)

 

200,353

 

167,431

 

Equity in income of partially-owned entities, including Alexander’s and Toys “R” Us

 

(76,717

)

(54,236

)

Net gain on dispositions of wholly-owned and partially-owned assets other than depreciable real estate

 

(57,495

)

(3,488

)

Net gain on sale of real estate

 

(33,769

)

(31,614

)

Minority limited partners’ interest in the Operating Partnership

 

33,198

 

51,170

 

Straight-lining of rental income

 

(30,182

)

(22,059

)

Perpetual preferred unit distributions of the Operating Partnership

 

10,347

 

31,493

 

Amortization of below market leases, net

 

(8,471

)

(5,656

)

Net loss (gain) from derivative positions, including Sears Holdings, McDonalds and GMH

 

5,076

 

(134,416

)

Minority interest of partially-owned entities

 

(2,844

)

(1,730

)

Write-off of issuance costs of preferred units redeemed

 

 

2,200

 

Distributions of income from partially-owned entities

 

19,318

 

14,895

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

44,364

 

4,533

 

Accounts payable and accrued expenses

 

(69,495

)

(11,948

)

Other assets

 

(13,545

)

(74,857

)

Other liabilities

 

26,722

 

7,834

 

Net cash provided by operating activities

 

359,241

 

320,453

 

Cash Flows from Investing Activities:

 

 

 

 

 

Investments in notes and mortgage loans receivable

 

(260,667

)

(275,000

)

Acquisitions of real estate and other

 

(244,938

)

(217,266

)

Proceeds received on settlement of derivatives (primarily Sears Holdings)

 

135,028

 

 

Proceeds from sale of, and return of investment in, marketable securities

 

132,898

 

29,468

 

Additions to real estate

 

(90,443

)

(26,868

)

Development costs and construction in progress

 

(112,650

)

(62,707

)

Proceeds from sale of real estate

 

110,388

 

126,584

 

Investments in partially-owned entities

 

(89,584

)

(182,657

)

Purchases of marketable securities

 

(57,992

)

(154,509

)

Distributions of capital from partially-owned entities

 

29,703

 

8,246

 

Proceeds received upon repayment of notes and mortgage loans receivable

 

20,248

 

358,000

 

Cash restricted, including mortgage escrows

 

(40,752

)

35,255

 

Deposits in connection with real estate acquisitions, including pre-acquisition costs

 

(44,163

)

 

Net cash used in investing activities

 

(512,924

)

(361,454

)

 

See notes to consolidated financial statements.

5




VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED
(UNAUDITED)

 

 

For the Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from borrowings

 

1,401,291

 

795,000

 

Repayments of borrowings

 

(786,519

)

(185,681

)

Dividends paid on common shares

 

(226,310

)

(202,591

)

Distributions to minority partners

 

(41,265

)

(57,984

)

Dividends paid on preferred shares

 

(28,853

)

(14,884

)

Debt issuance costs

 

(8,077

)

(4,797

)

Exercise of share options

 

9,157

 

40,798

 

Redemption of perpetual preferred shares and units

 

 

(195,000

)

Proceeds from issuance of preferred shares and units

 

34,145

 

108,956

 

Net cash provided by financing activities

 

353,569

 

283,817

 

Net increase in cash and cash equivalents

 

199,886

 

242,816

 

Cash and cash equivalents at beginning of period

 

294,504

 

599,282

 

Cash and cash equivalents at end of period

 

$

494,390

 

$

842,098

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash payments for interest (including capitalized interest of $6,094 and $7,200)

 

$

216,824

 

$

157,337

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

Financing assumed in acquisitions

 

$

272,846

 

$

98,783

 

Conversion of Class A Operating Partnership units to common shares

 

3,560

 

71,500

 

Unrealized net gain on securities available for sale

 

15,173

 

42,354

 

 

See notes to consolidated financial statements.

6




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.    Organization

Vornado Realty Trust is a fully-integrated real estate investment trust (“REIT”) and conducts its business through Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”).  All references to “our,” “we,” “us,” “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries.  We are the sole general partner of, and owned approximately 89.7% of the common limited partnership interest in, the Operating Partnership at June 30, 2006.

Substantially all of Vornado Realty Trust’s assets are held through subsidiaries of the Operating Partnership.  Accordingly, Vornado Realty Trust’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors.

2.     Basis of Presentation

The accompanying consolidated financial statements are unaudited.  In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission.  The results of operations for the three and six months ended June 30, 2006, are not necessarily indicative of the operating results for the full year.

The accompanying consolidated financial statements include the accounts of Vornado and its majority-owned subsidiaries, including the Operating Partnership, as well as certain partially-owned entities in which we own (i) more than 50% unless a partner has shared board and management representation and authority and substantive participation rights on all significant business decisions or (ii) 50% or less when we are considered the primary beneficiary and the entity qualifies as a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised) — Consolidation of Variable Interest Entities (“FIN 46R”).  In addition, we consider Emerging Issues Task Force (“EITF”) Issue No. 04-05 in determining whether our investments in limited partnerships, in which the Company is a general partner, should be consolidated.  All significant inter-company amounts have been eliminated.  Equity interests in partially-owned entities are accounted for under the equity method of accounting when they do not meet the criteria for consolidation and our ownership interest is greater than 20%.  When partially-owned investments are in partnership form, the 20% threshold for equity method accounting is generally reduced to 3% to 5%, based on our ability to influence the operating and financial policies of the partnership.  Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities.  Investments in partially-owned entities that do not meet the criteria for consolidation or for equity method accounting are accounted for on the cost method.

We have made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain prior year balances related to discontinued operations have been reclassified in order to conform to current year presentation.

7




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

3.       Recently Issued Accounting Literature

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123(R), Share-Based Payment (“SFAS No. 123R”).  SFAS No. 123R replaces SFAS No. 123 and requires that the compensation cost relating to share-based payment transactions be recognized in financial statements and measured based on the fair value of the equity or liability instruments issued.  We adopted SFAS No. 123R on the modified prospective method on January 1, 2006.  This adoption did not have a material effect on our consolidated financial statements.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and SFAS No. 3.  SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring retrospective application to prior periods’ financial statements of the change in accounting principle, unless it is impracticable to do so.  SFAS No. 154 also requires that a change in depreciation or amortization for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  We adopted SFAS No. 154 on January 1, 2006.  This adoption had no effect on our consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB No. 133 and 140.  The purpose of SFAS statement No. 155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.  SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold.  SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year beginning after September 15, 2006.  We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of SFAS No. 140.   SFAS No. 156 requires separate recognition of a servicing asset and a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a servicing contract.  This statement also requires that servicing assets and liabilities be initially recorded at fair value and subsequently adjusted to the fair value at the end of each reporting period.  This statement is effective in fiscal years beginning after September 15, 2006.  We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Interpretation also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 becomes effective on January 1, 2007.  We are currently evaluating the impact of adopting this Interpretation. 

 

8




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

4.       Acquisitions and Dispositions

Acquisitions:

San Francisco Bay Area Properties

On January 10, 2006, we acquired four properties consisting of 189,000 square feet of retail and office space in the San Francisco Bay area for approximately $72,000,000 in cash, including closing costs.  We consolidate the accounts of these properties into our financial position and results of operations from the date of acquisition.

Springfield Mall

On January 31, 2006, we closed on an option to purchase the 1.4 million square foot Springfield Mall which is located on 79 acres at the intersection of Interstate 95 and Franconia Road in Springfield, Fairfax County, Virginia, and is anchored by Macy’s, and J.C. Penney and Target, who own their stores aggregating 389,000 square feet.  The purchase price for the option was $35,600,000, of which we paid $14,000,000 in cash at closing and the remainder of $21,600,000 will be paid in installments over four years. We intend to redevelop, reposition and re-tenant the mall and have committed to spend $25,000,000 in capital expenditures over a six-year period from the closing of the option agreement.  The option becomes exercisable upon the passing of one of the existing principals of the selling entity and may be deferred at our election through November 2012.  Upon exercise of the option, we will pay $80,000,000 to acquire the mall, subject to the existing mortgage of $180,000,000, which will be amortized to $149,000,000 at maturity in 2013.  Upon closing of the option on January 31, 2006, we acquired effective control of the mall, including management of the mall and right to the mall’s net cash flow.  Accordingly, we consolidate the accounts of the mall into our financial position and results of operations pursuant to the provisions of FIN 46R.  We have a 2.5% minority partner in this transaction.

BNA Complex

On February 17, 2006, we entered into an agreement to sell our 277,000 square foot Crystal Mall Two office building, located in Arlington, Virginia, to The Bureau of National Affairs, Inc. (“BNA”) for its corporate headquarters.  Simultaneously, we agreed to acquire a three building complex from BNA containing approximately 300,000 square feet, which is located in Washington D.C.’s West End between Georgetown and the Central Business District.  We will receive sales proceeds of approximately $100,000,000 for Crystal Mall Two and recognize a net gain on sale of approximately $23,000,000.  We will pay BNA $111,000,000 for the three building complex.  One of the buildings, containing 130,000 square feet, will remain an office building, while the other two buildings will be redeveloped into residential condominiums.  These transactions are expected to close in the second half of 2007.

San Jose, California Ground-up Development

On March 29, 2006, a joint venture, in which we have a 45% equity interest and are a co-managing partner, acquired 55 acres of land in San Jose, California for approximately $59,600,000, including closing costs.  The purchase price was funded with $20,643,000 of cash contributed by the partners, of which our share was $9,289,000, and $38,957,000 drawn on a $117,000,000 acquisition/construction loan.  The remainder of the loan will be used to fund the development of a 635,000 square foot retail center on the site.  As of June 30, 2006, $44,599,000 was outstanding under the loan, which bears interest at LIBOR plus 1.75% (6.94% at June 30, 2006) and matures in March 2009 with a one-year extension option.  Upon completion of the development we have an option to acquire our partner’s 55% equity interest at a 7% unlevered yield. We account for this investment on the equity method.

1925 K Street

On April 13, 2006, we acquired the 92.65% interest that we did not already own of 1925 K Street, a 150,000 square foot office building located in the Central Business District of Washington, DC.  The purchase price for the 92.65% interest was $52,800,000, consisting of $34,600,000 in cash and $18,200,000 of existing mortgage debt.   Mitchell N. Schear, President of our Washington, DC Office division, received $3,675,000 for his share of the proceeds as a partner of the selling entity.  We plan to redevelop this property into a 225,000 square foot Class A office building at a cost of approximately $80,000,000.  We consolidate the accounts of this property into our financial position and results of operations from the date of acquisition.

9




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

4.    Acquisitions and Dispositions - continued

1540 Broadway

On July 11, 2006, we acquired the retail, signage and parking components of 1540 Broadway located in Manhattan’s Times Square between 45th and 46th Street.  The purchase price was approximately $260,000,000 in cash.  The property contains 152,000 square feet of retail space which is 60% occupied.  The principal tenants are Virgin Records and Planet Hollywood.  We consolidate the accounts of this property into our financial position and results of operations from the date of acquisition.

Filene’s, Boston, Massachusetts

On July 10, 2006, we entered into an agreement to purchase the 656,000 square foot Filene’s property located in the Downtown Crossing district of Boston from Federated Department Stores, Inc.  The purchase price is approximately $100,000,000 in cash.  We plan to redevelop and expand the property for office and retail use, subject to governmental approvals.  The purchase is expected to close in the fourth quarter of 2006, subject to customary closing conditions.

Other

In addition to the acquisitions described above, during 2006 we completed $205,950,000 of other real estate acquisitions and investments, comprised of $191,450,000 in cash and $14,500,000 of existing mortgage debt as follows:

(Amounts in thousands)

 

Amount

 

Segment

 

West 57th Street properties (50% interest)

 

$

68,450

 

Office

 

Wasserman Joint Venture - additional investment (95% interest)

 

53,000

 

Other

 

3040 M Street, Washington, DC

 

36,400

 

Retail

 

Tonnelle Avenue Land (40 acres), North Bergen, New Jersey

 

24,500

 

Retail

 

Verde Group - additional investment (8% interest)

 

12,500

 

Other

 

122-124 Spring Street, New York, NY

 

11,100

 

Retail

 

 

 

$

205,950

 

 

 

 

Dispositions:

33 North Dearborn Street

On March 14, 2006, we sold 33 North Dearborn Street, a 336,000 square foot office building located in Chicago, Illinois, for $46,000,000, which resulted in a net gain of $4,835,000.  All of the proceeds from the sale were used to fund a portion of the purchase price of the San Francisco Bay area properties (see Acquisitions above) pursuant to Section 1031 of the Internal Revenue Code.

424 Sixth Avenue

On March 13, 2006, we sold 424 Sixth Avenue, a 10,000 square foot retail property located in New York City, for $22,000,000, which resulted in a net gain of $9,218,000.

1919 South Eads Street

On June 22, 2006, we sold 1919 South Eads Street, a 96,000 square foot office building located in Arlington, Virginia, for $38,400,000, which resulted in a net gain of $17,609,000.

10




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

5.       Derivative Instruments and Marketable Securities

Investment in McDonald’s Corporation (“McDonalds”) (NYSE: MCD)

In July 2005, we acquired an aggregate of 858,000 common shares of McDonalds for $25,346,000, an average price of $29.54 per share. These shares are recorded as marketable equity securities on our consolidated balance sheet and are classified as “available for sale.”  Appreciation or depreciation in the fair market value of these shares is recorded as an increase or decrease in “accumulated other comprehensive income” in the shareholders’ equity section of our consolidated balance sheet and not recognized in income.  At June 30, 2006, based on McDonalds’ closing stock price of $33.60 per share, $3,482,000 of appreciation in the value of these shares was included in “accumulated other comprehensive income.”

During the second half of 2005, we acquired an economic interest in an additional 14,565,500 McDonalds common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on McDonalds’ common shares.  These call and put options had an initial weighted-average strike price of  $32.66 per share, or an aggregate of $475,692,000, expire on various dates between July 30, 2007 and September 10, 2007 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points (up to 95 basis points under certain circumstances) and is credited for the dividends received on the shares.  The options provide us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate purchase price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statement of income.

In the three months ended March 31, 2006, we sold 2,119,500 of the option shares in the derivative position at a weighted average sales price of $35.49.  In the three months ended June 30, 2006, we acquired an additional 1,250,000 option shares at a weighted average purchase price of $33.08.  As of June 30, 2006, there are 13,696,000 option shares in the derivative position with an adjusted weighted average strike price of $32.70 per share or an aggregate of $447,822,000.  For the three and six months ended June 30, 2006, we recognized a net loss of $14,515,000 and $8,215,000, respectively, representing the mark-to-market of the shares in the derivative and the expense resulting from the LIBOR charges.

Our aggregate net gain realized from inception of this investment through June 30, 2006 is $9,039,000.

11




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

5.       Derivative Instruments and Marketable Securities

Investment in Sears, Roebuck and Co. (“Sears”)

In August and September 2004, we acquired an economic interest in 7,916,900 Sears common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on Sears common shares.  These call and put options had an initial weighted-average strike price of $39.82 per share, or an aggregate of $315,250,000, expire in April 2006 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points and is credited for the dividends received on the shares.  The options provide us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate strike price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statement of income.

On March 30, 2005, as a result of the merger between Sears and Kmart and pursuant to the terms of the contract, our derivative position representing 7,916,900 Sears common shares became a derivative position representing 2,491,819 common shares of Sears Holdings, Inc. (“Sears Holdings”) (NYSE: SHLD) valued at $323,936,000 based on the then closing share price of $130.00 and $146,663,000 of cash.  As a result, we recognized a net gain of $58,443,000 based on the fair value of the derivative position on March 30, 2005.  In 2005 we sold 402,660 of the option shares at a weighted average sales price of $124.44 per share.  In the first quarter of 2006, we settled the entire derivative position by selling the remaining 2,089,159 option shares at a weighted average sales price of $125.43, which resulted in a net gain of $18,611,000, comprised of $20,673,000 from the remaining option shares sold, partially offset by, $2,062,000 of expense resulting from the increase in strike price for the LIBOR charge.

Our aggregate net gain realized from inception of this investment through settlement was $142,877,000.

Sears Canada, Inc. (“Sears Canada”)

On April 3, 2006, we tendered the 7,500,000 Sears Canada shares we owned to Sears Holdings at the increased tender price of $15.68 per share, which resulted in a net gain of $55,438,000 representing the difference between the tender price and our carrying amount of $8.29 per share.  The net gain is reflected as a component of “net gains on dispositions of wholly-owned assets other than depreciable real estate” on our consolidated statement of income.  Together with income recognized in the fourth quarter of 2005 that resulted from a Sears Canada special dividend, the aggregate net gain from inception on our $143,737,000 investment was $78,323,000.

12




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

6.       Investments in Partially-Owned Entities

The carrying amount of our investments in partially-owned entities and income recognized from such investments are as follows:

Investments:

(Amounts in thousands)

 

June 30,
2006

 

December 31,
2005

 

Toys “R” Us, Inc. (“Toys”) (see page 17)

 

$

463,701

 

$

425,830

 

 

 

 

 

 

 

H Street Building Corporation (“H Street”) non-consolidated subsidiaries (1)

 

$

200,868

 

$

196,563

 

Newkirk Master Limited Partnership (“Newkirk MLP”)

 

174,193

 

172,488

 

Alexander’s Inc. (“Alexander’s”) (see page 18)

 

111,793

 

105,241

 

GMH Communities L.P. (“GMH”) (see page 18)

 

108,798

 

90,103

 

Beverly Connection (2)

 

80,256

 

103,251

 

Other

 

353,912

 

276,377

 

 

 

 

 

 

 

 

 

$

1,029,820

 

$

944,023

 

 

 

 

 

 

 

 

 

Equity in Net Income (Loss):

 

For The Three Months
Ended June 30,

 

For The Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Toys:

 

 

 

 

 

 

 

 

 

32.9% share of equity in net (loss) income

 

$

(11,169

)

$

 

$

38,106

 

$

 

Interest and other income

 

3,285

 

 

6,770

 

 

 

 

$

(7,884

)

$

 

$

44,876

 

$

 

Alexander’s:

 

 

 

 

 

 

 

 

 

33% share of:

 

 

 

 

 

 

 

 

 

Equity in net income before net gain on sale of condominiums and stock appreciation rights compensation expense

 

$

4,453

 

$

3,455

 

$

8,596

 

$

8,229

 

Net gain on sale of condominiums

 

2,722

 

5,541

 

4,580

 

26,174

 

Stock appreciation rights compensation income (expense)

 

4,836

 

(2,034

)

(7,559

)

(9,467

)

Equity in net income

 

12,011

 

6,962

 

5,617

 

24,936

 

Management and leasing fees

 

2,545

 

2,046

 

5,133

 

5,421

 

Development and guarantee fees

 

194

 

975

 

405

 

4,236

 

Interest income

 

 

3,047

 

 

3,823

 

 

 

$

14,750

 

$

13,030

 

$

11,155

 

$

38,416

 

Beverly Connection:

 

 

 

 

 

 

 

 

 

50% share of equity in net loss

 

$

(2,056

)

$

(1,132

)

$

(6,023

)

$

(1,491

)

Interest and fee income

 

3,405

 

2,305

 

6,337

 

3,022

 

 

 

1,349

 

1,173

 

314

 

1,531

 

Newkirk MLP:

 

 

 

 

 

 

 

 

 

15.8% in 2006 and 22.5% in 2005 share of equity in net income

 

4,357

 

2,333

(3)

8,515

 

8,144

(3)

Interest and other income

 

13

 

600

 

58

 

1,257

 

 

 

4,370

 

2,933

 

8,573

 

9,401

 

GMH (see page 18):

 

 

 

 

 

 

 

 

 

13.5% in 2006 and 12.22% in 2005 share of equity in net income

 

 

439

 

 

500

 

 

 

 

 

 

 

 

 

 

 

H Street:

 

 

 

 

 

 

 

 

 

50% share of equity in income (1)

 

4,311

 

 

4,311

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

4,605

 

2,053

 

7,488

 

4,388

 

 

 

$

14,635

 

$

6,598

 

$

20,686

 

$

15,820

 


See notes on following page.

13




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

6.       Investments in Partially-Owned Entities - continued

Notes to preceding tabular information:

(Amounts in thousands)

(1)          We account for our investment in H Street partially owned entities on the equity method on a one-quarter lag basis.  Prior to the quarter ended June 30, 2006, two 50% owned entities that are contesting our acquisition of H Street impeded access to their financial information and accordingly, we were unable to record our pro rata share of their earnings.  During the quarter ended June 30, 2006, based on the financial information provided to us, we recognized equity in net income of $4,387 from these entities, of which $2,807 was for the period from July 20, 2005 (date of acquisition) to December 31, 2005 and $1,580 was for the quarter ended March 31, 2006.

(2)          In connection with our preferred equity investment to this venture, we provided the venture with a $59,500 first mortgage loan, which bore interest at 10% through its scheduled maturity in February 2006.  On February 11, 2006, $35,000 of our loan to the venture was converted to additional preferred equity on the same terms as our existing preferred equity and the maturity date of the loan was extended.  On June 30, 2006, the venture completed a $100,000 refinancing and repaid to us the remaining $24,500 balance of the loan.  The venture’s new loan bears interest at LIBOR (capped at 5.5%) plus 2.20% (7.55% as of June 30, 2006) and matures in July 2008 with 3 one-year extension options.

(3)          Includes our share of impairment losses of $3,520 and $4,016 for the three and six months ended June 30, 2005, respectively.

 

14




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

6.             Investments in Partially-Owned Entities - continued

Below is a summary of the debt of partially-owned entities as of June 30, 2006 and December 31, 2005, none of which is guaranteed by us.

 

 

100% of
Partially-Owned Entities Debt

 


(Amounts in thousands)

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Toys (32.9% interest):

 

 

 

 

 

$1.3 billion senior credit facility, due 2008, LIBOR plus 3.00% (8.11% at June 30, 2006)

 

$

1,300,000

 

$

 

$1.9 billion bridge loan, due 2012, LIBOR plus 5.25% (10.34% at June 30, 2006)

 

973,000

 

1,900,000

 

Mortgage loan, due 2007, LIBOR plus 1.30% (6.50% at June 30, 2006)

 

800,000

 

800,000

 

Senior U.K. real estate facility, due 2013, 4.56% plus 0.28% to 1.50% (5.02% at June 30, 2006)

 

650,000

 

 

7.625% bonds, due 2011 (Face value — $500,000)

 

475,000

 

475,000

 

7.875% senior notes, due 2013 (Face value — $400,000)

 

368,000

 

366,000

 

7.375% senior notes, due 2018 (Face value — $400,000)

 

326,000

 

324,000

 

Toys “R” Us - Japan short-term borrowings, 2006, tiered rates (weighted-average rate 0.31% at June 30, 2006)

 

253,000

 

 

6.875% bonds, due 2006 (Face value — $250,000)

 

250,000

 

253,000

 

8.750% debentures, due 2021 (Face value — $200,000)

 

193,000

 

193,000

 

Spanish real estate facility, due 2013, 1.50% plus EURIBOR (4.51% at June 30, 2006)

 

170,000

 

 

Toys “R” Us - Japan bank loans, due 2011-2014, 1.20%-2.80%

 

155,000

 

 

$1.0 billion senior facility, due 2006-2011, LIBOR plus 1.50% (5.76% at June 30, 2006)

 

126,000

 

1,035,000

 

Junior U.K. real estate facility, due 2013, LIBOR plus 2.25% (6.81% at June 30, 2006)

 

114,000

 

 

French real estate facility, due 2013, 1.50% plus EURIBOR (4.51% at June 30, 2006)

 

82,000

 

 

Note at an effective cost of 2.23% due in semi-annual installments through 2008

 

65,000

 

82,000

 

$2.0 billion credit facility, due 2010, LIBOR plus 1.75%-3.75%

 

5,000

 

1,160,000

 

Other

 

39,000

 

32,000

 

 

 

6,344,000

 

6,620,000

 

Alexander’s (33% interest):

 

 

 

 

 

731 Lexington Avenue mortgage note payable collateralized by the office space, due in February 2014, with interest at 5.33% (prepayable without penalty)

 

397,794

 

400,000

 

731 Lexington Avenue mortgage note payable, collateralized by the retail space, due in July 2015, with interest at 4.93% (prepayable without penalty)

 

320,000

 

320,000

 

Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011, with interest at 7.46% (prepayable with yield maintenance)

 

208,845

 

210,539

 

Rego Park mortgage note payable, due in June 2009, with interest at 7.25% (prepayable without penalty after March 2009)

 

80,530

 

80,926

 

Paramus mortgage note payable, due in October 2011, with interest at 5.92% (prepayable without penalty)

 

68,000

 

68,000

 

 

 

1,075,169

 

1,079,465

 

Newkirk MLP (15.8% interest in 2006 and 22.5% interest in 2005):

 

 

 

 

 

Portion of first mortgages collateralized by the partnership’s real estate, due from 2006 to 2024, with a weighted average interest rate of 6.74% at June 30, 2006 (various prepayment terms)

 

830,501

 

742,879

 

 

 

 

 

 

 

GMH (13.5% interest in 2006 and 12.22% interest in 2005):

 

 

 

 

 

Mortgage notes payable, collateralized by 47 properties, due from 2007 to 2015, with a weighted average interest rate of 5.01% (various prepayment terms)

 

688,412

 

688,412

 

 

 

 

 

 

 

H Street (50% interest):

 

 

 

 

 

Mortgage notes payable, collateralized by 6 properties, due from 2006 to 2029 with a weighted average interest rate of 6.77% at June 30, 2006

 

320,233

 

 

 

15




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

6.             Investments in Partially-Owned Entities - continued

 

 

100% of
Partially Owned Entities Debt

 

(Amounts in thousands)

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Partially-Owned Office Buildings:

 

 

 

 

 

Kaempfer Properties (2.5% to 5.0% interests in two partnerships) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2011 to 2031, with a weighted average interest rate of 6.43% at June 30, 2006 (various prepayment terms)

 

$

146,160

 

$

166,460

 

Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%

 

65,715

 

66,235

 

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

 

825 Seventh Avenue (50% interest) mortgage note payable, due in October 2014, with interest at 8.07% (prepayable with yield maintenance)

 

22,325

 

22,484

 

Rosslyn Plaza (46% interest) mortgage note payable, due in November 2007, with interest at 7.28% (prepayable without penalty)

 

57,758

 

58,120

 

West 57th Street (50% interest) mortgage note payable, due in October 2009, with interest at 4.94% (prepayable without penalty after July 2009)

 

29,000

 

 

 

 

 

 

 

 

Verde LLC & Verde Realty Master Limited Partnership (8.33% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2006 to 2029, with a weighted average interest rate of 6.05% at June 30, 2006 (various prepayment terms)

 

139,921

 

176,345

 

 

 

 

 

 

 

Monmouth Mall (50% interest) mortgage note payable, due in September 2015, with interest at 5.44% (prepayable with yield maintenance)

 

165,000

 

165,000

 

 

 

 

 

 

 

Green Courte Real Estate Partners, LLC (8.3% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2006 to 2015, with a weighted average interest rate of 5.62% at June 30, 2006 (various prepayment terms)

 

188,227

 

159,573

 

 

 

 

 

 

 

San Jose, California Ground-up Development (45% interest) construction loan, due in March 2009, with a one-year extension option and interest at 6.94% (LIBOR plus 1.75%)

 

44,599

 

 

 

 

 

 

 

 

Beverly Connection (50% interest) mortgage and mezzanine loans payable, due in March 2008 and July 2008, with a weighted average interest rate of 10.00%, $70,000 of which is due to Vornado (prepayable with yield maintenance)

 

170,000

 

69,003

 

 

 

 

 

 

 

TCG Urban Infrastructure Holdings (25% interest) mortgage notes payable, collateralized by the entity’s real estate, due from 2008 to 2012, with a weighted average interest rate of 9.00% at June 30, 2006 (various prepayment terms)

 

41,569

 

40,239

 

 

 

 

 

 

 

478-486 Broadway (50% interest) mortgage note payable, due October 2007, with interest at 8.02% (LIBOR plus 3.15%) (prepayable with yield maintenance)

 

20,000

 

20,000

 

 

 

 

 

 

 

Wells/Kinzie Garage (50% interest) mortgage note payable, due in May 2009, with interest at 7.03%

 

14,914

 

15,067

 

 

 

 

 

 

 

Orleans Hubbard Garage (50% interest) mortgage note payable, due in March 2009, with interest at 7.03%

 

9,358

 

9,455

 

 

 

 

 

 

 

Other

 

24,041

 

24,426

 

 

Based on our ownership interest in the partially-owned entities above, our pro rata share of the debt of these partially-owned entities was $3,062,067,000 and $3,002,346,000 as of June 30, 2006 and December 31, 2005, respectively.

16




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

6.       Investments in Partially-Owned Entities - continued

Toys

On July 21, 2005, a joint venture owned equally by us, Bain Capital and Kohlberg Kravis Roberts & Co. acquired Toys for $26.75 per share in cash or approximately $6.6 billion.  In connection therewith, we invested $428,000,000 of the $1.3 billion of equity in the venture, consisting of $407,000,000 in cash and $21,000,000 in Toys common shares held by us.  This investment is accounted for under the equity method of accounting.

On January 9, 2006, Toys announced plans and is in the process of closing 87 Toys “R” Us stores in the United States, of which twelve stores will be converted into Babies “R” Us stores, the leases on five stores are expiring and one store has been sold.  We are handling the leasing and disposition of the real estate of the remaining 69 stores.

As a result of the store-closing program, Toys incurred restructuring and other charges aggregating approximately $149,000,000 before tax, which includes $43,000,000 for the cost of liquidating the inventory.  Of this amount, $94,000,000 was recognized in Toys’ fourth quarter ending January 28, 2006 and $55,000,000 was recorded in Toys’ first quarter ending April 29, 2006.  Our 32.9% share of the $149,000,000 charge is $49,000,000, of which $33,000,000 had no income statement effect as a result of purchase price accounting and the remaining portion relating to the cost of liquidating inventory of approximately $10,000,000 after-tax, was recognized as an expense as part of our equity in Toys’ net income in the first quarter of 2006.

The business of Toys is highly seasonal.  Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income.  Because Toys’ fiscal year ends on the Saturday nearest January 31, we record our 32.9% share of Toys’ net income or loss on a one-quarter lag basis.  Equity in net loss from Toys for the three months ended June 30, 2006 was $7,884,000 which consisted of (i) our $11,169,000 share of Toys’ net loss for their quarter ended April 29, 2006, partially offset by (ii) $2,209,000 of interest income for our share of Toys’ senior unsecured bridge loan and (iii) $1,076,000 of management fees.  Equity in net income from Toys for the six months ended June 30, 2006 was $44,876,000, which consisted of (i) our $38,106,000 share of Toys’ net income for the period from October 30, 2005 to April 29, 2006, (ii) $4,865,000 of interest income from our share of Toys’ senior unsecured bridge loan and (iii) $1,905,000 of management fees.

On July 19, 2006, Toys completed a financing, consisting of an $804,000,000, six-year term loan bearing interest at LIBOR plus 4.25% and a $200,000,000, two-year term loan bearing interest at an initial rate of LIBOR plus 3.00% for the first three months (increasing to 3.50% for the next three months and then to 4.00% for the remainder of the term).  The proceeds from these loans were used to repay Toys’ $973,000,000 bridge loan, including the $76,816,000 balance due to us.

The unaudited information set forth below presents our pro forma condensed consolidated statement of income for the three and six months ended June 30, 2005 (including Toys’ results for the three and six months ended April 29, 2005) as if the above transaction occurred on February 1, 2004.   The unaudited pro forma information below is not necessarily indicative of what our actual results would have been had the Toys transaction been consummated on February 1, 2004, nor does it represent the results of operations for any future periods.  In our opinion, all adjustments necessary to reflect this transaction have been made.

