vrt2q2012.htm - Generated by SEC Publisher for SEC Filing  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2012

 

 

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 or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

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.  Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes No

 

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

 

x Large Accelerated Filer

 

o Accelerated Filer

o Non-Accelerated Filer (Do not check if smaller reporting company)

 

o Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

 

As of June 30, 2012, 185,814,787 of the registrant’s common shares of beneficial interest are outstanding.

 

 

  

 


 

 

PART I.

Financial Information:

Page Number

Item 1.

Financial Statements:

Consolidated Balance Sheets (Unaudited) as of

June 30, 2012 and December 31, 2011

3

Consolidated Statements of Income (Unaudited) for the

Three and Six Months Ended June 30, 2012 and 2011

4

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

for the Three and Six Months Ended June 30, 2012 and 2011

5

Consolidated Statements of Changes in Equity (Unaudited) for the

Six Months Ended June 30, 2012 and 2011

6

Consolidated Statements of Cash Flows (Unaudited) for the

Six Months Ended June 30, 2012 and 2011

8

Notes to Consolidated Financial Statements (Unaudited)

10

Report of Independent Registered Public Accounting Firm

38

Item 2.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

78

Item 4.

Controls and Procedures

79

PART II.

Other Information:

Item 1.

Legal Proceedings

80

Item 1A.

Risk Factors

81

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

81

Item 3.

Defaults Upon Senior Securities

81

Item 4.

Mine Safety Disclosures

81

Item 5.

Other Information

81

Item 6.

Exhibits

81

SIGNATURES

82

EXHIBIT INDEX

83

2

 


 

 

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

 

VORNADO REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

June 30,

December 31,

ASSETS

2012 

2011 

Real estate, at cost:

Land

$

4,598,453 

$

4,578,962 

Buildings and improvements

12,298,264 

12,328,234 

Development costs and construction in progress

140,394 

121,555 

Leasehold improvements and equipment

125,339 

126,841 

Total

17,162,450 

17,155,592 

Less accumulated depreciation and amortization

(3,070,968)

(2,979,897)

Real estate, net

14,091,482 

14,175,695 

Cash and cash equivalents

471,363 

606,553 

Restricted cash

112,726 

98,068 

Marketable securities

466,599 

741,321 

Accounts receivable, net of allowance for doubtful accounts of $42,166 and $43,241

180,769 

171,798 

Investments in partially owned entities

1,285,147 

1,233,650 

Investment in Toys "R" Us

573,292 

506,809 

Real Estate Fund investments

460,496 

346,650 

Mezzanine loans receivable

132,369 

133,948 

Receivable arising from the straight-lining of rents, net of allowance of $2,909 and $3,290

755,926 

712,231 

Deferred leasing and financing costs, net of accumulated amortization of $222,123 and $241,073

382,210 

368,873 

Identified intangible assets, net of accumulated amortization of $349,060 and $347,105

266,386 

295,460 

Assets related to discontinued operations

301,946 

661,724 

Due from officers

13,127 

Other assets

523,054 

380,580 

$

20,003,765 

$

20,446,487 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

Notes and mortgages payable

$

8,360,192 

$

8,483,621 

Senior unsecured notes

1,357,835 

1,357,661 

Revolving credit facility debt

500,000 

138,000 

Exchangeable senior debentures

497,898 

Convertible senior debentures

10,168 

Accounts payable and accrued expenses

431,346 

423,512 

Deferred revenue

481,302 

511,959 

Deferred compensation plan

101,163 

95,457 

Deferred tax liabilities

15,577 

13,315 

Liabilities related to discontinued operations

70,844 

93,603 

Other liabilities

175,056 

152,169 

Total liabilities

11,493,315 

11,777,363 

Commitments and contingencies

Redeemable noncontrolling interests:

Class A units - 12,036,494 and 12,160,771 units outstanding

1,010,825 

934,677 

Series D cumulative redeemable preferred units - 9,000,001 units outstanding

226,000 

226,000 

Total redeemable noncontrolling interests

1,236,825 

1,160,677 

Vornado shareholders' equity:

Preferred shares of beneficial interest: no par value per share; authorized 110,000,000

shares; issued and outstanding 42,184,609 and 42,186,709 shares

1,021,555 

1,021,660 

Common shares of beneficial interest: $.04 par value per share; authorized

250,000,000 shares; issued and outstanding 185,814,787 and 185,080,020 shares

7,402 

7,373 

Additional capital

7,059,872 

7,127,258 

Earnings less than distributions

(1,420,304)

(1,401,704)

Accumulated other comprehensive (loss) income

(162,785)

73,729 

Total Vornado shareholders' equity

6,505,740 

6,828,316 

Noncontrolling interests in consolidated subsidiaries

767,885 

680,131 

Total equity

7,273,625 

7,508,447 

$

20,003,765 

$

20,446,487 

See notes to consolidated financial statements (unaudited).

3

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

For the Three

For the Six

Months Ended June 30,

Months Ended June 30,

(Amounts in thousands, except per share amounts)

2012 

2011 

2012 

2011 

REVENUES:

Property rentals

$

532,399 

$

544,905 

$

1,067,374 

$

1,084,814 

Tenant expense reimbursements

78,833 

77,902 

157,934 

164,507 

Cleveland Medical Mart development project

56,304 

32,369 

111,363 

73,068 

Fee and other income

33,055 

40,862 

66,344 

75,048 

Total revenues

700,591 

696,038 

1,403,015 

1,397,437 

EXPENSES:

Operating

251,970 

257,228 

515,339 

528,642 

Depreciation and amortization

132,529 

125,802 

267,983 

251,598 

General and administrative

46,834 

49,795 

102,405 

108,243 

Cleveland Medical Mart development project

53,935 

29,940 

106,696 

68,218 

Acquisition related costs and tenant buy-outs

2,559 

1,897 

3,244 

20,167 

Total expenses

487,827 

464,662 

995,667 

976,868 

Operating income

212,764 

231,376 

407,348 

420,569 

(Loss) income applicable to Toys "R" Us

(19,190)

(22,846)

97,281 

90,098 

Income from partially owned entities

12,563 

26,016 

32,223 

41,895 

Income from Real Estate Fund (of which $12,306 and $12,102 in

each three-month period, respectively, and $20,239 and $12,028

in each six-month period, respectively, are attributable to

noncontrolling interests)

20,301 

19,058 

32,063 

20,138 

Interest and other investment (loss) income, net

(49,172)

7,998 

(33,507)

125,097 

Interest and debt expense (including amortization of deferred

financing costs of $5,855 and $5,191, in each three-month period,

respectively, and $11,720 and $9,792 in each six-month

period, respectively)

(128,427)

(135,361)

(262,655)

(268,296)

Net gain on disposition of wholly owned and partially owned assets

4,856 

4,856 

6,677 

Income before income taxes

53,695 

126,241 

277,609 

436,178 

Income tax expense

(7,479)

(5,641)

(14,304)

(11,589)

Income from continuing operations

46,216 

120,600 

263,305 

424,589 

Income from discontinued operations

12,012 

10,369 

75,187 

152,201 

Net income

58,228 

130,969 

338,492 

576,790 

Less net income attributable to noncontrolling interests in:

Consolidated subsidiaries

(14,721)

(13,657)

(24,318)

(15,007)

Operating Partnership, including unit distributions

(5,210)

(8,731)

(24,355)

(40,539)

Net income attributable to Vornado

38,297 

108,581 

289,819 

521,244 

Preferred share dividends

(17,787)

(16,668)

(35,574)

(30,116)

NET INCOME attributable to common shareholders

$

20,510 

$

91,913 

$

254,245 

$

491,128 

INCOME PER COMMON SHARE - BASIC:

Income from continuing operations, net

$

0.05 

$

0.44 

$

0.99 

$

1.89 

Income from discontinued operations, net

0.06 

0.06 

0.38 

0.78 

Net income per common share

$

0.11 

$

0.50 

$

1.37 

$

2.67 

Weighted average shares outstanding

185,673 

184,268 

185,521 

184,129 

INCOME PER COMMON SHARE - DILUTED:

Income from continuing operations, net

$

0.05 

$

0.44 

$

0.98 

$

1.88 

Income from discontinued operations, net

0.06 

0.05 

0.38 

0.75 

Net income per common share

$

0.11 

$

0.49 

$

1.36 

$

2.63 

Weighted average shares outstanding

186,342 

186,144 

186,271 

191,736 

DIVIDENDS PER COMMON SHARE

$

0.69 

$

0.69 

$

1.38 

$

1.38 

See notes to consolidated financial statements (unaudited).

4

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

For the Three

For the Six

Months Ended June 30,

Months Ended June 30,

(Amounts in thousands)

2012 

2011 

2012 

2011 

Net income

$

58,228 

$

130,969 

$

338,492 

$

576,790 

Other comprehensive (loss) income:

Change in unrealized net (loss) gain on securities

available-for-sale

(233,218)

(27,195)

(220,525)

40,844 

Pro rata share of other comprehensive (loss) income of

nonconsolidated subsidiaries

(4,310)

30,156 

(26,254)

26,365 

Change in value of interest rate swap

(8,388)

(10,887)

(6,002)

(18,034)

Other

496 

(5,105)

373 

(5,045)

Comprehensive (loss) income

(187,192)

117,938 

86,084 

620,920 

Less comprehensive income attributable to noncontrolling interests

(4,470)

(21,875)

(32,779)

(58,650)

Comprehensive (loss) income attributable to Vornado

$

(191,662)

$

96,063 

$

53,305 

$

562,270 

See notes to consolidated financial statements (unaudited).

5

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

Accumulated

(Amounts in thousands)

Earnings

Other

Non-

Preferred Shares

Common Shares

Additional

Less Than

Comprehensive

controlling

Total

Shares

Amount

Shares

Amount

Capital

Distributions

Income (Loss)

Interests

Equity

Balance, December 31, 2010

32,340 

$

783,088 

183,662 

$

7,317 

$

6,932,728 

$

(1,480,876)

$

73,453 

$

514,695 

$

6,830,405 

Net income

521,244 

15,007 

536,251 

Dividends on common shares

(254,099)

(254,099)

Dividends on preferred shares

(30,116)

(30,116)

Issuance of Series J preferred shares

8,850 

214,538 

214,538 

Common shares issued:

Upon redemption of Class A

units, at redemption value

401 

16 

35,192 

35,208 

Under employees' share

option plan

343 

14 

20,434 

(397)

20,051 

Under dividend reinvestment plan

10 

883 

883 

Contributions:

Real Estate Fund

109,241 

109,241 

Other

364 

364 

Distributions:

Real Estate Fund

(20,796)

(20,796)

Other

(15,604)

(15,604)

Conversion of Series A preferred

shares to common shares

(1)

(75)

75 

Deferred compensation shares

and options

10 

5,122 

5,122 

Change in unrealized net gain

on securities available-for-sale

40,844 

40,844 

Pro rata share of other

comprehensive income of

nonconsolidated subsidiaries

26,365 

26,365 

Change in value of interest rate swap

(18,034)

(18,034)

Adjustments to carry redeemable

Class A units at redemption value

(104,693)

(104,693)

Redeemable noncontrolling interests'

share of above adjustments

(3,104)

(3,104)

Other

(105)

(4,518)

(10)

(5,045)

4,376 

(5,302)

Balance, June 30, 2011

41,189 

$

997,446 

184,428 

$

7,347 

$

6,885,223 

$

(1,244,254)

$

114,479 

$

607,283 

$

7,367,524 

See notes to consolidated financial statements (unaudited).

6

 


 
 

 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - CONTINUED

(UNAUDITED)

Accumulated

(Amounts in thousands)

Earnings

Other

Non-

Preferred Shares

Common Shares

Additional

Less Than

Comprehensive

controlling

Total

Shares

Amount

Shares

Amount

Capital

Distributions

Income (Loss)

Interests

Equity

Balance, December 31, 2011

42,187 

$

1,021,660 

185,080 

$

7,373 

$

7,127,258 

$

(1,401,704)

$

73,729 

$

680,131 

$

7,508,447 

Net income

289,819 

24,318 

314,137 

Dividends on common shares

(256,119)

(256,119)

Dividends on preferred shares

(35,574)

(35,574)

Common shares issued:

Upon redemption of Class A

units, at redemption value

303 

12 

24,964 

24,976 

Under employees' share

option plan

412 

16 

8,800 

(16,389)

(7,573)

Under dividend reinvestment plan

10 

842 

843 

Contributions:

Real Estate Fund

108,319 

108,319 

Other

30 

30 

Distributions:

Real Estate Fund

(44,910)

(44,910)

Conversion of Series A preferred

shares to common shares

(2)

(105)

105 

Deferred compensation shares

and options

8,484 

(339)

8,145 

Change in unrealized net loss

on securities available-for-sale

(220,525)

(220,525)

Pro rata share of other

comprehensive loss of

nonconsolidated subsidiaries

(26,254)

(26,254)

Change in value of interest rate swap

(6,002)

(6,002)

Adjustments to carry redeemable

Class A units at redemption value

(110,581)

(110,581)

Redeemable noncontrolling interests'

share of above adjustments

15,894 

15,894 

Other

373 

(3)

372 

Balance, June 30, 2012

42,185 

$

1,021,555 

185,815 

$

7,402 

$

7,059,872 

$

(1,420,304)

$

(162,785)

$

767,885 

$

7,273,625 

See notes to consolidated financial statements (unaudited).

7

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the Six Months Ended

June 30,

2012 

2011 

(Amounts in thousands)

Cash Flows from Operating Activities:

Net income

$

338,492 

$

576,790 

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

Depreciation and amortization (including amortization of deferred financing costs)

285,617 

273,980 

Equity in net income of partially owned entities, including Toys “R” Us

(129,504)

(131,993)

Net gains on sale of real estate

(72,713)

(51,623)

Loss (income) from the mark-to-market of J.C. Penney derivative position

57,687 

(10,401)

Straight-lining of rental income

(43,124)

(22,291)

Distributions of income from partially owned entities

34,613 

43,741 

Unrealized gain on Real Estate Fund assets

(27,979)

(13,570)

Amortization of below-market leases, net

(26,457)

(33,704)

Other non-cash adjustments

20,993 

14,381 

Impairment losses

13,511 

Net gain on disposition of wholly owned and partially owned assets

(4,856)

(6,677)

Net gain on extinguishment of debt

(83,907)

Mezzanine loans loss reversal and net gain on disposition

(82,744)

Changes in operating assets and liabilities:

Real Estate Fund investments

(85,867)

(97,802)

Accounts receivable, net

(8,971)

(11,478)

Prepaid assets

(100,012)

(117,503)

Other assets

(18,582)

(10,424)

Accounts payable and accrued expenses

25,940 

13,250 

Other liabilities

5,076 

12,015 

Net cash provided by operating activities

263,864 

260,040 

Cash Flows from Investing Activities:

Proceeds from sales of real estate and related investments

370,037 

130,789 

Additions to real estate

(83,368)

(86,944)

Funding of J.C. Penney derivative collateral

(70,000)

Proceeds from sales of marketable securities

58,460 

19,301 

Development costs and construction in progress

(58,069)

(32,489)

Investments in partially owned entities

(57,237)

(426,376)

Acquisitions of real estate and other

(32,156)

Return of J.C. Penney derivative collateral

24,950 

Distributions of capital from partially owned entities

17,963 

271,375 

Restricted cash

(14,658)

91,127 

Proceeds from the repayment of loan to officer

13,123 

Proceeds from sales and repayments of mezzanine loans

1,994 

99,990 

Investments in mezzanine loans receivable and other

(145)

(43,516)

Net cash provided by investing activities

170,894 

23,257 

See notes to consolidated financial statements (unaudited).

8

 


 

 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

For the Six Months Ended

June 30,

2012 

2011 

(Amounts in thousands)

Cash Flows from Financing Activities:

Repayments of borrowings

$

(1,507,220)

$

(1,636,817)

Proceeds from borrowings

1,225,000 

1,284,167 

Dividends paid on common shares

(256,119)

(254,099)

Contributions from noncontrolling interests

108,349 

109,605 

Distributions to noncontrolling interests

(69,367)

(62,111)

Dividends paid on preferred shares

(35,576)

(27,117)

Repurchase of shares related to stock compensation agreements and/or related

tax withholdings

(30,034)

(748)

Debt issuance and other costs

(14,648)

(23,319)

Proceeds received from exercise of employee share options

9,667 

21,330 

Proceeds from the issuance of Series J preferred shares

214,538 

Purchases of outstanding preferred units and shares

(8,000)

Net cash used in financing activities

(569,948)

(382,571)

Net decrease in cash and cash equivalents

(135,190)

(99,274)

Cash and cash equivalents at beginning of period

606,553 

690,789 

Cash and cash equivalents at end of period

$

471,363 

$

591,515 

Supplemental Disclosure of Cash Flow Information:

Cash payments for interest, net of capitalized interest of $361 and $0

$

163,928 

$

256,776 

Cash payments for income taxes

$

6,494 

$

5,416 

Non-Cash Investing and Financing Activities:

Change in unrealized net (loss) gain on securities available-for-sale

$

(220,525)

$

40,844 

Adjustments to carry redeemable Class A units at redemption value

(110,581)

(104,693)

L.A. Mart seller financing

35,000 

Common shares issued upon redemption of Class A units, at redemption value

24,976 

35,208 

Contribution of mezzanine loan receivable to a joint venture

73,750 

Like-kind exchange of real estate

(45,625)

Decrease in assets and liabilities resulting from deconsolidation

of discontinued operations:

Assets related to discontinued operations

(145,333)

Liabilities related to discontinued operations

(232,502)

Write-off of fully depreciated assets

(131,770)

(32,794)

See notes to consolidated financial statements (unaudited).

9

 


 
 

 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.     Organization

 

Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”).  Accordingly, Vornado’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.  Vornado is the sole general partner of, and owned approximately 93.6% of the common limited partnership interest in the Operating Partnership at June 30, 2012.  All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.

 

 

2.    Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and include the accounts of Vornado, and the Operating Partnership and its consolidated partially owned entities.  All intercompany amounts have been eliminated. 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 (“GAAP”) have been condensed or omitted.  These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011, as filed with the SEC.

 

We have made estimates and assumptions that affect the reported amounts of assets and liabilities, 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.  The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the operating results for the full year.  Certain prior year balances have been reclassified in order to conform to current year presentation.

 

 

3.    Recently Issued Accounting Literature

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”).  ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy.  The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures (see Note 14 – Fair Value Measurements).

 

 

4.     Acquisitions

 

On July 5, 2012, we entered into an agreement to acquire a retail condominium located at 666 Fifth Avenue at 53rd Street for $707,000,000. The property has 126 feet of frontage on Fifth Avenue and contains 114,000 square feet, 39,000 square feet in fee and 75,000 square feet by long-term lease from the 666 Fifth Avenue office condominium, which is 49.5% owned by Vornado.  The acquisition will be funded by property level debt and proceeds from asset sales, and is expected to close in the fourth quarter, subject to customary closing conditions.

  

10

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

4.     Acquisitions- continued

 

 

On July 30, 2012, we entered into a lease with Host Hotels & Resorts, Inc. (NYSE:HST), under which we will redevelop the retail and signage components of the Marriott Marquis Times Square Hotel.  The lease contains options based on cash flow which, if exercised, would lead to our ownership.  The Marriott Marquis with over 1,900 rooms is one of the largest hotels in Manhattan.  It is located in the heart of the bow-tie of Times Square and spans the entire block front from 45th Street to 46th Street on Broadway.  The Marriott Marquis is directly across from our 1540 Broadway iconic retail property leased to Forever 21 and Disney flagship stores.  We plan to spend as much as $140 million to redevelop and substantially expand the existing retail space, including converting the below grade parking garage into retail, and creating six-story, 300 feet wide block front dynamic LED signs.

 

 

5.     Vornado Capital Partners Real Estate Fund (the “Fund”)

 

In February 2011, the Fund’s subscription period closed with an aggregate of $800,000,000 of capital commitments, of which we committed $200,000,000.  We are the general partner and investment manager of the Fund, which has an eight-year term and a three-year investment period.  During the investment period, which concludes in July 2013, the Fund is our exclusive investment vehicle for all investments that fit within its investment parameters, as defined.  The Fund is accounted for under the AICPA Investment Company Guide and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings.  We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting.

 

On April 26, 2012, the Fund acquired 520 Broadway, a 112,000 square foot office building located in Santa Monica, California for $59,650,000 and subsequently placed a $30,000,000 mortgage loan on the property.  The three-year loan bears interest at LIBOR plus 2.25% and has two one-year extension options.

 

On June 28, 2012, the Fund made an investment in an unconsolidated subsidiary that, on July 2, 2012, acquired 1100 Lincoln Road, a 167,000 square foot retail property, the western anchor of the Lincoln Road Shopping District in Miami Beach, Florida, for $132,000,000.  The purchase price consisted of $66,000,000 in cash and a $66,000,000 mortgage loan.  The three-year loan bears interest at LIBOR plus 2.75% and has two one-year extension options.

 

At June 30, 2012, the Fund had seven investments with an aggregate fair value of approximately $460,496,000, or $40,260,000  in excess of cost, and had remaining unfunded commitments of $330,753,000, of which our share was $82,688,250.  Below is a summary of income from the Fund for the three and six months ended June 30, 2012 and 2011.  

 

For the Three Months

For the Six Months

(Amounts in thousands)

Ended June 30,

Ended June 30,

2012 

2011 

2012 

2011 

Operating (loss) income

$

(834)

$

3,101 

$

4,084 

$

3,483 

Net realized gain

3,085 

3,085 

Net unrealized gains

21,135 

12,872 

27,979 

13,570 

Income from Real Estate Fund

20,301 

19,058 

32,063 

20,138 

Less (income) attributable to noncontrolling interests

(12,306)

(12,102)

(20,239)

(12,028)

Income from Real Estate Fund attributable to Vornado (1)

$

7,995 

$

6,956 

$

11,824 

$

8,110 

___________________________________

(1)

Excludes management, leasing and development fees of $600 and $865 for the three months ended June 30, 2012 and 2011, respectively, and $1,303 and $1,165 for the six months ended June 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                           

 

 

6.    Mezzanine Loans Receivable

 

As of June 30, 2012 and December 31, 2011, the carrying amount of mezzanine loans receivable was $132,369,000 and $133,948,000, respectively.  These loans have a weighted average interest rate of 9.53% and maturities ranging from August 2014 to May 2016.

11

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Marketable Securities and Derivative Instruments

Marketable Securities  

 

Our portfolio of marketable securities is comprised of debt and equity securities that are classified as available for sale.  Available for sale securities are presented on our consolidated balance sheets at fair value.  Gains and losses resulting from the mark-to-market of these securities are included in “other comprehensive (loss) income.”  Gains and losses are recognized in earnings only upon the sale of the securities and are recorded based on the weighted average cost of such securities.

 

In the six months ended June 30, 2012 and 2011, we sold certain marketable securities for aggregate proceeds of $58,460,000 and $19,301,000, resulting in net gains of $3,582,000 and $2,139,000, respectively, of which $3,582,000 and $48,000 were recognized in the three months ended June 30, 2012 and 2011.

 

Below is a summary of our marketable securities portfolio as of June 30, 2012 and December 31, 2011.

