EXHIBIT INDEX ON PAGE 36 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 2001 ------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------ ---------------- Commission File Number: 1-11954 ------------------------------------------------------ VORNADO REALTY TRUST - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MARYLAND 22-1657560 - --------------------------------------------- --------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) 888 SEVENTH AVENUE, NEW YORK, NEW YORK 10019 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) (212) 894-7000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of August 1, 2001, 88,661,224 of the registrant's common shares of beneficial interest are outstanding. Page 1 INDEX PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Page Number ----------- Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000........................................ 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2001 and June 30, 2000........ 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and June 30, 2000.................... 5 Notes to Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 16 Item 3. Quantitative and Qualitative Disclosures About Market Risks............................................. 33 PART II. OTHER INFORMATION: Item 1. Legal Proceedings........................................ 34 Item 4. Submission of Matters to a Vote of Security Holders...... 34 Item 6. Exhibits and Reports on Form 8-K......................... 34 Signatures ......................................................... 35 Exhibit Index ......................................................... 36 Page 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS (amounts in thousands except share and per share amounts) See notes to consolidated financial statements. Page 4
JUNE 30, DECEMBER 31, 2001 2000 ------------ ----------- ASSETS Real estate, at cost: Land............................................. $ 887,769 $ 870,023 Buildings and improvements....................... 3,459,286 3,328,760 Development costs and construction-in- progress..................................... 213,151 66,264 Leasehold improvements and equipment.................................... 36,320 29,795 ------------ ----------- Total.................................. 4,596,526 4,294,842 Less accumulated depreciation and amortization................................. (462,336) (393,787) ------------ ----------- Real estate, net................................. 4,134,190 3,901,055 Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $27,430 and $27,793............ 119,920 136,989 Escrow deposits and restricted cash................... 186,508 214,359 Marketable securities ................................ 118,809 120,340 Investments and advances to partially-owned entities, including Alexander's of $189,060 and $178,413........................ 1,279,468 1,459,211 Due from officers .................................... 19,522 20,549 Accounts receivable, net of allowance for doubtful accounts of $8,947 and $9,343 .................................. 52,322 47,937 Notes and mortgage loans receivable................... 213,432 188,722 Receivable arising from the straight-lining of rents ....................................... 126,592 111,504 Other assets ......................................... 251,888 169,648 ------------ ----------- TOTAL ASSETS $ 6,502,651 $ 6,370,314 ============ =========== JUNE 30, DECEMBER 31, 2001 2000 -------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Notes and mortgages payable........................... $ 2,284,009 $ 2,231,897 Revolving credit facility............................. 450,000 425,000 Accounts payable and accrued expenses................. 142,775 130,464 Officer's compensation payable........................ 39,644 38,424 Deferred leasing fee income........................... 7,595 7,852 Other liabilities..................................... 1,725 1,798 ------------ ----------- Total liabilities...................... 2,925,748 2,835,435 ------------ ----------- Minority interest of unitholders in the Operating Partnership............................. 1,464,544 1,456,159 ------------ ----------- Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest: no par value per share; authorized, 45,000,000 shares; Series A: liquidation preference $50.00 per share; issued 5,788,855 shares....... 289,446 288,507 Series B: liquidation preference $25.00 per share; issued 3,400,000 shares....... 81,805 81,805 Series C: liquidation preference $25.00 per share; issued 4,600,000 shares....... 111,148 111,148 Common shares of beneficial interest: $.04 par value per share; authorized, 150,000,000 shares; issued and outstanding 87,022,583 and 86,803,770 shares...................... 3,480 3,472 Additional capital.............................. 1,716,051 1,709,284 Accumulated deficit............................. (77,601) (90,366) ------------ ----------- 2,124,329 2,103,850 Accumulated other comprehensive loss............ (7,266) (20,426) Due from officers for purchase of common shares of beneficial interest.............. (4,704) (4,704) ------------ ----------- Total shareholders' equity............ 2,112,359 2,078,720 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 6,502,651 $ 6,370,314 ============ =========== See notes to consolidated financial statements. Page 3 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands except per share amounts) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Revenues: Rentals.................................................... $ 212,252 $ 169,107 $ 416,970 $ 336,010 Expense reimbursements..................................... 31,543 28,413 66,635 55,220 Other income (including fee income from related parties of $514 and $346 in each three month period and $884 and $667 in each six month period)....... 2,280 1,225 5,080 2,794 --------- --------- --------- --------- Total revenues................................................ 246,075 198,745 488,685 394,024 --------- --------- --------- --------- Expenses: Operating.................................................. 96,831 74,366 197,214 150,671 Depreciation and amortization.............................. 30,086 24,687 61,951 47,940 General and administrative................................. 22,415 10,770 36,663 20,967 Costs of acquisitions not consummated...................... -- -- 5,000 -- --------- --------- --------- --------- Total expenses................................................ 149,332 109,823 300,828 219,578 --------- --------- --------- --------- Operating income.............................................. 96,743 88,922 187,857 174,446 Income applicable to Alexander's.............................. 4,676 4,458 16,980 8,565 Income from partially-owned entities.......................... 19,228 22,681 43,218 45,232 Interest and other investment income.......................... 15,874 4,939 29,347 10,698 Write-off of investments in technology companies.............. (13,561) -- (18,284) -- Interest and debt expense..................................... (43,994) (39,335) (93,389) (78,682) Net gain on sale of real estate and partially-owned entities.. 12,445 -- 12,445 2,560 Net gain from condemnation proceeding......................... 3,050 -- 3,050 -- Minority interest: Perpetual preferred unit distributions..................... (17,326) (14,815) (34,652) (27,809) Minority limited partnership earnings...................... (10,614) (9,320) (20,243) (18,669) Partially-owned entities................................... (409) (577) (768) (1,067) --------- --------- --------- --------- Income before cumulative effect of change in accounting principle and extraordinary item............................ 66,112 56,953 125,561 115,274 Cumulative effect of change in accounting principle........... -- -- (4,110) -- Extraordinary item............................................ -- -- 1,170 (1,125) --------- --------- --------- --------- Net income.................................................... 66,112 56,953 122,621 114,149 Preferred stock dividends (including accretion of issuance expenses of $240 and $719 in each three month period and $958 and $1,438 in each six month period)............... (9,192) (9,672) (18,865) (19,345) --------- --------- --------- -------- NET INCOME applicable to common shares........................ $ 56,920 $ 47,281 $ 103,756 $ 94,804 ========= ========= ========= ======== NET INCOME PER COMMON SHARE - BASIC........................... $ .65 $ .55 $ 1.19 $ 1.10 ========= ========= ========= ======== NET INCOME PER COMMON SHARE - DILUTED......................... $ .64 $ .53 $ 1.16 $ 1.08 ========= ========= ========= ======== DIVIDENDS PER COMMON SHARE.................................... $ .53 $ .48 $ 1.06 $ .96 ========= ========= ========= ======== VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) See notes to consolidated financial statements. Page 5
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2001 2000 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................... $ 122,621 $ 114,149 Adjustments to reconcile net income to net cash provided by operations: Cumulative effect of change in accounting principle................. 4,110 -- Extraordinary item.................................................. (1,170) 1,125 Minority interest................................................... 55,663 47,544 Net gain on sale of real estate and partially-owned entities........ (12,445) (2,560) Net gain from condemnation proceeding............................... (3,050) -- Write-off of investments in technology companies.................... 18,284 -- Depreciation and amortization....................................... 61,951 47,940 Straight-lining of rental income.................................... (14,542) (15,182) Equity in income of Alexander's..................................... (16,980) (8,565) Equity in net income of partially-owned entities.................... (43,218) (45,232) Changes in operating assets and liabilities......................... 21,642 (34,668) ----------- ----------- Net cash provided by operating activities................................ 192,866 104,551 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Development costs and construction in progress........................... (74,856) (24,655) Proceeds from sale of real estate........................................ -- 23,992 Investments in partially-owned entities.................................. (25,221) (45,450) Distributions from partially-owned entities.............................. 93,032 17,705 Investment in notes and mortgage loans receivable........................ (30,767) (7,595) Repayment of notes and mortgage loans receivable......................... 6,057 -- Cash restricted for tenant improvements.................................. 27,851 (3,645) Additions to real estate................................................. (49,326) (49,116) Purchases of marketable securities ...................................... (9,350) (24,412) Acquisitions of real estate and other.................................... -- (6,660) Proceeds from sale of marketable securities ............................. 1,121 -- Real estate deposits and other........................................... 1,493 (1,020) ----------- ----------- Net cash (used in) investing activities.................................. (59,966) (120,856) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings................................................. 118,853 590,000 Repayments of borrowings................................................. (111,748) (619,444) Debt issuance costs...................................................... -- (17,996) Proceeds from issuance of preferred units................................ -- 195,639 Distributions to minority partners....................................... (53,710) (47,144) Dividends paid on common shares.......................................... (90,992) (82,051) Dividends paid on preferred shares....................................... (17,926) (17,907) Exercise of stock options................................................ 5,554 1,715 ----------- ----------- Net cash (used in) provided by financing activities...................... (149,969) 2,812 ----------- ----------- Net decrease in cash and cash equivalents................................ (17,069) (13,493) Cash and cash equivalents at beginning of period......................... 136,989 112,630 ----------- ----------- Cash and cash equivalents at end of period............................... $ 119,920 $ 99,137 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest (including capitalized interest of $7,556 in 2001 and $5,646 in 2000)................................................... $ 95,737 $ 82,381 =========== =========== NON-CASH TRANSACTIONS: Financing assumed in acquisitions........................................ $ -- $ 17,640 Unrealized gain on securities available for sale......................... 2,760 8,039 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Vornado Realty Trust is a fully-integrated real estate investment trust ("REIT"). Vornado conducts its business through Vornado Realty L.P., a Delaware limited partnership (the "Operating Partnership"). Vornado is the sole general partner of, and owned approximately 86% of the common limited partnership interest in, the Operating Partnership at June 30, 2001. All references to the "Company" and "Vornado" refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership. 