Condensed Consolidated
Statements of Income
(in thousands, except per share amounts)

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

Actual

 

Pro Forma

 

Actual

 

Pro Forma

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

$

663,032

 

$

591,475

 

$

1,310,369

 

$

1,186,724

 

Income before allocation to limited partners

 

$

185,867

 

$

185,989

 

$

355,926

 

$

496,588

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

(19,698

)

(33,198

)

(55,023

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

(15,152

)

(10,347

)

(33,693

)

Net income

 

163,169

 

151,139

 

312,381

 

407,872

 

Preferred share dividends

 

(14,404

)

(8,385

)

(28,811

)

(20,771

)

Net income applicable to common shares

 

$

148,765

 

$

142,754

 

$

283,570

 

$

387,101

 

Net income per common share — basic

 

$

1.05

 

$

1.10

 

$

2.01

 

$

2.99

 

Net income per common share — diluted

 

$

0.99

 

$

1.04

 

$

1.90

 

$

2.82

 

 

17




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

 

6.       Investments in Partially-Owned Entities - continued

Alexander’s (NYSE: ALX):

We own 33% of the outstanding common stock of Alexander’s at June 30, 2006.  As of June 30, 2006, the market value of our investment in Alexander’s was $450,646,000, based on Alexander’s June 30, 2006 closing share price of $271.76.  We manage, lease and develop Alexander’s properties pursuant to agreements, which expire in March of each year and are automatically renewable.  In addition, we provide property management services for the common area of 731 Lexington Avenue for an annual fee of $220,000, escalating at 3% per annum.

As of June 30, 2006, Alexander’s owed to us $34,401,000 for fees under the above agreements.

GMH Communities L.P. (“GMH”)

As of June 30, 2006, we own 7,337,857 limited partnership units (which are exchangeable on a one-for-one basis into common shares of GMH Communities Trust (“GCT”) (NYSE: GCT), a real estate investment trust that conducts its business through GMH and of which it is the sole general partner, and 2,517,247 common shares of GCT (1,817,247 shares were received upon exercise of our warrants discussed below), or 13.5% of the limited partnership interest of GMH.  As of June 30, 2006, the market value of our investment in GMH and GCT was $129,890,000, based on GCT’s June 30, 2006 closing share price of $13.18.

We account for our investment in GMH on the equity method and record our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT files its financial statements.  On July 31, 2006 GCT filed its annual report on Form 10-K for the year ended December 31, 2005, which restated the quarterly financial results of each of the first three quarters of 2005.  Because GMH’s earnings for the year ended December 31, 2005 were not available in time to be recorded in our consolidated financial statements, our earnings for the three and six months ended June 30, 2006 do not include a $94,000 net loss representing our share of GMH’s fourth quarter results, net of adjustments to restate its first three quarters of 2005.   In addition, as of the date of this filing, GCT has not filed its quarterly report on Form 10-Q for the quarter ended March 31, 2006 and accordingly, our earnings for the three and six months ended June 30, 2006 do not include our share of GMH’s first quarter 2006 earnings.

On May 2, 2006, the date our GMH warrants were to expire, we received 1,817,247 GCT common shares through an automatic cashless exercise.  The amount of the shares received was equal to the excess of GCT’s average closing share price for the trailing 20-day period ending on May 1, 2006 and the $8.22 exercise price, divided by GCT’s average closing share price for the trailing 20-day period ending on May 1, 2006, then multiplied by 6,085,180 warrants.  Accordingly, in the three months ended June 30, 2006, we recognized a net gain of $4,105,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price on March 31, 2006.  For the six months ended June 30, 2006, we recognized a net loss of $16,370,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price on December 31, 2005.  From inception of our investment in the warrants, including the first tranche of warrants exercised on November 3, 2004, the aggregate net gain recognized was $51,352,000.

18




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

 

7.       Notes and Mortgage Loans Receivable

Equinox Loan

On February 10, 2006 we acquired a 50% interest in a $115,000,000 note issued by Related Equinox Holdings II, LLC (the “Note”), for $57,500,000 in cash.  The Note is secured by a pledge of the stock of Related Equinox Holdings II.  Related Equinox Holdings II owns Equinox Holdings, which in turn owns all of the assets and obligations, including the fitness clubs, operated under the Equinox brand.  The Note is junior to a $50,000,000 (undrawn) revolving loan and $280,000,000 of senior unsecured obligations.  The Note is senior to $125,000,000 of cash equity contributed by third parties for their acquisition of the Equinox fitness club business.  The Note matures on February 15, 2013 and bears interest at 14% through February 15, 2011, increasing by 3% per annum through maturity.  The Note is prepayable at any time after February 15, 2009.

LNR Loans

In 2005 we made a $135,000,000 loan to Riley HoldCo Corp., consisting of a $60,000,000 mezzanine loan and a $75,000,000 fixed rate unsecured loan.  We received principal payments on the mezzanine loan of $5,557,000 and $13,901,000, on February 6, 2006 and June 2, 2006, respectively.  On July 12, 2006, the remaining $40,541,000 balance of the mezzanine loan was repaid with a pre-payment premium of $972,000, which will be recognized as “interest and other investment income” in the three months ended September 30, 2006.

Tharaldson Lodging Companies Loan

On June 16, 2006, we acquired an 81.5% interest in a $95,968,000 mezzanine loan to Tharaldson Lodging Companies for $78,166,000 in cash.  The loan is secured by a 107 hotel property portfolio with brands including Fairfield Inn, Residence Inn, Comfort Inn, and Courtyard by Marriott.  The loan is subordinate to $671,778,000 of debt and is senior to approximately $192,000,000 of other debt and equity.  The loan matures in April 2008, with three one-year extensions, provides for a 0.75% placement fee and bears interest at LIBOR plus 4.30% (9.63% at June 30, 2006).

280 Park Avenue Loan

On June 30, 2006, we made a $74,000,000 mezzanine loan secured by the equity interests in 280 Park Avenue, a 1.2 million square foot office building, located between 48th and 49th Street in Manhattan.  The loan bears interest at 10.25% and matures in June 2016.  The loan is subordinate to $1.036 billion of other debt and is senior to approximately $270,000,000 of equity and interest reserves.

Sheffield Loan

On July 7, 2006, we were repaid the $108,000,000 outstanding balance of the Sheffield mezzanine loan, together with accrued interest of $1,165,000 and a prepayment premium of $2,288,000, which will be recognized as “interest and other investment income” in the three months ended September 30, 2006.

Mervyn’s Loans

On April 12, 2006, we acquired a 23.6% interest in two mezzanine loans totaling $138,136,000, for $32,560,000 in cash.  The loans mature in January 2008 with two one-year extension options and bear interest at LIBOR plus 3.84% (9.19% at June 30, 2006).

Drake Hotel Loan

On June 19, 2006, we acquired a 49% interest in a $37,789,000 mezzanine loan for $18,517,000 in cash.  The loan matures in April 2007, with a six month extension option and bears interest at LIBOR plus 10% (15.35% at June 30, 2006).

19




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

8.       Identified Intangible Assets, Intangible Liabilities and Goodwill

The following summarizes our identified intangible assets, intangible liabilities (deferred credit) and goodwill as of June  30, 2006 and December 31, 2005.

(Amounts in thousands)

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Identified intangible assets (included in other assets):

 

 

 

 

 

Gross amount

 

$

276,313

 

$

266,268

 

Accumulated amortization

 

(86,925

)

(73,893

)

Net

 

$

189,388

 

$

192,375

 

 

 

 

 

 

 

Goodwill (included in other assets):

 

 

 

 

 

Gross amount

 

$

10,384

 

$

11,122

 

 

 

 

 

 

 

Identified intangible liabilities (included in deferred credit):

 

 

 

 

 

Gross amount

 

$

232,173

 

$

217,640

 

Accumulated amortization

 

(76,839

)

(66,748

)

Net

 

$

155,334

 

$

150,892

 

 

Amortization of acquired below market leases, net of acquired above market leases (a component of rental income) was $3,672,000 and $8,471,000 for the three and six months ended June 30, 2006 and $3,436,000 and $5,674,000 for the three and six months ended June 30, 2005.  The estimated annual amortization of acquired below market leases, net of acquired above market leases for each of the five succeeding years is as follows:

(Amounts in thousands)

 

 

 

 

 

 

 

2007

 

$13,343

 

2008

 

12,620

 

2009

 

10,942

 

2010

 

8,276

 

2011

 

8,484

 

 

The estimated annual amortization of all other identified intangible assets (a component of depreciation and amortization expense) including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years is as follows:

(Amounts in thousands)

 

 

 

 

 

 

 

2007

 

$17,802

 

2008

 

16,827

 

2009

 

16,272

 

2010

 

15,739

 

2011

 

14,476

 

 

20




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

9.                                    Debt

The following is a summary of our debt:

 

 

 

 

Interest Rate
as of

 

Balance as of

 

(Amounts in thousands)

 

Maturity

 

June 30,
2006

 

June 30,
2006

 

December 31,
2005

 

Notes and Mortgages Payable:

 

 

 

 

 

 

 

 

 

Fixed Interest:

 

 

 

 

 

 

 

 

 

Office:

 

 

 

 

 

 

 

 

 

New York:

 

 

 

 

 

 

 

 

 

888 Seventh Avenue

 

01/16

 

5.71%

 

$

318,554

 

$

318,554

 

770 Broadway (1)

 

03/16

 

5.65%

 

353,000

 

 

Two Penn Plaza

 

02/11

 

4.97%

 

298,539

 

300,000

 

909 Third Avenue

 

04/15

 

5.64%

 

221,793

 

223,193

 

Eleven Penn Plaza

 

12/14

 

5.20%

 

215,197

 

216,795

 

866 UN Plaza

 

05/07

 

8.39%

 

46,175

 

46,854

 

Washington, DC:

 

 

 

 

 

 

 

 

 

Crystal Park 1-5 (2)

 

08/07-08/13

 

6.66%-7.08%

 

203,370

 

249,212

 

Crystal Gateway 1-4, Crystal Square 5

 

07/12-01/25

 

6.75%-7.09%

 

209,143

 

210,849

 

Crystal Square 2, 3 and 4

 

10/10-11/14

 

6.82%-7.08%

 

137,658

 

138,990

 

Warner Building (3)

 

05/16

 

6.26%

 

292,700

 

137,236

 

Bowen Building (4)

 

06/16

 

6.14%

 

115,022

 

 

Skyline Place

 

08/06-12/09

 

6.60%-6.87%

 

126,794

 

128,732

 

Reston Executive I, II and III

 

01/13

 

5.57%

 

93,000

 

93,000

 

1101 17th , 1140 Connecticut, 1730 M and 1150 17th

 

08/10

 

6.74%

 

92,028

 

92,862

 

Courthouse Plaza 1 and 2

 

01/08

 

7.05%

 

75,204

 

75,970

 

Crystal Gateway N. and Arlington Plaza

 

11/07

 

6.77%

 

53,191

 

57,078

 

One Skyline Tower

 

06/08

 

7.12%

 

62,144

 

62,724

 

Crystal Malls 1-4

 

12/11

 

6.91%

 

46,013

 

49,214

 

1750 Pennsylvania Avenue

 

06/12

 

7.26%

 

48,081

 

48,358

 

Retail:

 

 

 

 

 

 

 

 

 

Cross-collateralized mortgages payable on 42 shopping centers

 

03/10

 

7.93%

 

466,551

 

469,842

 

Green Acres Mall

 

02/08

 

6.75%

 

141,832

 

143,250

 

Broadway Mall

 

06/13

 

6.42%

 

94,279

 

94,783

 

Westbury Retail Condominium

 

06/18

 

5.29%

 

80,000

 

80,000

 

Las Catalinas Mall

 

11/13

 

6.97%

 

64,006

 

64,589

 

Montehiedra Town Center (5)

 

06/16

 

6.04%

 

120,000

 

57,095

 

Forest Plaza

 

05/09

 

4.00%

 

19,642

 

20,094

 

Rockville Town Center

 

12/10

 

5.52%

 

15,018

 

15,207

 

Lodi Shopping Center

 

06/14

 

5.12%

 

11,689

 

11,890

 

386 West Broadway

 

05/13

 

5.09%

 

4,882

 

4,951

 

Springfield Mall

 

04/13

 

5.45%

 

196,542

 

 

Springfield Mall - present value of purchase option (see page 9)

 

11/12

 

5.45%

 

74,911

 

 

Merchandise Mart:

 

 

 

 

 

 

 

 

 

Boston Design Center

 

09/15

 

5.02%

 

72,000

 

72,000

 

Washington Design Center

 

11/11

 

6.95%

 

46,631

 

46,932

 

Market Square

 

07/11

 

7.95%

 

42,758

 

43,781

 

Furniture Plaza

 

02/13

 

5.23%

 

42,259

 

43,027

 

Other

 

10/10-06/13

 

7.52%-7.71%

 

17,669

 

17,831

 

Temperature Controlled Logistics:

 

 

 

 

 

 

 

 

 

Cross-collateralized mortgages payable on 55 properties

 

05/08

 

6.89%

 

460,883

 

469,903

 

Other:

 

 

 

 

 

 

 

 

 

Industrial Warehouses

 

10/11

 

6.95%

 

47,483

 

47,803

 

Total Fixed Interest Notes and Mortgages
Payable

 

 

 

6.34%

 

5,026,641

 

4,152,599

 


See notes on page 23.

21




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

9.                                    Debt - - continued

 

 

 

 

 

 

Interest Rate
as of

 

Balance as of

 

(Amounts in thousands)

 

Maturity

 

Spread over
LIBOR

 

 June 30,
2006

 

June 30,
2006

 

December 31,
2005

 

Notes and Mortgages Payable:

 

 

 

 

 

 

 

 

 

 

 

Variable Interest:

 

 

 

 

 

 

 

 

 

 

 

Office:

 

 

 

 

 

 

 

 

 

 

 

New York:

 

 

 

 

 

 

 

 

 

 

 

770 Broadway (1)

 

N/A

 

N/A

 

N/A

 

$

 

$

170,000

 

Washington, DC:

 

 

 

 

 

 

 

 

 

 

 

Bowen Building (4)

 

N/A

 

N/A

 

N/A

 

 

62,099

 

Commerce Executive III, IV and V

 

07/07

 

L+70

 

5.96

%

32,390

 

32,690

 

Commerce Executive III, IV and V B

 

07/07

 

L+70

 

5.96

%

18,433

 

18,433

 

1925 K Street

 

07/07

 

L+145

 

6.56

%

19,590

 

 

Warner Building $32 million line of credit (3)

 

N/A

 

N/A

 

N/A

 

 

12,717

 

 

 

 

 

 

 

 

 

 

 

 

 

Temperature Controlled Logistics:

 

 

 

 

 

 

 

 

 

 

 

Cross-collateralized mortgages payable on 27 properties (6)

 

06/07

 

L+60

 

5.80

%

243,124

 

245,208

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

220 Central Park South

 

08/06

 

L+350

 

8.50

%

94,570

 

90,732

 

Other

 

09/06

 

 

 

 

 

29,763

 

9,933

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Variable Interest Notes and Mortgages Payable

 

 

 

 

 

6.54

%

437,870

 

641,812

 

Total Notes and Mortgages Payable

 

 

 

 

 

6.36

%

$

5,464,511

 

$

4,794,411

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Unsecured Notes:

 

 

 

 

 

 

 

 

 

 

 

Senior unsecured notes due 2007 at fair value (accreted carrying amount of $499,343 and $499,786)

 

06/07

 

L+77

 

6.28

%

$

495,453

 

$

499,445

 

Senior unsecured notes due 2009

 

08/09

 

 

 

4.50

%

248,794

 

249,628

 

Senior unsecured notes due 2010

 

12/10

 

 

 

4.75

%

199,152

 

199,816

 

Senior unsecured notes due 2011 (7)

 

02/11

 

 

 

5.60

%

249,784

 

 

Total senior unsecured notes

 

 

 

 

 

5.51

%

$

1,193,183

 

$

948,889

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchangeable senior debentures due 2025

 

04/25

 

 

 

3.88

%

$

491,250

 

$

490,750

 

 

 

 

 

 

 

 

 

 

 

 

 

$1 billion unsecured revolving credit facility
($27,371 reserved for outstanding letters of credit)(8)

 

06/10

 

L+55

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

AmeriCold $30 million secured revolving credit facility ($17,100 reserved for outstanding letters of credit)

 

10/08

 

Prime

 

8.25

%

$

3,936

 

$

9,076

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Note Payable related to discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

1919 South Eads Street

 

 

 

 

 

 

 

$

 

$

11,757

 


See notes on following page.

22




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

9.       Debt - continued

Notes to preceding tabular information:
(Amounts in thousands)

(1)             On February 9, 2006, we completed a $353,000 refinancing of our 770 Broadway property.  The loan bears interest at 5.65% and matures in March 2016.  We retained net proceeds of $173,000 after repaying the existing floating rate loan and closing costs.

(2)             On April 3, 2006 we repaid the $43,496 balance of the Crystal Park 5 mortgage.

(3)             On May 5, 2006, we repaid the existing debt on the Warner Building and completed a 10-year interest-only refinancing of $292,700.  The loan bears interest at 6.26% and matures in May 2016.  We retained net proceeds of $133,000 after repaying the existing loan, closing costs and a prepayment penalty of $9,818.  As part of the purchase price accounting for the December 27, 2005 acquisition of the Warner Building, we accrued a liability for the unfavorable terms of the debt assumed in the acquisition.  Accordingly, the prepayment penalty did not result in an expense on our consolidated statement of income.

(4)             On May 23, 2006 we completed a $115,000 refinancing of the Bowen Building.  This interest-only loan bears interest at 6.14% and matures in June 2016.  We retained net proceeds of $51,600 after repaying the existing floating rate loan and closing costs.

(5)             On June 9, 2006, we completed a $120,000 refinancing of the Montehiedra Town Center.  The loan bears interest at 6.04% and matures in June 2016.  We retained net proceeds of $59,000 after repaying the existing loan and closing costs.  We incurred a prepayment penalty of approximately $2,498, which is included in “interest and debt expense” in the three and six months ended June 30, 2006.

(6)             On June 30, 2006, AmeriCold completed a $400,000, one-year, interest-only financing, collateralized by 21 owned and six leased temperature-controlled warehouses.  Of this loan, $243,000 was drawn to repay the existing mortgage on the same facilities.  The remaining $157,000 of the loan can be drawn at any time prior to October 7, 2006.  The initial interest rate on the loan is LIBOR plus 0.60% and increases to LIBOR plus 1.10% if the remaining balance is drawn.  In connection with the refinancing, AmeriCold wrote off $4,000 of deferred financing costs associated with the old loan, of which our share is $1,920, and is included in “interest and debt expense” in the three and six months ended June 30, 2006.

(7)             On February 16, 2006, we completed a public offering of $250,000 aggregate principal amount of 5.6% senior unsecured notes due February 15, 2011.  Interest on the notes is payable semi-annually on February 15 and August 15, commencing August 16, 2006.  The notes were priced at 99.906% of their face amount to yield 5.622%.

(8)             On June 28, 2006, we entered into a $1 billion unsecured revolving credit facility, which replaced our previous $600,000 unsecured revolving credit facility, which was due to mature in July 2006.  The new facility has a four-year term, with a one-year extension option and bears interest at LIBOR plus 0.55% (5.90% as of June 30, 2006).

Unsecured Notes Consent Solicitation

On May 9, 2006 we executed supplemental indentures with respect to our senior unsecured notes due 2007, 2009 and 2010 (collectively, the “Notes”), pursuant to our consent solicitation statement dated April 18, 2006, as amended.  Holders of approximately 96.7% of the aggregate principal amount of the Notes consented to the solicitation. The supplemental indentures contain modifications of certain covenants and related defined terms governing the terms of the Notes to make them consistent with corresponding provisions of the covenants and defined terms included in the senior unsecured notes due 2011 issued on February 16, 2006. The supplemental indentures also include a new covenant that provides for an increase in the interest rate of the Notes upon certain decreases in the ratings assigned by rating agencies to the Notes.  In connection with the consent solicitation we paid an aggregate fee of $2,241,000 to the consenting note holders, which will be amortized into expense over the remaining term of the Notes.  In addition, we incurred advisory and professional fees aggregating $1,415,000, which were expensed in the second quarter of 2006.

23




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

10.                             Fee and Other Income

The following table sets forth the details of our fee and other income:

 

 

For The Three Months
Ended June 30,

 

For The Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

Tenant cleaning fees

 

$

7,511

 

$

7,605

 

$

15,653

 

$

15,222

 

Management and leasing fees

 

2,534

 

4,265

 

5,182

 

8,081

 

Lease termination fees

 

5,907

 

3,878

 

10,389

 

18,179

 

Other income

 

5,637

 

5,828

 

12,022

 

9,923

 

 

 

$

21,589

 

$

21,576

 

$

43,246

 

$

51,405

 

 

Fee and other income above includes management fee income from Interstate Properties, a related party, of $194,000 and $199,000 in the three months ended June 30, 2006 and 2005, respectively, and $382,000 in each six month period ended June 30, 2006 and 2005.  The above table excludes fee income from partially-owned entities, which is included in income from partially-owned entities (see Note 6 — Investments in Partially-Owned Entities).

11.                               Discontinued Operations

Assets and liabilities related to discontinued operations at June 30, 2006 and December 31, 2005, consist primarily of the net book value of real estate of properties available for sale.  Such properties include our retail property in Vineland, New Jersey, 33 North Dearborn Street in Chicago, Illinois, 424 Sixth Avenue in New York City and 1919 South Eads Street in Arlington, Virginia.

The combined results of operations of the assets related to discontinued operations for the three and six months ended June 30, 2006 and 2005 include the operating results of Vineland, New Jersey; 33 North Dearborn Street in Chicago, Illinois, which was sold on March 14, 2006; 424 Sixth Avenue in New York City, which was sold on March 13, 2006 and 1919 South Eads Street in Arlington, Virginia, which was sold on June 22, 2006.

 

 

For The Three Months
Ended June 30,

 

For The Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

$

266

 

$

3,753

 

$

2,393

 

$

9,173

 

Expenses

 

1,113

 

2,437

 

2,665

 

6,171

 

Net (loss) income

 

(847

)

1,316

 

(272

)

3,002

 

Net gain on sale of 1919 South Eads Street

 

17,609

 

 

17,609

 

 

Net gain on sale of 424 Sixth Avenue

 

 

 

9,218

 

 

Net gain on sale of 33 North Dearborn Street

 

 

 

4,835

 

 

Net gain on sale of 400 North LaSalle

 

 

31,614

 

 

31,614

 

Net gain on disposition of other real estate

 

 

 

2,107

 

 

Income from discontinued operations

 

$

16,762

 

$

32,930

 

$

33,497

 

$

34,616

 

 

24




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

12.                               Income Per Share

The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and potentially dilutive share equivalents.  Potentially dilutive share equivalents include our Series A convertible preferred shares, employee stock options and restricted share awards, exchangeable senior debentures due 2025 as well as Operating Partnership convertible preferred units.

 

 

For The Three Months Ended
June 30,

 

For The Six Months Ended
June 30,

 

(Amounts in thousands, except per share amounts)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations after minority interest in the Operating Partnership

 

$

146,407

 

$

148,152

 

$

278,884

 

$

346,285

 

Income from discontinued operations

 

16,762

 

32,930

 

33,497

 

34,616

 

Net income

 

163,169

 

181,082

 

312,381

 

380,901

 

Preferred share dividends

 

(14,404

)

(8,385

)

(28,811

)

(20,771

)

 

 

 

 

 

 

 

 

 

 

Numerator for basic income per share — net income applicable to common shares

 

148,765

 

172,697

 

283,570

 

360,130

 

Impact of assumed conversions:

 

 

 

 

 

 

 

 

 

Interest on 3.875% exchangeable senior debentures

 

5,094

 

5,094

 

10,188

 

5,578

 

Series A convertible preferred share dividends

 

179

 

240

 

370

 

495

 

Numerator for diluted income per share — net income applicable to common shares

 

$

154,038

 

$

178,031

 

$

294,128

 

$

366,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic income per share — weighted average shares

 

141,418

 

130,178

 

141,275

 

129,254

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted share awards

 

7,640

 

6,747

 

7,529

 

6,511

 

3.875% exchangeable senior debentures

 

5,531

 

5,479

 

5,531

 

2,816

 

Series A convertible preferred shares

 

304

 

409

 

315

 

422

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted income per share — adjusted weighted average shares and assumed conversions

 

154,893

 

142,813

 

154,650

 

139,003

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE — BASIC:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.93

 

$

1.08

 

$

1.77

 

$

2.52

 

Income from discontinued operations

 

0.12

 

0.25

 

0.24

 

0.27

 

Net income per common share

 

$

1.05

 

$

1.33

 

$

2.01

 

$

2.79

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE — DILUTED:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.88

 

$

1.02

 

$

1.68

 

$

2.38

 

Income from discontinued operations

 

0.11

 

0.23

 

0.22

 

0.25

 

Net income per common share

 

$

0.99

 

$

1.25

 

$

1.90

 

$

2.63

 

 

25




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

13.           Comprehensive Income

 

 

For The Three Months Ended
June 30,

 

For The Six Months Ended
June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

163,169

 

$

181,082

 

$

312,381

 

$

380,901

 

Other comprehensive (loss) income

 

(53,446

)

27,616

 

(38,260

)

21,726

 

Comprehensive income

 

$

109,723

 

$

208,698

 

$

274,121

 

$

402,627

 

 

Substantially all of other comprehensive (loss) income for the three and six months ended June 30, 2006 and 2005 relates to income from the mark-to-market of marketable equity securities classified as available-for-sale. Included in other comprehensive loss for the three and six months ended June 30, 2006 is the reversal into earnings of previously recorded appreciation of $55,490,000 on the Sears Canada common shares which were sold on April 3, 2006.

14.    Stock-based Compensation

On January 1, 2003, we began to expense the fair value of stock-based compensation awards granted subsequent to January 1 2003, over the applicable vesting period as a component of general and administrative expenses on our consolidated statements of income.  In the three months ended June 30, 2006 and 2005, we recognized $2,873,000 and $1,255,000 of stock-based compensation expense, respectively and in the six months ended June 30, 2006 and 2005 we recognized $4,236,000 and $2,732,000 of stock-based compensation expense, respectively.

For stock-based compensation awards granted prior to 2003, we used the intrinsic value method of accounting.  Under this method, no stock-based compensation expense was recognized, as the exercise price equaled the closing share price of our stock on the date of each grant.  Because stock option awards granted prior to 2003 vested over a three-year term, the resulting compensation cost based on the fair value of the awards on the date of grant, on a pro forma basis would have been expensed during 2003, 2004 and 2005.  Accordingly, our net income applicable to common shares would remain the same on a pro forma basis for the three and six months ended June 30, 2006, and would have been reduced by $84,000 and $167,000 for the three and six months ended June 30, 2005, respectively, with no change in basic or diluted net income per share.

Amendment to 2002 Omnibus Share Plan

On March 17, 2006, our Board of Trustees (the “Board”) approved an amendment to our 2002 Omnibus Share Plan (the “Plan”) to permit the Compensation Committee of the Board (the “Compensation Committee”) to grant awards in the form of limited partnership units (“OP Units”) of the Operating Partnership. OP Units can be granted either as free-standing awards or in tandem with other awards under the Plan.  OP Units may be converted into the Operating Partnership’s Class A common units and, consequently, become convertible by the holder on a one-for-one basis for our common shares or the cash value of such shares at our election.  On April 25, 2006, the Compensation Committee granted a total of 49,851 restricted OP Units to certain officers of the Company.  These awards vest ratably over five years.  The fair value of these awards on the date of grant was approximately $3,100,000 and will be amortized into expense ratably over the five-year vesting period.

2006 Out-Performance Plan

On March 17, 2006, the Board approved the terms of the Vornado Realty Trust 2006 Out-Performance Plan (the “2006 Out-Performance Plan”), a long-term incentive compensation program. The purpose of the 2006 Out-Performance Plan is to further align the interests of our shareholders and management by encouraging our senior officers and employees to create shareholder value in a “pay-for-performance” structure.

26




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

14.    Stock-based Compensation - continued

Under the 2006 Out-Performance Plan, award recipients will share in a performance pool if our total return to shareholders over the three-year period from March 15, 2006 through March 14, 2009 exceeds a cumulative 30%, including both share appreciation and dividends paid, from a price per share of $89.17 (the average closing price per common share for the 30 trading days prior to March 15, 2006).  The size of the pool will be 10% of the out-performance return amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to $100,000,000.   A portion of the performance pool can be earned after the first and second years, up to a cumulative maximum of $20,000,000 and $40,000,000, respectively, based on a minimum total return to shareholders benchmark of 10% and 20%, respectively.  In the event the potential performance pool reaches the $20,000,000 dilution cap before March 14, 2007, the $40,000,000 dilution cap before March 14, 2008, or the $100,000,000 dilution cap before March 14, 2009, and remains at the applicable level or higher for 30 consecutive days, the applicable performance period will end early and the applicable pool will be established on the last day of such 30-day period.

On April 25, 2006, our Compensation Committee approved the 2006 Out-Performance Plan awards to a total of 54 officers of the Company.  Each award was designated as a specified percentage of the potential performance pool.  Awards were made in the form of a new class of Operating Partnership units (“OPP Units”) that, subject to performance, time vesting and other conditions, are convertible by the holder into an equivalent number of the Operating Partnership’s Class A units, which are redeemable by the holder for common shares of the Company on a one-for-one basis or the cash value of such shares, at our election.  The OPP Units were issued prior to the determination of the performance pool and are subject to forfeiture to the extent that less than the total award is earned.  All awards earned will vest 33.3% on each of March 15, 2009, 2010 and 2011 based on continued employment.

The awards issued under the 2006 Out-Performance Plan are accounted for in accordance with FASB No. 123R.  The fair value of the awards on the date of grant was approximately $25,000,000 and will be amortized into expense ratably over the five-year period beginning on the date of grant assuming 100% of the awards are earned.

15.    Commitments and Contingencies

At June 30, 2006, our $1 billion revolving credit facility, which expires in June 2010, had a zero outstanding balance and $27,371,000 was reserved for outstanding letters of credit. This facility contains financial covenants, which require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provides for higher interest rates in the event of a decline in our ratings below Baa3/BBB.  At June 30, 2006, Americold’s $30,000,000 revolving credit facility had a $3,936,000 outstanding balance and $17,000,000 was reserved for outstanding letters of credit.  This facility requires Americold to maintain, on a trailing four-quarter basis, a minimum of $30,000,000 of free cash flow, as defined.  Both of these facilities contain customary conditions precedent to borrowing, including representations and warranties and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

We have made acquisitions and investments in partially-owned entities for which we are committed to fund additional capital aggregating $77,800,000.  Of this amount, $25,000,000 relates to Springfield Mall capital expenditures to be funded over the next six years.

On November 10, 2005, we committed to fund the junior portion of up to $30,530,000 of a $173,000,000 construction loan to an entity developing a mix-use building complex in Boston, Massachusetts, at the north end of the Boston Harbor.  We will earn current-pay interest at 30-day LIBOR plus 11%.  The loan will mature in November 2008, with a one-year extension option.  Currently, the borrower does not meet the required conditions for us to fund under the loan agreement.

On July 28, 2006 we called for redemption of the 8.25% Series D-9 Cumulative Redeemable Preferred Units.  The Preferred Units will be redeemed on September 21, 2006 at a redemption price equal to $25.00 per unit or an aggregate of $45,000,000 plus accrued distributions.  In conjunction with the redemption, we will write-off $1,125,000 of issuance costs in the third quarter.

27




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

15.    Commitments and Contingencies - continued

Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), our senior unsecured notes due 2007, 2009, 2010 and 2011, our exchangeable senior debentures due 2025 and our revolving credit agreements, contain customary covenants requiring us to maintain insurance.  Although we believe that we have adequate insurance coverage under these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future.  Further, if lenders insist on greater coverage than we are able to obtain, or if the Terrorism Risk Insurance Extension Act of 2005 is not extended past 2007, it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.

Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs.