As of June 30, 2012

As of December 31, 2011

GAAP

Unrealized

GAAP

Unrealized

Maturity

Fair Value

Cost

(Loss) Gain

Maturity

Fair Value

Cost

Gain

Equity securities:

J.C. Penney

n/a

$

433,193 

$

591,214 

$

(158,021)

n/a

$

653,228 

$

591,069 

$

62,159 

Other

n/a

33,406 

14,183 

19,223 

n/a

30,568 

14,585 

15,983 

Debt securities

n/a

04/13 - 10/18

57,525 

53,941 

3,584 

$

466,599 

$

605,397 

$

(138,798)

$

741,321 

$

659,595 

$

81,726 

 

 

Investment in J.C. Penney Company, Inc. (“J.C. Penney”) (NYSE: JCP)

 

We own 23,400,000 J.C. Penney common shares, or 11.0% of its outstanding common shares.  Below are the details of our investment.

 

We own 18,584,010 common shares at an average economic cost of $25.76 per share, or $478,677,000 in the aggregate.  As of June 30, 2012, these shares have an aggregate fair value of $433,193,000, based on J.C. Penney’s closing share price of $23.31 per share.  Unrealized gains and losses from the mark-to-market of these shares are included in “other comprehensive (loss) income.”  The three and six months ended June 30, 2012 include $225,383,000 and $220,180,000, respectively, of unrealized losses.  The three and six months ended June 30, 2011 include $25,611,000 of unrealized losses and $41,292,000 of unrealized gains, respectively.

 

We also own an economic interest in 4,815,990 common shares through a forward contract executed on October 7, 2010, at a weighted average strike price of $28.93 per share, or $139,348,000 in the aggregate.  The contract may be settled, at our election, in cash or common shares, in whole or in part, at any time prior to October 9, 2012.  The strike price per share increases at an annual rate of LIBOR plus 80 basis points.  The contract is a derivative instrument that does not qualify for hedge accounting treatment.  Gains and losses from the mark-to-market of the underlying common shares are recognized in “interest and other investment (loss) income, net” on our consolidated statements of income.  In the three and six months ended June 30, 2012, we recognized losses of $58,732,000 and $57,687,000, respectively, from the mark-to-market of the underlying common shares, and as of June 30, 2012, have funded $45,050,000 in connection with this derivative position.  In the three and six months ended June 30, 2011, we recognized a loss of $6,762,000 and income of $10,401,000, respectively, from the mark-to-market of the underlying common shares. 

 

At June 30, 2012, the aggregate economic net loss on our investment in J.C. Penney, after dividends, was $43,224,000, based on our economic cost of $26.41 per share.

 

8.    Investments in Partially Owned Entities

 

Toys “R” Us (“Toys”)

As of June 30, 2012, we own 32.5% of Toys.  The business of Toys is highly seasonal.  Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income.  We account for our investment in Toys under the equity method and record our 32.5% share of Toys net income or loss on a one-quarter lag basis because Toys’ fiscal year ends on the Saturday nearest January 31, and our fiscal year ends on December 31.  As of June 30, 2012, the carrying amount of our investment in Toys does not differ materially from our share of the equity in the net assets of Toys on a purchase accounting basis.

12

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

8.    Investments in Partially Owned Entities – continued

 

Below is a summary of Toys’ latest available financial information on a purchase accounting basis:

 

(Amounts in thousands)

Balance as of

Balance Sheet:

April 28, 2012

October 29, 2011

Assets

$

11,889,000 

$

13,221,000 

Liabilities

9,969,000 

11,530,000 

Noncontrolling interests

34,000 

Toys “R” Us, Inc. equity

1,886,000 

1,691,000 

For the Three Months Ended

For the Six Months Ended

Income Statement:

April 28, 2012

April 30, 2011

April 28, 2012

April 30, 2011

Total revenues

$

2,612,000 

$

2,636,000 

$

8,537,000 

$

8,608,000 

Net (loss) income attributable to Toys

(66,000)

(77,000)

283,000 

262,000 

 

 

Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX)

 

As of June 30, 2012, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity.  We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.  As of June 30, 2012, Alexander’s owed us $40,480,000 in fees under these agreements.

 

As of June 30, 2012, the market value of our investment in Alexander’s, based on Alexander’s June 30, 2012 closing share price of $431.11, was $713,085,000, or $524,376,000 in excess of the carrying amount on our consolidated balance sheet.  As of June 30, 2012, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander’s by approximately $58,552,000.  The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets.  Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to real estate (land and buildings).  We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives.  This amortization is not material to our share of equity in Alexander’s net income.  The basis difference related to the land will be recognized upon disposition of our investment.

 

Below is a summary of Alexander’s latest available financial information:

 

(Amounts in thousands)

Balance as of

Balance Sheet:

June 30, 2012

December 31, 2011

Assets

$

1,761,000 

$

1,771,000 

Liabilities

1,397,000 

1,408,000 

Noncontrolling interests

5,000 

4,000 

Stockholders' equity

359,000 

359,000 

For the Three Months Ended

For the Six Months Ended

Income Statement:

June 30, 2012

June 30, 2011

June 30, 2012

June 30, 2011

Total revenues

$

64,000 

$

62,000 

$

127,000 

$

125,000 

Net income attributable to Alexander’s

19,000 

20,000 

38,000 

38,000 

                             

 

 

Lexington Realty Trust (“Lexington”) (NYSE: LXP)

 

As of June 30, 2012, we own 18,468,969 Lexington common shares, or approximately 11.9% of Lexington’s common equity.  We account for our investment in Lexington under the equity method because we believe we have the ability to exercise significant influence over Lexington’s operating and financial policies, based on, among other factors, our representation on Lexington’s Board of Trustees and the level of our ownership in Lexington as compared to other shareholders.  We record our pro rata share of Lexington’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its consolidated financial statements. 

13

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

8.    Investments in Partially Owned Entities – continued

 

Based on Lexington’s June 30, 2012 closing share price of $8.47, the market value of our investment in Lexington was $156,432,000, or $102,877,000 in excess of the June 30, 2012 carrying amount on our consolidated balance sheet.  As of June 30, 2012, the carrying amount of our investment in Lexington was less than our share of the equity in the net assets of Lexington by approximately $45,263,000.   This basis difference resulted primarily from $107,882,000 of non-cash impairment charges recognized in 2008, partially offset by purchase accounting for our acquisition of an additional 8,000,000 common shares of Lexington in October 2008, of which the majority relates to our estimate of the fair values of Lexington’s real estate (land and buildings) as compared to the carrying amounts in Lexington’s consolidated financial statements.  We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives.  This amortization is not material to our share of equity in Lexington’s net income or loss.  The basis difference related to the land will be recognized upon disposition of our investment.

 

Below is a summary of Lexington’s latest available financial information:

 

(Amounts in thousands)

Balance as of

Balance Sheet:

March 31, 2012

September 30, 2011

Assets

$

3,047,000 

$

3,164,000 

Liabilities

1,844,000 

1,888,000 

Noncontrolling interests

60,000 

59,000 

Shareholders’ equity

1,143,000 

1,217,000 

For the Three Months Ended

For the Six Months Ended

Income Statement:

March 31, 2012

March 31, 2011

March 31, 2012

March 31, 2011

Total revenues

$

83,000 

$

80,000 

$

166,000 

$

160,000 

Net income (loss) attributable to Lexington

4,000 

(17,000)

17,000 

(5,000)

 

 

LNR Property LLC (“LNR”)

 

As of June 30, 2012, we own a 26.2% equity interest in LNR.  We account for our investment in LNR under the equity method and record our 26.2% share of LNR’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to receiving LNR’s consolidated financial statements.

 

LNR consolidates certain Commercial Mortgage-Backed Securities (“CMBS”) and Collateralized Debt Obligation (“CDO”) trusts for which it is the primary beneficiary.  The assets of these trusts (primarily commercial mortgage loans), which aggregate approximately $85 billion as of March 31, 2012, are the sole source of repayment of the related liabilities, which are non-recourse to LNR and its equity holders, including us.  Changes in the fair value of these assets each period are offset by changes in the fair value of the related liabilities through LNR’s consolidated income statement.  As of June 30, 2012, the carrying amount of our investment in LNR does not materially differ from our share of LNR’s equity.

 

Below is a summary of LNR’s latest available financial information:

 

(Amounts in thousands)

Balance as of

Balance Sheet:

March 31, 2012

September 30, 2011

Assets

$

86,155,000 

$

128,536,000 

Liabilities

85,383,000 

127,809,000 

Noncontrolling interests

14,000 

55,000 

LNR Property Corporation equity

758,000 

672,000 

For the Three Months Ended

For the Six Months Ended

Income Statement:

March 31, 2012

March 31, 2011

March 31, 2012

March 31, 2011

Total revenues

$

55,000 

$

47,000 

$

104,000 

$

83,000 

Net income attributable to LNR

36,000 

42,000 

87,000 

100,000 

                             

14

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

8.    Investments in Partially Owned Entities – continued

 

Below is a schedule of our investments in partially owned entities as of June 30, 2012 and December 31, 2011.

 

Percentage

(Amounts in thousands)

Ownership at

Balance as of

Investments:

June 30, 2012

June 30, 2012

December 31, 2011

Toys

32.5 %(1)

$

573,292 

$

506,809 

Alexander’s

32.4 %

$

188,709 

$

189,775 

Lexington

11.9 %(2)

53,555 

57,402 

LNR

26.2 %

192,788 

174,408 

India real estate ventures

4.0%-36.5%

96,518 

80,499 

Partially owned office buildings:

280 Park Avenue

49.5 %

186,102 

184,516 

Rosslyn Plaza

43.7%-50.4%

62,552 

53,333 

West 57th Street properties

50.0 %

57,754 

58,529 

One Park Avenue

30.3 %

48,202 

47,568 

666 Fifth Avenue Office Condominium

49.5 %

33,107 

23,655 

330 Madison Avenue

25.0 %

23,229 

20,353 

1101 17th Street

55.0 %

21,688 

20,407 

Fairfax Square

20.0 %

6,144 

6,343 

Warner Building

55.0 %

5,009 

2,715 

Other partially owned office buildings

Various

10,569 

11,547 

Other equity method investments:

Verde Realty Operating Partnership

8.3 %

58,595 

59,801 

Independence Plaza Partnership (3)

51.0 %

51,718 

48,511 

Downtown Crossing, Boston

50.0 %

47,365 

46,691 

Monmouth Mall

50.0 %

7,573 

7,536 

Other equity method investments (4)

Various

133,970 

140,061 

$

1,285,147 

$

1,233,650 

(1)

32.7% at December 31, 2011.

(2)

12.0% at December 31, 2011.

(3)

Represents an investment in mezzanine loans to the property owner entity.

(4)

Includes interests in 85 10th Avenue, Farley Project, Suffolk Downs, Dune Capital L.P., Fashion Centre Mall and others.

15

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

8.    Investments in Partially Owned Entities - continued

 

Below is a schedule of income recognized from investments in partially owned entities for the three and six months ended June 30, 2012 and 2011.

Percentage

For the Three Months

For the Six Months

(Amounts in thousands)

Ownership

Ended June 30,

Ended June 30,

Our Share of Net Income (Loss):

June 30, 2012

2012 

2011 

2012 

2011 

Toys:

32.5 %(1)

Equity in net (loss) income before income taxes

$

(35,664)

$

(49,017)

$

121,723 

$

130,822 

Income tax benefit (expense)

14,103 

23,969 

(29,100)

(45,049)

Equity in net (loss) income

(21,561)

(25,048)

92,623 

85,773 

Management fees

2,371 

2,202 

4,658 

4,325 

$

(19,190)

$

(22,846)

$

97,281 

$

90,098 

Alexander’s:

32.4 %

Equity in net income

$

5,941 

$

6,351 

$

12,073 

$

12,070 

Fee income

1,907 

1,900 

3,796 

3,787 

7,848 

8,251 

15,869 

15,857 

Lexington:

11.9 %(2)

Equity in net (loss) income

(236)

346 

694 

1,066 

Net gain resulting from Lexington's stock issuance

8,308 

9,760 

(236)

8,654 

694 

10,826 

LNR:

26.2 %

Equity in net income

9,469 

4,983 

22,719 

11,260 

Net gains from asset sales and tax settlement gains

6,020 

14,997 

9,469 

11,003 

22,719 

26,257 

India real estate ventures

4.0%-36.5%

(3,815)

205 

(4,608)

(2)

Partially owned office buildings:

Warner Building:

55.0 %

Equity in net loss

(1,589)

(3,225)

(4,599)

(3,525)

Straight-line reserves and write-off of tenant

improvements

(9,022)

(1,589)

(3,225)

(4,599)

(12,547)

280 Park Avenue (acquired in May 2011)

49.5 %

(1,955)

(2,184)

(7,550)

(2,184)

666 Fifth Avenue Office Condominium (acquired

in December 2011)

49.5 %

1,785 

3,500 

1101 17th Street

55.0 %

646 

700 

1,329 

1,423 

330 Madison Avenue

25.0 %

18 

506 

812 

1,125 

One Park Avenue (acquired in March 2011)

30.3 %

303 

(243)

634 

(1,471)

West 57th Street properties

50.0 %

252 

238 

565 

336 

Rosslyn Plaza

43.7%-50.4%

145 

(195)

303 

2,220 

Fairfax Square

20.0 %

(40)

42 

(52)

29 

Other partially owned office buildings

Various

555 

1,997 

1,082 

4,086 

120 

(2,364)

(3,976)

(6,983)

Other equity method investments:

Independence Plaza Partnership (acquired in June 2011) (3)

51.0 %

1,733 

3,415 

Downtown Crossing, Boston

50.0 %

(500)

(242)

(834)

(748)

Monmouth Mall

50.0 %

298 

826 

660 

957 

Verde Realty Operating Partnership

8.3 %

(289)

585 

(612)

(1,209)

Other equity method investments (4)

Various

(2,065)

(902)

(1,104)

(3,060)

(823)

267 

1,525 

(4,060)

$

12,563 

$

26,016 

$

32,223 

$

41,895 

(1)

32.7% at June 30, 2011.

(2)

11.7% at June 30, 2011.

(3)

Represents an investment in mezzanine loans to the property owner entity.

(3)

Includes interests in 85 10th Avenue, Farley Project, Suffolk Downs, Dune Capital L.P., Fashion Centre Mall and others.

16

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

8.    Investments in Partially Owned Entities – continued

Below is a summary of the debt of our partially owned entities as of June 30, 2012 and December 31, 2011, none of which is recourse to us.

Interest  

100% of

Percentage

Rate at

Partially Owned Entities’ Debt at

(Amounts in thousands)

Ownership at

June 30,

June 30,

December 31,

June 30, 2012

Maturity

2012 

2012 

2011 

Toys:

32.5 %(1)

Notes, loans and mortgages payable

2012-2021

7.40 %

$

5,439,646 

$

6,047,521 

 

Alexander's:

32.4 %

 

Mortgage notes payable

2013-2018

3.51 %

$

1,323,532 

$

1,330,932 

 

Lexington:

11.9 %(2)

 

Mortgage notes payable

2012-2037

5.58 %

$

1,652,094 

$

1,712,750 

 

LNR:

26.2 %

 

Mortgage notes payable

2013-2031

4.34 %

$

373,286 

$

353,504 

Liabilities of consolidated CMBS and CDO trusts

n/a

5.32 %

84,922,346 

127,348,336 

 

$

85,295,632 

$

127,701,840 

 

Partially owned office buildings:

 

666 Fifth Avenue Office Condominium mortgage

 

note payable

49.5 %

02/19

6.76 %

$

1,070,288 

$

1,035,884 

280 Park Avenue mortgage notes payable

49.5 %

06/16

6.65 %

738,001 

737,678 

Warner Building mortgage note payable

55.0 %

05/16

6.26 %

292,700 

292,700 

One Park Avenue mortgage note payable

30.3 %

03/16

5.00 %

250,000 

250,000 

330 Madison Avenue mortgage note payable

25.0 %

06/15

1.74 %

150,000 

150,000 

Fairfax Square mortgage note payable

20.0 %

12/14

7.00 %

70,558 

70,974 

Rosslyn Plaza mortgage note payable

43.7% to 50.4%

n/a

n/a

56,680 

West 57th Street properties mortgage note payable

50.0 %

02/14

4.94 %

21,026 

21,864 

Other

Various

Various

6.38 %

69,972 

70,230 

 

$

2,662,545 

$

2,686,010 

 

India Real Estate Ventures:

 

TCG Urban Infrastructure Holdings mortgage notes

 

payable

25.0 %

2012-2022

12.97 %

$

227,820 

$

226,534 

 

Other:

 

Verde Realty Operating Partnership mortgage notes

 

payable

8.3 %

2013-2025

5.51 %

$

522,022 

$

340,378 

Monmouth Mall mortgage note payable

50.0 %

09/15

5.44 %

161,016 

162,153 

Other(3)

Various

Various

4.88 %

973,289 

992,872 

 

$

1,656,327 

$

1,495,403 

 

 

(1)

32.7% at December 31, 2011.

(2)

12.0% at December 31, 2011.

(3)

Includes interests in Suffolk Downs, Fashion Centre Mall and others.

 

 

Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $26,214,635,000 and $37,531,298,000 at June 30, 2012 and December 31, 2011, respectively.  Excluding our pro rata share of LNR’s liabilities related to consolidated CMBS and CDO trusts, which are non-recourse to LNR and its equity holders, including us, our pro rata share of partially owned entities debt was $3,987,060,000 and $4,199,145,000 at June 30, 2012 and December 31, 2011, respectively.

 

17

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

9.    Discontinued Operations

 

During 2012, we sold or have entered into agreements to sell (i) five Mart properties, (ii) one Washington, DC property, and (iii) 11 Retail properties, for an aggregate of $792,000,000.  Below are the details of these transactions.

 

Merchandise Mart Properties

 

On January 6, 2012, we completed the sale of 350 West Mart Center, a 1.2 million square foot office building in Chicago, Illinois, for $228,000,000 in cash, which resulted in a net gain of $54,911,000.

 

On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.

 

On July 5, 2012, we entered into agreements to sell the Washington Design Center, the Boston Design Center and the Canadian Trade Shows, for an aggregate of $175,000,000 in cash, which will result in a net gain aggregating approximately $24,500,000.  The sales of the Canadian Trade Shows and the Washington Design Center were completed in July 2012 and the sale of the Boston Design Center is expected to be completed in the third quarter, subject to customary closing conditions. 

 

Washington, DC Property

 

On July 26, 2012, we completed the sale of 409 Third Street S.W., a 409,000 square foot office building in Washington, DC, for $200,000,000 in cash, which resulted in a net gain of approximately $124,700,000, that will be recognized in the third quarter.  This building is contiguous to the Washington Design Center and was sold to the same purchaser.

 

Retail Properties

 

During 2012, we sold 11 retail properties in separate transactions, for an aggregate of $136,000,000 in cash, which resulted in a net gain aggregating $17,802,000.

 

We have reclassified the revenues and expenses of all of the properties discussed above, as well as 10 other retail properties that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying financial statements.  The tables below set forth the assets and liabilities related to discontinued operations at June 30, 2012 and December 31, 2011 and their combined results of operations for the three and six months ended June 30, 2012 and 2011.  

 

Assets Related to

Liabilities Related to

(Amounts in thousands)

Discontinued Operations as of

Discontinued Operations as of

June 30,

December 31,

June 30,

December 31,

2012 

2011 

2012 

2011 

Merchandise Mart Properties

$

134,698 

$

376,571 

$

67,071 

$

74,236 

Retail Properties

102,620 

220,249 

3,773 

19,367 

409 Third Street S.W.

64,628 

64,904 

Total

$

301,946 

$

661,724 

$

70,844 

$

93,603 

For the Three Months

For the Six Months

(Amounts in thousands)

Ended June 30,

Ended June 30,

2012 

2011 

2012 

2011 

Total revenues

$

22,678 

$

34,509 

$

49,429 

$

76,622 

Total expenses

14,051 

24,598 

33,444 

59,951 

8,627 

9,911 

15,985 

16,671 

Net gains on sale of real estate

16,896 

458 

72,713 

51,623 

Impairment losses

(13,511)

(13,511)

Net gain on extinguishment of High Point debt

83,907 

Income from discontinued operations

$

12,012 

$

10,369 

$

75,187 

$

152,201 

18

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

10.    Identified Intangible Assets and Liabilities

 

 

The following summarizes our identified intangible assets (primarily acquired above-market leases) and liabilities (primarily acquired below-market leases) as of June 30, 2012 and December 31, 2011.

 

Balance as of

June 30,

December 31,

(Amounts in thousands)

2012 

2011 

Identified intangible assets:

Gross amount

$

615,446 

$

642,565 

Accumulated amortization

(349,060)

(347,105)

Net

$

266,386 

$

295,460 

Identified intangible liabilities (included in deferred revenue):

Gross amount

$

819,397 

$

830,411 

Accumulated amortization

(386,293)

(367,525)

Net

$

433,104 

$

462,886 

 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $12,411,000 and $16,427,000 for the three months ended June 30, 2012 and 2011, respectively, and $25,986,000 and $32,772,000 for the six months ended June 30, 2012 and 2011, respectively.  Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2013 is as follows:

 

(Amounts in thousands)

2013 

$

43,597 

2014 

37,331 

2015 

34,260 

2016 

31,212 

2017 

25,704 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $14,492,000 and $13,060,000 for the three months ended June 30, 2012 and 2011, respectively, and $26,424,000 and $26,715,000 for the six months ended June 30, 2012 and 2011, respectively.  Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years commencing January 1, 2013 is as follows:

 

(Amounts in thousands)

2013 

$

40,047 

2014 

21,670 

2015 

16,700 

2016 

14,173 

2017 

11,571 

 

We are a tenant under ground leases for certain properties.  Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $408,000 and $344,000 for the three months ended June 30, 2012 and 2011, respectively, and $774,000 and $688,000 for the six months ended June 30, 2012 and 2011, respectively.  Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2013 is as follows:

 

(Amounts in thousands)

2013 

$

1,472 

2014 

1,457 

2015 

1,457 

2016 

1,457 

2017 

1,457 

19

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

11.    Debt

 

The following is a summary of our debt:

Interest

(Amounts in thousands)

Rate at

Balance at

June 30,

June 30,

December 31,

Notes and mortgages payable:

Maturity (1)

2012 

2012 

2011 

Fixed rate:

New York:

Two Penn Plaza

03/18

5.13 %

$

425,000 

$

425,000 

1290 Avenue of the Americas

01/13

5.97 %

410,841 

413,111 

770 Broadway

03/16

5.65 %

353,000 

353,000 

888 Seventh Avenue

01/16

5.71 %

318,554 

318,554 

350 Park Avenue(2)

01/17

3.75 %

300,000 

430,000 

909 Third Avenue

04/15

5.64 %

201,237 

203,217 

828-850 Madison Avenue Condominium - retail

06/18

5.29 %

80,000 

80,000 

510 5th Avenue - retail

01/16

5.60 %

31,495 

31,732 

Washington, DC:

Skyline Properties(3)

02/17

5.74 %

684,598 

678,000 

River House Apartments

04/15

5.43 %

195,546 

195,546 

2121 Crystal Drive

03/23

5.51 %

150,000 

150,000 

Bowen Building

06/16

6.14 %

115,022 

115,022 

1215 Clark Street, 200 12th Street and 251 18th Street

01/25

7.09 %

107,097 

108,423 

West End 25

06/21

4.88 %

101,671 

101,671 

Universal Buildings

04/14

6.47 %

95,755 

98,239 

Reston Executive I, II, and III

01/13

5.57 %

93,000 

93,000 

2011 Crystal Drive

08/17

7.30 %

80,023 

80,486 

1550 and 1750 Crystal Drive

11/14

7.08 %

75,254 

76,624 

220 20th Street

02/18

4.61 %

74,437 

75,037 

1235 Clark Street(4)

07/12

6.75 %

50,786 

51,309 

2231 Crystal Drive

08/13

7.08 %

42,581 

43,819 

1225 Clark Street

08/13

7.08 %

25,470 

26,211 

1750 Pennsylvania Avenue

n/a

n/a

44,330 

Retail:

Cross-collateralized mortgages on 40 strip shopping centers

09/20

4.22 %

579,350 

585,398 

Montehiedra Town Center

07/16

6.04 %

120,000 

120,000 

Broadway Mall

07/13

5.30 %

86,479 

87,750 

North Bergen (Tonnelle Avenue)

01/18

4.59 %

75,000 

75,000 

Las Catalinas Mall

11/13

6.97 %

55,022 

55,912 

Other

06/14-05/36

5.12%-7.30%

87,452 

88,237 

Merchandise Mart:

Merchandise Mart

12/16

5.57 %

550,000 

550,000 

Other:

555 California Street

09/21

5.10 %

600,000 

600,000 

Borgata Land

02/21

5.14 %

60,000 

60,000 

Total fixed rate notes and mortgages payable

5.44 %

$

6,224,670 

$

6,414,628 

___________________

See notes on page 22.