2. BASIS OF PRESENTATION The consolidated balance sheet as of June 30, 2001, the consolidated statements of income for the three and six months ended June 30, 2001 and 2000 and the consolidated statements of changes in cash flows for the six months ended June 30, 2001 and 2000 are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Vornado's annual report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the operating results for the full year. The accompanying consolidated financial statements include the accounts of Vornado Realty Trust and its majority-owned subsidiary, Vornado Realty L.P., as well as equity interests acquired that individually (or in the aggregate with prior interests) exceed a 50% interest and the Company exercises unilateral control. All significant intercompany amounts have been eliminated. Equity interests in partially-owned entities include partnerships and joint ventures and are accounted for under the equity method of accounting as the Company exercises significant influence. These investments are recorded initially at cost and subsequently adjusted for net equity in income (loss) and cash contributions and distributions. Prior to January 1, 2001, the Company's equity interests in partially-owned entities also included investments in preferred stock affiliates (corporations in which the Company owned all of the preferred stock and none of the common equity). Ownership of the preferred stock entitled the Company to substantially all of the economic benefits in the preferred stock affiliates. On January 1, 2001, the Company acquired the common stock of the preferred stock affiliates, which was owned by Officers and Trustees of Vornado, and converted them to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel Pennsylvania, the Company's investment in the Park Laurel (including the minority interest for the 20% the Company does not own) and the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated beginning January 1, 2001. Management has made estimates and assumptions that affect the reported amounts of assets and liabilities 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. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. Page 6 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, which establishes accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company's investment securities include stock purchase warrants received from companies that provide fiber-optic network and broadband access to the Company's Office division tenants. Statement 133 requires these warrants to be marked-to-market at each reporting period with the change in value recognized currently in earnings. The Company has previously marked-to-market changes in value through accumulated other comprehensive loss. Under Statement 133, those changes are recognized through earnings, and accordingly, the Company has reclassed $4,110,000 from accumulated other comprehensive loss to the consolidated statement of income as of January 1, 2001. Future changes in value of such securities will be recorded through earnings. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, BUSINESS COMBINATIONS (effective July 1, 2001) and SFAS No, 142, GOODWILL AND OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead be subject to periodic impairment testing. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS No. 142. 4. FINANCINGS AND DISPOSITIONS On January 11, 2001, the Company completed a $105,000,000 refinancing of its 888 Seventh Avenue office building. The loan bears interest at a fixed rate of 6.6% and matures on February 11, 2006. A portion of the proceeds received were used to repay the then existing mortgage of $55,000,000. On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue for $60,000,000, resulting in a gain of $12,445,000. In September 1998, Atlantic City condemned the Company's vacant property. In the third quarter of 1998, the Company recorded a gain of $1,694,000, which reflected the condemnation award of $3,100,000, net of the carrying value of the property of $1,406,000. The Company appealed the amount and on June 27, 2001, was awarded an additional $3,050,000, which has been recorded as a gain in the quarter ended June 30, 2001. On June 29, 2001, the Company entered into an agreement to sell its leasehold interest in 550/600 Mamaroneck Avenue, a 235,000 square foot office building, for $22,500,000. Vornado's gain on the sale will be approximately $1,000,000. The sale, which is subject to customary closing conditions, is expected to be completed in the third quarter of this year. 5. INVESTMENTS AND ADVANCES TO PARTIALLY-OWNED ENTITIES The Company's investments and advances to partially-owned entities and income recognized from such investments are as follows: Page 7
INVESTMENTS AND ADVANCES (amounts in thousands) June 30, 2001 December 31, 2000 ------------- ----------------- Temperature Controlled Logistics........................ $ 480,455 $ 469,613 Charles E. Smith Commercial Realty L.P. ("CESCR")....... 329,251 325,328 Alexander's............................................. 189,060 178,413 Newkirk Joint Ventures.................................. 181,071 163,157 Hotel Pennsylvania (1).................................. -- 73,531 Partially-Owned Office Buildings (4).................... 23,329 61,002 Vornado Ceruzzi Joint Ventures.......................... 27,542 28,847 Fort Lee................................................ 30,905 28,208 Park Laurel (2)......................................... -- 70,007 Management Companies and Other (2)...................... 17,855 61,105 ----------- ----------- $ 1,279,468 $ 1,459,211 =========== =========== VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) - --------- (1) As of December 31, 2000, the Company owned 100% of the commercial portion of the building (retail and office space) and 98% of the hotel portion which was owned through a preferred stock affiliate. On January 1, 2001, the Company acquired the common stock of the preferred stock affiliate and converted it to a taxable REIT subsidiary. Accordingly, the hotel portion is also consolidated in 2001. (2) On January 1, 2001, the Company acquired the common stock of the preferred stock affiliates and converted them to taxable REIT subsidiaries. Accordingly, the Park Laurel and the management companies are consolidated in 2001. (3) Equity in income includes $6,298 representing the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001 and excludes $1,170 representing the Company's share of Alexander's extraordinary gain on the early extinguishment of debt on this property which is reflected as an extraordinary item on the consolidated statements of income. Management and leasing fee income include a fee of $520 paid to the Company in connection with the sale. (4) Represents the Company's interests in 330 Madison Avenue (24.8%), and 570 Lexington Avenue (50%). On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue for $60,000,000, resulting in a gain of $12,445,000 which is not included in income in the table above. Page 8
INCOME For The Three Months For The Six Months (amounts in thousands) Ended June 30, Ended June 30, -------------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Income applicable to Alexander's: 33.1% share of equity in income............. $ 535 $ 171 $ 7,691(3) $ 478 Interest Income............................. 2,935 2,942 6,362 5,678 Management and Leasing Fee Income........... 1,206 1,345 2,927(3) 2,409 ---------- ---------- -------- -------- $ 4,676 $ 4,458 $ 16,980 $ 8,565 ========== ========== ======== ======== Temperature Controlled Logistics: 60% share of equity in net income........... $ 2,466 $ 5,585 $ 6,930 $ 13,660 Management fee (40% of 1% per annum of Total Combined Assets, as defined)....... 1,255 1,357 2,739 2,680 ---------- ---------- -------- -------- 3,721 6,942 9,669 16,340 ---------- ---------- -------- -------- CESCR-34% share of equity in income........... 6,828 6,589 14,195 13,318 ---------- ---------- -------- -------- Newkirk Joint Ventures: Equity in income of limited partnerships.. 6,371 3,377 12,726 6,392 Interest and other income................. 1,590 2,025 3,202 3,346 ---------- ---------- -------- -------- 7,961 5,402 15,928 9,738 ---------- ---------- -------- -------- Hotel Pennsylvania (1)........................ -- 2,886 -- 3,307 Partially-Owned Office Buildings (4).......... 1,509 978 2,773 1,678 Management Companies and Other................ (791) (116) 653 851 ---------- ---------- -------- -------- $ 19,228 $ 22,681 $ 43,218 $ 45,232 ========== ========== ======== ======== VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) TEMPERATURE CONTROLLED LOGISTICS On February 22, 2001, the Landlord restructured the AmeriCold Logistics leases to among other things, (i) reduce 2001's contractual rent to $146,000,000 (the same amount recognized as rental income in 2000's Funds from Operations), (ii) reduce 2002's contractual rent to $150,000,000 (plus additional contingent rent in certain circumstances), (iii) increase the Landlord's share of annual maintenance capital expenditures by $4,500,000 to $9,500,000 effective January 1, 2000 and (iv) extend the deferred rent period to December 31, 2003 from March 11, 2002. The tenant has advised the Landlord that (i) its revenue for the current quarter and six months ended June 30, 2001 from the warehouses it leases from the Landlord, is lower than last year by 1.1% and 3.3%, and (ii) its gross profit before rent at these warehouses for the corresponding periods is lower than last year by $5,971,000 (a 13.2% decline) and $10,183,000 (an 11.4% decline). These decreases are attributable to a reduction in total customer inventory stored at the warehouses and customer inventory turns. Based on the Company's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $2,340,000 of income for the quarter and six months ended June 30, 2001 and $2,400,000 of income for the quarter and six months ended June 30, 2000. At June 30, 2001, the Company's balance of the tenant's total deferred rent is $15,806,000 (Does not include $1,174,000 applicable to the receivable arising from the straight-lining of rents which was deferred in the year ended December 31, 2000). ALEXANDER'S Alexander's is managed by and its properties are leased by the Company, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable. At June 30, 2001, the Company has loans receivable from Alexander's of $119,000,000, including $24,000,000 under the $50,000,000 line of credit the Company granted to Alexander's on August 1, 2000. On March 15, 2001, the interest rate on these loans was reset from 15.72% to 13.74%, using the same spread to treasuries as previously used. On January 12, 2001, Alexander's sold its Fordham Road property for $25,500,000, which resulted in a gain of $19,026,000, of which the Company's share was $6,298,000. In addition, Alexander's paid off the mortgage on this property at a discount, which resulted in an extraordinary gain from the early extinguishment of debt of $3,534,000, of which the Company's share was $1,170,000. The Company also received a commission of $520,000 in connection with this sale. On June 1, 2001, Alexander's completed a $223,000,000 ten-year mortgage loan collateralized by its Kings Plaza Shopping Center. The note bears interest at a rate of 7.46%. A portion of the proceeds was used to repay the existing $115,210,000 mortgage loan. 6. OTHER RELATED PARTY TRANSACTIONS The Company currently manages and leases the real estate assets of Interstate Properties pursuant to a management agreement. Management fees earned by the Company pursuant to the management agreement were $514,000 and $200,000 for the three months ended June 30, 2001 and 2000, and $884,000 and $387,000 for the six months ended June 30, 2001 and 2000. The Mendik Group owns an entity, which provides cleaning and related services and security services to office properties, including the Company's Manhattan office properties. The Company was charged fees in connection with these contracts of $12,725,000 and $11,485,000 for the three months ended June 30, 2001 and 2000, and $25,625,000 and $23,418,000 for the six months ended June 30, 2001 and 2000. Page 9 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. MINORITY INTEREST The minority interest represents limited partners', other than the Company, interests in the Operating Partnership and are comprised of: - ---------- (a) Class A units are redeemable at the option of the holder for common shares of beneficial interest in Vornado, on a one-for-one basis, or at the Company's option for cash. (b) Class D unitholders participate in distributions at an annual rate of $2.12, then pari passu with Class A. Based on the current level of dividends, Class D units will convert into Class A units in the third quarter of 2001. (c) Increases to $3.38 in March 2007. (d) Convertible at the option of the holder for an equivalent amount of the Company's preferred shares and redeemable at the Company's option after the 5th anniversary of the date of issuance (ranging from December 1998 to December 2000). Page 10
Outstanding Units at Preferred --------------------------- Per Unit or Annual Conversion June 30, December 31, Liquidation Distribution Rate Into Unit Series 2001 2000 Preference Rate Class A Units ----------- ---- ---- ---------- ---- ------------- Common: Class A (a)...................... 6,627,994 6,456,749 -- $ 2.12 N/A Class D.......................... 864,259 869,387 -- $ 2.12 1.0(b) Convertible Preferred: 5.0% B-1 Convertible Preferred... 899,566 899,566 $ 50.00 $ 2.50 .914 8.0% B-2 Convertible Preferred... 449,783 449,783 $ 50.00 $ 4.00 .914 6.5% C-1 Convertible Preferred... 747,912 747,912 $ 50.00 $ 3.25 1.1431 6.5% E-1 Convertible Preferred... 4,998,000 4,998,000 $ 50.00 $ 3.25(c) 1.1364 Perpetual Preferred: (d) 8.5% D-1 Cumulative Redeemable Preferred........... 3,500,000 3,500,000 $ 25.00 $ 2.125 N/A 8.375% D-2 Cumulative Redeemable Preferred...................... 549,336 549,336 $ 50.00 $ 4.1875 N/A 8.25% D-3 Cumulative Redeemable Preferred...................... 8,000,000 8,000,000 $ 25.00 $ 2.0625 N/A 8.25% D-4 Cumulative Redeemable Preferred...................... 5,000,000 5,000,000 $ 25.00 $ 2.0625 N/A 8.25% D-5 Cumulative Redeemable Preferred...................... 7,480,000 7,480,000 $ 25.00 $ 2.0625 N/A 8.25% D-6 Cumulative Redeemable Preferred...................... 840,000 840,000 $ 25.00 $ 2.0625 N/A 8.25% D-7 Cumulative Redeemable Preferred...................... 7,200,000 7,200,000 $ 25.00 $ 2.0625 N/A 8.25% D-8 Cumulative Redeemable Preferred...................... 360,000 360,000 $ 25.00 $ 2.0625 N/A VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. INCOME PER SHARE The following table sets forth the computation of basic and diluted income per share: Page 11