We enter 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 our name by various money center banks. We have 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.  We had $66,050,000 and $177,650,000 of cash invested in these agreements at June 30, 2006 and December 31, 2005, respectively.

From time to time, we have disposed of substantial amounts of real estate to third parties for which, as to certain properties, we remain contingently liable for rent payments or mortgage indebtedness that cannot be quantified.

Litigation

On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey claiming we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty.  On May 17, 2005, we filed a motion for summary judgment.  On July 15, 2005, Stop & Shop opposed our motion and filed a cross-motion for summary judgment.  On December 13, 2005, the Court issued its decision denying the motions for summary judgment.  We intend to pursue our claims against Stop & Shop vigorously.

On July 22, 2005, two corporations owned 50% by H Street filed a complaint against the Company, H Street and three parties affiliated with the sellers of H Street in the Superior Court of the District of Columbia alleging that we encouraged H Street and the affiliated parties to breach their fiduciary duties to these corporations and interfered with prospective business and contractual relationships.  The complaint seeks an unspecified amount of damages and a rescission of our acquisition of H Street.   In addition, on July 29, 2005, a tenant under a ground lease with one of these corporations brought a separate suit in the Superior Court of the District of Columbia, alleging, among other things, that our acquisition of H Street violated a provision giving them a right of first offer and on that basis seeks a rescission of our acquisition and the right to acquire H Street for the price paid by us.   On September 12, 2005, we filed a complaint against each of these corporations and their acting directors seeking a restoration of H Street’s full shareholder rights and damages.  These legal actions are currently in the discovery stage.  The Company believes that the actions filed against the Company are without merit and that it will ultimately be successful in defending against them.

There are various other legal actions against us in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flow.

28




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

16.    Retirement Plans

The following table sets forth the components of net periodic benefit costs:

 

 

For The Three Months Ended
June 30,

 

For The Six Months Ended
June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

75

 

$

(402

)

$

243

 

$

650

 

Interest cost

 

1,254

 

859

 

2,460

 

2,476

 

Expected return on plan assets

 

(1,474

)

(1,054

)

(2,948

)

(2,692

)

Amortization of net (gain) loss

 

108

 

19

 

181

 

103

 

Net periodic benefit cost

 

$

(37

)

$

(578

)

$

(64

)

$

537

 

 

Employer Contributions

We made contributions of $4,272,000 and $2,578,000 to the plans during the six months ended June 30, 2006 and 2005, respectively.  We anticipate additional contributions of $3,807,000 to the plans during the remainder of 2006.

29




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

17.          Segment Information

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended June 30, 2006 and 2005. 

 

 

For the Three Months Ended June 30, 2006

 

 

 

 

 

Office

 

 

 

 

 

Temperature 

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Merchandise 
Mart

 

Controlled
Logistics

 

Toys

 

Other

 

Property rentals

 

$

372,192

 

$

120,115

 

$

103,010

 

$

64,541

 

$

61,885

 

$

 

$

 

$

22,641

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

7,991

 

1,994

 

2,320

 

2,101

 

1,597

 

 

 

(21

)

Amortization of free rent

 

9,621

 

1,927

 

6,089

 

1,263

 

342

 

 

 

 

Amortization of acquired below-market leases, net

 

3,672

 

(11

)

946

 

2,338

 

(93

)

 

 

492

 

Total rentals

 

393,476

 

124,025

 

112,365

 

70,243

 

63,731

 

 

 

23,112

 

Temperature Controlled Logistics

 

187,047

 

 

 

 

 

187,047

 

 

 

Tenant expense reimbursements

 

60,920

 

23,805

 

6,511

 

25,059

 

4,915

 

 

 

630

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

7,511

 

9,819

 

 

 

 

 

 

(2,308

)

Management and leasing fees

 

2,534

 

258

 

1,885

 

360

 

31

 

 

 

 

Lease termination fees

 

5,907

 

5,388

 

5

 

 

514

 

 

 

 

Other

 

5,637

 

2,296

 

1,920

 

80

 

1,341

 

 

 

 

Total revenues

 

663,032

 

165,591

 

122,686

 

95,742

 

70,532

 

187,047

 

 

21,434

 

Operating expenses

 

319,851

 

72,046

 

36,494

 

31,688

 

22,514

 

145,896

 

 

11,213

 

Depreciation and amortization

 

98,880

 

22,917

 

29,902

 

12,407

 

11,104

 

17,921

 

 

4,629

 

General and administrative

 

52,563

 

4,140

 

8,448

 

5,294

 

7,123

 

9,774

 

 

17,784

 

Total expenses

 

471,294

 

99,103

 

74,844

 

49,389

 

40,741

 

173,591

 

 

33,626

 

Operating income (loss)

 

191,738

 

66,488

 

47,842

 

46,353

 

29,791

 

13,456

 

 

(12,192

)

Income applicable to Alexander’s

 

14,750

 

186

 

 

178

 

 

 

 

14,386

 

Loss applicable to Toys “R” Us

 

(7,884

)

 

 

 

 

 

(7,884

)

 

Income from partially-owned entities

 

14,635

 

1,166

 

5,058

 

2,188

 

445

 

369

 

 

5,409

 

Interest and other investment income

 

16,623

 

180

 

378

 

353

 

66

 

1,364

 

 

14,282

 

Interest and debt expense

 

(120,822

)

(20,848

)

(26,187

)

(24,131

)

(3,542

)

(18,452

)

 

(27,662

)

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate

 

56,947

 

 

 

 

 

 

 

56,947

 

Minority interest of partially-owned entities

 

3,118

 

 

 

29

 

1

 

2,847

 

 

241

 

Income (loss) from continuing operations

 

169,105

 

47,172

 

27,091

 

24,970

 

26,761

 

(416

)

(7,884

)

51,411

 

Income (loss) from discontinued operations

 

16,762

 

 

16,807

 

(42

)

(3

)

 

 

 

Income (loss) before allocation to limited partners

 

185,867

 

47,172

 

43,898

 

24,928

 

26,758

 

(416

)

(7,884

)

51,411

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

 

 

 

 

 

 

(17,324

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

 

 

 

 

 

 

(5,374

)

Net income (loss)

 

163,169

 

47,172

 

43,898

 

24,928

 

26,758

 

(416

)

(7,884

)

28,713

 

Interest and debt expense (1)

 

171,778

 

21,523

 

30,315

 

27,118

 

3,762

 

8,779

 

44,348

 

35,933

 

Depreciation and amortization(1)

 

133,377

 

23,850

 

34,724

 

13,320

 

11,245

 

8,553

 

32,522

 

9,163

 

Income tax (benefit) expense (1)

 

(28,642

)

 

3,620

 

 

78

 

81

 

(32,522

)

101

 

EBITDA

 

$

439,682

 

$

92,545

 

$

112,557

 

$

65,366

 

$

41,843

 

$

16,997

 

$

36,464

 

$

73,910

 

Percentage of EBITDA by segment

 

100.0%

 

21.0%

 

25.6%

 

14.9%

 

9.5%

 

3.9%

 

8.3%

 

16.8%

 

 

Washington, DC office EBITDA includes a net gain on sale of real estate of $17,609.  In addition, Other segment EBITDA includes a $55,438 net gain on sale of marketable equity securities and a $10,410 net loss on mark-to-market of derivative instruments.


See notes on page 34.

30




 

VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

17.                               Segment Information - continued

 

 

For the Three Months Ended June 30, 2005

 

 

 

 

 

Office

 

 

 

 

 

Temperature 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Merchandise
Mart

 

Controlled
Logistics

 

Other

 

Property rentals

 

$

327,078

 

$

114,584

 

$

91,109

 

$

48,793

 

$

54,681

 

$

 

$

17,911

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

5,489

 

1,951

 

889

 

1,346

 

1,334

 

 

(31

)

Amortization of free rent

 

5,088

 

1,557

 

599

 

345

 

2,587

 

 

 

Amortization of acquired below-market leases, net

 

3,436

 

 

2,052

 

1,384

 

 

 

 

Total rentals

 

341,091

 

118,092

 

94,649

 

51,868

 

58,602

 

 

17,880

 

Temperature Controlled Logistics

 

178,891

 

 

 

 

 

178,891

 

 

Tenant expense reimbursements

 

49,917

 

22,771

 

3,329

 

18,816

 

4,223

 

 

778

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

7,605

 

7,605

 

 

 

 

 

 

Management and leasing fees

 

4,265

 

219

 

3,721

 

307

 

18

 

 

 

Lease termination fees

 

3,878

 

3,094

 

81

 

 

703

 

 

 

Other

 

5,828

 

2,012

 

2,571

 

74

 

1,171

 

 

 

Total revenues

 

591,475

 

153,793

 

104,351

 

71,065

 

64,717

 

178,891

 

18,658

 

Operating expenses

 

282,430

 

65,275

 

28,066

 

20,538

 

20,512

 

136,720

 

11,319

 

Depreciation and amortization

 

83,234

 

21,489

 

21,570

 

8,503

 

9,497

 

19,006

 

3,169

 

General and administrative

 

45,796

 

3,310

 

5,856

 

3,684

 

7,187

 

9,972

 

15,787

 

Total expenses

 

411,460

 

90,074

 

55,492

 

32,725

 

37,196

 

165,698

 

30,275

 

Operating income (loss)

 

180,015

 

63,719

 

48,859

 

38,340

 

27,521

 

13,193

 

(11,617

)

Income applicable to Alexander’s

 

13,030

 

101

 

 

53

 

 

 

12,876

 

Income from partially-owned entities

 

6,598

 

754

 

122

 

1,760

 

286

 

194

 

3,482

 

Interest and other investment income

 

69,923

 

171

 

254

 

64

 

71

 

669

 

68,694

 

Interest and debt expense

 

(83,414

)

(14,134

)

(20,223

)

(14,292

)

(2,680

)

(13,955

)

(18,130

)

Minority interest of partially-owned entities

 

1,127

 

 

 

 

42

 

1,085

 

—-

 

Income from continuing operations

 

187,279

 

50,611

 

29,012

 

25,925

 

25,240

 

1,186

 

55,305

 

Income from discontinued operations

 

32,930

 

 

394

 

131

 

656

 

 

31,749

 

Income before allocation to limited partners

 

220,209

 

50,611

 

29,406

 

26,056

 

25,896

 

1,186

 

87,054

 

Minority limited partners’ interest in the Operating Partnership

 

(23,975

)

 

 

 

 

 

(23,975

)

Perpetual preferred unit distributions of the Operating Partnership

 

(15,152

)

 

 

 

 

 

(15,152

)

Net income

 

181,082

 

50,611

 

29,406

 

26,056

 

25,896

 

1,186

 

47,927

 

Interest and debt expense (1)

 

91,875

 

14,632

 

20,966

 

16,857

 

2,905

 

6,640

 

29,875

 

Depreciation and amortization(1)

 

80,788

 

21,885

 

21,989

 

9,515

 

10,052

 

9,070

 

8,277

 

Income tax expense (1)

 

1,242

 

 

58

 

 

540

 

359

 

285

 

EBITDA

 

$

354,987

 

$

87,128

 

$

72,419

 

$

52,428

 

$

39,393

 

$

17,255

 

$

86,364

 

Percentage of EBITDA by segment

 

100%

 

24.5%

 

20.4%

 

14.8%

 

11.1%

 

4.9%

 

24.3%

 

 

EBITDA of the Other segment includes $50,601 of income from the mark-to-market of derivative instruments and $31,614 for a net gain on sale of real estate.


See notes on page 34.

31




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

17.       Segment Information - continued

 

 

For the Six Months Ended June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Temperature

 

 

 

 

 

 

 

 

 

Office

 

 

 

Merchandise

 

Controlled

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Mart

 

Logistics

 

Toys

 

Other

 

Property rentals

 

$

722,926

 

$

239,817

 

$

202,873

 

$

125,525

 

$

115,845

 

$

 

$

 

$

38,866

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

13,251

 

2,154

 

3,869

 

4,085

 

3,192

 

 

 

(49

)

Amortization of free rent

 

16,931

 

3,794

 

9,623

 

2,621

 

893

 

 

 

 

Amortization of acquired below-market leases, net

 

8,471

 

(22

)

2,130

 

4,547

 

22

 

 

 

1,794

 

Total rentals

 

761,579

 

245,743

 

218,495

 

136,778

 

119,952

 

 

 

40,611

 

Temperature Controlled Logistics

 

382,897

 

 

 

 

 

382,897

 

 

 

Tenant expense reimbursements

 

122,647

 

48,352

 

14,356

 

48,610

 

9,869

 

 

 

1,460

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

15,653

 

19,830

 

 

 

 

 

 

(4,177

)

Management and leasing fees

 

5,182

 

488

 

3,930

 

720

 

44

 

 

 

 

Lease termination fees

 

10,389

 

9,159

 

66

 

371

 

793

 

 

 

 

Other

 

12,022

 

4,846

 

3,045

 

951

 

3,179

 

 

 

1

 

Total revenues

 

1,310,369

 

328,418

 

239,892

 

187,430

 

133,837

 

382,897

 

 

37,895

 

Operating expenses

 

651,766

 

146,133

 

71,505

 

60,164

 

50,919

 

300,228

 

 

22,817

 

Depreciation and amortization

 

189,185

 

45,678

 

55,014

 

22,814

 

22,199

 

34,990

 

 

8,490

 

General and administrative

 

98,427

 

8,013

 

16,598

 

10,217

 

13,144

 

20,034

 

 

30,421

 

Total expenses

 

939,378

 

199,824

 

143,117

 

93,195

 

86,262

 

355,252

 

 

61,728

 

Operating income (loss)

 

370,991

 

128,594

 

96,775

 

94,235

 

47,575

 

27,645

 

 

(23,833

)

Income applicable to Alexander’s

 

11,155

 

399

 

 

358

 

 

 

 

10,398

 

Income applicable to Toys “R” Us

 

44,876

 

 

 

 

 

 

44,876

 

 

Income from partially-owned entities

 

20,686

 

1,810

 

5,724

 

2,230

 

779

 

764

 

 

9,379

 

Interest and other investment income

 

39,098

 

368

 

693

 

473

 

126

 

1,996

 

 

35,442

 

Interest and debt expense

 

(224,716

)

(41,122

)

(49,037

)

(43,792

)

(7,069

)

(32,714

)

 

(50,982

)

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate

 

57,495

 

 

 

 

 

 

 

57,495

 

Minority interest of partially-owned entities

 

2,844

 

 

 

29

 

4

 

2,379

 

 

432

 

Income from continuing operations

 

322,429

 

90,049

 

54,155

 

53,533

 

41,415

 

70

 

44,876

 

38,331

 

Income from discontinued operations

 

33,497

 

 

16,356

 

9,298

 

5,736

 

2,107

 

 

 

Income before allocation to limited partners

 

355,926

 

90,049

 

70,511

 

62,831

 

47,151

 

2,177

 

44,876

 

38,331

 

Minority limited partners’ interest in the Operating Partnership

 

(33,198

)

 

 

 

 

 

 

(33,198

)

Perpetual preferred unit distributions of the Operating Partnership

 

(10,347

)

 

 

 

 

 

 

(10,347

)

Net income (loss)

 

312,381

 

90,049

 

70,511

 

62,831

 

47,151

 

2,177

 

44,876

 

(5,214

)

Interest and debt expense (1)

 

342,239

 

42,434

 

54,399

 

49,456

 

7,511

 

15,565

 

105,449

 

67,425

 

Depreciation and amortization(1)

 

258,808

 

47,214

 

61,385

 

26,566

 

22,481

 

16,701

 

66,686

 

17,775

 

Income tax (benefit) expense (1)

 

(2,904

)

 

3,853

 

 

119

 

489

 

(7,556

)

191

 

EBITDA

 

$

910,524

 

$

179,697

 

$

190,148

 

$

138,853

 

$

77,262

 

$

34,932

 

$

209,455

 

$

80,177

 

Percentage of EBITDA by segment

 

100.0%

 

19.7%

 

20.9%

 

15.3%

 

8.5%

 

3.8%

 

23.0%

 

8.8%

 

EBITDA includes net gains on sale of real estate of $33,769, of which $17,609 is included in the Washington, DC segment, $9,218 is included in the Retail segment, $4,835 is included in the Merchandise Mart segment and $2,107 is included in the Temperature Controlled Logistics segment.  In addition, Other segment EBITDA includes a $55,438 net gain on sale of marketable equity securities and a $5,974 net loss on mark-to-market of derivative instruments.


See notes on page 34.

32




VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

17.          Segment Information - continued

 

 

For the Six Months Ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Temperature

 

 

 

 

 

 

 

Office

 

 

 

Merchandise

 

Controlled

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Mart

 

Logistics

 

Other

 

Property rentals

 

$

647,922

 

$

226,722

 

$

188,530

 

$

96,014

 

$

105,419

 

$

 

$

31,237

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

10,057

 

5,126

 

2,243

 

2,646

 

6

 

 

36

 

Amortization of free rent

 

11,824

 

5,609

 

599

 

973

 

4,643

 

 

 

Amortization of acquired below-market leases, net

 

5,674

 

 

3,545

 

2,129

 

 

 

 

Total rentals

 

675,477

 

237,457

 

194,917

 

101,762

 

110,068

 

 

31,273

 

Temperature Controlled Logistics

 

360,116

 

 

 

 

 

360,116

 

 

Tenant expense reimbursements

 

99,726

 

46,336

 

7,269

 

37,031

 

7,677

 

 

1,413

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

15,222

 

15,222

 

 

 

 

 

 

Management and leasing fees

 

8,081

 

453

 

7,101

 

497

 

30

 

 

 

Lease termination fees

 

18,179

 

3,402

 

103

 

583

 

14,091

 

 

 

Other

 

9,923

 

3,579

 

3,780

 

111

 

2,453

 

 

 

Total revenues

 

1,186,724

 

306,449

 

213,170

 

139,984

 

134,319

 

360,116

 

32,686

 

Operating expenses

 

578,256

 

133,507

 

59,181

 

43,042

 

43,753

 

276,278

 

22,495

 

Depreciation and amortization

 

160,522

 

41,956

 

40,962

 

15,456

 

18,529

 

37,377

 

6,242

 

General and administrative

 

86,455

 

6,647

 

11,126

 

7,479

 

12,428

 

18,769

 

30,006

 

Total expenses

 

825,233

 

182,110

 

111,269

 

65,977

 

74,710

 

332,424

 

58,743

 

Operating income (loss)

 

361,491

 

124,339

 

101,901

 

74,007

 

59,609

 

27,692

 

(26,057

)

Income applicable to Alexander’s

 

38,416

 

189

 

 

346

 

 

 

37,881

 

Income from partially-owned entities

 

15,820

 

1,293

 

303

 

3,296

 

430

 

426

 

10,072

 

Interest and other investment income

 

171,121

 

264

 

397

 

280

 

119

 

700

 

169,361

 

Interest and debt expense

 

(160,918

)

(27,081

)

(40,718

)

(29,178

)

(5,357

)

(27,600

)

(30,984

)

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate

 

3,488

 

573

 

 

896

 

 

 

2,019

 

Minority interest of partially-owned entities

 

1,730

 

 

 

 

94

 

1,636

 

—-

 

Income from continuing operations

 

431,148

 

99,577

 

61,883

 

49,647

 

54,895

 

2,854

 

162,292

 

Income from discontinued operations

 

34,616

 

 

445

 

271

 

1,297

 

 

32,603

 

Income before allocation to limited partners

 

465,764

 

99,577

 

62,328

 

49,918

 

56,192

 

2,854

 

194,895

 

Minority limited partners’ interest in the Operating Partnership

 

(51,170

)

 

 

 

 

 

(51,170

)

Perpetual preferred unit distributions of the Operating Partnership

 

(33,693

)

 

 

 

 

 

(33,693

)

Net income

 

380,901

 

99,577

 

62,328

 

49,918

 

56,192

 

2,854

 

110,032

 

Interest and debt expense (1)

 

174,966

 

28,074

 

42,163

 

33,299

 

5,807

 

13,132

 

52,491

 

Depreciation and amortization(1)

 

155,752

 

42,867

 

42,256

 

17,298

 

19,588

 

17,837

 

15,906

 

Income tax expense (1)

 

1,929

 

 

312

 

 

618

 

619

 

380

 

EBITDA

 

$

713,548

 

$

170,518

 

$

147,059

 

$

100,515

 

$

82,205

 

$

34,442

 

$

178,809

 

Percentage of EBITDA by segment

 

100%

 

23.9%

 

20.6%

 

14.1%

 

11.5%

 

4.8%

 

25.1%

 

 

EBITDA of the Other segment includes $134,416 of income from derivative instruments and $31,614 for a net gain on sale of real estate.


See notes on following page.

33




 

VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

17.          Segment Information - continued

Notes to preceding tabular information

(1)             EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.”  We consider EBITDA a supplemental measure for making decisions and assessing the un-levered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity.  As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers.  EBITDA should not be considered a substitute for net income.  EBITDA may not be comparable to similarly titled measures employed by other companies.

(2)             Other EBITDA is comprised of:

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

Alexander’s

 

$

21,970

 

$

19,933

 

$

25,506

 

$

50,202

 

Newkirk Master Limited Partnership

 

8,467

 

11,426

 

16,737

 

26,072

 

Hotel Pennsylvania

 

7,872

 

6,281

 

10,559

 

8,535

 

GMH Communities L.P.

 

 

2,023

 

 

2,993

 

Industrial warehouses

 

1,509

 

1,545

 

3,021

 

2,683

 

Other investments

 

3,789

 

 

6,403

 

 

 

 

43,607

 

41,208

 

62,226

 

90,485

 

 

 

 

 

 

 

 

 

 

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

(23,975

)

(33,198

)

(51,170

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

(15,152

)

(10,347

)

(33,693

)

Corporate general and administrative expenses

 

(16,489

)

(14,757

)

(28,001

)

(27,911

)

Investment income and other

 

69,490

 

67,287

 

89,497

 

168,420

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

400 North LaSalle (including $31,614 net gain on sale)

 

 

31,753

 

 

32,678

 

 

 

$

73,910

 

$

86,364

 

$

80,177

 

$

178,809

 

 

34




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York

We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust as of June 30, 2006, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2006 and 2005, and the consolidated statements of cash flows for the six-month periods ended June 30, 2006 and 2005.  These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended prior to the reclassification for the discontinued operations described in Note 11 to the accompanying consolidated financial statements (not presented herein); and in our report dated February 28, 2006, we expressed an unqualified opinion on those consolidated financial statements.  We also audited the adjustments described in Note 11 that were applied to reclassify the December 31, 2005 consolidated balance sheet of Vornado Realty Trust (not presented herein) for discontinued operations.  In our opinion, such adjustments are appropriate and have been properly applied and the information set forth in the accompanying consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the reclassified consolidated balance sheet from which it has been derived.

/s/  DELOITTE & TOUCHE LLP

Parsippany, New Jersey
August 1, 2006

35




Item 2.                          Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are not guarantees of performance.  They involve risks, uncertainties and assumptions.  Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements.  You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or similar expressions in this quarterly report on Form 10-Q.  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.  Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to, those set forth in our Annual Report on Form 10-K for the year ended December 31, 2005 under “Forward Looking Statements” and “Item 1. Business — Certain Factors That May Adversely Affect Our Business and Operations.”  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.  We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise.  Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three months and six months ended June 30, 2006.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Critical Accounting Policies

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2005 in Management’s Discussion and Analysis of Financial Condition.  There have been no significant changes to our policies during 2006.

36




Overview

Business Objective and Operating Strategy

Our business objective is to maximize shareholder value.  We measure our success in meeting this objective by our total return to shareholders.  Below is a table comparing our performance to the Morgan Stanley REIT Index (“RMS”) for the following periods ending June 30, 2006:

 

Total Return (1)

 

 

 

Vornado

 

RMS

 

One-year

 

26.8

%

19.6

%

Three-years

 

158.0

%

100.9

%

Five-years

 

230.1

%

142.4

%

Ten-years

 

713.2

%

307.7

%


(1)          Past performance is not necessarily indicative of how we will perform in the future.

We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:

·                  Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;

·                  Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is a high likelihood of capital appreciation;

·                  Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;

·                  Investing in retail properties in select under-stored locations such as the New York City metropolitan area;

·                  Investing in fully-integrated operating companies that have a significant real estate component;

·                  Developing and redeveloping our existing properties to increase returns and maximize value; and

·                  Providing specialty financing to real estate related companies.

Competition

We compete 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.  Our 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.  Economic growth has been fostered, in part, by low interest rates, Federal tax cuts, and increases in government spending.  To the extent economic growth stalls, we may experience lower occupancy rates, which may lead to lower initial rental rates, higher leasing costs and a corresponding decrease in our net income, funds from operations and cash flow.  Alternatively, if economic growth is sustained, we may experience higher occupancy rates leading to higher initial rents and higher interest rates causing an increase in our weighted average cost of capital and a corresponding effect on our net income, funds from operations and cash flow.  Our net income and funds from operations will also be affected by the seasonality of Toys’ business and competition from discount and mass merchandisers.

37




Overview - - continued

Quarter Ended June 30, 2006 Financial Results Summary

Net income applicable to common shares for the quarter ended June 30, 2006 was $148,765,000, or $0.99 per diluted share, versus $172,697,000, or $1.25 per diluted share, for the quarter ended June 30, 2005.  Net income for the quarter ended June 30, 2006 includes a $7,884,000 net loss from our investment in Toys “R” Us and a $17,609,000 net gain on sale of 1919 South Eads Street.  Net income for the three months ended June 30, 2005, includes a $31,614,000 net gain on sale of 400 North LaSalle Residential Tower.  Net income for the quarters ended June 30, 2006 and 2005 also includes certain other items that affect comparability which are listed in the table on page 40.  The aggregate of these items, the net gains on sales of real estate and our share of Toys’ net income, net of minority interest, increased net income applicable to common shares for the quarter ended June 30, 2006 by $55,828,000, or $0.36 per diluted share and increased net income for the quarter ended June 30, 2005 by $72,949,000, or $0.51 per diluted share.

Funds from operations applicable to common shares plus assumed conversions (“FFO”) for the quarter ended June 30, 2006 was $230,430,000, or $1.49 per diluted share, compared to $215,802,000, or $1.51 per diluted share, for the prior year’s quarter.  FFO for the quarters ended June 30, 2006 and 2005 includes certain other items that affect comparability which are listed in the table on page 40.  The aggregate of these items and our share of Toys’ FFO, net of minority interest, increased FFO for the quarter ended June 30, 2006 by $39,908,000, or $0.26 per diluted share and increased FFO for the quarter ended June 30, 2005 by $44,894,000, or $0.31 per diluted share.

Net income per diluted share and FFO per diluted share for the quarter ended June 30, 2006 were negatively impacted by an increase in weighted average common shares outstanding over the prior year’s quarter of 12,080,000.  This increase resulted primarily from the public offering of 9,000,000 common shares in August 2005.

We did not recognize income on certain assets with an aggregate carrying amount of $612,813,000 during the quarter ended June 30, 2006, because they were out of service for redevelopment or because financial information of investments that we do not control was not available.  Assets under redevelopment include the Bergen Mall, Crystal Plaza Two, 220 Central Park South, 40 East 66th Street, and investments in development joint ventures including our Beverly Connection and Wasserman ventures.

The percentage increase (decrease) in the same-store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended June 30, 2006 over the quarter ended June 30, 2005 and the trailing quarter ended March 31, 2006 are summarized below.

 

 

Office

 

 

 

 

 

 

 

 

 

New York City

 

Washington,
DC

 

Retail

 

Merchandise Mart

 

Temperature
Controlled
Logistics

 

Three Months Ended:

 

 

 

 

 

 

 

 

 

 

 

June 30, 2006 vs. June 30, 2005

 

3.7

%

3.1

%

5.1

%

(2.0

)%

1.0

%

June 30, 2006 vs. March 31, 2006

 

3.7

%

4.0

%

2.8

%

26.4

%

(1.3

)%

 

38




Overview - - continued

Six Months Ended June 30, 2006 Financial Results Summary

Net income applicable to common shares for the six months ended June 30, 2006 was $283,570,000, or $1.90 per diluted share, versus $360,130,000, or $2.63 per diluted share, for the six months ended June 30, 2005.  Net income for the six months ended June 30, 2006 includes $44,876,000 of earnings from our investment in Toys “R” Us and $33,769,000 of net gains on sale of real estate.  Net income for the six months ended June 30, 2005, includes a $31,614,000 net gain on sale of real estate.  Net income for the six months ended June 30, 2006 and 2005 also includes certain other items that affect comparability which are listed in the table on the following page.  The aggregate of these items, net gains on sales of real estate and our share of Toys’ net income, net of minority interest, increased net income applicable to common shares for the six months ended June 30, 2006 by $61,641,000, or $0.40 per diluted share and increased net income for the six months ended June 30, 2005 by $153,675,000, or $1.11 per diluted share.

Funds from operations applicable to common shares plus assumed conversions (“FFO”) for the six months ended June 30, 2006 was $442,346,000, or $2.86 per diluted share, compared to $465,011,000, or $3.35 per diluted share, for the prior year’s six months.  FFO for the six months ended June 30, 2006 includes our $62,287,000 share of Toys’ FFO for the period from October 30, 2005 to April 29, 2006. FFO for the six months ended June 30, 2006 and 2005 also includes certain other items that affect comparability which are listed in the table on the following page.  The aggregate of these items and our share of Toys’ FFO, net of minority interest, increased FFO for the six months ended June 30, 2006 by $33,040,000, or $0.21 per diluted share and increased FFO for the six months ended June 30, 2005 by $125,776,000, or $0.91 per diluted share.

Net income per diluted share and FFO per diluted share for the six months ended June 30, 2006 were negatively impacted by an increase in weighted average common shares outstanding over the prior year’s six months of 15,647,000.  This increase resulted primarily from the public offering of 9,000,000 common shares in August 2005 and the issuance of exchangeable senior debentures on March 29, 2005 (treated as 5,531,000 common share equivalents in the calculation of FFO per diluted share).

The percentage increase (decrease) in the same-store EBITDA of our operating segments for the six months ended June 30, 2006 over the previous six months ended June 30, 2005 is summarized below.

 

 

Office

 

 

 

 

 

 

 

 

 

New York
City

 

Washington,
DC

 

Retail

 

Merchandise
Mart

 

Temperature
Controlled
Logistics

 

Six Months Ended:

 

 

 

 

 

 

 

 

 

 

 

June 30, 2006 vs. June 30, 2005

 

4.5

%

1.1

%

5.6

%

(2.1

)%

2.0

%

 

Calculations of same-store EBITDA, reconciliations of net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.

39




Overview - continued

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

(Amounts in thousands, except per share amounts)

 

Amount

 

Per Share

 

Amount

 

Per Share

 

Amount

 

Per Share

 

Amount

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Items that affect comparability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Income) expense from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

McDonalds common shares

 

$

14,515

 

 

 

$

 

 

 

$

8,215

 

 

 

$

 

 

 

GMH stock purchase warrants

 

(4,105

)

 

 

(12,741

)

 

 

16,370

 

 

 

(2,563

)

 

 

Sears Holdings common shares

 

 

 

 

(37,860

)

 

 

(18,611

)

 

 

(131,853

)

 

 

Alexander’s (33% share):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock appreciation rights

 

(4,836

)

 

 

2,034

 

 

 

7,559

 

 

 

9,467

 

 

 

Net gain on sale of 731 Lexington Avenue condominiums

 

(2,722

)

 

 

(5,541

)

 

 

(4,580

)

 

 

(26,174

)

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain on sale of Sears Canada common shares

 

(55,438

)

 

 

 

 

 

(55,438

)

 

 

 

 

 

Prepayment penalties and write-off of unamortized financing costs upon refinancings

 

4,933

 

 

 

 

 

 

4,933

 

 

 

 

 

 

H Street litigation costs

 

2,093

 

 

 

 

 

 

3,561

 

 

 

 

 

 

Senior unsecured notes consent solicitation advisory fees

 

1,415

 

 

 

 

 

 

1,415

 

 

 

 

 

 

Net gain on sale of land parcels

 

 

 

 

 

 

 

 

 

 

(1,469

)

 

 

Write-off of perpetual preferred share and unit issuance costs upon their redemption

 

 

 

 

 

 

 

 

 

 

6,052

 

 

 

Impairment loss — Newkirk MLP

 

 

 

 

3,520

 

 

 

 

 

 

4,016

 

 

 

 

 

(44,145

)

 

 

(50,588

)

 

 

(36,576

)

 

 

(142,524

)

 

 

Minority limited partners’ share of above adjustments

 

4,237

 

 

 

5,694

 

 

 

3,536

 

 

 

16,748

 

 

 

Total items that affect comparability

 

$

(39,908

)    

$

(0.26

)    

$

(44,894

)    

$

(0.31

)    

$

(33,040

)    

$

(0.21

)    

$

(125,776

)    

$

(0.91

)

 

40




Overview - continued

2006 Acquisitions and Significant Investments

San Francisco Bay Area Properties

On January 10, 2006, we acquired four properties consisting of 189,000 square feet of retail and office space in the San Francisco Bay area for approximately $72,000,000 in cash, including closing costs.  We consolidate the accounts of these properties into our financial position and results of operations from the date of acquisition.