20

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

11.    Debt - continued

Interest

(Amounts in thousands)

Rate at

Balance at

Spread over

June 30,

June 30,

December 31,

Notes and mortgages payable:

Maturity (1)

LIBOR

2012 

2012 

2011 

Variable rate:

New York:

Eleven Penn Plaza

01/19

L+235 

2.59 %

$

330,000 

$

330,000 

100 West 33rd Street - office & retail(5)

03/17

L+250 

2.74 %

325,000 

232,000 

4 Union Square South - retail

04/14

L+325 

3.49 %

75,000 

75,000 

435 Seventh Avenue - retail(6)

08/14

L+300  (6)

5.00 %

51,093 

51,353 

866 UN Plaza

05/16

L+125 

1.49 %

44,978 

44,978 

Washington, DC:

2101 L Street

02/13

L+120 

1.42 %

148,125 

150,000 

River House Apartments

04/18

n/a (7)

1.62 %

64,000 

64,000 

2200/2300 Clarendon Boulevard

01/15

L+75 

0.99 %

50,359 

53,344 

1730 M and 1150 17th Street

06/14

L+140 

1.65 %

43,581 

43,581 

Retail:

Green Acres Mall

02/13

L+140 

1.64 %

308,825 

325,045 

Bergen Town Center

03/13

L+150 

1.74 %

282,312 

283,590 

San Jose Strip Center

03/13

L+400 

4.25 %

109,072 

112,476 

Beverly Connection (8)

09/14

L+425  (8)

4.75 %

100,000 

100,000 

Cross-collateralized mortgages on 40 strip

shopping centers (9)

09/20

L+136  (9)

2.36 %

60,000 

60,000 

Other

11/12

L+375 

3.99 %

19,427 

19,876 

Other:

220 Central Park South

10/13

L+275 

2.99 %

123,750 

123,750 

Total variable rate notes and mortgages payable

2.48 %

2,135,522 

2,068,993 

Total notes and mortgages payable

4.68 %

$

8,360,192 

$

8,483,621 

 

Senior unsecured notes:

 

Senior unsecured notes due 2015

04/15

4.25 %

$

499,545 

$

499,462 

Senior unsecured notes due 2039 (10)

10/39

7.88 %

460,000 

460,000 

Senior unsecured notes due 2022

01/22

5.00 %

398,290 

398,199 

Total senior unsecured notes

5.70 %

$

1,357,835 

$

1,357,661 

Unsecured revolving credit facilities:

$1.25 billion unsecured revolving credit facility

11/16

L+125 

1.47 %

$

500,000 

$

138,000 

$1.25 billion unsecured revolving credit facility

($22,195 reserved for outstanding letters of credit)

06/16

L+135 

-

Total unsecured revolving credit facilities

1.47 %

$

500,000 

$

138,000 

 

3.88% exchangeable senior debentures(11)

n/a

n/a

$

$

497,898 

2.85% convertible senior debentures(11)

n/a

n/a

$

$

10,168 

See notes on the following page.

21

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

11.    Debt - continued

 

Notes to preceding tabular information (amounts in thousands):

(1)

Represents the extended maturity for certain loans in which we have the unilateral right, ability and intent to extend.

(2)

On January 9, 2012, we completed a $300,000 refinancing of this property. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000 of existing cash were used to repay the existing loan and closing costs.

(3)

In the first quarter of 2012, we notified the lender that due to scheduled lease expirations resulting primarily from the effects of the Base Realignment and Closure statute, the Skyline properties had a 26% vacancy rate, which is expected to increase and, accordingly, cash flows are expected to decrease. As a result, our subsidiary that owns these properties does not have and is not expected to have for some time sufficient funds to pay all of its current obligations, including interest payments to the lender. Based on the projected vacancy and the significant amount of capital required to re-tenant these properties, at our request, the mortgage loan was transferred to the special servicer. In the second quarter of 2012, we entered into a forbearance agreement with the special servicer to apply cash flows of the property, before interest on the loan, towards the repayment of $4,000 of tenant improvements and leasing commissions we recently funded in connection with a new lease at these properties. The forbearance agreement provides that until the earlier of (i) the full repayment to us of that capital or (ii) December 1, 2012, any interest shortfall will be deferred and not give rise to a loan default. The deferred interest will be added to the principal balance of the loan and, as of June 30, 2012, amounted to $6,598. We continue to negotiate with the special servicer to restructure the terms of the loan.

(4)

On July 11, 2012, upon maturity, we repaid this loan.

(5)

On March 5, 2012, we completed a $325,000 refinancing of this property. The three-year loan bears interest at LIBOR plus 2.50% and has two one-year extension options. We retained net proceeds of approximately $87,000, after repaying the existing loan and closing costs.

(6)

LIBOR floor of 2.00%.

(7)

Interest at the Freddie Mac Reference Note Rate plus 1.53%.

(8)

LIBOR floor of 0.50%.

(9)

LIBOR floor of 1.00%.

(10)

May be redeemed at our option in whole or in part beginning on October 1, 2014, at a price equal to the principal amount plus accrued interest.

(11)

In April 2012, we redeemed all of the outstanding exchangeable and convertible senior debentures at par, for an aggregate of $510,215 in cash.

 

 

22

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

12.    Redeemable Noncontrolling Interests

 

Redeemable noncontrolling interests on our consolidated balance sheets represent Operating Partnership units held by third parties and are comprised of Class A units and Series D-10, D-14, D-15 and D-16 (collectively, “Series D”) cumulative redeemable preferred units.  Redeemable noncontrolling interests on our consolidated balance sheets are recorded at the greater of their carrying amount or redemption value at the end of each reporting period.  Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity.  Below is a table summarizing the activity of redeemable noncontrolling interests.

(Amounts in thousands)

Balance at December 31, 2010

$

1,327,974 

Net income

40,539 

Distributions

(25,711)

Conversion of Class A units into common shares, at redemption value

(35,208)

Adjustments to carry redeemable Class A units at redemption value

104,693 

Redemption of Series D-11 redeemable units

(8,000)

Other, net

17,180 

Balance at June 30, 2011

$

1,421,467 

Balance at December 31, 2011

$

1,160,677 

Net income

24,355 

Distributions

(24,457)

Conversion of Class A units into common shares, at redemption value

(24,976)

Adjustments to carry redeemable Class A units at redemption value

110,581 

Other, net

(9,355)

Balance at June 30, 2012

$

1,236,825 

 

As of June 30, 2012 and December 31, 2011, the aggregate redemption value of redeemable Class A units was $1,010,825,000 and $934,677,000, respectively. 

 

Redeemable noncontrolling interests exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares.  Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $55,097,000 and $54,865,000 as of June 30, 2012 and December 31, 2011, respectively.

 

On July 19, 2012, we redeemed all of the outstanding 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units with an aggregate face amount of $180,000,000 for $168,300,000 in cash, plus accrued and unpaid distributions through the date of redemption.

 

 

13.    Shareholders’ Equity

 

On July 11, 2012, we sold 12,000,000 5.70% Series K Cumulative Redeemable Preferred Shares at a price of $25.00 per share in an underwritten public offering pursuant to an effective registration statement.  We retained aggregate net proceeds of $291,923,000, after underwriters’ discounts and issuance costs.  Dividends on the Series K Preferred Shares are cumulative and payable quarterly in arrears.  The Series K Preferred Shares are not convertible into, or exchangeable for, any of our properties or securities.  On or after five years from the date of issuance (or sooner under limited circumstances), we may redeem the Series K Preferred Shares at a redemption price of $25.00 per share, plus accrued and unpaid dividends through the date of redemption.  The Series K Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

 

On July 17, 2012, we issued a notice of redemption to the holders of our 7.0% Series E Cumulative Redeemable Preferred Shares.  The preferred shares will be redeemed at par on August 16, 2012, for an aggregate of $75,000,000 in cash, plus accrued and unpaid dividends through the date of redemption.

23

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

14.  Fair Value Measurements

 

 

ASC 820, Fair Value Measurement and Disclosures defines fair value and establishes a framework for measuring fair value.  The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value.  Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities.  Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.   

 

Financial Assets and Liabilities Measured at Fair Value

 

Financial assets and liabilities that are measured at fair value in our consolidated financial statements consist of (i) marketable securities, (ii) Real Estate Fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) derivative positions in marketable equity securities, (v) interest rate swaps and (vi) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units).  The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at June 30, 2012 and December 31, 2011, respectively.

As of June 30, 2012

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

466,599 

$

466,599 

$

$

Real Estate Fund investments (75% of which is attributable to

noncontrolling interests)

460,496 

72,041 

388,455 

Deferred compensation plan assets (included in other assets)

101,163 

42,850 

58,313 

J.C. Penney derivative position (included in other assets)(1)

17,963 

17,963 

Total assets

$

1,046,221 

$

581,490 

$

17,963 

$

446,768 

Mandatorily redeemable instruments (included in other liabilities)

$

55,097 

$

55,097 

$

$

Interest rate swap (included in other liabilities)

50,120 

50,120 

Total liabilities

$

105,217 

$

55,097 

$

50,120 

$

(1) Represents the cash deposited with the counterparty in excess of the mark-to-market loss on the derivative position.

As of December 31, 2011

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

741,321 

$

741,321 

$

$

Real Estate Fund investments (75% of which is attributable to

noncontrolling interests)

346,650 

346,650 

Deferred compensation plan assets (included in other assets)

95,457 

39,236 

56,221 

J.C. Penney derivative position (included in other assets)(1)

30,600 

30,600 

Total assets

$

1,214,028 

$

780,557 

$

30,600 

$

402,871 

Mandatorily redeemable instruments (included in other liabilities)

$

54,865 

$

54,865 

$

$

Interest rate swap (included in other liabilities)

44,114 

44,114 

Total liabilities

$

98,979 

$

54,865 

$

44,114 

$

(1) Represents the mark-to-market gain on the derivative position.

24

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

14.  Fair Value Measurements – continued

 

 

Financial Assets and Liabilities Measured at Fair Value - continued

 

Real Estate Fund Investments

 

At June 30, 2012, our Real Estate Fund had seven investments with an aggregate fair value of approximately $460,496,000, or $40,260,000 in excess of cost.  These investments are classified as Level 3.  We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period.  The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 2.1 to 6.6 years.  Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit.  Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor.  Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods.  Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs. 

 

The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates.  These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments.  Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these Fund investments at June 30, 2012.

 

 

Weighted Average  

(based on fair  

Unobservable Quantitative Input

Range

value of investments)

Discount rates

12.5% to 23.3%

14.6 %

Terminal capitalization rates

5.5% to 7.0%

6.1 %

 

The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit.  Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments.  The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows.  Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate, may be partially offset by a change in the discount rate.  It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.  The table below summarizes the changes in the fair value of Fund investments that are classified as Level 3, for the three and six months ended June 30, 2012 and 2011.

 

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(Amounts in thousands)

2012 

2011 

2012 

2011 

Beginning balance

$

324,514 

$

230,657 

$

346,650 

$

144,423 

Purchases

44,592 

22,808 

44,592 

123,047 

Sales

(12,831)

(31,052)

(12,831)

Realized gains

3,085 

3,085 

Unrealized gains

21,135 

12,872 

27,979 

13,570 

Other, net

(1,786)

(796)

286 

(15,499)

Ending balance

$

388,455 

$

255,795 

$

388,455 

$

255,795 

25

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

14.  Fair Value Measurements – continued

 

 

Financial Assets and Liabilities Measured at Fair Value - continued

 

Deferred Compensation Plan Assets

 

Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties.  We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund.  The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis.  The third-party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements. The table below summarizes the changes in the fair value of Deferred Compensation Plan Assets for the three and six months ended June 30, 2012 and 2011. 

 

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(Amounts in thousands)

2012 

2011 

2012 

2011 

Beginning balance

$

58,881 

$

51,612 

$

56,221 

$

47,850 

Purchases

155 

17,818 

3,766 

19,104 

Sales

(616)

(16,347)

(4,011)

(17,494)

Realized and unrealized (loss) gain

(123)

594 

2,269 

4,217 

Other, net

16 

47 

68 

47 

Ending balance

$

58,313 

$

53,724 

$

58,313 

$

53,724 

                               

 

 

Financial Assets and Liabilities not Measured at Fair Value

 

Financial assets and liabilities that are not measured at fair value in our consolidated financial statements include mezzanine loans receivable and our secured and unsecured debt.  Estimates of the fair values of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist.  For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument.  The fair value of our mezzanine loans receivable is classified as Level 3 and the fair value of our secured and unsecured debt is classified as Level 2.  The table below summarizes the carrying amounts and fair values of these financial instruments as of June 30, 2012 and December 31, 2011.

 

As of June 30, 2012

As of December 31, 2011

Carrying

Fair

Carrying

Fair

(Amounts in thousands)

Amount

Value

Amount

Value

Mezzanine loans receivable

$

132,369 

$

128,000 

$

133,948 

$

129,000 

Debt:

Notes and mortgages payable

$

8,360,192 

$

8,430,000 

$

8,483,621 

$

8,686,000 

Senior unsecured notes

1,357,835 

1,465,000 

1,357,661 

1,426,000 

Revolving credit facility debt

500,000 

500,000 

138,000 

138,000 

Exchangeable senior debentures

497,898 

510,000 

Convertible senior debentures

10,168 

10,000 

$

10,218,027 

$

10,395,000 

$

10,487,348 

$

10,770,000 

26

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

15.    Incentive Compensation

 

 

Our Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, restricted Operating Partnership units and out-performance plan rewards to certain of our employees and officers.  We account for all stock-based compensation in accordance ASC 718, Compensation – Stock Compensation.   

 

On March 30, 2012, our Compensation Committee (the “Committee”) approved the 2012 formulaic annual incentive program for our senior executive management team.  Under the program, our senior executive management team, including our Chairman and our President and Chief Executive Officer, will have the ability to earn annual incentive payments (cash or equity) if and only if we achieve comparable funds from operations (“Comparable FFO”) of at least 80% or more of the prior year Comparable FFO.  Moreover, even if we achieve the stipulated Comparable FFO performance requirement, the Committee retains the right, consistent with best practices, to elect to make no payments under the program.  Comparable FFO excludes the impact of certain non-recurring items such as income or loss from discontinued operations, the sale or mark-to-market of marketable securities or derivatives and early extinguishment of debt, restructuring costs and non-cash impairment losses, among others, and thus the Committee believes provides a better metric than total FFO for assessing management’s performance for the year.  Aggregate incentive awards earned under the program are subject to a cap of 1.25% of Comparable FFO for the year, with individual award allocations determined by the Committee based on an assessment of individual and overall performance.

 

On March 30, 2012, the Committee also approved the 2012 Out-Performance Plan, a multi-year, performance-based equity compensation plan (the “2012 OPP”).  The aggregate notional amount of the 2012 OPP is $40,000,000.  Under the 2012 OPP, participants, including our Chairman and our President and Chief Executive Officer, have the opportunity to earn compensation payable in the form of equity awards if and only if we outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to a relative TSR in any year during a three-year performance period.   Specifically, awards under our 2012 OPP may be earned if we (i) achieve a TSR above that of the SNL US REIT Index (the “Index”) over a one-year, two-year or three-year performance period (the “Relative Component”), and/or (ii) achieve a TSR level greater than 7% per annum, or 21% over the three-year performance period (the “Absolute Component”).  To the extent awards would be earned under the Absolute Component of the 2012 OPP but we underperform the Index, such awards would be reduced (and potentially fully negated) based on the degree to which we underperform the Index.  In certain circumstances, in the event we outperform the Index but awards would not otherwise be earned under the Absolute Component, awards may still be earned under the Relative Component.  To the extent awards would otherwise be earned under the Relative Component but we fail to achieve at least a 6% per annum absolute TSR level, such awards would be reduced based on our absolute TSR performance, with no awards being earned in the event our TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which we may outperform the Index.  If the designated performance objectives are achieved, OPP Units are also subject to time-based vesting requirements. Dividends on awards issued accrue during the performance period and are paid to participants if and only if awards are ultimately earned based on the achievement of the designated performance objectives.  Awards earned under the 2012 OPP vest 33% in year three, 33% in year four and 34% in year five.  The fair value of the 2012 OPP on the date of grant, as adjusted for estimated forfeitures, was $12,250,000, and is being amortized into expense over a five-year period from the date of grant, using a graded vesting attribution model.

 

Stock-based compensation expense consists of stock option awards, restricted stock awards, Operating Partnership unit awards and out-performance plan awards.  Stock-based compensation expense was $8,438,000 and $6,919,000 in the three months ended June 30, 2012 and 2011, respectively, and $15,047,000 and $14,065,000 in the six months ended June 30, 2012 and 2011, respectively.

 

27

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

16.    Fee and Other Income

 

 

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

 

For the Three Months

For the Six Months

(Amounts in thousands)

Ended June 30,

Ended June 30,

2012 

2011 

2012 

2011 

BMS cleaning fees

$

16,982 

$

15,409 

$

32,492 

$

30,832 

Management and leasing fees

4,546 

7,376 

9,300 

11,887 

Lease termination fees

479 

6,499 

890 

7,675 

Other income

11,048 

11,578 

23,662 

24,654 

$

33,055 

$

40,862 

$

66,344 

$

75,048 

                               

 

Fee and other income above includes management fee income from Interstate Properties, a related party, of $192,000 and $194,000 for the three months ended June 30, 2012 and 2011, respectively, and $391,000 and $391,000 for the six months ended June 30, 2012 and 2011, respectively.  The above table excludes fee income from partially owned entities, which is typically included in “income from partially owned entities” (see Note 8 – Investments in Partially Owned Entities).

 

 

17.     Interest and Other Investment (Loss) Income, Net

 

 

          The following table sets forth the details of our interest and other investment (loss) income:

 

For the Three Months

For the Six Months

(Amounts in thousands)

Ended June 30,

Ended June 30,

2012 

2011 

2012 

2011 

(Loss) income from the mark-to-market of J.C. Penney derivative position

$

(58,732)

$

(6,762)

$

(57,687)

$

10,401 

Dividends and interest on marketable securities

4,846 

7,669 

11,093 

15,336 

Interest on mezzanine loans

3,165 

3,083 

6,015 

5,727 

Mark-to-market of investments in our deferred compensation plan (1)

24 

1,793 

4,151 

6,745 

Mezzanine loans loss reversal and net gain on disposition

82,744 

Other, net

1,525 

2,215 

2,921 

4,144 

$

(49,172)

$

7,998 

$

(33,507)

$

125,097 

__________________________

(1)

This income is entirely offset by the expense resulting from the mark-to-market of the deferred compensation plan liability, which is included in "general and administrative" expense.

28

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

18.    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 includes 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 dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options, restricted stock and exchangeable senior debentures.

 

For the Three Months

For the Six Months

(Amounts in thousands, except per share amounts)

Ended June 30,

Ended June 30,

2012 

2011 

2012 

2011 

Numerator:  

Income from continuing operations, net of income

attributable to noncontrolling interests

$

27,020 

$

98,241 

$

218,845 

$

377,671 

Income from discontinued operations, net of income

attributable to noncontrolling interests

11,277 

10,340 

70,974 

143,573 

Net income attributable to Vornado

38,297 

108,581 

289,819 

521,244 

Preferred share dividends

(17,787)

(16,668)

(35,574)

(30,116)

Net income attributable to common shareholders

20,510 

91,913 

254,245 

491,128 

Earnings allocated to unvested participating securities

(40)

(48)

(79)

(184)

Numerator for basic income per share

20,470 

91,865 

254,166 

490,944 

Impact of assumed conversions:

Interest on 3.88% exchangeable senior debentures

13,090 

Convertible preferred share dividends

57 

64 

Numerator for diluted income per share

$

20,470 

$

91,865 

$

254,223 

$

504,098 

Denominator:

Denominator for basic income per share –

weighted average shares

185,673 

184,268 

185,521 

184,129 

Effect of dilutive securities(1):

3.88% exchangeable senior debentures

5,736 

Employee stock options and restricted share awards

669 

1,876 

700 

1,815 

Convertible preferred shares

50 

56 

Denominator for diluted income per share –

weighted average shares and assumed conversions

186,342 

186,144 

186,271 

191,736 

INCOME PER COMMON SHARE – BASIC:

Income from continuing operations, net

$

0.05 

$

0.44 

$

0.99 

$

1.89 

Income from discontinued operations, net

0.06 

0.06 

0.38 

0.78 

Net income per common share

$

0.11 

$

0.50 

$

1.37 

$

2.67 

INCOME PER COMMON SHARE – DILUTED:

Income from continuing operations, net

$

0.05 

$

0.44 

$

0.98 

$

1.88 

Income from discontinued operations, net

0.06 

0.05 

0.38 

0.75 

Net income per common share

$

0.11 

$

0.49 

$

1.36 

$

2.63 

(1)

The effect of dilutive securities above excludes anti-dilutive weighted average common share equivalent of 14,002 and 18,349 in the three months ended June 30, 2012 and 2011, respectively, and 16,292 and 12,922 in the six months ended June 30, 2012 and 2011, respectively.

29

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

19.    Commitments and Contingencies

 

Insurance 

 

We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, including coverage for terrorist acts, with sub-limits for certain perils such as floods.  Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate.

 

Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism, including nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act.  Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC.  Coverage for NBCR losses is up to $2.0 billion per occurrence, for which PPIC is responsible for a deductible of $3,200,000 and 15% of the balance of a covered loss and the Federal government is responsible for the remaining 85% of a covered loss.  We are ultimately responsible for any loss borne by PPIC.

 

We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism.  However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.

 

Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of 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 it could adversely affect our ability to finance our properties and expand our portfolio.

 

 

Other Commitments and Contingencies

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of June 30, 2012, the aggregate dollar amount of these guarantees and master leases is approximately $266,074,000.

 

At June 30, 2012, $22,195,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also 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.

 

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 to us.

 

Two of our wholly owned subsidiaries that are contracted to develop and operate the Cleveland Medical Mart and Convention Center, in Cleveland, Ohio, are required to fund $11,500,000, primarily for tenant improvements, and they are responsible for operating expenses and are entitled to the net operating income, if any, upon the completion of development and the commencement of operations.

