vno3q2013.htm - Generated by SEC Publisher for SEC Filing  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)   

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended:   

September 30, 2013

 

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:

 

to

 

 

Commission File Number:

001-11954

 

 

VORNADO REALTY TRUST

(Exact name of registrant as specified in its charter)

 

Maryland

 

22-1657560

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

888 Seventh Avenue, New York, New York

 

10019

(Address of principal executive offices)

 

(Zip Code)

 

 

(212) 894-7000

(Registrant’s telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes No

 

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

 

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

 

x Large Accelerated Filer

 

o Accelerated Filer

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

 

o Smaller Reporting Company

 

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

 

As of September 30, 2013, 187,048,110 of the registrant’s common shares of beneficial interest are outstanding.

 


 

 

PART I.

Financial Information:

Page Number

Item 1.

Financial Statements:

Consolidated Balance Sheets (Unaudited) as of

September 30, 2013 and December 31, 2012

3

Consolidated Statements of Income (Unaudited) for the

Three and Nine Months Ended September 30, 2013 and 2012

4

Consolidated Statements of Comprehensive Income (Unaudited)

for the Three and Nine Months Ended September 30, 2013 and 2012

5

Consolidated Statements of Changes in Equity (Unaudited) for the

Nine Months Ended September 30, 2013 and 2012

6

Consolidated Statements of Cash Flows (Unaudited) for the

Nine Months Ended September 30, 2013 and 2012

8

Notes to Consolidated Financial Statements (Unaudited)

10

Report of Independent Registered Public Accounting Firm

40

Item 2.

Management's Discussion and Analysis of Financial Condition

and Results of Operations

41

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

84

Item 4.

Controls and Procedures

85

PART II.

Other Information:

Item 1.

Legal Proceedings

86

Item 1A.

Risk Factors

86

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

86

Item 3.

Defaults Upon Senior Securities

86

Item 4.

Mine Safety Disclosures

86

Item 5.

Other Information

86

Item 6.

Exhibits

86

SIGNATURES

87

EXHIBIT INDEX

88

2

 


 

 

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

 

VORNADO REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

September 30,

December 31,

ASSETS

2013 

2012 

Real estate, at cost:

Land

$

4,170,656 

$

4,791,049 

Buildings and improvements

12,387,153 

12,445,970 

Development costs and construction in progress

1,077,703 

920,349 

Leasehold improvements and equipment

129,425 

130,030 

Total

17,764,937 

18,287,398 

Less accumulated depreciation and amortization

(3,334,920)

(3,078,667)

Real estate, net

14,430,017 

15,208,731 

Cash and cash equivalents

872,323 

960,319 

Restricted cash

320,979 

183,256 

Marketable securities

210,554 

398,188 

Tenant and other receivables, net of allowance for doubtful accounts of $22,105 and $37,674

131,479 

195,718 

Investments in partially owned entities

1,169,728 

1,226,256 

Investment in Toys "R" Us

378,615 

478,041 

Real Estate Fund investments

635,990 

600,786 

Mortgage and mezzanine loans receivable

176,388 

225,359 

Receivable arising from the straight-lining of rents, net of allowance of $5,106 and $3,165

804,526 

759,742 

Deferred leasing and financing costs, net of accumulated amortization of $261,548 and $223,670

400,970 

407,126 

Identified intangible assets, net of accumulated amortization of $297,391 and $346,613

275,250 

406,309 

Assets related to discontinued operations

27,413 

634,139 

Other assets

441,089 

381,079 

$

20,275,321 

$

22,065,049 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

Mortgages payable

$

8,566,582 

$

8,644,200 

Senior unsecured notes

1,350,769 

1,358,008 

Revolving credit facility debt

83,982 

1,170,000 

Accounts payable and accrued expenses

442,623 

484,746 

Deferred revenue

472,805 

596,067 

Deferred compensation plan

111,752 

105,200 

Deferred tax liabilities

15,420 

15,305 

Liabilities related to discontinued operations

-   

442,293 

Other liabilities

452,456 

400,934 

Total liabilities

11,496,389 

13,216,753 

Commitments and contingencies

Redeemable noncontrolling interests:

Class A units - 11,302,612 and 11,215,682 units outstanding

950,098 

898,152 

Series D cumulative redeemable preferred units - 1 and 1,800,001 units outstanding

1,000 

46,000 

Total redeemable noncontrolling interests

951,098 

944,152 

Vornado shareholders' equity:

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

shares; issued and outstanding 52,682,807 and 51,184,609 shares

1,277,455 

1,240,278 

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

250,000,000 shares; issued and outstanding 187,048,110 and 186,734,711 shares

7,440 

7,440 

Additional capital

7,183,660 

7,195,438 

Earnings less than distributions

(1,527,663)

(1,573,275)

Accumulated other comprehensive income (loss)

83,327 

(18,946)

Total Vornado shareholders' equity

7,024,219 

6,850,935 

Noncontrolling interests in consolidated subsidiaries

803,615 

1,053,209 

Total equity

7,827,834 

7,904,144 

$

20,275,321 

$

22,065,049 

See notes to consolidated financial statements (unaudited).

3

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

For the Three

For the Nine

Months Ended September 30,

Months Ended September 30,

(Amounts in thousands, except per share amounts)

2013 

2012 

2013 

2012 

REVENUES:

Property rentals

$

532,691 

$

511,561 

$

1,609,442 

$

1,536,216 

Tenant expense reimbursements

84,638 

79,215 

236,580 

220,679 

Cleveland Medical Mart development project

4,893 

72,651 

34,026 

184,014 

Fee and other income

61,158 

39,625 

206,330 

105,889 

Total revenues

683,380 

703,052 

2,086,378 

2,046,798 

EXPENSES:

Operating

264,422 

261,512 

784,031 

749,213 

Depreciation and amortization

124,079 

122,241 

400,952 

381,270 

General and administrative

48,250 

48,456 

157,155 

150,578 

Cleveland Medical Mart development project

3,239 

70,431 

29,764 

177,127 

Acquisition related costs

2,818 

1,070 

6,769 

4,314 

Total expenses

442,808 

503,710 

1,378,671 

1,462,502 

Operating income

240,572 

199,342 

707,707 

584,296 

(Loss) income applicable to Toys "R" Us

(34,209)

(8,585)

(69,311)

88,696 

Income from partially owned entities

1,453 

21,268 

23,691 

53,491 

Income from Real Estate Fund

22,913 

5,509 

73,947 

37,572 

Interest and other investment (loss) income, net

(10,275)

10,523 

(32,933)

(22,984)

Interest and debt expense

(119,870)

(119,330)

(363,128)

(373,257)

Net gain (loss) on disposition of wholly owned and

partially owned assets

15,138 

(20,581)

4,856 

Income before income taxes

115,722 

108,727 

319,392 

372,670 

Income tax expense

(2,222)

(3,015)

(6,172)

(17,319)

Income from continuing operations

113,500 

105,712 

313,220 

355,351 

Income from discontinued operations

18,751 

158,444 

290,279 

247,297 

Net income

132,251 

264,156 

603,499 

602,648 

Less net income attributable to noncontrolling interests in:

Consolidated subsidiaries

(23,833)

(6,610)

(50,049)

(30,928)

Operating Partnership

(5,032)

(14,837)

(27,814)

(31,445)

Preferred unit distributions of the Operating Partnership

(12)

(1,403)

(1,146)

(9,150)

Net income attributable to Vornado

103,374 

241,306 

524,490 

531,125 

Preferred share dividends

(20,369)

(20,613)

(62,439)

(56,187)

Preferred unit and share redemptions

11,700 

(1,130)

11,700 

NET INCOME attributable to common shareholders

$

83,005 

$

232,393 

$

460,921 

$

486,638 

INCOME PER COMMON SHARE - BASIC:

Income from continuing operations, net

$

0.36 

$

0.45 

$

1.02 

$

1.36 

Income from discontinued operations, net

0.08 

0.80 

1.45 

1.26 

Net income per common share

$

0.44 

$

1.25 

$

2.47 

$

2.62 

Weighted average shares outstanding

186,969 

185,924 

186,885 

185,656 

INCOME PER COMMON SHARE - DILUTED:

Income from continuing operations, net

$

0.36 

$

0.44 

$

1.01 

$

1.36 

Income from discontinued operations, net

0.08 

0.80 

1.45 

1.25 

Net income per common share

$

0.44 

$

1.24 

$

2.46 

$

2.61 

Weighted average shares outstanding

187,724 

186,655 

187,679 

186,399 

DIVIDENDS PER COMMON SHARE

$

0.73 

$

0.69 

$

2.19 

$

2.07 

See notes to consolidated financial statements (unaudited).

4

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

For the Three

For the Nine

Months Ended September 30,

Months Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Net income

$

132,251 

$

264,156 

$

603,499 

$

602,648 

Other comprehensive income:

Change in unrealized net (loss) gain on

available-for-sale securities

(8,252)

18,358 

160,886 

(202,167)

Amounts reclassified from accumulated other comprehensive

income related to sale of available-for-sale securities

(42,404)

-   

(42,404)

-   

Pro rata share of other comprehensive loss of

nonconsolidated subsidiaries

(1,669)

(12,607)

(25,023)

(38,861)

Change in value of interest rate swap

(295)

(2,866)

14,265 

(8,868)

Other

(30)

531 

343 

Comprehensive income

79,632 

267,011 

711,754 

353,095 

Less comprehensive income attributable to noncontrolling interests

(25,825)

(23,027)

(84,991)

(55,806)

Comprehensive income attributable to Vornado

$

53,807 

$

243,984 

$

626,763 

$

297,289 

See notes to consolidated financial statements (unaudited).

5

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

Non-

Accumulated

controlling

(Amounts in thousands)

Earnings

Other

Interests in

Preferred Shares

Common Shares

Additional

Less Than

Comprehensive

Consolidated

Total

Shares

Amount

Shares

Amount

Capital

Distributions

Income (Loss)

Subsidiaries

Equity

Balance, December 31, 2011

42,187 

$

1,021,660 

185,080 

$

7,373 

$

7,127,258 

$

(1,401,704)

$

73,729 

$

680,131 

$

7,508,447 

Net income

-   

-   

-   

-   

-   

531,125 

-   

30,928 

562,053 

Dividends on common shares

-   

-   

-   

-   

-   

(384,353)

-   

-   

(384,353)

Dividends on preferred shares

-   

-   

-   

-   

-   

(56,187)

-   

-   

(56,187)

Issuance of Series K preferred shares

12,000 

291,144 

-   

-   

-   

-   

-   

-   

291,144 

Redemption of Series E preferred

shares

(3,000)

(75,000)

-   

-   

-   

-   

-   

-   

(75,000)

Common shares issued:

Upon redemption of Class A

units, at redemption value

-   

-   

624 

25 

51,191 

-   

-   

-   

51,216 

Under employees' share

option plan

-   

-   

414 

16 

8,915 

(16,389)

-   

-   

(7,458)

Under dividend reinvestment plan

-   

-   

15 

1,269 

-   

-   

-   

1,270 

Contributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

120,606 

120,606 

Other

-   

-   

-   

-   

-   

-   

-   

140 

140 

Distributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

(44,910)

(44,910)

Other

-   

-   

-   

-   

-   

-   

-   

(10)

(10)

Conversion of Series A preferred

shares to common shares

(2)

(105)

-   

105 

-   

-   

-   

-   

Deferred compensation shares

and options

-   

-   

-   

11,009 

(339)

-   

-   

10,670 

Change in unrealized net loss

on available-for-sale securities

-   

-   

-   

-   

-   

-   

(202,167)

-   

(202,167)

Pro rata share of other

comprehensive loss of

nonconsolidated subsidiaries

-   

-   

-   

-   

-   

-   

(38,861)

-   

(38,861)

Change in value of interest rate swap

-   

-   

-   

-   

-   

-   

(8,868)

-   

(8,868)

Adjustments to carry redeemable

Class A units at redemption value

-   

-   

-   

-   

(63,657)

-   

-   

-   

(63,657)

Redeemable noncontrolling interests'

share of above adjustments

-   

-   

-   

-   

-   

-   

15,717 

-   

15,717 

Preferred unit and share

redemptions

-   

-   

-   

-   

-   

11,700 

-   

-   

11,700 

Other

-   

-   

-   

-   

-   

(2,971)

343 

(10)

(2,638)

Balance, September 30, 2012

51,185 

$

1,237,699 

186,143 

$

7,415 

$

7,136,090 

$

(1,319,118)

$

(160,107)

$

786,875 

$

7,688,854 

See notes to consolidated financial statements (unaudited).

 

6

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - CONTINUED

(UNAUDITED)

Non-

Accumulated

controlling

(Amounts in thousands)

Earnings

Other

Interests in

Preferred Shares

Common Shares

Additional

Less Than

Comprehensive

Consolidated

Total

Shares

Amount

Shares

Amount

Capital

Distributions

Income (Loss)

Subsidiaries

Equity

Balance, December 31, 2012

51,185 

$

1,240,278 

186,735 

$

7,440 

$

7,195,438 

$

(1,573,275)

$

(18,946)

$

1,053,209 

$

7,904,144 

Net income

-   

-   

-   

-   

-   

524,490 

-   

50,049 

574,539 

Dividends on common shares

-   

-   

-   

-   

-   

(409,332)

-   

-   

(409,332)

Dividends on preferred shares

-   

-   

-   

-   

-   

(62,439)

-   

-   

(62,439)

Issuance of Series L preferred shares

12,000 

290,536 

-   

-   

-   

-   

-   

-   

290,536 

Redemption of Series F and Series H

preferred shares

(10,500)

(253,269)

-   

-   

-   

-   

-   

-   

(253,269)

Common shares issued:

Upon redemption of Class A

units, at redemption value

-   

-   

234 

19,618 

-   

-   

-   

19,627 

Under employees' share

option plan

-   

-   

66 

3,678 

-   

-   

-   

3,681 

Under dividend reinvestment plan

-   

-   

16 

-   

1,376 

-   

-   

-   

1,376 

Contributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

24,328 

24,328 

Other

-   

-   

-   

-   

-   

-   

-   

15,687 

15,687 

Distributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

(47,268)

(47,268)

Other

-   

-   

-   

-   

-   

-   

-   

(126,799)

(126,799)

Conversion of Series A preferred

shares to common shares

(2)

(90)

-   

90 

-   

-   

-   

-   

Deferred compensation shares

and options

-   

-   

(6)

(12)

7,194 

(305)

-   

-   

6,877 

Change in unrealized net gain on

available-for-sale securities

-   

-   

-   

-   

-   

-   

160,886 

-   

160,886 

Amounts reclassified related to sale

of available-for-sale securities

-   

-   

-   

-   

-   

-   

(42,404)

-   

(42,404)

Pro rata share of other

comprehensive loss of

nonconsolidated subsidiaries

-   

-   

-   

-   

-   

-   

(25,023)

-   

(25,023)

Change in value of interest rate swap

-   

-   

-   

-   

-   

-   

14,265 

-   

14,265 

Adjustments to carry redeemable

Class A units at redemption value

-   

-   

-   

-   

(43,709)

-   

-   

-   

(43,709)

Redeemable noncontrolling interests'

share of above adjustments

-   

-   

-   

-   

-   

-   

(5,982)

-   

(5,982)

Preferred unit and share

redemptions

-   

-   

-   

-   

-   

(1,130)

-   

-   

(1,130)

Deconsolidation of partially

owned entity

-   

-   

-   

-   

-   

-   

-   

(165,427)

(165,427)

Other

-   

-   

-   

-   

(25)

(5,672)

531 

(164)

(5,330)

Balance, September 30, 2013

52,683 

$

1,277,455 

187,048 

$

7,440 

$

7,183,660 

$

(1,527,663)

$

83,327 

$

803,615 

$

7,827,834 

See notes to consolidated financial statements (unaudited).

7

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the Nine Months Ended

September 30,

2013 

2012 

(Amounts in thousands)

Cash Flows from Operating Activities:

Net income

$

603,499 

$

602,648 

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

Depreciation and amortization (including amortization of deferred financing costs)

419,249 

419,007 

Net gains on sale of real estate

(286,990)

(203,801)

Other non-cash adjustments

60,957 

39,360 

Net unrealized gain on Real Estate Fund investments

(59,476)

(33,537)

Return of capital from Real Estate Fund investments

56,664 

61,052 

Straight-lining of rental income

(48,561)

(55,553)

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

45,620 

(142,187)

Amortization of below-market leases, net

(40,341)

(39,693)

Non-cash impairment loss on J.C. Penney common shares

39,487 

-   

Distributions of income from partially owned entities

34,350 

59,322 

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

33,487 

53,343 

Net loss (gain) on disposition of wholly owned and partially owned assets

20,581 

(4,856)

Impairment losses

4,727 

13,511 

Gain on sale of Canadian Trade Shows

-   

(31,105)

Changes in operating assets and liabilities:

Real Estate Fund investments

(32,392)

(163,307)

Accounts receivable, net

63,280 

(9,444)

Prepaid assets

(60,388)

(52,895)

Other assets

(25,854)

(43,103)

Accounts payable and accrued expenses

(38,904)

34,546 

Other liabilities

597 

7,338 

Net cash provided by operating activities

789,592 

510,646 

Cash Flows from Investing Activities:

Proceeds from sales of real estate and related investments

734,427 

408,856 

Proceeds from sales of marketable securities

378,676 

58,460 

Distributions of capital from partially owned entities

287,944 

26,665 

Proceeds from the sale of LNR

240,474 

-   

Investments in partially owned entities

(212,624)

(116,264)

Funding of J.C. Penney derivative collateral; and settlement of derivative in 2013

(186,079)

(121,117)

Additions to real estate

(170,424)

(138,060)

Development costs and construction in progress

(149,010)

(106,502)

Return of J.C. Penney derivative collateral

101,150 

89,850 

Acquisitions of real estate and other

(75,079)

(73,069)

Proceeds from repayments of mortgage and mezzanine loans receivable and other

49,452 

2,379 

Restricted cash

21,883 

(62,813)

Investment in mortgage and mezzanine loans receivable

(390)

-   

Proceeds from the sale of Canadian Trade Shows

-   

52,504 

Proceeds from the repayment of loan to officer

-   

13,123 

Net cash provided by investing activities

1,020,400 

34,012 

See notes to consolidated financial statements (unaudited).

 

8

 


 
 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

For the Nine Months Ended

September 30,

2013 

2012 

(Amounts in thousands)

Cash Flows from Financing Activities:

Repayments of borrowings

$

(2,851,420)

$

(2,070,295)

Proceeds from borrowings

1,600,357 

1,773,000 

Dividends paid on common shares

(409,332)

(384,353)

Purchases of outstanding preferred units and shares

(299,400)

(243,300)

Proceeds from the issuance of preferred shares

290,536 

291,144 

Distributions to noncontrolling interests

(200,667)

(80,994)

Dividends paid on preferred shares

(62,820)

(54,034)

Contributions from noncontrolling interests

40,015 

120,746 

Debt issuance and other costs

(9,982)

(17,417)

Proceeds received from exercise of employee share options

5,057 

10,210 

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

tax withholdings

(332)

(30,034)

Net cash used in financing activities

(1,897,988)

(685,327)

Net decrease in cash and cash equivalents

(87,996)

(140,669)

Cash and cash equivalents at beginning of period

960,319 

606,553 

Cash and cash equivalents at end of period

$

872,323 

$

465,884 

Supplemental Disclosure of Cash Flow Information:

Cash payments for interest, excluding capitalized interest of $28,024 and $7,884

$

350,899 

$

368,018 

Cash payments for income taxes

$

7,529 

$

19,222 

Non-Cash Investing and Financing Activities:

Decrease in assets and liabilities resulting from the deconsolidation of Independence Plaza:

Real estate, net

$

(852,166)

$

-   

Notes and mortgages payable

(322,903)

-   

Financing provided to purchaser of L.A. Mart

-   

35,000 

Marriott Marquis Times Square - retail and signage capital lease:

Asset (included in development costs and construction in progress)

-   

240,000 

Liability (included in other liabilities)

-   

(240,000)

Like-kind exchange of real estate

(155,805)

(230,913)

See notes to consolidated financial statements (unaudited).

9

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.     Organization

 

Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”).  Vornado is the sole general partner of, and owned approximately 94.0% of the common limited partnership interest in the Operating Partnership at September 30, 2013.  All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.

 

 

2.    Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and its consolidated subsidiaries, including the Operating Partnership.  All intercompany amounts have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2012, as filed with the SEC.

 

We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full year.  Certain prior year balances have been reclassified in order to conform to current year presentation. 

 

 

3.    Recently Issued Accounting Literature

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2013-02”) to Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income (“Topic 220”).  ASU 2013-02 requires additional disclosures regarding significant reclassifications out of each component of accumulated other comprehensive income, including the effect on the respective line items of net income for amounts that are required to be reclassified into net income in their entirety and cross-references to other disclosures providing additional information for amounts that are not required to be reclassified into net income in their entirety.  The adoption of this update as of January 1, 2013, did not have a material impact on our consolidated financial statements, but resulted in additional disclosures (see Note 13 - Accumulated Other Comprehensive Income).  

 

In June 2013, the FASB issued an update (“ASU 2013-08”) to ASC Topic 946, Financial Services - Investment Companies (“Topic 946”).  ASU 2013-08 amends the guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures.  ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.  We are currently evaluating the impact, if any, of ASU 2013-08 on our real estate fund and our consolidated financial statements. 

10

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

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

 

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

 

At September 30, 2013, the Fund had nine investments with an aggregate fair value of $635,990,000, or $127,118,000 in excess of cost, and had remaining unfunded commitments of $239,186,000, of which our share was $59,796,000.  Below is a summary of income from the Fund for the three and nine months ended September 30, 2013 and 2012.

 

For the Three Months

For the Nine Months

 

(Amounts in thousands)

Ended September 30,

Ended September 30,

 

2013 

2012 

2013 

2012 

 

Net investment income (loss)

$

2,362 

$

(49)

$

6,287 

$

4,035 

 

Net realized gain

8,184 

8,184 

 

Net unrealized gains

12,367 

5,558 

59,476 

33,537 

 

Income from Real Estate Fund

22,913 

5,509 

73,947 

37,572 

 

Less (income) attributable to noncontrolling interests

(15,422)

(4,787)

(39,321)

(25,026)

 

Income from Real Estate Fund attributable to Vornado (1)

$

7,491 

$

722 

$

34,626 

$

12,546 

 

___________________________________

 
 

(1)

Excludes management, leasing and development fees of $770 and $954 for the three months ended September 30, 2013 and 2012, respectively, and $2,446 and $2,374 for the nine months ended September 30, 2013 and 2012, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

 
                           

 

 

5.    Mortgage and Mezzanine Loans Receivable

 

As of September 30, 2013 and December 31, 2012, the carrying amount of mortgage and mezzanine loans receivable was $176,388,000 and $225,359,000, respectively.  These loans have a weighted average interest rate of 10.8% and 10.3% at September 30, 2013 and December 31, 2012, respectively, and have maturities ranging from August 2014 to May 2016. 

 

On March 27, 2013, we transferred, at par, a 25% participation in a mortgage loan on 701 Seventh Avenue to a third party for $59,375,000 in cash.  We acquired this participation in October 2012, together with a 25% interest in a mezzanine loan on the property.  The transfer did not qualify for sale accounting given our continuing interest in the mezzanine loan.  Accordingly, we continue to include the 25% participation in the mortgage loan in “Mortgage and Mezzanine Loans Receivable” and have recorded a $59,375,000 liability in “Other Liabilities” on our consolidated balance sheet. 

 

On April 17, 2013, a $50,091,000 mezzanine loan that was scheduled to mature in August 2015, was repaid.  In connection therewith, we received net proceeds of $55,358,000, including prepayment penalties, which resulted in income of $5,267,000, included in “interest and other investment (loss) income” on our consolidated statement of income.