Springfield Mall

On January 31, 2006, we closed on an option to purchase the 1.4 million square foot Springfield Mall which is located on 79 acres at the intersection of Interstate 95 and Franconia Road in Springfield, Fairfax County, Virginia, and is anchored by Macy’s, and J.C. Penney and Target, who own their stores aggregating 389,000 square feet.  The purchase price for the option was $35,600,000, of which we paid $14,000,000 in cash at closing and the remainder of $21,600,000 will be paid in installments over four years. We intend to redevelop, reposition and re-tenant the mall and have committed to spend $25,000,000 in capital expenditures over a six-year period from the closing of the option agreement.  The option becomes exercisable upon the passing of one of the existing principals of the selling entity and may be deferred at our election through November 2012.  Upon exercise of the option, we will pay $80,000,000 to acquire the mall, subject to the existing mortgage of $180,000,000, which will be amortized to $149,000,000 at maturity in 2013.  Upon closing of the option on January 31, 2006, we acquired effective control of the mall, including management of the mall and right to the mall’s net cash flow.  Accordingly, we consolidate the accounts of the mall into our financial position and results of operations pursuant to the provisions of FIN 46R.  We have a 2.5% minority partner in this transaction.

BNA Complex

On February 17, 2006, we entered into an agreement to sell our 277,000 square foot Crystal Mall Two office building, located in Arlington, Virginia, to The Bureau of National Affairs, Inc. (“BNA”) for its corporate headquarters.  Simultaneously, we agreed to acquire a three building complex from BNA containing approximately 300,000 square feet, which is located in Washington D.C.’s West End between Georgetown and the Central Business District.  We will receive sales proceeds of approximately $100,000,000 for Crystal Mall Two and recognize a net gain on sale of approximately $23,000,000.  We will pay BNA $111,000,000 for the three building complex.  One of the buildings, containing 130,000 square feet, will remain an office building, while the other two buildings will be redeveloped into residential condominiums.  These transactions are expected to close in the second half of 2007.

San Jose, California Ground-up Development

On March 29, 2006, a joint venture, in which we have a 45% equity interest and are a co-managing partner, acquired 55 acres of land in San Jose, California for approximately $59,600,000, including closing costs.  The purchase price was funded with $20,643,000 of cash contributed by the partners, of which our share was $9,289,000, and $38,957,000 drawn on a $117,000,000 acquisition/construction loan.  The remainder of the loan will be used to fund the development of a 635,000 square foot retail center on the site.  As of June 30, 2006, $44,599,000 was outstanding under the loan, which bears interest at LIBOR plus 1.75% (6.94% at June 30, 2006) and matures in March 2009 with a one-year extension option.  Upon completion of the development we have an option to acquire our partner’s 55% equity interest at a 7% unlevered yield.  We account for this investment on the equity method.

1925 K Street

On April 13, 2006, we acquired the 92.65% interest that we did not already own of 1925 K Street, a 150,000 square foot office building located in the Central Business District of Washington, DC.  The purchase price for the 92.65% interest was $52,800,000, consisting of $34,600,000 in cash and $18,200,000 of existing mortgage debt.   Mitchell N. Schear, President of our Washington, DC Office division, received $3,675,000 for his share of the proceeds as a partner of the selling entity.  We plan to redevelop this property into a 225,000 square foot Class A office building at a cost of approximately $80,000,000.  We consolidate the accounts of this property into our financial position and results of operations from the date of acquisition.

1540 Broadway

On July 11, 2006, we acquired the retail, signage and parking components of 1540 Broadway located in Manhattan’s Times Square between 45th and 46th Street.  The purchase price was approximately $260,000,000 in cash.  The property contains 152,000 square feet of retail space which is 60% occupied.  The principal tenants are Virgin Records and Planet Hollywood.  We consolidate the accounts of this property into our financial position and results of operations from the date of acquisition.

41




Overview - - continued

Filene’s, Boston, Massachusetts

On July 10, 2006, we entered into an agreement to purchase the 656,000 square foot Filene’s property located in the Downtown Crossing district of Boston from Federated Department Stores, Inc.  The purchase price is approximately $100,000,000 in cash.  We plan to redevelop and expand the property for office and retail use, subject to governmental approvals.  The purchase is expected to close in the fourth quarter of 2006, subject to customary closing conditions.

Other

In addition to the acquisitions described above, during 2006 we completed $205,950,000 of other real estate acquisitions and investments, comprised of $191,450,000 in cash and $14,500,000 of existing mortgage debt as follows:

(Amounts in thousands)

 

Amount

 

Segment

 

West 57th Street properties (50% interest)

 

$

68,450

 

Office

 

Wasserman Joint Venture - additional investment (95% interest)

 

53,000

 

Other

 

3040 M Street, Washington, DC

 

36,400

 

Retail

 

Tonnelle Avenue Land (40 acres), North Bergen, New Jersey

 

24,500

 

Retail

 

Verde Group - additional investment (8% interest)

 

12,500

 

Other

 

122-124 Spring Street, New York, NY

 

11,100

 

Retail

 

 

 

$

205,950

 

 

 

 

Investment in McDonald’s Corporation (“McDonalds”) (NYSE: MCD)

In July 2005, we acquired an aggregate of 858,000 common shares of McDonalds for $25,346,000, an average price of $29.54 per share. These shares are recorded as marketable equity securities on our consolidated balance sheet and are classified as “available for sale.”  Appreciation or depreciation in the fair market value of these shares is recorded as an increase or decrease in “accumulated other comprehensive income” in the shareholders’ equity section of our consolidated balance sheet and not recognized in income.  At June 30, 2006, based on McDonalds’ closing stock price of $33.60 per share, $3,482,000 of appreciation in the value of these shares was included in “accumulated other comprehensive income.”

During the second half of 2005, we acquired an economic interest in an additional 14,565,500 McDonalds common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on McDonalds’ common shares.  These call and put options had an initial weighted-average strike price of  $32.66 per share, or an aggregate of $475,692,000, expire on various dates between July 30, 2007 and September 10, 2007 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points (up to 95 basis points under certain circumstances) and is credited for the dividends received on the shares.  The options provide us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate purchase price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statement of income.

In the three months ended March 31, 2006, we sold 2,119,500 of the option shares in the derivative position at a weighted average sales price of $35.49.  In the three months ended June 30, 2006, we acquired an additional 1,250,000 option shares at a weighted average purchase price of $33.08.  As of June 30, 2006, there are 13,696,000 option shares in the derivative position with an adjusted weighted average strike price of $32.70 per share or an aggregate of $447,822,000.  For the three and six months ended June 30, 2006, we recognized a net loss of $14,515,000 and $8,215,000, respectively, representing the mark-to-market of the shares in the derivative and the expense resulting from the LIBOR charges.

Our aggregate net gain realized from inception of this investment through June 30, 2006 is $9,039,000.

42




Overview - - continued

Investment in Sears, Roebuck and Co. (“Sears”)

In August and September 2004, we acquired an economic interest in 7,916,900 Sears common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on Sears common shares.  These call and put options had an initial weighted-average strike price of $39.82 per share, or an aggregate of $315,250,000, expire in April 2006 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points and is credited for the dividends received on the shares.  The options provide us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate strike price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statement of income.

On March 30, 2005, as a result of the merger between Sears and Kmart and pursuant to the terms of the contract, our derivative position representing 7,916,900 Sears common shares became a derivative position representing 2,491,819 common shares of Sears Holdings, Inc. (“Sears Holdings”) (NYSE: SHLD) valued at $323,936,000 based on the then closing share price of $130.00 and $146,663,000 of cash.  As a result, we recognized a net gain of $58,443,000 based on the fair value of the derivative position on March 30, 2005.  In 2005 we sold 402,660 of the option shares at a weighted average sales price of $124.44 per share.  In the first quarter of 2006, we settled the entire derivative position by selling the remaining 2,089,159 option shares at a weighted average sales price of $125.43 which resulted in a net gain of $18,611,000, comprised of $20,673,000 from the remaining option shares sold, partially offset by, $2,062,000 of expense resulting from the increase in strike price for the LIBOR charge.

Our aggregate net gain realized from inception of this investment through settlement was $142,877,000.

Sears Canada, Inc. (“Sears Canada”)

On April 3, 2006, we tendered the 7,500,000 Sears Canada shares we owned to Sears Holdings at the increased tender price of $15.68 per share, which resulted in a net gain of $55,438,000 representing the difference between the tender price and our carrying amount of $8.29 per share.  The net gain is reflected as a component of “net gains on dispositions of wholly-owned assets other than depreciable real estate” on our consolidated statement of income.  Together with income recognized in the fourth quarter of 2005 that resulted from a Sears Canada special dividend, the aggregate net gain from inception on our $143,737,000 investment was $78,323,000.

43




Overview - - continued

2006 Mezzanine Loan Activity:

On February 10, 2006 we acquired a 50% interest in a $115,000,000 note issued by Related Equinox Holdings II, LLC (the “Note”), for $57,500,000 in cash.  The Note is secured by a pledge of the stock of Related Equinox Holdings II.  Related Equinox Holdings II owns Equinox Holdings which in turn owns all of the assets and obligations, including the clubs, operated under the Equinox brand.  The Note is junior to a $50,000,000 (undrawn) revolving loan and $280,000,000 of senior unsecured obligations.  The Note is senior to $125,000,000 of cash equity contributed by third parties for their acquisition of the Equinox fitness club business.  The Note matures on February 15, 2013 and bears interest at 14% through February 15, 2011, increasing by 3% per annum through maturity.  The Note is prepayable at any time after February 15, 2009.

On April 12, 2006, we acquired a 23.6% interest in two mezzanine loans totaling $138,136,000, for $32,560,000 in cash.  The loans mature in January 2008 with two one-year extension options and bear interest at LIBOR plus 3.84% (9.19% at June 30, 2006).

In 2005 we made a $135,000,000 loan to Riley HoldCo Corp., consisting of a $60,000,000 mezzanine loan and a $75,000,000 fixed rate unsecured loan.  We received principal payments on the mezzanine loan of $5,557,000 and $13,901,000, on February 6, 2006 and June 2, 2006, respectively.  On July 12, 2006, the remaining $40,541,000 balance of the mezzanine loan was repaid with a pre-payment premium of $972,000, which will be recognized as “interest and other investment income” in the three months ended September 30, 2006.

On June 16, 2006, we acquired an 81.5% interest in a $95,968,000 mezzanine loan to Tharaldson Lodging Companies for $78,166,000 in cash.  The loan is secured by a 107 hotel property portfolio with brands including Fairfield Inn, Residence Inn, Comfort Inn, and Courtyard by Marriott.  The loan is subordinate to $671,778,000 of debt and is senior to approximately $192,000,000 of other debt and equity.  The loan matures in April 2008, with three one-year extensions, provides for a 0.75% placement fee and bears interest at LIBOR plus 4.30% (9.63% at June 30, 2006).

On June 19, 2006, we acquired a 49% interest in a $37,789,000 mezzanine loan for $18,517,000 in cash.  The loan matures in April 2007, with a six month extension option and bears interest at LIBOR plus 10% (15.35% at June 30, 2006).

On June 30, 2006, we made a $74,000,000 mezzanine loan secured by the equity interests in 280 Park Avenue, a 1.2 million square foot office building, located between 48th and 49th Street in Manhattan.  The loan bears interest at 10.25% and matures in June 2016.  The loan is subordinate to $1.036 billion of other debt and is senior to approximately $270,000,000 of equity and interest reserves.

On July 7, 2006, we were repaid the $108,000,000 outstanding balance of the Sheffield mezzanine loan, together with accrued interest of $1,165,000 and a prepayment premium of $2,288,000, which was recognized as “interest and other investment income” in the three months ended September 30, 2006.

2006 Dispositions:

On March 14, 2006, we sold 33 North Dearborn Street, a 336,000 square foot office building located in Chicago, Illinois, for $46,000,000, which resulted in a net gain of $4,835,000.  All of the proceeds from the sale were used to fund a portion of the purchase price of the San Francisco Bay area properties (see Acquisitions above) pursuant to Section 1031 of the Internal Revenue Code.

On March 13, 2006, we sold 424 Sixth Avenue, a 10,000 square foot retail property located in New York City, for $22,000,000, which resulted in a net gain of $9,218,000.

On June 22, 2006, we sold 1919 South Eads Street, a 96,000 square foot office building located in Arlington, Virginia for $38,400,000, which resulted in a net gain of $17,609,000.

44




 

Overview - - continued

2006 Financings:

On February 9, 2006, we completed a $353,000,000 refinancing of 770 Broadway.  The loan bears interest at 5.65% and matures in March 2016.  The net proceeds of $173,000,000, after repaying the existing floating rate loan and closing costs, were used for general corporate purposes.

On February 16, 2006, we completed a public offering of $250,000,000 aggregate principal amount of 5.6% senior unsecured notes due February 15, 2011.  Interest on the notes is payable semi-annually on February 15 and August 15, commencing August 16, 2006.  The notes were priced at 99.906% of their face amount to yield 5.622%.  The net proceeds of approximately $248,000,000 were used for general corporate purposes.

On May 2, 2006, we sold 1,400,000 perpetual 6.875% Series D-15 Cumulative Redeemable Preferred Units, at a price of $25.00 per share.  We may redeem the Series D-15 Units at a price of $25.00 per share after May 2, 2011.  The net proceeds of the offering of $34,125,000 were used for general corporate purposes.

On May 5, 2006, we repaid the existing debt on the Warner Building and completed a 10-year interest-only refinancing of $292,700,000.  The loan bears interest at 6.26% and matures in May 2016.  We retained net proceeds of $133,000,000, after repaying the existing loan, closing costs and a prepayment penalty of $9,818,000.  As part of the purchase price accounting for the December 27, 2005 acquisition of the Warner Building, we accrued a liability for the unfavorable terms of the debt assumed in the acquisition.  Accordingly, the prepayment penalty did not result in an expense on our consolidated statement of income.

On May 23, 2006 we completed a $115,000,000 refinancing of the Bowen Building.  This interest-only loan bears interest at 6.14% and matures in June 2016.  The net proceeds of $51,600,000, after repaying the existing floating rate loan and closing costs, were used for general corporate purposes.

On June 9, 2006, we completed a $120,000,000 refinancing of the Montehiedra Town Center.  The loan bears interest at 6.04% and matures in June 2016.  The net proceeds of $59,000,000, after repaying the existing loan and closing costs, were used for general corporate purposes.  We incurred a prepayment penalty of approximately $2,498,000, which is included “interest and debt expense” in the three and six months ended June 30, 2006.

On June 28, 2006, we entered into a $1.0 billion unsecured revolving credit facility which replaced our previous $600,000,000 unsecured revolving credit facility which was due to mature in July 2006.  The new facility has a four-year term, with a one-year extension option and bears interest at LIBOR plus 0.55% (5.90% as of June 30, 2006).  The new facility contains financial covenants similar to the prior facility but have been modified to more accurately reflect the current market conditions in the real estate industry.

On June 30, 2006, Americold completed a $400,000,000, one-year, interest-only financing, collateralized by 21 of its owned and six of its leased temperature-controlled warehouses.  Of this loan, $243,000,000 was drawn to repay the existing mortgage on the same facilities.  The remaining $157,000,000 of the loan can be drawn at any time prior to October 7, 2006.  The initial interest rate on the new mortgage is LIBOR plus 0.60% and increases to LIBOR plus 1.10% if the remaining balance is drawn.  In connection with the refinancing, Americold wrote off $4,000 of deferred financing costs associated with the old loan, of which our share is $1,920, and is included in “interest and debt expense” in the three and six months ended June 30, 2006.

On July 28, 2006 we called for redemption of the 8.25% Series D-9 Cumulative Redeemable Preferred Units.  The Preferred Units will be redeemed on September 21, 2006 at a redemption price equal to $25.00 per unit or an aggregate of $45,000,000 plus accrued distributions.  In conjunction with the redemption, we will write-off $1,125,000 of issuance costs in the three months ended September 30, 2006.

Unsecured Notes Consent Solicitation

On May 9, 2006 we executed supplemental indentures with respect to our senior unsecured notes due 2007, 2009 and 2010 (collectively, the “Notes”), pursuant to our consent solicitation statement dated April 18, 2006, as amended.  Holders of approximately 96.7% of the aggregate principal amount of the Notes consented to the solicitation. The supplemental indentures contain modifications of certain covenants and related defined terms governing the terms of the Notes to make them consistent with corresponding provisions of the covenants and defined terms included in the senior unsecured notes due 2011 issued on February 16, 2006. The supplemental indentures also include a new covenant that provides for an increase in the interest rate of the Notes upon certain decreases in the ratings assigned by rating agencies to the Notes.  In connection with the consent solicitation we paid an aggregate fee of $2,241,000 to the consenting note holders, which will be amortized into expense over the remaining term of the Notes.  In addition, we incurred advisory and professional fees aggregating $1,415,000, which were expensed in the second quarter of 2006.

45




Overview - - continued

The following table sets forth certain information for the properties we own directly or indirectly, including leasing activity.  Tenant improvements and leasing commissions are presented below based on square feet leased during the period and on a per annum basis based on the weighted average term of the leases.

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

 

 

 

 

Temperature

 

(Square feet and cubic feet in thousands)

 

New York

 

Washington,

 

 

 

Merchandise Mart

 

Controlled

 

As of June 30, 2006:

 

City

 

DC(2)(3)

 

Retail

 

Office

 

Showroom

 

Logistics

 

Square feet / cubic feet

 

13,122

 

17,833

 

17,558

 

2,701

 

6,366

 

17,417/442,200

 

Number of properties

 

24

 

90

 

119

 

9

 

9

 

85

 

Occupancy rate

 

96.5

%

92.2

%

95.1

%

97.4

%

91.9

%

73.7

%

Leasing Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

759

 

740

 

401

 

36

 

311

 

 

 

Initial rent (1)

 

$

52.23

 

$

32.12

 

$

25.13

 

$

23.02

 

$

26.69

 

 

 

Weighted average lease terms (years)

 

10.8

 

7.7

 

15.7

 

11.3

 

5.8

 

 

 

Rent per square foot on relet space:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

727

 

541

 

83

 

36

 

311

 

 

 

Initial Rent (1)

 

$

52.19

 

$

31.92

 

$

28.18

 

$

23.02

 

$

26.69

 

 

 

Prior escalated rent

 

$

42.01

 

$

31.05

 

$

24.80

 

$

21.27

 

$

25.72

 

 

 

Percentage increase:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash basis

 

24.2

%

2.8

%

13.6

%

8.2

%

3.8

%

 

 

Straight-line basis

 

31.6

%

2.8

%

20.1

%

29.9

%

15.0

%

 

 

Rent per square foot on space previously vacant:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

32

 

199

 

318

 

 

 

 

 

Initial rent (1)

 

$

53.14

 

$

32.66

 

$

24.40

 

$

 

$

 

 

 

Tenant improvements and leasing commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Per square foot

 

$

44.66

 

$

15.96

 

$

6.37

 

$

63.68

 

$

8.57

 

 

 

Per square foot per annum

 

$

4.13

 

$

2.07

 

$

0.41

 

$

5.64

 

$

1.48

 

 

 

Six months ended June, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

1,217

 

1,240

 

574

 

104

 

572

 

 

 

Initial rent (1)

 

$

49.23

 

$

32.00

 

$

27.34

 

$

19.13

 

$

26.75

 

 

 

Weighted average lease terms (years)

 

9.8

 

7.1

 

13.0

 

8.9

 

5.7

 

 

 

Rent per square foot on relet space:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

962

 

738

 

185

 

104

 

572

 

 

 

Initial Rent (1)

 

$

50.37

 

$

31.52

 

$

36.44

 

$

19.13

 

$

26.75

 

 

 

Prior escalated rent

 

$

42.27

 

$

30.89

 

$

29.86

 

$

20.98

 

$

26.65

 

 

 

Percentage increase (decrease):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash basis

 

19.2

%

2.0

%

22.0

%

(8.8

%)

0.4

%

 

 

Straight-line basis

 

26.4

%

3.1

%

30.4

%

5.4

%

11.7

%

 

 

Rent per square foot on space previously vacant:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

255

 

503

 

389

 

 

 

 

 

Initial rent (1)

 

$

44.94

 

$

32.69

 

$

23.01

 

$

 

$

 

 

 

Tenant improvements and leasing commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Per square foot

 

$

38.22

 

$

14.89

 

$

8.12

 

$

37.24

 

$

7.51

 

 

 

Per square foot per annum

 

$

3.91

 

$

2.10

 

$

0.63

 

$

4.18

 

$

1.32

 

 

 

 

In addition to the above, 27 square feet of retail space was leased in New York Office buildings at an initial rent of $131.13 per square foot, a 51.0% increase over the prior escalated rent.


(1)             Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

(2)    As of June 30, 2006, we have re-leased 1,202 square feet of the 1,939 square feet of space vacated by the U.S. Patent and Trade Office (“PTO”) in Crystal City during 2004 and 2005. Of the remaining 739 square feet to be re-leased, 181 square feet was taken out of service to be converted to a 19-story residential tower.

(3)             Crystal Plaza Two, Three and Four (aggregating 712 square feet) were taken out of service for redevelopment in 2004.  During the six months ended June 30, 2006, Crystal Plaza Three and Four (aggregating 531 square feet) were substantially completed, placed into service and re-leased.  Occupancy statistics above exclude these properties for the periods they were out of service.

46




 

Overview - - continued

 

 

Office

 

 

 

 

 

Temperature

 

 

 

New York

 

Washington,

 

 

 

Merchandise Mart

 

Controlled

 

(Square feet and cubic feet in thousands)

 

City

 

DC

 

Retail

 

Office

 

Showroom

 

Logistics

 

As of March 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet/cubic feet

 

13,021

 

17,764

 

17,470

 

2,703

 

6,360

 

17,212/436,800

 

Number of properties

 

21

 

91

 

119

 

9

 

9

 

84

 

Occupancy rate

 

96.1

%

91.0

%

94.5

%

97.4

%

93.0

%

77.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet/cubic feet

 

12,972

 

17,727

 

16,169

 

3,100

 

6,290

 

17,275/437,500

 

Number of properties

 

20

 

91

 

111

 

10

 

10

 

85

 

Occupancy rate

 

96.0

%

91.2

%

95.6

%

97.0

%

94.7

%

78.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet/cubic feet

 

12,926

 

14,622

 

14,049

 

3,027

 

5,810

 

17,311/437,200

 

Number of properties

 

19

 

67

 

98

 

9

 

9

 

85

 

Occupancy rate

 

94.6

%

87.7

%

94.5

%

95.8

%

95.7

%

75.2

%

 

2006 Other Developments

GMH Communities L.P. (“GMH”)

As of June 30, 2006, we own 7,337,857 limited partnership units (which are exchangeable on a one-for-one basis into common shares of GMH Communities Trust (“GCT”) (NYSE: GCT), a real estate investment trust that conducts its business through GMH and of which it is the sole general partner, and 2,517,247 common shares of GCT (1,817,247 shares were received upon exercise of our warrants discussed below), or 13.5% of the limited partnership interest of GMH.

We account for our investment in GMH on the equity method and record our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT files its financial statements.  On July 31, 2006 GCT filed its annual report on Form 10-K for the year ended December 31, 2005, which restated the quarterly financial results of each of the first three quarters of 2005.  Because GMH’s earnings for the year ended December 31, 2005 were not available in time to be recorded in our consolidated financial statements, our earnings for the three and six months ended June 30, 2006 do not include a $94,000 net loss representing our share of GMH’s fourth quarter results, net of adjustments to restate its first three quarters of 2005.   In addition, as of the date of this filing, GCT has not filed its quarterly report on Form 10-Q for the quarter ended March 31, 2006 and accordingly, our earnings for the three and six months ended June 30, 2006 do not include our share of GMH’s first quarter 2006 earnings.

On May 2, 2006, the date our GMH warrants were to expire, we received 1,817,247 GCT common shares through an automatic cashless exercise.  The amount of the shares received was equal to the excess of GCT’s average closing share price for the trailing 20-day period ending on May 1, 2006 and the $8.22 exercise price, divided by GCT’s average closing share price for the trailing 20-day period ending on May 1, 2006, then multiplied by 6,085,180 warrants.  Accordingly, in the three months ended June 30, 2006, we recognized a net gain of $4,105,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price on March 31, 2006.  For the six months ended June 30, 2006, we recognized a net loss of $16,370,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price on December 31, 2005.  From inception of our investment in the warrants, including the first tranche of warrants exercised on November 3, 2004, the aggregate net gain recognized was $51,352,000.

 

47




Reconciliation of Net Income and EBITDA

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended June 30, 2006 and 2005.

 

 

For the Three Months Ended June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Termperature

 

 

 

 

 

 

 

 

 

Office

 

 

 

Merchandise

 

Controlled

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Mart

 

Logistics

 

Toys

 

Other

 

Property rentals

 

$

372,192

 

$

120,115

 

$

103,010

 

$

64,541

 

$

61,885

 

$

 

$

 

$

22,641

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

7,991

 

1,994

 

2,320

 

2,101

 

1,597

 

 

 

(21

)

Amortization of free rent

 

9,621

 

1,927

 

6,089

 

1,263

 

342

 

 

 

 

Amortization of acquired below-market leases, net

 

3,672

 

(11

)

946

 

2,338

 

(93

)

 

 

492

 

Total rentals

 

393,476

 

124,025

 

112,365

 

70,243

 

63,731

 

 

 

23,112

 

Temperature Controlled Logistics

 

187,047

 

 

 

 

 

187,047

 

 

 

Tenant expense reimbursements

 

60,920

 

23,805

 

6,511

 

25,059

 

4,915

 

 

 

630

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

7,511

 

9,819

 

 

 

 

 

 

(2,308

)

Management and leasing fees

 

2,534

 

258

 

1,885

 

360

 

31

 

 

 

 

Lease termination fees

 

5,907

 

5,388

 

5

 

 

514

 

 

 

 

Other

 

5,637

 

2,296

 

1,920

 

80

 

1,341

 

 

 

 

Total revenues

 

663,032

 

165,591

 

122,686

 

95,742

 

70,532

 

187,047

 

 

21,434

 

Operating expenses

 

319,851

 

72,046

 

36,494

 

31,688

 

22,514

 

145,896

 

 

11,213

 

Depreciation and amortization

 

98,880

 

22,917

 

29,902

 

12,407

 

11,104

 

17,921

 

 

4,629

 

General and administrative

 

52,563

 

4,140

 

8,448

 

5,294

 

7,123

 

9,774

 

 

17,784

 

Total expenses

 

471,294

 

99,103

 

74,844

 

49,389

 

40,741

 

173,591

 

 

33,626

 

Operating income (loss)

 

191,738

 

66,488

 

47,842

 

46,353

 

29,791

 

13,456

 

 

(12,192

)

Income applicable to Alexander’s

 

14,750

 

186

 

 

178

 

 

 

 

14,386

 

Loss applicable to Toys “R” Us

 

(7,884

)

 

 

 

 

 

(7,884

)

 

Income from partially-owned entities

 

14,635

 

1,166

 

5,058

 

2,188

 

445

 

369

 

 

5,409

 

Interest and other investment income

 

16,623

 

180

 

378

 

353

 

66

 

1,364

 

 

14,282

 

Interest and debt expense

 

(120,822

)

(20,848

)

(26,187

)

(24,131

)

(3,542

)

(18,452

)

 

(27,662

)

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate

 

56,947

 

 

 

 

 

 

 

56,947

 

Minority interest of partially-owned entities

 

3,118

 

 

 

29

 

1

 

2,847

 

 

241

 

Income (loss) from continuing operations

 

169,105

 

47,172

 

27,091

 

24,970

 

26,761

 

(416

)

(7,884

)

51,411

 

Income (loss) from discontinued operations

 

16,762

 

 

16,807

 

(42

)

(3

)

 

 

 

Income (loss) before allocation to limited partners

 

185,867

 

47,172

 

43,898

 

24,928

 

26,758

 

(416

)

(7,884

)

51,411

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

 

 

 

 

 

 

(17,324

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

 

 

 

 

 

 

(5,374

)

Net income (loss)

 

163,169

 

47,172

 

43,898

 

24,928

 

26,758

 

(416

)

(7,884

)

28,713

 

Interest and debt expense(1)

 

171,778

 

21,523

 

30,315

 

27,118

 

3,762

 

8,779

 

44,348

 

35,933

 

Depreciation and amortization(1)

 

133,377

 

23,850

 

34,724

 

13,320

 

11,245

 

8,553

 

32,522

 

9,163

 

Income (benefit) tax expense(1)

 

(28,642

)

 

3,620

 

 

78

 

81

 

(32,522

)

101

 

EBITDA

 

$

439,682

 

$

92,545

 

$

112,557

 

$

65,366

 

$

41,843

 

$

16,997

 

$

36,464

 

$

73,910

 

Percentage of EBITDA by segment

 

100.0%

 

21.0%

 

25.6%

 

14.9%

 

9.5%

 

3.9%

 

8.3%

 

16.8%

 

 

Washington, D.C. office EBITDA includes a net gain on sale of real estate of $17,609.  In addition, Other segment EBITDA includes a $55,438 net gain on sale of marketable equity securities and a $10,410 net loss on mark-to-market of derivative instruments.  Excluding these items, the percentages of EBITDA by segment are 24.8% for New York Office, 26.0% for Washington, DC Office, 17.5% for Retail, 11.2% for Merchandise Mart, 4.6% for Temperature Controlled Logistics, 9.8% for Toys and 6.1% for Other.


See notes on page 50.