For The Three Months For The Six Months Ended June 30, Ended June 30, -------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (amounts in thousands except per share amounts) Numerator: Income before cumulative effect of change in accounting principle and extraordinary item ... $ 66,112 $ 56,953 $ 125,561 $ 115,274 Cumulative effect of change in accounting principle ..................................... -- -- (4,110) -- Extraordinary item .............................. -- -- 1,170 (1,125) --------- --------- --------- --------- Net income ...................................... 66,112 56,953 122,621 114,149 Preferred stock dividends ....................... (9,192) (9,672) (18,865) (19,345) --------- --------- --------- --------- Numerator for basic and diluted income per share - net income applicable to common shares .. $ 56,920 $ 47,281 $ 103,756 $ 94,804 ========= ========= ========= ========= Denominator: Denominator for basic income per share - weighted average shares ................................ 86,901 86,399 86,864 86,389 Effect of dilutive securities: Employee stock options ........................ 2,701 2,347 2,637 1,689 --------- --------- --------- --------- Denominator for diluted income per share - adjusted weighted average shares and assumed conversions ........................... 89,602 88,746 89,501 88,078 ========= ========= ========= ========= INCOME PER COMMON SHARE - BASIC: Income before cumulative effect of change in accounting principle and extraordinary item . $ .65 $ .55 $ 1.23 $ 1.11 Cumulative effect of change in accounting principle ................................... -- -- (.05) -- Extraordinary item ............................ -- -- .01 (.01) --------- --------- --------- --------- Net income per common share ................... $ .65 $ .55 $ 1.19 $ 1.10 ========= ========= ========= ========= INCOME PER COMMON SHARE - DILUTED: Income before cumulative effect of change in accounting principle and extraordinary item . $ .64 $ .53 $ 1.20 $ 1.09 Cumulative effect of change in accounting principle .................................. -- -- (.05) -- Extraordinary item ............................ -- -- .01 (.01) --------- --------- --------- --------- Net income per common share ................... $ .64 $ .53 $ 1.16 $ 1.08 ========= ========= ========= ========= VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. COMPREHENSIVE INCOME The following table sets forth the Company's comprehensive income: - ---------- (1) Primarily reflects the fluctuations in the market value of Vornado's investments in companies that provide fiber-optic networks and broadband access to the Company's Office division tenants. In the first quarter of 2000, the Company was required to record the unrealized appreciation on such securities of $52,779. In the second quarter of 2000, the value of these securities decreased by $54,456 and accordingly, the Company was required to record such decrease. 10. WRITE-OFF OF EQUITY INVESTMENTS IN TECHNOLOGY COMPANIES In the first quarter of 2001, the Company recorded a charge of $4,723,000 resulting from the write-off of an equity investment in a technology company. In the second quarter of 2001, the Company recorded an additional charge of $13,561,000 resulting from the write-off of all of its remaining equity investments in technology companies due to both the deterioration of the financial condition of these companies and the lack of acceptance by the market of certain of their products and services. 11. COSTS OF ACQUISITIONS NOT CONSUMMATED The Company was unable to reach a final agreement with the Port Authority of NY & NJ to conclude a net lease of the World Trade Center. In the three months ended March 31, 2001, the Company wrote-off costs of $5,000,000 primarily associated with the World Trade Center. 12. COMMITMENTS AND CONTINGENCIES At June 30, 2001, in addition to the $450 million outstanding under the Company's revolving credit facility, the Company had utilized $84.7 million of availability under the facility for letters of credit and guarantees. Each of the Company's properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to the Company. From time-to-time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness. There are various legal actions against the Company in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition, results of operations or cash flow. Page 12
(amounts in thousands) For The Three Months For The Six Months Ended June 30, Ended June 30, -------------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Net income applicable to common shares................. $ 56,920 $ 47,281 $ 103,756 $ 94,804 Adjustment to record cumulative effect of change in accounting principle............................ -- -- 4,110 -- Other comprehensive income............................. 8,532 (54,456)(1) 9,050 (2,256)(1) ----------- -------- --------- ---------- Comprehensive income................................... $ 65,452 $ (7,175) $ 116,916 $ 92,548 =========== ======== ========= ========== VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 13. SEGMENT INFORMATION The Company has four business segments: Office, Retail, Merchandise Mart Properties and Temperature Controlled Logistics. Prior to this year, income from the Company's preferred stock affiliates was included in Income from partially-owned entities. On January 1, 2001, the Company acquired the common stock of its preferred stock affiliates and converted these entities to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel Pennsylvania, the Company's investment in the Park Laurel (including the minority interest for the 20% the Company does not own) and the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated. Net income and EBITDA for the three and six months ended June 30, 2000 have been restated on a pro forma basis to reflect these entities as if consolidated as of January 1, 2000. See footnotes 1-6 on page 15. Page 13
For The Three Months Ended June 30, ---------------------------------------------------------------------------------------------- (amounts in thousands) 2001 ------------------------------------------------------------------------------ ----------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) Total ----- ------ ------ ---- --------- -------- ----- Rentals ........................... $ 212,252 $ 114,260 $ 30,232 $ 50,118 $ -- $ 17,642 $ 196,600 Expense reimbursements ............ 31,543 15,920 11,145 3,858 -- 620 28,412 Other income ...................... 2,280 813 542 818 -- 107 4,109 --------- --------- --------- --------- --------- --------- --------- Total revenues .................... 246,075 130,993 41,919 54,794 -- 18,369 229,121 --------- --------- --------- --------- --------- --------- --------- Operating expenses ................ 96,831 51,684 13,797 21,662 -- 9,688 90,981 Depreciation and amortization ..... 30,086 17,300 4,347 6,064 -- 2,375 26,387 General and administrative ........ 22,415 2,637 24 4,650 -- 15,104 17,280 --------- --------- --------- --------- --------- --------- --------- Total expenses .................... 149,332 71,621 18,168 32,376 -- 27,167 134,648 --------- --------- --------- --------- --------- --------- --------- Operating income .................. 96,743 59,372 23,751 22,418 -- (8,798) 94,473 Income applicable to Alexander's .. 4,676 -- -- -- -- 4,676 4,458 Income from partially-owned entities ........................ 19,228 8,365 495 (4) 3,721(6) 6,651 18,261 Interest and other investment income .......................... 15,874 1,897 416 714 -- 12,847 4,694 Write-off of investments in technology companies ............ (13,561) -- -- -- -- (13,561) -- Interest and debt expense ......... (43,994) (14,407) (14,264) (8,317) -- (7,006) (40,221) Net gain on sale of real estate and partially-owned entities .... 12,445 12,445 -- -- -- -- -- Net gain from condemnation proceeding ...................... 3,050 -- 3,050 -- -- -- -- Minority interest ................. (28,349) (14,734) (4,349) (4,125) (2,815) (2,326) (24,712) --------- --------- --------- --------- --------- --------- --------- Net income ........................ 66,112 52,938 9,099 10,686 906 (7,517) 56,953 Minority interest ................. 28,349 14,734 4,349 4,125 2,815 2,326 24,712 Net gain on sale of real estate and partially-owned entities ........ (12,445) (12,445) -- -- -- -- -- Net gain from condemnation proceeding ...................... (3,050) -- (3,050) -- -- -- -- Interest and debt expense(3) ...... 67,151 24,859 14,906 8,317 6,773 12,296 62,962 Depreciation and amortization(3) .. 45,918 21,992 4,612 6,064 8,403 4,847 40,932 Straight-lining of rents(3) ....... (6,339) (4,050) (534) (1,280) -- (475) (6,349) Other ............................. 2,997 (1,130) -- -- 69 4,058 2,707 --------- --------- --------- --------- --------- --------- --------- EBITDA(1) ......................... $ 188,693 $ 96,898 $ 29,382 $ 27,912 $ 18,966 $ 15,535 $ 181,917 ========= ========= ========= ========= ========= ========= ========= ----------------------------------------------------------------- (amounts in thousands) 2000 (Pro Forma) ----------------------------------------------------------------- Temperature Merchandise Controlled Office Retail Mart Logistics Other(2) ------ ------ ---- --------- -------- Rentals ........................... $ 98,651 $ 31,784 $ 46,113 $ -- $ 20,052 Expense reimbursements ............ 14,194 10,404 2,649 -- 1,165 Other income ...................... 724 848 1,182 -- 1,355 --------- --------- --------- --------- --------- Total revenues .................... 113,569 43,036 49,944 -- 22,572 --------- --------- --------- --------- --------- Operating expenses ................ 45,743 13,427 20,567 -- 11,244 Depreciation and amortization ..... 13,934 4,635 5,448 -- 2,370 General and administrative ........ 3,244 418 4,680 -- 8,938 --------- --------- --------- --------- --------- Total expenses .................... 62,921 18,480 30,695 -- 22,552 --------- --------- --------- --------- --------- Operating income .................. 50,648 24,556 19,249 -- 20 Income applicable to Alexander's .. -- -- -- -- 4,458 Income from partially-owned entities ........................ 7,403 222 -- 6,942(6) 3,694 Interest and other investment income .......................... 260 5 52 -- 4,377 Write-off of investments in technology companies ............ -- -- -- -- -- Interest and debt expense ......... (13,810) (13,851) (9,558) -- (3,002) Net gain on sale of real estate and partially-owned entities .... -- -- -- -- -- Net gain from condemnation proceeding ...................... -- -- -- -- -- Minority interest ................. (11,673) (3,938) (2,974) (2,892) (3,235) --------- --------- --------- --------- --------- Net income ........................ 32,828 6,994 6,769 4,050 6,312 Minority interest ................. 11,673 3,938 2,974 2,892 3,235 Net gain on sale of real estate and partially-owned entities ........ -- -- -- -- -- Net gain from condemnation proceeding ...................... -- -- -- -- -- Interest and debt expense(3) ...... 22,964 14,494 9,558 7,307 8,639 Depreciation and amortization(3) .. 18,343 5,483 5,021 8,005 4,080 Straight-lining of rents(3) ....... (3,985) (709) (1,485) (282) 112 Other ............................. -- -- -- 294 2,413 --------- --------- --------- --------- --------- EBITDA(1) ......................... $ 81,823 $ 30,200 $ 22,837 $ 22,266 $ 24,791 ========= ========= ========= ========= ========= VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) - ---------- See footnotes 1-6 on the next page. Page 14
For The Six Months Ended June 30, ---------------------------------------------------------------------------- (amounts in thousands) 2001 ---------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----- ------ ------ ---- --------- -------- Rentals ......................... $ 416,970 $ 228,120 $ 59,336 $ 97,123 $ -- $ 32,391 Expense reimbursements .......... 66,635 34,961 22,440 7,831 -- 1,403 Other income .................... 5,080 1,385 1,971 1,537 -- 187 --------- --------- --------- --------- --------- --------- Total revenues .................. 488,685 264,466 83,747 106,491 -- 33,981 --------- --------- --------- --------- --------- --------- Operating expenses .............. 197,214 107,445 29,209 42,794 -- 17,766(4) Depreciation and amortization ... 61,951 35,944 8,810 12,506 -- 4,691 General and administrative ...... 36,663 6,007 47 9,245 -- 21,364 Costs of acquisitions not consummated ................. 5,000 -- -- -- -- 5,000 --------- --------- --------- --------- --------- --------- Total expenses .................. 300,828 149,396 38,066 64,545 -- 48,821 --------- --------- --------- --------- ------- --------- Operating income ................ 187,857 115,070 45,681 41,946 -- (14,840) Income applicable to Alexander's 16,980 -- -- -- -- 16,980 Income from partially-owned entities ....................... 43,218 17,060 2,392 109 9,669(6) 13,988 Interest and other investment income ......................... 29,347 4,195 416 1,377 -- 23,359 Write-off of investments in ..... -- -- -- -- technology companies ........... (18,284) -- -- -- -- (18,284) Interest and debt expense ....... (93,389) (31,014) (28,413) (17,986) -- (15,976) Net gain on sale of real estate and partially-owned entities ... 12,445 12,445 -- -- -- -- Net gain from condemnation proceeding .................... 3,050 -- 3,050 -- -- -- Minority interest ............... (55,663) (28,322) (8,476) (7,769) (5,825) (5,271) --------- --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principle and extraordinary item 125,561 89,434 14,650 17,677 3,844 (44) Cumulative effect of change in accounting principle ........... (4,110) -- -- -- -- (4,110) Extraordinary item .............. 1,170 -- -- -- -- 1,170 --------- --------- --------- --------- --------- --------- Net income ...................... 122,621 89,434 14,650 17,677 3,844 (2,984) Cumulative effect of change in accounting principle ........... 4,110 -- -- -- -- 4,110 Extraordinary item .............. (1,170) -- -- -- -- (1,170) Minority interest ............... 55,663 28,322 8,476 7,769 5,825 5,271 Net gain on sale of real estate and partially-owned entities ... (12,445) (12,445) -- -- -- -- Net gain from condemnation proceeding .................... (3,050) -- (3,050) -- -- -- Interest and debt expense(3) .... 140,405 52,306 29,697 17,986 13,486 26,930 Depreciation and amortization(3) 93,836 45,636 9,339 12,506 16,811 9,544 Straight-lining of rents(3) ..... (14,076) (10,005) (695) (2,388) -- (988) Other ........................... (7,560) (3,220) -- -- 181 (4,521)(5) --------- --------- --------- --------- --------- --------- EBITDA(1) ....................... $ 378,334 190,028 $ 58,417 $ 53,550 $ 40,147 $ 36,192 ========= ========= ========= ========= ========= ========= For The Six Months Ended June 30, --------------------------------------------------------------------------- (amounts in thousands) 2000 (Pro Forma) --------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----- ------ ------ ---- --------- -------- Rentals ......................... $ 379,144 $ 195,679 $ 63,749 $ 83,985 $ -- $ 35,731 Expense reimbursements .......... 