11

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

6.    Marketable Securities and Derivative Instruments

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

 

From the inception of our investment in Lexington in 2008, until the first quarter of 2013, we accounted for our investment under the equity method because of our ability to exercise significant influence over Lexington’s operating and financial policies.  As a result of Lexington’s common share issuances, our ownership interest has been reduced over time from approximately 17.2% to 8.8% at March 31, 2013.  In the first quarter of 2013, we concluded that we no longer have the ability to exercise significant influence over Lexington’s operating and financial policies, and began accounting for this investment as a marketable equity security – available for sale, in accordance with ASC Topic 320, Investments – Debt and Equity Securities.   

 

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

 

At December 31, 2012, we owned 23,400,000 J.C. Penney common shares comprised of (i) 18,584,010 common shares at a GAAP cost of $19.71 per share, or $366,291,000 in the aggregate, and (ii) 4,815,990 common shares through a forward contract at a weighted average strike price of $29.34 per share, or $141,309,000 in the aggregate.

 

On March 4, 2013, we sold 10,000,000 J.C. Penney common shares at a price of $16.03 per share, or $160,300,000 in the aggregate, resulting in a net loss of $36,800,000, which is included in “net gain (loss) on disposition of wholly owned and partially owned assets” on our consolidated statements of income.  In addition, in the first quarter of 2013, we wrote down the remaining 8,584,010 J.C. Penney common shares we owned to fair value, based on J.C. Penney’s March 31, 2013 closing share price of $15.11 per share, and recorded a $39,487,000 impairment loss, which is included in “interest and other investment (loss) income, net” on our consolidated statements of income.

 

On September 19, 2013, we settled the forward contract and received 4,815,990 J.C. Penney common shares.  In connection therewith, we recognized a $20,012,000 loss from the mark-to-market of the derivative position through its settlement date, which is included in “interest and other investment (loss) income, net” on our consolidated statements of income.

 

On September 19, 2013, we also sold the remaining 13,400,000 J.C. Penney common shares in a block trade at a price of $13.00 per share, or $174,200,000 in the aggregate and recognized an $18,114,000 net loss, which is included in “net gain (loss) on disposition of wholly owned and partially owned assets” on our consolidated statements of income.

 

The aggregate economic net loss on our investment in J.C. Penney, from inception through disposition, was $256,156,000.

 

Other Investments

 

In the third quarter of 2013, we sold a marketable security for $44,176,000, resulting in a net gain of $31,741,000, which is included in “net gain (loss) on disposition of wholly owned and partially owned assets.”

 

Below is a summary of our marketable securities portfolio as of September 30, 2013 and December 31, 2012.

 

(Amounts in thousands)

As of September 30, 2013

As of December 31, 2012

GAAP

Unrealized

GAAP

Unrealized

Fair Value

Cost

Gain

Fair Value

Cost

Gain

Equity securities:

Lexington

$

207,407 

$

72,549 

$

134,858 

$

-   

$

-   

$

-   

J.C. Penney

-   

-   

-   

366,291 

366,291 

-   

Other

3,147 

91 

3,056 

31,897 

12,465 

19,432 

$

210,554 

$

72,640 

$

137,914 

$

398,188 

$

378,756 

$

19,432 

12

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities

 

 

Toys “R” Us (“Toys”)

 

As of September 30, 2013, we own 32.6% of Toys.  We account for our investment in Toys under the equity method and record our share of Toys’ net income or loss on a one-quarter lag basis because Toys’ fiscal year ends on the Saturday nearest January 31, and our fiscal year ends on December 31.  The business of Toys is highly seasonal.  Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income.

 

In the fourth quarter of 2012, we recorded a $40,000,000 non-cash impairment loss on our investment in Toys and disclosed, that if current facts don’t change, our share of Toys’ undistributed income, which in accordance with the equity method of accounting, would increase the carrying amount of our investment above fair value, would require an offsetting impairment loss.  

 

In the first quarter of 2013, we recognized our share of Toys’ fourth quarter net income of $78,542,000 and a corresponding non-cash impairment loss of the same amount.

 

As of September 30, 2013, the carrying amount of our investment in Toys is less than our share of Toys' equity by approximately $145,809,000.  This basis difference resulted primarily from the non-cash impairment losses we recognized in 2012 and 2013 aggregating $118,542,000.  We have allocated the basis difference to Toys' intangible assets (primarily trade names and trademarks).  The basis difference is not being amortized and will be recognized upon disposition of our investment. 

 

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

 

(Amounts in thousands)

Balance as of

Balance Sheet:

August 3, 2013

October 27, 2012

Assets

$

11,274,000 

$

12,953,000 

Liabilities

9,562,000 

11,190,000 

Noncontrolling interests

72,000 

44,000 

Toys “R” Us, Inc. equity

1,640,000 

1,719,000 

For the Three Months Ended

For the Nine Months Ended

Income Statement:

August 3, 2013

July 28, 2012

August 3, 2013

July 28, 2012

Total revenues

$

2,377,000 

$

2,552,000 

$

10,555,000 

$

11,089,000 

Net (loss) income attributable to Toys

(111,000)

(34,000)

11,000 

249,000 

 

13

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities – continued

 

 

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

 

As of September 30, 2013, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity.  We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.  As of September 30, 2013, we have a $44,032,000 receivable from Alexander’s for fees under these agreements.

 

As of September 30, 2013, the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s September 30, 2013 closing share price of $286.12, was $473,262,000, or $305,644,000 in excess of the carrying amount on our consolidated balance sheet.  As of September 30, 2013, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander’s by approximately $42,224,000.  The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets.  Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to real estate (land and buildings).  We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives.  This depreciation is not material to our share of equity in Alexander’s net income.  The basis difference related to the land will be recognized upon disposition of our investment.

 

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

 

(Amounts in thousands)

Balance as of

Balance Sheet:

September 30, 2013

December 31, 2012

Assets

$

1,471,000 

$

1,482,000 

Liabilities

1,141,000 

1,150,000 

Stockholders' equity

330,000 

332,000 

For the Three Months Ended

For the Nine Months Ended

Income Statement:

September 30, 2013

September 30, 2012

September 30, 2013

September 30, 2012

Total revenues

$

50,000 

$

49,000 

$

146,000 

$

143,000 

Net income attributable to Alexander’s

14,000 

19,000 

41,000 

57,000 

                             

 

 

LNR Property LLC (“LNR”)  

 

In the first quarter of 2013, we recognized our 26.2% share of LNR’s fourth quarter net income of $18,731,000, which increased the carrying amount of our investment to approximately $241,000,000.  On April 22, 2013, LNR was sold for $1.053 billion, and we received net proceeds of $241,000,000 for our interest. Pursuant to the sale agreement, we ceased receiving income as of January 1, 2013.

 

14

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities – continued

 

 

Independence Plaza

 

On December 21, 2012, we acquired a 58.75% economic interest in Independence Plaza, a three-building 1,328 unit residential complex in the Tribeca submarket of Manhattan (the “Property”).  We determined, at that time, that we were the primary beneficiary of the variable interest entity (“VIE”) that owned the Property.  Accordingly, we consolidated the operations of the Property from the date of acquisition.  Upon consolidation, our preliminary purchase price allocation was primarily to land ($309,848,000) and building ($527,578,000).  Based on a third party appraisal and additional information about facts and circumstances that existed at the acquisition date, which was obtained subsequent to the acquisition date, we finalized the purchase price allocation in the first quarter of 2013, and retroactively adjusted our December 31, 2012 consolidated balance sheet as follows:

  

(Amounts in thousands)

Land

$

602,662 

Building and improvements

252,844 

Acquired above-market leases (included in identified intangible assets)

13,115 

Acquired in-place leases (included in identified intangible assets)

67,879 

Other assets

7,374 

Acquired below-market leases (included in deferred revenue)

(99,074)

Purchase price

$

844,800 

 

On June 7, 2013, the existing $323,000,000 mortgage loan was refinanced with a $550,000,000 five-year, fixed-rate interest only mortgage loan bearing interest at 3.48%.  The net proceeds of $219,000,000, after repaying the existing loan and closing costs, were distributed to the partners, of which our share was $137,000,000.  Simultaneously with the refinancing, we sold an 8.65% economic interest in the Property to our partner for $41,000,000 in cash, which reduced our economic interest to 50.1%.  As a result of this transaction, we determined that we were no longer the primary beneficiary of the VIE.  Accordingly, we deconsolidated the operations of the Property on June 7, 2013 and began accounting for our investment under the equity method. 

 

 

650 Madison Avenue

 

On September 30, 2013, a joint venture, in which we have a 20.1% interest, acquired 650 Madison Avenue, a 27-story, 594,000 square foot Class A office and retail tower located on the full western blockfront of Madison Avenue between 59th and 60th Street, for $1.295 billion.  The property contains 523,000 square feet of office space and 71,000 square feet of retail space.  The purchase price was funded with cash and a new $800,000,000 seven-year 4.39% interest-only loan.  We account for our investment in the joint venture under the equity method.

   

15

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities – continued

 

Below is a schedule of our investments in partially owned entities as of September 30, 2013 and December 31, 2012.

 

Percentage

(Amounts in thousands)

Ownership at

Balance as of

Investments:

September 30, 2013

September 30, 2013

December 31, 2012

Toys

32.6%

$

378,615 

$

478,041 

Alexander’s

32.4%

$

167,618 

$

171,013 

Lexington(1)

n/a

-   

75,542 

LNR(2)

n/a

-   

224,724 

India real estate ventures

4.0%-36.5%

90,200 

95,516 

Partially owned office buildings:

280 Park Avenue

49.5%

229,152 

197,516 

650 Madison Avenue (see page 15 for details)

20.1%

121,775 

-   

Rosslyn Plaza

43.7%-50.4%

59,416 

62,627 

West 57th Street properties

50.0%

56,743 

57,033 

One Park Avenue

30.3%

56,064 

50,509 

666 Fifth Avenue Office Condominium

49.5%

40,047 

35,527 

330 Madison Avenue

25.0%

33,991 

30,277 

Warner Building

55.0%

13,387 

8,775 

Fairfax Square

20.0%

5,191 

5,368 

Other partially owned office buildings

Various

9,338 

9,315 

Other investments:

Independence Plaza (includes $26,266 attributable

to non-controlling interests)(3)

50.1%

164,488 

-   

Monmouth Mall

50.0%

6,876 

7,205 

Downtown Crossing, Boston(4)

n/a

-   

48,122 

Other investments(5)

Various

115,442 

147,187 

$

1,169,728 

$

1,226,256 

(1)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale (see page 12 for details).

(2)

On April 22, 2013, LNR was sold (see page 14 for details).

(3)

On June 7, 2013, we sold an 8.65% economic interest in the property (see page 15 for details).

(4)

On April 24, 2013, the joint venture sold the site in Downtown Crossing, Boston (see note 3 on page 17 for details).

(5)

Includes interests in 85 10th Avenue, Fashion Centre Mall, 50-70 West 93rd Street and others.

 

16

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities - continued

 

Below is a schedule of income recognized from investments in partially owned entities for the three and nine months ended September 30, 2013 and 2012.

Percentage

For the Three Months

For the Nine Months

(Amounts in thousands)

Ownership

Ended September 30,

Ended September 30,

Our Share of Net Income (Loss):

September 30, 2013

2013 

2012 

2013 

2012 

Toys:

Equity in net (loss) income before income taxes

32.6%

$

(58,746)

$

(22,074)

$

14,737 

$

99,649 

Income tax benefit (expense)

22,690 

11,118 

(10,959)

(17,982)

Equity in net (loss) income

(36,056)

(10,956)

3,778 

81,667 

Non-cash impairment loss (see page 13 for details)

-   

-   

(78,542)

-   

Management fees

1,847 

2,371 

5,453 

7,029 

$

(34,209)

$

(8,585)

$

(69,311)

$

88,696 

Alexander’s:

Equity in net income

32.4%

$

4,299 

$

7,137 

$

12,785 

$

19,210 

Management, leasing and development fees

1,676 

1,821 

5,017 

5,617 

5,975 

8,958 

17,802 

24,827 

Lexington(1)

n/a

-   

(323)

(979)

371 

LNR(2)

n/a

-   

16,600 

18,731 

39,319 

India real estate ventures

4.0%-36.5%

(1,449)

82 

(2,630)

(4,526)

Partially owned office buildings:

Warner Building

55.0%

(2,004)

(2,839)

(6,346)

(7,438)

280 Park Avenue

49.5%

(1,890)

(1,717)

(6,480)

(9,267)

666 Fifth Avenue Office Condominium

49.5%

1,858 

1,744 

5,776 

5,244 

330 Madison Avenue

25.0%

1,225 

1,224 

3,714 

2,036 

Rosslyn Plaza

43.7%-50.4%

(707)

(204)

(2,158)

99 

One Park Avenue

30.3%

680 

256 

1,054 

890 

1101 17th Street

55.0%

376 

591 

996 

1,920 

West 57th Street properties

50.0%

47 

167 

415 

732 

Fairfax Square

20.0%

(24)

(33)

(87)

(85)

Other partially owned office buildings

Various

477 

505 

1,530 

1,587 

38 

(306)

(1,586)

(4,282)

Other investments:

Independence Plaza (see page 15 for details)

50.1%

(2,081)

1,828 

(3,199)

5,243 

Monmouth Mall

50.0%

165 

347 

1,450 

1,007 

Downtown Crossing, Boston(3)

n/a

-   

(38)

(2,358)

(872)

Other investments(4)

Various

(1,195)

(5,880)

(3,540)

(7,596)

(3,111)

(3,743)

(7,647)

(2,218)

$

1,453 

$

21,268 

$

23,691 

$

53,491 

(1)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale (see page 12 for details).

(2)

On April 22, 2013, LNR was sold (see page 14 for details).

(3)

On April 24, 2013, the joint venture sold the site in Downtown Crossing, Boston, and we received approximately $45,000 for our 50% interest. In connection therewith, we recognized a $2,335 impairment loss in the first quarter.

(4)

Includes interests in 85 10th Avenue, Fashion Centre Mall, 50-70 West 93rd Street and others.

 

17

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities – continued

Below is a summary of the debt of our partially owned entities as of September 30, 2013 and December 31, 2012, none of which is recourse to us.

Percentage

Interest

100% of

Ownership at

Rate at

Partially Owned Entities’ Debt at

(Amounts in thousands)

September 30,

September 30,

September 30,

December 31,

2013 

Maturity

2013 

2013 

2012 

Toys:

Notes, loans and mortgages payable

32.6%

2014-2021

7.69%

$

5,253,323 

$

5,683,733 

Alexander's:

Mortgages payable

32.4%

2014-2018

3.84%

$

1,054,046 

$

1,065,916 

Lexington(1):

Mortgages payable

n/a

n/a

n/a

$

-   

$

1,994,179 

LNR(2):

Mortgages payable

n/a

n/a

n/a

$

-   

$

309,787 

Liabilities of consolidated CMBS and CDO trusts

n/a

n/a

-   

97,211,734 

$

-   

$

97,521,521 

Partially owned office buildings:

666 Fifth Avenue Office Condominium mortgage

payable

49.5%

02/19

6.76%

$

1,155,038 

$

1,109,700 

650 Madison Avenue mortgage payable

20.1%

10/20

4.39%

800,000 

-   

280 Park Avenue mortgage payable

49.5%

06/16

6.64%

738,582 

738,228 

Warner Building mortgage payable

55.0%

05/16

6.26%

292,700 

292,700 

One Park Avenue mortgage payable

30.3%

03/16

5.00%

250,000 

250,000 

330 Madison Avenue mortgage payable

25.0%

06/15

1.68%

150,000 

150,000 

Fairfax Square mortgage payable

20.0%

12/14

7.00%

69,452 

70,127 

1101 17th Street mortgage payable

55.0%

01/15

1.43%

31,000 

31,000 

Rosslyn Plaza mortgage payable

43.7%-50.4%

03/16

2.68%

23,785 

-   

West 57th Street properties mortgages payable

50.0%

07/23

3.50%

20,000 

20,434 

Other

Various

Various

6.36%

69,280 

69,704 

$

3,599,837 

$

2,731,893 

India Real Estate Ventures:

TCG Urban Infrastructure Holdings mortgages

payable

25.0%

2013-2022

13.63%

$

213,963 

$

236,579 

Other:

Independence Plaza (see page 15 for details)

50.1%

06/18

3.48%

550,000 

-   

Monmouth Mall mortgage payable

50.0%

09/15

5.44%

158,296 

159,896 

Other(3)

Various

Various

5.01%

972,135 

990,647 

$

1,680,431 

$

1,150,543 

(1)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale (see page 12 for details).

(2)

On April 22, 2013, LNR was sold (see page 14 for details).

(3)

Includes interests in Fashion Centre Mall, 50-70 West 93rd Street and others.

 

 

Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $4,032,534,000 and $29,443,128,000 at September 30, 2013 and December 31, 2012, respectively.  Excluding our pro rata share of LNR’s liabilities related to consolidated CMBS and CDO trusts, which were non-recourse to LNR and its equity holders, including us, our pro rata share of partially owned entities debt was $3,998,929,000 at December 31, 2012.

18

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

8.    Discontinued Operations

 

On January 24, 2013, we sold the Green Acres Mall located in Valley Stream, New York, for $500,000,000.  The sale resulted in net proceeds of $185,000,000, after repaying the existing loan and closing costs, and a net gain of $202,275,000. 

 

On April 15, 2013, we sold The Plant, a power strip shopping center in San Jose, California, for $203,000,000.  The sale resulted in net proceeds of $98,000,000, after repaying the existing loan and closing costs, and a net gain of $32,169,000.

 

On April 15, 2013, we sold a retail property in Philadelphia, which is a part of the Gallery at Market Street, for $60,000,000.  The sale resulted in net proceeds of $58,000,000, and a net gain of $33,058,000.

 

On September 23, 2013, we sold a retail property in Tampa, Florida for $45,000,000, of which our 75% share was $33,750,000.  Our share of the net proceeds after repaying the existing loan and closing costs were $20,810,000, and our share of the net gain was $8,728,000.

 

In addition to the above, during 2013, we sold 12 other non-core properties, in separate transactions, for an aggregate of $82,300,000, in cash, which resulted in a net gain aggregating $7,851,000.

 

We have reclassified the revenues and expenses of all of the properties discussed above, as well as certain other retail properties that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying financial statements.  The tables below set forth the assets and liabilities related to discontinued operations at September 30, 2013 and December 31, 2012 and their combined results of operations for the three and nine months ended September 30, 2013 and 2012.  

 

Assets Related to

Liabilities Related to

(Amounts in thousands)

Discontinued Operations as of

Discontinued Operations as of

September 30,

December 31,

September 30,

December 31,

2013 

2012 

2013 

2012 

Retail properties

$

20,428 

$

600,640 

$

$

442,293 

Other properties

6,985 

33,499 

Total

$

27,413 

$

634,139 

$

$

442,293 

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2013 

2012 

2013 

2012 

Total revenues

$

2,963 

$

35,576 

$

35,193 

$

144,274 

Total expenses

2,488 

27,877 

27,177 

106,924 

475 

7,699 

8,016 

37,350 

Net gains on sale of real estate (2013 includes $2,909

attributable to noncontrolling interests)

18,996 

131,088 

286,990 

203,801 

Gain on sale of Canadian Trade Shows, net of $11,448 of

income taxes

19,657 

19,657 

Impairment losses

(720)

(4,727)

(13,511)

Income from discontinued operations

$

18,751 

$

158,444 

$

290,279 

$

247,297 

19

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

9.    Identified Intangible Assets and Liabilities

 

 

The following summarizes our identified intangible assets (primarily acquired in-place and above-market leases) and liabilities (primarily acquired below-market leases) as of September 30, 2013 and December 31, 2012.

 

Balance as of

September 30,

December 31,

(Amounts in thousands)

2013 

2012 

Identified intangible assets:

Gross amount

$

572,641 

$

752,922 

Accumulated amortization

(297,391)

(346,613)

Net

$

275,250 

$

406,309 

Identified intangible liabilities (included in deferred revenue):

Gross amount

$

811,917 

$

902,525 

Accumulated amortization

(372,329)

(341,536)

Net

$

439,588 

$

560,989 

 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $11,820,000 and $13,256,000 for the three months ended September 30, 2013 and 2012, respectively, and $40,326,000 and $39,569,000 for the nine months ended September 30, 2013 and 2012, respectively.  Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2014 is as follows:

 

(Amounts in thousands)

2014 

$

41,069 

2015 

38,263 

2016 

36,321 

2017 

30,936 

2018 

29,171 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $11,257,000 and $11,415,000 for the three months ended September 30, 2013 and 2012, respectively, and $53,339,000 and $35,519,000 for the nine months ended September 30, 2013 and 2012, respectively.  Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years commencing January 1, 2014 is as follows:

 

(Amounts in thousands)

2014 

$

26,708 

2015 

21,543 

2016 

18,363 

2017 

15,203 

2018 

11,005 

 

We are a tenant under ground leases for certain properties.  Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $981,000 and $312,000 for the three months ended September 30, 2013 and 2012, respectively, and $3,704,000 and $894,000 for the nine months ended September 30, 2013 and 2012, respectively.  Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2014 is as follows:

 

(Amounts in thousands)

2014 

$

3,921 

2015 

3,921 

2016 

3,921 

2017 

3,921 

2018 

3,921 

20

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

10.    Debt

 

The following is a summary of our debt:

Interest

(Amounts in thousands)

Rate at

Balance at

September 30,

September 30,

December 31,

Mortgages payable:

Maturity (1)

2013 

2013 

2012 

Fixed rate:

New York:

1290 Avenue of the Americas (70% owned)

11/22

3.34%

$

950,000 

$

950,000 

Two Penn Plaza

03/18

5.13%

425,000 

425,000 

666 Fifth Avenue Retail Condominium(2)

03/23

3.61%

390,000 

-   

770 Broadway

03/16

5.65%

353,000 

353,000 

888 Seventh Avenue

01/16

5.71%

318,554 

318,554 

350 Park Avenue

01/17

3.75%

300,000 

300,000 

909 Third Avenue

04/15

5.64%

196,013 

199,198 

828-850 Madison Avenue Retail Condominium

06/18

5.29%

80,000 

80,000 

510 Fifth Avenue

01/16

5.60%

30,872 

31,253 

Washington, DC:

Skyline Properties(3)

02/17

5.74%

736,259 

704,957 

River House Apartments

04/15

5.43%

195,546 

195,546 

2101 L Street

08/24

3.97%

150,000 

150,000 

2121 Crystal Drive

03/23

5.51%

149,005 

150,000 

Bowen Building

06/16

6.14%

115,022 

115,022 

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

01/25

7.09%

103,794 

105,724 

West End 25

06/21

4.88%

101,671 

101,671 

Universal Buildings

04/14

6.56%

89,321 

93,226 

2011 Crystal Drive

08/17

7.30%

78,875 

79,624 

220 20th Street

02/18

4.61%

73,003 

73,939 

1550 and 1750 Crystal Drive

11/14

7.08%

71,841 

74,053 

2231 Crystal Drive

n/a

n/a

-   

41,298 

1225 Clark Street

n/a

n/a

-   

24,834 

Retail Properties:

Cross-collateralized mortgages on 40 strip shopping centers

09/20

4.25%

563,692 

573,180 

Bergen Town Center(4)

04/23

3.56%

300,000 

-   

Montehiedra Town Center(5)

07/16

6.04%

120,000 

120,000 

North Bergen (Tonnelle Avenue)

01/18

4.59%

75,000 

75,000 

Las Catalinas Mall

11/13

6.97%

52,822 

54,101 

Broadway Mall

n/a

n/a

-   

85,180 

Other

06/14-11/34

5.12%-7.30%

68,659 

86,641 

Other:

555 California Street (70% owned)

09/21

5.10%

600,000 

600,000 

Merchandise Mart

12/16

5.57%

550,000 

550,000 

Borgata Land

02/21

5.14%

59,518 

60,000 

Total fixed rate mortgages payable

4.91%

$

7,297,467 

$

6,771,001 

___________________

See notes on page 23.