 

48




 

 

For the Three Months Ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Temperature

 

 

 

 

 

 

 

Office

 

 

 

Merchandise

 

Controlled

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Mart

 

Logistics

 

Other

 

Property rentals

 

$

327,078

 

$

114,584

 

$

91,109

 

$

48,793

 

$

54,681

 

$

 

$

17,911

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

5,489

 

1,951

 

889

 

1,346

 

1,334

 

 

(31

)

Amortization of free rent

 

5,088

 

1,557

 

599

 

345

 

2,587

 

 

 

Amortization of acquired below-market leases, net

 

3,436

 

 

2,052

 

1,384

 

 

 

 

Total rentals

 

341,091

 

118,092

 

94,649

 

51,868

 

58,602

 

 

17,880

 

Temperature Controlled Logistics

 

178,891

 

 

 

 

 

178,891

 

 

Tenant expense reimbursements

 

49,917

 

22,771

 

3,329

 

18,816

 

4,223

 

 

778

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

7,605

 

7,605

 

 

 

 

 

 

Management and leasing fees

 

4,265

 

219

 

3,721

 

307

 

18

 

 

 

Lease termination fees

 

3,878

 

3,094

 

81

 

 

703

 

 

 

Other

 

5,828

 

2,012

 

2,571

 

74

 

1,171

 

 

 

Total revenues

 

591,475

 

153,793

 

104,351

 

71,065

 

64,717

 

178,891

 

18,658

 

Operating expenses

 

282,430

 

65,275

 

28,066

 

20,538

 

20,512

 

136,720

 

11,319

 

Depreciation and amortization

 

83,234

 

21,489

 

21,570

 

8,503

 

9,497

 

19,006

 

3,169

 

General and administrative

 

45,796

 

3,310

 

5,856

 

3,684

 

7,187

 

9,972

 

15,787

 

Total expenses

 

411,460

 

90,074

 

55,492

 

32,725

 

37,196

 

165,698

 

30,275

 

Operating income (loss)

 

180,015

 

63,719

 

48,859

 

38,340

 

27,521

 

13,193

 

(11,617

)

Income applicable to Alexander’s

 

13,030

 

101

 

 

53

 

 

 

12,876

 

Income from partially-owned entities

 

6,598

 

754

 

122

 

1,760

 

286

 

194

 

3,482

 

Interest and other investment income

 

69,923

 

171

 

254

 

64

 

71

 

669

 

68,694

 

Interest and debt expense

 

(83,414

)

(14,134

)

(20,223

)

(14,292

)

(2,680

)

(13,955

)

(18,130

)

Minority interest of partially-owned entities

 

1,127

 

 

 

 

42

 

1,085

 

—-

 

Income from continuing operations

 

187,279

 

50,611

 

29,012

 

25,925

 

25,240

 

1,186

 

55,305

 

Income from discontinued operations

 

32,930

 

 

394

 

131

 

656

 

 

31,749

 

Income before allocation to limited partners

 

220,209

 

50,611

 

29,406

 

26,056

 

25,896

 

1,186

 

87,054

 

Minority limited partners’ interest in the Operating Partnership

 

(23,975

)

 

 

 

 

 

(23,975

)

Perpetual preferred unit distributions of the Operating Partnership

 

(15,152

)

 

 

 

 

 

(15,152

)

Net income

 

181,082

 

50,611

 

29,406

 

26,056

 

25,896

 

1,186

 

47,927

 

Interest and debt expense(1)

 

91,875

 

14,632

 

20,966

 

16,857

 

2,905

 

6,640

 

29,875

 

Depreciation and amortization(1)

 

80,788

 

21,885

 

21,989

 

9,515

 

10,052

 

9,070

 

8,277

 

Income tax expense(1)

 

1,242

 

 

58

 

 

540

 

359

 

285

 

EBITDA

 

$

354,987

 

$

87,128

 

$

72,419

 

$

52,428

 

$

39,393

 

$

17,255

 

$

86,364

 

Percentage of EBITDA by segment

 

100%

 

24.5%

 

20.4%

 

14.8%

 

11.1%

 

4.9%

 

24.3%

 

 

EBITDA of the Other segment includes $50,601 of income from the mark-to-market of derivative instruments and $31,614 for a net gain on sale of real estate.  Excluding these items, the percentages of EBITDA by segment are 32.2% for New York Office, 26.5% for Washington, DC Office, 19.3% for Retail, 14.2% for Merchandise Mart, 6.4% for Temperature Controlled Logistics and 1.4% for Other.


See notes on following page.

49




Notes:

(1)             EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.”  We consider EBITDA a supplemental measure for making decisions and assessing the un-levered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity.  As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers.  EBITDA should not be considered a substitute for net income.  EBITDA may not be comparable to similarly titled measures employed by other companies.

(2)             Other EBITDA is comprised of:

 

 

For the Three Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Alexander’s

 

$

21,970

 

$

19,933

 

Newkirk Master Limited Partnership

 

8,467

 

11,426

 

Hotel Pennsylvania

 

7,872

 

6,281

 

GMH Communities L.P.

 

 

2,023

 

Industrial warehouses

 

1,509

 

1,545

 

Other investments

 

3,789

 

 

 

 

43,607

 

41,208

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

(23,975

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

(15,152

)

Corporate general and administrative expenses

 

(16,489

)

(14,757

)

Investment income and other

 

69,490

 

67,287

 

Discontinued operations:

 

 

 

 

 

400 North LaSalle (including $31,614 net gain on sale)

 

 

31,753

 

 

 

$

73,910

 

$

86,364

 

 

 

50




Results of Operations

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, Temperature Controlled Logistics revenues, hotel revenues, trade shows revenues, amortization of acquired below market leases, net of above market leases pursuant to SFAS No. 141 and 142, and fee income, were $663,032,000 for the quarter ended June 30, 2006, compared to $591,475,000 in the prior year’s quarter, an increase of $71,557,000.  Below are the details of the increase (decrease) by segment:

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Date of
Acquisition

 

Total

 

New York

 

Washington,
DC

 

 

Retail

 

Merchandise
Mart

 

Temperature
Controlled
Logistics

 

Other

 

Property rentals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warner Building

 

December 2005

 

$

5,763

 

$

 

$

5,763

 

(3)

$

 

$

 

$

 

$

 

Springfield Mall

 

January 2006

 

4,877

 

 

 

 

4,877

 

 

 

 

Broadway Mall

 

December 2005

 

4,087

 

 

 

 

4,087

 

 

 

 

Boston Design Center

 

December 2005

 

2,595

 

 

 

 

 

2,595

 

 

 

Bowen Building

 

June 2005

 

1,811

 

 

1,811

 

(3)

 

 

 

 

San Francisco properties

 

January 2006

 

1,412

 

 

 

 

1,412

 

 

 

 

40 East 66th Street

 

July 2005

 

974

 

 

 

 

974

 

 

 

 

Westbury Retail Condominium

 

May 2005

 

918

 

 

 

 

918

 

 

 

 

South Hills Mall

 

August 2005

 

786

 

 

 

 

786

 

 

 

 

Other

 

 

 

3,455

 

 

1,570

 

 

1,885

 

 

 

 

Development/Redevelopment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crystal Plaza 3 and 4 — placed into service

 

 

 

3,035

 

 

3,035

 

 

 

 

 

 

7 West 34th Street — conversion from office space to showroom space

 

 

 

(355)

 

 

 

 

 

(355

)

 

 

Bergen Mall — taken out of service

 

 

 

(123)

 

 

 

 

(123

)

 

 

 

Amortization of acquired below market leases, net

 

 

 

218

 

(11

)

(1,124

)

 

954

 

(93

)

 

492

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Pennsylvania

 

 

 

2,210

 

 

 

 

 

 

 

2,210

(1)

Trade shows

 

 

 

2,186

 

 

 

 

 

 

2,186

 

 

 

Leasing activity (see page 46)

 

 

 

18,536

 

5,944

 

6,661

 

 

2,605

 

796

 

 

2,530

 

Total increase in property rentals

 

 

 

52,385

 

5,933

 

17,716

 

 

18,375

 

5,129

 

 

5,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Temperature Controlled Logistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase due to operations

 

 

 

8,156

 

 

 

 

 

 

8,156

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/development

 

 

 

9,840

 

 

3,563

 

 

5,419

 

858

 

 

 

Operations

 

 

 

1,163

 

1,034

 

(381

)

 

824

 

(166

)

 

(148

)

Total increase (decrease) in tenant expense reimbursements

 

 

 

11,003

 

1,034

 

3,182

 

 

6,243

 

692

 

 

(148

)

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease cancellation fee income

 

 

 

2,029

 

2,294

 

(76

)

 

 

(189

)

 

 

Management and leasing fees

 

 

 

(1,731

)

39

 

(1,836

)

(3)

53

 

13

 

 

 

BMS Cleaning fees

 

 

 

(94

)

2,214

 

 

 

 

 

 

(2,308)

(4)

Other

 

 

 

(191

)

284

 

(651

)

 

6

 

170

 

 

 

Total increase (decrease) in fee and other income

 

 

 

13

 

4,831

 

(2,563

)

 

59

 

(6

)

 

(2,308

)

Total increase in revenues

 

 

 

$

71,557

 

$

11,798

 

$

18,335

 

 

$

24,677

 

$

5,815

 

$

8,156

 

$

2,776

 


(1)                Average occupancy and revenue per available room (“REVPAR”) were 87.9% and $114.61 for the three months ended June 30, 2006 compared to 86.7% and $99.84 for the prior year’s second quarter.

(2)                Results primarily from a $4,899 increase in transportation management services, resulting from both new and existing customers and a $1,839 increase in storage, handling and accessorial service revenue.  See note 3 on page 52 for a discussion of Americold’s gross margin.

(3)                Reflects an increase in rentals and a reduction in leasing and management fees as a result of acquiring buildings which were previously partially owned and presented as managed for third parties.

(4)                Represents the elimination of inter-company cleaning fees charged by the New York Office division to certain properties included in the Washington, DC Office, Retail and Merchandise Mart divisions.

51




 

Expenses

Our expenses, which consist of operating, depreciation and amortization and general and administrative expenses, were $471,294,000 for the quarter ended June 30, 2006, compared to $411,460,000 in the prior year’s quarter, an increase of $59,834,000.  Below are the details of the increase (decrease) by segment:

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Temperature

 

 

 

 

 

Date of

 

 

 

 

 

 

 

 

 

Merchandise

 

 

Controlled

 

 

 

(Amounts in thousands)

 

Acquisition

 

Total

 

New York

 

Washington,DC

 

Retail

 

Mart

 

 

Logistics

 

Other

 

Operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadway Mall

 

December 2005

 

$

3,246

 

$

 

$

 

$

3,246

 

$

 

 

$

 

$

 

Warner Building

 

December 2005

 

3,058

 

 

3,058

 

 

 

 

 

 

Springfield Mall

 

January 2006

 

2,753

 

 

 

2,753

 

 

 

 

 

Boston Design Center

 

December 2005

 

1,622

 

 

 

 

1,622

 

 

 

 

Bowen Building

 

June 2005

 

1,127

 

 

1,127

 

 

 

 

 

 

South Hills Mall

 

August 2005

 

547

 

 

 

547

 

 

 

 

 

San Francisco properties

 

January 2006

 

449

 

 

 

449

 

 

 

 

 

Other

 

 

 

3,075

 

 

1,461

 

1,614

 

 

 

 

 

Development/Redevelopment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crystal Plaza 3 and 4 — placed into service

 

 

 

1,545

 

 

1,545

 

 

 

 

 

 

Bergen Mall — taken out of service

 

 

 

210

 

 

 

210

 

 

 

 

 

7 West 34th Street — conversion from office space to showroom space

 

 

 

(488

)

 

 

 

(488

)

 

 

 

Hotel activity

 

 

 

599

 

 

 

 

 

 

 

599

 

Trade shows activity

 

 

 

2,379

 

 

 

 

2,379

 

 

 

 

Operations

 

 

 

17,299

 

6,771

(1)

1,237

 

2,331

 

(1,511

)

(2)

9,176

(3)

(705

)

Total increase (decrease) in
operating expenses

 

 

 

37,421

 

6,771

 

8,428

 

11,150

 

2,002

 

 

9,176

 

(106

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/Development

 

 

 

11,467

 

 

6,810

 

3,838

 

819

 

 

 

 

Operations (due to additions to
buildings and improvements)

 

 

 

4,179

 

1,428

 

1,522

 

66

 

788

 

 

(1,085

)

1,460

 

Total increase (decrease) in
depreciation and amortization

 

 

 

15,646

 

1,428

 

8,332

 

3,904

 

1,607

 

 

(1,085

)

1,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/Development

 

 

 

3,071

 

 

2,299

 

1,147

 

(375

)

 

 

 

Operations

 

 

 

3,696

 

830

 

293

 

463

 

311

 

 

(198

)

1,997

(4)

Total increase (decrease) in
general and administrative

 

 

 

6,767

 

830

 

2,592

 

1,610

 

(64

)

 

(198

)

1,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total increase in expenses

 

 

 

$

59,834

 

$

9,029

 

$

19,352

 

$

16,664

 

$

3,545

 

 

$

7,893

 

$

3,351

 


(1)                      Results primarily from a $2,922 increase in real estate taxes and a $1,920 increase in utility costs.

 

(2)                      Results primarily from a reversal of $3,040 in allowance for doubtful accounts for receivables arising from the straight-lining of rents due to a change in estimate, partially offset by a $1,048 increase in operating expenses.

 

(3)                      Results primarily from (i) a $4,872 increase in expenses of transportation management services associated with higher revenue from both new and existing customers, (ii) a $1,475 increase in property insurance premiums and (iii) a $1,241increase in utility rates.

Americold’s gross margin from owned warehouses was $36,589 or 32.0%, for the quarter ended June 30, 2006, compared to $38,258 or 34.5%, for the quarter ended June 30, 2005, a decrease of $1,669, primarily due to rate increases in utilities and insurance premiums.  Gross margin from transportation management services, managed warehouses and other non-warehouse activities was $4,560 for the quarter ended June 30, 2006, compared to $3,913 for the quarter ended June 30, 2005, an increase of $647, primarily due to new managed warehouse customer contracts which commenced in 2005.

 

(4)                      Primarily due to $1,091 of stock-based compensation expense for the amortization of Out-Performance Plan awards granted to certain officers and employees on April 25, 2006.

52




 

Income Applicable to Alexander’s

Our 33% share of Alexander’s net income (including equity in net income or loss, management, leasing, development and commitment fees) was $14,750,000 for the three months ended June 30, 2006, compared to $13,030,000 for the prior year’s second quarter, an increase of $1,720,000.  This increase was primarily due to  (i) $4,836,000 of income in the current quarter for the reversal of accrued stock appreciation rights compensation expense, as compared to $2,034,000 of expense in the prior quarter, partially offset by, (ii) $3,047,000 of interest income in the prior quarter on loans to Alexander’s which were repaid to us in July 2005, (iii) a $2,819,000 reduction in our share of Alexander’s net gain on sale of 731 Lexington Avenue condominiums.

Income Applicable to Toys

On January 9, 2006, Toys announced plans and is in the process of closing 87 Toys “R” Us stores in the United States, of which twelve stores will be converted into Babies “R” Us stores, the leases on five stores are expiring and one store has been sold.  We are handling the leasing and disposition of the real estate of the remaining 69 stores.

As a result of the store-closing program, Toys incurred restructuring and other charges aggregating approximately $149,000,000 before tax, which includes $43,000,000 for the cost of liquidating the inventory.  Of this amount, $94,000,000 was recognized in Toys’ fourth quarter ending January 28, 2006 and $55,000,000 was recorded in Toys’ first quarter ending April 29, 2006.  Our 32.9% share of the $149,000,000 charge is $49,000,000, of which $33,000,000 had no income statement effect as a result of purchase price accounting and the remaining portion relating to the cost of liquidating inventory of approximately $10,000,000 after-tax, was recognized as an expense as part of our equity in Toys’ net income in the first quarter of 2006.

The business of Toys is highly seasonal.  Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income.  Because Toys’ fiscal year ends on the Saturday nearest January 31, we record our 32.9% share of Toys’ net income or loss on a one-quarter lag basis.  Equity in net loss from Toys for the three months ended June 30, 2006 was $7,884,000 which consisted of (i) our $11,169,000 share of Toys’ first quarter net loss in for their quarter ended April 29, 2006, partially offset by (ii) $2,209,000 of interest income from our share of Toys’ senior unsecured bridge loan and (iii) $1,076,000 of management fees.

On July 19, 2006, Toys completed a financing, consisting of an $804,000,000, six-year term loan bearing interest at LIBOR plus 4.25% and a $200,000,000, two-year term loan bearing interest at an initial rate of LIBOR plus 3.00% for the first three months (increasing to 3.50% for the next three months and then to 4.00% for the remainder of the term).  The proceeds from these loans were used to repay Toys’ $973,000,000 bridge loan, including the $76,816,000 balance due to us.

The unaudited information set forth below presents our pro forma condensed consolidated statement of income for the three months ended June 30, 2005 (including Toys’ results for the three months ended April 29, 2005) as if the above transaction occurred on February 1, 2004.   The unaudited pro forma information below is not necessarily indicative of what our actual results would have been had the Toys transaction been consummated on February 1, 2004, nor does it represent the results of operations for any future periods.  In our opinion, all adjustments necessary to reflect this transaction have been made.

Condensed Consolidated

 

 

 

 

 

Statements of Income

 

For the Three Months 

 

 

 

Ended June 30,

 

 

 

Actual

 

Pro Forma

 

(in thousands, except per share amounts)

 

2006

 

2005

 

Revenues

 

$

663,032

 

$

591,475

 

Income before allocation to limited partners

 

$

185,867

 

$

185,989

 

Minority limited partners’ interest in the Operating Partnership

 

(17,324

)

(19,698

)

Perpetual preferred unit distributions of the Operating Partnership

 

(5,374

)

(15,152

)

Net income

 

163,169

 

151,139

 

Preferred share dividends

 

(14,404

)

(8,385

)

Net income applicable to common shares

 

$

148,765

 

$

142,754

 

Net income per common share — basic

 

$

1.05

 

$

1.10

 

Net income per common share — diluted

 

$

0.99

 

$

1.04

 

 

53




 

Income from Partially-Owned Entities

Summarized below are the components of income from partially owned entities for the three months ended June 30, 2006 and 2005.

 

Equity in Net Income (Loss):

 

For The Three Months

 

 

 

Ended June 30,

 

 

 

 

 

 

 

(Amounts in thousands)

 

2006

 

2005

 

Beverly Connection:

 

 

 

 

 

50% share of equity in net loss

 

$

(2,056

)

$

(1,132

)

Interest and fee income

 

3,405

 

2,305

 

 

 

1,349

 

1,173

 

Newkirk MLP:

 

 

 

 

 

15.8% in 2006 and 22.5% in 2005 share of equity in net income

 

4,357

 

2,333

(1)

Interest and other income

 

13

 

600

 

 

 

4,370

 

2,933

 

GMH Communities L.P:

 

 

 

 

 

13.5% in 2006 and 12.22% in 2005 share of equity in net income

 

(2)

439

 

 

 

 

 

 

 

H Street:

 

 

 

 

 

50% share of equity in income

 

4,311

(3)

 

 

 

 

 

 

 

Other (4)

 

4,605

 

2,053

 

 

 

$

14,635

 

$

6,598

 


(1)             Includes our $3,520 share of Newkirk MLP’s impairment loss.

(2)             We account for our investment in GMH on the equity method and record our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT files its financial statements.  On July 31, 2006 GCT filed its annual report on Form 10-K for the year ended December 31, 2005, which restated the quarterly financial results of each of the first three quarters of 2005.  Because GMH’s earnings for the year ended December 31, 2005 were not available in time to be recorded in our consolidated financial statements, our earnings for the three and six months ended June 30, 2006 do not include a $94,000 net loss representing our share of GMH’s fourth quarter results, net of adjustments to restate its first three quarters of 2005.   In addition, as of the date of this filing, GCT has not filed its quarterly report on Form 10-Q for the quarter ended March 31, 2006 and accordingly, our earnings for the three and six months ended June 30, 2006 do not include our share of GMH’s first quarter 2006 earnings.

(3)             We account for our investment in H Street partially-owned entities on the equity method on a one-quarter lag basis.  Prior to the quarter ended June 30, 2006, two 50% owned entities that are contesting our acquisition of H Street impeded access to their financial information and accordingly, we were unable to record our pro rata share of their earnings.  During the quarter ended June 30, 2006, based on the financial information provided to us, we recognized equity in net income of $4,387 from these entities, of which $2,807 was for the period from July 20, 2005 (date of acquisition) to December 31, 2005 and $1,580 was for the quarter ended March 31, 2006.

(4)             Includes our equity in net earnings of partially owned entities including, partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Dune Capital LP, Verde Group LLC, and others.

54




 

Interest and Other Investment Income

Interest and other investment income (mark-to-market of derivative positions, interest income on mortgage loans receivable, other interest income and dividend income) was $16,623,000 for the three months ended June 30, 2006, compared to $69,923,000 in the prior year’s quarter, a decrease of $53,300,000.  This decrease resulted primarily from:

 

(Amounts in thousands)

 

 

 

Sears Holdings derivative position — net gain of $37,860 in the prior year’s quarter (investment sold in the first quarter of 2006)

 

$

(37,860

)

McDonalds derivative position — net loss this quarter (investment made subsequent to the prior year’s second quarter)

 

(14,515

)

GMH warrants derivative position — net gain of $4,105 this quarter compared to $12,741 in the prior year’s quarter

 

(8,636

)

Other, net — primarily due to interest earned on higher average cash balances

 

7,711

 

 

 

$

(53,300

)

 

Interest and Debt Expense

Interest and debt expense was $120,822,000 for the three months ended June 30, 2006, compared to $83,414,000 in the prior year’s quarter, an increase of $37,408,000.  Of this increase, (i) approximately $21,000,000 resulted from a $1.4 billion increase in outstanding debt due to property acquisitions and refinancings, (ii) $4,400,000 resulted from a 194 basis point increase in the weighted average interest rate on variable rate of debt, (iii) $3,500,000 resulted from the February 16, 2006 issuance of $250,000,000 unsecured notes due 2011, (iv) $7,046,000 resulted from prepayment penalties and the write off of deferred financing costs in connection with refinancings during the quarter and (v) $1,415,000 resulted from advisory fees incurred in connection with the senior unsecured notes consent solicitation.

Net Gain on Disposition of Wholly-Owned and Partially-Owned Assets Other than Depreciable Real Estate

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate was $56,947,000 for the three months ended June 30, 2006 and consists primarily of a net gain on sale of Sears Canada common shares.

Minority Interest of Partially-Owned Entities

Minority interest of partially owned entities represents the minority partners’ pro rata share of the net income or loss of consolidated partially owned entities, including Americold, 220 Central Park South, Wasserman and the Springfield Mall.  In the three months ended June 30, 2006 and 2005, the minority interests’ share of net losses of consolidated partially owned entities was $3,118,000 and $1,127,000, respectively.  The increase of $1,991,000 over the prior year’s quarter relates primarily to a reduction in Americold’s net income.

Income From Discontinued Operations

The combined results of operations of the assets related to discontinued operations for the three months ended June 30, 2006 and 2005 include the operating results of Vineland, New Jersey; 33 North Dearborn Street in Chicago, Illinois, which was sold on March 14, 2006; 424 Sixth Avenue in New York City, which was sold on March 13, 2006 and 1919 South Eads Street in Arlington, Virginia, which was sold on June 22, 2006.

 

 

 

For The Three Months

 

 

 

Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Revenues

 

$

266

 

$

3,753

 

Expenses

 

1,113

 

2,437

 

Net (loss) income

 

(847

)

1,316

 

Net gain on sale of 1919 South Eads Street

 

17,609

 

 

Net gain on sale of 400 North LaSalle

 

 

31,614

 

Income from discontinued operations

 

$

16,762

 

$

32,930

 

 

55




 

Minority Limited Partners’ Interest in the Operating Partnership

Minority limited partners’ interest in the Operating Partnership was $17,324,000 for the three months ended June 30, 2006 compared to $23,975,000 for the prior year’s first quarter, a decrease of $6,651,000.  This decrease results primarily from lower net income subject to allocation to the minority limited partners.

Perpetual Preferred Unit Distributions of the Operating Partnership

Perpetual preferred unit distributions of the Operating Partnership were $5,374,000 for the three months ended June 30, 2006, compared to $15,152,000 for the prior year’s first quarter, a decrease of $9,778,000.  This decrease resulted primarily from the redemption of the D-3, D-4, D-5, D-6, D-7, and D-8 perpetual preferred units in 2005.

Preferred Share Dividends

Preferred share dividends were $14,404,000 for the three months ended June 30, 2006, compared to $8,385,000 for the prior year’s first quarter, an increase of $6,019,000.  This increase resulted primarily from dividends paid on the 6.75% Series H and 6.625% Series I Cumulative Redeemable Preferred Shares which were issued in June 2005 and August 2005, respectively.

EBITDA by Segment

Below are the details of the changes in EBITDA by segment for the three months ended June 30, 2006 from the three months ended June 30, 2005.

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington,
DC

 

Retail

 

Merchandise
Mart

 

Temperature
Controlled
Logistics

 

Toys

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2005

 

$

354,987

 

$

87,128

 

$

72,419

 

$

52,428

 

$

39,393

 

$

17,255

 

$

 

$

86,364

 

2006 Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store operations(1)

 

 

 

3,304

 

2,343

 

2,558

 

(823

)

209

 

 

 

 

 

Acquisitions, dispositions and non-operating items that affect comparability, including divisional general and administrative expenses

 

 

 

2,113

 

37,795

 

10,380

 

3,273

 

(467

)

 

 

 

 

Three months ended June 30, 2006

 

$

439,682

 

$

92,545

 

$

112,557

 

$

65,366

 

$

41,843

 

$

16,997

 

$

36,464

 

$

73,910

 

% increase (decrease) in same store operations

 

 

 

3.7%

 

3.1%

 

5.1%

 

(2.0)%(2)

 

1.0%

 

 

 

 

 


(1)          Represents the increase (decrease) in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses.  Beginning on January 1, 2006, we have revised our definition of same store operations to exclude divisional general and administrative expenses.  We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers.  Same store operations may not be comparable to similarly titled measures employed by other companies.

(2)          Represents a decrease in EBITDA from the April High Point Home Furniture show, which was primarily due to higher promotional expenses.

56




Reconciliation of Net Income and EBITDA

Below is a summary of net income and a reconciliation of net income to EBITDA by segment for the six months ended June 30, 2006.

 

 

 

For the Six Months Ended June 30, 2006

 

 

 

 

 

Office

 

 

 

 

 

Temperature 

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York 

 

Washington, DC

 

Retail

 

Merchandise
 Mart

 

Controlled
Logistics

 

Toys

 

Other

 

Property rentals

 

$

722,926

 

$

239,817

 

$

202,873

 

$

125,525

 

$

115,845

 

$

 

$

 

$

38,866

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

13,251

 

2,154

 

3,869

 

4,085

 

3,192

 

 

 

(49

)

Amortization of free rent

 

16,931

 

3,794

 

9,623

 

2,621

 

893

 

 

 

 

Amortization of acquired below-market leases, net

 

8,471

 

(22

)

2,130

 

4,547

 

22

 

 

 

1,794

 

Total rentals

 

761,579

 

245,743

 

218,495

 

136,778

 

119,952

 

 

 

40,611

 

Temperature Controlled Logistics

 

382,897

 

 

 

 

 

382,897

 

 

 

Tenant expense reimbursements

 

122,647

 

48,352

 

14,356

 

48,610

 

9,869

 

 

 

1,460

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

15,653

 

19,830

 

 

 

 

 

 

(4,177

)

Management and leasing fees

 

5,182

 

488

 

3,930

 

720

 

44

 

 

 

 

Lease termination fees

 

10,389

 

9,159

 

66

 

371

 

793

 

 

 

 

Other

 

12,022

 

4,846

 

3,045

 

951

 

3,179

 

 

 

1

 

Total revenues

 

1,310,369

 

328,418

 

239,892

 

187,430

 

133,837

 

382,897

 

 

37,895

 

Operating expenses

 

651,766

 

146,133

 

71,505

 

60,164

 

50,919

 

300,228

 

—-

 

22,817

 

Depreciation and amortization

 

189,185

 

45,678

 

55,014

 

22,814

 

22,199

 

34,990

 

 

8,490

 

General and administrative

 

98,427

 

8,013

 

16,598

 

10,217

 

13,144

 

20,034

 

 

30,421

 

Total expenses

 

939,378

 

199,824

 

143,117

 

93,195

 

86,262

 

355,252

 

 

61,728

 

Operating income (loss)

 

370,991

 

128,594

 

96,775

 

94,235

 

47,575

 

27,645

 

 

(23,833

)

Income applicable to Alexander’s

 

11,155

 

399

 

 

358

 

 

 

 

10,398

 

Income applicable to Toys “R” Us

 

44,876

 

 

 

 

 

 

44,876

 

 

Income from partially-owned entities

 

20,686

 

1,810

 

5,724

 

2,230

 

779

 

764

 

 

9,379

 

Interest and other investment income

 

39,098

 

368

 

693

 

473

 

126

 

1,996

 

 

35,442

 

Interest and debt expense

 

(224,716

)

(41,122

)

(49,037

)

(43,792

)

(7,069

)

(32,714

)

 

(50,982

)

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate

 

57,495

 

 

 

 

 

 

 

57,495

 

Minority interest of partially-owned entities

 

2,844

 

 

 

29

 

4

 

2,379

 

 

432

 

Income from continuing operations

 

322,429

 

90,049

 

54,155

 

53,533

 

41,415

 

70

 

44,876

 

38,331

 

Income from discontinued operations

 

33,497

 

 

16,356

 

9,298

 

5,736

 

2,107

 

 

 

Income before allocation to limited partners

 

355,926

 

90,049

 

70,511

 

62,831

 

47,151

 

2,177

 

44,876

 

38,331

 

Minority limited partners’ interest in the Operating Partnership

 

(33,198

)

 

 

 

 

 

 

(33,198

)

Perpetual preferred unit distributions of the Operating Partnership

 

(10,347

)

 

 

 

 

 

 

(10,347

)

Net income (loss)

 

312,381

 

90,049

 

70,511

 

62,831

 

47,151

 

2,177

 

44,876

 

(5,214

)

Interest and debt expense (1)

 

342,239

 

42,434

 

54,399

 

49,456

 

7,511

 

15,565

 

105,449

 

67,425

 

Depreciation and amortization(1)

 

258,808

 

47,214

 

61,385

 

26,566

 

22,481

 

16,701

 

66,686

 

17,775

 

Income tax (benefit) expense (1)

 

(2,904

)

 

3,853

 

 

119

 

489

 

(7,556

)

191

 

EBITDA

 

$

910,524

 

$

179,697

 

$

190,148

 

$

138,853

 

$

77,262

 

$

34,932

 

$

209,455

 

$

80,177

 

Percentage of EBITDA by segment

 

100.0%

 

19.7%

 

20.9%

 

15.3%

 

8.5%

 

3.8%

 

23.0%

 

8.8%

 

 

EBITDA includes net gains on sale of real estate of $33,769, of which $17,609 is included in the Washington, DC segment, $9,218 is included in the Retail segment, $4,835 is included in the Merchandise Mart segment and $2,107 is included in the Temperature Controlled Logistics segment.  In addition, Other segment EBITDA includes a $55,438 net gain on sale of marketable equity securities and a $5,974 net loss on mark-to-market of derivative instruments.  Excluding these items, the percentages of EBITDA by segment are 21.5% for New York Office, 21.1% for Washington, DC Office, 15.5% for Retail, 8.6% for Merchandise Mart, 4.0% for Temperature Controlled Logistics, 25.1% for Toys and 4.2% for Other.


See notes on page 59.