 

As of June 30, 2012, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $259,607,000. 

30

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

19.          Commitments and Contingencies – continued

 

 

Litigation  

 

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 matter referred to below, is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

In 2003, Stop & Shop filed an action against us in the New York Supreme Court, claiming that we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to a Master Agreement and Guaranty, because of the expiration of the leases to which the annual rent was previously allocated. Stop & Shop asserted that an order of the Bankruptcy Court for the Southern District of New York, as modified on appeal by the District Court, froze our right to reallocate and effectively terminated our right to collect the annual rent from Stop & Shop.  We asserted a counterclaim seeking a judgment for all the unpaid annual rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the annual rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect.   After summary judgment motions by both sides were denied, the parties conducted discovery.  A trial was held in November 2010.  On November 7, 2011, the Court determined that we have a continuing right to allocate the annual rent to unexpired leases covered by the Master Agreement and Guaranty, and directed entry of a judgment in our favor ordering Stop & Shop to pay us the unpaid annual rent accrued through February 28, 2011 in the amount of $37,422,000, a portion of the annual rent due from March 1, 2011 through the date of judgment, interest, and attorneys’ fees.  On December 16, 2011, a money judgment based on the Court’s decision was entered in our favor in the amount of $56,597,000 (including interest and costs).  The amount for attorneys’ fees is being addressed in a proceeding before a special referee.  Stop & Shop has appealed the Court’s decision and the judgment, and has posted a bond to secure payment of the judgment.  On January 12, 2012, we commenced a new action against Stop & Shop seeking recovery of $2,500,000 of annual rent not included in the money judgment, plus additional annual rent as it accrues.  A motion by Stop & Shop to dismiss the new action was denied on July 19, 2012.

 

As of June 30, 2012, we have a $44,900,000 receivable from Stop & Shop, excluding amounts due to us for interest and costs resulting from the Court’s judgment.  As a result of Stop & Shop appealing the Court’s decision, we believe, after consultation with counsel, that the maximum reasonably possible loss is up to the total amount of the receivable of $44,900,000.

 

 

20.    Related Party Transactions

 

 

On March 8, 2012, Steven Roth, the Chairman of our Board of Trustees, repaid his $13,122,500 outstanding loan from the Company.

31

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

21.    Segment Information

 

 

Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment).  Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation.  See note (3) on page 36 for the elements of the New York segment’s EBITDA.  Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and six months ended June 30, 2012 and 2011.

(Amounts in thousands)

For the Three Months Ended June 30, 2012

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

498,644 

$

245,948 

$

120,532 

$

75,718 

$

34,015 

$

$

22,431 

Straight-line rent adjustments

21,344 

17,065 

1,261 

2,970 

82 

(34)

Amortization of acquired below-

market leases, net

12,411 

7,623 

508 

2,791 

1,489 

Total rentals

532,399 

270,636 

122,301 

81,479 

34,097 

23,886 

Tenant expense reimbursements

78,833 

36,985 

10,958 

28,314 

1,267 

1,309 

Cleveland Medical Mart development

project

56,304 

56,304 

Fee and other income:

BMS cleaning fees

16,982 

23,911 

(6,929)

Management and leasing fees

4,546 

1,113 

2,384 

1,068 

(20)

Lease termination fees

479 

233 

128 

117 

Other

11,048 

5,455 

4,971 

388 

312 

(78)

Total revenues

700,591 

338,333 

140,742 

111,250 

92,098 

18,168 

Operating expenses

251,970 

143,190 

48,500 

41,527 

16,258 

2,495 

Depreciation and amortization

132,529 

56,665 

35,994 

21,415 

7,869 

10,586 

General and administrative

46,834 

6,654 

6,233 

6,367 

4,848 

22,732 

Cleveland Medical Mart development

project

53,935 

53,935 

Acquisition related costs and

tenant buy-outs

2,559 

2,559 

Total expenses

487,827 

206,509 

90,727 

69,309 

82,910 

38,372 

Operating income (loss)

212,764 

131,824 

50,015 

41,941 

9,188 

(20,204)

(Loss) applicable to Toys

(19,190)

(19,190)

Income (loss) from partially owned

entities

12,563 

6,851 

(519)

294 

185 

5,752 

Income from Real Estate Fund

20,301 

20,301 

Interest and other investment

(loss) income, net

(49,172)

1,057 

29 

(50,264)

Interest and debt expense

(128,427)

(36,407)

(29,313)

(18,963)

(7,781)

(35,963)

Net gain on disposition of wholly

owned and partially owned assets

4,856 

4,856 

Income (loss) before income taxes

53,695 

103,325 

20,212 

23,278 

1,592 

(19,190)

(75,522)

Income tax expense

(7,479)

(1,064)

(852)

(892)

(4,671)

Income (loss) from continuing

operations

46,216 

102,261 

19,360 

23,278 

700 

(19,190)

(80,193)

Income (loss) from discontinued

operations

12,012 

(32)

3,713 

10,744 

(9,588)

7,175 

Net income (loss)

58,228 

102,229 

23,073 

34,022 

(8,888)

(19,190)

(73,018)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(14,721)

(2,998)

97 

(11,820)

Operating Partnership, including

unit distributions

(5,210)

(5,210)

Net income (loss) attributable to

Vornado

38,297 

99,231 

23,073 

34,119 

(8,888)

(19,190)

(90,048)

Interest and debt expense(2)

190,942 

46,413 

32,549 

20,102 

8,786 

37,293 

45,799 

Depreciation and amortization(2)

184,028 

63,664 

39,656 

22,131 

9,826 

32,505 

16,246 

Income tax (benefit) expense(2)

(5,214)

1,113 

1,034 

1,215 

(14,103)

5,527 

EBITDA(1)

$

408,053 

$

210,421 

(3)

$

96,312 

$

76,352 

(4)

$

10,939 

$

36,505 

$

(22,476)

(5)

See notes on page 36.

32

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

21.    Segment Information – continued

 

(Amounts in thousands)

For the Three Months Ended June 30, 2011

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

521,431 

$

246,218 

$

137,430 

$

76,137 

$

39,295 

$

$

22,351 

Straight-line rent adjustments

7,047 

6,093 

(698)

1,486 

(553)

719 

Amortization of acquired below-

market leases, net

16,427 

11,671 

512 

3,135 

1,109 

Total rentals

544,905 

263,982 

137,244 

80,758 

38,742 

24,179 

Tenant expense reimbursements

77,902 

37,891 

8,724 

28,391 

1,543 

1,353 

Cleveland Medical Mart development

project

32,369 

32,369 

Fee and other income:

BMS cleaning fees

15,409 

22,300 

(6,891)

Management and leasing fees

7,376 

1,574 

4,074 

1,548 

200 

(20)

Lease termination fees

6,499 

5,571 

900 

28 

Other

11,578 

6,345 

5,128 

450 

(481)

136 

Total revenues

696,038 

337,663 

156,070 

111,175 

72,373 

18,757 

Operating expenses

257,228 

139,264 

48,163 

44,275 

21,767 

3,759 

Depreciation and amortization

125,802 

54,534 

33,472 

19,905 

6,991 

10,900 

General and administrative

49,795 

6,423 

6,462 

6,746 

6,406 

23,758 

Cleveland Medical Mart development

project

29,940 

29,940 

Acquisition related costs and

tenant buy-outs

1,897 

1,897 

Total expenses

464,662 

200,221 

88,097 

70,926 

65,104 

40,314 

Operating income (loss)

231,376 

137,442 

67,973 

40,249 

7,269 

(21,557)

(Loss) applicable to Toys

(22,846)

(22,846)

Income (loss) from partially owned

entities

26,016 

5,408 

(767)

635 

178 

20,562 

Income from Real Estate Fund

19,058 

19,058 

Interest and other investment

income (loss), net

7,998 

1,050 

48 

(8)

6,908 

Interest and debt expense

(135,361)

(38,709)

(30,729)

(19,487)

(7,781)

(38,655)

Income (loss) before income taxes

126,241 

105,191 

36,525 

21,389 

(334)

(22,846)

(13,684)

Income tax expense

(5,641)

(440)

(504)

(695)

(4,002)

Income (loss) from continuing

operations

120,600 

104,751 

36,021 

21,389 

(1,029)

(22,846)

(17,686)

Income (loss) from discontinued

operations

10,369 

110 

2,490 

4,593 

3,294 

(118)

Net income (loss)

130,969 

104,861 

38,511 

25,982 

2,265 

(22,846)

(17,804)

Less net income attributable to

noncontrolling interests in:

Consolidated subsidiaries

(13,657)

(2,325)

(69)

(11,263)

Operating Partnership, including

unit distributions

(8,731)

(8,731)

Net income (loss) attributable to

Vornado

108,581 

102,536 

38,511 

25,913 

2,265 

(22,846)

(37,798)

Interest and debt expense(2)

202,956 

45,268 

34,093 

20,796 

9,595 

43,393 

49,811 

Depreciation and amortization(2)

182,496 

59,363 

38,306 

21,802 

11,227 

32,896 

18,902 

Income tax (benefit) expense(2)

(17,343)

443 

607 

911 

(23,969)

4,665 

EBITDA(1)

$

476,690 

$

207,610 

(3)

$

111,517 

$

68,511 

(4)

$

23,998 

$

29,474 

$

35,580 

(5)

See notes on page 36.

33

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

21.    Segment Information – continued

(Amounts in thousands)

For the Six Months Ended June 30, 2012

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

997,745 

$

479,884 

$

245,772 

$

151,347 

$

76,062 

$

$

44,680 

Straight-line rent adjustments

43,643 

34,194 

3,127 

5,245 

751 

326 

Amortization of acquired below-

market leases, net

25,986 

15,318 

1,031 

6,780 

2,857 

Total rentals

1,067,374 

529,396 

249,930 

163,372 

76,813 

47,863 

Tenant expense reimbursements

157,934 

73,697 

21,122 

57,738 

2,501 

2,876 

Cleveland Medical Mart development

project

111,363 

111,363 

Fee and other income:

BMS cleaning fees

32,492 

46,558 

(14,066)

Management and leasing fees

9,300 

2,221 

5,167 

1,904 

46 

(38)

Lease termination fees

890 

256 

128 

505 

Other

23,662 

11,802 

10,562 

739 

740 

(181)

Total revenues

1,403,015 

663,930 

286,909 

223,754 

191,968 

36,454 

Operating expenses

515,339 

288,862 

95,662 

85,033 

40,799 

4,983 

Depreciation and amortization

267,983 

110,424 

79,517 

42,025 

14,885 

21,132 

General and administrative

102,405 

15,241 

13,186 

12,700 

10,757 

50,521 

Cleveland Medical Mart development

project

106,696 

106,696 

Acquisition related costs and

tenant buy-outs

3,244 

3,244 

Total expenses

995,667 

414,527 

188,365 

139,758 

173,137 

79,880 

Operating income (loss)

407,348 

249,403 

98,544 

83,996 

18,831 

(43,426)

Income applicable to Toys

97,281 

97,281 

Income (loss) from partially owned

entities

32,223 

11,036 

(2,389)

698 

341 

22,537 

Income from Real Estate Fund

32,063 

32,063 

Interest and other investment

(loss) income, net

(33,507)

2,109 

73 

20 

(35,709)

Interest and debt expense

(262,655)

(72,548)

(59,724)

(38,171)

(15,561)

(76,651)

Net gain on disposition of wholly

owned and partially owned assets

4,856 

4,856 

Income (loss) before income taxes

277,609 

190,000 

36,504 

46,543 

3,611 

97,281 

(96,330)

Income tax expense

(14,304)

(1,665)

(1,302)

(1,823)

(9,514)

Income (loss) from continuing

operations

263,305 

188,335 

35,202 

46,543 

1,788 

97,281 

(105,844)

Income (loss) from discontinued operations

75,187 

(640)

5,943 

15,395 

47,499 

6,990 

Net income (loss)

338,492 

187,695 

41,145 

61,938 

49,287 

97,281 

(98,854)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(24,318)

(5,174)

211 

(19,355)

Operating Partnership, including

unit distributions

(24,355)

(24,355)

Net income (loss) attributable to

Vornado

289,819 

182,521 

41,145 

62,149 

49,287 

97,281 

(142,564)

Interest and debt expense(2)

384,024 

93,471 

66,206 

40,540 

17,576 

68,862 

97,369 

Depreciation and amortization(2)

375,201 

125,575 

87,916 

44,406 

19,304 

67,211 

30,789 

Income tax expense(2)

46,226 

1,806 

1,557 

2,377 

29,100 

11,386 

EBITDA(1)

$

1,095,270 

$

403,373 

(3)

$

196,824 

$

147,095 

(4)

$

88,544 

$

262,454 

$

(3,020)

(5)

See notes on page 36.

34

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

21.    Segment Information – continued

(Amounts in thousands)

For the Six Months Ended June 30, 2011

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

1,032,339 

$

480,092 

$

272,075 

$

151,863 

$

82,954 

$

$

45,355 

Straight-line rent adjustments

19,703 

16,191 

(696)

3,219 

(760)

1,749 

Amortization of acquired below-

market leases, net

32,772 

23,340 

978 

6,206 

2,248 

Total rentals

1,084,814 

519,623 

272,357 

161,288 

82,194 

49,352 

Tenant expense reimbursements

164,507 

76,796 

17,685 

61,103 

3,307 

5,616 

Cleveland Medical Mart development

project

73,068 

73,068 

Fee and other income:

BMS cleaning fees

30,832 

44,342 

(13,510)

Management and leasing fees

11,887 

2,538 

6,959 

2,313 

303 

(226)

Lease termination fees

7,675 

5,636 

2,011 

28 

Other

24,654 

12,003 

10,281 

950 

1,248 

172 

Total revenues

1,397,437 

660,938 

309,293 

225,682 

160,120 

41,404 

Operating expenses

528,642 

282,639 

95,384 

91,714 

49,921 

8,984 

Depreciation and amortization

251,598 

109,346 

66,562 

40,243 

13,952 

21,495 

General and administrative

108,243 

13,957 

12,999 

13,958 

13,453 

53,876 

Cleveland Medical Mart development

project

68,218 

68,218 

Acquisition related costs and

tenant buy-outs

20,167 

15,000 

3,040 

2,127 

Total expenses

976,868 

420,942 

174,945 

145,915 

148,584 

86,482 

Operating income (loss)

420,569 

239,996 

134,348 

79,767 

11,536 

(45,078)

Income applicable to Toys

90,098 

90,098 

Income (loss) from partially owned

entities

41,895 

12,117 

(4,682)

646 

254 

33,560 

Income from Real Estate Fund

20,138 

20,138 

Interest and other investment

income, net

125,097 

2,122 

80 

122,895 

Interest and debt expense

(268,296)

(75,293)

(59,655)

(38,875)

(15,476)

(78,997)

Net gain on disposition of wholly

owned and partially owned assets

6,677 

6,677 

Income (loss) before income taxes

436,178 

178,942 

70,091 

41,538 

(3,686)

90,098 

59,195 

Income tax expense

(11,589)

(959)

(1,174)

(5)

(739)

(8,712)

Income (loss) from continuing

operations

424,589 

177,983 

68,917 

41,533 

(4,425)

90,098 

50,483 

Income (loss) from discontinued operations

152,201 

233 

51,439 

12,890 

87,882 

(243)

Net income

576,790 

178,216 

120,356 

54,423 

83,457 

90,098 

50,240 

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(15,007)

(4,596)

86 

(10,497)

Operating Partnership, including

unit distributions

(40,539)

(40,539)

Net income (loss) attributable to

Vornado

521,244 

173,620 

120,356 

54,509 

83,457 

90,098 

(796)

Interest and debt expense(2)

401,804 

85,557 

66,314 

41,466 

22,502 

83,528 

102,437 

Depreciation and amortization(2)

368,344 

116,072 

80,205 

44,177 

22,402 

67,569 

37,919 

Income tax expense(2)

49,485 

910 

1,455 

1,321 

45,049 

745 

EBITDA(1)

$

1,340,877 

$

376,159 

(3)

$

268,330 

$

140,157 

(4)

$

129,682 

$

286,244 

$

140,305 

(5)

See notes on the following page.

35

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

21. 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 unlevered 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)

Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.

(3)

The elements of "New York" EBITDA are summarized below.

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(Amounts in thousands)

2012 

2011 

2012 

2011 

Office

$

142,573 

$

137,630 

$

278,520 

$

262,321 

Retail(a)

45,081 

47,382 

89,234 

78,027 

Alexander's

13,026 

13,921 

26,397 

27,202 

Hotel Pennsylvania

9,741 

8,677 

9,222 

8,609 

Total New York

$

210,421 

$

207,610 

$

403,373 

$

376,159 

(a)

The EBITDA for the six months ended June 30, 2011 is after a $15,000 expense for the buy-out of a below market lease.

(4)

The elements of "Retail Properties" EBITDA are summarized below.

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(Amounts in thousands)

2012 

2011 

2012 

2011 

Strip Shopping Centers(a)

$

52,268 

$

45,622 

$

99,176 

$

95,782 

Regional Malls

24,084 

22,889 

47,919 

44,375 

Total Retail Properties

$

76,352 

$

68,511 

$

147,095 

$

140,157 

(a)

EBITDA from continuing operations was $41,438 and $39,564 for the three months ended June 30, 2012 and 2011, respectively, and $82,604 and $79,605 for the six months ended June 30, 2012 and 2011, respectively.

36

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

 

21. Segment Information - continued

Notes to preceding tabular information - continued:

(5)

The elements of "other" EBITDA are summarized below.

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(Amounts in thousands)

2012 

2011 

2012 

2011 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

170 

$

827 

$

2,288 

$

1,807 

Net unrealized gains

5,284 

3,218 

6,995 

3,392 

Net realized gains

771 

771 

Carried interest

2,541 

2,140 

2,541 

2,140 

Total

7,995 

6,956 

11,824 

8,110 

LNR

11,671 

13,410 

27,233 

22,800 

555 California Street

10,377 

10,423 

20,692 

21,388 

Lexington

7,703 

9,005 

16,921 

19,546 

Other investments

11,523 

11,735 

20,823 

19,936 

49,269 

51,529 

97,493 

91,780 

Corporate general and administrative expenses(a)

(21,812)

(20,024)

(44,129)

(41,379)

Investment income and other, net(a)

13,387 

11,660 

23,832 

24,743 

Fee income from Alexander's

1,907 

1,900 

3,796 

3,787 

(Loss) income from the mark-to-market of J.C. Penney derivative

position

(58,732)

(6,762)

(57,687)

10,401 

Acquisition costs

(2,559)

(1,897)

(3,244)

(2,127)

Net gain on sale of condominiums

1,274 

1,274 

4,586 

Net gain resulting from Lexington's stock issuance

8,308 

9,760 

Real Estate Fund placement fees

(403)

(3,451)

Mezzanine loans loss reversal and net gain on disposition

82,744 

Net income attributable to noncontrolling interests in the Operating

Partnership, including unit distributions

(5,210)

(8,731)

(24,355)

(40,539)

$

(22,476)

$

35,580 

$

(3,020)

$

140,305 

(a)

The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting liability.

37

 


 
 

 

 

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 (the “Company”) as of June 30, 2012, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011, and of changes in equity and cash flows for the six-month periods ended June 30, 2012 and 2011.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the 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 the 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2012, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the change in method of presenting comprehensive income due to the adoption of FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP

 

Parsippany, New Jersey

August 6, 2012

38

 


 

  

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

 

 

Certain statements contained in this Quarterly Report 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 represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. 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 other similar expressions in this Quarterly Report on Form 10‑Q.  Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three and six months ended June 30, 2012.  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.

39

 


 

  

Overview

 

Business Objective and Operating Strategy

Our business objective is to maximize shareholder value, which we measure by the total return provided to our shareholders. Below is a table comparing our performance to the Morgan Stanley REIT Index (“RMS”) and the SNL REIT Index (“SNL”) for the following periods ended June 30, 2012.

 

Total Return(1)

Vornado

RMS

SNL

One-year

(6.7%)

13.2%

13.0%

Three-year

105.2%

135.6%

136.1%

Five-year

(9.3%)

13.8%

18.0%

Ten-year

178.6%

166.3%

178.9%

(1) Past performance is not necessarily indicative of future performance.

 

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;

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

·      Investing in operating companies that have a significant real estate component.

 

We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from asset sales and by accessing the public and private capital markets.  We may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire these securities in the future.

 

We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, the 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.  See “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for additional information regarding these factors.

40

 


 

  

 

Overview – continued

 

 

Quarter Ended June 30, 2012 Financial Results Summary

 

Net income attributable to common shareholders for the quarter ended June 30, 2012 was $20,510,000, or $0.11 per diluted share, compared to $91,913,000, or $0.49 per diluted share, for the quarter ended June 30, 2011.  Net income for the quarters ended June 30, 2012 and 2011 include $17,130,000 and $3,069,000, respectively, of net gains on sale of real estate, and $14,879,000 of real estate impairment losses in the quarter ended June 30, 2012.  In addition, the quarters ended June 30, 2012 and 2011 include certain other items that affect comparability, which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the quarter ended June 30, 2012 by $44,022,000, or $0.24 per diluted share and increased net income attributable to common shareholders for the quarter ended June 30, 2011 by $20,349,000, or $0.11 per diluted share.

 

Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended June 30, 2012 was $166,672,000, or $0.89 per diluted share, compared to $243,418,000, or $1.27 per diluted share, for the prior year’s quarter.  FFO for the quarters ended June 30, 2012 and 2011 include certain items that affect comparability, which are listed in the table below.  The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the quarter ended June 30, 2012 by $44,926,000, or $0.24 per diluted share and increased FFO for the quarter ended June 30, 2011 by $23,158,000, or $0.12 per diluted share.

 

For the Three Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Items that affect comparability income (expense):

Loss from the mark-to-market of J.C. Penney derivative position

$

(58,732)

$

(6,762)

FFO attributable to discontinued operations

9,926 

15,929 

Net gain on sale of condominiums

1,274 

Net gain resulting from Lexington's stock issuances

8,308 

Our share of LNR's net gain from asset sales

6,020 

Other, net

(392)

1,215 

(47,924)

24,710 

Noncontrolling interests' share of above adjustments

2,998 

(1,552)

Items that affect comparability, net

$

(44,926)

$

23,158 

 

 

The percentage increase (decrease) in GAAP basis and Cash basis same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended June 30, 2012 over the quarter ended June 30, 2011 and the trailing quarter ended March 31, 2012 are summarized below.

Retail

Merchandise

Same Store EBITDA:

New York

Washington, DC

Properties

Mart

June 30, 2012 vs. June 30, 2011

GAAP basis

2.9%

(8.1%)

0.7%

10.5%

Cash Basis

1.5%

(9.9%)

(1.3%)

7.2%

June 30, 2012 vs. March 31, 2012

GAAP basis

8.0%

(1)

(1.7%)

1.2%

(2.2%)

Cash Basis

9.7%

(1)

(1.8%)

0.5%

0.4%

(1)

Excluding the seasonality impact of the Hotel Pennsylvania, same store increased by 2.9% and 3.5% on a GAAP and Cash basis, respectively.