 

21

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

10.    Debt - continued

Interest

(Amounts in thousands)

Rate at

Balance at

Spread over

September 30,

September 30,

December 31,

Mortgages payable:

Maturity (1)

LIBOR

2013 

2013 

2012 

Variable rate:

New York:

Eleven Penn Plaza

01/19

L+235 

2.53%

$

330,000 

$

330,000 

100 West 33rd Street - office and retail

03/17

L+250 

2.68%

325,000 

325,000 

4 Union Square South - retail

11/19

L+215 

2.33%

120,000 

120,000 

435 Seventh Avenue - retail

08/19

L+225 

2.43%

98,000 

98,000 

866 UN Plaza

05/16

L+125 

1.43%

44,978 

44,978 

Independence Plaza (see page 15 for details)

n/a

n/a

n/a

-   

334,225 

Washington, DC:

River House Apartments

04/18

n/a(6)

1.58%

64,000 

64,000 

2200 / 2300 Clarendon Boulevard

01/15

L+75 

0.93%

42,806 

47,353 

1730 M and 1150 17th Street

06/14

L+140 

1.58%

43,581 

43,581 

Retail:

Cross-collateralized mortgages on 40 strip

shopping centers (7)

09/20

L+136(7)

2.36%

60,000 

60,000 

Bergen Town Center(4)

n/a

n/a

n/a

-   

282,312 

Other

07/18

L+130 

1.48%

17,000 

-   

Other:

220 Central Park South

10/13

L+275 

2.93%

123,750 

123,750 

Total variable rate mortgages payable

2.39%

1,269,115 

1,873,199 

Total mortgages payable

4.54%

$

8,566,582 

$

8,644,200 

Senior unsecured notes:

Senior unsecured notes due 2015

04/15

4.25%

$

499,752 

$

499,627 

Senior unsecured notes due 2039 (8)

10/39

7.88%

452,500 

460,000 

Senior unsecured notes due 2022

01/22

5.00%

398,517 

398,381 

Total senior unsecured notes

5.69%

$

1,350,769 

$

1,358,008 

Unsecured revolving credit facilities:

$1.25 billion unsecured revolving credit facility

11/16

L+125 

-

$

-   

$

1,150,000 

$1.25 billion unsecured revolving credit facility

($33,068 and $22,807 reserved for outstanding

letters of credit) (9)

06/18

L+115 

1.33%

83,982 

20,000 

Total unsecured revolving credit facilities

1.33%

$

83,982 

$

1,170,000 

___________________________

See notes on the following page.

 

22

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

10.    Debt - continued

Notes to preceding tabular information (amounts in thousands):

(1)

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

(2)

On February 20, 2013, we completed a $390,000 financing of this property. The 10-year fixed-rate interest only loan bears interest at 3.61%. This property was previously unencumbered.

(3)

On October 31, 2013, we completed the restructuring of the $678,000 (face amount) 5.74% Skyline properties mortgage loan. The loan has been separated into two tranches; a senior $350,000 position and a junior $328,000 position. The maturity date has been extended from February 2017 to February 2022, with a one-year extension option. The effective interest rate is 2.965%. Capital we invest to re-lease the property will be senior to the $328,000 junior position.

(4)

On March 25, 2013, we completed a $300,000 financing of this property. The 10-year fixed-rate interest only loan bears interest at 3.56%. The property was previously encumbered by a $282,312 floating-rate loan.

(5)

On May 13, 2013, we notified the lender that due to tenants vacating, the property's operating cash flow will be insufficient to pay the debt service; accordingly, at our request, the mortgage loan was transferred to the special servicer. We are in discussions with the special servicer to restructure the terms of the loan; there can be no assurance as to the timing and ultimate resolution of these discussions.

(6)

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

(7)

LIBOR floor of 1.00%.

(8)

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

(9)

On March 28, 2013, we extended this revolving credit facility from June 2015 to June 2017, with two six-month extension options. The interest on the extended facility was reduced from LIBOR plus 135 basis points to LIBOR plus 115 basis points. In addition, the facility fee was reduced from 30 basis points to 20 basis points.

23

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

11.    Redeemable Noncontrolling Interests

 

Redeemable noncontrolling interests on our consolidated balance sheets are primarily comprised of Class A Operating Partnership units held by third parties.  Redeemable noncontrolling interests on our consolidated balance sheets are recorded at the greater of their carrying amount or redemption value at the end of each reporting period.  Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity.  Below is a table summarizing the activity of redeemable noncontrolling interests.

 

(Amounts in thousands)

Balance at December 31, 2011

$

1,160,677 

Net income

40,595 

Other comprehensive loss

(15,717)

Distributions

(34,138)

Redemption of Class A units for common shares, at redemption value

(51,216)

Adjustments to carry redeemable Class A units at redemption value

63,657 

Redemption of Series D-10 and D-14 redeemable units

(168,300)

Other, net

(59)

Balance at September 30, 2012

$

995,499 

Balance at December 31, 2012

$

944,152 

Net income

28,960 

Other comprehensive income

5,982 

Distributions

(25,827)

Redemption of Class A units for common shares, at redemption value

(19,627)

Adjustments to carry redeemable Class A units at redemption value

43,709 

Redemption of Series D-15 redeemable units

(36,900)

Other, net

10,649 

Balance at September 30, 2013

$

951,098 

 

As of September 30, 2013 and December 31, 2012, the aggregate redemption value of redeemable Class A units was $950,098,000 and $898,152,000, respectively. 

 

Redeemable noncontrolling interests exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares.  Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $55,097,000 and $55,011,000 as of September 30, 2013 and December 31, 2012, respectively. 

 

On May 9, 2013, we redeemed all of the outstanding 6.875% Series D-15 Cumulative Redeemable Preferred Units with an aggregate face amount of $45,000,000 for $36,900,000 in cash, plus accrued and unpaid distributions through the date of redemption.

 

12.    Shareholders’ Equity

 

On January 25, 2013, we sold 12,000,000 5.40% Series L Cumulative Redeemable Preferred Shares at a price of $25.00 per share in an underwritten public offering pursuant to an effective registration statement.  We retained aggregate net proceeds of $290,536,000, after underwriters’ discounts and issuance costs, and contributed the net proceeds to the Operating Partnership in exchange for 12,000,000 Series L Preferred Units (with economic terms that mirror those of the Series L Preferred Shares).  Dividends on the Series L Preferred Shares are cumulative and payable quarterly in arrears.  The Series L Preferred Shares are not convertible into, or exchangeable for, any of our properties or securities.  On or after five years from the date of issuance (or sooner under limited circumstances), we may redeem the Series L Preferred Shares at a redemption price of $25.00 per share, plus accrued and unpaid dividends through the date of redemption.  The Series L Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.

 

On February 19, 2013, we redeemed all of the outstanding 6.75% Series F Cumulative Redeemable Preferred Shares and 6.75% Series H Cumulative Redeemable Preferred Shares at par, for an aggregate of $262,500,000 in cash, plus accrued and unpaid dividends through the date of redemption.

24

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

13.    Accumulated Other Comprehensive Income

 

The following tables set forth the changes in accumulated other comprehensive income (loss) by component.

 

For the Three Months Ended September 30, 2013

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of June 30, 2013

$

132,894 

$

188,570 

$

(12,041)

$

(35,505)

$

(8,130)

OCI before reclassifications

(7,163)

(8,252)

(1,669)

(295)

3,053 

Amounts reclassified from AOCI

(42,404)

(42,404)

(1)

-   

-   

-   

Net current period OCI

(49,567)

(50,656)

(1,669)

(295)

3,053 

Balance as of September 30, 2013

$

83,327 

$

137,914 

$

(13,710)

$

(35,800)

$

(5,077)

(1)

Reclassified to "net gain (loss) on disposition of wholly owned and partially owned assets" on our consolidated statements of income.

For the Nine Months Ended September 30, 2013

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of December 31, 2012

$

(18,946)

$

19,432 

$

11,313 

$

(50,065)

$

374 

OCI before reclassifications

144,677 

160,886 

(25,023)

14,265 

(5,451)

Amounts reclassified from AOCI

(42,404)

(42,404)

(1)

-   

-   

-   

Net current period OCI

102,273 

118,482 

(25,023)

14,265 

(5,451)

Balance as of September 30, 2013

$

83,327 

$

137,914 

$

(13,710)

$

(35,800)

$

(5,077)

(1)

Reclassified to "net gain (loss) on disposition of wholly owned and partially owned assets" on our consolidated statements of income.

 

14.    Variable Interest Entities (“VIEs”)

 

Consolidated VIEs

 

The entity that owns Independence Plaza was a consolidated VIE at December 31, 2012.  On June 7, 2013, we sold a portion of our economic interest in this entity and determined that we are no longer its primary beneficiary.  Accordingly, we deconsolidated this VIE (see Note 7 – Investments in Partially Owned Entities).  The table below summarizes the assets and liabilities of the VIE at December 31, 2012.  The liabilities were secured only by the assets of the VIE, and were non-recourse to us.

 

As of September 30,

As of December 31,

(Amounts in thousands)

2013 

2012 

Total assets

$

-   

$

957,730 

Total liabilities

$

-   

$

443,894 

Noncontrolling interest

$

-   

$

193,933 

 

Unconsolidated VIEs

 

At September 30, 2013, we have unconsolidated VIEs comprised of our investments in the entities that own the Warner Building and Independence Plaza.  We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance.  We account for our investment in these entities under the equity method (see Note 7 – Investments in Partially Owned Entities).  As of September 30, 2013, the net carrying amount of our investment in these entities was $151,609,000, and at December 31, 2012, the carrying amount of our investment in the Warner Building was $8,775,000.  Our maximum exposure to loss in these entities, is limited to our investment.

25

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

15.    Fair Value Measurements

 

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

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Financial assets and liabilities that are measured at fair value in our consolidated financial statements consist of (i) marketable securities, (ii) Real Estate Fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) interest rate swaps and (v) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units).  The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at September 30, 2013 and December 31, 2012, respectively.

As of September 30, 2013

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

210,554 

$

210,554 

$

-   

$

-   

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

noncontrolling interests)

635,990 

-   

-   

635,990 

Deferred compensation plan assets (included in other assets)

111,752 

45,227 

-   

66,525 

Total assets

$

958,296 

$

255,781 

$

-   

$

702,515 

Mandatorily redeemable instruments (included in other liabilities)

$

55,097 

$

55,097 

$

-   

$

-   

Interest rate swap (included in other liabilities)

35,800 

-   

35,800 

-   

Total liabilities

$

90,897 

$

55,097 

$

35,800 

$

-   

As of December 31, 2012

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

398,188 

$

398,188 

$

-   

$

-   

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

noncontrolling interests)

600,786 

-   

-   

600,786 

Deferred compensation plan assets (included in other assets)

105,200 

42,569 

-   

62,631 

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

11,165 

-   

11,165 

-   

Total assets

$

1,115,339 

$

440,757 

$

11,165 

$

663,417 

Mandatorily redeemable instruments (included in other liabilities)

$

55,011 

$

55,011 

$

-   

$

-   

Interest rate swap (included in other liabilities)

50,065 

-   

50,065 

-   

Total liabilities

$

105,076 

$

55,011 

$

50,065 

$

-   

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

 

26

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

15.  Fair Value Measurements – continued

 

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued

 

Real Estate Fund Investments

 

At September 30, 2013, our Real Estate Fund had nine investments with an aggregate fair value of $635,990,000, or $127,118,000 in excess of cost.  These investments are classified as Level 3.  We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period.  The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 0.8 to 6.7 years.  Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit.  Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor.  Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods.  Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs. 

 

The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates.  These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments.  Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these Fund investments at September 30, 2013.

 

Weighted Average

(based on fair

Unobservable Quantitative Input

Range

value of investments)

Discount rates

12.0% to 17.5%

13.9%

Terminal capitalization rates

5.3% to 6.0%

5.7%

 

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

 

The table below summarizes the changes in the fair value of Fund investments that are classified as Level 3, for the three and nine months ended September 30, 2013 and 2012.

 

Real Estate Fund Investments

Real Estate Fund Investments

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Beginning balance

$

622,124 

$

388,455 

$

600,786 

$

346,650 

Purchases

7,406 

88,429 

38,299 

163,021 

Sales/Returns

(14,184)

-   

(70,848)

(61,052)

Net realized gain

8,184 

-   

8,184 

-   

Net unrealized gains

12,367 

5,558 

59,476 

33,537 

Other, net

93 

-   

93 

286 

Ending balance

$

635,990 

$

482,442 

$

635,990 

$

482,442 

 

27

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

15.    Fair Value Measurements – continued

 

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued

 

Deferred Compensation Plan Assets

 

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

 

The table below summarizes the changes in the fair value of Deferred Compensation Plan Assets that are classified as Level 3, for the three and nine months ended September 30, 2013 and 2012. 

 

Deferred Compensation Plan Assets

Deferred Compensation Plan Assets

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Beginning balance

$

66,502 

$

58,313 

$

62,631 

$

56,221 

Purchases

880 

1,650 

4,027 

5,416 

Sales

(873)

(276)

(5,318)

(4,287)

Realized and unrealized (loss) gain

(42)

1,080 

4,094 

3,349 

Other, net

58 

-   

1,091 

68 

Ending balance

$

66,525 

$

60,767 

$

66,525 

$

60,767 

                               

 

Fair Value Measurements on a Nonrecurring Basis

 

Assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consist primarily of our investment in Toys “R” Us and real estate assets that were written-down to estimated fair value at December 31, 2012.  The fair values of these assets were determined using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity.  Generally, we consider multiple valuation techniques when measuring fair values but in certain circumstances, a single valuation technique may be appropriate.  The tables below aggregate the fair values of these assets by their levels in the fair value hierarchy.

 

As of December 31, 2012

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Investment in Toys "R" Us

$

478,041 

$

-   

$

-   

$

478,041 

Real estate assets

189,529 

-   

-   

189,529 

Condominium units (included in other assets)

52,142 

-   

-   

52,142 

Total assets

$

719,712 

$

-   

$

-   

$

719,712 

 

28

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

15.    Fair Value Measurements – continued

 

Financial Assets and Liabilities not Measured at Fair Value

 

Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), mortgage and mezzanine loans receivable and our secured and unsecured debt.  Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist.  For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument.  The fair value of cash equivalents and borrowings under our revolving credit facility is classified as Level 1, and the fair value of our mortgage and mezzanine loans receivable is classified as Level 3.  The fair value of our secured and unsecured debt are classified as Level 2.  The table below summarizes the carrying amounts and fair value of these financial instruments as of September 30, 2013 and December 31, 2012.

 

As of September 30, 2013

As of December 31, 2012

Carrying

Fair

Carrying

Fair

       (Amounts in thousands)

Amount

Value

Amount

Value

Cash equivalents

$

380,248 

$

380,248 

$

543,000 

$

543,000 

Mortgage and mezzanine loans receivable

176,388 

176,098 

225,359 

221,446 

$

556,636 

$

556,346 

$

768,359 

$

764,446 

Debt:

Mortgages payable

$

8,566,582 

$

8,638,000 

$

8,644,200 

$

8,672,000 

Senior unsecured notes

1,350,769 

1,413,000 

1,358,008 

1,468,000 

Revolving credit facility debt

83,982 

83,982 

1,170,000 

1,170,000 

$

10,001,333 

$

10,134,982 

$

11,172,208 

$

11,310,000 

 

16.    Incentive Compensation

 

Our 2010 Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, restricted Operating Partnership units and out-performance plan rewards to certain of our employees and officers.  We account for all stock-based compensation in accordance ASC 718, Compensation – Stock Compensation.  Stock-based compensation expense was $9,201,000 and $7,774,000 in the three months ended September 30, 2013 and 2012, respectively and $25,796,000 and $22,821,000 in the nine months ended September 30, 2013 and 2012, respectively.

 

On March 15, 2013, our Compensation Committee (the “Committee”) approved the 2013 Outperformance Plan, a performance-based equity compensation plan and related form of award agreement (the “2013 OPP”).  Under the 2013 OPP, participants have the opportunity to earn compensation payable in the form of operating partnership units in the second and/or third year during a three-year performance measurement period, if and only if, we outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to relative total TSR.  Awards under our 2013 OPP may be earned if (i) we achieve a TSR greater than 14% over the two-year performance measurement period, or 21% over the three-year performance measurement period (the “Absolute Component”), and/or (ii) we achieve a TSR above that of the SNL US REIT Index (the “Index”) over a two-year or three-year performance measurement period (the “Relative Component”).  To the extent awards would be earned under the Absolute Component but we underperform the Index, such awards earned would be reduced (and potentially fully negated) based on the degree to which we underperform the Index.  In certain circumstances, in the event we outperform the Index but awards would not otherwise be fully earned under the Absolute Component, awards may be increased under the Relative Component.  To the extent awards would otherwise be earned under the Relative Component but we fail to achieve at least a 6% per annum absolute TSR, such awards earned under the Relative Component would be reduced based on our absolute TSR performance, with no awards being earned in the event our TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which we may outperform the Index.  If the designated performance objectives are achieved, OPP Units are also subject to time-based vesting requirements. Awards earned under the 2013 OPP vest 33% in year three, 33% in year four and 34% in year five. Dividends on awards earned accrue during the performance measurement period. In addition, our executive officers (for the purposes of Section 16 of the Exchange Act) are required to hold earned OPP awards for one year following vesting. 

29

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

17.    Fee and Other Income

 

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

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2013 

2012 

2013 

2012 

BMS cleaning fees

$

15,898 

$

16,945 

$

49,071 

$

49,437 

Signage revenue

8,738 

4,783 

23,566 

14,252 

Management and leasing fees

7,982 

7,234 

19,675 

16,534 

Lease termination fees (1)

20,432 

282 

87,587 

1,172 

Other income

8,108 

10,381 

26,431 

24,494 

$

61,158 

$

39,625 

$

206,330 

$

105,889 

(1)

The three months ended September 30, 2013 includes a $19,500 termination fee from a tenant at 1290 Avenue of the Americas, of which our 70% share, net of a $1,529 write-off of the straight lining of rents, was $12,121, and the nine months ended September 30, 2013 also includes $59,599 of income pursuant to a settlement agreement with Stop & Shop, which terminates our right to receive $6,000 of additional annual rent under a 1992 agreement, for a period potentially through 2031.

 

Management and leasing fees include management fees from Interstate Properties, a related party, of $134,000 and $198,000 for the three months ended September 30, 2013 and 2012, respectively, and $467,000 and $588,000 for the nine months ended September 30, 2013 and 2012, respectively.  The above table excludes fee income from partially owned entities, which is typically included in “income from partially owned entities” (see Note 7 – Investments in Partially Owned Entities). 

 

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

 

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

 

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2013 

2012 

2013 

2012 

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

position

$

(20,012)

$

4,344 

$

(33,487)

$

(53,343)

Interest on mezzanine loans receivable

4,766 

2,852 

14,783 

8,867 

Dividends and interest on marketable securities

2,804 

-   

8,344 

11,093 

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

269 

1,116 

6,207 

5,267 

Non-cash impairment loss on J.C. Penney common shares

-   

-   

(39,487)

-   

Income from prepayment penalties in connection with the

repayment of a mezzanine loan

-   

-   

5,267 

-   

Other, net

1,898 

2,211 

5,440 

5,132 

$

(10,275)

$

10,523 

$

(32,933)

$

(22,984)

(1)

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

 

19.     Interest and Debt Expense

 

The following table sets forth the details of interest and debt expense:

 

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2013 

2012 

2013 

2012 

Interest expense

$

125,422 

$

121,230 

$

375,963 

$

364,223 

Amortization of deferred financing costs

4,980 

5,623 

15,189 

16,918 

Capitalized interest

(10,532)

(7,523)

(28,024)

(7,884)

$

119,870 

$

119,330 

$

363,128 

$

373,257 

30

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

20.    Income Per Share

 

 

The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options and restricted stock.

 

For the Three Months

For the Nine Months

(Amounts in thousands, except per share amounts)

Ended September 30,

Ended September 30,

2013 

2012 

2013 

2012 

Numerator:

Income from continuing operations, net of income attributable

to noncontrolling interests

$

88,486 

$

92,208 

$

253,567 

$

297,290 

Income from discontinued operations, net of income attributable

to noncontrolling interests

14,888 

149,098 

270,923 

233,835 

Net income attributable to Vornado

103,374 

241,306 

524,490 

531,125 

Preferred share dividends

(20,369)

(20,613)

(62,439)

(56,187)

Preferred unit and share redemptions

-   

11,700 

(1,130)

11,700 

Net income attributable to common shareholders

83,005 

232,393 

460,921 

486,638 

Earnings allocated to unvested participating securities

(24)

(71)

(97)

(149)

Numerator for basic income per share

82,981 

232,322 

460,824 

486,489 

Impact of assumed conversions:

Convertible preferred share dividends

-   

28 

54 

85 

Numerator for diluted income per share

$

82,981 

$

232,350 

$

460,878 

$

486,574 

Denominator:

Denominator for basic income per share – weighted average shares

186,969 

185,924 

186,885 

185,656 

Effect of dilutive securities(1):

Employee stock options and restricted share awards

755 

681 

746 

693 

Convertible preferred shares

-   

50 

48 

50 

Denominator for diluted income per share – weighted average

shares and assumed conversions

187,724 

186,655 

187,679 

186,399 

INCOME PER COMMON SHARE – BASIC:

Income from continuing operations, net

$

0.36 

$

0.45 

$

1.02 

$

1.36 

Income from discontinued operations, net

0.08 

0.80 

1.45 

1.26 

Net income per common share

$

0.44 

$

1.25 

$

2.47 

$

2.62 

INCOME PER COMMON SHARE – DILUTED:

Income from continuing operations, net

$

0.36 

$

0.44 

$

1.01 

$

1.36 

Income from discontinued operations, net

0.08 

0.80 

1.45 

1.25 

Net income per common share

$

0.44 

$

1.24 

$

2.46 

$

2.61 

(1)

The effect of dilutive securities in the three months ended September 30, 2013 and 2012 excludes an aggregate of 12,002 and 12,652 weighted average common share equivalents, respectively, and 11,890 and 15,048 weighted average common share equivalents in the nine months ended September 30, 2013 and 2012, respectively, as their effect was anti-dilutive.

31

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

21.    Commitments and Contingencies

 

 

Insurance 

 

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

 

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

 

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

 

Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.

 

 

Other Commitments and Contingencies

 

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

 

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

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of September 30, 2013, the aggregate dollar amount of these guarantees and master leases is approximately $367,000,000.

 

At September 30, 2013, $33,068,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

Two of our wholly owned subsidiaries that are contracted to develop and operate the Cleveland Medical Mart and Convention Center, in Cleveland, Ohio, are required to fund $11,500,000, primarily for tenant improvements, and they are responsible for operating expenses and are entitled to the net operating income, if any, upon the completion of development and the commencement of operations.  As of September 30, 2013, our subsidiaries have funded approximately $3,598,000 of the commitment.

 

As of September 30, 2013, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $155,000,000. 

32

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

22.  Subsequent Events

 

 

On October 1, 2013, we sold a parcel of land known as Harlem Park located at 1800 Park Avenue (at 125th Street) in New York City for $66,000,000. The sale resulted in net proceeds of approximately $63,000,000 and a net gain of approximately $23,000,000.

 

On October 4, 2013, we acquired a 92.5% interest in 655 Fifth Avenue, a 57,500 square foot retail and office property located at the northeast corner of Fifth Avenue and 52nd Street in Manhattan with 50 feet of frontage on Fifth Avenue, for $277,500,000 in cash. We consolidate the accounts of the property into our consolidated financial statements.

 

On October 15, 2013, we acquired, for $194,000,000, land and air rights for 137,000 zoning square feet thereby completing the assemblage for our 220 Central Park South site in Manhattan. 

33

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

23.    Segment Information

 

As a result of certain organizational changes and asset sales in 2012, the Merchandise Mart segment no longer meets the criteria to be a separate reportable segment; accordingly, effective January 1, 2013, the remaining assets have been reclassified to “Other.”  We have also reclassified the prior period segment financial results to conform to the current year presentation.  Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and nine months ended September 30, 2013 and 2012.  