55,219 26,126 21,943 5,640 -- 1,510 Other income .................... 8,193 1,749 1,164 2,780 -- 2,500 --------- --------- --------- --------- --------- --------- Total revenues .................. 442,556 223,554 86,856 92,405 -- 39,741 --------- --------- --------- --------- --------- --------- Operating expenses .............. 175,939 91,884 28,159 34,892 -- 21,004 Depreciation and amortization ... 51,235 27,286 8,624 10,885 -- 4,440 General and administrative ...... 31,708 6,008 479 8,166 -- 17,055 --------- --------- --------- --------- --------- --------- Total expenses .................. 258,882 125,178 37,262 53,943 -- 42,499 --------- --------- --------- --------- --------- --------- Operating income ................ 183,674 98,376 49,594 38,462 -- (2,758) Income applicable to Alexander's 8,565 -- -- -- -- 8,565 Income from partially-owned entities ....................... 38,114 15,128 499 -- 16,340(6) 6,147 Interest and other investment income ......................... 10,482 644 8 163 -- 9,667 Write-off of investments in ..... technology companies ........... -- -- -- -- -- -- Interest and debt expense ....... (80,577) (28,133) (24,656) (17,905) -- (9,883) Net gain on sale of real estate and partially-owned entities ... 2,560 -- 2,560 -- -- -- Net gain from condemnation proceeding .................... -- -- -- -- -- -- Minority interest ............... (47,544) (21,854) (7,834) (6,011) (6,109) (5,736) --------- --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principle and extraordinary item 115,274 64,161 20,171 14,709 10,231 6,002 Cumulative effect of change in accounting principle ........... -- -- -- -- -- -- Extraordinary item .............. (1,125) -- (1,125) -- -- -- --------- --------- --------- --------- --------- --------- Net income ...................... 114,149 64,161 19,046 14,709 10,231 6,002 Cumulative effect of change in accounting principle ........... 1,125 -- 1,125 -- -- -- Extraordinary item .............. -- -- -- -- -- -- Minority interest ............... 47,544 21,854 7,834 6,011 6,109 5,736 Net gain on sale of real estate and partially-owned entities ... (2,560) -- (2,560) -- -- -- Net gain from condemnation proceeding .................... -- -- -- -- -- -- Interest and debt expense(3) .... 124,622 46,152 25,954 17,905 14,037 20,574 Depreciation and amortization(3) 80,309 36,299 9,785 10,048 16,334 7,843 Straight-lining of rents(3) ..... (13,781) (9,286) (1,386) (2,764) (809) 464 Other ........................... 3,981 -- -- -- 809 3,172 --------- --------- --------- --------- --------- --------- EBITDA(1) ....................... $ 355,389 $ 159,180 $ 59,798 $ 45,909 $ 46,711 $ 43,791 ========= ========= ========= ========= ========= ========= June 30, 2001 ------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other -------- ---------- ---------- ------------ ------------ ------ Balance sheet data: Real estate, net .......... $4,134,190 $2,436,196 $ 621,998 $ 873,666 $ -- $ 202,330 Investments and advances to partially-owned entities 1,279,468 353,512 29,758 6,684 480,455 409,059 Capital expenditures Acquisitions ............ -- -- -- -- -- -- Other ................... 124,182 48,488 2,641 26,621 -- 46,432 December 31, 2000 ---------------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other -------- ---------- ---------- ------------ ------------ ------ Balance sheet data: Real estate, net .......... $3,901,055 $2,388,393 $ 551,183 $ 862,003 $ -- $ 99,476 Investments and advances to partially-owned entities 1,459,211 394,089 31,660 41,670 469,613 522,179 Capital expenditures Acquisitions ............ 246,500 128,000 -- 89,000 -- 29,500 Other ................... 200,181 106,689 7,251 37,362 28,582 20,297 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Notes to segment information: (1) EBITDA represents income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of real estate, the effect of straight-lining of property rentals for rent escalations and minority interest. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other EBITDA is comprised of: (3) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. (4) Includes a $1,900 settlement from a tenant for rent previously reserved. (5) Includes the reversal of $6,298 representing the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001. (6) Net of rent not recognized of $2,340 for the three and six months ended June 30, 2001 and $2,400 for the three and six months ended June 30, 2000. Page 15
(amounts in thousands) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------- -------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Hotel Pennsylvania ................................... $ 6,141 $ 7,634 $ 11,421 (4) $ 11,061 Newkirk Joint Ventures: Equity in income of limited partnerships ........... 12,107 9,514 26,708 19,926 Interest and other income .......................... 1,590 2,025 3,202 3,346 Other partially-owned entities (Alexander's and other) 4,834 3,987 9,639 8,654 Write-off of investments in technology companies ..... (13,561) -- (18,284) -- Unallocated general and administrative expenses ...... (9,187) (8,025) (16,720) (13,837) Costs of acquisitions not consummated ................ -- -- (5,000) -- Investment income and other .......................... 13,611 9,656 25,226 14,641 -------- -------- -------- -------- Total ....................................... $ 15,535 $ 24,791 $ 36,192 $ 43,791 ======== ======== ======== ======== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All of the amounts presented are in thousands, except share amounts and percentages) Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain factors could cause actual results to differ materially from those in the forward-looking statements. Factors that might cause such a material difference include, but are not limited to, (a) changes in the general economic climate, (b) local conditions such as an oversupply of space or a reduction in demand for real estate in the area, (c) conditions of tenants, (d) competition from other available space, (e) increased operating costs and interest expense, (f) the timing of and costs associated with property improvements, (g) changes in taxation or zoning laws, (h) government regulations, (i) failure of Vornado to continue to qualify as a REIT, (j) availability of financing on acceptable terms, (k) potential liability under environmental or other laws or regulations, and (l) general competitive factors. OVERVIEW Below is a summary of net income and EBITDA(1) by segment for the three and six months ended June 30, 2001 and 2000. Prior to this year, income from the Company's preferred stock affiliates was included in income from partially-owned entities. On January 1, 2001, the Company acquired the common stock of its preferred stock affiliates and converted these entities to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel Pennsylvania, the Company's investment in the Park Laurel (including the minority interest for the 20% the Company does not own) and the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated. Net income and EBITDA for the three and six months ended June 30, 2000 have been restated on a pro forma basis to reflect these entities as if consolidated as of January 1, 2000. Page 16
Three Months Ended June 30, 2001 ----------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) --------- --------- --------- --------- --------- --------- Rentals ...................................... $ 212,252 $ 114,260 $ 30,232 $ 50,118 $ -- $ 17,642 Expense reimbursements ....................... 31,543 15,920 11,145 3,858 -- 620 Other income ................................. 2,280 813 542 818 -- 107 --------- --------- --------- --------- --------- --------- Total revenues ............................... 246,075 130,993 41,919 54,794 -- 18,369 --------- --------- --------- --------- --------- --------- Operating expenses ........................... 96,831 51,684 13,797 21,662 -- 9,688 Depreciation and amortization ................ 30,086 17,300 4,347 6,064 -- 2,375 General and administrative ................... 22,415 2,637 24 4,650 -- 15,104 --------- --------- --------- --------- --------- --------- Total expenses ............................... 149,332 71,621 18,168 32,376 -- 27,167 --------- --------- --------- --------- --------- --------- Operating income ............................. 96,743 59,372 23,751 22,418 -- (8,798) Income applicable to Alexander's ............. 4,676 -- -- -- -- 4,676 Income from partially-owned entities ......... 19,228 8,365 495 (4) 3,721(4) 6,651 Interest and other investment income ......... 15,874 1,897 416 714 -- 12,847 Write-off of investments in technology companies .................................. (13,561) -- -- -- -- (13,561) Interest and debt expense .................... (43,994) (14,407) (14,264) (8,317) -- (7,006) Net gain on sale of real estate and partially- owned entities .............................. 12,445 12,445 -- -- -- -- Net gain from condemnation proceeding ........ 3,050 -- 3,050 -- -- -- Minority interest ............................ (28,349) (14,734) (4,349) (4,125) (2,815) (2,326) --------- --------- --------- --------- --------- --------- Net income ................................... 66,112 52,938 9,099 10,686 906 (7,517) Minority interest ............................ 28,349 14,734 4,349 4,125 2,815 2,326 Net gain on sale of real estate and partially- owned entities .............................. (12,445) (12,445) -- -- -- -- Net gain from condemnation proceeding ........ (3,050) -- (3,050) -- -- -- Interest and debt expense(3) ................. 67,151 24,859 14,906 8,317 6,773 12,296 Depreciation and amortization(3) ............. 45,918 21,992 4,612 6,064 8,403 4,847 Straight-lining of rents(3) .................. (6,339) (4,050) (534) (1,280) -- (475) Other ........................................ 2,997 (1,130) -- -- 69 4,058(5) --------- --------- --------- --------- --------- --------- EBITDA(1) .................................... $ 188,693 $ 96,898 $ 29,382 $ 27,912 $ 18,966 $ 15,535 ========= ========= ========= ========= ========= ========= (1) EBITDA represents income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of real estate, the effect of straight-lining of property rentals for rent escalations and minority interest. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other EBITDA is comprised of:
Three Months Ended June 30, 2000 (Pro Forma) ----------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) --------- --------- --------- --------- --------- --------- Rentals ............................ $ 196,600 $ 98,651 $ 31,784 $ 46,113 $ -- $ 20,052 Expense reimbursements ............. 28,412 14,194 10,404 2,649 -- 1,165 Other income ....................... 4,109 724 848 1,182 -- 1,355 --------- --------- --------- --------- --------- --------- Total revenues ..................... 229,121 113,569 43,036 49,944 -- 22,572 --------- --------- --------- --------- --------- --------- Operating expenses ................. 90,981 45,743 13,427 20,567 -- 11,244 Depreciation and amortization ...... 26,387 13,934 4,635 5,448 -- 2,370 General and administrative ......... 17,280 3,244 418 4,680 -- 8,938 --------- --------- --------- --------- --------- --------- Total expenses ..................... 134,648 62,921 18,480 30,695 -- 22,552 --------- --------- --------- --------- --------- --------- Operating income ................... 94,473 50,648 24,556 19,249 -- 20 Income applicable to Alexander's ... 4,458 -- -- -- -- 4,458 Income from partially-owned entities 18,261 7,403 222 -- 6,942(4) 3,694 Interest and other investment income 4,694 260 5 52 -- 4,377 Interest and debt expense .......... (40,221) (13,810) (13,851) (9,558) -- (3,002) Minority interest .................. (24,712) (11,673) (3,938) (2,974) (2,892) (3,235) --------- --------- --------- --------- --------- --------- Net income ......................... 56,953 32,828 6,994 6,769 4,050 6,312 Minority interest .................. 24,712 11,673 3,938 2,974 2,892 3,235 Interest and debt expense(3) ....... 62,962 22,964 14,494 9,558 7,307 8,639 Depreciation and amortization(3) ... 40,932 18,343 5,483 5,021 8,005 4,080 Straight-lining of rents(3) ........ (6,349) (3,985) (709) (1,485) (282) 112 Other .............................. 2,707 -- -- -- 294 2,413 --------- --------- --------- --------- --------- --------- EBITDA(1) .......................... $ 181,917 $ 81,823 $ 30,200 $ 22,837 $ 22,266 $ 24,791 ========= ========= ========= ========= ========= ========= (3) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. (4) Net of rent not recognized of $2,340 in the three and six months ended June 30, 2001 and $2,400 in the three and six months ended June 30, 2000. (5) Includes the reversal of $2,952 of expenses incurred in connection with a deferred compensation arrangement. Page 17