41

 


 

  

 

Overview – continued

 

 

Six Months Ended June 30, 2012 Financial Results Summary

 

Net income attributable to common shareholders for the six months ended June 30, 2012 was $254,245,000, or $1.36 per diluted share, compared to $491,128,000, or $2.63 per diluted share, for the six months ended June 30, 2011. Net income for the six months ended June 30, 2012 and 2011 include $73,608,000 and $55,883,000, respectively, of net gains on sale of real estate and $23,754,000 of real estate impairment losses in the six months ended June 30, 2012.  In addition, the six months ended June 30, 2012 and 2011 include certain items that affect comparability, which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders by $8,252,000, or $0.04 per diluted share for the six months ended June 30, 2012 and $246,409,000, or $1.29 per diluted share for the six months ended June 30, 2011.

 

FFO for the six months ended June 30, 2012 was $516,328,000, or $2.72 per diluted share, compared to $749,349,000, or $3.91 per diluted share, for the six months ended June 30, 2011.  FFO for the six months ended June 30, 2012 and 2011 includes certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the six months ended June 30, 2012 by $33,617,000, or $0.18 per diluted share and increased FFO for the six months ended June 30, 2011 by $205,625,000, or $1.07 per diluted share.

 

For the Six Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Items that affect comparability income (expense):

(Loss) income from the mark-to-market of J.C. Penney derivative position

$

(57,687)

$

10,401 

FFO attributable to discontinued operations

21,200 

29,028 

Net gain on sale of condominiums

1,274 

4,586 

Net gain on extinguishment of debt

83,907 

Mezzanine loans loss reversal and net gain on disposition

82,744 

Our share of LNR's asset sales and tax settlement gains

14,997 

Net gain resulting from Lexington's stock issuances

9,760 

Buy-out of a below-market lease

(15,000)

Other, net

(620)

(978)

(35,833)

219,445 

Noncontrolling interests' share of above adjustments

2,216 

(13,820)

Items that affect comparability, net

$

(33,617)

$

205,625 

 

 

The percentage increase (decrease) in GAAP basis and Cash basis same store EBITDA of our operating segments for the six months ended June 30, 2012 over the six months ended June 30, 2011 is summarized below.

 

Retail

Merchandise

Same Store EBITDA:

New York

Washington, DC

Properties

Mart

June 30, 2012 vs. June 30, 2011

GAAP basis

3.2%

(7.6%)

0.5%

4.6%

Cash Basis

1.9%

(9.1%)

(0.3%)

1.0%

 

Calculations of same store EBITDA, reconciliations of our 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.

42

 


 
 

  

 

Overview - continued

 

2012 Acquisitions

 

On July 5, 2012, we entered into an agreement to acquire a retail condominium located at 666 Fifth Avenue at 53rd Street for $707,000,000. The property has 126 feet of frontage on Fifth Avenue and contains 114,000 square feet, 39,000 square feet in fee and 75,000 square feet by long-term lease from the 666 Fifth Avenue office condominium, which is 49.5% owned by Vornado. The acquisition will be funded by property level debt and proceeds from asset sales, and is expected to close in the fourth quarter, subject to customary closing conditions.

 

On July 30, 2012, we entered into a lease with Host Hotels & Resorts, Inc. (NYSE:HST), under which we will redevelop the retail and signage components of the Marriott Marquis Times Square Hotel.  The lease contains options based on cash flow which, if exercised, would lead to our ownership.  The Marriott Marquis with over 1,900 rooms is one of the largest hotels in Manhattan.  It is located in the heart of the bow-tie of Times Square and spans the entire block front from 45th Street to 46th Street on Broadway.  The Marriott Marquis is directly across from our 1540 Broadway iconic retail property leased to Forever 21 and Disney flagship stores.  We plan to spend as much as $140 million to redevelop and substantially expand the existing retail space, including converting the below grade parking garage into retail, and creating six-story, 300 feet wide block front dynamic LED signs.

 

On April 26, 2012, our 25% owned Real Estate Fund acquired 520 Broadway, a 112,000 square foot office building in Santa Monica, California for $59,650,000 and subsequently placed a $30,000,000 mortgage loan on the property.  The three-year loan bears interest at LIBOR plus 2.25% and has two one-year extension options.

 

On June 28, 2012, our 25% owned Real Estate Fund made an investment in an unconsolidated subsidiary that, on July 2, 2012, acquired 1100 Lincoln Road, a 167,000 square foot retail property, the western anchor of the Lincoln Road Shopping District in Miami Beach, Florida, for $132,000,000.  The purchase price consisted of $66,000,000 in cash and a $66,000,000 mortgage loan.  The three-year loan bears interest at LIBOR plus 2.75% and has two one-year extension options.

 

 

2012 Dispositions

 

We sold or have entered into agreements to sell (i) five Mart properties, (ii) one Washington, DC property, and (iii) 11 Retail properties, for an aggregate of $792,000,000.  Below are the details of these transactions.

 

Merchandise Mart Properties

 

On January 6, 2012, we completed the sale of 350 West Mart Center, a 1.2 million square foot office building in Chicago, Illinois, for $228,000,000 in cash, which resulted in a net gain of $54,911,000.

 

On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California, for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.

 

On July 5, 2012, we entered into agreements to sell the Washington Design Center, the Boston Design Center and the Canadian Trade Shows, for an aggregate of $175,000,000 in cash, which will result in a net gain aggregating approximately $24,500,000, including non-comparable FFO of $19,200,000 from the sale of the Canadian Trade Shows.  The sales of the Canadian Trade Shows and the Washington Design Center were completed in July 2012 and the sale of the Boston Design Center is expected to be completed in the third quarter, subject to customary closing conditions.

 

Washington, DC Property

 

On July 26, 2012, we completed the sale of 409 Third Street S.W., a 409,000 square foot office building in Washington, DC, for $200,000,000 in cash, which resulted in a net gain of approximately $124,700,000, that will be recognized in the third quarter.  This building is contiguous to the Washington Design Center and was sold to the same purchaser.

 

Retail Properties

 

We sold 11 retail properties in separate transactions, for an aggregate of $136,000,000 in cash, which resulted in a net gain aggregating $17,802,000.  

 

We have engaged the services of a real estate broker to sell the 1.8 million square foot Green Acres Mall, located in Valley Stream, New York.  In addition, Alexander’s, our 32.4% owned affiliate, has engaged the services of the same broker to sell its 1.2 million square foot Kings Plaza Regional Shopping Center, located in Brooklyn, New York.  There can be no assurance that these efforts will result in the sales of these properties. 

43

 


 

  

Overview – continued

 

 

2012 Financing Activities

 

Secured Debt

 

On January 9, 2012, we completed a $300,000,000 refinancing of 350 Park Avenue, a 559,000 square foot Manhattan office building. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000,000 of existing cash were used to repay the existing loan and closing costs.

 

On March 5, 2012, we completed a $325,000,000 refinancing of 100 West 33rd Street, a 1.1 million square foot property located on the entire Sixth Avenue block front between 32nd and 33rd Streets in Manhattan.  The building contains the 257,000 square foot Manhattan Mall and 848,000 square feet of office space.  The three-year loan bears interest at LIBOR plus 2.50% (2.74% at June 30, 2012) and has two one-year extension options.  We retained net proceeds of approximately $87,000,000, after repaying the existing loan and closing costs.

 

Senior Unsecured Debt

 

In April 2012, we redeemed all of the outstanding exchangeable and convertible senior debentures at par, for an aggregate of $510,215,000 in cash.

 

Preferred Equity

 

On July 11, 2012, we sold 12,000,000 5.70% Series K Cumulative Redeemable Preferred Shares at a price of $25.00 per share in an underwritten public offering pursuant to an effective registration statement.  We retained aggregate net proceeds of $291,923,000, after underwriters’ discounts and issuance costs.  Dividends on the Series K Preferred Shares are cumulative and payable quarterly in arrears.  The Series K Preferred Shares are not convertible into, or exchangeable for, any of our properties or securities.  On or after five years from the date of issuance (or sooner under limited circumstances), we may redeem the Series K Preferred Shares at a redemption price of $25.00 per share, plus accrued and unpaid dividends through the date of redemption.  The Series K Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us. 

 

On July 17, 2012, we issued a notice of redemption to the holders of our 7.0% Series E Cumulative Redeemable Preferred Shares.  The preferred shares will be redeemed at par on August 16, 2012, for an aggregate of $75,000,000 in cash, plus accrued and unpaid dividends through the date of redemption.

 

Redeemable Noncontrolling Interests

 

On July 19, 2012, we redeemed all of the outstanding 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units with an aggregate face amount of $180,000,000 for $168,300,000 in cash, plus accrued and unpaid distributions through the date of redemption.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44

 


 

  

Overview - continued

 

 

Recently Issued Accounting Literature

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”).  ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy.  The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures.

 

 

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, 2011 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2012.

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Overview - continued

 

Leasing Activity:

 

The leasing activity in the table below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Tenant improvements and leasing commissions are based on our share of square feet leased during the period.  Second generation relet space represents square footage that has not been vacant for more than nine months.  The leasing activity for the New York segment excludes Alexander’s and the Hotel Pennsylvania.

 

 

 

New York

Retail Properties

Merchandise Mart

 

(Square feet in thousands)

Office

Retail

Washington, DC

Strips

Malls(3)

Office

Showroom

 

 

Quarter Ended June 30, 2012:

 

Total square feet leased

474 

140 

526 

352 

32 

12 

79 

 

Our share of square feet leased:

328 

140 

512 

352 

24 

12 

79 

 

Initial rent (1)

$

64.50 

$

69.08 

$

36.66 

$

15.54 

$

56.28 

$

31.00 

$

35.38 

 

Weighted average lease term (years)

8.1 

14.5 

7.2 

9.3 

5.6 

6.0 

4.3 

 

Second generation relet space:

 

Square feet

191 

137 

503 

271 

12 

79 

 

Cash basis:

 

Initial rent (1)

$

70.39 

$

68.83 

$

36.59 

$

15.07 

$

76.28 

$

31.00 

$

35.38 

 

Prior escalated rent

$

67.36 

$

66.72 

$

38.19 

$

12.24 

$

75.04 

$

31.00 

$

35.65 

 

Percentage increase (decrease)

4.5%

3.2%

(4.2%)

23.1%

1.7%

-%

(0.8%)

 

GAAP basis:

 

Straight-line rent (2)

$

70.81 

$

72.00 

$

36.37 

$

15.36 

$

80.42 

$

30.01 

$

35.68 

 

Prior straight-line rent

$

65.93 

$

69.46 

$

36.13 

$

11.89 

$

66.41 

$

30.01 

$

33.71 

 

Percentage increase

7.4%

3.7%

0.7%

29.2%

21.1%

-%

5.8%

 

Tenant improvements and leasing

 

commissions:

 

Per square foot

$

49.97 

$

22.97 

$

32.79 

$

3.66 

$

1.73 

$

45.50 

$

8.80 

 

Per square foot per annum:

$

6.17 

$

1.58 

$

4.55 

$

0.39 

$

0.31 

$

7.58 

$

2.05 

 

Percentage of initial rent

9.6%

2.3%

12.4%

2.5%

0.6%

24.5%

5.8%

 

 

Six Months Ended June 30, 2012:

 

Total square feet leased

987 

174 

1,238 

874 

75 

12 

193 

 

Our share of square feet leased:

837 

174 

1,140 

874 

62 

12 

193 

 

Initial rent (1)

$

57.90 

$

102.29 

$

38.73 

$

17.46 

$

45.61 

$

31.00 

$

37.17 

 

Weighted average lease term (years)

8.7 

12.2 

6.5 

8.6 

5.3 

6.0 

6.0 

 

Second generation relet space:

 

Square feet

673 

147 

1,093 

657 

15 

12 

193 

 

Cash basis:

 

Initial rent (1)

$

58.60 

$

102.10 

$

38.67 

$

15.04 

$

87.79 

$

31.00 

$

37.17 

 

Prior escalated rent

$

56.90 

$

83.15 

$

39.20 

$

13.45 

$

84.57 

$

31.00 

$

38.07 

 

Percentage increase (decrease)

3.0%

22.8%

(1.4%)

11.8%

3.8%

-%

(2.4%)

 

GAAP basis:

 

Straight-line rent (2)

$

57.96 

$

107.41 

$

38.26 

$

15.70 

$

90.94 

$

30.01 

$

37.38 

 

Prior straight-line rent

$

55.48 

$

84.47 

$

37.55 

$

12.32 

$

78.33 

$

30.01 

$

34.67 

 

Percentage increase

4.5%

27.2%

1.9%

27.4%

16.1%

-%

7.8%

 

Tenant improvements and leasing

 

commissions:

 

Per square foot

$

45.46 

$

28.13 

$

32.14 

$

9.15 

$

4.17 

$

45.50 

$

12.73 

 

Per square foot per annum:

$

5.22 

$

2.31 

$

4.91 

$

1.06 

$

0.79 

$

7.58 

$

2.12 

 

Percentage of initial rent

9.0%

2.3%

12.7%

6.1%

1.7%

24.5%

5.7%

 

 

(1)

Represents the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.

(2)

Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases, and includes the effect of free rent and periodic step-ups in rent.

(3)

Mall sales per square foot, including partially owned malls, for the trailing twelve months ended June 30, 2012 and 2011 were $480 and $474, respectively.

                                                                                               

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Overview – continued

 

 

Square footage (in service) and Occupancy as of June 30, 2012:

 

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

Properties

Portfolio

Share

Occupancy %

New York:

Office

30 

19,426 

16,483 

95.3%

Retail

46 

2,080 

1,916 

94.5%

Alexander's

3,389 

1,098 

98.0%

Hotel Pennsylvania

1,400 

1,400 

26,295 

20,897 

95.4%

Washington, DC

76 

19,594 

16,986 

85.9%(1)

Retail Properties:

Strips

112 

15,402 

14,820 

93.8%

Regional Malls

7,179 

5,539 

92.6%

22,581 

20,359 

93.5%

Merchandise Mart:

Office

1,258 

1,249 

89.3%

Showroom

2,747 

2,747 

79.7%

4,005 

3,996 

82.6%

Other

555 California Street

1,795 

1,257 

92.6%

Primarily Warehouses

1,235 

1,235 

50.1%

3,030 

2,492 

Total square feet at June 30, 2012

75,505 

64,730 

(1)

The occupancy rate for office properties excluding residential and other properties is 83.5%.

 

Square footage (in service) and Occupancy as of December 31, 2011:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

properties

Portfolio

Share

Occupancy %

New York:

Office

30 

19,571 

16,598 

96.2%

Retail

46 

2,239 

1,982 

95.6%

Alexander's

3,389 

1,098 

97.8%

Hotel Pennsylvania

1,400 

1,400 

26,599 

21,078 

96.2%

Washington, DC

76 

20,120 

17,516 

90.0%(1)

Retail Properties:

Strips

112 

15,417 

14,834 

93.3%

Regional Malls

7,278 

5,631 

92.0%

22,695 

20,465 

92.9%

Merchandise Mart:

Office

1,220 

1,211 

90.3%

Showroom

2,715 

2,715 

89.8%

3,935 

3,926 

89.9%

Other

555 California Street

1,795 

1,257 

93.1%

Primarily Warehouses

1,235 

1,235 

45.3%

3,030 

2,492 

Total square feet at December 31, 2011

76,379 

65,477 

(1)

The occupancy rate for office properties excluding residential and other properties is 88.6%.

47

 


 

  

 

Overview - continued

 

Square footage (in service) and Occupancy as of June 30, 2011:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

properties

Portfolio

Share

Occupancy %

New York:

Office

28 

18,607 

16,283 

95.2%

Retail

44 

2,079 

1,903 

97.4%

Alexander's

3,402 

1,102 

96.8%

Hotel Pennsylvania

1,400 

1,400 

25,488 

20,688 

95.5%

Washington, DC

76 

20,147 

17,418 

93.2%(1)

Retail Properties:

Strips

111 

15,554 

15,226 

92.2%

Regional Malls

7,216 

5,577 

92.2%

22,770 

20,803 

92.2%

Merchandise Mart:

Office

1,145 

1,136 

90.9%

Showroom

2,789 

2,789 

95.6%

3,934 

3,925 

94.2%

Other

555 California Street

1,795 

1,257 

92.6%

Primarily Warehouses

1,235 

1,235 

45.3%

3,030 

2,492 

Total square feet at June 30, 2011

75,369 

65,326 

(1)

The occupancy rate for office properties excluding residential and other properties is 92.3%.

48

 


 

  

 

Overview - continued

 

 

Washington, DC Properties Segment

 

In our Form 10-K for the year ended December 31, 2011, as a result of the BRAC statute, we estimated that occupancy will decrease from 90% at year end, to between 82% to 84% in 2012 and that 2012 EBITDA from continuing operations will be lower than 2011 by approximately $55,000,000 to $65,000,000 based on 2,902,000 square feet expiring in 2012, partially offset by leasing over 1,000,000 square feet.

 

At June 30, 2012, occupancy is at 85.9% and EBITDA from continuing operations for the three and six months ended June 30, 2012 is lower by approximately $14,500,000 and $22,100,000, respectively, than it was for the three and six months ended June 30, 2011.  Based on leasing activity as of June 30, 2012, we currently estimate that 2012 EBITDA from continuing operations will be lower than 2011 by approximately $50,000,000 to $60,000,000.

 

Of the 2,395,000 square feet subject to BRAC, 348,000 square feet has been taken out of service for redevelopment and 470,000 square feet has been leased or is pending.  The table below summarizes the status of the BRAC space as of June 30, 2012.

 

Rent Per

Square Feet

Square Foot

Total

Crystal City

Skyline

Rosslyn

Resolved:

Relet as of June 30, 2012

$

38.66 

354,000 

266,000 

88,000 

Leases pending

39.65 

116,000 

116,000 

Taken out of service for redevelopment

348,000 

348,000 

818,000 

730,000 

88,000 

To Be Resolved:

Already vacated

32.71 

664,000 

310,000 

354,000 

Expiring in:

2012 

41.91 

361,000 

232,000 

119,000 

10,000 

2013 

37.08 

179,000 

43,000 

136,000 

2014 

31.39 

280,000 

79,000 

201,000 

2015 

42.37 

93,000 

88,000 

5,000 

1,577,000 

709,000 

722,000 

146,000 

Total square feet subject to BRAC

2,395,000 

1,439,000 

810,000 

146,000 

 

 

In the first quarter of 2012, we notified the lender that due to scheduled lease expirations resulting primarily from the effects of the BRAC statute, the Skyline properties had a 26% vacancy rate, which is expected to increase and, accordingly, cash flows are expected to decrease.  As a result, our subsidiary that owns these properties does not have and is not expected to have for some time sufficient funds to pay all of its current obligations, including interest payments to the lender.  Based on the projected vacancy and the significant amount of capital required to re-tenant these properties, at our request, the mortgage loan was transferred to the special servicer.  In the second quarter of 2012, we entered into a forbearance agreement with the special servicer to apply cash flows of the property, before interest on the loan, towards the repayment of $4,000,000 of tenant improvements and leasing commissions we recently funded in connection with a new lease at these properties.  The forbearance agreement provides that until the earlier of (i) the full repayment to us of that capital or (ii) December 1, 2012, any interest shortfall will be deferred and not give rise to a loan default. The deferred interest will be added to the principal balance of the loan and, as of June 30, 2012, amounted to $6,598,000.  We continue to negotiate with the special servicer to restructure the terms of the loan.

49

 


 
 

  

Net Income and EBITDA by Segment for the Three Months Ended June 30, 2012 and 2011

Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment).  Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation.  See note (3) on page 52 for the elements of the New York segment’s 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, 2012 and 2011.

(Amounts in thousands)

For the Three Months Ended June 30, 2012

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

498,644 

$

245,948 

$

120,532 

$

75,718 

$

34,015 

$

$

22,431 

Straight-line rent adjustments

21,344 

17,065 

1,261 

2,970 

82 

(34)

Amortization of acquired below-

market leases, net

12,411 

7,623 

508 

2,791 

1,489 

Total rentals

532,399 

270,636 

122,301 

81,479 

34,097 

23,886 

Tenant expense reimbursements

78,833 

36,985 

10,958 

28,314 

1,267 

1,309 

Cleveland Medical Mart development

project

56,304 

56,304 

Fee and other income:

BMS cleaning fees

16,982 

23,911 

(6,929)

Management and leasing fees

4,546 

1,113 

2,384 

1,068 

(20)

Lease termination fees

479 

233 

128 

117 

Other

11,048 

5,455 

4,971 

388 

312 

(78)

Total revenues

700,591 

338,333 

140,742 

111,250 

92,098 

18,168 

Operating expenses

251,970 

143,190 

48,500 

41,527 

16,258 

2,495 

Depreciation and amortization

132,529 

56,665 

35,994 

21,415 

7,869 

10,586 

General and administrative

46,834 

6,654 

6,233 

6,367 

4,848 

22,732 

Cleveland Medical Mart development

project

53,935 

53,935 

Acquisition related costs and

tenant buy-outs

2,559 

2,559 

Total expenses

487,827 

206,509 

90,727 

69,309 

82,910 

38,372 

Operating income (loss)

212,764 

131,824 

50,015 

41,941 

9,188 

(20,204)

(Loss) applicable to Toys

(19,190)

(19,190)

Income (loss) from partially owned

entities

12,563 

6,851 

(519)

294 

185 

5,752 

Income from Real Estate Fund

20,301 

20,301 

Interest and other investment

(loss) income, net

(49,172)

1,057 

29 

(50,264)

Interest and debt expense

(128,427)

(36,407)

(29,313)

(18,963)

(7,781)

(35,963)

Net gain on disposition of wholly

owned and partially owned assets

4,856 

4,856 

Income (loss) before income taxes

53,695 

103,325 

20,212 

23,278 

1,592 

(19,190)

(75,522)

Income tax expense

(7,479)

(1,064)

(852)

(892)

(4,671)

Income (loss) from continuing

operations

46,216 

102,261 

19,360 

23,278 

700 

(19,190)

(80,193)

Income (loss) from discontinued

operations

12,012 

(32)

3,713 

10,744 

(9,588)

7,175 

Net income (loss)

58,228 

102,229 

23,073 

34,022 

(8,888)

(19,190)

(73,018)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(14,721)

(2,998)

97 

(11,820)

Operating Partnership, including

unit distributions

(5,210)

(5,210)

Net income (loss) attributable to

Vornado

38,297 

99,231 

23,073 

34,119 

(8,888)

(19,190)

(90,048)

Interest and debt expense(2)

190,942 

46,413 

32,549 

20,102 

8,786 

37,293 

45,799 

Depreciation and amortization(2)

184,028 

63,664 

39,656 

22,131 

9,826 

32,505 

16,246 

Income tax (benefit) expense(2)

(5,214)

1,113 

1,034 

1,215 

(14,103)

5,527 

EBITDA(1)

$

408,053 

$

210,421 

(3)

$

96,312 

$

76,352 

(4)

$

10,939 

$

36,505 

$

(22,476)

(5)

____________________

See notes on page 52.