(Amounts in thousands)

For the Three Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

505,062 

$

277,855 

$

113,737 

$

63,361 

$

-   

$

50,109 

Straight-line rent adjustments

15,809 

9,430 

234 

1,491 

-   

4,654 

Amortization of acquired below-market

leases, net

11,820 

7,151 

521 

2,894 

-   

1,254 

Total rentals

532,691 

294,436 

114,492 

67,746 

-   

56,017 

Tenant expense reimbursements

84,638 

47,142 

10,462 

21,670 

-   

5,364 

Cleveland Medical Mart development project

4,893 

-   

-   

-   

-   

4,893 

Fee and other income:

BMS cleaning fees

15,898 

21,191 

-   

-   

-   

(5,293)

Signage revenue

8,738 

8,738 

-   

-   

-   

-   

Management and leasing fees

7,982 

2,615 

5,263 

371 

-   

(267)

Lease termination fees

20,432 

19,496 

867 

-   

-   

69 

Other income

8,108 

581 

6,520 

656 

-   

351 

Total revenues

683,380 

394,199 

137,604 

90,443 

-   

61,134 

Operating expenses

264,422 

160,465 

49,646 

31,628 

-   

22,683 

Depreciation and amortization

124,079 

58,058 

31,109 

16,455 

-   

18,457 

General and administrative

48,250 

7,849 

6,857 

4,240 

-   

29,304 

Cleveland Medical Mart development project

3,239 

-   

-   

-   

-   

3,239 

Acquisition related costs

2,818 

-   

-   

-   

-   

2,818 

Total expenses

442,808 

226,372 

87,612 

52,323 

-   

76,501 

Operating income (loss)

240,572 

167,827 

49,992 

38,120 

-   

(15,367)

(Loss) applicable to Toys

(34,209)

-   

-   

-   

(34,209)

-   

Income (loss) from partially owned entities

1,453 

4,189 

(2,003)

188 

-   

(921)

Income from Real Estate Fund

22,913 

-   

-   

-   

-   

22,913 

Interest and other investment

(loss) income, net

(10,275)

1,468 

17 

-   

(11,761)

Interest and debt expense

(119,870)

(42,538)

(27,246)

(10,839)

-   

(39,247)

Net gain on disposition of wholly owned and

partially owned assets

15,138 

-   

-   

1,377 

-   

13,761 

Income (loss) before income taxes

115,722 

130,946 

20,760 

28,847 

(34,209)

(30,622)

Income tax expense

(2,222)

(65)

(766)

(731)

-   

(660)

Income (loss) from continuing operations

113,500 

130,881 

19,994 

28,116 

(34,209)

(31,282)

Income (loss) from discontinued operations

18,751 

-   

-   

19,012 

-   

(261)

Net income (loss)

132,251 

130,881 

19,994 

47,128 

(34,209)

(31,543)

Less net income attributable to

noncontrolling interests in:

Consolidated subsidiaries

(23,833)

(6,556)

-   

(2,970)

-   

(14,307)

Operating Partnership

(5,032)

-   

-   

-   

-   

(5,032)

Preferred unit distributions of the

Operating Partnership

(12)

-   

-   

-   

-   

(12)

Net income (loss) attributable to

Vornado

103,374 

124,325 

19,994 

44,158 

(34,209)

(50,894)

Interest and debt expense(2)

183,116 

59,344 

30,717 

12,119 

38,435 

42,501 

Depreciation and amortization(2)

172,756 

67,294 

35,403 

17,573 

32,176 

20,310 

Income tax (benefit) expense (2)

(20,292)

67 

828 

731 

(22,690)

772 

EBITDA(1)

$

438,954 

$

251,030 

(3)

$

86,942 

(4)

$

74,581 

(5)

$

13,712 

$

12,689 

(6)

See notes on page 38.

 

34

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

23.    Segment Information – continued

 

(Amounts in thousands)

For the Three Months Ended September 30, 2012

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

486,914 

$

255,703 

$

115,641 

$

63,408 

$

-   

$

52,162 

Straight-line rent adjustments

11,391 

8,140 

1,267 

1,873 

-   

111 

Amortization of acquired below-market

leases, net

13,256 

8,458 

506 

2,882 

-   

1,410 

Total rentals

511,561 

272,301 

117,414 

68,163 

-   

53,683 

Tenant expense reimbursements

79,215 

45,164 

9,601 

19,787 

-   

4,663 

Cleveland Medical Mart development project

72,651 

-   

-   

-   

-   

72,651 

Fee and other income:

BMS cleaning fees

16,945 

23,918 

-   

-   

-   

(6,973)

Signage revenue

4,783 

4,783 

-   

-   

-   

-   

Management and leasing fees

7,234 

1,816 

4,615 

736 

-   

67 

Lease termination fees

282 

78 

128 

73 

-   

Other income

10,381 

1,116 

8,288 

569 

-   

408 

Total revenues

703,052 

349,176 

140,046 

89,328 

-   

124,502 

Operating expenses

261,512 

159,048 

50,305 

30,726 

-   

21,433 

Depreciation and amortization

122,241 

57,967 

29,825 

16,359 

-   

18,090 

General and administrative

48,456 

6,739 

6,668 

6,103 

-   

28,946 

Cleveland Medical Mart development project

70,431 

-   

-   

-   

-   

70,431 

Acquisition related costs

1,070 

-   

-   

-   

-   

1,070 

Total expenses

503,710 

223,754 

86,798 

53,188 

-   

139,970 

Operating income (loss)

199,342 

125,422 

53,248 

36,140 

-   

(15,468)

(Loss) applicable to Toys

(8,585)

-   

-   

-   

(8,585)

-   

Income (loss) from partially owned entities

21,268 

9,309 

(2,182)

342 

-   

13,799 

Income from Real Estate Fund

5,509 

-   

-   

-   

-   

5,509 

Interest and other investment

income, net

10,523 

1,057 

24 

-   

9,438 

Interest and debt expense

(119,330)

(36,817)

(28,311)

(13,292)

-   

(40,910)

Income (loss) before income taxes

108,727 

98,971 

22,779 

23,194 

(8,585)

(27,632)

Income tax (expense) benefit

(3,015)

(815)

25 

-   

-   

(2,225)

Income (loss) from continuing operations

105,712 

98,156 

22,804 

23,194 

(8,585)

(29,857)

Income from discontinued operations

158,444 

-   

126,437 

11,370 

-   

20,637 

Net income (loss)

264,156 

98,156 

149,241 

34,564 

(8,585)

(9,220)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(6,610)

(2,092)

-   

97 

-   

(4,615)

Operating Partnership

(14,837)

-   

-   

-   

-   

(14,837)

Preferred unit distributions of the

Operating Partnership

(1,403)

-   

-   

-   

-   

(1,403)

Net income (loss) attributable to

Vornado

241,306 

96,064 

149,241 

34,661 

(8,585)

(30,075)

Interest and debt expense(2)

183,241 

46,823 

33,280 

17,499 

34,526 

51,113 

Depreciation and amortization(2)

177,593 

62,905 

35,071 

21,345 

33,160 

25,112 

Income tax expense (benefit)(2)

3,850 

871 

(25)

-   

(11,118)

14,122 

EBITDA(1)

$

605,990 

$

206,663 

(3)

$

217,567 

(4)

$

73,505 

(5)

$

47,983 

$

60,272 

(6)

See notes on page 38.

 

35

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

23.    Segment Information – continued

(Amounts in thousands)

For the Nine Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

1,521,127 

$

839,349 

$

338,742 

$

189,964 

$

-   

$

153,072 

Straight-line rent adjustments

47,989 

27,289 

4,242 

3,741 

-   

12,717 

Amortization of acquired below-market

leases, net

40,326 

26,184 

1,543 

8,669 

-   

3,930 

Total rentals

1,609,442 

892,822 

344,527 

202,374 

-   

169,719 

Tenant expense reimbursements

236,580 

128,598 

31,264 

63,601 

-   

13,117 

Cleveland Medical Mart development project

34,026 

-   

-   

-   

-   

34,026 

Fee and other income:

BMS cleaning fees

49,071 

63,192 

-   

-   

-   

(14,121)

Signage revenue

23,566 

23,566 

-   

-   

-   

-   

Management and leasing fees

19,675 

7,533 

11,529 

1,170 

-   

(557)

Lease termination fees

87,587 

24,986 

1,417 

59,797 

-   

1,387 

Other income

26,431 

4,550 

17,915 

1,448 

-   

2,518 

Total revenues

2,086,378 

1,145,247 

406,652 

328,390 

-   

206,089 

Operating expenses

784,031 

478,318 

145,258 

98,374 

-   

62,081 

Depreciation and amortization

400,952 

203,679 

92,678 

47,935 

-   

56,660 

General and administrative

157,155 

25,552 

20,655 

14,824 

-   

96,124 

Cleveland Medical Mart development project

29,764 

-   

-   

-   

-   

29,764 

Acquisition related costs

6,769 

-   

-   

-   

-   

6,769 

Total expenses

1,378,671 

707,549 

258,591 

161,133 

-   

251,398 

Operating income (loss)

707,707 

437,698 

148,061 

167,257 

-   

(45,309)

(Loss) applicable to Toys

(69,311)

-   

-   

-   

(69,311)

-   

Income (loss) from partially owned entities

23,691 

14,020 

(6,545)

1,512 

-   

14,704 

Income from Real Estate Fund

73,947 

-   

-   

-   

-   

73,947 

Interest and other investment (loss)

income, net

(32,933)

4,076 

99 

-   

(37,113)

Interest and debt expense

(363,128)

(125,991)

(83,350)

(34,523)

-   

(119,264)

Net (loss) gain on disposition of wholly

owned and partially owned assets

(20,581)

-   

-   

1,377 

-   

(21,958)

Income (loss) before income taxes

319,392 

329,803 

58,265 

135,628 

(69,311)

(134,993)

Income tax expense

(6,172)

(1,298)

(1,949)

(1,480)

-   

(1,445)

Income (loss) from continuing operations

313,220 

328,505 

56,316 

134,148 

(69,311)

(136,438)

Income from discontinued operations

290,279 

-   

-   

290,267 

-   

12 

Net income (loss)

603,499 

328,505 

56,316 

424,415 

(69,311)

(136,426)

Less net income attributable to

noncontrolling interests in:

Consolidated subsidiaries

(50,049)

(9,518)

-   

(3,079)

-   

(37,452)

Operating Partnership

(27,814)

-   

-   

-   

-   

(27,814)

Preferred unit distributions of the

Operating Partnership

(1,146)

-   

-   

-   

-   

(1,146)

Net income (loss) attributable to

Vornado

524,490 

318,987 

56,316 

421,336 

(69,311)

(202,838)

Interest and debt expense(2)

551,357 

163,579 

93,715 

40,057 

119,347 

134,659 

Depreciation and amortization(2)

549,072 

220,280 

105,799 

52,440 

103,732 

66,821 

Income tax expense(2)

18,101 

1,444 

2,134 

1,480 

10,959 

2,084 

EBITDA(1)

$

1,643,020 

$

704,290 

(3)

$

257,964 

(4)

$

515,313 

(5)

$

164,727 

$

726 

(6)

See notes on page 38.

 

36

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

23.    Segment Information – continued

(Amounts in thousands)

For the Nine Months Ended September 30, 2012

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

1,443,478 

$

735,587 

$

356,459 

$

190,671 

$

-   

$

160,761 

Straight-line rent adjustments

53,169 

42,334 

4,382 

5,265 

-   

1,188 

Amortization of acquired below-market

leases, net

39,569 

23,776 

1,537 

9,989 

-   

4,267 

Total rentals

1,536,216 

801,697 

362,378 

205,925 

-   

166,216 

Tenant expense reimbursements

220,679 

118,861 

30,471 

61,307 

-   

10,040 

Cleveland Medical Mart development project

184,014 

-   

-   

-   

-   

184,014 

Fee and other income:

BMS cleaning fees

49,437 

70,476 

-   

-   

-   

(21,039)

Signage revenue

14,252 

14,252 

-   

-   

-   

-   

Management and leasing fees

16,534 

4,037 

9,782 

2,640 

-   

75 

Lease termination fees

1,172 

334 

256 

74 

-   

508 

Other income

24,494 

3,449 

18,846 

1,232 

-   

967 

Total revenues

2,046,798 

1,013,106 

421,733 

271,178 

-   

340,781 

Operating expenses

749,213 

447,910 

143,923 

97,154 

-   

60,226 

Depreciation and amortization

381,270 

168,391 

107,395 

51,877 

-   

53,607 

General and administrative

150,578 

21,980 

19,849 

18,803 

-   

89,946 

Cleveland Medical Mart development project

177,127 

-   

-   

-   

-   

177,127 

Acquisition related costs

4,314 

-   

-   

-   

-   

4,314 

Total expenses

1,462,502 

638,281 

271,167 

167,834 

-   

385,220 

Operating income (loss)

584,296 

374,825 

150,566 

103,344 

-   

(44,439)

Income applicable to Toys

88,696 

-   

-   

-   

88,696 

-   

Income (loss) from partially owned entities

53,491 

20,345 

(4,571)

1,040 

-   

36,677 

Income from Real Estate Fund

37,572 

-   

-   

-   

-   

37,572 

Interest and other investment (loss)

income, net

(22,984)

3,166 

97 

24 

-   

(26,271)

Interest and debt expense

(373,257)

(109,365)

(85,408)

(45,362)

-   

(133,122)

Net gain on disposition of wholly owned and

partially owned assets

4,856 

-   

-   

-   

-   

4,856 

Income (loss) before income taxes

372,670 

288,971 

60,684 

59,046 

88,696 

(124,727)

Income tax expense

(17,319)

(2,480)

(1,277)

-   

-   

(13,562)

Income (loss) from continuing operations

355,351 

286,491 

59,407 

59,046 

88,696 

(138,289)

Income (loss) from discontinued operations

247,297 

(640)

130,979 

37,456 

-   

79,502 

Net income (loss)

602,648 

285,851 

190,386 

96,502 

88,696 

(58,787)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(30,928)

(7,266)

-   

308 

-   

(23,970)

Operating Partnership

(31,445)

-   

-   

-   

-   

(31,445)

Preferred unit distributions of the

Operating Partnership

(9,150)

-   

-   

-   

-   

(9,150)

Net income (loss) attributable to

Vornado

531,125 

278,585 

190,386 

96,810 

88,696 

(123,352)

Interest and debt expense(2)

567,265 

140,294 

99,486 

58,039 

103,388 

166,058 

Depreciation and amortization(2)

552,794 

188,480 

122,987 

65,751 

100,371 

75,205 

Income tax expense(2)

50,076 

2,677 

1,532 

-   

17,982 

27,885 

EBITDA(1)

$

1,701,260 

$

610,036 

(3)

$

414,391 

(4)

$

220,600 

(5)

$

310,437 

$

145,796 

(6)

See notes on the following page.

 

37

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

23.    Segment Information – continued

Notes to preceding tabular information:

(1)

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

(2)

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

(3)

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

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Office

$

172,367 

$

139,894 

$

476,849 

$

418,414 

Retail

59,782 

46,165 

177,394 

135,399 

Alexander's (decrease due to sale of Kings Plaza

in November 2012)

10,387 

13,080 

31,141 

39,477 

Hotel Pennsylvania

8,494 

7,524 

18,906 

16,746 

Total New York

$

251,030 

$

206,663 

$

704,290 

$

610,036 

(4)

The elements of "Washington, DC" EBITDA are summarized below.

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Office, excluding the Skyline Properties (a)

$

69,220 

$

197,009 

$

202,463 

$

350,296 

Skyline properties

6,841 

9,936 

22,546 

32,127 

Total Office

76,061 

206,945 

225,009 

382,423 

Residential

10,881 

10,622 

32,955 

31,968 

Total Washington, DC

$

86,942 

$

217,567 

$

257,964 

$

414,391 

(a)

The three and nine months ended September 30, 2012, includes a $126,621 net gain on sale of real estate.

(5)

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

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Strip shopping centers(a)

$

59,175 

$

49,378 

$

264,065 

$

148,554 

Regional malls(b)

15,406 

24,127 

251,248 

72,046 

Total Retail properties

$

74,581 

$

73,505 

$

515,313 

$

220,600 

(a)

The three and nine months ended September 30, 2013, includes $16,087 and $81,806, respectively, of net gains on sale of real estate and the nine months ended also includes $59,599 of income pursuant to a settlement agreement with Stop & Shop.

(b)

The nine months ended September 30, 2013, includes a $202,275 net gain on sale of the Green Acres Mall.

 

38

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

23.    Segment Information – continued

Notes to preceding tabular information - continued:

(6)

The elements of "other" EBITDA are summarized below.

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2013 

2012 

2013 

2012 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

1,997 

$

1,874 

$

1,746 

$

4,162 

Net unrealized gains

3,092 

1,389 

14,869 

8,384 

Net realized gain

2,046 

-   

2,046 

-   

Carried interest

356 

(2,541)

15,965 

-   

Total

7,491 

722 

34,626 

12,546 

Merchandise Mart Building, 7 West 34th Street and trade shows

15,006 

13,869 

52,167 

46,518 

555 California Street

10,720 

10,714 

32,371 

31,406 

India real estate ventures

695 

1,841 

4,708 

1,718 

LNR(a)

-   

18,773 

20,443 

46,006 

Lexington(b)

-   

7,859 

6,931 

24,780 

Other investments

5,330 

9,280 

14,207 

30,226 

39,242 

63,058 

165,453 

193,200 

Corporate general and administrative expenses(c)

(23,467)

(22,811)

(71,054)

(66,940)

Investment income and other, net(c)

11,108 

6,854 

39,153 

30,900 

Net gain on sale of marketable securities

31,741 

-   

31,741 

3,582 

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

derivative position

(20,012)

4,344 

(33,487)

(53,343)

Loss on sale of J.C. Penney common shares

(18,114)

-   

(54,914)

-   

Non-cash impairment loss on J.C. Penney common shares

-   

-   

(39,487)

-   

Acquisition related costs

(2,818)

(1,070)

(6,769)

(4,314)

Net gain on sale of residential condominiums

134 

-   

1,139 

1,274 

Merchandise Mart discontinued operations (including

net gains on sale of assets)

(81)

32,087 

2,065 

88,488 

Verde Realty impairment loss

-   

(4,936)

-   

(4,936)

Severance costs (primarily reduction in force at

the Merchandise Mart)

-   

(1,014)

(4,154)

(1,520)

Net income attributable to noncontrolling interests in

the Operating Partnership

(5,032)

(14,837)

(27,814)

(31,445)

Preferred unit distributions of the Operating Partnership

(12)

(1,403)

(1,146)

(9,150)

$

12,689 

$

60,272 

$

726 

$

145,796 

(a)

On April 22, 2013, LNR was sold (see page 14 for details).

(b)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale (see page 12 for details).

(c)

The amounts in these captions (for this table only) exclude income(expense) from the mark-to-market of our deferred compensation plan.

39

 


 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Shareholders and Board of Trustees

Vornado Realty Trust

New York, New York

 

We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of September 30, 2013, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012, and changes in equity and cash flows for the nine-month periods ended September 30, 2013 and 2012.  These interim financial statements are the responsibility of the Company’s management.

 

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

 

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

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2013, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP

 

Parsippany, New Jersey

November 4, 2013

40

 


 

  

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

 

 

Certain statements contained in this Quarterly Report constitute forward‑looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q.  Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three and nine months ended September 30, 2013.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full year.  Certain prior year balances have been reclassified in order to conform to current year presentation.

41

 


 

  

Overview

 

Business Objective and Operating Strategy

Our business objective is to maximize shareholder value, which we measure by the total return provided to our shareholders. Below is a table comparing our performance to the FTSE NAREIT Office REIT Index (“Office REIT”) and the Morgan Stanley REIT Index (“RMS”) for the following periods ended September 30, 2013.

 

Total Return(1)

Vornado

Office REIT

RMS

Three-month

2.3% 

(1.7%) 

(3.0%) 

Nine-month

7.7% 

4.9% 

3.2% 

One-year

8.8% 

5.0% 

5.8% 

Three-year

10.0% 

23.3% 

41.8% 

Five-year

15.2% 

14.5% 

33.0% 

Ten-year

170.1% 

102.7% 

147.1% 

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

 

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

 

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

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

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

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

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

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

 

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

 

We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.  See “Item 1A. Risk Factors” in our Annual Report on Form 10-K, for additional information regarding these factors.

 

42

 


 

  

Overview – continued

 

 

Quarter Ended September 30, 2013 Financial Results Summary

 

Net income attributable to common shareholders for the quarter ended September 30, 2013 was $83,005,000, or $0.44 per diluted share, compared to $232,393,000, or $1.24 per diluted share for the quarter ended September 30, 2012.  Net income for the quarters ended September 30, 2013 and 2012 include $16,087,000 and $132,244,000, respectively, of net gains on sale of real estate, and $2,546,000 of real estate impairment losses in the quarter ended September 30, 2013.  In addition, the quarters ended September 30, 2013 and 2012 include certain other items that affect comparability, which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the quarter ended September 30, 2013 by $24,585,000, or $0.13 per diluted share and increased net income attributable to common shareholders for the quarter ended September 30, 2012 by $163,257,000 or $0.87 per diluted share.

 

Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended September 30, 2013 was $210,627,000, or $1.12 per diluted share, compared to $251,019,000, or $1.34 per diluted share for the prior year’s quarter.  FFO for the quarters ended September 30, 2013 and 2012 include certain items that affect comparability, which are listed in the table below.  The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the quarter ended September 30, 2013 by $27,622,000, or $0.15 per diluted share, and increased FFO for the quarter ended September 30, 2012 by $58,779,000, or 0.31 per diluted share.

 

For the Three Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Items that affect comparability income (expense):

Net gain on sale of marketable securities

$

31,741 

$

-   

FFO from discontinued operations, including LNR and discontinued operations of

Alexander's

699 

32,454 

Toys "R" Us FFO

(22,343)

2,403 

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

(20,012)

4,344 

Loss on sale of J.C. Penney common shares

(18,114)

-   

Acquisition related costs

(2,818)

(1,070)

After-tax net gain on sale of Canadian Trade Shows

-   

19,657 

Other, net

1,511 

5,013 

(29,336)

62,801 

Noncontrolling interests' share of above adjustments

1,714 

(4,022)

Items that affect comparability, net

$

(27,622)

$

58,779 

 

 

The percentage increase (decrease) in GAAP basis and Cash basis same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended September 30, 2013 over the quarter ended September 30, 2012 and the trailing quarter ended June 30, 2013 are summarized below.

Same Store EBITDA:

New York

Washington, DC

Retail Properties

September 30, 2013 vs. September 30, 2012

GAAP basis

7.0

%

(1.8

%)

2.5

%

Cash basis

8.6

%

(2.1

%)

3.7

%

September 30, 2013 vs. June 30, 2013

GAAP basis

(0.9

%)

(1)

0.5

%

(0.7

%)

Cash basis

0.3

%

(1)

1.7

%

(0.2

%)

(1)

Excluding the Hotel Pennsylvania, same store EBITDA decreased by 0.3% on a GAAP basis and increased by 1.2% on a cash basis.

 

43

 


 

  

Overview – continued

 

 

Nine Months Ended September 30, 2013 Financial Results Summary

 

Net income attributable to common shareholders for the nine months ended September 30, 2013 was $460,921,000, or $2.46 per diluted share, compared to $486,638,000, or $2.61 per diluted share for the nine months ended September 30, 2012. Net income for the nine months ended September 30, 2013 and 2012 include $284,546,000 and $205,852,000, respectively, of net gains on sale of real estate, and $10,823,000 and $23,754,000, respectively, of real estate impairment losses.  In addition, the nine months ended September 30, 2013 and 2012 include certain items that affect comparability, which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the nine months ended September 30, 2013  by $172,832,000, or $0.92 per diluted share, and $300,868,000, or $1.61 per diluted share for the nine months ended September 30, 2012.