For the Three Months Ended June 30, -------------------------- 2001 2000 -------- -------- Hotel Pennsylvania ................................... $ 6,141 $ 7,634 Newkirk Joint Ventures: Equity in income of limited partnerships ........... 12,107 9,514 Interest and other income .......................... 1,590 2,025 Other partially-owned entities (Alexander's and other) 4,834 3,987 Write-off of investments in technology companies ..... (13,561) -- Unallocated general and administrative expenses ...... (9,187) (8,025) Investment income and other .......................... 13,611 9,656 -------- -------- Total ....................................... $ 15,535 $ 24,791 ======== ======== RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 Below are the details of the changes by segment in EBITDA. - -------------------------- (1) Represents operations which were owned for the same period in each year and excludes non-recurring income and expenses. (2) EBITDA and the same store percentage increase was $75,998 and 15.0% for the New York City office portfolio and $20,900 and 3.7% for the CESCR portfolio. (3) The Company reflects its 60% share of the Vornado/Crescent Partnerships' ("the Landlord") equity in the rental income it receives from AmeriCold Logistics, its tenant, which leases the underlying temperature controlled warehouses used in its business. On February 22, 2001, the Landlord restructured the AmeriCold Logistics leases to among other things, (i) reduce 2001's contractual rent to $146,000 (the same amount recognized as rental income in 2000's Funds from Operations), (ii) reduce 2002's contractual rent to $150,000 (plus additional contingent rent in certain circumstances), (iii) increase the Landlord's share of annual maintenance capital expenditures by $4,500 to $9,500 effective January 1, 2000 and (iv) extend the deferred rent period to December 31, 2003 from March 11, 2002. The tenant has advised the Landlord that (i) its revenue for the current quarter and six months ended June 30, 2001 from the warehouses it leases from the Landlord, is lower than last year by 1.1% and 3.3%, and (ii) its gross profit before rent at these warehouses for the corresponding periods is lower than last year by $5,971 (a 13.2% decline) and $10,183 (an 11.4% decline). These decreases are attributable to a reduction in total customer inventory stored at the warehouses and customer inventory turns. Based on the Company's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $2,340 of income for the quarter and six months ended June 30, 2001 and $2,400 of income for the quarter and six months ended June 30, 2000. At June 30, 2001, the Company's balance of the tenant's total deferred rent is $15,806 (Does not include $1,174 applicable to the receivable arising from the straight-lining of rents which was deferred in the year ended December 31, 2000). (4) Includes $13,561 resulting from the write-off of all of the Company's remaining equity investments in technology companies. Page 18
Temperature Merchandise Controlled Total Office Retail Mart Logistics Other ----- ------ ------ ----------- ----------- --------- Three months ended June 30, 2000 ........ $181,917 $81,823 $30,200 $22,837 $22,266 $ 24,791 2001 Operations: Same store operations(1) ........... 10,725 10,243 695 1,600 (3,300)(3) 1,487 Acquisitions, dispositions and non-recurring income and expenses......................... (3,949) 4,832 (1,513) 3,475 -- (10,743)(4) -------- ------- ------- ------- ------- -------- Three months ended June 30, 2001 ........ $188,693 $96,898(2) $29,382 $27,912 $18,966 $ 15,535 ======== ======= ======= ======= ======= ======== % increase in same store operations ................. 5.9% 12.5%(2) 2.3% 7.0% (14.8%)(3) 6.0% Revenues The Company's revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, and other income were $246,075 for the three months ended June 30, 2001, compared to $229,121 in the prior year's quarter, an increase of $16,954. This increase by segment resulted from: - ------------------------ (1) Results primarily from Bradlees rejection of its lease at the 14th Street and Union Square property on February 9, 2001. (2) Results primarily from the termination of the Sports Authority lease at the Hotel Pennsylvania in January 2001. See supplemental information on page 29 for further details. Page 19
Date of Merchandise Acquisition Total Office Retail Mart Other ------------- --------- ---------- --------- ----------- --------- Property Rentals: Acquisitions: 7 West 34th Street ...... November 2000 $ 3,648 $ 3,648 $ -- $ -- $ -- 33 North Dearborn Street September 2000 1,395 -- -- 1,395 -- L.A. Mart ............... October 2000 2,971 -- -- 2,971 -- Dispositions and other ..... (2,419) -- (2,419)(1) -- -- Leasing activity ........... 12,908 11,961 867 577 (497)(2) ------- ------- ------- ------ ------- Total increase in property Rentals ................. 18,503 15,609 (1,552) 4,943 (497) ------- ------- ------- ------ ------- Tenant expense reimbursements: Increase in tenant expense reimbursements due to acquisitions/dispositions 1,736 1,176 (445) 1,005 -- Other ...................... 1,395 550 1,186 204 (545)(2) ------- ------- ------- ------ ------- Total increase in tenant expense reimbursements .. 3,131 1,726 741 1,209 (545) ------- ------- ------- ------ ------- Hotel activity ............... (1,913) -- -- -- (1,913) Trade shows activity ......... (938) -- -- (938) -- Other income ................. (1,829) 89 (306) (364) (1,248) ------- ------- ------- ------ ------- Total increase in revenues ... $16,954 $17,424 $(1,117) $4,850 $(4,203) ======= ======= ======= ====== ======= EXPENSES The Company's expenses were $149,332 for the three months ended June 30, 2001, compared to $134,648 in the prior year's quarter, an increase of $14,684. This increase by segment resulted from: Income from partially-owned entities was $19,228 in the three months ended June 30, 2001, compared to $18,261 in the prior year's quarter, an increase of $967. This increase by segment resulted from:
Merchandise Total Office Retail Mart Other --------- ---------- --------- ----------- --------- Operating: Acquisitions ........... $ 2,922 $ 1,644 $ (597) $ 1,875 $ -- Same store operations .. 2,928 4,297 967 (780) (1,556) -------- -------- -------- -------- -------- 5,850 5,941 370 1,095 (1,556) -------- -------- -------- -------- -------- Depreciation and amortization: Acquisitions ........... 938 683 (241) 496 -- Same store operations .. 2,761 2,683 (47) 120 5 -------- -------- -------- -------- -------- 3,699 3,366 (288) 616 5 -------- -------- -------- -------- -------- General and administrative: Appreciation in value of Vornado shares and other securities held in officer's deferred compensation trust ..... 4,162 -- -- -- 4,162 Other expenses ........... 973 (607) (394) (30) 2,004 -------- -------- -------- -------- -------- 5,135 (607) (394) (30) 6,166 -------- -------- -------- -------- -------- $ 14,684 $ 8,700 $ (312) $ 1,681 $ 4,615 -------- -------- -------- -------- -------- Page 20
Temperature Merchandise Controlled Total Office Retail Mart Logistics Other --------- ---------- ---------- ----------- ------------ -------- Increase (decrease) in equity in income: Temperature Controlled Logistics ...................... $(3,221) $ -- $ -- $ -- $(3,221) $ -- Charles E. Smith Commercial Realty L.P. ........... 239 239 -- -- -- -- Newkirk Joint Ventures ............. 2,559 -- -- -- -- 2,559 Partially-owned office buildings ................. 531 531 -- -- -- -- Other .............................. 859 192 273 (4) -- 398 --------- ---------- ---------- ----------- ------------ -------- $ 967 $ 962 $ 273 $ (4) $(3,221) $ 2,957 ========= ========== ========== =========== ============ ======== Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains on sale of marketable securities) was $15,874 for the three months ended June 30, 2001, compared to $4,694 for the prior year's quarter, an increase of $11,180. This increase resulted primarily from the acquisition of NorthStar subordinated unsecured debt (22% effective rate) on September 19, 2000 and a loan to Primestone Investment Partners, L.P. (20% effective rate) on September 28, 2000. In the three months ended June 30, 2001, the Company recorded a charge of $13,561 resulting from the write-off of all of its remaining equity investments in technology companies due to both the deterioration of the financial condition of these companies and the lack of acceptance by the market of certain of their products and services. Interest and debt expense was $43,994 for the three months ended June 30, 2001, compared to $40,221 in the prior year's quarter, an increase of $3,773. This increase resulted from interest on higher average outstanding loan balances, partially offset by a $6,148 savings from a 90 basis point reduction in weighted average interest rates of variable rate debt. In June 2001, the Company recorded a net gain of $12,445 on the sale of its 50% interest in 570 Lexington Avenue and a net gain of $3,050 in connection with the final settlement of the 1998 condemnation of its Atlantic City Property. Minority interest was $28,349 for the three months ended June 30, 2001, compared to $24,712 in the prior year's quarter, an increase of $3,637. This increase is primarily due to the issuance of perpetual preferred units in connection with acquisitions. Page 21 SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 - --------------------------- See footnotes on page 23. Page 22
For The Six Months Ended June 30, 2001 ---------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----------- ---------- --------- ------------- ------------- ---------- Rentals................................ $ 416,970 $ 228,120 $ 59,336 $ 97,123 $ -- $ 32,391 Expense reimbursements................. 66,635 34,961 22,440 7,831 -- 1,403 Other income........................... 5,080 1,385 1,971 1,537 -- 187 ----------- ---------- --------- ------------- ------------- ---------- Total revenues......................... 488,685 264,466 83,747 106,491 -- 33,981 ----------- ---------- --------- ------------- ------------- ---------- Operating expenses..................... 197,214 107,445 29,209 42,794 -- 17,766(4) Depreciation and amortization.......... 61,951 35,944 8,810 12,506 -- 4,691 General and administrative............. 36,663 6,007 47 9,245 -- 21,364 Costs of acquisitions not consummated.. 5,000 -- -- -- -- 5,000 ----------- ---------- --------- ------------- ------------- ---------- Total expenses......................... 300,828 149,396 38,066 64,545 -- 48,821 ----------- ---------- --------- ------------- ------------- ---------- Operating income....................... 187,857 115,070 45,681 41,946 -- (14,840) Income applicable to Alexander's....... 16,980 -- -- -- -- 16,980 Income from partially-owned entities... 43,218 17,060 2,392 109 9,669(6) 13,988 Interest and other investment income... 29,347 4,195 416 1,377 -- 23,359 Write-off of investments in technology companies............................. (18,284) -- -- -- -- (18,284) Interest and debt expense.............. (93,389) (31,014) (28,413) (17,986) -- (15,976) Net gain on sale of real estate and partially-owned entities............. 12,445 12,445 -- -- -- -- Net gain from condemnation proceeding........................... 3,050 -- 3,050 -- -- -- Minority interest...................... (55,663) (28,322) (8,476) (7,769) (5,825) (5,271) ----------- ---------- --------- ------------- ------------- ---------- Income before cumulative effect of change in accounting principle and extraordinary item.................... 125,561 89,434 14,650 17,677 3,844 (44) Cumulative effect of change in accounting principle............................. (4,110) -- -- -- -- (4,110) Extraordinary item..................... 1,170 -- -- -- -- 1,170 ----------- ---------- --------- ------------- ------------- ---------- Net income............................. 122,621 89,434 14,650 17,677 3,844 (2,984) Cumulative effect of change in accounting principle............................. 4,110 -- -- -- -- 4,110 Extraordinary item..................... (1,170) -- -- -- -- (1,170) Minority interest...................... 55,663 28,322 8,476 7,769 5,825 5,271 Net gain on sale of real estate and partially-owned entities............. (12,445) (12,445) -- -- -- -- Net gain from condemnation proceeding........................... (3,050) -- (3,050) -- -- -- Interest and debt expense(3)........... 140,405 52,306 29,697 17,986 13,486 26,930 Depreciation and amortization(3)....... 93,836 45,636 9,339 12,506 16,811 9,544 Straight-lining of rents(3)............ (14,076) (10,005) (695) (2,388) -- (988) Other.................................. (7,560) (3,220) -- -- 181 (4,521)(5) ----------- ---------- --------- ------------- ------------- ---------- EBITDA(1).............................. $ 378,334 $ 190,028 $ 58,417 $ 53,550 $ 40,147 $ 36,192 =========== ========== ========= ============= ============= ========== - --------------------------- (1) EBITDA represents income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of real estate, the effect of straight-lining of property rentals for rent escalations and minority interest. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other EBITDA is comprised of:
For the Six Months Ended June 30, 2000 (Pro Forma) ---------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----------- ---------- --------- ------------- ------------- ---------- Rentals................................ $ 379,144 $ 195,679 $ 63,749 $ 83,985 $ -- $ 35,731 Expense reimbursements................. 55,219 26,126 21,943 5,640 -- 1,510 Other income........................... 8,193 1,749 1,164 2,780 -- 2,500 ----------- ---------- --------- ------------- ------------- ---------- Total revenues......................... 442,556 223,554 86,856 92,405 -- 39,741 ----------- ---------- --------- ------------- ------------- ---------- Operating expenses..................... 175,939 91,884 28,159 34,892 -- 21,004 Depreciation and amortization.......... 51,235 27,286 8,624 10,885 -- 4,440 General and administrative............. 31,708 6,008 479 8,166 -- 17,055 ----------- ---------- --------- ------------- ------------- ---------- Total expenses......................... 258,882 125,178 37,262 53,943 -- 42,499 ----------- ---------- --------- ------------- ------------- ---------- Operating income....................... 183,674 98,376 49,594 38,462 -- (2,758) Income applicable to Alexander's....... 8,565 -- -- -- -- 8,565 Income from partially-owned entities... 38,114 15,128 499 -- 16,340(6) 6,147 Interest and other investment income... 10,482 644 8 163 -- 9,667 Interest and debt expense.............. (80,577) (28,133) (24,656) (17,905) -- (9,883) Net gain on sale of real estate........ 2,560 -- 2,560 -- -- -- Minority interest...................... (47,544) (21,854) (7,834) (6,011) (6,109) (5,736) ----------- ---------- --------- ------------- ------------- ---------- Income before cumulative effect of change in accounting principle and extraordinary item.................... 115,274 64,161 20,171 14,709 10,231 6,002 Cumulative effect of change in accounting principle............................. -- -- -- -- -- -- Extraordinary item..................... (1,125) -- (1,125) -- -- -- ----------- ---------- --------- ------------- ------------- ---------- Net income............................. 114,149 64,161 19,046 14,709 10,231 6,002 Extraordinary item..................... 1,125 -- 1,125 -- -- -- Cumulative effect of change in accounting principle.......................... -- -- -- -- -- -- Minority interest...................... 47,544 21,854 7,834 6,011 6,109 5,736 Net gain on sale of real estate........ (2,560) -- (2,560) -- -- -- Interest and debt expense(3)........... 124,622 46,152 25,954 17,905 14,037 20,574 Depreciation and amortization(3)....... 80,309 36,299 9,785 10,048 16,334 7,843 Straight-lining of rents(3)............ (13,781) (9,286) (1,386) (2,764) (809) 464 Other.................................. 3,981 -- -- -- 809 3,172 ----------- ---------- --------- ------------- ------------- ---------- EBITDA(1).............................. $ 355,389 $ 159,180 $ 59,798 $ 45,909 $ 46,711 $ 43,791 =========== ========== ========= ============= ============= ========== (3) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. (4) Includes a $1,900 settlement from a tenant for rent previously reserved. (5) Includes the reversal of $6,298 representing the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001. (6) Net of rent not recognized of $2,340 in the three and six months ended June 30, 2001 and $2,400 in the three and six months ended June 30, 2000. Page 23