57




 

 

For the Six Months Ended June 30, 2005

 

 

 

 

 

Office

 

 

 

 

 

Temperature

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, DC

 

Retail

 

Merchandise 
Mart

 

 Controlled
Logistics

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property rentals

 

$

647,922

 

$

226,722

 

$

188,530

 

$

96,014

 

$

105,419

 

$

 

$

31,237

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

10,057

 

5,126

 

2,243

 

2,646

 

6

 

 

36

 

Amortization of free rent

 

11,824

 

5,609

 

599

 

973

 

4,643

 

 

 

Amortization of acquired below-market leases, net

 

5,674

 

 

3,545

 

2,129

 

 

 

 

Total rentals

 

675,477

 

237,457

 

194,917

 

101,762

 

110,068

 

 

31,273

 

Temperature Controlled Logistics

 

360,116

 

 

 

 

 

360,116

 

 

Tenant expense reimbursements

 

99,726

 

46,336

 

7,269

 

37,031

 

7,677

 

 

1,413

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning fees

 

15,222

 

15,222

 

 

 

 

 

 

Management and leasing fees

 

8,081

 

453

 

7,101

 

497

 

30

 

 

 

Lease termination fees

 

18,179

 

3,402

 

103

 

583

 

14,091

 

 

 

Other

 

9,923

 

3,579

 

3,780

 

111

 

2,453

 

 

 

Total revenues

 

1,186,724

 

306,449

 

213,170

 

139,984

 

134,319

 

360,116

 

32,686

 

Operating expenses

 

578,256

 

133,507

 

59,181

 

43,042

 

43,753

 

276,278

 

22,495

 

Depreciation and amortization

 

160,522

 

41,956

 

40,962

 

15,456

 

18,529

 

37,377

 

6,242

 

General and administrative

 

86,455

 

6,647

 

11,126

 

7,479

 

12,428

 

18,769

 

30,006

 

Total expenses

 

825,233

 

182,110

 

111,269

 

65,977

 

74,710

 

332,424

 

58,743

 

Operating income (loss)

 

361,491

 

124,339

 

101,901

 

74,007

 

59,609

 

27,692

 

(26,057

)

Income applicable to Alexander’s

 

38,416

 

189

 

 

346

 

 

 

37,881

 

Income from partially-owned entities

 

15,820

 

1,293

 

303

 

3,296

 

430

 

426

 

10,072

 

Interest and other investment income

 

171,121

 

264

 

397

 

280

 

119

 

700

 

169,361

 

Interest and debt expense

 

(160,918

)

(27,081

)

(40,718

)

(29,178

)

(5,357

)

(27,600

)

(30,984

)

Net gain on disposition of wholly-owned and partially-owned assets
other than depreciable real estate

 

3,488

 

573

 

 

896

 

 

 

2,019

 

Minority interest of partially-owned entities

 

1,730

 

 

 

 

94

 

1,636

 

 

Income from continuing operations

 

431,148

 

99,577

 

61,883

 

49,647

 

54,895

 

2,854

 

162,292

 

Income from discontinued operations

 

34,616

 

 

445

 

271

 

1,297

 

 

32,603

 

Income before allocation to limited partners

 

465,764

 

99,577

 

62,328

 

49,918

 

56,192

 

2,854

 

194,895

 

Minority limited partners’ interest in the Operating Partnership

 

(51,170

)

 

 

 

 

 

(51,170

)

Perpetual preferred unit distributions of the Operating Partnership

 

(33,693

)

 

 

 

 

 

(33,693

)

Net income

 

380,901

 

99,577

 

62,328

 

49,918

 

56,192

 

2,854

 

110,032

 

Interest and debt expense(1)

 

174,966

 

28,074

 

42,163

 

33,299

 

5,807

 

13,132

 

52,491

 

Depreciation and amortization(1)

 

155,752

 

42,867

 

42,256

 

17,298

 

19,588

 

17,837

 

15,906

 

Income tax expense(1)

 

1,929

 

 

312

 

 

618

 

619

 

380

 

EBITDA

 

$

713,548

 

$

170,518

 

$

147,059

 

$

100,515

 

$

82,205

 

$

34,442

 

$

178,809

 

Percentage of EBITDA by segment

 

100%

 

23.9%

 

20.6%

 

14.1%

 

11.5%

 

4.8%

 

25.1%

 

EBITDA of the Other segment includes $134,416 of income from derivative instruments and $31,614 for a net gain on sale of real estate.  Excluding these items, the percentages of EBITDA by segment are 32.0% for New York Office, 27.5% for Washington, DC Office, 18.7% for Retail, 15.1% for Merchandise Mart, 6.5% for Temperature Controlled Logistics and 0.2% for Other.


See notes on following page.

58




Notes:

(1)             EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization.”  We consider EBITDA a supplemental measure for making decisions and assessing the un-levered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity.  As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers.  EBITDA should not be considered a substitute for net income.  EBITDA may not be comparable to similarly titled measures employed by other companies.

(2)             Other EBITDA is comprised of:

 

For the Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Alexander’s

 

$

25,506

 

$

50,202

 

Newkirk Master Limited Partnership

 

16,737

 

26,072

 

Hotel Pennsylvania

 

10,559

 

8,535

 

GMH Communities L.P

 

 

2,993

 

Industrial warehouses

 

3,021

 

2,683

 

Other investments

 

6,403

 

 

 

 

62,226

 

90,485

 

 

 

 

 

 

 

Minority limited partners’ interest in the Operating Partnership

 

(33,198

)

(51,170

)

Perpetual preferred unit distributions of the Operating Partnership

 

(10,347

)

(33,693

)

Corporate general and administrative expenses

 

(28,001

)

(27,911

)

Investment income and other

 

89,497

 

168,420

 

Discontinued operations:

 

 

 

 

 

400 North LaSalle (including $31,614 net gain on sale)

 

 

32,678

 

 

 

$

80,177

 

$

178,809

 

 

 

59




Results of Operations

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, Temperature Controlled Logistics revenues, hotel revenues, trade shows revenues, amortization of acquired below market leases, net of above market leases pursuant to SFAS No. 141 and 142, and fee income, were $1,310,369,000 for the six months ended June 30, 2006, compared to $1,186,724,000 in the prior year’s six months, an increase of $123,645,000.  Below are the details of the increase (decrease) by segment:

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Date of
Acquisition

 

Total

 

New York

 

Washington,
DC

 

 

Retail

 

Merchandise
Mart

 

 

Temperature
Controlled
Logistics

 

Other

 

Property rentals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warner Building

 

December 2005

 

$

11,503

 

$

 

$

11,503

 

 

$

 

$

 

 

$

 

$

 

Broadway Mall

 

December 2005

 

7,826

 

 

 

 

7,826

 

 

 

 

 

Springfield Mall

 

January 2006

 

7,875

 

 

 

 

7,875

 

 

 

 

 

Boston Design Center

 

December 2005

 

5,219

 

 

 

 

 

5,219

 

 

 

 

Bowen Building

 

June 2005

 

3,575

 

 

3,575

 

 

 

 

 

 

 

San Francisco properties

 

January 2006

 

2,781

 

 

 

 

2,781

 

 

 

 

 

Westbury Retail Condominium

 

May 2005

 

2,517

 

 

 

 

2,517

 

 

 

 

 

40 East 66th Street

 

July 2005

 

1,914

 

 

 

 

1,914

 

 

 

 

 

South Hills Mall

 

August 2005

 

1,635

 

 

 

 

1,635

 

 

 

 

 

Other

 

 

 

6,071

 

 

2,203

 

 

3,868

 

 

 

 

 

Development/Redevelopment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crystal Plaza 3 and 4 — placed into service

 

 

 

3,315

 

 

3,315

 

 

 

 

 

 

 

7 West 34th Street — conversion from office space to showroom space

 

 

 

453

 

 

 

 

 

453

 

 

 

 

Bergen Mall — taken out of service

 

 

 

(400

)

 

 

 

(400

)

 

 

 

 

Amortization of acquired below market leases, net

 

 

 

2,797

 

(22

)

(1,415

)

 

2,418

 

22

 

 

 

1,794

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Pennsylvania

 

 

 

3,867

 

 

 

 

 

 

 

 

3,867

(1)

Trade shows

 

 

 

2,377

 

 

 

 

 

2,377

 

 

 

 

Leasing activity (see page 46)

 

 

 

22,777

 

8,308

 

4,397

 

 

4,582

 

1,813

 

 

 

3,677

 

Total increase in property rentals

 

 

 

86,102

 

8,286

 

23,578

 

 

35,016

 

9,884

 

 

 

9,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Temperature Controlled Logistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase due to operations

 

 

 

22,781

 

 

 

 

 

 

 

22,781

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/development

 

 

 

19,231

 

 

7,474

 

 

9,668

 

2,089

 

 

 

 

Operations

 

 

 

3,690

 

2,016

 

(387

)

 

1,911

 

103

 

 

 

47

 

Total increase in tenant expense reimbursements

 

 

 

22,921

 

2,016

 

7,087

 

 

11,579

 

2,192

 

 

 

47

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease cancellation fee income

 

 

 

(7,790

)

5,757

 

(37

)

 

(212

)

(13,298

)

(3)

 

 

Management and leasing fees

 

 

 

(2,899

)

35

 

(3,171

)

(4)

223

 

14

 

 

 

 

BMS Cleaning fees

 

 

 

431

 

4,608

 

 

 

 

 

 

 

(4,177)

(5)

Other

 

 

 

2,099

 

1,267

 

(735

)

 

840

 

726

 

 

 

1

 

Total (decrease) increase in fee and other income

 

 

 

(8,159

)

11,667

 

(3,943

)

 

851

 

(12,558

)

 

 

(4,176

)

Total increase (decrease) in revenues

 

 

 

$

123,645

   

$

21,969

   

$

26,722

 

 

$

47,446

   

$

(482

)

 

$

22,781

   

$

5,209

 


(1)                Average occupancy and REVPAR were 81.5% and $98.41 for the six months ended June 30, 2006 compared to 81.0% and $85.90 for the prior year’s six months.

(2)                Results primarily from (i) a $9,880 increase in Americold’s transportation management services, resulting from both new and existing customers, (ii) a $5,963 increase in storage, handling and accessorial services and  (iii) a $3,519 increase in managed warehouse revenues.  See note 3 on page 61 for a discussion of Americold’s gross margin.

(3)                Reflects lease termination income of $13,362 received from HIP at 7 West 34th Street in January 2005.

(4)                Reflects an increase in rentals and a reduction in leasing and management fees as a result of acquiring buildings which were previously partially owned and presented as managed for third parties.

(5)                Represents the elimination of inter-company cleaning fees charged by the New York Office division to certain properties included in the Washington, DC Office, Retail and Merchandise Mart divisions.

60




Expenses

Our expenses, which consist of operating, depreciation and amortization and general and administrative expenses, were $939,378,000 for the six months ended June 30, 2006, compared to $825,233,000 in the prior year’s six months, an increase of $114,145,000.  Below are the details of the increase (decrease) by segment:

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Date of
Acquisition

 

Total

 

New York

 

Washington,
DC

 

Retail

 

Merchandise
Mart

 

Temperature
Controlled
Logistics

 

Other

 

Operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadway Mall

 

December 2005

 

$            6,170

 

$                   —

 

$                    —

 

$            6,170

 

$                   —

 

$                   —

 

$                   —

 

Warner Building

 

December 2005

 

5,536

 

 

5,536

 

 

 

 

 

Springfield Mall

 

January 2006

 

4,118

 

 

 

4,118

 

 

 

 

Boston Design Center

 

December 2005

 

3,534

 

 

 

 

3,534

 

 

 

Bowen Building

 

June 2005

 

2,245

 

 

2,245

 

 

 

 

 

South Hills Mall

 

August 2005

 

963

 

 

 

963

 

 

 

 

San Francisco properties

 

January 2006

 

894

 

 

 

894

 

 

 

 

Other

 

 

 

4,974

 

 

1,711

 

3,263

 

 

 

 

Development/Redevelopment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crystal Plaza 3 and 4 — placed into service

 

 

 

1,731

 

 

1,731

 

 

 

 

 

Bergen Mall — taken out of service

 

 

 

(589

)

 

 

(589

)

 

 

 

7 West 34th Street — conversion from office
space to showroom space

 

 

 

(211

)

 

 

 

(211

)

 

 

Hotel activity

 

 

 

1,682

 

 

 

 

 

 

1,682

 

Trade shows activity

 

 

 

3,855

 

 

 

 

3,855

 

 

 

Operations

 

 

 

38,608

 

12,626

(1)

1,101

 

2,303

 

(12)

(2)

23,950

(3)

(1,360)

(4)

Total increase in operating expenses

 

 

 

73,510

 

12,626

 

12,324

 

17,122

 

7,166

 

23,950

 

322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/Development

 

 

 

18,435

 

 

10,863

 

6,560

 

1,012

 

 

 

Operations (due to additions to buildings and improvements)

 

 

 

10,228

 

3,722

 

3,189

 

798

 

2,658

 

(2,387

)

2,248

 

Total increase (decrease) in depreciation and amortization

 

 

 

28,663

 

3,722

 

14,052

 

7,358

 

3,670

 

(2,387

)

2,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/Development

 

 

 

5,573

 

 

3,815

 

1,812

 

(54

)

 

 

Operations

 

 

 

6,399

 

1,366

 

1,657

 

926

 

770

 

1,265

 

415

 

Total increase in general and administrative

 

 

 

11,972

 

1,366

 

5,472

 

2,738

 

716

 

1,265

 

415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total increase in expenses

 

 

 

$       114,145

 

$          17,714

 

$           31,848

 

$          27,218

 

$          11,552

 

$          22,828

 

$            2,985

 


(1)             Results primarily from a $4,810 increase in real estate taxes and a $3,219 increase in utility costs.

(2)             Results primarily from a reversal of $2,608 in allowance for doubtful accounts for receivables arising from the straight-lining of rents due to a change in estimate, partially offset by a $2,596 increase in operating expenses.

(3)             Results primarily from (i) a $10,004 increase in expenses of transportation management services, (ii) a $2,628 increase in expenses of managed warehouses, (iii) a $2,224 increase in utilities, primarily due to higher rates and (iv) a $1,013 increase in property insurance premiums.

Gross margin from owned warehouses was $73,672 or 31.8%, for the six months ended June 30, 2006, compared to $76,265 or 34.3%, for the six months ended June 30, 2005, a decrease of $2,593, primarily due to a rate increases in utilities and insurance premiums.  Gross margin from transportation management services, managed warehouses and other non-warehouse activities was $8,997 for the six months ended June 30, 2006, compared to $7,573 for the six months ended June 30, 2005, an increase of $1,424, primarily due to new managed warehouse customer contracts which commenced during 2005.

(4)             Results primarily from a $4,177 elimination of inter-company cleaning fees charged by the New York Office division to certain properties included in the Washington, DC Office, Retail and Merchandise Mart divisions.

61




Income Applicable to Alexander’s

Our 33% share of Alexander’s net income (including equity in net income, management, leasing, development and commitment fees) was $11,155,000 for the six months ended June 30, 2006, compared to $38,416,000 for the prior year’s six months, a decrease of $27,261,000.  This decrease was primarily due to (i) a $21,594,000 reduction in our share of Alexander’s net gain on sale of 731 Lexington Avenue condominiums, (ii) a $3,831,000 reduction in development and guarantee fees, primarily because Alexander’s 731 Lexington Avenue project was substantially completed in 2005, (iii) $3,823,000 of interest income in the prior year’s six-month period on loans to Alexander’s which were repaid to us in July 2005, partially offset by a $1,908,000 decrease in Alexander’s stock appreciation rights compensation expense from the prior year’s six-month period.

Income Applicable to Toys

Equity in net income from Toys for the six months ended June 30, 2006 was $44,876,000, which consisted of (i) our $38,106,000 share of Toys’ net income for the period from October 30, 2005 to April 29, 2006, (ii) $4,865,000 of interest income from our share of Toys’ senior unsecured bridge loan and (iii) $1,905,000 of management fees.

The unaudited information set forth below presents our pro forma condensed consolidated statement of income for the six months ended June 30, 2005 (including Toys’ results for six months ended April 29, 2005) as if the above transaction occurred on February 1, 2004.   The unaudited pro forma information below is not necessarily indicative of what our actual results would have been had the Toys transaction been consummated on February 1, 2004, nor does it represent the results of operations for any future periods.  In our opinion, all adjustments necessary to reflect this transaction have been made.

Condensed Consolidated
Statements of Income

 

 

 

For the Six Months Ended
June 30,

 

 

 

Actual

 

Pro Forma

 

(in thousands, except per share amounts)

 

2006

 

2005

 

Revenues

 

$

1,310,369

 

$

1,186,724

 

Income before allocation to limited partners

 

$

355,926

 

$

496,588

 

Minority limited partners’ interest in the Operating Partnership

 

(33,198

)

(55,023

)

Perpetual preferred unit distributions of the Operating Partnership

 

(10,347

)

(33,693

)

Net income

 

312,381

 

407,872

 

Preferred share dividends

 

(28,811

)

(20,771

)

Net income applicable to common shares

 

$

283,570

 

$

387,101

 

Net income per common share — basic

 

$

2.01

 

$

2.99

 

Net income per common share — diluted

 

$

1.90

 

$

2.82

 

 

62




 

Income from Partially-Owned Entities

Summarized below are the components of income from partially owned entities for the six months ended June 30, 2006 and 2005.

Equity in Net Income (Loss):

 

 

For The Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Beverly Connection:

 

 

 

 

 

50% share of equity in net loss

 

$

(6,023

)(1)

$

(1,491

)

Interest and fee income

 

6,337

 

3,022

 

 

 

314

 

1,531

 

Newkirk MLP:

 

 

 

 

 

15.8% in 2006 and 22.5% in 2005 share of equity in net income

 

8,515

 

8,144

(2)

Interest and other income

 

58

 

1,257

 

 

 

8,573

 

9,401

 

GMH Communities L.P:

 

 

 

 

 

13.5% in 2006 12.22% in 2005 share of equity in net income

 

(3)

500

 

 

 

 

 

 

 

H Street:

 

 

 

 

 

50% share of equity in income

 

4,311

(4)

 

 

 

 

 

 

 

Other (5)

 

7,488

 

4,388

 

 

 

$

20,686

 

$

15,820

 


(1)             Includes our $2,062 share of accelerated depreciation expense upon the write-off of one of the venture’s assets.

(2)             Includes our $4,016 share of Newkirk MLP’s impairment loss.

(3)             We account for our investment in GMH on the equity method and record our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT files its financial statements.  On July 31, 2006 GCT filed its annual report on Form 10-K for the year ended December 31, 2005, which restated the quarterly financial results of each of the first three quarters of 2005.  Because GMH’s earnings for the year ended December 31, 2005 were not available in time to be recorded in our consolidated financial statements, our earnings for the three and six months ended June 30, 2006 do not include a $94,000 net loss representing our share of GMH’s fourth quarter results, net of adjustments to restate its first three quarters of 2005.   In addition, as of the date of this filing, GCT has not filed its quarterly report on Form 10-Q for the quarter ended March 31, 2006 and accordingly, our earnings for the three and six months ended June 30, 2006 do not include our share of GMH’s first quarter 2006 earnings.

(4)             We account for our investment in H Street partially-owned entities on the equity method on a one-quarter lag basis.  Prior to the quarter ended June 30, 2006, two 50% owned entities that are contesting our acquisition of H Street impeded access to their financial information and accordingly, we were unable to record our pro rata share of their earnings.  During the quarter ended June 30, 2006, based on the financial information provided to us, we recognized equity in net income of $4,387 from these entities, of which $2,807 was for the period from July 20, 2005 (date of acquisition) to December 31, 2005 and $1,580 was for the quarter ended March 31, 2006.

(5)             Includes our equity in net earnings of partially owned entities including, partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Dune Capital LP, Verde Group LLC, and others.

63




 

Interest and Other Investment Income

Interest and other investment income (mark-to-market of derivative positions, interest income on mortgage loans receivable, other interest income and dividend income) was $39,098,000 for the six months ended June 30, 2006, compared to $171,121,000 in the prior year’s six months, a decrease of $132,023,000.  This decrease resulted primarily from:

 

(Amounts in thousands)

 

 

 

Sears Holdings derivative position — net gain of $18,611 in this year’s six months compared to $131,853 in the prior year’s six months

 

$

(113,242

)

McDonalds derivative position — net loss in this year’s six months (investment made subsequent to the prior year’s six months)

 

(8,215

)

GMH warrants derivative position — net loss of $16,370 in this year’s six months compared to a net gain of $2,563 in the prior year’s six months

 

(18,933

)

Other, net — primarily due to higher interest earned on higher average cash balances

 

8,367

 

 

 

$

(132,023

)

 

Interest and Debt Expense

Interest and debt expense was $224,716,000 for the six months ended June 30, 2006, compared to $160,918,000 in the prior year’s quarter, an increase of $63,798,000.  Of this increase, (i) approximately $38,700,000 resulted from a $1.5 billion increase in outstanding debt due to property acquisitions and refinancings, (ii) $10,400,000 resulted from a 227 basis point increase in the weighted average interest rate on variable rate of debt, (iii) $4,500,000 resulted from the March 29, 2005 issuance of $500,000,000 exchangeable senior debentures, (iv) $5,300,000 resulted from the February 16, 2006 issuance of $250,000 unsecured notes due 2011, (v) $7,046,000 resulted from the prepayment penalties and write-off of deferred financing costs in connection with refinancings this year and (vi) $1,415,000 resulted from advisory fees incurred in connection with the senior unsecured notes consent solicitation.

Net Gain on Disposition of Wholly-Owned and Partially-Owned Assets Other than Depreciable Real Estate

Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate was $57,495,000 and $3,488,000 for the six months ended June 30, 2006 and 2005, respectively, and consists primarily of net gains on sales of marketable equity securities.  In addition, the six months ended June 30, 2005 includes a $1,469,000 net gain on sale of a land parcel.

Minority Interest of Partially-Owned Entities

Minority interest of partially owned entities represents the minority partners’ pro rata share of the net income or loss of consolidated partially owned entities, including Americold, 220 Central Park South, Wasserman and the Springfield Mall.  In the six months ended June 30, 2006 and 2005, the minority interests’ share of net losses of consolidated partially owned entities was $2,844,000 and $1,730,000, respectively.  The increase of $1,114,000 over the prior year relates primarily to a reduction in Americold’s minority interest expense as a result of lower net income.

64




 

Income From Discontinued Operations

The combined results of operations of the assets related to discontinued operations for the six months ended June 30, 2006 and 2005 include the operating results of Vineland, New Jersey; 33 North Dearborn Street in Chicago, Illinois, which was sold on March 14, 2006; 424 Sixth Avenue in New York City, which was sold on March 13, 2006 and 1919 South Eads Street in Arlington, Virginia, which was sold on June 22, 2006.

 

 

For The Six Months
Ended June 30,

 

(Amounts in thousands)

 

2006

 

2005

 

Revenues

 

$

2,393

 

$

9,173

 

Expenses

 

2,665

 

6,171

 

Net (loss) income

 

(272

)

3,002

 

Net gain on sale of 1919 South Eads Street

 

17,609

 

 

Net gain on sale of 424 Sixth Avenue

 

9,218

 

 

Net gain on sale of 33 North Dearborn Street

 

4,835

 

 

Net gain on sale of 400 North LaSalle

 

 

31,614

 

Net gain on disposition of other real estate

 

2,107

 

 

Income from discontinued operations

 

$

33,497

 

$

34,616

 

 

Minority Limited Partners’ Interest in the Operating Partnership

Minority limited partners’ interest in the Operating Partnership was $33,198,000 for the six months ended June 30, 2006 compared to $51,170,000 for the prior year’s first quarter, a decrease of $17,972,000.  This decrease results primarily from lower net income subject to allocation to the minority limited partners.

Perpetual Preferred Unit Distributions of the Operating Partnership

Perpetual preferred unit distributions of the Operating Partnership were $10,347,000 for the six months ended June 30, 2006, compared to $33,693,000 for the prior year’s first quarter, a decrease of $23,346,000.  This decrease resulted primarily from the redemption of the D-3, D-4, D-5, D-6, D-7, and D-8 perpetual preferred units in 2005.

Preferred Share Dividends

Preferred share dividends were $28,811,000 for the six months ended June 30, 2006, compared to $20,771,000 for the prior year’s six months, an increase of $8,040,000.  This increase resulted primarily from dividends paid on the 6.75% Series H and 6.625% Series I Cumulative Redeemable Preferred Shares which were issued in June 2005 and August 2005, respectively.

EBITDA by Segment

Below are the details of the changes in EBITDA by segment for the six months ended June 30, 2006 from the six months ended June 30, 2005.

 

 

 

 

Office

 

 

 

 

 

Temperature

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington,
DC

 

Retail

 

Merchandise
Mart

 

Controlled
Logistics

 

Toys

 

Other

 

Six months ended June 30, 2005

 

$

713,548

 

$

170,518

 

$

147,059

 

$

100,515

 

$

82,205

 

$

34,442

 

$

 

$

178,809

 

2006 Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store operations(1)

 

 

 

7,677

 

1,644

 

5,513

 

(1,588

)

798

 

 

 

 

 

Acquisitions, dispositions and non-operating items that affect comparability, including divisional general and administrative expenses

 

 

 

1,502

 

41,445

 

32,825

 

(3,355

)

(308

)

 

 

 

 

Six months ended June 30, 2006

 

$

910,524

 

$

179,697

 

$

190,148

 

$

138,853

 

$

77,262

 

$

34,932

 

$

209,455

 

$

80,177

 

% increase (decrease) in same store operations

 

 

 

4.5%

 

1.1%

 

5.6%

 

(2.1)%(2)

 

2.0%

 

 

 

 

 


(1)             Represents the increase (decrease) in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses.  Beginning on January 1, 2006, we have revised our definition of same store operations to exclude divisional general and administrative expenses.  We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers.  Same store operations may not be comparable to similarly titled measures employed by other companies.

(2)             Results from a decrease in EBITDA from the April High Point Home Furniture show, the Chicago Gift Show and the Los Angeles Furniture trade show as a result of lower booth sales and higher promotional expenses.

65




 

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Six Months Ended June 30, 2006

Cash flows provided by operating activities of $359,241,000 was primarily comprised of (i) net income of $312,381,000, (ii) adjustments for non-cash items of $39,496,000, (iii) distributions of income from partially-owned entities of $19,318,000, partially offset by, (iv) the net change in operating assets and liabilities of $11,954,000.  The adjustments for non-cash items are primarily comprised of (i) depreciation and amortization of $200,353,000, (ii) allocation of income to minority limited partners of the Operating Partnership of $33,198,000, (iii) perpetual preferred unit distributions of the Operating Partnership of $10,347,000, partially offset by, (iv) net gains on disposition of wholly owned and partially owned assets other than depreciable real estate (primarily on the sale of Sears Canada common shares) of $57,495,000, (v) equity in net income of partially-owned entities (including Toys and Alexander’s) of $76,717,000, (vi) net gains on sale of real estate of $33,769,000, and (vii) the effect of straight-lining of rental income of $30,182,000.

Net cash used in investing activities of $512,924,000 was primarily comprised of (i) investments in notes and mortgage loans receivable of $260,667,000, (ii) capital expenditures of $90,443,000, (iii) development and redevelopment expenditures of $112,650,000, (iv) investments in partially-owned entities of $89,584,000, (v) acquisitions of real estate of $244,938,000, (vi) investments in marketable securities of $57,992,000, (vii) deposits in connection with real estate acquisitions, including pre-acquisition costs, of $44,163,000, (viii) restricted cash, including mortgage escrows, of $40,752,000, partially offset by, (ix) proceeds received on the settlement of derivatives (primarily Sears Holdings) of $135,028,000, (x) proceeds from the sale of real estate of $110,388,000, (xi) distributions of capital from partially-owned entities of $29,703,000, (xii) proceeds from the sale of, and returns of investment in, marketable securities of $132,898,000, and (xiii) proceeds from  repayments on notes and mortgages receivable of $20,248,000.

Net cash provided by financing activities of $353,569,000 was primarily comprised of (i) proceeds from borrowings of $1,401,291,000, (ii) proceeds from the issuance of preferred units of $34,145,000, (iii) proceeds of $9,157,000 from the exercise by employees of share options, partially offset by, (iv) dividends paid on common shares of $226,310,000, (v) repayments of borrowings of $786,519,000, (vi) dividends paid on preferred shares of $28,853,000, (vii) distributions to minority partners of $41,265,000 and (viii) debt issuance costs of $8,077,000.

During 2006 and 2007, $156,313,000 and $989,049,000 of the Company’s notes and mortgages payable mature, respectively.  The Company may refinance such loans or choose to repay all or a portion of such loans using existing cash balances or its revolving credit facility.

Capital Expenditures

We classify our capital expenditures, comprised of expenditures to maintain assets, tenant improvements and leasing commissions, as follows:

·                  Recurring — capital improvements expended to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases.

·                  Non-recurring — capital improvements completed in the year of acquisition and the following two years which were planned at the time of acquisition as well as tenant improvements and leasing commissions for space which was vacant at the time of acquisition of a property.

Our 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.

66




 

Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2006.

 

(Amounts in thousands)

 

Total

 

New York
Office

 

Washington,
DC
Office

 

Retail

 

Merchandise
Mart

 

Temperature
Controlled
Logistics

 

Other

 

Capital Expenditures — Accrual basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures to maintain the assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

22,725

 

$

6,371

 

$

7,424

 

$

442

 

$

3,951

 

$

1,384

 

$

3,153

 

Non-recurring

 

 

 

 

 

 

 

 

 

 

22,725

 

6,371

 

7,424

 

442

 

3,951

 

1,384

 

3,153

 

Tenant improvements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

57,151

 

31,333

 

15,145

 

3,229

 

7,444

 

 

 

Non-recurring

 

89

 

 

89

 

 

 

 

 

 

 

57,240

 

31,333

 

15,234

 

3,229

 

7,444

 

 

 

Total

 

$

79,965

 

$

37,704

 

$

22,658

 

$

3,671

 

$

11,395

 

$

1,384

 

$

3,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing Commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

20,636

 

$

15,319

 

$

3,273

 

$

1,315

 

$

729

 

$

 

$

 

Non-recurring

 

32

 

 

32

 

 

 

 

 

 

 

$

20,668

 

$

15,319

 

$

3,305

 

$

1,315

 

$

729

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant improvements and leasing commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per square foot

 

$

20.99

 

$

38.22

 

$

14.89

 

$

8.12

 

$

12.08

 

$

 

$

 

Per square foot per annum

 

$

2.40

 

$

3.91

 

$

2.10

 

$

0.63

 

$

1.76

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet leased

 

3,707

 

1,217

 

1,240

 

574

 

676

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital Expenditures and Leasing Commissions - Accrual basis

 

$

100,633

 

$

53,023

 

$

25,963

 

$

4,986

 

$

12,124

 

$

1,384

 

$

3,153

 

Adjustments to reconcile accrual basis to cash basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures in the current year applicable to prior periods

 

35,880

 

12,049

 

18,607

 

324

 

4,900

 

 

 

Expenditures to be made in future periods for the current period

 

(61,446

)

(39,685

)

(13,754

)

(4,115

)

(3,892

)

 

 

Total Capital Expenditures and Leasing Commissions - Cash basis

 

$

75,067

 

$

25,387

 

$

30,816

 

$

1,195

 

$

13,132

 

$

1,384

 

$

3,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Development and Redevelopment Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tonnelle Avenue

 

$

25,614

 

$

 

$

 

$

25,614

 

$

 

$

 

$

 

Green Acres Mall

 

15,143

 

 

 

15,143

 

 

 

 

Bergen Mall

 

9,815

 

 

 

9,815

 

 

 

 

Crystal Plazas (PTO)

 

9,519

 

 

9,519

 

 

 

 

 

7 West 34th Street

 

7,286

 

 

 

 

7,286

 

 

 

1740 Broadway

 

4,953

 

4,953

 

 

 

 

 

 

640 Fifth Avenue

 

1,261

 

1,261

 

 

 

 

 

 

Other

 

32,689

 

377

 

3,715

 

6,994

 

 

 

21,603

 

 

 

$

106,280

 

$

6,591

 

$

13,234

 

$

57,566

 

$

7,286

 

$

 

$

21,603

 

 

67




Cash Flows for the Six Months Ended June 30, 2005

Cash flows provided by operating activities of $320,453,000 was primarily comprised of (i) net income of $380,901,000, (ii) distributions of income from partially-owned entities of $14,895,000, partially offset by (iii) the net change in operating assets and liabilities of $74,438,000 and (iv) adjustments for non-cash items of $905,000.  The adjustments for non-cash items are primarily comprised of (i) depreciation and amortization of $167,431,000, (ii) allocation of income to minority limited partners of the Operating Partnership of $51,170,000, (iii) perpetual preferred unit distributions of the Operating Partnership of $31,493,000, (iv) the write-off of preferred unit issuance costs of $2,200,000, partially offset by, (v) net gains on conversion of Sears common shares and derivative position to Sears Holding common shares and derivative position of $86,094,000, (vi) net gain on mark-to-market of Sears Holding derivative position of $45,759,000, (vii) net gain from mark-to-market of GMH Communities L.P. warrants of $2,563,000, (viii) net gains on disposition of wholly-owned and partially-owned assets other than depreciable real estate of $3,488,000, (ix) the effect of straight-lining of rental income of $22,059,000, (x) equity in net income of partially-owned entities and Alexander’s of $54,236,000, (xi) amortization of acquired below market leases net of above market leases of $5,656,000 and (xii) net gains on sale of real estate of $31,614,000.