 

FFO for the nine months ended September 30, 2013 was $647,767,000, or $3.45 per diluted share, compared to $767,347,000, or $4.07 per diluted share for the nine months ended September 30, 2012.  FFO for the nine months ended September 30, 2013 and 2012 include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the nine months ended September 30, 2013 by $48,077,000, or $0.26 per diluted share, and increased FFO for the nine months ended September 30, 2012 by $188,576,000, or $1.00 per diluted share.

 

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Items that affect comparability income (expense):

Stop & Shop litigation settlement income

$

59,599 

$

-   

Net gain on sale of marketable securities

31,741 

3,582 

FFO from discontinued operations, including LNR and discontinued operations

of Alexander's

28,903 

103,921 

After-tax net gain on sale of Canadian Trade Shows

-   

19,657 

Loss on sale of J.C. Penney common shares

(54,914)

-   

Non-cash impairment loss on J.C. Penney common shares

(39,487)

-   

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

(33,487)

(53,343)

Toys "R" Us FFO (after a $78,542 impairment loss in 2013)

(30,747)

127,031 

Acquisition related costs

(6,769)

(4,314)

Preferred unit and share redemptions

(1,130)

11,700 

Other, net

(4,757)

(7,254)

(51,048)

200,980 

Noncontrolling interests' share of above adjustments

2,971 

(12,404)

Items that affect comparability, net

$

(48,077)

$

188,576 

 

The percentage increase (decrease) in GAAP basis and Cash basis same store EBITDA of our operating segments for the nine months ended September 30, 2013 over the nine months ended September 30, 2012 is summarized below.

 

Same Store EBITDA:

New York

Washington, DC

Retail Properties

September 30, 2013 vs. September 30, 2012

GAAP basis

5.3

%

(5.0

%)

2.6

%

Cash basis

8.6

%

(6.0

%)

3.1

%

                                 

 

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

 

44

 


 
 

  

Overview – continued

 

 

2013 Acquisitions and Investments

 

On September 30, 2013, a joint venture, in which we have a 20.1% interest, acquired 650 Madison Avenue, a 27-story, 594,000 square foot Class A office and retail tower located on the full western blockfront of Madison Avenue between 59th and 60th Street, for $1.295 billion.  The property contains 523,000 square feet of office space and 71,000 square feet of retail space.  The purchase price was funded with cash and a new $800,000,000 seven-year 4.39% interest-only loan.

 

On October 4, 2013, we acquired a 92.5% interest in 655 Fifth Avenue, a 57,500 square foot retail and office property located at the northeast corner of Fifth Avenue and 52nd Street in Manhattan with 50 feet of frontage on Fifth Avenue, for $277,500,000 in cash. 

 

On October 15, 2013, we acquired, for $194,000,000, land and air rights for 137,000 zoning square feet thereby completing the assemblage for our 220 Central Park South site in Manhattan.

 

 

2013 Dispositions

 

During 2013, we sold an aggregate of $1.230 billion in assets resulting in net proceeds of approximately $790,000,000 and net gains aggregating $307,000,000.  Below are the details of these sales.

 

On January 24, 2013, we sold the Green Acres Mall located in Valley Stream, New York, for $500,000,000.  The sale resulted in net proceeds of $185,000,000, after repaying the existing loan and closing costs, and a net gain of $202,275,000. 

 

On April 15, 2013, we sold The Plant, a power strip shopping center in San Jose, California, for $203,000,000.  The sale resulted in net proceeds of $98,000,000, after repaying the existing loan and closing costs, and a net gain of $32,169,000.

 

On April 15, 2013, we sold a retail property in Philadelphia, which is a part of the Gallery at Market Street, for $60,000,000.  The sale resulted in net proceeds of $58,000,000, and a net gain of $33,058,000.

 

On April 22, 2013, LNR was sold for $1.053 billion.  We owned 26.2% of LNR and received net proceeds of approximately $241,000,000.

 

On April 24, 2013, a site located in the Downtown Crossing district of Boston was sold by a joint venture, which we owned 50% of.  Our share of the net proceeds were approximately $45,000,000, which resulted in a $2,335,000 impairment loss that was recognized in the first quarter.

 

On September 23, 2013, we sold a retail property in Tampa, Florida for $45,000,000, of which our 75% share was $33,750,000.  Our share of the net proceeds after repaying the existing loan and closing costs were $20,810,000, and our share of the net gain was $8,728,000.

 

On October 1, 2013, we sold a parcel of land known as Harlem Park located at 1800 Park Avenue (at 125th Street) in New York City for $66,000,000.  The sale resulted in net proceeds of approximately $63,000,000 and a net gain of approximately $23,000,000. 

 

In addition to the above, during 2013, we sold 12 other non-core properties, in separate transactions, for an aggregate of $82,300,000, in cash, which resulted in a net gain aggregating $7,851,000.

 

 

45

 


 

  

Overview – continued

 

 

2013 Financings

 

Secured Debt

 

On February 20, 2013, we completed a $390,000,000 financing of the retail condominium located at 666 Fifth Avenue at 53rd Street, which we had acquired December 2012.  The 10-year fixed-rate interest only loan bears interest at 3.61%.  This property was previously unencumbered.  The net proceeds from this financing were approximately $387,000,000. 

 

On March 25, 2013, we completed a $300,000,000 financing of the Outlets at Bergen Town Center, a 948,000 square foot shopping center located in Paramus, New Jersey.  The 10-year fixed-rate interest only loan bears interest at 3.56%.  The property was previously encumbered by a $282,312,000 floating-rate loan. 

 

On June 7, 2013, we completed a $550,000,000 refinancing of Independence Plaza, a three-building 1,328 unit residential complex in the Tribeca submarket of Manhattan.  The five-year, fixed-rate interest only mortgage loan bears interest at 3.48%.  The property was previously encumbered by a $323,000,000 floating-rate loan.  The net proceeds of $219,000,000, after repaying the existing loan and closing costs, were distributed to the partners, of which our share was $137,000,000.   

 

 

Unsecured Revolving Credit Facility

 

On March 28, 2013, we extended one of our two revolving credit facilities from June 2015 to June 2017, with two six-month extension options. The interest on the extended facility was reduced from LIBOR plus 135 basis points to LIBOR plus 115 basis points. In addition, the facility fee was reduced from 30 basis points to 20 basis points.

 

 

Preferred Securities

 

On January 25, 2013, we sold 12,000,000 5.40% Series L Cumulative Redeemable Preferred Shares at a price of $25.00 per share in an underwritten public offering pursuant to an effective registration statement.  We retained aggregate net proceeds of $290,536,000, after underwriters’ discounts and issuance costs, and contributed the net proceeds to the Operating Partnership in exchange for 12,000,000 Series L Preferred Units (with economic terms that mirror those of the Series L Preferred Shares).

 

On February 19, 2013, we redeemed all of the outstanding 6.75% Series F Cumulative Redeemable Preferred Shares and 6.75% Series H Cumulative Redeemable Preferred Shares at par, for an aggregate of $262,500,000 in cash, plus accrued and unpaid dividends through the date of redemption.

 

On May 9, 2013, we redeemed all of the outstanding 6.875% Series D-15 Cumulative Redeemable Preferred Units with an aggregate face amount of $45,000,000 for $36,900,000 in cash, plus accrued and unpaid distributions through the date of redemption.

 

 

 

46

 


 

  

Overview – continued

 

 

Recently Issued Accounting Literature

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2013-02”) to Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income (“Topic 220”).  ASU 2013-02 requires additional disclosures regarding significant reclassifications out of each component of accumulated other comprehensive income, including the effect on the respective line items of net income for amounts that are required to be reclassified into net income in their entirety and cross-references to other disclosures providing additional information for amounts that are not required to be reclassified into net income in their entirety.  The adoption of this update as of January 1, 2013, did not have a material impact on our consolidated financial statements, but resulted in additional disclosures. 

 

In June 2013, the FASB issued an update (“ASU 2013-08”) to ASC Topic 946, Financial Services - Investment Companies (“Topic 946”).  ASU 2013-08 amends the guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures.  ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.  We are currently evaluating the impact, if any, of ASU 2013-08 on our real estate fund and our consolidated financial statements. 

 

 

Critical Accounting Policies

 

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2012 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2013.

47

 


 
 

  

Overview - continued

 

 

Leasing Activity:

 

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

 

 

New York

Washington, DC

Retail Properties

 

(Square feet in thousands)

Office

Retail

Office

Strips

Malls

 

 

Quarter Ended September 30, 2013

 

Total square feet leased

396 

35 

953 

 

288 

243 

 

Our share of square feet leased:

323 

35 

626 

288 

195 

 

Initial rent (1)

$

62.04 

$

270.81 

$

38.35 

$

18.07 

$

20.42 

 

Weighted average lease term (years)

6.7 

8.3 

9.3 

4.9 

10.6 

 

Second generation relet space:

 

Square feet

226 

22 

397 

134 

41 

 

Cash basis:

 

Initial rent (1)

$

60.01 

$

221.79 

$

42.02 

$

24.50 

$

12.60 

 

Prior escalated rent

$

55.12 

$

98.14 

$

42.47 

$

22.82 

$

12.16 

 

Percentage increase (decrease)

8.9% 

126.0% 

(1.1%) 

7.4% 

3.6% 

 

GAAP basis:

 

Straight-line rent (2)

$

58.45 

$

259.00 

$

42.73 

$

25.10 

$

12.93 

 

Prior straight-line rent

$

54.11 

$

77.15 

$

41.15 

$

22.07 

$

11.61 

 

Percentage increase

8.0% 

235.7% 

3.8% 

13.7% 

11.4% 

 

Tenant improvements and leasing

 

commissions:

 

Per square foot

$

56.11 

$

102.21 

$

34.76 

$

1.76 

$

37.02 

 

Per square foot per annum

$

8.38 

$

12.31 

$

3.74 

$

0.36 

$

3.49 

 

Percentage of initial rent

13.5% 

4.5% 

9.8% 

2.0% 

17.1% 

 

 

Nine Months Ended September 30, 2013:

 

Total square feet leased

1,851 

75 

1,525 

 

1,188 

537 

 

Our share of square feet leased:

1,599 

69 

1,116 

1,188 

465 

 

Initial rent (1)

$

61.13 

$

262.38 

$

39.87 

$

16.26 

$

26.74 

 

Weighted average lease term (years)

11.4 

8.0 

7.4 

5.8 

9.1 

 

Second generation relet space:

 

Square feet

1,419 

53 

731 

830 

117 

 

Cash basis:

 

Initial rent (1)

$

60.06 

$

243.40 

$

41.39 

$

16.22 

$

25.31 

 

Prior escalated rent

$

57.35 

$

100.98 

$

41.45 

$

14.91 

$

24.13 

 

Percentage increase (decrease)

4.7% 

141.0% 

(0.1%) 

8.8% 

4.9% 

 

GAAP basis:

 

Straight-line rent (2)

$

60.23 

$

275.86 

$

41.44 

$

16.55 

$

25.89 

 

Prior straight-line rent

$

52.77 

$

91.20 

$

39.88 

$

14.51 

$

23.43 

 

Percentage increase

14.1% 

202.5% 

3.9% 

14.1% 

10.5% 

 

Tenant improvements and leasing

 

commissions:

 

Per square foot

$

60.14 

$

114.50 

$

34.82 

$

3.51 

$

27.28 

 

Per square foot per annum:

$

5.31 

$

14.31 

$

4.71 

$

0.61 

$

3.00 

 

Percentage of initial rent

8.7% 

5.5% 

11.8% 

3.8% 

11.2% 

 

 

 

 

 

 

 

(1)

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

(2)

 

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

                                                                                 

 

48

 


 
 

  

Overview – continued

 

Square footage (in service) and Occupancy as of September 30, 2013:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

Properties

Portfolio

Share

Occupancy %

New York:

Office

32 

20,379 

16,957 

95.9%

Retail

52 

2,302 

2,087 

97.1%

Alexander's

2,179 

706 

99.4%

Hotel Pennsylvania

1,400 

1,400 

Residential - 1,655 units

1,523 

870 

94.0%

27,783 

22,020 

96.1%

Washington, DC:

Office, excluding the Skyline Properties

51 

13,584 

11,153 

85.4%

Skyline Properties

2,652 

2,652 

61.3%

Total Office

59 

16,236 

13,805 

80.7%

Residential - 2,414 units

2,597 

2,455 

97.2%

Other

418 

418 

100.0%

19,251 

16,678 

83.6%

Total occupancy, excluding the Skyline Properties

87.9%

Retail Properties:

Strip Shopping Centers

99 

14,306 

13,927 

94.3%

Regional Malls

5,250 

3,613 

94.0%

19,556 

17,540 

94.3%

Other:

Merchandise Mart

3,842 

3,833 

96.3%

555 California Street

1,796 

1,257 

93.8%

Primarily Warehouses

971 

971 

43.2%

6,609 

6,061 

Total square feet at September 30, 2013

73,199 

62,299 

 

49

 


 

  

Overview - continued

Square footage (in service) and Occupancy as of December 31, 2012:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

properties

Portfolio

Share

Occupancy %

New York:

Office

31 

19,729 

16,751 

95.9%

Retail

49 

2,217 

2,057 

96.8%

Alexander's

2,179 

706 

99.1%

Hotel Pennsylvania

1,400 

1,400 

Residential - 1,655 units

1,528 

873 

96.9%

27,053 

21,787 

96.2%

Washington, DC:

Office, excluding the Skyline Properties

51 

13,463 

10,994 

86.3%

Skyline Properties

2,643 

2,643 

60.0%

Total Office

59 

16,106 

13,637 

81.2%

Residential - 2,414 units

2,599 

2,457 

97.9%

Other

435 

435 

100.0%

19,140 

16,529 

84.1%

Total occupancy, excluding the Skyline Properties

88.8%

Retail Properties:

Strip Shopping Centers

100 

14,126 

13,748 

93.9%

Regional Malls

5,244 

3,608 

92.7%

19,370 

17,356 

93.7%

Other:

Merchandise Mart

3,905 

3,896 

94.6%

555 California Street

1,795 

1,257 

93.1%

Primarily Warehouses

971 

971 

55.9%

6,671 

6,124 

Total square feet at December 31, 2012

72,234 

61,796 

 

50

 


 
 

  

Overview - continued

 

 

Washington, DC Segment

 

For the nine months ended September 30, 2013, EBITDA from continuing operations was lower than the prior year’s nine months by approximately $17,720,000, which is above the range of EBITDA diminution of $5,000,000 to $15,000,000 that we had previously estimated for the full year.  We expect this EBITDA reduction to be partially offset by an increase in the fourth quarter and that EBITDA for the full year will be lower than the prior year by approximately $10,000,000 to $15,000,000.

 

Of the 2,395,000 square feet subject to the effects of the Base Realignment and Closure (“BRAC”) statute, 348,000 square feet has been taken out of service for redevelopment and 755,000 square feet has been leased or is pending.  The table below summarizes the status of the BRAC space as of September 30, 2013.

 

Rent Per

Square Feet

Square Foot

Total

Crystal City

Skyline

Rosslyn

Resolved:

Relet as of September 30, 2013

$

37.77 

716,000 

389,000 

263,000 

64,000 

Leases pending

45.09 

39,000 

39,000 

-   

-   

Taken out of service for redevelopment

348,000 

348,000 

-   

-   

1,103,000 

776,000 

263,000 

64,000 

To Be Resolved:

Vacated as of September 30, 2013

37.58 

930,000 

507,000 

341,000 

82,000 

Expiring in:

2014 

32.34 

292,000 

91,000 

201,000 

-   

2015 

43.13 

70,000 

65,000 

5,000 

-   

1,292,000 

663,000 

547,000 

82,000 

Total square feet subject to BRAC

2,395,000 

1,439,000 

810,000 

146,000 

 

On October 31, 2013, we completed the restructuring of the $678,000,000 (face amount) 5.74% Skyline properties mortgage loan.  The loan has been separated into two tranches; a senior $350,000,000 position and a junior $328,000,000 position.  The maturity date has been extended from February 2017 to February 2022, with a one-year extension option.  The effective interest rate is 2.965%.  Capital we invest to re-lease the property will be senior to the $328,000,000 junior position.    

51

 


 

  

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2013 and 2012

As a result of certain organizational changes and asset sales in 2012, the Merchandise Mart segment no longer meets the criteria to be a separate reportable segment; accordingly, effective January 1, 2013, the remaining assets have been reclassified to “Other.”  We have also reclassified the prior period segment financial results to conform to the current year presentation.  Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended September 30, 2013 and 2012.

(Amounts in thousands)

For the Three Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

505,062 

$

277,855 

$

113,737 

$

63,361 

$

-   

$

50,109 

Straight-line rent adjustments

15,809 

9,430 

234 

1,491 

-   

4,654 

Amortization of acquired below-market

leases, net

11,820 

7,151 

521 

2,894 

-   

1,254 

Total rentals

532,691 

294,436 

114,492 

67,746 

-   

56,017 

Tenant expense reimbursements

84,638 

47,142 

10,462 

21,670 

-   

5,364 

Cleveland Medical Mart development project

4,893 

-   

-   

-   

-   

4,893 

Fee and other income:

BMS cleaning fees

15,898 

21,191 

-   

-   

-   

(5,293)

Signage revenue

8,738 

8,738 

-   

-   

-   

-   

Management and leasing fees

7,982 

2,615 

5,263 

371 

-   

(267)

Lease termination fees

20,432 

19,496 

867 

-   

-   

69 

Other income

8,108 

581 

6,520 

656 

-   

351 

Total revenues

683,380 

394,199 

137,604 

90,443 

-   

61,134 

Operating expenses

264,422 

160,465 

49,646 

31,628 

-   

22,683 

Depreciation and amortization

124,079 

58,058 

31,109 

16,455 

-   

18,457 

General and administrative

48,250 

7,849 

6,857 

4,240 

-   

29,304 

Cleveland Medical Mart development project

3,239 

-   

-   

-   

-   

3,239 

Acquisition related costs

2,818 

-   

-   

-   

-   

2,818 

Total expenses

442,808 

226,372 

87,612 

52,323 

-   

76,501 

Operating income (loss)

240,572 

167,827 

49,992 

38,120 

-   

(15,367)

(Loss) applicable to Toys

(34,209)

-   

-   

-   

(34,209)

-   

Income (loss) from partially owned entities

1,453 

4,189 

(2,003)

188 

-   

(921)

Income from Real Estate Fund

22,913 

-   

-   

-   

-   

22,913 

Interest and other investment

(loss) income, net

(10,275)

1,468 

17 

-   

(11,761)

Interest and debt expense

(119,870)

(42,538)

(27,246)

(10,839)

-   

(39,247)

Net gain on disposition of wholly owned and

partially owned assets

15,138 

-   

-   

1,377 

-   

13,761 

Income (loss) before income taxes

115,722 

130,946 

20,760 

28,847 

(34,209)

(30,622)

Income tax expense

(2,222)

(65)

(766)

(731)

-   

(660)

Income (loss) from continuing operations

113,500 

130,881 

19,994 

28,116 

(34,209)

(31,282)

Income (loss) from discontinued operations

18,751 

-   

-   

19,012 

-   

(261)

Net income (loss)

132,251 

130,881 

19,994 

47,128 

(34,209)

(31,543)

Less net income attributable to

noncontrolling interests in:

Consolidated subsidiaries

(23,833)

(6,556)

-   

(2,970)

-   

(14,307)

Operating Partnership

(5,032)

-   

-   

-   

-   

(5,032)

Preferred unit distributions of the

Operating Partnership

(12)

-   

-   

-   

-   

(12)

Net income (loss) attributable to

Vornado

103,374 

124,325 

19,994 

44,158 

(34,209)

(50,894)

Interest and debt expense(2)

183,116 

59,344 

30,717 

12,119 

38,435 

42,501 

Depreciation and amortization(2)

172,756 

67,294 

35,403 

17,573 

32,176 

20,310 

Income tax (benefit) expense (2)

(20,292)

67 

828 

731 

(22,690)

772 

EBITDA(1)

$

438,954 

$

251,030 

(3)

$

86,942 

(4)

$

74,581 

(5)

$

13,712 

$

12,689 

(6)

_____________________________

See notes on page 54.

 

52

 


 

  

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2013 and 2012 - continued

(Amounts in thousands)

For the Three Months Ended September 30, 2012

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

486,914 

$

255,703 

$

115,641 

$

63,408 

$

-   

$

52,162 

Straight-line rent adjustments

11,391 

8,140 

1,267 

1,873 

-   

111 

Amortization of acquired below-market

leases, net

13,256 

8,458 

506 

2,882 

-   

1,410 

Total rentals

511,561 

272,301 

117,414 

68,163 

-   

53,683 

Tenant expense reimbursements

79,215 

45,164 

9,601 

19,787 

-   

4,663 

Cleveland Medical Mart development project

72,651 

-   

-   

-   

-   

72,651 

Fee and other income:

BMS cleaning fees

16,945 

23,918 

-   

-   

-   

(6,973)

Signage revenue

4,783 

4,783 

-   

-   

-   

-   

Management and leasing fees

7,234 

1,816 

4,615 

736 

-   

67 

Lease termination fees

282 

78 

128 

73 

-   

Other income

10,381 

1,116 

8,288 

569 

-   

408 

Total revenues

703,052 

349,176 

140,046 

89,328 

-   

124,502 

Operating expenses

261,512 

159,048 

50,305 

30,726 

-   

21,433 

Depreciation and amortization

122,241 

57,967 

29,825 

16,359 

-   

18,090 

General and administrative

48,456 

6,739 

6,668 

6,103 

-   

28,946 

Cleveland Medical Mart development project

70,431 

-   

-   

-   

-   

70,431 

Acquisition related costs

1,070 

-   

-   

-   

-   

1,070 

Total expenses

503,710 

223,754 

86,798 

53,188 

-   

139,970 

Operating income (loss)

199,342 

125,422 

53,248 

36,140 

-   

(15,468)

(Loss) applicable to Toys

(8,585)

-   

-   

-   

(8,585)

-   

Income (loss) from partially owned entities

21,268 

9,309 

(2,182)

342 

-   

13,799 

Income from Real Estate Fund

5,509 

-   

-   

-   

-   

5,509 

Interest and other investment

income, net

10,523 

1,057 

24 

-   

9,438 

Interest and debt expense

(119,330)

(36,817)

(28,311)

(13,292)

-   

(40,910)

Income (loss) before income taxes

108,727 

98,971 

22,779 

23,194 

(8,585)

(27,632)

Income tax (expense) benefit

(3,015)

(815)

25 

-   

-   

(2,225)

Income (loss) from continuing operations

105,712 

98,156 

22,804 

23,194 

(8,585)

(29,857)

Income from discontinued operations

158,444 

-   

126,437 

11,370 

-   

20,637 

Net income (loss)

264,156 

98,156 

149,241 

34,564 

(8,585)

(9,220)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(6,610)

(2,092)

-   

97 

-   

(4,615)

Operating Partnership

(14,837)

-   

-   

-   

-   

(14,837)

Preferred unit distributions of the

Operating Partnership

(1,403)

-   

-   

-   

-   

(1,403)

Net income (loss) attributable to

Vornado

241,306 

96,064 

149,241 

34,661 

(8,585)

(30,075)

Interest and debt expense(2)

183,241 

46,823 

33,280 

17,499 

34,526 

51,113 

Depreciation and amortization(2)

177,593 

62,905 

35,071 

21,345 

33,160 

25,112 

Income tax expense (benefit)(2)

3,850 

871 

(25)

-   

(11,118)

14,122 

EBITDA(1)

$

605,990 

$

206,663 

(3)

$

217,567 

(4)

$

73,505 

(5)

$

47,983 

$

60,272 

(6)

_____________________________

See notes on the following page.