50

 


 
 

  

 

Net Income and EBITDA by Segment for the Three Months Ended June 30, 2012 and 2011 - continued

(Amounts in thousands)

For the Three Months Ended June 30, 2011

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

521,431 

$

246,218 

$

137,430 

$

76,137 

$

39,295 

$

$

22,351 

Straight-line rent adjustments

7,047 

6,093 

(698)

1,486 

(553)

719 

Amortization of acquired below-

market leases, net

16,427 

11,671 

512 

3,135 

1,109 

Total rentals

544,905 

263,982 

137,244 

80,758 

38,742 

24,179 

Tenant expense reimbursements

77,902 

37,891 

8,724 

28,391 

1,543 

1,353 

Cleveland Medical Mart development

project

32,369 

32,369 

Fee and other income:

BMS cleaning fees

15,409 

22,300 

(6,891)

Management and leasing fees

7,376 

1,574 

4,074 

1,548 

200 

(20)

Lease termination fees

6,499 

5,571 

900 

28 

Other

11,578 

6,345 

5,128 

450 

(481)

136 

Total revenues

696,038 

337,663 

156,070 

111,175 

72,373 

18,757 

Operating expenses

257,228 

139,264 

48,163 

44,275 

21,767 

3,759 

Depreciation and amortization

125,802 

54,534 

33,472 

19,905 

6,991 

10,900 

General and administrative

49,795 

6,423 

6,462 

6,746 

6,406 

23,758 

Cleveland Medical Mart development

project

29,940 

29,940 

Acquisition related costs and

tenant buy-outs

1,897 

1,897 

Total expenses

464,662 

200,221 

88,097 

70,926 

65,104 

40,314 

Operating income (loss)

231,376 

137,442 

67,973 

40,249 

7,269 

(21,557)

(Loss) applicable to Toys

(22,846)

(22,846)

Income (loss) from partially owned

entities

26,016 

5,408 

(767)

635 

178 

20,562 

Income from Real Estate Fund

19,058 

19,058 

Interest and other investment

income (loss), net

7,998 

1,050 

48 

(8)

6,908 

Interest and debt expense

(135,361)

(38,709)

(30,729)

(19,487)

(7,781)

(38,655)

Income (loss) before income taxes

126,241 

105,191 

36,525 

21,389 

(334)

(22,846)

(13,684)

Income tax expense

(5,641)

(440)

(504)

(695)

(4,002)

Income (loss) from continuing

operations

120,600 

104,751 

36,021 

21,389 

(1,029)

(22,846)

(17,686)

Income (loss) from discontinued

operations

10,369 

110 

2,490 

4,593 

3,294 

(118)

Net income (loss)

130,969 

104,861 

38,511 

25,982 

2,265 

(22,846)

(17,804)

Less net income attributable to

noncontrolling interests in:

Consolidated subsidiaries

(13,657)

(2,325)

(69)

(11,263)

Operating Partnership, including

unit distributions

(8,731)

(8,731)

Net income (loss) attributable to

Vornado

108,581 

102,536 

38,511 

25,913 

2,265 

(22,846)

(37,798)

Interest and debt expense(2)

202,956 

45,268 

34,093 

20,796 

9,595 

43,393 

49,811 

Depreciation and amortization(2)

182,496 

59,363 

38,306 

21,802 

11,227 

32,896 

18,902 

Income tax (benefit) expense(2)

(17,343)

443 

607 

911 

(23,969)

4,665 

EBITDA(1)

$

476,690 

$

207,610 

(3)

$

111,517 

$

68,511 

(4)

$

23,998 

$

29,474 

$

35,580 

(5)

__________________________

See notes on the following page.

51

 


 

  

 

Net Income and EBITDA by Segment for the Three Months Ended June 30, 2012 and 2011 - 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 unlevered 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)

Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.

(3)

The elements of "New York" EBITDA are summarized below.

For the Three Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Office

$

142,573 

$

137,630 

Retail

45,081 

47,382 

Alexander's

13,026 

13,921 

Hotel Pennsylvania

9,741 

8,677 

Total New York

$

210,421 

$

207,610 

(4)

The elements of "Retail Properties" EBITDA are summarized below.

For the Three Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Strip Shopping Centers(a)

$

52,268 

$

45,622 

Regional Malls

24,084 

22,889 

Total Retail Properties

$

76,352 

$

68,511 

(a)

EBITDA from continuing operations was $41,438 and $39,564 for the three months ended June 30, 2012 and 2011, respectively.

(5)

The elements of "other" EBITDA are summarized below.

For the Three Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

170 

$

827 

Net unrealized gains

5,284 

3,218 

Net realized gains

771 

Carried interest

2,541 

2,140 

Total

7,995 

6,956 

LNR

11,671 

13,410 

555 California Street

10,377 

10,423 

Lexington

7,703 

9,005 

Other investments

11,523 

11,735 

49,269 

51,529 

Corporate general and administrative expenses(a)

(21,812)

(20,024)

Investment income and other, net(a)

13,387 

11,660 

Fee income from Alexander's

1,907 

1,900 

(Loss) from the mark-to-market of J.C. Penney derivative position

(58,732)

(6,762)

Acquisition costs

(2,559)

(1,897)

Net gain on sale of condominiums

1,274 

Net gain resulting from Lexington's stock issuance

8,308 

Real Estate Fund placement fees

(403)

Net income attributable to noncontrolling interests in the Operating

Partnership, including unit distributions

(5,210)

(8,731)

$

(22,476)

$

35,580 

(a)

The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting liability.

52

 


 

  

 

Net Income and EBITDA by Segment for the Three Months Ended June 30, 2012 and 2011 - continued

 

EBITDA by Region

 

Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations and other gains and losses that affect comparability), from our New York, Washington, DC, Retail Properties and Merchandise Mart segments.

 

For the Three Months

Ended June 30,

2012 

2011 

Region:

New York City metropolitan area

66%

64%

Washington, DC / Northern Virginia metropolitan area

25%

28%

Chicago

4%

4%

California

2%

2%

Puerto Rico

1%

1%

Other geographies

2%

1%

100%

100%

53

 


 

  

Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011

 

 

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below-market leases, net of above-market leases and fee income, were $700,591,000 in the three months ended June 30, 2012, compared to $696,038,000 in the prior year’s quarter, an increase of $4,553,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Merchandise

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Mart

Other

Property rentals:

Acquisitions, sale of partial interests

and other

$

1,413 

$

$

1,413 

$

$

$

Development

(8,106)

(1,417)

(6,690)

Hotel Pennsylvania

1,644 

1,644 

Trade Shows

(4,219)

(4,219)

Amortization of acquired below-market

leases, net

(4,016)

(4,048)

(4)

(344)

380 

Leasing activity (see page 46)

778 

10,475 

(9,662)

1,064 

(426)

(673)

(12,506)

6,654 

(14,943)

721 

(4,645)

(293)

Tenant expense reimbursements:

Acquisitions/development, sale of partial

interests and other

449 

(657)

798 

308 

Operations

482 

(249)

1,436 

(385)

(276)

(44)

931 

(906)

2,234 

(77)

(276)

(44)

Cleveland Medical Mart development

project

23,935 

(1)

23,935 

(1)

Fee and other income:

BMS cleaning fees

1,573 

1,611 

(38)

Management and leasing fees

(2,830)

(461)

(1,690)

(480)

(199)

Lease cancellation fee income

(6,020)

(5,338)

(772)

(27)

117 

Other

(530)

(890)

(157)

(62)

793 

(214)

(7,807)

(5,078)

(2,619)

(569)

711 

(252)

Total increase (decrease) in revenues

$

4,553 

$

670 

$

(15,328)

$

75 

$

19,725 

$

(589)

(1)

This increase in income is offset by an increase in development costs expensed in the quarter. See note (4) on page 55.

54

 


 

  

 

Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Expenses

Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $487,827,000 in the three months ended June 30, 2012, compared to $464,662,000 in the prior year’s quarter, an increase of $23,165,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Merchandise

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Mart

Other

Operating:

Acquisitions, sale of partial interests

and other

$

929 

$

71 

$

858 

$

$

$

Development/redevelopment

(733)

30 

(1,394)

631 

Non-reimbursable expenses, including

bad debt reserves

(6,965)

(667)

(109)

(3,569)

(2,620)

Hotel Pennsylvania

507 

507 

Trade Shows

(4,233)

(4,233)

BMS expenses

1,443 

1,481 

(38)

Operations

3,794 

2,504 

982 

190 

1,344 

(1,226)

(5,258)

3,926 

337 

(2,748)

(5,509)

(1,264)

Depreciation and amortization:

Acquisitions/development, sale of partial

interests and other

4,354 

(105)

3,910 

549 

Operations

2,373 

2,236 

(1,388)

961 

878 

(314)

6,727 

2,131 

2,522 

1,510 

878 

(314)

General and administrative:

Mark-to-market of deferred compensation

plan liability (1)

(1,769)

(1,769)

Real Estate Fund placement fees

(403)

(403)

Operations

(789)

231 

(229)

(379)

(1,558)

(2)

1,146 

(3)

(2,961)

231 

(229)

(379)

(1,558)

(1,026)

Cleveland Medical Mart development

project

23,995 

(4)

23,995 

(4)

Acquisition related costs and

tenant buy-outs

662 

662 

Total increase (decrease) in expenses

$

23,165 

$

6,288 

$

2,630 

$

(1,617)

$

17,806 

$

(1,942)

(1)

This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment (loss) income, net” on our consolidated statements of income.

(2)

Primarily from lower payroll costs due to a reduction in workforce.

(3)

Primarily from higher payroll costs and stock based compensation expense.

(4)

This increase in expense is offset by the increase in development revenue in the quarter. See note (1) on page 54.

55

 


 

  

 

Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Loss Applicable to Toys

 

In the three months ended June 30, 2012, we recognized a net loss of $19,190,000 from our investment in Toys, comprised of $21,561,000 for our 32.5% share of Toys’ net loss ($35,664,000 before our share of Toys’ income tax benefit) and $2,371,000 of management fees.  In the three months ended June 30, 2011, we recognized a net loss of $22,846,000 from our investment in Toys, comprised of $25,048,000 for our 32.7% share of Toys’ net loss ($49,017,000 before our share of Toys’ income tax benefit) and $2,202,000 of management fees.

 

 

Income from Partially Owned Entities

Summarized below are the components of income (loss) from partially owned entities for the three months ended June 30, 2012 and 2011.

 

Percentage

For the Three Months Ended

Ownership at

June 30,

(Amounts in thousands)

June 30, 2012

2012 

2011 

Equity in Net Income (Loss):

Alexander's

32.4%

$

7,848 

$

8,251 

Lexington (1)

11.9% (2)

(236)

8,654 

LNR (3)

26.2%

9,469 

11,003 

India real estate ventures

4.0%-36.5%

(3,815)

205 

Partially owned office buildings:

280 Park Avenue (acquired in May 2011)

49.5%

(1,955)

(2,184)

666 Fifth Avenue Office Condominium (acquired in

December 2011)

49.5%

1,785 

Warner Building

55.0%

(1,589)

(3,225)

1101 17th Street

55.0%

646 

700 

One Park Avenue (acquired in March 2011)

30.3%

303 

(243)

West 57th Street Properties

50.0%

252 

238 

Rosslyn Plaza

43.7%-50.4%

145 

(195)

Fairfax Square

20.0%

(40)

42 

330 Madison Avenue

25.0%

18 

506 

Other partially owned office buildings

Various

555 

1,997 

Other equity method investments:

Independence Plaza Partnership (mezzanine position)

(acquired in June 2011)

51.0%

1,733 

Downtown Crossing, Boston

50.0%

(500)

(242)

Monmouth Mall

50.0%

298 

826 

Verde Realty Operating Partnership

8.3%

(289)

585 

Other equity method investments

Various

(2,065)

(902)

$

12,563 

$

26,016 

(1)

2011 includes an $8,308 net gain resulting from Lexington's stock issuance.

(2)

11.7% at June 30, 2011.

(3)

2011 includes $6,020 of net gains from asset sales.

56

 


 

  

 

Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Income from Real Estate Fund

Below are the components of the income from our Real Estate Fund for the three months ended June 30, 2012 and 2011.

 

(Amounts in thousands)

For the Three Months Ended June 30,

2012 

2011 

Operating (loss) income

$

(834)

$

3,101 

Net realized gain

3,085 

Net unrealized gains

21,135 

12,872 

Income from Real Estate Fund

20,301 

19,058 

Less (income) attributable to noncontrolling interests

(12,306)

(12,102)

Income from Real Estate Fund attributable to Vornado (1)

$

7,995 

$

6,956 

___________________________________

(1)

Excludes management, leasing and development fees of $600 and $865 for the three months ended June 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

 

Interest and Other Investment (Loss) Income, net

Interest and other investment (loss) income, net (comprised of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable, other interest income and dividend income) was a loss of $49,172,000 in the three months ended June 30, 2012, compared to income of $7,998,000 in the prior year’s quarter, a decrease of $57,170,000. This decrease resulted from:

 

(Amounts in thousands)

J.C. Penney derivative position ($58,732 mark-to-market loss in the current year's quarter, compared to

$6,762 in the prior year's quarter)

$

(51,970)

Decrease in the value of investments in our deferred compensation plan (offset by a corresponding

decrease in the liability for plan assets in general and administrative expenses)

(1,769)

Other, net (primarily lower average investments in marketable securities)

(3,431)

$

(57,170)

 

 

Interest and Debt Expense

 

Interest and debt expense was $128,427,000 in the three months ended June 30, 2012, compared to $135,361,000 in the prior year’s quarter, a decrease of $6,934,000.  This decrease was primarily due to (i) $7,842,000 from the redemption of our exchangeable and convertible senior debentures in April 2012 and November 2011, respectively, and (ii) $3,146,000 from the refinancing of 350 Park Avenue in January 2012 (of which $1,880,000 was due to a lower rate and $1,266,000 was due to a lower outstanding loan balance), partially offset by (iii) $5,046,000 from the issuance of $400,000,000 of senior unsecured notes in November 2011.

 

 

Net Gain on Disposition of Wholly Owned and Partially Owned Assets

Net gain on disposition of wholly owned and partially owned assets was $4,856,000 in the three months ended June 30, 2012 and resulted primarily from the sale of marketable securities and residential condominiums.

57

 


 

  

 

Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Income Tax Expense

 

Income tax expense was $7,479,000 in the three months ended June 30, 2012, compared to $5,641,000 in the prior year’s quarter, an increase of $1,838,000.  This increase resulted primarily from higher taxable income of our taxable REIT subsidiaries.

 

 

Income from Discontinued Operations

 

On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.

 

In the second quarter of 2012, we sold four retail properties in separate transactions, for an aggregate of $43,500,000 in cash, which resulted in a net gain aggregating $16,896,000.

 

We have reclassified the revenues and expenses of the properties that were sold and that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements.  The table below sets forth the combined results of assets related to discontinued operations for the three months ended June 30, 2012 and 2011. 

For the Three Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Total revenues

$

22,678 

$

34,509 

Total expenses

14,051 

24,598 

8,627 

9,911 

Net gains on sale of real estate

16,896 

458 

Impairment losses

(13,511)

Income from discontinued operations

$

12,012 

$

10,369 

 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $14,721,000 in the three months ended June 30, 2012, compared to $13,657,000 in the prior year’s quarter, an increase of $1,064,000.  This increase resulted primarily from higher income at 1290 Avenue of the Americas and 555 California Street.

 

 

Net Income Attributable to Noncontrolling Interests in the Operating Partnership, including Unit Distributions

 

Net income attributable to noncontrolling interests in the Operating Partnership, including unit distributions for the three months ended June 30, 2012 and 2011 is primarily comprised of allocations of income to redeemable noncontrolling interests of $1,337,000 and $6,283,000, respectively, and preferred unit distributions of the Operating Partnership of $3,873,000 and $4,448,000, respectively.  The decrease of $4,946,000 in allocations of income to redeemable noncontrolling interests resulted primarily from lower net income subject to allocation to unitholders.

 

 

Preferred Share Dividends

Preferred share dividends were $17,787,000 in the three months ended June 30, 2012, compared to $16,668,000 in the prior year’s quarter, an increase of $1,119,000.  This increase resulted from the issuance of Series J preferred shares during 2011.

58

 


 
 

  

 

Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Same Store EBITDA

Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods.  Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items.  We present same store EBITDA on both a GAAP basis and a cash basis, which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments. We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers.  Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies. 

 

Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the three months ended June 30, 2012, compared to the three months ended June 30, 2011.

 

Retail

Merchandise

(Amounts in thousands)

New York

Washington, DC

Properties

Mart

EBITDA for the three months ended June 30, 2012

$

210,421 

$

96,312 

$

76,352 

$

10,939 

Add-back: non-property level overhead

expenses included above

6,654 

6,233 

6,367 

4,848 

Less: EBITDA from acquisitions, dispositions

and other non-operating income or expenses

(9,384)

(4,745)

(13,446)

6,448 

GAAP basis same store EBITDA for the three months

ended June 30, 2012

207,691 

97,800 

69,273 

22,235 

Less: Adjustments for straight-line rents,

amortization of below-market leases, net, and other

non-cash adjustments

(29,307)

(1,883)

(4,365)

(83)

Cash basis same store EBITDA for the three months

ended June 30, 2012

$

178,384 

$

95,917 

$

64,908 

$

22,152 

EBITDA for the three months ended June 30, 2011

$

207,610 

$

111,517 

$

68,511 

$

23,998 

Add-back: non-property level overhead

expenses included above

6,423 

6,462 

6,746 

6,406 

Less: EBITDA from acquisitions, dispositions

and other non-operating income or expenses

(12,124)

(11,582)

(6,491)

(10,289)

GAAP basis same store EBITDA for the three months

ended June 30, 2011

201,909 

106,397 

68,766 

20,115 

Less: Adjustments for straight-line rents,

amortization of below-market leases, net, and other

non-cash adjustments

(26,246)

50 

(2,972)

553 

Cash basis same store EBITDA for the three months

ended June 30, 2011

$

175,663 

$

106,447 

$

65,794 

$

20,668 

Increase (decrease) in GAAP basis same store EBITDA for

the three months ended June 30, 2012 over the

three months ended June 30, 2011

$

5,782 

$

(8,597)

$

507 

$

2,120 

Increase (decrease) in Cash basis same store EBITDA for

the three months ended June 30, 2012 over the

three months ended June 30, 2011

$

2,721 

$

(10,530)

$

(886)

$

1,484 

% increase (decrease) in GAAP basis same store EBITDA

2.9%

(8.1%)

0.7%

10.5%

% increase (decrease) in Cash basis same store EBITDA

1.5%

(9.9%)

(1.3%)

7.2%

59

 


 

  

Net Income and EBITDA by Segment for the Six Months Ended June 30, 2012 and 2011

Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment).  Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation.  See note (3) on page 62 for the elements of the New York segment’s EBITDA.   

 

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the six months ended June 30, 2012 and 2011.

(Amounts in thousands)

For the Six Months Ended June 30, 2012

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

997,745 

$

479,884 

$

245,772 

$

151,347 

$

76,062 

$

$

44,680 

Straight-line rent adjustments

43,643 

34,194 

3,127 

5,245 

751 

326 

Amortization of acquired below-

market leases, net

25,986 

15,318 

1,031 

6,780 

2,857 

Total rentals

1,067,374 

529,396 

249,930 

163,372 

76,813 

47,863 

Tenant expense reimbursements

157,934 

73,697 

21,122 

57,738 

2,501 

2,876 

Cleveland Medical Mart development

project

111,363 

111,363 

Fee and other income:

BMS cleaning fees

32,492 

46,558 

(14,066)

Management and leasing fees

9,300 

2,221 

5,167 

1,904 

46 

(38)

Lease termination fees

890 

256 

128 

505 

Other

23,662 

11,802 

10,562 

739 

740 

(181)

Total revenues

1,403,015 

663,930 

286,909 

223,754 

191,968 

36,454 

Operating expenses

515,339 

288,862 

95,662 

85,033 

40,799 

4,983 

Depreciation and amortization

267,983 

110,424 

79,517 

42,025 

14,885 

21,132 

General and administrative

102,405 

15,241 

13,186 

12,700 

10,757 

50,521 

Cleveland Medical Mart development

project

106,696 

106,696 

Acquisition related costs and

tenant buy-outs

3,244 

3,244 

Total expenses

995,667 

414,527 

188,365 

139,758 

173,137 

79,880 

Operating income (loss)

407,348 

249,403 

98,544 

83,996 

18,831 

(43,426)

Income applicable to Toys

97,281 

97,281 

Income (loss) from partially owned

entities

32,223 

11,036 

(2,389)

698 

341 

22,537 

Income from Real Estate Fund

32,063 

32,063 

Interest and other investment

(loss) income, net

(33,507)

2,109 

73 

20 

(35,709)

Interest and debt expense

(262,655)

(72,548)

(59,724)

(38,171)

(15,561)

(76,651)

Net gain on disposition of wholly

owned and partially owned assets

4,856 

4,856 

Income (loss) before income taxes

277,609 

190,000 

36,504 

46,543 

3,611 

97,281 

(96,330)

Income tax expense

(14,304)

(1,665)

(1,302)

(1,823)

(9,514)

Income (loss) from continuing

operations

263,305 

188,335 

35,202 

46,543 

1,788 

97,281 

(105,844)

Income (loss) from discontinued operations

75,187 

(640)

5,943 

15,395 

47,499 

6,990 

Net income (loss)

338,492 

187,695 

41,145 

61,938 

49,287 

97,281 

(98,854)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(24,318)

(5,174)

211 

(19,355)

Operating Partnership, including

unit distributions

(24,355)

(24,355)

Net income (loss) attributable to

Vornado

289,819 

182,521 

41,145 

62,149 

49,287 

97,281 

(142,564)

Interest and debt expense(2)

384,024 

93,471 

66,206 

40,540 

17,576 

68,862 

97,369 

Depreciation and amortization(2)

375,201 

125,575 

87,916 

44,406 

19,304 

67,211 

30,789 

Income tax expense(2)

46,226 

1,806 

1,557 

2,377 

29,100 

11,386 

EBITDA(1)

$

1,095,270 

$

403,373 

(3)

$

196,824 

$

147,095 

(4)

$

88,544 

$

262,454 

$

(3,020)

(5)

____________________

See notes on page 62.

60

 


 

  

 

Net Income and EBITDA by Segment for the Six Months Ended June 30, 2012 and 2011 - continued

(Amounts in thousands)

For the Six Months Ended June 30, 2011

Retail

Merchandise

Total

New York

Washington, DC

Properties

Mart

Toys

Other

Property rentals

$

1,032,339 

$

480,092 

$

272,075 

$

151,863 

$

82,954 

$

$

45,355 

Straight-line rent adjustments

19,703 

16,191 

(696)

3,219 

(760)

1,749 

Amortization of acquired below-

market leases, net

32,772 

23,340 

978 

6,206 

2,248 

Total rentals

1,084,814 

519,623 

272,357 

161,288 

82,194 

49,352 

Tenant expense reimbursements

164,507 

76,796 

17,685 

61,103 

3,307 

5,616 

Cleveland Medical Mart development

project

73,068 

73,068 

Fee and other income:

BMS cleaning fees

30,832 

44,342 

(13,510)

Management and leasing fees

11,887 

2,538 

6,959 

2,313 

303 

(226)

Lease termination fees

7,675 

5,636 

2,011 

28 

Other

24,654 

12,003 

10,281 

950 

1,248 

172 

Total revenues

1,397,437 

660,938 

309,293 

225,682 

160,120 

41,404 

Operating expenses

528,642 

282,639 

95,384 

91,714 

49,921 

8,984 

Depreciation and amortization

251,598 

109,346 

66,562 

40,243 

13,952 

21,495 

General and administrative

108,243 

13,957 

12,999 

13,958 

13,453 

53,876 

Cleveland Medical Mart development

project

68,218 

68,218 

Acquisition related costs and

tenant buy-outs

20,167 

15,000 

3,040 

2,127 

Total expenses

976,868 

420,942 

174,945 

145,915 

148,584 

86,482 

Operating income (loss)

420,569 

239,996 

134,348 

79,767 

11,536 

(45,078)

Income applicable to Toys

90,098 

90,098 

Income (loss) from partially owned

entities

41,895 

12,117 

(4,682)

646 

254 

33,560 

Income from Real Estate Fund

20,138 

20,138 

Interest and other investment

income, net

125,097 

2,122 

80 

122,895 

Interest and debt expense

(268,296)

(75,293)

(59,655)

(38,875)

(15,476)

(78,997)

Net gain on disposition of wholly

owned and partially owned assets

6,677 

6,677 

Income (loss) before income taxes

436,178 

178,942 

70,091 

41,538 

(3,686)

90,098 

59,195 

Income tax expense

(11,589)

(959)

(1,174)

(5)

(739)

(8,712)

Income (loss) from continuing

operations

424,589 

177,983 

68,917 

41,533 

(4,425)

90,098 

50,483 

Income (loss) from discontinued operations

152,201 

233 

51,439 

12,890 

87,882 

(243)

Net income

576,790 

178,216 

120,356 

54,423 

83,457 

90,098 

50,240 

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(15,007)

(4,596)

86 

(10,497)

Operating Partnership, including

unit distributions

(40,539)

(40,539)

Net income (loss) attributable to

Vornado

521,244 

173,620 

120,356 

54,509 

83,457 

90,098 

(796)

Interest and debt expense(2)

401,804 

85,557 

66,314 

41,466 

22,502 

83,528 

102,437 

Depreciation and amortization(2)

368,344 

116,072 

80,205 

44,177 

22,402 

67,569 

37,919 

Income tax expense(2)

49,485 

910 

1,455 

1,321 

45,049 

745 

EBITDA(1)

$

1,340,877 

$

376,159 

(3)

$

268,330 

$

140,157 

(4)

$

129,682 

$

286,244 

$

140,305 

(5)

___________________________

See notes on the following page.