Net cash used in investing activities of $361,454,000 was primarily comprised of (i) investments in notes and mortgage loans receivable of $275,000,000, (ii) capital expenditures of $26,868,000, (iii) development and redevelopment expenditures of $62,707,000, (iv) investments in partially-owned entities of $182,657,000, (v) acquisitions of real estate of $217,266,000, (vi) investments in marketable securities of $154,509,000, partially offset by (vii) proceeds from the sale of real estate of $126,584,000, (viii) distributions from partially-owned entities of $8,246,000, (ix) repayments on notes and mortgages receivable of $358,000,000, (x) restricted cash of $35,255,000 and (xi) proceeds from the sale of marketable securities of $29,468,000.

Net cash provided by financing activities of $283,817,000 was primarily comprised of (i) proceeds from borrowings of $795,000,000, (ii) proceeds from the issuance of preferred shares and units of $108,956,000, (iii) proceeds of $40,798,000 from the exercise by employees of share options, partially offset by (iv) dividends paid on common shares of $202,591,000, (v) repayments of borrowings of $185,681,000, (vi) redemption of preferred shares and units of $195,000,000, (vii) dividends paid on preferred shares of $14,884,000, and (viii) distributions to minority partners of $57,984,000.

68




 

Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2005.

(Amounts in thousands)

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Other

 

Capital Expenditures - Accrual basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures to maintain the assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

13,634

 

$

6,005

 

$

2,343

 

$

(1,213)

(1)

$

6,392

 

$

107

 

Non-recurring

 

 

 

 

 

 

 

 

 

13,634

 

6,005

 

2,343

 

(1,213

)

6,392

 

107

 

Tenant improvements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

40,131

 

17,384

 

9,193

 

3,483

 

10,071

 

 

Non-recurring

 

1,938

 

 

1,938

 

 

 

 

 

 

42,069

 

17,384

 

11,131

 

3,483

 

10,071

 

 

Total

 

$

55,703

 

$

23,389

 

$

13,474

 

$

2,270

 

$

16,463

 

$

107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing Commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

7,892

 

$

3,972

 

$

2,048

 

$

288

 

$

1,584

 

$

 

Non-recurring

 

294

 

 

294

 

 

 

 

 

 

$

8,186

 

$

3,972

 

$

2,342

 

$

288

 

$

1,584

 

$

 

Tenant improvements and leasing commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Per square foot

 

$

16.28

 

$

33.08

 

$

11.44

 

$

9.77

 

$

12.98

 

$

 

Per square foot per annum

 

$

2.61

 

$

4.93

 

$

2.16

 

$

1.17

 

$

2.09

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet leased

 

3,109

 

660

 

1,178

 

373

 

898

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital Expenditures and Leasing Commissions - Accrual basis

 

$

63,889

 

$

27,361

 

$

15,816

 

$

2,558

 

$

18,047

 

$

107

 

Adjustments to reconcile accrual basis to cash basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures in the current year applicable to prior periods

 

30,613

 

11,245

 

9,313

 

1,672

 

8,383

 

 

Expenditures to be made in future periods for the current period

 

(36,050

)

(18,315

)

(9,224

)

(3,071

)

(5,440

)

 

Total Capital Expenditures and Leasing Commissions - Cash basis

 

$

58,452

 

$

20,291

 

$

15,905

 

$

1,159

 

$

20,990

 

$

107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Development and Redevelopment Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

7 West 34th Street

 

$

12,425

 

$

 

$

 

$

 

$

12,425

 

$

 

Crystal Plaza (PTO)

 

16,543

 

 

16,543

 

 

 

 

640 Fifth Avenue

 

5,435

 

5,435

 

 

 

 

 

Crystal Drive - retail

 

1,212

 

 

1,212

 

 

 

 

Other

 

27,092

 

1,478

 

328

 

16,664

 

8,140

 

482

 

 

 

$

62,707

 

$

6,913

 

$

18,083

 

$

16,664

 

$

20,565

 

$

482

 


(1)             Reflects reimbursements from tenants for expenditures incurred in the prior year.

69




 

SUPPLEMENTAL INFORMATION

Three Months Ended June 30, 2006 vs. Three Months Ended March 31, 2006

Below are the details of the changes in EBITDA by segment for the three months ended June 30, 2006 from the three months ended March 31, 2006.

 

 

 

 

Office

 

 

 

 

 

Temperature

 

 

 

 

 

 

 

 

 

 

 

Washington,

 

 

 

Merchandise

 

Controlled

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

DC

 

Retail

 

Mart

 

Logistics

 

Toys

 

Other

 

EBITDA for the three months ended March 31, 2006

 

$

470,842

 

$

87,152

 

$

77,591

 

$

73,487

 

$

35,419

 

$

17,935

 

$

172,991

 

$

6,267

 

2006 Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store operations(1)

 

 

 

3,240

 

3,400

 

1,738

 

8,641

 

(273

)

 

 

 

 

Acquisitions, dispositions and non-operating items that affect comparability, including divisional general and administrative expenses

 

 

 

2,153

 

31,566

 

(9,859

)

(2,217

)

(665

)

 

 

 

 

EBITDA for the three months ended June 30, 2006

 

$

439,682

 

$

92,545

 

$

112,557

 

$

65,366

 

$

41,843

 

$

16,997

 

$

36,464

 

$

73,910

 

% increase (decrease) in same store operations

 

 

 

3.7%

 

4.0%

 

2.8%

 

26.4%(2)

 

(1.3%)(2)

 

 

 

 

 


(1)             Represents the increase (decrease) in property-level operations which were owned for the same period in each year and excludes the effect of property acquisitions, dispositions and other non-operating items that affect comparability, including divisional general and administrative expenses.  Beginning on January 1, 2006, we have revised our definition of same store operations to exclude divisional general and administrative expenses.  We utilize this measure to make decisions on whether to buy or sell properties as well as to compare the performance of our properties to that of our peers.  Same store operations may not be comparable to similarly titled measures employed by other companies.

(2)             Results primarily from the seasonality of operations.

The following table reconciles Net income to EBITDA for the quarter ended March 31, 2006.

 

 

 

 

 

Office

 

 

 

 

 

Temperature

 

 

 

 

 

 

 

 

 

 

 

Washington,

 

 

 

Merchandise

 

Controlled

 

 

 

 

 

(Amounts in thousands)

 

Total

 

New York

 

DC

 

Retail

 

Mart

 

Logistics

 

Toys

 

Other

 

Net income (loss) for the three months ended March 31, 2006

 

$

149,212

 

$

42,877

 

$

26,613

 

$

37,903

 

$

20,393

 

$

2,593

 

$

52,760

 

$

(33,927

)

Interest and debt expense

 

170,461

 

20,911

 

24,084

 

22,338

 

3,749

 

6,786

 

61,101

 

31,492

 

Depreciation and amortization

 

125,431

 

23,364

 

26,661

 

13,246

 

11,236

 

8,148

 

34,164

 

8,612

 

Income tax expense

 

25,738

 

 

233

 

 

41

 

408

 

24,966

 

90

 

EBITDA for the three months ended March 31, 2006

 

$

470,842

 

$

87,152

 

$

77,591

 

$

73,487

 

$

35,419

 

$

17,935

 

$

172,991

 

$

6,267

 

 

70




 

FUNDS FROM OPERATIONS (“FFO”)

FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”).  NAREIT defines FFO as net income or loss determined in accordance with Generally Accepted Accounting Principles (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

FFO and FFO per diluted share are used by management, investors and industry analysts as supplemental measures of operating performance of equity REITs.  FFO and FFO per diluted share should be evaluated along with GAAP net income and income per diluted share (the most directly comparable GAAP measures), as well as cash flow from operating activities, investing activities and financing activities, in evaluating the operating performance of equity REITs.  We believe that FFO and FFO per diluted share are helpful to investors as supplemental performance measures because these measures exclude the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs which implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values instead have historically risen or fallen with market conditions, these non-GAAP measures can facilitate comparisons of operating performance between periods and among other equity REITs.

FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as disclosed in our Consolidated Statements of Cash Flows.  FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity.

The calculations of both the numerator and denominator used in the computation of income per share are disclosed in footnote 12 - Income Per Share, in the notes to our consolidated financial statements on page 25 of this Quarterly Report on Form 10-Q.

FFO for the Three and Six Months Ended June 30, 2006, and 2005

FFO applicable to common shares plus assumed conversions was $230,430,000, or $1.49 per diluted share for the three months ended June 30, 2006, compared to $215,802,000, or $1.51 per diluted share for the prior year’s quarter.  FFO applicable to common shares plus conversions was $442,346,000, or $2.86 per diluted share for the six months ended June 30, 2006, compared to $465,011,000, or $3.35 per diluted share for the prior years six months.  Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”

 

(Amounts in thousands, except per share amounts)

 

For The Three Months
Ended June 30,

 

For The Six Months
Ended June 30,

 

Reconciliation of Net Income to FFO:

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

163,169

 

$

181,082

 

$

312,381

 

$

380,901

 

Depreciation and amortization of real property

 

84,156

 

68,418

 

160,599

 

132,294

 

Net gains on sale of real estate

 

(17,609

)

(31,614

)

(33,769

)

(31,614

)

Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at FFO:

 

 

 

 

 

 

 

 

 

Depreciation and amortization of real property

 

23,011

 

6,290

 

48,020

 

12,587

 

Net losses (gains) on sale of real estate

 

658

 

(79

)

329

 

(214

)

Income tax effect of Toys adjustments included above

 

(4,928

)

 

(10,841

)

 

Minority limited partners’ share of above adjustments

 

(8,896

)

(5,244

)

(16,120

)

(14,245

)

FFO

 

239,561

 

218,853

 

460,599

 

479,709

 

Preferred share dividends

 

(14,404

)

(8,385

)

(28,811

)

(20,771

)

FFO applicable to common shares

 

225,157

 

210,468

 

431,788

 

458,938

 

Interest on 3.875% exchangeable senior debentures

 

5,094

 

5,094

 

10,188

 

5,578

 

Series A convertible preferred share dividends

 

179

 

240

 

370

 

495

 

FFO applicable to common shares plus assumed conversions

 

$

230,430

 

$

215,802

 

$

442,346

 

$

465,011

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Weighted Average Shares:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

141,418

 

130,178

 

141,275

 

129,254

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted share awards

 

7,640

 

6,747

 

7,529

 

6,511

 

3.875% exchangeable senior debentures

 

5,531

 

5,479

 

5,531

 

2,816

 

Series A convertible preferred shares

 

304

 

409

 

315

 

422

 

Denominator for diluted FFO per share

 

154,893

 

142,813

 

154,650

 

139,003

 

 

 

 

 

 

 

 

 

 

 

Diluted FFO per share

 

$

1.49

 

$

1.51

 

$

2.86

 

$

3.35

 

 

71




 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We have exposure to fluctuations in market interest rates.  Market interest rates are highly sensitive to many factors that are beyond our control.  Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:

 

 

 

As at June 30, 2006

 

As at December 31, 2005

 

(Amounts in thousands, except per share amounts)

 

Balance

 

Weighted
Average
Interest Rate

 

Effect of 1%
Change In
Base Rates

 

Balance

 

Weighted
Average
Interest Rate

 

Consolidated debt:

 

 

 

 

 

 

 

 

 

 

 

Variable rate(1)

 

$

937,259

 

6.41

%

$

9,373

 

$

1,150,333

 

5.98

%

Fixed rate

 

6,215,621

 

5.99

%

 

5,104,550

 

6.06

%

 

 

$

7,152,880

 

6.05

%

9,373

 

$

6,254,883

 

6.04

%

Pro-rata share of debt of non-consolidated entities (non-recourse):

 

 

 

 

 

 

 

 

 

 

 

Variable rate — excluding Toys

 

$

187,856

 

6.54

%

1,879

 

$

199,273

 

5.64

%

Variable rate — Toys

 

1,148,437

 

7.71

%

11,484

 

1,623,447

 

7.02

%

Fixed rate (including $935,568, and $557,844 of Toys debt in 2006 and 2005)

 

1,725,774

 

6.65

%

 

1,179,626

 

7.23

%

 

 

$

3,062,067

 

7.04

%

13,363

 

$

3,002,346

 

7.01

%

Minority limited partners’ share of above

 

 

 

 

 

(2,182

)

 

 

 

 

Total change in annual net income

 

 

 

 

 

$

20,554

 

 

 

 

 

Per share-diluted

 

 

 

 

 

$

0.13

 

 

 

 

 


(1)             Includes $495,453 for our senior unsecured notes due 2007, as we entered into an interest rate swap that effectively converted the interest rate from a fixed rate of 5.625% to a floating rate of LIBOR plus 0.7725%, based upon the trailing three month LIBOR rate (6.28% if set on June 30, 2006).  In accordance with SFAS No. 133, as amended, we are required to record the fair value of this derivative instrument at each reporting period.  At June 30, 2006, the fair value adjustment was a reduction of $3,889, and is included in the balance of the senior unsecured notes above.

We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies.   In addition, we have notes and mortgage loans receivables aggregating $317,953,000, as of June 30, 2006, which are based on variable rates, and partially mitigates our exposure to a change in interest rates.

Fair Value of Our Debt

The carrying amount of our debt exceeds its aggregate fair value, 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, by approximately $454,865,000 at June 30, 2006.

Derivative Instruments

We have, and may in the future enter into, derivative positions that do not qualify for hedge accounting treatment, including an economic interest in McDonalds common shares.  In addition, during the six months ended June 30, 2006, we settled our derivative position in the common shares of Sears Holdings and exercised our warrants to purchase common shares of GMH Communities Trust.  Because these derivatives do not qualify for hedge accounting treatment, the gains or losses resulting from their mark-to-market at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statements of income.  In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative positions and a specified spread over LIBOR. Because the market value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our investment income and expense. During the three and six months ended June 30, 2006, we recognized net losses aggregating approximately $8,215,000 and $5,076,000, respectively, from these positions.

72




 

Item 4.   Controls and Procedures

Disclosure Controls and Procedures:  The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2006, such disclosure controls and procedures were effective.

Internal Control Over Financial Reporting:  There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

73




 

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

We are from time to time involved in legal actions arising in the ordinary course of business.  In our opinion, after consultation with legal counsel, the outcome of such matters, including the matters referred to below, are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

The following updates the discussion set forth under “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2005.

Stop & Shop

On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) 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.  Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, froze the Company’s right to re-allocate which effectively terminated the Company’s right to collect the additional rent from Stop & Shop.  On March 3, 2003, after the Company moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint.  On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint.  The Company removed the action to the United States District Court for the Southern District of New York.  In January 2005 that court remanded the action to the New York Supreme Court.  On February 14, 2005, the Company served an answer in which it asserted a counterclaim seeking a judgment for all the unpaid additional rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the additional rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect.  On May 17, 2005, the Company filed a motion for summary judgment.  On July 15, 2005, Stop & Shop opposed the Company’s motion and filed a cross-motion for summary judgment.  On December 13, 2005, the Court issued its decision denying the motions for summary judgment.  The Company intends to pursue its claims against Stop & Shop vigorously.

H Street Building Corporation (“H Street”)

On July 22, 2005, two corporations owned 50% by H Street filed a complaint against the Company, H Street and three parties affiliated with the sellers of H Street in the Superior Court of the District of Columbia alleging that the Company  encouraged H Street and the affiliated parties to breach their fiduciary duties to these corporations and interfered with prospective business and contractual relationships.  The complaint seeks an unspecified amount of damages and a rescission of the Company’s acquisition of H Street.   In addition, on July 29, 2005, a tenant under a ground lease with one of these corporations brought a separate suit in the Superior Court of the District of Columbia, alleging, among other things, that the Company’s acquisition of H Street violated a provision giving them a right of first offer and on that basis seeks a rescission of the Company’s acquisition and the right to acquire H Street for the price paid by the Company.   On September 12, 2005, the Company filed a complaint against each of these corporations and their acting directors seeking a restoration of H Street’s full shareholder rights and damages.  These legal actions are currently in the discovery stage.  The Company believes that the actions filed against the Company are without merit and that it will ultimately be successful in defending against them.

74




 

Item 1A. Risk Factors

There were no material changes to the Risk Factors disclosed in our annual report on Form 10-K for the year ended December 31, 2005.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of Security Holders

On May 18, 2006, we held our annual meeting of shareholders.  The shareholders voted, in person or by proxy, for (i) the election of three nominees to serve on the Board of Trustees for a three-year term and until their respective successors are duly elected and qualified, (ii) the approval of the full original allotment of 10,000,000 shares available under the 2002 Omnibus Share Plan, as amended and (iii) the ratification of the selection of independent auditors with regard to the current fiscal year.  The results of the voting are shown below:

 

Votes Cast for

 

Votes Cast
Against or
Withheld

 

(i)   Election of Trustees:

 

 

 

 

 

Steven Roth

 

98,462,222

 

4,889,908

 

Michael D. Fascitelli

 

98,345,897

 

5,006,233

 

Russell B. Wight, Jr.

 

92,128,663

 

11,223,467

 

 

 

 

 

 

 

(ii)   Approval of the full original allotment of 10,000,000 shares available under the 2002 Omnibus Share Plan, as amended

 

55,352,504

 

51,792,405

 

 

 

 

 

 

 

(iii) Ratification of selection of independent auditors for the current fiscal year

 

101,665,906

 

5,460,019

 

 

In addition to the three Trustees elected or re-elected above, David Mandelbaum, Richard R. West, Robert P. Kogod, Robert H. Smith, Anthony W. Deering, Michael Lynne and Ronald G. Targan continued to serve as Trustees after the meeting.

Because of the nature of the above voting matters, there were no abstentions or broker non-votes.

Item 5.    Other Information

None.

Item 6.    Exhibits

Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index.

75




 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

VORNADO REALTY TRUST

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

Date August 1, 2006

By:

/s/ Joseph Macnow

 

 

Joseph Macnow, Executive Vice President -Finance and Administration and Chief Financial Officer (duly authorized officer and principal financial and accounting officer)

 

76




 

EXHIBIT INDEX

 

Exhibit
No.

 

 

 

 

3.1

-

Amended and Restated Declaration of Trust of Vornado Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on April 16, 1993 - Incorporated by reference to Exhibit 3(a) to Vornado Realty Trust’s Registration Statement on Form S-4/A (File No. 33-60286), filed on April 15, 1993

*

 

 

 

 

 

3.2

-

Articles of Amendment of Declaration of Trust of Vornado Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on May 23, 1996 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’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 Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on April 3, 1997 - Incorporated by reference to Exhibit 3.3 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 11, 2002

*

 

 

 

 

 

3.4

-

Articles of Amendment of Declaration of Trust of Vornado Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on October 14, 1997 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’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 Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on April 22, 1998 - Incorporated by reference to Exhibit 3.5 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003

*

 

 

 

 

 

3.6

-

Articles of Amendment of Declaration of Trust of Vornado Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on November 24, 1999 - Incorporated by reference to Exhibit 3.4 to Vornado Realty Trust’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 Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on April 20, 2000 - Incorporated by reference to Exhibit 3.5 to Vornado Realty Trust’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 Realty Trust, as filed with the State Department of Assessments and Taxation of Maryland on September 14, 2000 - Incorporated by reference to Exhibit 4.6 to Vornado Realty Trust’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 Realty Trust, dated May 31, 2002, as filed with the State Department of Assessments and Taxation 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), filed on August 7, 2002

*

 

 

 

 

 

3.10

-

Articles of Amendment of Declaration of Trust of Vornado Realty Trust, dated June 6, 2002, as filed with the State Department of Assessments and Taxation 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), filed on August 7, 2002

*

 


 

*              Incorporated by reference.

77




 

3.11

-

Articles of Amendment of Declaration of Trust of Vornado Realty Trust, dated December 16, 2004, as filed with the State Department of Assessments and Taxation of Maryland on December 16, 2004 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on December 21, 2004

*

 

 

 

 

 

3.12

-

Articles Supplementary Classifying Vornado Realty Trust’s $3.25 Series A Convertible Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 3.11 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003

*

 

 

 

 

 

3.13

-

Articles Supplementary Classifying Vornado Realty Trust’s $3.25 Series A Convertible Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, 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 Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 11, 2002

*

 

 

 

 

 

3.14

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-6 8.25% Cumulative Redeemable Preferred Shares, liquidation preference $25.00 per share, as filed with the State Department of Assessments and Taxation of Maryland on May 1, 2000 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed May 19, 2000

*

 

 

 

 

 

3.15

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-8 8.25% Cumulative Redeemable Preferred Shares, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on December 28, 2000

*

 

 

 

 

 

3.16

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-9 8.75% Preferred Shares, liquidation preference $25.00 per share, as filed with the State Department of Assessments and Taxation of Maryland on September 25, 2001 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001

*

 

 

 

 

 

3.17

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-10 7.00% Cumulative Redeemable Preferred Shares, liquidation preference $25.00 per share, as filed with the State Department of Assessments and Taxation of Maryland on November 17, 2003 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on November 18, 2003

*

 

 

 

 

 

3.18

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-11 7.20% Cumulative Redeemable Preferred Shares, liquidation preference $25.00 per share, as filed with the State Department of Assessments and Taxation of Maryland on May 27, 2004 - Incorporated by reference to Exhibit 99.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on June 14, 2004

*

 

 

 

 

 

3.19

-

Articles Supplementary Classifying Vornado Realty Trust’s 7.00% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.27 to Vornado Realty Trust’s Registration Statement on Form 8-A (File No. 001-11954), filed on August 20, 2004

*

 

 

 

 

 

3.20

-

Articles Supplementary Classifying Vornado Realty Trust’s 6.75% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.28 to Vornado Realty Trust’s Registration Statement on Form 8-A (File No. 001-11954), filed on November 17, 2004

*

 

 

 

 

 

 


 

*              Incorporated by reference.

78




 

3.21

-

Articles Supplementary Classifying Vornado Realty Trust’s 6.55% Series D-12 Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on December 21, 2004

*

 

 

 

 

 

3.22

-

Articles Supplementary Classifying Vornado Realty Trust’s 6.625% Series G Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on December 21, 2004

*

 

 

 

 

 

3.23

-

Articles Supplementary Classifying Vornado Realty Trust’s 6.750% Series H Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.32 to Vornado Realty Trust’s Registration Statement on Form 8-A (File No. 001-11954), filed on June 16, 2005

*

 

 

 

 

 

3.24

-

Articles Supplementary Classifying Vornado Realty Trust’s 6.625% Series I Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.33 to Vornado Realty Trust’s Registration Statement on Form 8-A (File No. 001-11954), filed on August 30, 2005

*

 

 

 

 

 

3.25

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-14 6.75% Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on September 14, 2005

*

 

 

 

 

 

3.26

-

Articles Supplementary Classifying Vornado Realty Trust’s Series D-15 6.875% Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on May 3, 2006

*

 

 

 

 

 

3.27

-

Amended and Restated Bylaws of Vornado Realty Trust, as amended on March 2, 2000 - Incorporated by reference to Exhibit 3.12 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000

*

 

 

 

 

 

3.28

-

Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of October 20, 1997 (the “Partnership Agreement”) - Incorporated by reference to Exhibit 3.26 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003

*

 

 

 

 

 

3.29

-

Amendment to the Partnership Agreement, dated as of December 16, 1997 - Incorporated by reference to Exhibit 3.27 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003

*

 

 

 

 

 

3.30

-

Second Amendment to the Partnership Agreement, dated as of April 1, 1998 - Incorporated by reference to Exhibit 3.5 to Vornado Realty Trust’s Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998

*

 

 

 

 

 

3.31

-

Third Amendment to the Partnership Agreement, dated as of November 12, 1998 - Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on November 30, 1998

*

 

 

 

 

 

3.32

-

Fourth Amendment to the Partnership Agreement, dated as of November 30, 1998 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on February 9, 1999

*

 


 

*              Incorporated by reference.

79




 

3.33

-

Fifth Amendment to the Partnership Agreement, dated as of March 3, 1999 - Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K(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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Current Report on Form 8-K (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 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001

*

 

 

 

 

 

3.44

-

Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001 - Incorporated by reference to Exhibit 3.3 to 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 to 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 to Vornado Realty Trust’s Current Report on Form 8-K/A (File No. 001-11954), filed on March 18, 2002

*

 


 

*              Incorporated by reference.

80




 

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), filed on August 7, 2002

*

 

 

 

 

 

3.48

-

Twentieth Amendment to the Partnership Agreement, dated April 9, 2003 - Incorporated by reference to Exhibit 3.46 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003

*

 

 

 

 

 

3.49

-

Twenty-First Amendment to the Partnership Agreement, dated as of July 31, 2003 - Incorporated by reference to Exhibit 3.47 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 001-11954), filed on November 7, 2003

*

 

 

 

 

 

3.50

-

Twenty-Second Amendment to the Partnership Agreement, dated as of November 17, 2003 - Incorporated by reference to Exhibit 3.49 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-11954), filed on March 3, 2004

*

 

 

 

 

 

3.51

-

Twenty-Third Amendment to the Partnership Agreement, dated May 27, 2004 - Incorporated by reference to Exhibit 99.2 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on June 14, 2004

*

 

 

 

 

 

3.52

-

Twenty-Fourth Amendment to the Partnership Agreement, dated August 17, 2004 - Incorporated by reference to Exhibit 3.57 to Vornado Realty Trust and Vornado Realty L.P.’s Registration Statement on Form S-3 (File No. 333-122306), filed on January 26, 2005

*

 

 

 

 

 

3.53

-

Twenty-Fifth Amendment to the Partnership Agreement, dated November 17, 2004 - Incorporated by reference to Exhibit 3.58 to Vornado Realty Trust and Vornado Realty L.P.’s Registration Statement on Form S-3 (File No. 333-122306), filed on January 26, 2005

*

 

 

 

 

 

3.54

-

Twenty-Sixth Amendment to the Partnership Agreement, dated December 17, 2004 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on December 21, 2004

*

 

 

 

 

 

3.55

-

Twenty-Seventh Amendment to the Partnership Agreement, dated December 20, 2004 - Incorporated by reference to Exhibit 3.2 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on December 21, 2004

*

 

 

 

 

 

3.56

-

Twenty-Eighth Amendment to the Partnership Agreement, dated December 30, 2004 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on January 4, 2005

*

 

 

 

 

 

3.57

-

Twenty-Ninth Amendment to the Partnership Agreement, dated June 17, 2005 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on June 21, 2005

*

 

 

 

 

 

3.58

-

Thirtieth Amendment to the Partnership Agreement, dated August 31, 2005 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on September 1, 2005

*

 

 

 

 

 

3.59

-

Thirty-First Amendment to the Partnership Agreement, dated September 9, 2005 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on September 14, 2005

*

 


 

*              Incorporated by reference.

81




 

3.60

-

Thirty-Third Amendment to Second Amended and Restated Agreement of Limited Partnership, dated as of April 25, 2006 - Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on May 1, 2006

*

 

 

 

 

4.1

-

Indenture and Servicing Agreement, dated as of March 1, 2000, among Vornado Finance LLC, LaSalle Bank National Association, ABN Amro Bank N.V. and Midland Loan Services, Inc. - Incorporated by reference to Exhibit 10.48 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000

*

 

 

 

 

 

4.2

-

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 (File No. 000-22685), filed on June 24, 2002

*

 

 

 

 

4.3

-

Indenture, dated as of November 25, 2003, between Vornado Realty L.P. and The Bank of New York, as Trustee - Incorporated by reference to Exhibit 4.10 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 001-11954), filed on April 28, 2005

*

 

 

 

 

 

 

 

Certain instruments defining the rights of holders of long-term debt securities of Vornado Realty Trust and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. Vornado Realty Trust hereby undertakes to furnish to the Securities and Exchange Commission, upon request, copies of any such instruments.

 

 

 

 

 

 

10.1**

-

Vornado Realty Trust’s 1993 Omnibus Share Plan - Incorporated by reference to Exhibit 4.1 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 331-09159), filed on July 30, 1996

*

 

 

 

 

 

10.2**

-

Vornado Realty Trust’s 1993 Omnibus Share Plan, as amended - Incorporated by reference to Exhibit 4.1 to Vornado Realty Trust’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, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 001-11954), filed May 8, 1992

*

 

 

 

 

 

10.4**

-

Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Exhibit 10(C)(3) to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 001-11954), filed March 13, 1997

*

 

 

 

 

 

10.5

-

Registration Rights Agreement between Vornado, Inc. and Steven Roth, dated December 29, 1992 - Incorporated by reference to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993

*

 

 

 

 

 

10.6

-

Stock Pledge Agreement between Vornado, Inc. and Steven Roth dated December 29, 1992 - Incorporated by reference to Vornado, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993

*

 


 

*              Incorporated by reference.

**           Management contract or compensatory agreement.

82




 

10.7

-

Management Agreement between Interstate Properties and Vornado, Inc. dated July 13, 1992 -Incorporated by reference to Vornado, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993

*

 

 

 

 

 

10.8

-

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, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993

*

 

 

 

 

 

10.9

-

Amendment to Real Estate Retention Agreement between Vornado, Inc., Keen Realty Consultants, Inc. and Alexander’s, Inc., dated February 6, 1995 - Incorporated by reference to Exhibit 10(F)(2) to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001-11954), filed March 23, 1995

*

 

 

 

 

 

10.10

-

Stipulation between Keen Realty Consultants Inc. and Vornado Realty Trust re: Alexander’s Retention Agreement - Incorporated by reference to Exhibit 10(F)(2) to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-11954), filed March 24, 1994

*

 

 

 

 

 

10.11

-

Management and Development Agreement among Alexander’s Inc. and Vornado Realty Trust, dated as of February 6, 1995 - Incorporated by reference to Exhibit 99.1 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed February 21, 1995

*

 

 

 

 

 

10.12**

-

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 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997

*

 

 

 

 

 

10.13

-

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 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000

*

 

 

 

 

 

10.14**

-

Promissory Note from Steven Roth to Vornado Realty Trust, dated December 23, 2005 - Incorporated by reference to Exhibit 10.15 to Vornado Realty Trust Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-11954), filed on February 28, 2006

*

 

 

 

 

 

10.15**

-

Letter agreement, dated November 16, 1999, between Steven Roth and Vornado Realty Trust - Incorporated by reference to Exhibit 10.51 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000

*

 

 

 

 

 

10.16

-

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 to Vornado Realty Trust’s Current Report on Form 8-K (File No. 001-11954), filed on January 16, 2002

*

 

 

 

 

 

10.17

-

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 to Vornado Realty Trust’s Current Report on Form 8-K/A (File No. 1-11954), filed on March 18, 2002

*

 


 

*              Incorporated by reference.

**           Management contract or compensatory agreement.

83




 

10.18

-

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 to Vornado Realty Trust’s Current Report on Form 8-K/A (File No. 1-11954), filed on March 18, 2002

*

 

 

 

 

 

10.19**

-

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

*

 

 

 

 

 

10.20**

-

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

*

 

 

 

 

 

10.21**

-

Convertible Units Agreement, dated December 2, 1996, between Vornado Realty Trust and Michael D. Fascitelli - Incorporated by reference to Exhibit E of the Employment Agreement, dated December 2, 1996, between Vornado Realty Trust and Michael D. Fascitelli, filed as Exhibit 10(C)(3) to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 001-11954), filed on March 13, 1997

*

 

 

 

 

 

10.22**

-

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

*

 

 

 

 

 

10.23**

-

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

*

 

 

 

 

 

10.24**

-

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

*

 

 

 

 

 

10.25**

-

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

*

 

 

 

 

 

10.26**

-

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

*

 

 

 

 

 

10.27**

-

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

*

 

 

 

 

 

10.28**

-

First Amendment, dated September 17, 2002, to the Trust Agreement between Vornado Realty Trust and The 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

*

 

 

 

 

 

10.29

-

Registration Rights Agreement, dated as of July 21, 1999, by and between Vornado Realty Trust and the holders of Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Registration Statement on Form S-3 (File No. 333-102217), filed on December 26, 2002

*

 


 

*              Incorporated by reference.