 

53

 


 

  

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2013 and 2012 - continued

Notes to preceding tabular information:

(1)

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

(2)

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

(3)

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

For the Three Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Office

$

172,367 

$

139,894 

Retail

59,782 

46,165 

Alexander's (decrease due to sale of Kings Plaza in November 2012)

10,387 

13,080 

Hotel Pennsylvania

8,494 

7,524 

Total New York

$

251,030 

$

206,663 

(4)

The elements of "Washington, DC" EBITDA are summarized below.

For the Three Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Office, excluding the Skyline Properties (a)

$

69,220 

$

197,009 

Skyline properties

6,841 

9,936 

Total Office

76,061 

206,945 

Residential

10,881 

10,622 

Total Washington, DC

$

86,942 

$

217,567 

(a)

2012 includes EBITDA from discontinued operations, net gains on sale of real estate and other items that affect comparability, aggregating $128,745. Excluding these items, EBITDA was $68,264.

(5)

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

For the Three Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Strip shopping centers(a)

$

59,175 

$

49,378 

Regional malls(b)

15,406 

24,127 

Total Retail properties

$

74,581 

$

73,505 

(a)

The three months ended September 30, 2013 and 2012 includes EBITDA from discontinued operations, net gains on sale of real estate and other items that affect comparability, aggregating $17,756 and $12,161, respectively. Excluding these items, EBITDA was $41,419 and $37,217, respectively.

(b)

2012 includes EBITDA from discontinued operations, net gains on sale of real estate and other items that affect comparability, aggregating $8,329. Excluding these items, EBITDA was $15,798.

 

54

 


 

  

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2013 and 2012 - continued

Notes to preceding tabular information - continued:

(6)

The elements of "other" EBITDA are summarized below.

For the Three Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

1,997 

$

1,874 

Net unrealized gains

3,092 

1,389 

Net realized gain

2,046 

-   

Carried interest

356 

(2,541)

Total

7,491 

722 

Merchandise Mart Building, 7 West 34th Street and trade shows

15,006 

13,869 

555 California Street

10,720 

10,714 

India real estate ventures

695 

1,841 

LNR(a)

-   

18,773 

Lexington(b)

-   

7,859 

Other investments

5,330 

9,280 

39,242 

63,058 

Corporate general and administrative expenses(c)

(23,467)

(22,811)

Investment income and other, net(c)

11,108 

6,854 

Net gain on sale of marketable securities

31,741 

-   

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

(20,012)

4,344 

Loss on sale of J.C. Penney common shares

(18,114)

-   

Acquisition related costs

(2,818)

(1,070)

Net gain on sale of residential condominiums

134 

-   

Merchandise Mart discontinued operations

(81)

32,087 

Verde Realty impairment loss

-   

(4,936)

Severance costs (primarily reduction in force at the Merchandise Mart)

-   

(1,014)

Net income attributable to noncontrolling interests in the Operating Partnership

(5,032)

(14,837)

Preferred unit distributions of the Operating Partnership

(12)

(1,403)

$

12,689 

$

60,272 

(a)

On April 22, 2013, LNR was sold.

(b)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale.

(c)

The amounts in these captions (for this table only) exclude income(expense) from the mark-to-market of our deferred compensation plan.

 

EBITDA by Region

 

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

 

For the Three Months

Ended September 30,

2013 

2012 

Region:

New York City metropolitan area

74%

70%

Washington, DC / Northern Virginia metropolitan area

23%

26%

Puerto Rico

1%

2%

California

1%

1%

Other geographies

1%

1%

100%

100%

55

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012

 

 

Revenues

Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $683,380,000 in the three months ended September 30, 2013, compared to $703,052,000 in the prior year’s quarter, a decrease of $19,672,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Other

Property rentals:

Acquisitions and other

$

7,765 

$

11,162 

$

-   

$

(2,473)

$

(924)

Properties placed into / taken out of

service for redevelopment

527 

128 

64 

330 

Hotel Pennsylvania

2,941 

2,941 

-   

-   

-   

Trade Shows

(1,973)

-   

-   

-   

(1,973)

Same store operations

11,870 

7,904 

(2,986)

1,726 

5,226 

21,130 

22,135 

(2,922)

(417)

2,334 

Tenant expense reimbursements:

Acquisitions and other

(364)

175 

-   

(276)

(263)

Properties placed into / taken out of

service for redevelopment

296 

52 

184 

76 

(16)

Same store operations

5,491 

1,751 

677 

2,083 

980 

5,423 

1,978 

861 

1,883 

701 

Cleveland Medical Mart development

project

(67,758)

(1)

-   

-   

-   

(67,758)

(1)

Fee and other income:

BMS cleaning fees

(1,047)

(2,727)

-   

-   

1,680 

(2)

Signage revenue

3,955 

3,955 

-   

-   

-   

Management and leasing fees

748 

799 

648 

(365)

(334)

Lease termination fees

20,150 

19,418 

(3)

739 

(73)

66 

Other income

(2,273)

(535)

(1,768)

87 

(57)

21,533 

20,910 

(381)

(351)

1,355 

Total (decrease) increase in revenues

$

(19,672)

$

45,023 

$

(2,442)

$

1,115 

$

(63,368)

(1)

Primarily due to the project nearing completion. This decrease in revenue is offset by a decrease in development costs expensed in the period. See note (3) on page 57.

(2)

Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 57.

(3)

Primarily due to a $19,500 termination fee from a tenant at 1290 Avenue of the Americas. Our share of this income, net of the write off of the straight lining of rents and amounts attributable to the noncontrolling interest was $12,121.

 

56

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Expenses

Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $442,808,000 in the three months ended September 30, 2013, compared to $503,710,000 in the prior year’s quarter, a decrease of $60,902,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Other

Operating:

Acquisitions and other

$

2,197 

$

3,355 

$

-   

$

(507)

$

(651)

Properties placed into / taken out of

service for redevelopment

(1,159)

(93)

(111)

(938)

(17)

Non-reimbursable expenses, including

bad debt reserves

(3,292)

(2,316)

(48)

-   

(928)

Hotel Pennsylvania

1,919 

1,919 

-   

-   

-   

Trade Shows

(2,189)

-   

-   

-   

(2,189)

BMS expenses

(847)

(2,527)

-   

-   

1,680 

(2)

Same store operations

6,281 

1,079 

(500)

2,347 

3,355 

2,910 

1,417 

(659)

902 

1,250 

Depreciation and amortization:

Acquisitions and other

4,504 

5,114 

-   

(504)

(106)

Properties placed into / taken out of

service for redevelopment

415 

(268)

37 

646 

-   

Same store operations

(3,081)

(4,755)

1,247 

(46)

473 

1,838 

91 

1,284 

96 

367 

General and administrative:

Mark-to-market of deferred

compensation plan liability (1)

(847)

-   

-   

-   

(847)

Severance costs (primarily reduction

in force at the Merchandise Mart)

(1,014)

-   

-   

-   

(1,014)

Same store operations

1,655 

1,110 

189 

(1,863)

2,219 

(206)

1,110 

189 

(1,863)

358 

Cleveland Medical Mart development

project

(67,192)

(3)

-   

-   

-   

(67,192)

(3)

Acquisition related costs

1,748 

-   

-   

-   

1,748 

Total (decrease) increase in expenses

$

(60,902)

$

2,618 

$

814 

$

(865)

$

(63,469)

(1)

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

(2)

Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 56.

(3)

Primarily due to the project nearing completion. This decrease in expense is offset by the decrease in development revenue in the period. See note (1) on page 56.

 

57

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

(Loss) Income Applicable to Toys

 

In the three months ended September 30, 2013, we recognized a net loss of $34,209,000 from our investment in Toys, comprised of $36,056,000 for our 32.6% share of Toys’ net loss, partially offset by $1,847,000 of management fee income.  In the three months ended September 30, 2012, we recognized a net loss of $8,585,000 from our investment in Toys, comprised of $10,956,000 for our 32.5% share of Toys’ net loss, partially offset by $2,371,000 of management fee income.

 

 

Income from Partially Owned Entities

Summarized below are the components of income (loss) from partially owned entities for the three months ended September 30, 2013 and 2012.

 

Percentage

For the Three Months Ended

Ownership at

September 30,

(Amounts in thousands)

September 30, 2013

2013 

2012 

Equity in Net Income (Loss):

Alexander's (decrease due to sale of Kings Plaza

in November 2012)

32.4%

$

5,975 

$

8,958 

India real estate ventures

4.0%-36.5%

(1,449)

82 

Partially owned office buildings:

Warner Building

55.0%

(2,004)

(2,839)

280 Park Avenue

49.5%

(1,890)

(1,717)

666 Fifth Avenue Office Condominium

49.5%

1,858 

1,744 

330 Madison Avenue

25.0%

1,225 

1,224 

Rosslyn Plaza

43.7%-50.4%

(707)

(204)

One Park Avenue

30.3%

680 

256 

1101 17th Street

55.0%

376 

591 

West 57th Street Properties

50.0%

47 

167 

Fairfax Square

20.0%

(24)

(33)

Other partially owned office buildings

Various

477 

505 

Other investments:

Independence Plaza

50.1%

(2,081)

1,828 

Monmouth Mall

50.0%

165 

347 

Lexington (1)

n/a

-   

(323)

LNR (2)

n/a

-   

16,600 

Downtown Crossing, Boston (3)

n/a

-   

(38)

Other investments (4)

Various

(1,195)

(5,880)

$

1,453 

$

21,268 

(1)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale.

(2)

On April 22, 2013, LNR was sold for $1.053 billion. We owned 26.2% of LNR and received net proceeds of approximately $241,000.

(3)

On April 24, 2013, the joint venture sold the site in Downtown Crossing, Boston, and we received approximately $45,000 for our 50% interest.

(4)

Includes interests in 85 10th Avenue, Fashion Centre Mall, 50-70 West 93rd Street and others.

 

58

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Income from Real Estate Fund

Below are the components of the income from our Real Estate Fund for the three months ended September 30, 2013 and 2012.

 

(Amounts in thousands)

For the Three Months Ended September 30,

2013 

2012 

Net investment income (loss)

$

2,362 

$

(49)

Net realized gain

8,184 

Net unrealized gains

12,367 

5,558 

Income from Real Estate Fund

22,913 

5,509 

Less (income) attributable to noncontrolling interests

(15,422)

(4,787)

Income from Real Estate Fund attributable to Vornado (1)

$

7,491 

$

722 

___________________________________

(1)

Excludes management, leasing and development fees of $770 and $954 for the three months ended September 30, 2013 and 2012, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

 

Interest and Other Investment (Loss) Income, net

 

Interest and other investment (loss) income, net was a loss of $10,275,000 in the three months ended September 30, 2013, compared to income of $10,523,000 in the prior year’s quarter, a decrease in income of $20,798,000. This decrease resulted from:

 

(Amounts in thousands)

J.C. Penney derivative position ($20,012 mark-to-market loss in the current year's quarter, compared to a

$4,344 mark-to-market gain in the prior year's quarter)

$

(24,356)

Dividends and interest on marketable securities in the current year's quarter

2,804 

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

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

(847)

Other, net

1,601 

$

(20,798)

 

 

Interest and Debt Expense

 

Interest and debt expense was $119,870,000 in the three months ended September 30, 2013, compared to $119,330,000 in the prior year’s quarter, an increase of $540,000. 

 

 

Net Gain (Loss) on Disposition of Wholly Owned and Partially Owned Assets

In the three months ended September 30, 2013, we recognized a $15,138,000 gain on disposition of wholly owned and partially owned assets, primarily from a $31,741,000 net gain on the sale of a marketable security, partially offset by an $18,114,000 loss on sale of the remaining 13,400,000 J.C. Penney common shares.

 

 

Income Tax Expense

 

Income tax expense was $2,222,000 in the three months ended September 30, 2013, compared to $3,015,000 in the prior year’s quarter, a decrease of $793,000.  This decrease resulted primarily from an income tax provision in the prior year’s quarter applicable to a taxable REIT subsidiary that was liquidated in the fourth quarter of 2012.

 

59

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Income from Discontinued Operations

 

We have reclassified the revenues and expenses of the properties that were sold and that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements.  The table below sets forth the combined results of assets related to discontinued operations for the three months ended September 30, 2013 and 2012. 

For the Three Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Total revenues

$

2,963 

$

35,576 

Total expenses

2,488 

27,877 

475 

7,699 

Net gains on sale of real estate (2013 includes $2,909

attributable to noncontrolling interests)

18,996 

131,088 

Gain on sale of Canadian Trade Shows, net of $11,448 of

income taxes

-   

19,657 

Impairment losses

(720)

-   

Income from discontinued operations

$

18,751 

$

158,444 

 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $23,833,000 in the three months ended September 30, 2013, compared to $6,610,000 in the prior year’s quarter, an increase of $17,223,000.  This increase resulted primarily from higher net income allocated to the noncontrolling interests of our Real Estate Fund and the noncontrolling interests’ share of the net gain on sale of a retail property in Tampa, Florida.

 

 

Net Income Attributable to Noncontrolling Interests in the Operating Partnership

 

Net income attributable to noncontrolling interests in the Operating Partnership was $5,032,000 in the three months ended September 30, 2013, compared to $14,837,000 in the prior year’s quarter, a decrease of $9,805,000.  This decrease resulted primarily from lower net income subject to allocation to unitholders.

 

 

Preferred Unit Distributions of the Operating Partnership

 

Preferred unit distributions of the Operating Partnership were $12,000 in the three months ended September 30, 2013, compared to $1,403,000 in the prior year’s quarter, a decrease of $1,391,000.  This decrease resulted from the redemption of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units in July 2012.

 

Preferred Share Dividends

Preferred share dividends were $20,369,000 in the three months ended September 30, 2013, compared to $20,613,000 in the prior year’s quarter, a decrease of $244,000. 

 

 

Preferred Unit and Share Redemptions

In the three months ended September 30, 2012, we recognized an $11,700,000 discount from the redemption of all of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units. 

 

60

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Same Store EBITDA

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

 

Below are reconciliations of EBITDA to the same store EBITDA on a GAAP basis for each of our segments for the three months ended September 30, 2013, compared to the three months ended September 30, 2012.

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

EBITDA for the three months ended September 30, 2013

$

251,030 

$

86,942 

$

74,581 

Add-back:

Non-property level overhead expenses included above

7,849 

6,857 

4,240 

Less EBITDA from:

Acquisitions

(14,310)

-   

-   

Dispositions, including net gains on sale

-   

(46)

(17,873)

Properties taken out-of-service for redevelopment

(5,461)

(1,182)

(2,196)

Other non-operating (income) expense

(20,114)

(867)

(549)

GAAP basis same store EBITDA for the three months ended

September 30, 2013

$

218,994 

$

91,704 

$

58,203 

EBITDA for the three months ended September 30, 2012

$

206,663 

$

217,567 

$

73,505 

Add-back:

Non-property level overhead expenses included above

6,739 

6,668 

6,103 

Less EBITDA from:

Acquisitions

(581)

-   

-   

Dispositions, including net gains on sale

(3,016)

(128,754)

(19,325)

Properties taken out-of-service for redevelopment

(5,012)

(1,776)

(597)

Other non-operating (income) expense

(61)

(327)

(2,878)

GAAP basis same store EBITDA for the three months ended

September 30, 2012

$

204,732 

$

93,378 

$

56,808 

Increase (decrease) in GAAP basis same store EBITDA -

Three months ended September 30, 2013 vs. September 30, 2012(1)

$

14,262 

$

(1,674)

$

1,395 

% increase (decrease) in GAAP basis same store EBITDA

7.0% 

(1.8%) 

2.5% 

(1)

See notes on following page

 

61

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Notes to preceding tabular information

 

 

New York:

 

The $14,262,000 increase in New York GAAP basis same store EBITDA resulted primarily from an increase in Office and Retail GAAP basis same store EBITDA of $10,690,000 and $2,562,000, respectively.  The $10,690,000 increase in Office GAAP basis same store EBITDA resulted primarily from an increase in (i) rental revenue of $4,889,000 (due to a $0.60 increase in average annual rents per square foot, and a 150 basis point increase in average same store occupancy to 95.3% from 93.8%), and (ii) signage revenue and management and leasing fees of $4,754,000.  The $2,562,000 increase in Retail GAAP basis same store EBITDA resulted primarily from an increase in rental revenue of $3,019,000 (due to a $9.80 increase in average annual rents per square foot).

 

 

Washington, DC:

 

The $1,674,000 decrease in Washington, DC GAAP basis same store EBITDA resulted primarily from a decrease in rental revenue of $2,986,000, primarily due to a 150 basis point decrease in office average same store occupancy to 83.6% from 85.1%, a significant portion of which resulted from the effects of the BRAC statute (see page 51).

 

 

Retail Properties:

 

The $1,395,000 increase in Retail Properties GAAP basis same store EBITDA resulted primarily from an increase in rental revenue of $1,726,000, primarily due to a 200 basis point increase in average same store occupancy to 94.0% from 92.0%.   

 

62

 


 

  

Results of Operations – Three Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Reconciliation of GAAP basis Same Store EBITDA to Cash basis Same Store EBITDA

 

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

GAAP basis same store EBITDA for the three months ended

September 30, 2013

$

218,994 

$

91,704 

$

58,203 

Less: Adjustments for straight line rents, amortization of acquired

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

(25,220)

(1,519)

(2,852)

Cash basis same store EBITDA for the three months ended

September 30, 2013

$

193,774 

$

90,185 

$

55,351 

GAAP basis same store EBITDA for the three months ended

September 30, 2012

$

204,732 

$

93,378 

$

56,808 

Less: Adjustments for straight line rents, amortization of acquired

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

(26,341)

(1,241)

(3,439)

Cash basis same store EBITDA for the three months ended

September 30, 2012

$

178,391 

$

92,137 

$

53,369 

Increase (decrease) in Cash basis same store EBITDA -

Three months ended September 30, 2013 vs. September 30, 2012

$

15,383 

$

(1,952)

$

1,982 

% increase (decrease) in Cash basis same store EBITDA

8.6% 

(2.1%) 

3.7% 

63

 


 

  

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2013 and 2012

As a result of certain organizational changes and asset sales in 2012, the Merchandise Mart segment no longer meets the criteria to be a separate reportable segment; accordingly, effective January 1, 2013, the remaining assets have been reclassified to “Other.”  We have also reclassified the prior period segment financial results to conform to the current year presentation.  Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the nine months ended September 30, 2013 and 2012.

(Amounts in thousands)

For the Nine Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

1,521,127 

$

839,349 

$

338,742 

$

189,964 

$

-   

$

153,072 

Straight-line rent adjustments

47,989 

27,289 

4,242 

3,741 

-   

12,717 

Amortization of acquired below-market

leases, net

40,326 

26,184 

1,543 

8,669 

-   

3,930 

Total rentals

1,609,442 

892,822 

344,527 

202,374 

-   

169,719 

Tenant expense reimbursements

236,580 

128,598 

31,264 

63,601 

-   

13,117 

Cleveland Medical Mart development project

34,026 

-   

-   

-   

-   

34,026 

Fee and other income:

BMS cleaning fees

49,071 

63,192 

-   

-   

-   

(14,121)

Signage revenue

23,566 

23,566 

-   

-   

-   

-   

Management and leasing fees

19,675 

7,533 

11,529 

1,170 

-   

(557)

Lease termination fees

87,587 

24,986 

1,417 

59,797 

-   

1,387 

Other income

26,431 

4,550 

17,915 

1,448 

-   

2,518 

Total revenues

2,086,378 

1,145,247 

406,652 

328,390 

-   

206,089 

Operating expenses

784,031 

478,318 

145,258 

98,374 

-   

62,081 

Depreciation and amortization

400,952 

203,679 

92,678 

47,935 

-   

56,660 

General and administrative

157,155 

25,552 

20,655 

14,824 

-   

96,124 

Cleveland Medical Mart development project

29,764 

-   

-   

-   

-   

29,764 

Acquisition related costs

6,769 

-   

-   

-   

-   

6,769 

Total expenses

1,378,671 

707,549 

258,591 

161,133 

-   

251,398 

Operating income (loss)

707,707 

437,698 

148,061 

167,257 

-   

(45,309)

(Loss) applicable to Toys

(69,311)

-   

-   

-   

(69,311)

-   

Income (loss) from partially owned entities

23,691 

14,020 

(6,545)

1,512 

-   

14,704 

Income from Real Estate Fund

73,947 

-   

-   

-   

-   

73,947 

Interest and other investment (loss)

income, net

(32,933)

4,076 

99 

-   

(37,113)

Interest and debt expense

(363,128)

(125,991)

(83,350)

(34,523)

-   

(119,264)

Net (loss) gain on disposition of wholly

owned and partially owned assets

(20,581)

-   

-   

1,377 

-   

(21,958)

Income (loss) before income taxes

319,392 

329,803 

58,265 

135,628 

(69,311)

(134,993)

Income tax expense

(6,172)

(1,298)

(1,949)

(1,480)

-   

(1,445)

Income (loss) from continuing operations

313,220 

328,505 

56,316 

134,148 

(69,311)

(136,438)

Income from discontinued operations

290,279 

-   

-   

290,267 

-   

12 

Net income (loss)

603,499 

328,505 

56,316 

424,415 

(69,311)

(136,426)

Less net income attributable to

noncontrolling interests in:

Consolidated subsidiaries

(50,049)

(9,518)

-   

(3,079)

-   

(37,452)

Operating Partnership

(27,814)

-   

-   

-   

-   

(27,814)

Preferred unit distributions of the

Operating Partnership

(1,146)

-   

-   

-   

-   

(1,146)

Net income (loss) attributable to

Vornado

524,490 

318,987 

56,316 

421,336 

(69,311)

(202,838)

Interest and debt expense(2)

551,357 

163,579 

93,715 

40,057 

119,347 

134,659 

Depreciation and amortization(2)

549,072 

220,280 

105,799 

52,440 

103,732 

66,821 

Income tax expense(2)

18,101 

1,444 

2,134 

1,480 

10,959 

2,084 

EBITDA(1)

$

1,643,020 

$

704,290 

(3)

$

257,964 

(4)

$

515,313 

(5)

$

164,727 

$

726 

(6)

 

__________________________

See notes on page 66.

 

64

 


 

  

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2013 and 2012 - continued

(Amounts in thousands)

For the Nine Months Ended September 30, 2012

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Property rentals

$

1,443,478 

$

735,587 

$

356,459 

$

190,671 

$

-   

$

160,761 

Straight-line rent adjustments

53,169 

42,334 

4,382 

5,265 

-   

1,188 

Amortization of acquired below-market

leases, net

39,569 

23,776 

1,537 

9,989 

-   

4,267 

Total rentals

1,536,216 

801,697 

362,378 

205,925 

-   

166,216 

Tenant expense reimbursements

220,679 

118,861 

30,471 

61,307 

-   

10,040 

Cleveland Medical Mart development project

184,014 

-   

-   

-   

-   

184,014 

Fee and other income:

BMS cleaning fees

49,437 

70,476 

-   

-   

-   

(21,039)

Signage revenue

14,252 

14,252 

-   

-   

-   

-   

Management and leasing fees

16,534 

4,037 

9,782 

2,640 

-   

75 

Lease termination fees

1,172 

334 

256 

74 

-   

508 

Other income

24,494 

3,449 

18,846 

1,232 

-   

967 

Total revenues

2,046,798 

1,013,106 

421,733 

271,178 

-   

340,781 

Operating expenses

749,213 

447,910 

143,923 

97,154 

-   

60,226 

Depreciation and amortization

381,270 

168,391 

107,395 

51,877 

-   

53,607 

General and administrative

150,578 

21,980 

19,849 

18,803 

-   

89,946 

Cleveland Medical Mart development project

177,127 

-   

-   

-   

-   

177,127 

Acquisition related costs

4,314 

-   

-   

-   

-   

4,314 

Total expenses

1,462,502 

638,281 

271,167 

167,834 

-   

385,220 

Operating income (loss)

584,296 

374,825 

150,566 

103,344 

-   

(44,439)

Income applicable to Toys

88,696 

-   

-   

-   

88,696 

-   

Income (loss) from partially owned entities

53,491 

20,345 

(4,571)

1,040 

-   

36,677 

Income from Real Estate Fund

37,572 

-   

-   

-   

-   

37,572 

Interest and other investment (loss)

income, net

(22,984)

3,166 

97 

24 

-   

(26,271)

Interest and debt expense

(373,257)

(109,365)

(85,408)

(45,362)

-   

(133,122)

Net gain on disposition of wholly owned and

partially owned assets

4,856 

-   

-   

-   

-   

4,856 

Income (loss) before income taxes

372,670 

288,971 

60,684 

59,046 

88,696 

(124,727)

Income tax expense

(17,319)

(2,480)

(1,277)

-   

-   

(13,562)

Income (loss) from continuing operations

355,351 

286,491 

59,407 

59,046 

88,696 

(138,289)

Income (loss) from discontinued operations

247,297 

(640)

130,979 

37,456 

-   

79,502 

Net income (loss)

602,648 

285,851 

190,386 

96,502 

88,696 

(58,787)

Less net (income) loss attributable to

noncontrolling interests in:

Consolidated subsidiaries

(30,928)

(7,266)

-   

308 

-   

(23,970)

Operating Partnership

(31,445)

-   

-   

-   

-   

(31,445)

Preferred unit distributions of the

Operating Partnership

(9,150)

-   

-   

-   

-   

(9,150)

Net income (loss) attributable to

Vornado

531,125 

278,585 

190,386 

96,810 

88,696 

(123,352)

Interest and debt expense(2)

567,265 

140,294 

99,486 

58,039 

103,388 

166,058 

Depreciation and amortization(2)

552,794 

188,480 

122,987 

65,751 

100,371 

75,205 

Income tax expense(2)

50,076 

2,677 

1,532 

-   

17,982 

27,885 

EBITDA(1)

$

1,701,260 

$

610,036 

(3)

$

414,391 

(4)

$

220,600 

(5)

$

310,437 

$

145,796 

(6)

_____________________________

See notes on the following page.