61

 


 

  

 

Net Income and EBITDA by Segment for the Six Months Ended June 30, 2012 and 2011 - 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 unlevered 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)

Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.

(3)

The elements of "New York" EBITDA are summarized below.

For the Six Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Office

$

278,520 

$

262,321 

Retail(a)

89,234 

78,027 

Alexander's

26,397 

27,202 

Hotel Pennsylvania

9,222 

8,609 

Total New York

$

403,373 

$

376,159 

(a)

The EBITDA for the six months ended June 30, 2011 is after a $15,000 expense for the buy-out of a below market lease.

(4)

The elements of "Retail Properties" EBITDA are summarized below.

For the Six Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Strip Shopping Centers(a)

$

99,176 

$

95,782 

Regional Malls

47,919 

44,375 

Total Retail Properties

$

147,095 

$

140,157 

(a)

EBITDA from continuing operations was $82,604 and $79,605 for the six months ended June 30, 2012 and 2011, respectively.

(5)

The elements of "other" EBITDA are summarized below.

For the Six Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

2,288 

$

1,807 

Net unrealized gains

6,995 

3,392 

Net realized gains

771 

Carried interest

2,541 

2,140 

Total

11,824 

8,110 

LNR

27,233 

22,800 

555 California Street

20,692 

21,388 

Lexington

16,921 

19,546 

Other investments

20,823 

19,936 

97,493 

91,780 

Corporate general and administrative expenses(a)

(44,129)

(41,379)

Investment income and other, net(a)

23,832 

24,743 

Fee income from Alexander's

3,796 

3,787 

(Loss) income from the mark-to-market of J.C. Penney derivative position

(57,687)

10,401 

Acquisition costs

(3,244)

(2,127)

Net gain on sale of condominiums

1,274 

4,586 

Mezzanine loans loss reversal and net gain on disposition

82,744 

Net gain resulting from Lexington's stock issuance

9,760 

Real Estate Fund placement fees

(3,451)

Net income attributable to noncontrolling interests in the Operating

Partnership, including unit distributions

(24,355)

(40,539)

$

(3,020)

$

140,305 

(a)

The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting liability.

62

 


 

  

 

Net Income and EBITDA by Segment for the Six Months Ended June 30, 2012 and 2011 - continued

 

EBITDA by Region

 

Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations and other gains and losses that affect comparability), from our New York, Washington, DC, Retail Properties and Merchandise Mart segments.

 

For the Six Months Ended June 30,

2012 

2011 

Region:

New York City metropolitan area

66%

64%

Washington, DC / Northern Virginia metropolitan area

26%

28%

Chicago

4%

4%

California

2%

2%

Puerto Rico

1%

1%

Other geographies

1%

1%

100%

100%

63

 


 

  

Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011

 

 

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below-market leases, net of above-market leases and fee income, were $1,403,015,000 for the six months ended June 30, 2012, compared to $1,397,437,000 in the prior year’s six months, an increase of $5,578,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Merchandise

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Mart

Other

Property rentals:

Acquisitions, sale of partial interests

and other

$

3,037 

$

$

3,037 

$

$

$

Development

(13,203)

(3,160)

(10,130)

87 

Hotel Pennsylvania

2,229 

2,229 

Trade Shows

(3,550)

(3,550)

Amortization of acquired below-market

leases, net

(6,786)

(8,022)

53 

574 

609 

Leasing activity (see page 46)

833 

18,726 

(15,387)

1,423 

(1,831)

(2,098)

(17,440)

9,773 

(22,427)

2,084 

(5,381)

(1,489)

Tenant expense reimbursements:

Acquisitions/development, sale of partial

interests and other

(2,446)

(997)

1,963 

(725)

(2,687)

Operations

(4,127)

(2,102)

1,474 

(2,640)

(806)

(53)

(6,573)

(3,099)

3,437 

(3,365)

(806)

(2,740)

Cleveland Medical Mart development

project

38,295 

(1)

38,295 

(1)

Fee and other income:

BMS cleaning fees

1,660 

2,216 

(556)

Management and leasing fees

(2,587)

(317)

(1,792)

(409)

(257)

188 

Lease cancellation fee income

(6,785)

(5,380)

(1,883)

(27)

505 

Other

(992)

(201)

281 

(211)

(508)

(353)

(8,704)

(3,682)

(3,394)

(647)

(260)

(721)

Total increase (decrease) in revenues

$

5,578 

$

2,992 

$

(22,384)

$

(1,928)

$

31,848 

$

(4,950)

(1)

This increase in income is offset by an increase in development costs expensed in the period. See note (4) on page 65.

64

 


 

  

 

Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Expenses

Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $995,667,000 for the six months ended June 30, 2012, compared to $976,868,000 in the prior year’s six months, an increase of $18,799,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Merchandise

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Mart

Other

Operating:

Acquisitions, sale of partial interests

and other

$

(762)

$

160 

$

1,765 

$

$

$

(2,687)

Development/redevelopment

(2,109)

100 

(2,044)

(165)

Non-reimbursable expenses, including

bad debt reserves

(11,577)

(1,869)

(533)

(4,247)

(4,928)

Hotel Pennsylvania

1,428 

1,428 

Trade Shows

(3,905)

(3,905)

BMS expenses

1,123 

1,679 

(556)

Operations

2,499 

4,725 

1,090 

(2,269)

(289)

(758)

(13,303)

6,223 

278 

(6,681)

(9,122)

(4,001)

Depreciation and amortization:

Acquisitions/development, sale of partial

interests and other

15,957 

(708)

15,849 

816 

Operations

428 

1,786 

(2,894)

966 

933 

(363)

16,385 

1,078 

12,955 

1,782 

933 

(363)

General and administrative:

Mark-to-market of deferred compensation

plan liability (1)

(2,594)

(2,594)

Real Estate Fund placement fees

(3,451)

(3,451)

Operations

207 

1,284 

187 

(1,258)

(2,696)

(2)

2,690 

(3)

(5,838)

1,284 

187 

(1,258)

(2,696)

(3,355)

Cleveland Medical Mart development

project

38,478 

(4)

38,478 

(4)

Acquisition related costs and

tenant buy-outs

(16,923)

(15,000)

(5)

(3,040)

1,117 

Total increase (decrease) in expenses

$

18,799 

$

(6,415)

$

13,420 

$

(6,157)

$

24,553 

$

(6,602)

(1)

This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment (loss) income, net” on our consolidated statements of income.

(2)

Primarily from lower payroll costs due to a reduction in workforce.

(3)

Primarily from higher payroll costs and stock based compensation.

(4)

This increase in expense is offset by the increase in development revenue in the period. See note (1) on page 64.

(5)

Represents the buy-out of a below-market lease in the prior year.

65

 


 

  

 

Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Income Applicable to Toys

 

In the six months ended June 30, 2012, we recognized net income of $97,281,000 from our investment in Toys, comprised of $92,623,000 for our 32.5% share of Toys’ net income ($121,723,000 before our share of Toys’ income tax expense) and $4,658,000 of management fees.  In the six months ended June 30, 2011, we recognized net income of $90,098,000 from our investment in Toys, comprised of $85,773,000 for our 32.7% share of Toys’ net income ($130,822,000 before our share of Toys’ income tax expense) and $4,325,000 of management fees.

 

 

Income from Partially Owned Entities

Summarized below are the components of income (loss) from partially owned entities for the six months ended June 30, 2012 and 2011.

 

Percentage

For the Six Months Ended

Ownership at

June 30,

(Amounts in thousands)

June 30, 2012

2012 

2011 

Equity in Net Income (Loss):

Alexander's

32.4%

$

15,869 

$

15,857 

Lexington (1)

11.9% (2)

694 

10,826 

LNR (3)

26.2%

22,719 

26,257 

India real estate ventures

4.0%-36.5%

(4,608)

(2)

Partially owned office buildings:

280 Park Avenue (acquired in May 2011)

49.5%

(7,550)

(2,184)

Warner Building (4)

55.0%

(4,599)

(12,547)

666 Fifth Avenue Office Condominium (acquired in

December 2011)

49.5%

3,500 

1101 17th Street

55.0%

1,329 

1,423 

330 Madison Avenue

25.0%

812 

1,125 

One Park Avenue (acquired in March 2011)

30.3%

634 

(1,471)

West 57th Street Properties

50.0%

565 

336 

Rosslyn Plaza

43.7%-50.4%

303 

2,220 

Fairfax Square

20.0%

(52)

29 

Other partially owned office buildings

Various

1,082 

4,086 

Other equity method investments:

Independence Plaza Partnership (mezzanine position)

(acquired in June 2011)

51.0%

3,415 

Downtown Crossing, Boston

50.0%

(834)

(748)

Monmouth Mall

50.0%

660 

957 

Verde Realty Operating Partnership

8.3%

(612)

(1,209)

Other equity method investments

Various

(1,104)

(3,060)

$

32,223 

$

41,895 

(1)

2011 includes a $9,760 net gain resulting from Lexington's stock issuance.

(2)

11.7% at June 30, 2011.

(3)

2011 includes $8,977 for our share of a tax settlement gain and $6,020 of net gains from asset sales.

(4)

2011 includes $9,022 for our share of expense, primarily for straight-line reserves and the write-off of tenant improvements in connection with a tenant's bankruptcy at the Warner Building.

66

 


 

  

 

Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Income from Real Estate Fund

 

Below are the components of the income from our Real Estate Fund for the six months ended June 30, 2012 and 2011.

 

(Amounts in thousands)

For the Six Months Ended June 30,

2012 

2011 

Operating income

$

4,084 

$

3,483 

Net realized gain

3,085 

Net unrealized gains

27,979 

13,570 

Income from Real Estate Fund

32,063 

20,138 

Less income attributable to noncontrolling interests

(20,239)

(12,028)

Income from Real Estate Fund attributable to Vornado (1)

$

11,824 

$

8,110 

___________________________________

(1)

Excludes management, leasing and development fees of $1,303 and $1,165 for the six months ended June 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

 

Interest and Other Investment (Loss) Income, net

Interest and other investment (loss) income, net (comprised of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable, other interest income and dividend income) was a loss of  $33,507,000 in the six months ended June 30, 2012, compared to income of $125,097,000 in the prior year’s six months, a decrease of $158,604,000. This decrease resulted from:

 

(Amounts in thousands)

Mezzanine loan loss reversal and net gain on disposition in 2011

$

(82,744)

J.C. Penney derivative position ($57,687 mark-to-market loss in 2012, compared to a $10,401

mark-to-market gain in 2011)

(68,088)

Decrease in the value of investments in our deferred compensation plan (offset by a corresponding

decrease in the liability for plan assets in general and administrative expenses)

(2,594)

Other, net (primarily lower average investments in marketable securities)

(5,178)

$

(158,604)

 

 

Interest and Debt Expense

 

Interest and debt expense was $262,655,000 in the six months ended June 30, 2012, compared to $268,296,000 in the prior year’s six months, a decrease of $5,641,000.  This decrease was primarily due to (i) $10,093,000 from the redemption of our exchangeable and convertible senior debentures in April 2012 and November 2011, respectively, and (ii) $5,659,000 from the refinancing of 350 Park Avenue in January 2012 (of which $3,554,000 was due to a lower rate and $2,105,000 was due to a lower outstanding loan balance), partially offset by (iii) $10,091,000 from the issuance of $400,000,000 of senior unsecured notes in November 2011.

 

 

Net Gain on Disposition of Wholly Owned and Partially Owned Assets

 

Net gain on disposition of wholly owned and partially owned assets was $4,856,000 in the six months ended June 30, 2012 compared to $6,677,000, in the prior year’s six months and resulted primarily from the sale of marketable securities and residential condominiums.

67

 


 

  

 

Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Income Tax Expense

 

Income tax expense was $14,304,000 in the six months ended June 30, 2012, compared to $11,589,000 in the prior year’s six months, an increase of $2,715,000.  This increase resulted primarily from higher taxable income of our taxable REIT subsidiaries.

 

 

Income from Discontinued Operations

On January 6, 2012, we completed the sale of 350 West Mart Center, a 1.2 million square foot office building in Chicago, Illinois, for $228,000,000 in cash, which resulted in a net gain of $54,911,000.

 

On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.

 

In addition, during 2012, we sold 11 retail properties in separate transactions, for an aggregate of $136,000,000 in cash, which resulted in a net gain aggregating $17,802,000.

 

We have reclassified the revenues and expenses of the properties that were sold and that are currently being held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements.  The table below sets forth the combined results of assets related to discontinued operations for the six months ended June 30, 2012 and 2011.

 

For the Six Months Ended June 30,

(Amounts in thousands)

2012 

2011 

Total revenues

$

49,429 

$

76,622 

Total expenses

33,444 

59,951 

15,985 

16,671 

Net gains on sales of real estate

72,713 

51,623 

Impairment losses

(13,511)

Net gain on extinguishment of High Point debt

83,907 

Income from discontinued operations

$

75,187 

$

152,201 

 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $24,318,000 in the six months ended June 30, 2012, compared to $15,007,000 in the prior year’s six months, an increase of $9,311,000.  This increase resulted primarily from an $8,211,000 increase in income allocated to the noncontrolling interests of our Real Estate Fund.

 

 

Net Income Attributable to Noncontrolling Interests in the Operating Partnership, including Unit Distributions

 

Net income attributable to noncontrolling interests in the Operating Partnership, including unit distributions for the six months ended June 30, 2012 and 2011 is primarily comprised of allocations of income to redeemable noncontrolling interests of $16,608,000 and $33,588,000, respectively, and preferred unit distributions of the Operating Partnership of $7,747,000 and $8,951,000, respectively.  The decrease of $16,980,000 in allocations of income to redeemable noncontrolling interests resulted primarily from lower net income subject to allocation to unitholders. 

 

 

Preferred Share Dividends

Preferred share dividends were $35,574,000 in the six months ended June 30, 2012, compared to $30,116,000 in the prior year’s six months, an increase of $5,458,000.  This increase resulted from the issuance of Series J preferred shares in 2011.

68

 


 

  

 

Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011 - continued

 

 

Same Store EBITDA

Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods.  Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items.  We present same store EBITDA on both a GAAP basis and a cash basis, which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments. We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers.  Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies. 

 

Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the six months ended June 30, 2012, compared to the six months ended June 30, 2011.

 

Retail

Merchandise

(Amounts in thousands)

New York

Washington, DC

Properties

Mart

EBITDA for the six months ended June 30, 2012

$

403,373 

$

196,824 

$

147,095 

$

88,544 

Add-back: non-property level overhead

expenses included above

15,241 

13,186 

12,700 

10,757 

Less: EBITDA from acquisitions, dispositions

and other non-operating income or expenses

(19,900)

(12,792)

(21,891)

(54,577)

GAAP basis same store EBITDA for the six months

ended June 30, 2012

398,714 

197,218 

137,904 

44,724 

Less: Adjustments for straight-line rents,

amortization of below-market leases, net, and other

non-cash adjustments

(58,756)

(3,583)

(7,780)

(751)

Cash basis same store EBITDA for the six months

ended June 30, 2012

$

339,958 

$

193,635 

$

130,124 

$

43,973 

EBITDA for the six months ended June 30, 2011

$

376,159 

$

268,330 

$

140,157 

$

129,682 

Add-back: non-property level overhead

expenses included above

13,957 

12,999 

13,958 

13,453 

Less: EBITDA from acquisitions, dispositions

and other non-operating income or expenses

(3,810)

(67,816)

(16,830)

(100,359)

GAAP basis same store EBITDA for the six months

ended June 30, 2011

386,306 

213,513 

137,285 

42,776 

Less: Adjustments for straight-line rents,

amortization of below-market leases, net, and other

non-cash adjustments

(52,670)

(587)

(6,727)

760 

Cash basis same store EBITDA for the six months

ended June 30, 2011

$

333,636 

$

212,926 

$

130,558 

$

43,536 

Increase (decrease) in GAAP basis same store EBITDA for

the six months ended June 30, 2012 over the

six months ended June 30, 2011

$

12,408 

$

(16,295)

$

619 

$

1,948 

Increase (decrease) in Cash basis same store EBITDA for

the six months ended June 30, 2012 over the

six months ended June 30, 2011

$

6,322 

$

(19,291)

$

(434)

$

437 

% increase (decrease) in GAAP basis same store EBITDA

3.2%

(7.6%)

0.5%

4.6%

% increase (decrease) in Cash basis same store EBITDA

1.9%

(9.1%)

(0.3%)

1.0%

69

 


 
 

  

SUPPLEMENTAL INFORMATION

 

 

Reconciliation of EBITDA to Same Store EBITDA - Three Months Ended June 30, 2012 vs. March 31, 2012

 

Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the three months ended June 30, 2012, compared to the three months ended March 31, 2012.

 

Retail

Merchandise

(Amounts in thousands)

New York

Washington, DC

Properties

Mart

EBITDA for the three months ended June 30, 2012

$

210,421 

$

96,312 

$

76,352 

$

10,939 

Add-back: non-property level overhead expenses

included above

6,654 

6,233 

6,367 

4,848 

Less: EBITDA from acquisitions, dispositions

and other non-operating income or expenses

(4,961)

(4,745)

(10,467)

6,331 

GAAP basis same store EBITDA for the three months

ended June 30, 2012

212,114 

97,800 

72,252 

22,118 

Less: Adjustments for straight-line rents, amortization of

below-market leases, net, and other non-cash adjustments

(33,461)

(1,883)

(4,832)

(83)

Cash basis same store EBITDA for the three months

ended June 30, 2012

$

178,653 

$

95,917 

$

67,420 

$

22,035 

EBITDA for the three months ended March 31, 2012(1)

$

192,952 

$

100,512 

$

70,743 

$

77,605 

Add-back: non-property level overhead expenses

included above

8,587 

6,953 

6,333 

5,909 

Less: EBITDA from acquisitions, dispositions

and other non-operating income or expenses

(5,185)

(7,926)

(5,692)

(60,908)

GAAP basis same store EBITDA for the three months

ended March 31, 2012

196,354 

99,539 

71,384 

22,606 

Less: Adjustments for straight-line rents, amortization of

below-market leases, net, and other non-cash adjustments

(33,567)

(1,822)

(4,285)

(668)

Cash basis same store EBITDA for the three months

ended March 31, 2012

$

162,787 

$

97,717 

$

67,099 

$

21,938 

Increase (decrease) in GAAP basis same store EBITDA for

the three months ended June 30, 2012 over the

three months ended March 31, 2012

$

15,760 

$

(1,739)

$

868 

$

(488)

Increase (decrease) in Cash basis same store EBITDA for

the three months ended June 30, 2012 over the

three months ended March 31, 2012

$

15,866 

$

(1,800)

$

321 

$

97 

% increase (decrease) in GAAP basis same store EBITDA

8.0%

(1.7%)

1.2%

(2.2%)

% increase (decrease) in Cash basis same store EBITDA

9.7%

(1.8%)

0.5%

0.4%

(1)

Below is the reconciliation of net income to EBITDA for the three months ended March 31, 2012.

Retail

Merchandise

(Amounts in thousands)

New York

Washington, DC

Properties

Mart

Net income attributable to Vornado for the three months

ended March 31, 2012

$

83,290 

$

18,072 

$

28,030 

$

58,175 

Interest and debt expense

47,058 

33,657 

20,438 

8,790 

Depreciation and amortization

61,911 

48,260 

22,275 

9,478 

Income tax expense

693 

523 

1,162 

EBITDA for the three months ended March 31, 2012

$

192,952 

$

100,512 

$

70,743 

$

77,605 

70

 


 

  

Related Party Transactions

 

 

On March 8, 2012, Steven Roth, the Chairman of our Board of Trustees, repaid his $13,122,500 outstanding loan from the Company.

 

 

Liquidity and Capital Resources

 

 

Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties.   Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, dividends to shareholders, distributions to unitholders of the Operating Partnership, as well as acquisition and development costs.  Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, and our revolving credit facilities; proceeds from the issuance of common and preferred equity; and asset sales.    

 

We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures.  Capital requirements for development expenditures and acquisitions (excluding Fund acquisitions) may require funding from borrowings and/or equity offerings.  Our Real Estate Fund has aggregate unfunded equity commitments of $330,753,000 for acquisitions, including $82,688,250 from us. 

 

We may from time to time purchase or retire outstanding debt securities or redeem our equity securities.  Such purchases, if any, will depend on prevailing market conditions, liquidity requirements and other factors.  The amounts involved in connection with these transactions could be material to our consolidated financial statements.

 

See “Overview” on page 43 for significant transactions that have occurred subsequent to quarter end that may have an impact on our liquidity and capital resources.

 

 

Cash Flows for the Six Months Ended June 30, 2012

Our cash and cash equivalents were $471,363,000 at June 30, 2012, a $135,190,000 decrease over the balance at December 31, 2011.  Our consolidated outstanding debt was $10,218,027,000 at June 30, 2012, a $269,321,000 decrease over the balance at December 31, 2011.  As of June 30, 2012 and December 31, 2011, $500,000,000 and $138,000,000, respectively, was outstanding under our revolving credit facilities.  During the remainder of 2012 and 2013, $70,213,000 and $1,685,477,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it using a portion of our $2,471,363,000 of available capacity (comprised of $471,363,000 of cash and cash equivalents and $2,000,000,000 of availability under our revolving credit facilities).

 

Cash flows provided by operating activities of $263,864,000 was comprised of (i) net income of $338,492,000, (ii) distributions of income from partially owned entities of $34,613,000 and (iii) $73,175,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities and net gains on sale of real estate, partially offset by (iv) the net change in operating assets and liabilities of $182,416,000, including $85,867,000 related to Real Estate Fund investments.