For the Six Months Ended June 30, --------------------------- 2001 2000 ----------- ----------- Hotel Pennsylvania....................................... $ 11,421(4) $ 11,061 Newkirk Joint Ventures: Equity in income of limited partnerships............... 26,708 19,926 Interest and other income.............................. 3,202 3,346 Other partially-owned entities (Alexander's and other)... 9,639 8,654 Write-off of investments in technology companies......... (18,284) -- Unallocated general and administrative expenses.......... (16,720) (13,837) Costs of acquisitions not consummated.................... (5,000) -- Investment income and other.............................. 25,226 14,641 ----------- ----------- Total................................................ $ 36,192 $ 43,791 =========== =========== Below are the details of the changes by segment in EBITDA. - --------------------------- (1) Represents operations which were owned for the same period in each year and excludes non-recurring income and expenses. (2) EBITDA and the same store percentage increase was $147,528 and 14.9% for the New York City office portfolio and $42,500 and 4.0% for the CESCR portfolio. (3) The Company reflects its 60% share of the Vornado/Crescent Partnerships' ("the Landlord") equity in the rental income it receives from AmeriCold Logistics, its tenant, which leases the underlying temperature controlled warehouses used in its business. On February 22, 2001, the Landlord restructured the AmeriCold Logistics leases to among other things, (i) reduce 2001's contractual rent to $146,000 (the same amount recognized as rental income in 2000's Funds from Operations), (ii) reduce 2002's contractual rent to $150,000 (plus additional contingent rent in certain circumstances), (iii) increase the Landlord's share of annual maintenance capital expenditures by $4,500 to $9,500 effective January 1, 2000 and (iv) extend the deferred rent period to December 31, 2003 from March 11, 2002. The tenant has advised the Landlord that (i) its revenue for the current quarter and six months ended June 30, 2001 from the warehouses it leases from the Landlord, is lower than last year by 1.1% and 3.3%, and (ii) its gross profit before rent at these warehouses for the corresponding periods is lower than last year by $5,971 (a 13.2% decline) and $10,183 (an 11.4% decline). These decreases are attributable to a reduction in total customer inventory stored at the warehouses and customer inventory turns. Based on the Company's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $2,340 of income for the quarter and six months ended June 30, 2001 and $2,400 of income for the quarter and six months ended June 30, 2000. At June 30, 2001, the Company's balance of the tenant's total deferred rent is $15,806 (Does not include $1,174 applicable to the receivable arising from the straight-lining of rents which was deferred in the year ended December 31, 2000). (4) Includes $18,284 resulting from the write-off of all of the Company's remaining equity investments in technology companies. Page 24
Temperature Merchandise Controlled Total Office Retail Mart Logistics Other ----------- ---------- --------- ------------- ------------- ---------- Six months ended June 30, 2000.......... $ 355,389 $ 159,180 $ 59,798 $ 45,909 $ 46,711 $ 43,791 2000 Operations: Same store operations(1).. 20,600 19,833 1,394 3,241 (6,564)(3) 2,696 Acquisitions and other.... 2,345 11,015 (2,775) 4,400 -- (10,295)(4) ----------- ---------- --------- ------------- ------------- ---------- Six months ended June 30, 2001.......... $ 378,334 $ 190,028(2) $ 58,417 $ 53,550 $ 40,147 $ 36,192 =========== ========== ========= ============= ============= ========== % increase in same store operations.... 5.8% 12.5%(2) 2.3% 7.1% (14.1%)(3) 6.2% Revenues The Company's revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, and other income were $488,685 in the six months ended June 30, 2001, compared to $442,556 in the prior year's six months, an increase of $46,129. This increase by segment resulted from: Date of Merchandise Acquisition Total Office Retail Mart Other ----------- ------- -------- -------- ------------ ----- > Property Rentals: Acquisitions: 7 West 34th Street ....... November 2000 $ 7,296 $ 7,296 $ -- $ -- $-- 33 North Dearborn Street . September 2000 2,810 -- -- 2,810 -- L.A. Mart ................ October 2000 6,010 -- -- 6,010 -- Dispositions and other ...... (5,475) -- (5,475)(1) -- -- Leasing activity ............ 26,723 25,145 1,062 2,025 (1,509) -------- -------- -------- -------- ------- Total increase in property rentals ................... 37,364 32,441 (4,413) 10,845 (1,509)(2) -------- -------- -------- -------- ------- Tenant expense reimbursements: Increase in tenant expense reimbursements due to acquisitions/dispositions 2,463 2,019 (445)(1) 889 -- Other ....................... 8,953 6,816 942 1,302 (107) -------- -------- -------- -------- ------- Total increase in tenant expense reimbursements .... 11,416 8,835 497 2,191 (107) -------- -------- -------- -------- ------- Hotel activity ................ (1,831) -- -- -- (1,831) Trade shows activity .......... 2,293 -- -- 2,293 -- Other income .................. (3,113) (364) 807 (1,243) (2,313) -------- -------- -------- -------- ------- Total increase in revenues .... $ 46,129 $ 40,912 $ (3,109) $ 14,086 $(5,760) ======== ======== ======== ======== ======= - ---------------- (1) Results primarily from Bradlees rejection of its lease at 14th Street and Union Square on February 9, 2001 and the sale of the Company's Texas properties on March 2, 2000. (2) Results primarily from the termination of the Sports Authority lease at the Hotel Pennsylvania in January 2001. See Supplemental Information on page 29. Expenses The Company's expenses were $300,828 in the six months ended June 30, 2001 compared to $258,882 in the prior year's six months, an increase of $41,946. This increase by segment resulted from: Merchandise Total Office Retail Mart Other -------- --------- --------- ------------ --------- Operating: Acquisitions ................................ $ 7,322 $ 3,138 $ (597) $ 4,781 $ -- Same store operations ....................... 13,953 12,423 1,647 3,121 (3,238)(1) -------- -------- -------- -------- -------- 21,275 15,561 1,050 7,902 (3,238) -------- -------- -------- -------- -------- Depreciation and amortization: Acquisitions ................................ 2,005 1,269 (241) 977 -- Same store operations ....................... 8,711 7,389 427 644 251 -------- -------- -------- -------- -------- 10,716 8,658 186 1,621 251 -------- -------- -------- -------- -------- General and administrative: Depreciation in value of Vornado's shares and other securities held in Officer's deferred compensation trust .......................... 302 -- -- -- 302 Other expenses .................................. 4,653(2) (1) (432) 1,079 4,007 -------- -------- -------- -------- -------- 4,955 (1) (432) 1,079 4,309 -------- -------- -------- -------- -------- Costs of acquisitions not consumated ............ 5,000 -- -- -- 5,000(3) -------- -------- -------- -------- -------- $ 41,946 $ 24,218 $ 804 $ 10,602 $ 6,322 ======== ======== ======== ======== ======== - ---------- (1) Includes a $1,900 settlement from a tenant for rent previously reserved. (2) Higher payroll expenses, partially offset by lower professional fees. (3) Primarily associated with the World Trade Center. Page 25 Income applicable to Alexander's (loan interest income, equity in income and depreciation) was $16,980 in the six months ended June 30, 2001, compared to $8,565 in the prior year's six months, an increase of $8,415. This increase resulted primarily from the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001. Income from partially-owned entities was $43,218 in the six months ended June 30, 2001, compared to $38,114 in the prior year's six months, an increase of $5,104. This increase by segment resulted from: Temperature Merchandise Controlled Total Office Retai Mart Logistics Other -------- ---------- --------- ------------- ------------ ------- Increase (decrease) in equity in income: Temperature Controlled ................. $(6,671) $ -- $ -- $ -- $(6,671) $ -- Logistics CESCR .................................. 877 877 -- -- -- -- Newkirk Joint Ventures ................. 6,190 -- -- -- -- 6,190 Partially-owned office buildings ....... 1,095 1,095 -- -- -- -- Other ........................... 3,613 (40) 1,893 109 -- 1,651 ------- ------- ------- ------- ------- ------- $ 5,104 $ 1,932 $ 1,893 $ 109 $(6,671) $ 7,841 ======= ======= ======= ======= ======= ======= Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains on sale of marketable securities) was $29,347 for the six months ended June 30, 2001, compared to $10,482 in the prior year's six months, an increase of $18,865. This increase resulted primarily from the acquisition of NorthStar subordinated unsecured debt (22% effective rate) on September 19, 2000 and a loan to Primestone Investment Partners, L.P. (20% effective rate) on September 28, 2000. The Company recorded a charge of $18,284 this year resulting from the write-off of all of its remaining equity investments in technology companies due to both the deterioration of the financial condition of these companies and the lack of acceptance by the market of certain of their products and services. Interest and debt expense was $93,389 for the six months ended June 30, 2001, compared to $80,577 in the prior year's six months, an increase of $12,812. This increase resulted from interest on higher average outstanding loan balances, partially offset by a $8,219 savings from a 60 basis point reduction in weighted average interest rates on variable rate debt. In June 2001, the Company recorded a net gain of $12,445 on the sale of its 50% interest in 570 Lexington Avenue and a net gain of $3,050 in connection with the final settlement of the 1998 condemnation of its Atlantic City property. Minority interest was $55,663 for the six months ended June 30, 2000, compared to $47,544 in the prior year's six months, an increase of $8,119. This increase is primarily due to the issuance of perpetual preferred units. The Company recorded the cumulative effect of a change in accounting principle of $4,110 in the first quarter of 2001. The Company had previously marked-to-market changes in value of stock purchase warrants through accumulated other comprehensive loss. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, those changes are recognized through earnings, and accordingly, the Company has reclassed $4,110 from accumulated other comprehensive loss to the consolidated statement of income as of January 1, 2001. Future changes in value of such securities will be recorded through earnings. The Company recorded an extraordinary item of $1,170 in the first quarter of 2001 representing the Company's share of Alexander's extraordinary gain from early extinguishment of debt. The Company incurred an extraordinary loss of $1,125 in the first quarter of 2000 due to the write-off of unamortized financing costs in connection with the prepayment of debt. Page 26
LIQUIDITY AND CAPITAL RESOURCES SIX MONTHS ENDED JUNE 30, 2001 Cash flows provided by operating activities of $192,866 was primarily comprised of (i) income of $122,621 and (ii) adjustments for non-cash items of $63,798 and (iii) the net change in operating assets and liabilities of $21,642. The adjustments for non-cash items are primarily comprised of (i) cumulative effect of change in accounting principle of $4,110, (ii) the write-off of equity investments in technology of $18,284, (iii) depreciation and amortization of $61,951 and (iv) minority interest of $55,663, partially offset by (v) the effect of straight-lining of rental income of $14,542 and (vi) equity in net income of partially-owned entities and income applicable to Alexander's of $60,198. Net cash used in investing activities of $59,966 was primarily comprised of (i) recurring capital expenditures of $26,490, (ii) non-recurring capital expenditures of $22,836, (iii) development and redevelopment expenditures of $74,856, (iv) investment in notes and mortgages receivable of $30,767, (v) investments in partially-owned entities of $25,221 partially offset by, (vi) distributions from partially-owned entities of $93,032 and (vii) a decrease in restricted cash arising primarily from the repayment of mortgage escrows of $27,851. Net cash used in financing activities of $149,969 was primarily comprised of (i) proceeds from borrowings of $118,853, partially offset by, (ii) repayments of borrowings of $111,748, (iii) dividends paid on common shares of $90,992, (iv) dividends paid on preferred shares of $17,926, and (v) distributions to minority partners of $53,710. Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures. Capital expenditures are categorized as follows: Recurring -- capital improvements expended to maintain a property's competitive position within the market and tenant improvements and leasing commissions for costs to release expiring leases or renew or extend existing leases. Non-recurring -- capital improvements completed in the year of acquisition and the following two years (which were planned at the time of acquisition) and tenant improvements and leasing commissions for space which was vacant at the time of acquisition of a property. Development and Redevelopment expenditures include all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions and capitalized interest and operating costs until the property is substantially complete and ready for its intended use. New York Merchandise Total City Office Retail Mart Other -------- ----------- ------ ------------ ------- Capital Expenditures: Expenditures to maintain the assets: Recurring .......................................... $ 8,268 $ 4,937 $ 412 $ 1,187 $ 1,732 Non-recurring ...................................... 19,732 10,523 -- 3,259 5,950 ------- ------- ------- ------- ------- 28,000 15,460 412 4,446 7,682 ------- ------- ------- ------- ------- Tenant improvements: Recurring .......................................... 18,222 15,242 265 2,715 -- Non-recurring ...................................... 3,104 3,104 -- -- -- ------- ------- ------- ------- ------- 21,326 18,346 265 2,715 -- ------- ------- ------- ------- ------- Total ................................................. $49,326 $33,806 $ 677 $ 7,161 $ 7,682 ======= ======= ======= ======= ======= Leasing Commissions: Recurring .......................................... $ 6,090 $ 5,710 $ 195 $ 48 $ 137 Non-recurring ...................................... -- -- -- -- -- ------- ------- ------- ------- ------- $ 6,090 $ 5,710 $ 195 $ 48 $ 137 ======= ======= ======= ======= ======= Development and Redevelopment: Expenditures: (1) Park Laurel (80% interest) ........................ $29,212 $ -- $ -- $ -- $29,212 Market Square on Main Street ...................... 17,597 -- -- 17,597 -- Other ............................................. 28,047 14,682 1,964 1,863 9,538 ------- ------- ------- ------- ------- $74,856 $14,682 $ 1,964 $19,460 $38,750 ======= ======= ======= ======= ======= - ---------- (1) Does not include $60,951 of Fort Lee development costs during the six months ended June 30, 2001, which were funded by a construction loan. Page 27