**           Management contract or compensatory agreement.

84




 

10.30

-

Form of Registration Rights Agreement between Vornado Realty Trust and the holders of Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.3 to Vornado Realty Trust’s Registration Statement on Form S-3 (File No. 333-102217), filed on December 26, 2002

*

 

 

 

 

 

10.31

-

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) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002

*

 

 

 

 

 

10.32

-

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) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002

*

 

 

 

 

 

10.33

-

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) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002

*

 

 

 

 

 

10.34

-

59th Street Management and Development Agreement, dated as of July 3, 2002, by and between 731 Residential LLC, 731 Commercial LLC and Vornado Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(2) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002

*

 

 

 

 

 

10.35

-

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/A dated May 29, 2002 (File No. 005-44144), filed on May 30, 2002

*

 

 

 

 

 

10.36**

-

Vornado Realty Trust’s 2002 Omnibus Share Plan - Incorporated by reference to Exhibit 4.2 to Vornado Realty Trust’s Registration Statement on Form S-8 (File No. 333-102216) filed on December 26, 2002

*

 

 

 

 

 

10.37**

-

First Amended and Restated Promissory Note from Michael D. Fascitelli to Vornado Realty Trust, dated December 17, 2001 - Incorporated by reference to Exhibit 10.59 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2003

*

 

 

 

 

 

10.38**

-

Promissory Note from Joseph Macnow to Vornado Realty Trust, dated July 23, 2002— Incorporated by reference to Exhibit 10.60 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2003

*

 

 

 

 

 

10.39**

-

Employment Agreement between Vornado Realty Trust and Mitchell Schear, dated April 9, 2003 - Incorporated by reference to Exhibit 10.1 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-11954), filed on August 8, 2003

*

 


 

*              Incorporated by reference.

**           Management contract or compensatory agreement.

85




 

10.40

-

Revolving Credit Agreement, dated as of July 2, 2003 among Vornado Realty L.P., as Borrower, Vornado Realty Trust, as General Partner, JPMorgan Chase Bank, as Administrative Agent, and Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents, Deutsche Bank Trust Company Americas and Fleet National Bank, as Documentation Agents, and JPMorgan Securities Inc. and Bank of America Securities, L.L.C., as Lead Arrangers and Bookrunners - Incorporated by reference to Exhibit 10.2 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-11954), filed on August 8, 2003

*

 

 

 

 

 

10.41

-

Guaranty of Payment, made as of July 2, 2003, by Vornado Realty Trust, for the benefit of JPMorgan Chase Bank - Incorporated by reference to Exhibit 10.3 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-11954), filed on August 8, 2003

*

 

 

 

 

 

10.42

-

Registration Rights Agreement by and between Vornado Realty Trust and Bel Holdings LLC dated as of November 17, 2003 - Incorporated by reference to Exhibit 10.68 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-11954), filed on March 3, 2004

*

 

 

 

 

 

10.43

-

Registration Rights Agreement, dated as of May 27, 2004, by and between Vornado Realty Trust and 2004 Realty Corp. - Incorporated by reference to Exhibit 10.75 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005

*

 

 

 

 

 

10.44

-

Registration Rights Agreement, dated as of December 17, 2004, by and between Vornado Realty Trust and Montebello Realty Corp. 2002 - Incorporated by reference to Exhibit 10.76 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005

*

 

 

 

 

 

10.45**

-

Form of Stock Option Agreement between the Company and certain employees dated as of February 8, 2005 - Incorporated by reference to Exhibit 10.77 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005

*

 

 

 

 

 

10.46**

-

Form of Restricted Stock Agreement between the Company and certain employees - Incorporated by reference to Exhibit 10.78 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-11954), filed on February 25, 2005

*

 

 

 

 

 

10.47**

-

Employment Agreement between Vornado Realty Trust and Sandeep Mathrani, dated February 22, 2005 and effective as of January 1, 2005 - Incorporated by reference to Exhibit 10.76 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 001-11954), filed on April 28, 2005

*

 

 

 

 

10.48

-

Contribution Agreement, dated May 12, 2005, by and among Robert Kogod, Vornado Realty L.P. and certain Vornado Realty Trust’s affiliates - Incorporated by reference to Exhibit 10.49 to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-11954), filed on February 28, 2006

*

 

 

 

 

 

10.49**

-

Amendment, dated March 17, 2006, to the Vornado Realty Trust Omnibus Share Plan - Incorporated by reference to Exhibit 10.50 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 001-11954), filed on May 2, 2006

*

 


 

*              Incorporated by reference.

**           Management contract or compensatory agreement.

86




 

10.50**

-

Form of Vornado Realty Trust 2006 Out-Performance Plan Award Agreement, dated as of April 25, 2006 - Incorporated by reference to Exhibit 10.1 to Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on May 1, 2006

*

 

 

 

 

 

10.51**

-

Form of Vornado Realty Trust 2002 Restricted LTIP Unit Agreement - Incorporated by reference to Vornado Realty Trust’s Form 8-K (Filed No. 001-11954), filed on May 1, 2006

*

 

 

 

 

 

10.52**

-

Revolving Credit Agreement, dated as of June 28, 2006, among the Operating Partnership, the banks party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents, Deutsche Bank Trust Company Americas, Lasalle Bank National Association, and UBS Loan Finance LLC, as Documentation Agents and Vornado Realty Trust - Incorporated by reference to Exhibit 10.1 to Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on June 28, 2006

*

 

 

 

 

 

10.53**

 

-

Amendment No.2, dated May 18, 2006, to the Vornado Realty Trust Omnibus Share Plan

 

 

 

 

 

 

10.54**

 

-

Amended and Restated Employment Agreement between Vornado Realty Trust and Joseph Macnow dated July 27, 2006

 

 

 

 

 

 

15.1

 

-

Letter Regarding Unaudited Interim Financial Information

 

 

 

 

 

 

31.1

 

-

Rule 13a-14 (a) Certification of the Chief Executive Officer

 

 

 

 

 

 

31.2

 

-

Rule 13a-14 (a) Certification of the Chief Financial Officer

 

 

 

 

 

 

32.1

 

-

Section 1350 Certification of the Chief Executive Officer

 

 

 

 

 

 

32.2

 

-

Section 1350 Certification of the Chief Financial Officer

 

 


 

*              Incorporated by reference.

**           Management contract or compensatory agreement.

87



Exhibit 10.53

VORNADO REALTY TRUST

AMENDMENT NO. 2 TO VORNADO REALTY TRUST 2002 OMNIBUS SHARE PLAN

1.  Purpose Of Amendment.

The Vornado Realty Trust 2002 Omnibus Share Plan, as previously amended effective March 17, 2006 (the “Plan”) is hereby amended pursuant to Section 16 thereof to replace Section 15 (as such Sections were renumbered pursuant to Amendment No. 1 to the Plan) thereof, in its entirety, with the following:

“15.  Adjustment of and Changes in Shares.  In the event of any change in the outstanding Shares by reason of any share dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of Shares or other corporate change, or any distributions to common shareholders other than regular cash dividends, the Committee or the Board of Trustees, respectively, shall make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan and to outstanding awards; provided, however, that no such substitution or adjustment shall be required if the Committee or the Board of Trustees determines that such action could cause an award to fail to satisfy the conditions of an applicable exception from the requirements of Section 409A of the Internal Revenue Code (“Section 409A) or otherwise could subject a Participant to the additional tax impose under Section 409A in respect of an outstanding award; and further provided that no Participant shall have the right to require the Committee or the Board of Trustees to make any adjustment or substitution under this Section 14 or have any claim or right whatsoever against the Trust or any of its subsidiaries or affiliates or any of their respective trustees, directors, officer or employees in respect of any action taken or not taken under this Section 15.”

2.  No Shareholder Approval Required

Pursuant to Section 16 of the Plan, no shareholder approval of this amendment is required.

3.  No Other Changes

Except as expressly provided herein, there are no other amendments or modifications to the Plan other than all references to the Plan in the Plan or otherwise will mean 2002 Omnibus Share Plan as modified by Amendment No. 1 and Amendment No. 2 there to (and as may hereafter be amended or modified from time to time in accordance with the terms thereof).  The Plan continues in full force and effect as so modified

4.  Effective Date

This amendment is effective as of May 18, 2006, the date on which it was approved by the Board of Trustees.

 



Exhibit 10-54

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of July 27, 2006 (the “Agreement”), by and between VORNADO REALTY TRUST, a Maryland unincorporated business trust and Vornado Realty LP, a Delaware Operating Partnership (hereinafter referred to as “Employer”) and JOSEPH MACNOW, an individual (hereinafter referred to as “Employee”).

WHEREAS, Employer and Employee are parties to an agreement as of January 1, 2001, in connection with the terms and conditions of Employee’s employment by Employer (as previously amended, the “January 2001 Agreement”); and

WHEREAS, Employer and Employee have decided to amend some of the terms and conditions of the January 2001 Agreement and restate the agreement in its entirety.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree to amend and restate the January 2001 Agreement as of the date hereof as follows:

1.                   Employment.

Employer hereby agrees to employ Employee, and Employee agrees to serve as Executive Vice President-Finance and Administration and Chief Financial Officer of Employer during the Period of employment, as defined in Section 2.

2.                   Period of Employment.

The “Period of Employment” under this Agreement shall commence as of January 1, 2006 and subject to the provisions of this Agreement, shall continue through December 31, 2006; provided that the Period of Employment shall automatically be extended commencing on December 31, 2006 for successive additional one (1) year periods unless either party gives written notice not to extend the Period of Employment not less than ninety (90) days prior to the then next upcoming expiration date.

3.                   Duties During the Period of Employment.

Employee shall devote his full business time, attention and best efforts to the affairs of Employer and its subsidiaries during the Period of Employment; provided, however, that

 

1




Employee may engage in other activities, such as activities involving charitable, educational, religious and similar types of organizations (all of which are deemed to benefit Employer), speaking engagements, membership on the board of directors of non-profit organizations, and similar type activities to the extent that such other activities do not materially impair the performance of his duties under this Agreement, or inhibit or conflict in any material way with the business of Employer and its subsidiaries, and to the extent Employer does not object to such other activities.

4.                   Cash Compensation.

Employer shall pay to Employee a salary (“Base Compensation”) at an annual rate of $1,000,000.00, to be paid in equal biweekly installments.  Employee’s Base Compensation shall not be reduced during the term of this Agreement.

5.                   Stock Options and Other Equity.

(a)  For the purposes hereof, the term “Equity Awards” means grants, made at the discretion of the Compensation Committee of the Board of Trustees, of share options, restricted shares, restricted units or other forms of equity of the Employer or its affiliates (including the Outperformance Plan Units that were awarded to Employee on April 25, 2006 or similar units that may be granted thereafter (“OPP Units”)) made to employees of the Employer in connection with their service to the Employer.  Except as expressly designated otherwise at the time of grant, Equity Awards are intended to be granted pursuant to the terms of the Employer’s 2002 Omnibus Share Plan, as amended, or the applicable replacement plan.  During each calendar year in the Period of Employment that the Employer shall grant Equity Awards to platform heads of the Company, the Employer shall grant to Employee (unless otherwise agreed to by Employee) Equity Awards at a level commensurate with his position.  Such Equity Awards will be granted at the discretion of the Compensation Committee of the Board of Trustees of the Employer.  Employer shall take all necessary actions to ensure that grants of options qualify, to the extent permitted, as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), and successor provisions.

(b)  Notwithstanding the foregoing or anything else to the contrary in this Agreement or in any applicable agreement pertaining to Equity Awards now or hereafter existing, all Equity

2




Awards granted to the Employee will become vested and fully exercisable if the Employee is terminated by the Company pursuant to any of the terms and conditions of this Agreement, (including as a result of disability as provided in Section 7 (c)) or upon termination by Employee with Good Reason or death or retirement of the Employee following the Employee reaching the age of 65, provided if the Employee is terminated for Cause pursuant to Section 7(b), all Equity Awards remaining to vest shall be cancelled.  The provisions of this paragraph do not apply to a termination by the Employee (except for Good Reason) or to the effect of any termination upon any grant of OPP Units.  In each case described in the immediately preceding sentence, the terms and provisions of the applicable agreement governing the applicable grant of Equity Awards shall govern.

6.                   Other Employee Benefits.

(a)                 Vacation and Sick Leave.

Employee shall be entitled to paid annual vacation periods and to sick leave in accordance with Employer’s policy.

(b)                 Automobile.

Employer shall provide Employee with the use of an automobile of the same quality as that provided to other corporate officers of equal or similar position and pay all expenses incurred by Employee in connection with the use of the automobile.

(c)                 Regular Reimbursed Business Expenses.

Employer shall reimburse Employee for all expenses and disbursements reasonably incurred by Employee in the performance of his duties during the Period of Employment, and such other facilities or services as Employer and Employee may, from time to time, agree are reimbursable.

(d)                 Employee Benefit Plans or Arrangements.

In addition to the cash compensation provided for in Section 4 hereof and the stock options and other awards provided in Section 5 hereof, Employee, subject to meeting eligibility provisions and to the provisions of this Agreement, shall be entitled to participate in all employee benefits plans of Employer, as presently in effect or as they may be modified or added to by Employer from time to time, including, without limitation, plans providing retirement benefits,

3




medical insurance, life insurance, disability insurance, and accidental death or dismemberment insurance.  Without limiting the foregoing, Employee shall be entitled to tax preparation and financial planning assistance of $15,000 per calendar year and upon approval by an insurance carrier, a $3 million five-year renewal term life insurance policy or at Employee’s election other life insurance with a comparable cost to Employer.

7.                   Termination and Termination Benefits.

The termination of Employee’s employment during the Period of Employment by Employee or Employer shall not be treated as a breach of this agreement.

(a)                 Termination by the Employer Without Cause.

The Employer may terminate the Period of Employment and Employee’s employment hereunder without “Cause” upon written notice to Employee.  For purposes of this Section 7(a), a termination of the Period of Employment by the Employer without Cause shall include any termination or nonextension by the Employer (other than a termination for Cause as defined in Section 7(b) below).

(b)                 Termination by the Employer for Cause.

Subject to the following paragraph, the Employer may terminate the Period of Employment and Employee’s employment hereunder for “Cause” upon written notice to Employee. For purposes of this Section 7(b), a termination for Cause shall only mean a termination as a result of (i) Employee’s willful misconduct with regard to Employer or to any entity in control of, controlled by or under common control with the Employer (an “Affiliate”), including, but not limited to, any preferred stock subsidiary of the Employer that is materially economically injurious to Employer, (ii) Employee’s conviction of, or plea of guilty or nolo contendere to, a felony (other than a traffic violation) or (iii) Employee’s willful and continued failure to use reasonable business efforts to attempt to substantially perform his duties hereunder (other than such failure resulting from Employee’s incapacity due to a physical or mental illness or subsequent to the issuance of a notice of termination by Employee for Good Reason) after demand for substantial performance is delivered by Employer in writing that specifically identifies the manner in which Employer believes Employee has not used reasonable business efforts to attempt to substantially perform his duties.

4




 

For purposes of this Section 7(b), in addition to the other legal requirements to be “willful”, no act, or failure to act, by Employee shall be considered “willful” unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of Employer.  In addition, no action or inaction shall give rise to a right of Employer to terminate this Agreement and Employee’s employment hereunder for Cause pursuant to the preceding paragraph unless and until Employer has delivered to Employee a copy of a resolution duly adopted by a majority of the Board of Trustees (“Board”) at a meeting of the Board called and held for such purpose after reasonable (but in no event less than thirty (30) days notice to Employee and an opportunity for Employee, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Employee was guilty of any conduct set forth in the preceding paragraph and specifying the particulars thereof in detail.  This Section 7(b) shall not prevent Employee from challenging in any court of competent jurisdiction the Board’s determination that Cause exists or that Employee has failed to cure any act (or failure to act) that purportedly formed the basis for the Board’s determination.

(c)                 Termination by Employer Due to Disability.

If, due to illness, physical or mental disability, or other incapacity, Employee is substantially unable, for one hundred and eighty (180) consecutive days, to perform his duties hereunder, Employer may terminate the Period of Employment and his Employment hereunder upon at least thirty (30) days’ prior written notice to Employee given after one hundred eighty (180) days, and provided Employee does not return to the substantial performance of his duties on a full-time basis within such thirty (30) day period.

(d)                 Termination by Employee With Good Reason.

Subject to the following paragraph, Employee may terminate the Period of Employment and his employment hereunder for “Good Reason” upon written notice to Employer.  For purposes of this Section 7(d), a termination for Good Reason shall mean a termination as a result of (unless otherwise consented to in writing by Employee) (i) the failure to appoint Employee to the positions set forth in Section 1, the alteration of the duties, responsibilities and authority of Employee as set forth in Section 1 in a manner that is materially and adversely inconsistent with

5




such duties, and responsibilities or authority or a change to Employee’s position or title; (ii) a failure by Employer to pay when due any compensation to Employee or to substantially provide any benefit to Employee; (iii) the relocation of Employer’s principal executive offices to a location other than the New York Metropolitan area or relocation of Employee’s own office location from that of the principal offices; (iv) any purported termination of Employee’s employment for Cause which is not effected pursuant to the procedures of Section 7(b) (and for purposes of this Agreement, no such purported termination shall be effective); (v) Employer’s material breach of any material term contained in this Agreement; (vi) a Change in Control (as defined below), or (vii) any requirement that Employee report to anyone other than the Board, the President of Employer or the Chief Executive Officer of Employer.  Employee’s right to terminate his employment hereunder for Good Reason shall not be affected by his incapacity due to physical or mental illness.

For purposes of this Section 7(d), no action or inaction shall give rise to the right of Employee to terminate the Period of Employment and Employee’s employment hereunder for Good Reason unless a written notice is given by Employee to the Employer within one hundred twenty (120) days after Employee has actual knowledge of the occurrence of the event giving rise to Employee’s right to terminate pursuant to this Section 7(d), and such event has not been cured within thirty (30) days after such notice.  Employee’s continued employment during the one hundred and twenty (120) day period referred to above in this Section 7(d), shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.

For purposes of this Section 7(d), “Change in Control” shall mean the occurrence of any one of the following:

(i)          individuals who, as of January 1, 2006, constitute the Board (the “Incumbent Trustees”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a trustee subsequent to January 1, 2006 whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Trustees then on the Board (either by a specific vote or by approval of the proxy statement of Employer in which such person is named as a nominee for trustee, without objection to such nomination) shall be an Incumbent

6




Trustee, provided, however, that no individual initially elected or nominated as a trustee of Employer as a result of an actual or threatened election contest with respect to trustees or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be an Incumbent Trustee.

(ii) any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes, after January 1, 2006, a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Employer representing 30% or more of the combined voting power of Employer’s then outstanding securities eligible to vote for the election of the Board (the “Employer’s Voting Securities”), provided, however, that an event described in this paragraph (ii) shall not be deemed to be Change in Control if any of the following becomes such a beneficial owner:  (A) Employer or any majority-owned subsidiary (provided, that this exclusion applies solely to the ownership levels of Employer or the majority-owned subsidiary), (B) any tax-qualified, broad-based employee benefit plan sponsored or maintained by Employer or any majority-owned subsidiary, (C) any underwriter temporarily holding securities pursuant to an offering of such securities, (D) any person pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), (E) Employee or any group of persons including Employee (or any entity controlled by Employee or any group of persons including Employee) or (F) (i) any of the partners (as of January 1, 2006) in Interstate Properties (“Interstate”) including immediate family members and family trusts or family-only partnerships and any charitable foundations of such partners (the “Interstate Partners”), (ii) any entities the majority of the voting interests of which are beneficially owned by the Interstate Partners, or  (iii) any “group” (as described in Rule 13d-5(b) (i) under the Exchange Act) including the Interstate Partners, provided, that the Interstate Partners beneficially own a majority of Employer’s Voting Securities beneficially owned by such group (the persons in (i), (ii) and (iii) shall be individually and collectively referred to herein as, “Interstate Holders”);

(iii) the consummation of a merger, consolidation, share exchange or similar form of transaction involving Employer or any of its Subsidiaries, or the sale or other disposition of

7




all or substantially all of Employer’s assets (a “Business Transaction”), unless immediately following such Business Transaction (y) more than fifty percent (50%) of the total voting power of the entity resulting from such Business Transaction or the entity acquiring Employer’s assets of the Operating Partnership in such Business Transaction (the “Surviving Corporation”) is beneficially owned, directly or indirectly, by the Interstate Holders or Employer’s shareholders immediately prior to any such Business Transaction, and (z) no person (other than the persons set forth in clauses (A), (B), (C), or (F) of paragraph (ii) above or any tax-qualified, broad-based employee benefit plan of the Surviving Corporation or its Affiliates) beneficially owns, directly or indirectly, 30% or more of the total voting power of the Surviving Corporation (a “Non-Qualifying Transaction”); or

(iv) Board approval of a liquidation or dissolution of Employer, unless the voting common equity interests of an ongoing entity (other than a liquidating trust) are beneficially owned, directly or indirectly, by Employer’s shareholders in substantially the same proportions as such shareholders owned Employer’s outstanding voting common equity interests immediately prior to such liquidation and such ongoing entity assumes all existing obligations of Employer under this Agreement and any equity grant.

(e)                 Termination by Employee Other Than Pursuant to Section 7(d).  Employee may terminate this Agreement and Employee’s employment hereunder at any time, for any reason upon ninety (90)-days’ prior written notice to Employer.

(f)                  Death Benefit.  Notwithstanding any other provision of this Agreement, the Period of Employment shall terminate on the date of Employee’s death.  In such event, (i) Employee’s estate shall be paid the amount specified in Section 7(g)(i) below and one (1) times Employee’s annual rate of Base Salary and (ii) Employer shall provide Employee’s spouse and dependents with welfare benefits as provided in Section 7(g)(ii) for one (1) year from the date of death.

8




 

(g)                 Termination Compensation.  Upon the termination of the Period of Employment and Employee’s employment hereunder (including any nonextension of the Period of Employment), Employer shall provide Employee with the payments and benefits set forth below.  Employee acknowledges and agrees that the payments and benefits set forth in this Section and elsewhere herein and in other written grants and agreements constitute liquidated damages for termination of his employment hereunder (including any nonextension of the Period of Employment).

(i)  Upon a termination of the Period of Employment and Employee’s employment hereunder, Employee shall be entitled to promptly receive (A) his Base Compensation through the effective date of termination, (B) if such termination is other than pursuant to Section 7(b) hereof, any annual earned bonus for any completed fiscal year, (C) if such termination is pursuant to Sections 7(a), 7(c) or 7(d) hereof, a pro rata share of Employee’s annual target bonus for the fiscal year of termination, (D) the benefits, fringes and perquisites, including without limitation accrued vacation (provided that if the termination is pursuant to Section 7(b) or 7(e) hereof, only such payment of accrued vacation as is required by law or Employer’s vacation policy), provided pursuant to Section 6 hereof up to the effective date of such termination and (E) any other amount due to Employee under any other program or plan of Employer.

(ii) In the event of a termination of the Period of Employment and Employee’s employment pursuant to Section 7(a) (such reference shall include, without limitation, a nonextension by Employer of this Agreement) or 7(d) hereof, Employee shall also be entitled to (A) receive an amount (the “Severance Amount”) equal to the sum of (x) three times Employee’s annualized Base Compensation (as in effect on the date of such termination or, if greater, immediately prior to the Good Reason event, if any, based on which the termination of employment occurs) and (y) three times Employee’s Bonus Severance Amount (as defined herein).  The “Bonus Severance Amount” shall mean an amount equal to the average of all annual bonuses earned by the Employee from Employer in the two (2) fiscal years ending immediately prior to Employee’s termination; provided, however, that if Employee’s termination occurs during fiscal 2006, the “Bonus Severance Amount” shall be the higher of Employee’s annual bonus amount for the 2006

9




fiscal year or Employee’s annual target bonus for 2006 (the Severance Amount shall be payable in a lump sum within thirty (30) days of such termination) and (B) Employee shall become fully vested in any stock options granted to Employee by the Board.  In the event of a termination pursuant to Section 7(a), 7(c) or 7(d) hereof, Employee (his spouse and his dependents, if applicable) shall also be entitled to continue to participate in the medical, dental, hospitalization and life insurance programs existing on the date of termination (or any replacement plans for any such plans) with regard to senior executive officers of a similar level (or their cash equivalents, and, if Employer provides a cash payment in lieu of such benefits, it shall be calculated on a grossed-up tax basis as if Employee had remained an employee) for three (3) years from the date of termination; provided, that Employee shall be obligated to make all employee contributions required to receive such benefits under Employer’s programs and that such continued benefits shall terminate on the date or dates Employee receives equivalent coverage and benefits, without waiting period or pre-existing conditions limitations, under the plans and programs of a subsequent employer (such coverage and benefits to be determined on a coverage-by-coverage or benefit-by-benefit, basis).  Employee shall not be entitled to any compensation or benefits pursuant to this Section 7(g)(ii) if his employment hereunder is terminated pursuant to Section 7(b) or as a result of Employee’s voluntary termination pursuant to Section 7(e).  Notwithstanding anything herein to the contrary no Severance Amount payable to Employee under this section shall exceed the aggregate sum of $3,300,000.

(h)                 No Mitigation.  All amounts due hereunder shall be paid without any obligation to mitigate and such amounts shall not be reduced by or offset by any other amounts earned by Employee or any claims of Employer.

8.                   Non-Competition and Non-Disclosure.

In consideration of the benefits to be provided to Employee hereunder, Employee covenants that he will not, without the consent in writing of Employer, (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; and (b) upon termination of

10




the Period of Employment for any reason whatsoever, Employee will not for a period of two years thereafter, (i) solicit or aid in soliciting any employees of Employer or its subsidiaries to leave their employment, or (ii) copy, remove from Employer or its subsidiaries, disclose or make any use of, any client list, confidential business information with respect to clients, material relating to the practices or procedures of Employer or its subsidiaries, or any other proprietary information.  Employee acknowledges that the restrictions, prohibitions and other provisions of this Section 8 are reasonable, fair and equitable in scope, terms and duration, are necessary to protect the legitimate business interests of the Employer and are a material inducement to the Employer to enter into this Agreement.  It is the intention of the parties hereto that the restrictions contained in this paragraph be enforceable to the fullest extent permitted by applicable law.  Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable.  Should Employee engage in or perform, directly or indirectly, any of the acts prohibited by Section 8 hereof, it is agreed that the Employer shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining Employee and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts.  The foregoing remedy available to Employer shall not be deemed to limit or prevent the exercise by the Employer of any or all further rights and remedies, which may be available to the Employer hereunder or at law or in equity.

9.                   Burden and Benefit.

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and assigns.  In the event of the death of Employee at or after his termination, any amounts due hereunder shall be paid to his estate unless he has designated a beneficiary.

10.                 Legal Fees and Expenses.

If any contest or dispute shall arise between Employer and Employee regarding any provision of this Agreement or any equity grant or other agreement or compensation arrangement specifically set forth or provided for herein, Employer shall reimburse Employee for all legal fees

11




and expenses reasonably incurred by Employee in connection with such contest or dispute, but only if Employee is successful in respect of substantially all of the Employee’s claims brought and pursued in connection with such contest or dispute.  Such reimbursement shall be made as soon as practicable following the resolution of such contest or dispute (whether or not appealed) to the extent Employer receives reasonable written evidence of such fees and expenses.

11.                 Governing Law.

This Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of New Jersey.  If under such law any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement; and the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof.

12.                 Notices.

All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Employer’s case to its Secretary) or twenty-four (24) hours after deposit thereof in the U.S. mails, postage prepaid, for delivery as registered or certified mail — addressed, in the case of Employee, to him at his residential address, and in the case of Employer, to its corporate headquarters, attention of the Secretary, or to such other address as  Employee or Employer may designate in writing at any time or from time to time to the other party.  In lieu of notice by deposit in the U.S. mail, a party may give notice by telegram or telex.

13.                 Amendment.

No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Employee and by a duly authorized officer of the Employer, and such waiver is set forth in writing and signed by the party to be charged.  No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

12




 

14.                               Section 409A Provisions

It is the parties’ intention that the rights and benefits to which the Employee could become entitled in connection with the termination of employment covered under this Agreement comply with Section 409A of the Code.  Accordingly, such rights and benefits to which the Employee could become entitled are not intended to provide for the “deferral of compensation” within the meaning of Section 409A(d)(1) of the Code, and they shall be interpreted and construed in accordance with such intent.

15.                 Survival.

The respective obligations of, and benefits afforded to, Employee and Employer as provided in Section 8 of this Agreement shall survive the termination of this Agreement.

16.                 No Conflict of Interest.

During the Period of Employment, Employee shall not directly, or indirectly render service, or undertake any employment or consulting agreement with another entity without the express written consent of the Board of Trustees of the Employer.

17.                 Counterparts.

This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one of the same instrument.

18.                 Section Headings.

The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation.

19.                 Miscellaneous.

This Agreement constitutes the entire understanding between Employer and Employee relating to employment of Employee by Employer and supersedes and cancels all prior written and oral agreements and understandings with respect to the subject matter of this Agreement.  Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled.

13




 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the year and day first above written.

 

EMPLOYER:

 

VORNADO REALTY TRUST and

 

VORNADO REALTY LP

 

 

 

 

By:

/s/ Michael D. Fascitelli

 

 

Michael D. Fascitelli

 

 

President

 

 

 

 

EMPLOYEE:

 

 

 

 

 

/s/ Joseph Macnow

 

 

Joseph Macnow

 

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Exhibit 15.1

August 1, 2006

Vornado Realty Trust
New York, New York

We have made a review, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Vornado Realty Trust for the periods ended June 30, 2006 and 2005, as indicated in our report dated August 1, 2006; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 is incorporated by reference in:

Registration Statement No. 333-68462 on Form S-8
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
Amendment No.1 to Registration Statement No. 333-102215 on Form S-3
Amendment No.1 to Registration Statement No. 333-102217 on Form S-3
Registration Statement No. 333-105838 on Form S-3
Registration Statement No. 333-107024 on Form S-3
Registration Statement No. 333-109661 on Form S-3
Registration Statement No. 333-114146 on Form S-3
Registration Statement No. 333-114807 on Form S-3
Registration Statement No. 333-121929 on Form S-3

and in the following joint registration statements of Vornado Realty Trust and Vornado Realty L.P. :

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
Registration Statement No. 333-108138 on Form S-3
Registration Statement No. 333-122306 on Form S-3

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey

 



 

Exhibit 31.1

CERTIFICATION

I, Steven Roth, certify that:

1.               I have reviewed this quarterly report on Form 10-Q of Vornado Realty Trust;

2.               Based on my knowledge, this 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 report;

3.               Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.               The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure control and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)              Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 1, 2006

/s/ Steven Roth

 

 

Steven Roth

 

Chief Executive Officer

 



 

Exhibit 31.2

CERTIFICATION

I, Joseph Macnow, certify that:

1.               I have reviewed this quarterly report on Form 10-Q of Vornado Realty Trust;

2.               Based on my knowledge, this 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 report;

3.               Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.               The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure control and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)              Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 1, 2006

/s/ Joseph Macnow

 

 

Joseph Macnow

 

Chief Financial Officer

 



 

EXHIBIT 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsection (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of Vornado Realty Trust (the “Company”), hereby certifies, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for quarter ended June 30, 2006 (the “Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 1, 2006

/s/ Steven Roth

 

Name: Steven Roth

 

Title:   Chief Executive Officer

 

 



 

EXHIBIT 32.2

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsection (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of Vornado Realty Trust (the “Company”), hereby certifies, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (the “Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

August 1, 2006

/s/ Joseph Macnow

 

Name: Joseph Macnow

 

Title:   Chief Financial Officer