 

Net cash provided by investing activities of $170,894,000 was comprised of (i) $370,037,000 of proceeds from sales of real estate and related investments, (ii) $58,460,000 of proceeds from the sale of marketable securities, (iii) $24,950,000 from the return of the J.C. Penney derivative collateral, (iv) $17,963,000 of capital distributions from partially owned entities, (v) $13,123,000 of proceeds from the repayment of loan to officer and (vi) $1,994,000 of proceeds from repayments of mezzanine loans, partially offset by (vii) $83,368,000 of additions to real estate, (viii) $70,000,000 for the funding of the J.C. Penney derivative collateral, (ix) $58,069,000 of development costs and construction in progress, (x) $57,237,000 of investments in partially owned entities, (xi) $32,156,000 of acquisitions of real estate and other, (xii) $14,658,000 of changes in restricted cash, and (xiii) $145,000 of investments in mezzanine loans receivable and other.

 

Net cash used in financing activities of $569,948,000 was comprised of (i) $1,507,220,000 for the repayments of borrowings, (ii) $256,119,000 of dividends paid on common shares, (iii) $69,367,000 of distributions to noncontrolling interests, (iv) $35,576,000 of dividends paid on preferred shares, (v) $30,034,000 for the repurchase of shares related to stock compensation agreements and related tax holdings and (vi) $14,648,000 of debt issuance and other costs, partially offset by (vii) $1,225,000,000 of proceeds from borrowings, (viii) $108,349,000 of contributions from noncontrolling interests in consolidated subsidiaries and (ix) $9,667,000 of proceeds from exercise of employee share options.

71

 


 
 

  

 

Liquidity and Capital Resources – continued

 

Capital Expenditures in the six months ended June 30, 2012

 

Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions.  Recurring capital expenditures include expenditures 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 expenditures include expenditures to lease space that has been vacant for more than nine months and expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition, as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition.  Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2012.

Retail

Merchandise

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Mart

Other

Expenditures to maintain assets

$

22,625 

$

10,033 

$

5,244 

$

2,665 

$

1,891 

$

2,792 

Tenant improvements

60,511 

25,820 

25,332 

6,503 

2,856 

Leasing commissions

23,438 

14,219 

7,342 

1,755 

122 

Non-recurring capital expenditures

4,877 

4,095 

782 

Total capital expenditures and leasing

commissions (accrual basis)

111,451 

54,167 

37,918 

10,923 

4,869 

3,574 

Adjustments to reconcile to cash basis:

Expenditures in the current year

applicable to prior periods

58,095 

20,667 

16,603 

4,917 

10,672 

5,236 

Expenditures to be made in future

periods for the current period

(69,209)

(33,249)

(27,479)

(6,951)

(1,530)

Total capital expenditures and leasing

commissions (cash basis)

$

100,337 

$

41,585 

$

27,042 

$

8,889 

$

14,011 

$

8,810 

Tenant improvements and leasing commissions:

Per square foot per annum

$

3.51   

$

4.57   

$

4.91   

$

1.05   

$

2.44   

$

Percentage of initial rent

8.5%  

7.0%  

12.7%  

5.4%  

6.6%  

 

 

Development and Redevelopment Expenditures in the six months ended June 30, 2012

 

Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions, capitalized interest and operating costs until the property is substantially completed and ready for its intended use.  Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2012.

 

Retail

Merchandise

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Mart

Other

510 Fifth Avenue

$

8,369   

$

8,369   

$

 

$

 

$

 

$

Bergen Town Center

8,114   

 

 

8,114   

 

Crystal Square 5

6,976   

 

6,976   

 

 

Beverly Connection

5,842   

 

 

5,842   

 

220 Central Park South

3,108   

 

 

 

 

3,108 

1290 Avenue of the Americas

2,947   

2,947   

 

 

 

Poughkeepsie, New York

1,411   

 

 

1,411   

 

Crystal City Hotel

1,316   

 

1,316   

 

 

Crystal Plaza 5

1,191   

 

1,191   

 

 

Other

18,795   

5,933   

5,327   

7,260   

28   

247 

$

58,069   

$

17,249   

$

14,810   

$

22,627   

$

28   

$

3,355 

 

As of June 30, 2012, the estimated costs to complete the above projects are approximately $26,000,000.  In addition, during 2012, we plan to redevelop 1851 South Bell Street, a 348,000 square foot office building in Crystal City, into a new 700,000 square foot office building (readdressed as 1900 Crystal Drive).  The estimated cost of this project is approximately $300,000,000, or $425 per square foot.  There can be no assurance that these projects will commence, or, if commenced, be completed on schedule or within budget. 

72

 


 

  

 

Liquidity and Capital Resources – continued

 

 

Cash Flows for the Six Months Ended June 30, 2011

 

Our cash and cash equivalents were $591,515,000 at June 30, 2011, a $99,274,000 decrease over the balance at December 31, 2010.  This decrease was primarily due to cash flows from financing activities, partially offset by cash flows from operating activities, as discussed below.

 

Cash flows provided by operating activities of $260,040,000 was comprised of (i) net income of $576,790,000 and (ii) distributions of income from partially owned entities of $43,741,000, partially offset by (iii) $148,549,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income and equity in net income of partially owned entities, and (iv) the net change in operating assets and liabilities of $211,942,000, including $97,802,000 related to Real Estate Fund investments.

 

Net cash provided by investing activities of $23,257,000 was comprised of (i) $271,375,000 of capital distributions from partially owned entities, (ii) $130,789,000 of proceeds from sales of real estate and related investments, (iii) $99,990,000 of proceeds from sales and repayments of mezzanine loans, (iv) changes in restricted cash of $91,127,000 and (v) $19,301,000 of proceeds from sales of, and return of investments in, marketable securities, partially offset by (vi) $426,376,000 of investments in partially owned entities, (vii) $86,944,000 of additions to real estate, (viii) $43,516,000 of investments in mezzanine loans receivable and other and (ix) $32,489,000 of development costs and construction in progress.

 

Net cash used in financing activities of $382,571,000 was comprised of (i) $1,636,817,000 for the repayments of borrowings, (ii) $254,099,000 of dividends paid on common shares, (iii) $62,111,000 of distributions to noncontrolling interests, (iv) $27,117,000 of dividends paid on preferred shares, (v) $23,319,000 of debt issuance and other costs, (vi) $8,000,000 for the purchase of outstanding preferred units and (vii) $748,000 for the repurchase of shares related to stock compensation agreements and related tax holdings, partially offset by (viii) $1,284,167,000 of proceeds from borrowings, (ix) $214,538,000 of proceeds from the issuance of Series J preferred shares, (x) $109,605,000 of contributions from noncontrolling interests and (xi) $21,330,000 of proceeds received from exercise of employee share options.

73

 


 

  

 

Liquidity and Capital Resources – continued

 

 

Capital Expenditures in the six months ended June 30, 2011

 

Retail

Merchandise

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Mart

Other

Expenditures to maintain assets

$

20,864 

$

8,400 

$

4,124 

$

2,387 

$

4,326 

$

1,627 

Tenant improvements

38,972 

22,293 

12,608 

1,610 

2,139 

322 

Leasing commissions

10,142 

7,467 

2,177 

303 

72 

123 

Non-recurring capital expenditures

14,945 

13,085 

500 

1,360 

Total capital expenditures and leasing

commissions (accrual basis)

84,923 

51,245 

18,909 

4,800 

6,537 

3,432 

Adjustments to reconcile to cash basis:

Expenditures in the current year

applicable to prior periods

62,082 

25,604 

9,028 

7,412 

19,210 

828 

Expenditures to be made in future

periods for the current period

(49,923)

(31,924)

(13,547)

(2,405)

(2,047)

Total capital expenditures and leasing

commissions (cash basis)

$

97,082 

$

44,925 

$

14,390 

$

9,807 

$

23,700 

$

4,260 

Tenant improvements and leasing commissions:

Per square foot per annum

$

3.31 

$

5.10 

$

3.96 

$

0.60 

$

1.47 

$

Percentage of initial rent

8.0%

7.6%

10.1%

3.1%

4.3%

 

 

Development and Redevelopment Expenditures in the six months ended June 30, 2011

 

Retail

Merchandise

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Mart

Other

Bergen Town Center

$

10,105 

$

$

$

10,105 

$

$

Green Acres Mall

3,539 

3,539 

West End 25

1,841 

1,841 

North Bergen, New Jersey

1,494 

1,494 

510 Fifth Avenue

1,492 

1,492 

Crystal City Hotel

1,207 

1,207 

Crystal Square

1,046 

1,046 

Crystal Plaza

1,013 

1,013 

Poughkeepsie, New York

796 

796 

Other

9,956 

2,664 

3,559 

1,528 

310 

1,895 

$

32,489 

$

4,156 

$

8,666 

$

17,462 

$

310 

$

1,895 

74

 


 

  

 

Liquidity and Capital Resources – continued

 

 

Insurance

 

We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, including coverage for terrorist acts, with sub-limits for certain perils such as floods.  Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate.

 

Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism, including nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC.  Coverage for NBCR losses is up to $2.0 billion per occurrence, for which PPIC is responsible for a deductible of $3,200,000 and 15% of the balance of a covered loss and the Federal government is responsible for the remaining 85% of a covered loss.  We are ultimately responsible for any loss borne by PPIC.

 

We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism.  However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.

 

Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of 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 it could adversely affect our ability to finance our properties and expand our portfolio.

 

 

Other Commitments and Contingencies

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of June 30, 2012, the aggregate dollar amount of these guarantees and master leases is approximately $266,074,000.

 

At June 30, 2012, $22,195,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also 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.

 

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 to us.

 

Two of our wholly owned subsidiaries that are contracted to develop and operate the Cleveland Medical Mart and Convention Center, in Cleveland, Ohio, are required to fund $11,500,000, primarily for tenant improvements, and they are responsible for operating expenses and are entitled to the net operating income, if any, upon the completion of development and the commencement of operations.

 

As of June 30, 2012, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $259,607,000.

 

75

 


 

  

Liquidity and Capital Resources – continued

 

 

Litigation

 

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 matter referred to below, is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

In 2003, Stop & Shop filed an action against us in the New York Supreme Court, claiming that we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to a Master Agreement and Guaranty, because of the expiration of the leases to which the annual rent was previously allocated. Stop & Shop asserted that an order of the Bankruptcy Court for the Southern District of New York, as modified on appeal by the District Court, froze our right to reallocate and effectively terminated our right to collect the annual rent from Stop & Shop.  We asserted a counterclaim seeking a judgment for all the unpaid annual rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the annual rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect.   After summary judgment motions by both sides were denied, the parties conducted discovery.  A trial was held in November 2010.  On November 7, 2011, the Court determined that we have a continuing right to allocate the annual rent to unexpired leases covered by the Master Agreement and Guaranty, and directed entry of a judgment in our favor ordering Stop & Shop to pay us the unpaid annual rent accrued through February 28, 2011 in the amount of $37,422,000, a portion of the annual rent due from March 1, 2011 through the date of judgment, interest, and attorneys’ fees.  On December 16, 2011, a money judgment based on the Court’s decision was entered in our favor in the amount of $56,597,000 (including interest and costs).  The amount for attorneys’ fees is being addressed in a proceeding before a special referee.  Stop & Shop has appealed the Court’s decision and the judgment, and has posted a bond to secure payment of the judgment.  On January 12, 2012, we commenced a new action against Stop & Shop seeking recovery of $2,500,000 of annual rent not included in the money judgment, plus additional annual rent as it accrues.  A motion by Stop & Shop to dismiss the new action was denied on July 19, 2012.

 

As of June 30, 2012, we have a $44,900,000 receivable from Stop & Shop, excluding amounts due to us for interest and costs resulting from the Court’s judgment.  As a result of Stop & Shop appealing the Court’s decision, we believe, after consultation with counsel, that the maximum reasonably possible loss is up to the total amount of the receivable of $44,900,000.

76

 


 

  

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 GAAP net income or loss adjusted to exclude net gain from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets, extraordinary items and other specified non-cash items, including the pro-rata share of such adjustments of unconsolidated subsidiaries.  FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions.  FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flows as a liquidity measure.  FFO may not be comparable to similarly titled measures employed by other companies.  The calculations of both the numerator and denominator used in the computation of income per share are disclosed in footnote 18 – Income per Share, in the notes to our consolidated financial statements on page 29 of this Quarterly Report on Form 10-Q.

 

 

FFO for the Three and Six Months Ended June 30, 2012 and 2011

 

FFO attributable to common shareholders plus assumed conversions was $166,672,000, or $0.89 per diluted share for the three months ended June 30, 2012, compared to $243,418,000, or $1.27 per diluted share, for the prior year’s quarter.  FFO attributable to common shareholders plus assumed conversions was $516,328,000, or $2.72 per diluted share for the six months ended June 30, 2012, compared to $749,349,000, or $3.91 per diluted share, for the prior year’s six months.  Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”

 

For The Three Months

For The Six Months

(Amounts in thousands, except per share amounts)

Ended June 30,

Ended June 30,

Reconciliation of our net income to FFO:

2012 

2011 

2012 

2011 

Net income attributable to Vornado

$

38,297 

$

108,581 

$

289,819 

$

521,244 

Depreciation and amortization of real property

126,063 

124,326 

258,621 

248,647 

Net gains on sale of real estate

(16,896)

(458)

(72,713)

(51,623)

Real estate impairment losses

13,511 

13,511 

Proportionate share of adjustments to equity in net income

of Toys, to arrive at FFO:

Depreciation and amortization of real property

16,513 

17,168 

33,801 

34,897 

Net gains on sale of real estate

(491)

(491)

Real estate impairment losses

1,368 

8,394 

Income tax effect of above adjustments

(6,351)

(5,835)

(14,848)

(12,040)

Proportionate share of adjustments to equity in net income of

partially owned entities, excluding Toys, to arrive at FFO:

Depreciation and amortization of real property

21,684 

22,233 

43,060 

46,202 

Net gains on sale of real estate

(234)

(2,120)

(895)

(3,769)

Real estate impairment losses

1,849 

Noncontrolling interests' share of above adjustments

(9,524)

(9,906)

(16,584)

(16,756)

FFO

184,431 

253,498 

544,015 

766,311 

Preferred share dividends

(17,787)

(16,668)

(35,574)

(30,116)

FFO attributable to common shareholders

166,644 

236,830 

508,441 

736,195 

Interest on 3.88% exchangeable senior debentures

6,556 

7,830 

13,090 

Convertible preferred share dividends

28 

32 

57 

64 

FFO attributable to common shareholders plus assumed conversions

$

166,672 

$

243,418 

$

516,328 

$

749,349 

Reconciliation of Weighted Average Shares

Weighted average common shares outstanding

185,673 

184,268 

185,521 

184,129 

Effect of dilutive securities:

3.88% exchangeable senior debentures

5,736 

3,430 

5,736 

Employee stock options and restricted share awards

669 

1,876 

700 

1,815 

Convertible preferred shares

49 

55 

50 

56 

Denominator for FFO per diluted share

186,391 

191,935 

189,701 

191,736 

FFO attributable to common shareholders plus assumed conversions

$

0.89 

$

1.27 

$

2.72 

$

3.91 

77

 


 

  

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

We have exposure to fluctuations in market interest rates. Market interest rates are 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:

 

(Amounts in thousands, except per share amounts)

2012 

2011 

Weighted

Effect of 1%

Weighted

June 30,

Average

Change In

December 31,

Average

Consolidated debt:

Balance

Interest Rate

Base Rates

Balance

Interest Rate

Variable rate

$

2,635,522 

2.29%

$

26,355 

$

2,206,993 

2.25%

Fixed rate

7,582,505 

5.49%

8,280,355 

5.55%

$

10,218,027 

4.66%

26,355 

$

10,487,348 

4.86%

Pro-rata share of debt of non-consolidated

entities (non-recourse):

Variable rate – excluding Toys

$

344,482 

2.70%

3,445 

$

284,372 

2.85%

Variable rate – Toys

633,411 

6.00%

6,334 

706,301 

4.83%

Fixed rate (including $1,134,474 and

$1,270,029 of Toys debt in 2012 and 2011)

3,009,167 

(1)

6.99%

3,208,472 

6.96%

$

3,987,060 

6.46%

9,779 

$

4,199,145 

6.32%

Noncontrolling interests’ share of above

(2,276)

Total change in annual net income

$

33,858 

Per share-diluted

$

0.18 

(1)

Excludes $22.2 billion for our 26.2% pro rata share of LNR's liabilities related to consolidated CMBS and CDO trusts which are non-recourse to LNR and its equity holders, including us.

 

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. As of June 30, 2012, variable rate debt with an aggregate principal amount of $211,093,000 and a weighted average interest rate of 4.13% was subject to LIBOR caps.  These caps are based on a notional amount of $211,093,000 and cap LIBOR at a weighted average rate of 4.03%.  In addition, we have one interest rate swap on a $425,000,000 loan that swapped the rate from LIBOR plus 2.00% (2.25% at June 30, 2012) to a fixed rate of 5.13% for the remaining seven-year term of the loan. 

 

As of June 30, 2012, we have investments in mezzanine loans with an aggregate carrying amount of $54,770,000 that are based on variable interest rates which partially mitigate our exposure to a change in interest rates on our variable rate debt.

 

Fair Value of Debt

 

The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt.  As of June 30, 2012, the estimated fair value of our consolidated debt was $10,395,000,000.

 

Derivative Instruments

 

We have, and may in the future enter into, derivative positions that do not qualify for hedge accounting treatment, including our economic interest in J.C. Penney common shares.  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, net” 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 or expense in any given period. In the three and six months ended June 30, 2012, we recognized losses of $58,732,000 and $57,687,000, respectively, from derivative instruments, compared to a loss of $6,762,000 and income of $10,401,000, respectively, for the three and six months ended June 30, 2011.

78

 


 

  

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, 2012, 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.

 

79

 


 

  

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 matter referred to below, is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

In 2003, Stop & Shop filed an action against us in the New York Supreme Court, claiming that we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to a Master Agreement and Guaranty, because of the expiration of the leases to which the annual rent was previously allocated. Stop & Shop asserted that an order of the Bankruptcy Court for the Southern District of New York, as modified on appeal by the District Court, froze our right to reallocate and effectively terminated our right to collect the annual rent from Stop & Shop.  We asserted a counterclaim seeking a judgment for all the unpaid annual rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the annual rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect.   After summary judgment motions by both sides were denied, the parties conducted discovery.  A trial was held in November 2010.  On November 7, 2011, the Court determined that we have a continuing right to allocate the annual rent to unexpired leases covered by the Master Agreement and Guaranty, and directed entry of a judgment in our favor ordering Stop & Shop to pay us the unpaid annual rent accrued through February 28, 2011 in the amount of $37,422,000, a portion of the annual rent due from March 1, 2011 through the date of judgment, interest, and attorneys’ fees.  On December 16, 2011, a money judgment based on the Court’s decision was entered in our favor in the amount of $56,597,000 (including interest and costs).  The amount for attorneys’ fees is being addressed in a proceeding before a special referee.  Stop & Shop has appealed the Court’s decision and the judgment, and has posted a bond to secure payment of the judgment.  On January 12, 2012, we commenced a new action against Stop & Shop seeking recovery of $2,500,000 of annual rent not included in the money judgment, plus additional annual rent as it accrues.  A motion by Stop & Shop to dismiss the new action was denied on July 19, 2012.

   

As of June 30, 2012, we have a $44,900,000 receivable from Stop & Shop, excluding amounts due to us for interest and costs resulting from the Court’s judgment.  As a result of Stop & Shop appealing the Court’s decision, we believe, after consultation with counsel, that the maximum reasonably possible loss is up to the total amount of the receivable of $44,900,000.

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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, 2011.

 

 

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

 

During the second quarter of 2012, we issued 16,257 common shares upon the redemption of Class A units of the Operating Partnership held by persons who received units, in private placements in earlier periods, in exchange for their interests in limited partnerships that owned real estate. The common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4 (2) of that Act.

 

Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under Part III, Item 12 of the Annual Report on Form 10-K for the year ended December 31, 2011, and such information is incorporated by reference herein.

 

 

Item 3.   Defaults Upon Senior Securities

        None.

 

 

Item 4.   Mine Safety Disclosures

        Not applicable.

 

 

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.

 

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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 6, 2012

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)

82

 


 

  

 

EXHIBIT INDEX

Exhibit No.

 

 

 

 

 

 

 

3.3

 

-

Articles Supplementary, 5.70% Series K Cumulative Redeemable Preferred Shares of

*

 

 

 

 

Beneficial Interest, liquidation preference $25.00 per share, no par value – Incorporated by

 

 

 

 

 

reference to Exhibit 3.5 to Vornado Realty Trust’s Registration Statement on Form 8-A

 

 

 

 

 

(File No. 001-11954), filed on July 18, 2012

 

 

 

 

 

 

 

 

3.48

 

-

Forty-Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership,

*

 

 

 

 

dated as of July 18, 2012 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s

 

 

 

 

 

Current Report on Form 8-K (File No. 001-34482), filed on July 18, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15.1

 

-

Letter regarding Unaudited Interim Financial

 

 

 

 

 

 

 

 

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

 

 

 

101.INS

-

XBRL Instance Document

 

 

 

101.SCH

-

XBRL Taxonomy Extension Schema

 

 

 

101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF

-

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

-

XBRL Taxonomy Extension Label Linkbase

 

 

 

 

 

 

 

 

101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

______________________________

 

 

 

*

Incorporated by reference

 

ex151.htm - Generated by SEC Publisher for SEC Filing

 

EXHIBIT 15.1

August 6, 2012

 

Vornado Realty Trust

New York, New York

 

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Vornado Realty Trust for the periods ended June 30, 2012, and 2011, as indicated in our report dated August 6, 2012; 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, 2012, is incorporated by reference in the following registration statements of Vornado Realty Trust:

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

Amendment No.1 to Registration Statement No. 333-120384 on Form S-3

Registration Statement No. 333-126963 on Form S-3

Registration Statement No. 333-139646 on Form S-3

Registration Statement No. 333-141162 on Form S-3

Registration Statement No. 333-150592 on Form S-3

Registration Statement No. 333-150593 on Form S-8

Registration Statement No. 333-166856 on Form S-3

Registration Statement No. 333-172880 on Form S-8

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

Registration Statement No. 333-138367 on Form S-3

Registration Statement No. 333-162775 on Form S-3

Registration Statement No. 333-180640 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

 

ex311.htm - Generated by SEC Publisher for SEC Filing

 

EXHIBIT 31.1

CERTIFICATION

I, Michael D. Fascitelli, 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 6, 2012

 

 


/s/ Michael D. Fascitelli

 

 

Michael D. Fascitelli

 

 

President and Chief Executive Officer

 

 

ex312.htm - Generated by SEC Publisher for SEC Filing  

 

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 6, 2012

 

 


/s/ Joseph Macnow

 

 

Joseph Macnow

 

 

Executive Vice President - Finance and Administration and
Chief Financial Officer

 

 

ex321.htm - Generated by SEC Publisher for SEC Filing

 

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, 2012 (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 6, 2012

 

 


/s/ Michael D. Fascitelli

 

 

Name:

Michael D. Fascitelli

 

 

Title:

President and Chief Executive Officer

         

 

ex322.htm - Generated by SEC Publisher for SEC Filing

 

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 quarter ended June 30, 2012 (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 6, 2012

 

 


/s/ Joseph Macnow

 

 

Name:

Joseph Macnow

 

 

Title:

Executive Vice President – Finance and Administration and Chief Financial Officer