 

65

 


 

  

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2013 and 2012 - continued

Notes to preceding tabular information:

(1)

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

(2)

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

(3)

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

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Office

$

476,849 

$

418,414 

Retail

177,394 

135,399 

Alexander's (decrease due to sale of Kings Plaza in November 2012)

31,141 

39,477 

Hotel Pennsylvania

18,906 

16,746 

Total New York

$

704,290 

$

610,036 

(4)

The elements of "Washington, DC" EBITDA are summarized below.

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Office, excluding the Skyline Properties (a)

$

202,463 

$

350,296 

Skyline properties

22,546 

32,127 

Total Office

225,009 

382,423 

Residential

32,955 

31,968 

Total Washington, DC

$

257,964 

$

414,391 

(a)

2012 includes EBITDA from discontinued operations, net gains on sale of real estate and other items that affect comparability, aggregating $138,707. Excluding these items, EBITDA was $211,589.

(5)

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

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Strip shopping centers(a)

$

264,065 

$

148,554 

Regional malls(b)

251,248 

72,046 

Total Retail properties

$

515,313 

$

220,600 

(a)

The nine months ended September 30, 2013 and 2012 includes EBITDA from discontinued operations, net gains on sale of real estate and other items that affect comparability, aggregating $149,659 and $38,856, respectively. Excluding these items, EBITDA was $114,406 and $109,698, respectively.

(b)

The nine months ended September 30, 2013 and 2012 includes EBITDA from discontinued operations, net gains on sale of real estate and other items that affect comparability, aggregating $203,151 and $25,057, respectively. Excluding these items, EBITDA was $48,097 and $46,989, respectively.

 

66

 


 

  

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2013 and 2012 - continued

Notes to preceding tabular information - continued:

(6)

The elements of "other" EBITDA are summarized below.

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

1,746 

$

4,162 

Net unrealized gains

14,869 

8,384 

Net realized gain

2,046 

-   

Carried interest

15,965 

-   

Total

34,626 

12,546 

Merchandise Mart Building, 7 West 34th Street and trade shows

52,167 

46,518 

555 California Street

32,371 

31,406 

India real estate ventures

4,708 

1,718 

LNR(a)

20,443 

46,006 

Lexington(b)

6,931 

24,780 

Other investments

14,207 

30,226 

165,453 

193,200 

Corporate general and administrative expenses(c)

(71,054)

(66,940)

Investment income and other, net(c)

39,153 

30,900 

Loss on sale of J.C. Penney common shares

(54,914)

-   

Non-cash impairment loss on J.C. Penney common shares

(39,487)

-   

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

(33,487)

(53,343)

Net gain on sale of marketable securities

31,741 

3,582 

Acquisition related costs

(6,769)

(4,314)

Severance costs (primarily reduction in force at the Merchandise Mart)

(4,154)

(1,520)

Merchandise Mart discontinued operations (including net gains on sale of assets)

2,065 

88,488 

Net gain on sale of residential condominiums

1,139 

1,274 

Verde Realty impairment loss

-   

(4,936)

Net income attributable to noncontrolling interests in the Operating Partnership

(27,814)

(31,445)

Preferred unit distributions of the Operating Partnership

(1,146)

(9,150)

$

726 

$

145,796 

(a)

On April 22, 2013, LNR was sold.

(b)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale.

(c)

The amounts in these captions (for this table only) exclude income(expense) from the mark-to-market of our deferred compensation plan.

 

EBITDA by Region

 

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

 

For the Nine Months

Ended September 30,

2013 

2012 

Region:

New York City metropolitan area

73%

69%

Washington, DC / Northern Virginia metropolitan area

23%

27%

Puerto Rico

2%

2%

California

1%

1%

Other geographies

1%

1%

100%

100%

67

 


 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012

 

 

Revenues

Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $2,086,378,000 for the nine months ended September 30, 2013, compared to $2,046,798,000 in the prior year’s nine months, an increase of $39,580,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Other

Property rentals:

Acquisitions and other

$

56,273 

$

63,808 

$

655 

$

(7,443)

$

(747)

Properties placed into / taken out of

service for redevelopment

(4,553)

(320)

(2,196)

(1,939)

(98)

Hotel Pennsylvania

7,357 

7,357 

-   

-   

-   

Trade Shows

(5,049)

-   

-   

-   

(5,049)

Same store operations

19,198 

20,280 

(16,310)

5,831 

9,397 

73,226 

91,125 

(17,851)

(3,551)

3,503 

Tenant expense reimbursements:

Acquisitions and other

(14)

2,207 

(523)

(1,597)

(101)

Properties placed into / taken out of

service for redevelopment

(1,500)

(83)

22 

(1,325)

(114)

Same store operations

17,415 

7,613 

1,294 

5,216 

3,292 

15,901 

9,737 

793 

2,294 

3,077 

Cleveland Medical Mart development

project

(149,988)

(1)

-   

-   

-   

(149,988)

(1)

Fee and other income:

BMS cleaning fees

(366)

(7,284)

-   

-   

6,918 

(2)

Signage revenue

9,314 

9,314 

-   

-   

-   

Management and leasing fees

3,141 

3,496 

1,747 

(1,470)

(632)

Lease termination fees

86,415 

24,652 

(3)

1,161 

59,723 

(4)

879 

Other income

1,937 

1,101 

(931)

216 

1,551 

100,441 

31,279 

1,977 

58,469 

8,716 

Total increase (decrease) in revenues

$

39,580 

$

132,141 

$

(15,081)

$

57,212 

$

(134,692)

(1)

Primarily due to the project nearing completion. This decrease in revenue is offset by a decrease in development costs expensed in the period. See note (3) on page 69.

(2)

Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 69.

(3)

Primarily due to a $19,500 termination fee from a tenant at 1290 Avenue of the Americas. Our share of this income, net of the write off of the straight lining of rents and amounts attributable to the noncontrolling interest was $12,121.

(4)

Results primarily from income recognized in the first quarter of 2013 in connection with the settlement of the Stop & Shop litigation.

 

68

 


 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Expenses

Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $1,378,671,000 for the nine months ended September 30, 2013, compared to $1,462,502,000 in the prior year’s nine months, a decrease of $83,831,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Other

Operating:

Acquisitions and other

$

22,086 

$

24,007 

$

-   

$

(1,029)

$

(892)

Properties placed into / taken out of

service for redevelopment

(8,800)

(1,099)

(1,009)

(5,537)

(1,155)

Non-reimbursable expenses, including

bad debt reserves

(2,113)

(3,784)

-   

1,470 

201 

Hotel Pennsylvania

5,089 

5,089 

-   

-   

-   

Trade Shows

(4,642)

-   

-   

-   

(4,642)

BMS expenses

565 

(6,353)

-   

-   

6,918 

(2)

Same store operations

22,633 

12,548 

2,344 

6,316 

1,425 

34,818 

30,408 

1,335 

1,220 

1,855 

Depreciation and amortization:

Acquisitions and other

35,112 

36,718 

-   

(1,335)

(271)

Properties placed into / taken out of

service for redevelopment

(19,136)

(463)

(16,109)

(2,564)

-   

Same store operations

3,706 

(967)

1,392 

(43)

3,324 

19,682 

35,288 

(14,717)

(3,942)

3,053 

General and administrative:

Mark-to-market of deferred

compensation plan liability (1)

940 

-   

-   

-   

940 

Severance costs (primarily reduction

in force at the Merchandise Mart)

2,634 

-   

-   

-   

2,634 

Same store operations

3,003 

3,572 

806 

(3,979)

2,604 

6,577 

3,572 

806 

(3,979)

6,178 

Cleveland Medical Mart development

project

(147,363)

(3)

-   

-   

-   

(147,363)

(3)

Acquisition related costs

2,455 

-   

-   

-   

2,455 

Total (decrease) increase in expenses

$

(83,831)

$

69,268 

$

(12,576)

$

(6,701)

$

(133,822)

(1)

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

(2)

Represents the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 68.

(3)

Primarily due to the project nearing completion. This decrease in expense is offset by the decrease in development revenue in the period. See note (1) on page 68.

 

69

 


 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

(Loss) Income Applicable to Toys

 

In the fourth quarter of 2012, we recorded a $40,000,000 non-cash impairment loss on our investment in Toys and disclosed, that if current facts don’t change, our share of Toys’ undistributed income, which in accordance with the equity method of accounting, would increase the carrying amount of our investment above fair value, would require an offsetting impairment loss.

 

In the first quarter of 2013, we recognized our share of Toys’ fourth quarter net income of $78,542,000 and a corresponding non-cash impairment loss of the same amount. 

 

In the nine months ended September 30, 2013, we recognized a net loss of $69,311,000 from our investment in Toys, comprised of $3,778,000 for our 32.6% share of Toys’ net income and $5,453,000 of management fee income, offset by a $78,542,000 impairment loss (see above).  In the nine months ended September 30, 2012, we recognized net income of $88,696,000 from our investment in Toys, comprised of $81,667,000 for our 32.5% share of Toys’ net income and $7,029,000 of management fee income.

 

 

Income from Partially Owned Entities

Summarized below are the components of income (loss) from partially owned entities for the nine months ended September 30, 2013 and 2012.

Percentage

For the Nine Months Ended

Ownership at

September 30,

(Amounts in thousands)

September 30, 2013

2013 

2012 

Equity in Net Income (Loss):

Alexander's (decrease due to sale of Kings Plaza

in November 2012)

32.4%

$

17,802 

$

24,827 

Lexington (1)

n/a

(979)

371 

LNR (2)

n/a

18,731 

39,319 

India real estate ventures

4.0%-36.5%

(2,630)

(4,526)

Partially owned office buildings:

280 Park Avenue

49.5%

(6,480)

(9,267)

Warner Building

55.0%

(6,346)

(7,438)

666 Fifth Avenue Office Condominium

49.5%

5,776 

5,244 

330 Madison Avenue

25.0%

3,714 

2,036 

Rosslyn Plaza

43.7%-50.4%

(2,158)

99 

One Park Avenue

30.3%

1,054 

890 

1101 17th Street

55.0%

996 

1,920 

West 57th Street Properties

50.0%

415 

732 

Fairfax Square

20.0%

(87)

(85)

Other partially owned office buildings

Various

1,530 

1,587 

Other investments:

Independence Plaza

50.1%

(3,199)

5,243 

Downtown Crossing, Boston (3)

n/a

(2,358)

(872)

Monmouth Mall

50.0%

1,450 

1,007 

Other investments (4)

Various

(3,540)

(7,596)

$

23,691 

$

53,491 

(1)

In the first quarter of 2013, we began accounting for our investment in Lexington as a marketable equity security - available for sale.

(2)

On April 22, 2013, LNR was sold for $1.053 billion. We owned 26.2% of LNR and received net proceeds of approximately $241,000.

(3)

On April 24, 2013, the joint venture sold the site in Downtown Crossing, Boston, and we received approximately $45,000 for our 50% interest. In connection therewith, we recognized a $2,335 impairment loss in the first quarter.

(4)

Includes interests in 85 10th Avenue, Fashion Centre Mall, 50-70 West 93rd Street and others.

 

70

 


 
 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Income from Real Estate Fund

 

Below are the components of the income from our Real Estate Fund for the nine months ended September 30, 2013 and 2012.

(Amounts in thousands)

For the Nine Months Ended September 30,

2013 

2012 

Net investment income

$

6,287 

$

4,035 

Net realized gain

8,184 

Net unrealized gains

59,476 

33,537 

Income from Real Estate Fund

73,947 

37,572 

Less (income) attributable to noncontrolling interests

(39,321)

(25,026)

Income from Real Estate Fund attributable to Vornado (1)

$

34,626 

$

12,546 

___________________________________

(1)

Excludes management, leasing and development fees of $2,446 and $2,374 for the nine months ended September 30, 2013 and 2012, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

Interest and Other Investment (Loss) Income, net

 

Interest and other investment loss, net was a loss of $32,933,000 in the nine months ended September 30, 2013, compared to a loss of $22,984,000 in the prior year’s nine months, an increase in loss of $9,949,000. This increase resulted from:

(Amounts in thousands)

Non-cash impairment loss on J.C. Penney common shares in 2013

$

(39,487)

J.C. Penney derivative position ($33,487 mark-to-market loss in 2013, compared to a

$53,343 mark-to-market loss in the prior year)

19,856 

Higher interest on mezzanine loans receivable

5,916 

Income from prepayment penalties in connection with the repayment of a mezzanine loan

5,267 

Lower dividends and interest on marketable securities

(2,749)

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

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

940 

Other, net

308 

$

(9,949)

 

Interest and Debt Expense

 

Interest and debt expense was $363,128,000 in the nine months ended September 30, 2013, compared to $373,257,000 in the prior year’s nine months, a decrease of $10,129,000.  This decrease was primarily due to $20,140,000 of higher capitalized interest in the current period, partially offset by interest expense of $8,721,000 from the financing of the retail condominium at 666 Fifth Avenue in the first quarter of 2013.

 

 

Net Gain (Loss) on Disposition of Wholly Owned and Partially Owned Assets

 

In the nine months ended September 30, 2013, we recognized a $20,581,000 loss on disposition of wholly owned and partially owned assets, primarily from a $54,914,000 loss on sale of the J.C. Penney common shares, partially offset by a $31,741,000 net gain on the sale of a marketable security, compared to a $4,856,000 net gain in the prior year’s nine months, primarily from the sale of residential condominiums and marketable securities.

 

 

Income Tax Expense

 

Income tax expense was $6,172,000 in the nine months ended September 30, 2013, compared to $17,319,000 in the prior year’s nine months, a decrease of $11,147,000.  This decrease resulted primarily from an $12,038,000 income tax provision in the prior year’s nine months applicable to a taxable REIT subsidiary that was liquidated in the fourth quarter of 2012. 

 

71

 


 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Income from Discontinued Operations

We have reclassified the revenues and expenses of the properties that were sold and that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements.  The table below sets forth the combined results of assets related to discontinued operations for the nine months ended September 30, 2013 and 2012.

For the Nine Months Ended September 30,

(Amounts in thousands)

2013 

2012 

Total revenues

$

35,193 

$

144,274 

Total expenses

27,177 

106,924 

8,016 

37,350 

Net gains on sale of real estate (2013 includes $2,909

attributable to noncontrolling interests)

286,990 

203,801 

Gain on sale of Canadian Trade Shows, net of $11,448 of

income taxes

-   

19,657 

Impairment losses

(4,727)

(13,511)

Income from discontinued operations

$

290,279 

$

247,297 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $50,049,000 in the nine months ended September 30, 2013, compared to $30,928,000 in the prior year’s nine months, an increase of $19,121,000.  This increase resulted primarily from higher net income allocated to the noncontrolling interests of our Real Estate Fund and the noncontrolling interests’ share of the net gain on sale of a retail property in Tampa, Florida.

 

Net Income Attributable to Noncontrolling Interests in the Operating Partnership

 

Net income attributable to noncontrolling interests in the Operating Partnership was $27,814,000 in the nine months ended September 30, 2013, compared to $31,445,000 in the prior year’s nine months, a decrease of $3,631,000.  This decrease resulted primarily from lower net income subject to allocation to unitholders.

 

Preferred Unit Distributions of the Operating Partnership

 

Preferred unit distributions of the Operating Partnership were $1,146,000 in the nine months ended September 30, 2013, compared to $9,150,000 in the prior year’s nine months, a decrease of $8,004,000.  This decrease resulted from the redemption of the 6.875% Series D-15 cumulative redeemable preferred units in May 2013, and the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units in July 2012.

 

Preferred Share Dividends

 

Preferred share dividends were $62,439,000 in the nine months ended September 30, 2013, compared to $56,187,000 in the prior year’s nine months, an increase of $6,252,000.  This increase resulted from the issuance of $300,000,000 of 5.70% Series K cumulative redeemable preferred shares in July 2012 and $300,000,000 of 5.40% Series L cumulative redeemable preferred shares in January 2013, partially offset by the redemption of $262,500,000 of 6.75% Series F and Series H cumulative redeemable preferred shares in February 2013 and $75,000,000 of 7.0% Series E cumulative redeemable preferred shares in August 2012.

 

Preferred Unit and Share Redemptions

 

In the nine months ended September 30, 2013, we recognized $1,130,000 of expense in connection with preferred unit and share redemptions, comprised of $9,230,000 of expense from the redemption of the 6.75% Series F and Series H cumulative redeemable preferred shares in February 2013, partially offset by an $8,100,000 discount from the redemption of all of the 6.875% Series D-15 cumulative redeemable preferred units in May 2013.  In the nine months ended September 30, 2012, we recognized an $11,700,000 discount from the redemption of all of the 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units in July 2012.

 

72

 


 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Same Store EBITDA

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

 

Below are reconciliations of EBITDA to same store EBITDA on a GAAP basis for each of our segments for the nine months ended September 30, 2013, compared to nine months ended September 30, 2012.

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

EBITDA for the nine months ended September 30, 2013

$

704,290 

$

257,964 

$

515,313 

Add-back:

Non-property level overhead expenses included above

25,552 

20,655 

14,824 

Less EBITDA from:

Acquisitions

(47,549)

-   

-   

Dispositions, including net gains on sale

-   

(117)

(293,042)

Properties taken out-of-service for redevelopment

(14,771)

(3,280)

(3,579)

Other non-operating (income) expense

(27,003)

(813)

(59,492)

GAAP basis same store EBITDA for the nine months ended

September 30, 2013

$

640,519 

$

274,409 

$

174,024 

EBITDA for the nine months ended September 30, 2012

$

610,036 

$

414,391 

$

220,600 

Add-back:

Non-property level overhead expenses included above

21,980 

19,849 

18,803 

Less EBITDA from:

Acquisitions

(581)

-   

-   

Dispositions, including net gains on sale

(8,423)

(138,705)

(60,497)

Properties taken out-of-service for redevelopment

(14,915)

(7,045)

(606)

Other non-operating (income) expense

24 

289 

(8,657)

GAAP basis same store EBITDA for the nine months ended

September 30, 2012

$

608,121 

$

288,779 

$

169,643 

Increase (decrease) in GAAP basis same store EBITDA -

Nine months ended September 30, 2013 vs. September 30, 2012(1)

$

32,398 

$

(14,370)

$

4,381 

% increase (decrease) in GAAP basis same store EBITDA

5.3% 

(5.0%) 

2.6% 

(1)

See notes on following page

 

73

 


 
 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Notes to preceding tabular information

 

 

New York:

 

The $32,398,000 increase in New York GAAP basis same store EBITDA resulted primarily from an increase in Office and Retail GAAP basis same store EBITDA of $24,560,000 and $5,576,000, respectively.  The $24,560,000 increase in Office GAAP basis same store EBITDA resulted primarily from an increase in (i) rental revenue of $14,036,000 (due to a $2.34 increase in average annual rents per square foot, partially offset by a 40 basis point decrease in average same store occupancy to 95.0% from 95.4%), and (ii) signage revenue and management and leasing fees of $12,810,000.  The $5,576,000 increase in Retail GAAP basis same store EBITDA resulted primarily from an increase in (i) rental revenue of $6,244,000, (primarily due a $7.22 increase in average annual rents per square foot).

 

 

Washington, DC:

 

The $14,370,000 decrease in Washington, DC GAAP basis same store EBITDA resulted primarily from a decrease in rental revenue of $16,310,000, primarily due to a 420 basis point decrease in office average same store occupancy to 82.9% from 87.1%, a significant portion of which resulted from the effects of the BRAC statute (see page 51).

 

 

Retail Properties:

 

The $4,381,000 increase in Retail Properties GAAP basis same store EBITDA resulted primarily from an increase in rental revenue of $5,831,000, due to a 120 basis point increase in average same store occupancy to 93.4% from 92.2%, and a $0.29 increase in average annual rents per square foot.

74

 


 

  

Results of Operations – Nine Months Ended September 30, 2013 Compared to September 30, 2012 - continued

 

 

Reconciliation of GAAP basis Same Store EBITDA to Cash basis Same Store EBITDA

 

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

GAAP basis same store EBITDA for the nine months ended

September 30, 2013

$

640,519 

$

274,409 

$

174,024 

Less: Adjustments for straight line rents, amortization of acquired

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

(77,291)

(8,282)

(9,179)

Cash basis same store EBITDA for the nine months ended

September 30, 2013

$

563,228 

$

266,127 

$

164,845 

GAAP basis same store EBITDA for the nine months ended

September 30, 2012

$

608,121 

$

288,779 

$

169,643 

Less: Adjustments for straight line rents, amortization of acquired

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

(89,594)

(5,662)

(9,701)

Cash basis same store EBITDA for the nine months ended

September 30, 2012

$

518,527 

$

283,117 

$

159,942 

Increase (decrease) in Cash basis same store EBITDA -

Nine months ended September 30, 2013 vs. September 30, 2012

$

44,701 

$

(16,990)

$

4,903 

% increase (decrease) in Cash basis same store EBITDA

8.6% 

(6.0%) 

3.1% 

75

 


 

  

SUPPLEMENTAL INFORMATION

 

Reconciliation of Net Income to EBITDA for the Three Months Ended June 30, 2013.