SIX MONTHS ENDED JUNE 30, 2000 Cash flows provided by operating activities of $104,551 was primarily comprised of (i) income of $114,149 and (ii) adjustments for non-cash items of $27,631, offset by (iii) the net change in operating assets and liabilities of $34,669. The adjustments for non-cash items are primarily comprised of (i) depreciation and amortization of $47,940 and (ii) minority interest of $47,544, partially offset by (iii) the effect of straight-lining of rental income of $15,182 and (iv) equity in net income of partially-owned entities and income applicable to Alexander's of $53,796. Net cash used in investing activities of $120,856 was primarily comprised of (i) capital expenditures of $73,771 (see detail below), (ii) investment in notes and mortgages receivable of $7,595 (loan to Vornado Operating Company), (iii) acquisitions of real estate of $6,660 (see detail below), (iv) investments in partially-owned entities of $45,450 (see detail below), partially offset by (vi) proceeds from the sale of real estate of $23,992 and distributions from partially-owned entities of $17,705. Acquisitions of real estate and investments in partially-owned entities are comprised of: Debt Cash Assumed Investment ---------- ---------- --------------- Real Estate: Student Housing Complex (90% Interest)................ $ 6,660 $ 17,640 $ 24,300 ========= ========== ============= Investments in Partially-Owned Entities: Vornado Ceruzzi Joint Venture (80% interest).......... $ 18,220 $ -- $ 18,220 Funding of Development Expenditures: Fort Lee............................................ 8,875 -- 8,875 Park Laurel......................................... 15,587 -- 15,587 Other................................................. 2,768 -- 2,768 --------- ---------- ------------- $ 45,450 $ -- $ 45,450 ========= ========== ============= Capital expenditures were comprised of: New York Merchandise Total City Office Retail Mart Other ------- ----------- ------- ------------ ------- Expenditures to maintain the assets ..................... $ 8,068 $ 5,182 $ 331 $ 2,195 $ 360 Tenant allowances ....................................... 31,672 27,080 2,497 2,095 -- Redevelopment expenditures .............................. 24,655 13,759 1,585 9,311 -- Corporate (primarily relocation of offices) ............. 9,376 -- -- -- 9,376 ------- ------- ------- ------- ------- $73,771 $46,021 $ 4,413 $13,601 $ 9,736 ======= ======= ======= ======= ======= Net cash provided by financing activities of $2,812 was primarily comprised of (i) proceeds from borrowings of $590,000, (ii) proceeds from issuance of preferred units of $195,639, partially offset by, (iii) repayments of borrowings of $619,444, (iv) dividends paid on common shares of $82,051, (v) dividends paid on preferred shares of $17,907, and (vi) distributions to minority partners of $47,144. Page 28
SUPPLEMENTAL INFORMATION Below are the details of the changes by segment in EBITDA for the three months ended June 30, 2001 and March 31, 2001. Temperature Merchandise Controlled Total Office Retail Mart Logistics Other --------- ---------- ----------- ----------- ------------ ------------ Three months ended March 31, 2001 .......................... $ 189,641 $ 93,130 $ 29,035 $ 25,638 $ 21,181 $ 20,657 2001 Operations: Same store operations(1) ................ 7,588 6,543 347 2,274(3) (2,215) 639(3) Acquisitions, dispositions and other non-recurring income and expenses (8,536) (2,775) -- -- -- (5,761) --------- ----------- --------- --------- --------- --------- Three months ended June 30, 2001 ........................... $ 188,693 $ 96,898(2) $ 29,382 $ 27,912 $ 18,966 $ 15,535 ========= =========== ========= ========= ========= ========= % increase in same store operations ..................... 4.0% 7.0%(2) 1.2% 8.9% (10.5%) 3.1% - ---------------- (1) Represents operations which were owned for the same period in each year and excludes non-recurring income and expenses. (2) Same store percentage increase was 8.5% for the New York City office portfolio, and 2.2% for the CESCR portfolio. (3) Reflects seasonality of the Merchandise Mart trade show business and the Hotel Pennsylvania which is included in Other. The following table sets forth certain information for the properties the Company owns directly or indirectly, including leasing activity for space previously occupied: Office Merchandise Mart ---------------------- ---------------------- Temperature New York Controlled City CESCR Retail Office(1) Showroom(1) Logistics --------- -------- --------- ---------- ---------- ----------- As of June 30, 2001: Square feet ....................................... 14,465 4,249 11,301 2,869 5,044 17,569 Cubic feet ........................................ -- -- -- -- -- 440,200 Number of properties .............................. 22 50 55 9 9 88 Occupancy rate .................................... 95% 96% 92% 90% 97% 74%(5) Leasing Activity: For the quarter ended June 30, 2001: Square feet ............................... 116 108 161(3) -- 58 -- Rent per square foot: Initial rent (2) ........................ $ 43.19 $ 32.55 $ 13.32 -- $ 24.28 -- Prior escalated rent .................... $ 31.30 $ 27.05 $ 13.22 -- $ 22.33 -- Percentage increase ..................... 38% 20% 1% -- 9% -- For the six months ended June 30, 2001: Square feet ............................... 510(4) 430 248(3) 10 162 -- Rent per square foot: Initial rent (2) ........................ $ 46.93 $ 31.50 $ 15.90 $ 28.35 $ 23.37 -- Prior escalated rent .................... $ 31.37 $ 25.06 $ 15.16 $ 24.78 $ 20.67 -- Percentage increase ..................... 50% 26% 5% 14% 13% -- As of March 31, 2001: Square feet ....................................... 14,410 4,248 11,300 2,869 5,044 17,495 Cubic feet ........................................ -- -- -- -- -- 438,900 Number of properties .............................. 22 50 55 9 9 88 Occupancy rate .................................... 97% 98% 92% 91% 98% 73%(5) Page 29
As of December 31, 2000: Square feet ...................... 14,396 4,248 11,293 2,869 5,044 17,495 Cubic feet ....................... -- -- -- -- -- 438,900 Number of properties ............. 22 50 55 9 9 88 Occupancy rate ................... 96% 98% 92% 90% 98% 82% As of June 30, 2000: Square feet ...................... 14,200 3,782 11,960 2,739 4,317 18,073 Cubic feet ....................... -- -- -- -- -- 454,500 Number of properties ............. 22 41 56 7 7 92 Occupancy rate ................... 97% 98% 94% 89% 99% 82% - ---------------- (1) The office and showroom space is contained in the same mixed-use properties. (2) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. (3) Does not reflect the assignment to new tenants (Kohls, 83,000 square feet, and Giant Foods, 85,000 square feet) of two former Bradlees leases, which continue to be subject to the guarantee of Stop & Shop Companies, Inc., under a Master Agreement and Guaranty, dated May 1, 1992. (4) In addition to the above, the Company leased 27,000 square feet of retail space at $221.03 per square foot. (5) The tenant has advised the Landlord that (i) its revenue for the current quarter and six months ended June 30, 2001 from the warehouses it leases from the Landlord, is lower than last year by 1.1% and 3.3%, and (ii) its gross profit before rent at these warehouses for the corresponding periods is lower than last year by $5,971 (a 13.2% decline) and $10,183 (an 11.4% decline). These decreases are attributable to a reduction in total customer inventory stored at the warehouses and customer inventory turns. Page 30
FUNDS FROM OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 Funds from operations was $83,930 in the three months ended June 30, 2001, compared to $83,003 in the prior year's quarter, an increase of $927. Funds from operations was $165,837 in the six months ended June 30, 2001, compared to $163,179 in the prior year's six months, an increase of $2,658. Funds from operations for the three months ended June 30, 2001 includes a charge of $13,561 resulting from the write-off of all of the Company's remaining equity investments in technology companies. Funds from operations for the six months ended June 30, 2001, includes (i) a charge of $5,000 for the write-off of costs associated with two acquisitions which were not consummated and (ii) a charge of $18,284 resulting from the write-off of all of the Company's investments in technology companies. The following table reconciles funds from operations and net income: For the Three Months Ended June 30, For the Six Months Ended June 30, ----------------------------------- --------------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ----------- Net income applicable to common shares........ $ 56,920 $ 47,281 $ 103,756 $ 94,804 Cumulative effect of a change in accounting principle................................. -- -- 4,110 -- Extraordinary item............................ -- -- (1,170) 1,125 Depreciation and amortization of real property ............................ 29,041 24,263 60,081 47,078 Straight-lining of property rentals for rent escalations.......................... (5,819) (5,999) (13,074) (13,037) Leasing fees received in excess of income recognized................................ (124) 485 (248) 970 Appreciation of securities held in officer's deferred compensation trust ............. 2,952 1,150 669 1,490 Net gain on sale of real estate and partially-owned entities.................. (12,445) -- (12,445) (2,560) Net gain from condemnation proceeding......... (3,050) -- (3,050) -- Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at funds from operations: Depreciation and amortization of real property............................ 15,615 16,245 31,607 32,368 Net gain on sale of real estate (Alexander's Fordham Road property)........................... -- -- (6,298) -- Other................................. (323) (1,660) (751) (1,992) Minority interest in excess of preferential distributions............................. (3,780) (4,184) (7,716) (7,912) ---------- ---------- --------- ---------- Series A preferred shares..................... 78,987 77,581 155,471 152,334 Funds from operations--diluted (1)............ 4,943 5,422 10,366 10,845 ---------- ---------- --------- ---------- $ 83,930 $ 83,003 $ 165,837 $ 163,179 ========== ========== ========= ========== The number of shares that should be used for determining funds from operations per share is as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, ----------------------------------- --------------------------------- 2001 2000 2001 2000 ------- ------ ------- ------- Weighted average shares used for determining diluted income per share................. 89,602 88,746 89,501 88,078 Series A preferred shares................ 8,018 8,018 8,018 8,018 ------ ------ ------ ------ Shares used for determining diluted funds from operations per share (1)...... 97,620 96,764 97,519 96,096 ====== ====== ====== ====== Page 31