 

Retail

(Amounts in thousands)

New York

Washington, DC

Properties

Net income attributable to Vornado for the three months ended

June 30, 2013

$

105,574 

$

17,433 

$

87,594 

Interest and debt expense

54,546 

31,245 

13,715 

Depreciation and amortization

74,573 

35,248 

16,348 

Income tax expense

1,030 

852 

749 

EBITDA for the three months ended June 30, 2013

$

235,723 

$

84,778 

$

118,406 

 

 

Reconciliation of EBITDA to GAAP basis Same Store EBITDA – Three Months Ended September 30, 2013 compared to June 30, 2013

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

EBITDA for the three months ended September 30, 2013

$

251,030 

$

86,942 

$

74,581 

Add-back:

Non-property level overhead expenses included above

7,849 

6,857 

4,240 

Less EBITDA from:

Acquisitions

(575)

-   

-   

Dispositions, including net gains on sale

-   

(46)

(17,873)

Properties taken out-of-service for redevelopment

(5,461)

(1,182)

(2,196)

Other non-operating (income) expense

(20,115)

(867)

(549)

GAAP basis same store EBITDA for the three months ended

September 30, 2013

$

232,728 

$

91,704 

$

58,203 

EBITDA for the three months ended June 30, 2013

$

235,723 

$

84,778 

$

118,406 

Add-back:

Non-property level overhead expenses included above

8,881 

6,873 

5,169 

Less EBITDA from:

Acquisitions

913 

-   

-   

Dispositions, including net gains on sale

-   

27 

(64,874)

Properties taken out-of-service for redevelopment

(4,900)

(822)

(916)

Other non-operating (income) expense

(5,679)

422 

839 

GAAP basis same store EBITDA for the three months ended

June 30, 2013

$

234,938 

$

91,278 

$

58,624 

(Decrease) increase in GAAP basis same store EBITDA -

Three months ended September 30, 2013 vs. June 30, 2013

$

(2,210)

$

426 

$

(421)

% (decrease) increase in GAAP basis same store EBITDA

(0.9%) 

0.5% 

(0.7%) 

 

76

 


 

  

SUPPLEMENTAL INFORMATION – CONTINUED

 

Reconciliation of GAAP basis Same Store EBITDA to Cash basis Same Store EBITDA – Three Months Ended September 30, 2013 vs. June 30, 2013

 

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

GAAP basis same store EBITDA for the three months ended

September 30, 2013

$

232,728 

$

91,704 

$

58,203 

Less: Adjustments for straight line rents, amortization of acquired

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

(25,219)

(1,519)

(2,852)

Cash basis same store EBITDA for the three months ended

September 30, 2013

$

207,509 

$

90,185 

$

55,351 

GAAP basis same store EBITDA for the three months ended June 30, 2013

$

234,938 

$

91,278 

$

58,624 

Less: Adjustments for straight line rents, amortization of acquired

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

(28,106)

(2,596)

(3,160)

Cash basis same store EBITDA for the three months ended June 30, 2013

$

206,832 

$

88,682 

$

55,464 

Increase (decrease) in Cash basis same store EBITDA -

Three months ended September 30, 2013 vs. June 30, 2013

$

677 

$

1,503 

$

(113)

% increase (decrease) in Cash basis same store EBITDA

0.3% 

1.7% 

(0.2%) 

77

 


 

  

Liquidity and Capital Resources

 

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

 

We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures.  Capital requirements for development expenditures and acquisitions (excluding Fund acquisitions) may require funding from borrowings and/or equity offerings.  Our Real Estate Fund has aggregate unfunded commitments of $239,186,000, including $59,796,000 from us. 

 

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

 

 

Cash Flows for the Nine Months Ended September 30, 2013

Our cash and cash equivalents were $872,323,000 at September 30, 2013, a $87,996,000 decrease over the balance at December 31, 2012.  Our consolidated outstanding debt was $10,001,333,000 at September 30, 2013, a $1,170,875,000 decrease over the balance at December 31, 2012.  As of September 30, 2013 and December 31, 2012, $83,982,000 and $1,170,000,000, respectively, was outstanding under our revolving credit facilities.  During the remainder of 2013 and 2014, $176,572,000 and $233,283,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.

 

Cash flows provided by operating activities of $789,592,000 was comprised of (i) net income of $603,499,000, (ii) $188,740,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities and net gains on sale of real estate, (iii) return of capital from Real Estate Fund investments of $56,664,000, and (iv) distributions of income from partially owned entities of $34,350,000, partially offset by (v) the net change in operating assets and liabilities of $93,661,000, including $32,392,000 related to Real Estate Fund investments.

 

Net cash provided by investing activities of $1,020,400,000 was comprised of (i) $734,427,000 of proceeds from sales of real estate and related investments, (ii) $378,676,000 of proceeds from the sale of marketable securities, (iii) $287,944,000 of capital distributions from partially owned entities, (iv) $240,474,000 from the sale of LNR, (v) $101,150,000 from the return of the J.C. Penney derivative collateral, (vi) $49,452,000 of proceeds from repayments of mortgages and mezzanine loans receivable and other, and (vii) $21,883,000 of changes in restricted cash, partially offset by (viii) $212,624,000 of investments in partially owned entities, (ix) $186,079,000 for the funding of the J.C. Penney derivative collateral; and settlement of derivative position in 2013, (x) $170,424,000 of additions to real estate, (xi) $149,010,000 of development costs and construction in progress, (xii) $75,079,000 of acquisitions of real estate, and (xiii) $390,000 of investment in mortgage and mezzanine loans receivable.

 

Net cash used in financing activities of $1,897,988,000 was comprised of (i) $2,851,420,000 for the repayments of borrowings, (ii) $409,332,000 of dividends paid on common shares, (iii) $299,400,000 for purchases of outstanding preferred units and shares, (iv) $200,667,000 of distributions to noncontrolling interests, (v) $62,820,000 of dividends paid on preferred shares, (vi) $9,982,000 of debt issuance and other costs, and (vii) $332,000 for the repurchase of shares related to stock compensation agreements and related tax holdings, partially offset by (viii) $1,600,357,000 of proceeds from borrowings, (ix) $290,536,000 of proceeds from the issuance of preferred shares, (x) $40,015,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (xi) $5,057,000 of proceeds received from the exercise of employee share options.

 

78

 


 

  

Liquidity and Capital Resources – continued

 

 

Capital Expenditures

 

Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions.  Recurring capital expenditures include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases.  Non-recurring capital improvements include expenditures to lease space that has been vacant for more than nine months and expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition, as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property. 

 

Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the nine months ended September 30, 2013.

 

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Expenditures to maintain assets

$

39,322 

$

20,665 

$

9,244 

$

3,160 

$

6,253 

Tenant improvements

117,088 

67,476 

32,087 

11,075 

6,450 

Leasing commissions

42,341 

31,324 

8,030 

1,686 

1,301 

Non-recurring capital expenditures

6,454 

6,183 

-   

-   

271 

Total capital expenditures and leasing

commissions (accrual basis)

205,205 

125,648 

49,361 

15,921 

14,275 

Adjustments to reconcile to cash basis:

Expenditures in the current year

applicable to prior periods

111,984 

43,536 

22,228 

4,577 

41,643 

Expenditures to be made in future

periods for the current period

(116,655)

(68,813)

(34,191)

(12,556)

(1,095)

Total capital expenditures and leasing

commissions (cash basis)

$

200,534 

$

100,371 

$

37,398 

$

7,942 

$

54,823 

Tenant improvements and leasing commissions:

Per square foot per annum

$

4.19 

$

5.54 

$

4.71 

$

1.52 

$

-   

Percentage of initial rent

9.7%

8.0%

11.8%

7.9%

-   

 

 

Development and Redevelopment Expenditures

 

Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions, capitalized interest and operating costs until the property is substantially completed and ready for its intended use. 

 

We are in the process of renovating the Springfield Mall, which is expected to be substantially completed in 2014.  The estimated cost of this project is approximately $225,000,000, of which $21,500,000 was expended prior to 2013, $80,000,000 is expected to be expended in 2013 and the balance is to be expended in 2014. 

 

We plan to develop a new 699-unit residential project in Pentagon City (Metropolitan Park 4&5), which is expected to be completed in 2016.  The project will include a 37,000 square foot Whole Foods Market at the base of the building.  The estimated cost of this project is approximately $250,000,000; a significant portion of which is expected to be financed.

 

79

 


 

  

Liquidity and Capital Resources – continued

 

Development and Redevelopment Expenditures - continued

 

Below is a summary of development and redevelopment expenditures incurred in the nine months ended September 30, 2013.

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Springfield Mall

$

39,810 

$

-   

$

-   

$

39,810 

$

-   

220 Central Park South

23,946 

-   

-   

-   

23,946 

Marriott Marquis Times Square - retail

and signage

13,920 

13,920 

-   

-   

-   

1290 Avenue of the Americas

11,374 

11,374 

-   

-   

-   

Metropolitan Park 4 & 5

5,054 

-   

5,054 

-   

-   

LED Signage

4,589 

4,589 

-   

-   

-   

1540 Broadway

4,267 

4,267 

-   

-   

-   

1851 South Bell Street (1900 Crystal Drive)

3,739 

-   

3,739 

-   

-   

Other

42,311 

7,949 

15,039 

15,910 

3,413 

$

149,010 

$

42,099 

$

23,832 

$

55,720 

$

27,359 

 

In addition to the development and redevelopment projects above, we are in the process of retenanting and repositioning 280 Park Avenue (50% owned).  Our share of the estimated cost of this project is approximately $62,000,000, of which $11,000,000 was expended prior to 2013 and $18,000,000 has been expended in 2013.

There can be no assurance that any of our development projects will commence, or if commenced, be completed on schedule or within budget.   

 

 

Cash Flows for the Nine Months Ended September 30, 2012

 

Our cash and cash equivalents were $465,884,000 at September 30, 2012, a $140,669,000 decrease over the balance at December 31, 2011.  This decrease was primarily due to cash flows from financing activities, partially offset by cash flows from operating and investing activities, as discussed below.

 

Cash flows provided by operating activities of $510,646,000 was comprised of (i) net income of $602,648,000, (ii) return of capital from Real Estate Fund investments of $61,052,000, (iii) distributions of income from partially owned entities of $59,322,000, and (iv) $14,489,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities and net gains on sale of real estate, partially offset by (v) the net change in operating assets and liabilities of $226,865,000, including $163,307,000 related to Real Estate Fund investments.

 

Net cash provided by investing activities of $34,012,000 was comprised of (i) $408,856,000 of proceeds from sales of real estate and related investments, (ii) $89,850,000 from the return of the J.C. Penney derivative collateral,  (iii) $58,460,000 of proceeds from the sale of marketable securities, (iv) $52,504,000 of proceeds from the sale of the Canadian Trade Shows, (v) $26,665,000 of capital distributions from partially owned entities, (vi) $13,123,000 of proceeds from the repayment of loan to officer, and (vii) $2,379,000 of proceeds from repayments of mezzanine loans, partially offset by (viii) $138,060,000 of additions to real estate, (ix) $121,117,000 for the funding of the J.C. Penney derivative collateral, (x) $116,264,000 of investments in partially owned entities, (xi) $106,502,000 of development costs and construction in progress, (xii) $73,069,000 of acquisitions of real estate and other, and (xiii) $62,813,000 of changes in restricted cash.

 

Net cash used in financing activities of $685,327,000 was comprised of (i) $2,070,295,000 for the repayments of borrowings, (ii) $384,353,000 of dividends paid on common shares, (iii) $243,300,000 for purchases of outstanding preferred units and shares, (iv) $80,994,000 of distributions to noncontrolling interests, (v) $54,034,000 of dividends paid on preferred shares, (vi) $30,034,000 for the repurchase of shares related to stock compensation agreements and related tax holdings, and (vii) $17,417,000 of debt issuance and other costs, partially offset by (viii) $1,773,000,000 of proceeds from borrowings, (ix) $291,144,000 of proceeds from the issuance of preferred shares, (x) $120,746,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (xi) $10,210,000 of proceeds from exercise of employee share options.

 

80

 


 

  

Liquidity and Capital Resources – continued

 

 

Capital Expenditures in the nine months ended September 30, 2012

 

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Expenditures to maintain assets

$

37,829 

$

17,925 

$

10,758 

$

2,497 

$

6,649 

Tenant improvements

150,099 

55,628 

41,874 

6,682 

45,915 

Leasing commissions

48,900 

21,536 

10,607 

1,971 

14,786 

Non-recurring capital expenditures

5,227 

4,240 

-   

-   

987 

Total capital expenditures and leasing

commissions (accrual basis)

242,055 

99,329 

63,239 

11,150 

68,337 

Adjustments to reconcile to cash basis:

Expenditures in the current year

applicable to prior periods

74,087 

35,008 

11,811 

6,868 

20,400 

Expenditures to be made in future

periods for the current period

(157,152)

(66,954)

(38,221)

(5,731)

(46,246)

Total capital expenditures and leasing

commissions (cash basis)

$

158,990 

$

67,383 

$

36,829 

$

12,287 

$

42,491 

Tenant improvements and leasing commissions:

Per square foot per annum

$

4.28 

$

5.43 

$

5.18 

$

1.05 

$

-   

Percentage of initial rent

9.8%

8.5%

12.9%

5.4%

-   

 

 

Development and Redevelopment Expenditures in the nine months ended September 30, 2012

 

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Crystal Square 5

$

12,773 

$

-   

$

12,773 

$

-   

$

-   

1290 Avenue of the Americas

11,613 

11,613 

-   

-   

-   

510 Fifth Avenue

10,203 

10,203 

-   

-   

-   

Bergen Town Center

9,881 

-   

-   

9,881 

-   

Springfield Mall

8,801 

-   

-   

8,801 

-   

Marriott Marquis Times Square - retail

and signage

5,970 

5,970 

-   

-   

-   

1851 South Bell Street (1900 Crystal Drive)

2,840 

-   

2,840 

-   

-   

Other

44,421 

9,581 

9,716 

17,252 

7,872 

$

106,502 

$

37,367 

$

25,329 

$

35,934 

$

7,872 

 

81

 


 

  

Liquidity and Capital Resources – continued

 

 

Other Commitments and Contingencies

 

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

 

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

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of September 30, 2013, the aggregate dollar amount of these guarantees and master leases is approximately $367,000,000.

 

At September 30, 2013, $33,068,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

Two of our wholly owned subsidiaries that are contracted to develop and operate the Cleveland Medical Mart and Convention Center, in Cleveland, Ohio, are required to fund $11,500,000, primarily for tenant improvements, and they are responsible for operating expenses and are entitled to the net operating income, if any, upon the completion of development and the commencement of operations.  As of September 30, 2013, our subsidiaries have funded approximately $3,598,000 of the commitment.

 

As of September 30, 2013, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $155,000,000.

82

 


 

  

Funds From Operations (“FFO”)

 

FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gain from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets, extraordinary items and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries.  FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions.  FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flows as a liquidity measure.  FFO may not be comparable to similarly titled measures employed by other companies.  The calculations of both the numerator and denominator used in the computation of income per share are disclosed in Note 20 – Income per Share, in our consolidated financial statements on page 31 of this Quarterly Report on Form 10-Q.

 

FFO for the Three and Nine Months Ended September 30, 2013 and 2012

 

FFO attributable to common shareholders plus assumed conversions was $210,627,000, or $1.12 per diluted share for the three months ended September 30, 2013, compared to $251,019,000, or $1.34 per diluted share, for the prior year’s quarter.  FFO attributable to common shareholders plus assumed conversions was $647,767,000, or $3.45 per diluted share for the nine months ended September 30, 2013, compared to $767,347,000, or $4.07 per diluted share, for the prior year’s nine months.  Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”

 

For The Three Months

For The Nine Months

(Amounts in thousands, except per share amounts)

Ended September 30,

Ended September 30,

Reconciliation of our net income to FFO:

2013 

2012 

2013 

2012 

Net income attributable to Vornado

$

103,374 

$

241,306 

$

524,490 

$

531,125 

Depreciation and amortization of real property

117,901 

118,717 

377,142 

377,338 

Net gains on sale of real estate

(16,087)

(131,088)

(284,081)

(203,801)

Real estate impairment losses

720 

-   

4,727 

13,511 

Proportionate share of adjustments to equity in net income

of Toys, to arrive at FFO:

Depreciation and amortization of real property

16,430 

16,905 

53,235 

50,706 

Real estate impairment losses

1,826 

-   

6,096 

8,394 

Income tax effect of above adjustments

(6,390)

(5,917)

(20,766)

(20,765)

Proportionate share of adjustments to equity in net income of

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

Depreciation and amortization of real property

20,931 

22,750 

62,247 

65,810 

Net gains on sale of real estate

-   

(1,156)

(465)

(2,051)

Real estate impairment losses

-   

-   

-   

1,849 

Noncontrolling interests' share of above adjustments

(7,736)

(1,613)

(11,343)

(18,197)

FFO

230,969 

259,904 

711,282 

803,919 

Preferred share dividends

(20,369)

(20,613)

(62,439)

(56,187)

Preferred unit and share redemptions

-   

11,700 

(1,130)

11,700 

FFO attributable to common shareholders

210,600 

250,991 

647,713 

759,432 

Convertible preferred share dividends

27 

28 

54 

85 

Interest on 3.88% exchangeable senior debentures

-   

-   

-   

7,830 

FFO attributable to common shareholders plus assumed conversions

$

210,627 

$

251,019 

$

647,767 

$

767,347 

Reconciliation of Weighted Average Shares

Weighted average common shares outstanding

186,969 

185,924 

186,885 

185,656 

Effect of dilutive securities:

Employee stock options and restricted share awards

755 

681 

746 

693 

Convertible preferred shares

47 

50 

48 

50 

3.88% exchangeable senior debentures

-   

-   

-   

2,279 

Denominator for FFO per diluted share

187,771 

186,655 

187,679 

188,678 

FFO attributable to common shareholders plus assumed conversions

per diluted share

$

1.12 

$

1.34 

$

3.45 

$

4.07 

83

 


 

  

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

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

 

(Amounts in thousands, except per share amounts)

2013 

2012 

Weighted

Effect of 1%

Weighted

September 30,

Average

Change In

December 31,

Average

Consolidated debt:

Balance

Interest Rate

Base Rates

Balance

Interest Rate

Variable rate

$

1,353,097 

2.32%

$

13,531 

$

3,043,199 

1.84%

Fixed rate

8,648,236 

5.03%

-   

8,129,009 

5.18%

$

10,001,333 

4.67%

13,531 

$

11,172,208 

4.27%

Prorata share of debt of non-consolidated

entities (non-recourse):

Variable rate – excluding Toys

$

194,423 

2.12%

1,944 

$

264,531 

2.88%

Variable rate – Toys

731,522 

5.71%

7,315 

703,922 

5.69%

Fixed rate (including $984,990 and

$1,148,407 of Toys debt in 2013 and 2012)

3,106,589 

6.89%

-   

3,030,476 

7.04%

$

4,032,534 

6.44%

9,259 

$

3,998,929 

6.53%

Noncontrolling interests’ share of above

(1,322)

Total change in annual net income

$

21,468 

Per share-diluted

$

0.11 

 

We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of September 30, 2013, we have one interest rate cap with a principal amount of $60,000,000 and an interest rate of 2.36%.  This cap is based on a notional amount of $60,000,000 and caps LIBOR at a rate of 7.00%.  In addition, we have one interest rate swap on a $425,000,000 mortgage loan that swapped the rate from LIBOR plus 2.00% (2.18% at September 30, 2013) to a fixed rate of 5.13% for the remaining five-year term of the loan. 

 

As of September 30, 2013, we have investments in mezzanine loans with an aggregate carrying amount of $152,079,000 that are based on variable interest rates which partially mitigate our exposure to a change in interest rates on our variable rate debt.

 

Fair Value of Debt

 

The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt.  As of September 30, 2013, the estimated fair value of our consolidated debt was $10,134,982,000.

84

 


 

  

Item 4.   Controls and Procedures

Disclosure Controls and Procedures:  The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, such disclosure controls and procedures were effective.

 

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

 

85

 


 

  

PART II.   OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

 

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

 

Item 1A. Risk Factors

 

 

There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

 

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

 

During the third quarter of 2013, we issued 6,558 common shares upon the redemption of Class A units of the Operating Partnership held by persons who received units, in private placements in earlier periods, in exchange for their interests in limited partnerships that owned real estate. The common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4 (2) of that Act.

 

Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under Part III, Item 12 of the Annual Report on Form 10-K for the year ended December 31, 2012, and such information is incorporated by reference herein.

 

 

Item 3.   Defaults Upon Senior Securities

        None.

 

 

Item 4.   Mine Safety Disclosures

        Not applicable.

 

 

Item 5.   Other Information

       None.

 

Item 6.   Exhibits

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

 

86

 


 

  

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: November 4, 2013

By:

/s/ Stephen W. Theriot

 

 

Stephen W. Theriot, Chief Financial Officer
(duly authorized officer and principal financial and
accounting officer)

87

 


 
 

  

 

EXHIBIT INDEX

Exhibit No.

 

 

 

 

 

 

 

3.3

 

-

Articles Supplementary, 5.40% Series L Cumulative Redeemable Preferred Shares of

*

 

 

 

 

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

 

 

 

 

 

reference to Exhibit 3.6 to Vornado Realty Trust’s Registration Statement on Form 8-A

 

 

 

 

 

(File No. 001-11954), filed on January 25, 2013

 

 

 

 

 

 

 

 

3.49

 

-

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

*

 

 

 

 

dated as of January 25, 2013 – Incorporated by reference to Exhibit 3.1 to Vornado Realty

 

 

 

 

 

L.P.’s Current Report on Form 8-K (File No. 001-34482), filed on January 25, 2013

 

 

 

 

 

 

 

 

10.46

**

-

Letter Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated

*

 

 

 

 

February 27, 2013. Incorporated by reference to Exhibit 99.1 to Vornado Realty Trust’s

 

 

 

 

 

Current Report on Form 8-K (File No. 001-11954), filed on February 27, 2013

 

 

 

 

 

 

 

 

10.47

**

-

Waiver and Release between Vornado Realty Trust and Michael D. Fascitelli, dated

*

 

 

 

 

February 27, 2013. Incorporated by reference to Exhibit 99.2 to Vornado Realty Trust’s

 

 

 

 

 

Current Report on Form 8-K (File No. 001-11954), filed on February 27, 2013

 

 

 

 

 

 

 

 

10.48

 

-

Amendment to June 2011 Revolving Credit Agreement dated as of March 28, 2013, by and

*

 

 

 

 

among Vornado Realty L.P., as Borrower, the banks listed on the signature pages, and

 

 

 

 

 

J.P. Morgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to

 

 

 

 

 

Exhibit 10.48 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter

 

 

 

 

 

ended March 31, 2013 (File No. 001-11954), filed on May 6, 2013

 

 

 

 

 

 

 

 

10.49

 

-

Amendment to November 2011 Revolving Credit Agreement dated as of March 28, 2013, by

*

 

 

 

 

and among Vornado Realty L.P., as Borrower, the banks listed on the signature pages, and

 

 

 

 

 

J.P. Morgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to

 

 

 

 

 

Exhibit 10.49 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter

 

 

 

 

 

ended March 31, 2013 (File No. 001-11954), filed on May 6, 2013

 

 

 

 

 

 

 

 

10.50

**

-

Form of Vornado Realty Trust 2013 Outperformance Plan Award Agreement. Incorporated

*

 

 

 

 

by reference to Exhibit 10.50 to Vornado Realty Trust’s Quarterly Report on Form 10-Q

 

 

 

 

 

for the quarter ended March 31, 2013 (File No. 001-11954), filed on May 6, 2013

 

 

 

 

 

 

 

 

10.51

**

-

Employment agreement between Vornado Realty Trust and Stephen W. Theriot dated

*

 

 

 

 

June 1, 2013. Incorporated by reference to Exhibit 10.51 to Vornado Realty Trust’s

 

 

 

 

 

Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 001-11954),

 

 

 

 

 

filed on August 5, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

______________________________

 

   

  *

Incorporated by reference

   

**

Management contract or compensation agreement

 

88

 


 
 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT INDEX

Exhibit No.

 

 

 

 

 

 

 

15.1

 

-

Letter regarding Unaudited Interim Financial

 

 

 

 

 

 

 

 

31.1

-

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

   

 

31.2

-

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

   

 

32.1

-

Section 1350 Certification of the Chief Executive Officer

   

 

32.2

-

Section 1350 Certification of the Chief Financial Officer

 

 

 

 

 

 

 

101.INS

-

XBRL Instance Document

   

 

101.SCH

-

XBRL Taxonomy Extension Schema

   

 

101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase

   

 

101.DEF

-

XBRL Taxonomy Extension Definition Linkbase

   

 

101.LAB

-

XBRL Taxonomy Extension Label Linkbase

 

 

 

 

 

 

 

 

101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase

 

 

 

 

 

89