Funds from operations does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations may not be comparable to similarly titled measures reported by other REITs since a number of REITs, including the Company, calculate funds from operations in a manner different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified from this definition to adjust primarily for (i) the effect of straightlining of property rentals for rent escalations and leasing fee income, and (ii) the reversal of income taxes (benefit) which are considered non-recurring because of the conversion of Temperature Controlled Logistics Companies to REITs in 2000. Below are the cash flows provided by (used in) operating, investing and financing activities: For the Six Months Ended June 30, ---------------------------------- 2001 2000 ----------- ----------- Operating activities............... $ 192,866 $ 104,551 =========== =========== Investing activities............... $ (59,966) $ (120,856) =========== =========== Financing activities............... $ (149,969) $ 2,812 =========== =========== - ---------- (1) Assuming all of the convertible units of the Operating Partnership were converted to shares, the minority interest in partnership earnings would not be deducted in calculating funds from operations and the shares used in calculating funds from operations per share would be increased to reflect the conversion. Funds from operations per share would not change. The following table reconciles funds from operations as shown above, to the Operating Partnership's funds from operations for the three and six months ended June 30, 2001: For the Three Months Ended June 30, For the Six Months Ended June 30, ------------------------------------ --------------------------------- 2001 2000 2001 2000 ------------- ------------ ------------ ------------ Funds from operations, as above.............. $ 83,930 $ 83,003 $ 165,837 $ 163,179 Addback of minority interest reflected as equity in the Operating Partnership......... 13,147 13,504 25,951 26,068 ------------- ------------ ------------ ------------ Operating Partnership funds from operations.. $ 97,077 $ 96,507 $ 191,788 $ 189,247 ============= ========== ============ ============ The number of shares that should be used for determining Operating Partnership funds from operations per share is as follows: Shares used for determining diluted funds from operations per share, as above.............. 97,620 96,764 97,519 96,096 Convertible units: Non-Vornado owned Class A units.......... 6,628 6,284 6,628 6,284 Class D units............................ 864 877 864 877 B-1 units................................ 822 822 822 822 B-2 units................................ 411 411 411 411 C-1 units................................ 855 855 855 855 E-1 units................................ 5,680 5,680 5,680 5,680 ------- ------- ------- ------- Shares used for determining Operating Partnership diluted funds from operations per share............. 112,880 111,693 112,779 111,025 ======= ======= ======= ======= Financings The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an on-going basis for more than the next twelve months; however, capital outlays for significant acquisitions would require funding from borrowings or equity offerings. Page 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company's exposure to a change in interest rates on its wholly-owned and partially-owned debt (all of which arises out of non-trading activity) is as follows: ($ in thousands, except per share amounts) June 30, 2001 December 31, 2000 ------------------------------------------------- --------------------------------- Weighted Effect of 1% Weighted Average Change In Base Average Balance Interest Rate Rates Balance Interest Rate ------------ -------------- -------------- ------------ ------------- Wholly-owned debt: Variable rate .................... $ 1,581,042 5.23% $ 14,575(1) $ 1,593,751 8.00% Fixed rate ....................... 1,152,967 7.57% -- 1,063,146 7.61% ----------- ----- ----------- $ 2,734,009 6.22% 14,575 $ 2,656,897 =========== ------ =========== Partially-owned debt: Variable rate .................... $ 144,671 6.53% 1,447 $ 204,462 8.40% Fixed rate ....................... 1,197,976 7.08% -- 1,123,926 7.54% ----------- ----- ----------- $ 1,342,647 7.02% 1,447 $ 1,328,388 =========== ----- =========== Minority interest ....................... (2,323) ----------- Total decrease in the Company's annual net income ........... $ 13,699 =========== Per share-diluted .................. $ .15 =========== - ---------------- (1) Excludes the effect of a $123,500 mortgage financing, cross-collateralized by the Company's 770 Broadway and 595 Madison Avenue office properties, as the proceeds are in a restricted mortgage escrow account which bears interest at the same rate as the loan. Page 33
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 30, 2001, the Company held its annual meeting of shareholders. The shareholders voted, in person or by proxy, for the election of two nominees to serve on the Board of Trustees for a term of three years or until their respective successors are duly elected and qualified. The results of the voting are shown below: Election of Trustees: Votes Cast Against or Trustee Votes Cast For Withheld ------------- -------------- ---------- David Mandelbaum 72,723,142 1,278,550 Richard West 72,742,477 1,259,215 Because of the nature of the matters voted upon, there were no abstentions or broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed in the attached Exhibit Index. (b) Reports on Form 8-K During the quarter ended June 30, 2001, Vornado Realty Trust did not file any reports on Form 8-K. Page 34
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 2, 2001 By: /s/ Joseph Macnow ----------------------------------------- Joseph Macnow, Executive Vice President - Finance and Administration and Chief Financial Officer Page 35
EXHIBIT INDEX - ---------------------------------- * Incorporated by reference Page 39
EXHIBIT NO. - ------- 3.1 -- Amended and Restated Declaration of Trust of Vornado, amended April 3, 1997--Incorporated by reference to Exhibit 3.1 of Vornado's Registration Statement on Form S-8 (File No. 333-29011), filed on June 12, 1997......................................................................... * 3.2 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on October 14, 1997 - Incorporated by reference to Exhibit 3.2 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000........................................................................................ * 3.3 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 22, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated April 22, 1998 (File No. 001-11954), filed on April 28, 1998.............................................................................. * 3.4 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on November 24, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000.................................................................................... * 3.5 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 20, 2000 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000.................................................................................... * 3.6 -- Articles Supplementary Classifying Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 4.1 of Vornado's Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997.................................................................................. * 3.7 -- Articles Supplementary Classifying Vornado's Series D-1 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, no par value (the "Series D-1 Preferred Shares") - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998............................................... * 3.8 -- Articles Supplementary Classifying Additional Series D-1 Preferred Shares - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999................................................ * 3.9 -- Articles Supplementary Classifying 8.5% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999.................................................. * 3.10 -- Articles Supplementary Classifying Vornado's Series C Preferred Shares - Incorporated by reference to Exhibit 3.7 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed on May 19, 1999.......................................................................... * - ---------------------------------- * Incorporated by reference Page 36 EXHIBIT NO. - ------- 3.11 -- Articles Supplementary Classifying Vornado Realty Trust's Series D-2 Preferred Shares, dated as of May 27, 1999, as filed with the State Department of Assessments and Taxation of Maryland on May 27, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999............................ * 3.12 -- Articles Supplementary Classifying Vornado's Series D-3 Preferred Shares, dated September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999........................ * 3.13 -- Articles Supplementary Classifying Vornado's Series D-4 Preferred Shares, dated September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999........................ * 3.14 -- Articles Supplementary Classifying Vornado's Series D-5 Preferred Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999............................................... * 3.15 -- Articles Supplementary to Declaration of Trust of Vornado Realty Trust with respect to the Series D-6 Preferred Shares, dated May 1, 2000, as filed with the State Department of Assessments and Taxation of Maryland on May 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed May 19, 2000........................................................................................... * 3.16 -- Articles Supplementary to Declaration of Trust of Vornado Realty Trust with respect to the Series D-7 Preferred Shares, dated May 25, 2000, as filed with the State Department of Assessments and Taxation of Maryland on June 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000.................................................................................. * 3.17 -- Articles Supplementary to Declaration of Trust of Vornado Realty Trust with respect to the Series D-8 Preferred Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000..... * 3.18 -- Amended and Restated Bylaws of Vornado, as amended on March 2, 2000 - Incorporated by reference to Exhibit 3.12 of Vornado's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000.................................................... * 3.19 -- Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of October 20, 1997 - Incorporated by reference to Exhibit 3.4 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-11954) filed on March 31, 1998 (the "1997 10-K")............................................................................... * 3.20 -- Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of December 16, 1997--Incorporated by reference to Exhibit 3.5 of the 1997 10-K. * 3.21 -- Second Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of April 1, 1998 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998..... * - ---------------------------------- * Incorporated by reference Page 37 EXHIBIT NO. - ------- 3.22 -- Third Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating * Partnership, dated as of November 12, 1998 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998.............................................................................. * 3.23 -- Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of November 30, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 1, 1998 (File No. 001-11954), filed on February 9, 1999...................................................................... * 3.24 -- Exhibit A, dated as of December 22, 1998, to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999............................................................................... * 3.25 -- Fifth Amendment to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of March 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999.. * 3.26 -- Exhibit A to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of March 11, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999....................................................................................... * 3.27 -- Sixth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of March 17, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999................................................................................... * 3.28 -- Seventh Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999..... * 3.29 -- Eighth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999..... * 3.30 -- Ninth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999........................................................................................... * 3.31 -- Tenth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999........................................................................................... * - ---------------------------------- * Incorporated by reference Page 38 EXHIBIT NO. - ------- 3.32 -- Eleventh Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of November 24, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999.............................................................................. * 3.33 -- Twelfth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of May 1, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed on May 19, 2000...... * 3.34 -- Thirteenth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of May 25, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000.... * 3.35 -- Fourteenth Amendment to Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P., dated as of December 8, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000.............................................................................. * 4.1 -- Instruments defining the rights of security holders (see Exhibits 3.1 through 3.18 of this Quarterly Report on Form 10-Q)................................................................. 4.2 -- Indenture dated as of November 24, 1993 between Vornado Finance Corp. and Bankers Trust Company, as Trustee - Incorporated by reference to Vornado's current Report on Form 8-K dated November 24, 1993 (File No. 001-11954), filed December 1, 1993................................. * 4.3 -- Specimen certificate representing Vornado's Common Shares of Beneficial Interest, par value $0.04 per share - Incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Registration Statement on Form S-3 (File No. 33-62395), filed on October 26, 1995........................... * 4.4 -- Specimen certificate representing Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 4.2 of Vornado's Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997.................................................................................. * 4.5 -- Specimen certificate evidencing Vornado's Series B 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest - Incorporated by reference to Exhibit 4.2 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed on March 15, 1999............................ * 4.6 -- Specimen certificate evidencing Vornado's 8.5% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preferences $25.00 per share, no par value - Incorporated by reference to Exhibit 4.2 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed May 19, 1999................................................................. * 4.7 -- Indenture and Servicing Agreement, dated as of March 1, 2000, among Vornado, Lasalle Bank National Association, ABN Amro Bank N.V. and Midland Loan Services, Inc. - Incorporated by reference to Exhibit 10.48 of Vornado's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000.................................. *