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3: EX-15.2 Letter re: Unaudited Interim Financial Info HTML 30K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 35K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 35K
6: EX-31.3 Certification -- §302 - SOA'02 HTML 34K
7: EX-31.4 Certification -- §302 - SOA'02 HTML 34K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 32K
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10: EX-32.3 Certification -- §906 - SOA'02 HTML 33K
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18: R1 Cover HTML 97K
19: R2 Consolidated Balance Sheets (Unaudited) HTML 195K
20: R3 Consolidated Balance Sheets (Unaudited) HTML 65K
(Parentheticals)
21: R4 Consolidated Statements of Income (Unaudited) HTML 167K
22: R5 Consolidated Statements of Comprehensive Income HTML 62K
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23: R6 Consolidated Statements of Changes in Equity HTML 267K
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24: R7 Consolidated Statements of Changes in Equity HTML 32K
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25: R8 Consolidated Statements of Cash Flows (Unaudited) HTML 238K
26: R9 Consolidated Statements of Cash Flows (Unaudited) HTML 38K
(Parentheticals)
27: R10 Organization HTML 33K
28: R11 COVID-19 Pandemic HTML 39K
29: R12 Basis of Presentation HTML 34K
30: R13 Recently Issued Accounting Literature HTML 47K
31: R14 Revenue Recognition HTML 124K
32: R15 Real Estate Fund Investments HTML 50K
33: R16 Marketable Securities HTML 37K
34: R17 Investments in Partially Owned Entities HTML 99K
35: R18 220 Central Park South 220 CPS HTML 34K
36: R19 Identified Intangible Assets and Liabilities HTML 50K
37: R20 Debt HTML 55K
38: R21 Redeemable Noncontrolling Interests HTML 63K
39: R22 Shareholders' Equity/Partners' Capital HTML 95K
40: R23 Variable Interest Entities (VIEs) HTML 34K
41: R24 Fair Value Measurements HTML 194K
42: R25 Stock-based Compensation HTML 36K
43: R26 (Expense from Transaction Related Costs and HTML 46K
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44: R27 Interest and Other Investment Income (Loss), Net HTML 58K
45: R28 Interest and Debt Expense HTML 44K
46: R29 Income (Loss) Per Share/Income (Loss) Per Class A HTML 122K
Unit
47: R30 Commitments and Contingencies HTML 46K
48: R31 Segment Information HTML 134K
49: R32 Recently Issued Accounting Literature (Policies) HTML 57K
50: R33 Revenue Recognition (Tables) HTML 134K
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53: R36 Investments in Partially Owned Entities (Tables) HTML 90K
54: R37 Identified Intangible Assets and Liabilities HTML 51K
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56: R39 Redeemable Noncontrolling Interests (Tables) HTML 58K
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58: R41 Fair Value Measurements (Tables) HTML 244K
59: R42 (Expense from Transaction Related Costs and HTML 45K
Impairment Losses) and Gain from Lease Liability
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60: R43 Interest and Other Investment Income (Loss), Net HTML 57K
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61: R44 Interest and Debt Expense (Tables) HTML 44K
62: R45 Income (Loss) Per Share/Income (Loss) Per Class A HTML 124K
Unit (Tables)
63: R46 Segment Information (Tables) HTML 130K
64: R47 Organization (Narrative) (Details) HTML 33K
65: R48 COVID-19 Pandemic (Narrative) (Details) HTML 75K
66: R49 Recently Issued Accounting Literature (Narrative) HTML 61K
(Details)
67: R50 Revenue Recognition (Revenues by Segment) HTML 99K
(Details)
68: R51 Revenue Recognition (Components of Lease Revenue) HTML 37K
(Details)
69: R52 Real Estate Fund Investments (Narrative) (Details) HTML 71K
70: R53 Real Estate Fund Investments (Income from the Fund HTML 44K
and the Co-Investment) (Details)
71: R54 Marketable Securities (Narrative) (Details) HTML 39K
72: R55 Marketable Securities (Marketable Securities HTML 40K
Portfolio) (Details)
73: R56 Investments in Partially Owned Entities (Fifth HTML 80K
Avenue and Times Square JV) (Details)
74: R57 Investments in Partially Owned Entities (Latest HTML 49K
Financial Information of Fifth Avenue and Times
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75: R58 Investments in Partially Owned Entities HTML 70K
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76: R59 Investments in Partially Owned Entities (Summary HTML 55K
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77: R60 Investments in Partially Owned Entities (Summary HTML 63K
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78: R61 220 Central Park South 220 CPS (Narrative) HTML 52K
(Details)
79: R62 Identified Intangible Assets and Liabilities HTML 39K
(Narrative) (Details)
80: R63 Identified Intangible Assets and Liabilities HTML 44K
(Schedule of Identified Intangible Assets and
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81: R64 Identified Intangible Assets and Liabilities HTML 46K
(Schedule of Future Amortization Expense of
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82: R65 Debt (Narrative) (Details) HTML 74K
83: R66 Debt (Summary of Debt) (Details) HTML 59K
84: R67 Redeemable Noncontrolling Interests (Narrative) HTML 63K
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85: R68 Redeemable Noncontrolling Interests (Activity of HTML 60K
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86: R69 Shareholders' Equity/Partners' Capital (Narrative) HTML 38K
(Details)
87: R70 Shareholders' Equity/Partners' Capital (Schedule HTML 70K
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88: R71 Shareholders' Equity/Partners' Capital (AOCI by HTML 61K
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89: R72 Variable Interest Entities (VIEs) (Narrative) HTML 44K
(Details)
90: R73 Fair Value Measurements (Narrative) (Details) HTML 48K
91: R74 Fair Value Measurements (Financial Assets and HTML 74K
Liabilities Measured at Fair Value on a Recurring
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92: R75 Fair Value Measurements (Unobservable Quantitative HTML 54K
Input Ratios) (Details)
93: R76 Fair Value Measurements (Changes in the Fair Value HTML 50K
of Real Estate Fund Investments and Deferred
Compensation Plan Assets) (Details)
94: R77 Fair Value Measurements (Changes in the Fair Value HTML 38K
of Loans Receivable) (Details)
95: R78 Fair Value Measurements (Summary of Derivative HTML 81K
Instruments) (Details)
96: R79 Fair Value Measurements (Fair Value Measurements HTML 41K
on a Nonrecurring Basis) (Details)
97: R80 Fair Value Measurements (Carrying amounts and fair HTML 67K
value of financial instruments) (Details)
98: R81 Stock-based Compensation (Narrative) (Details) HTML 89K
99: R82 (Expense from Transaction Related Costs and HTML 40K
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103: R86 Interest and Debt Expense (Footnote) (Details) HTML 38K
104: R87 Income (Loss) Per Share/Income (Loss) Per Class A HTML 119K
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105: R88 Income (Loss) Per Share/Income (Loss) Per Class A HTML 35K
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(Exact name of registrants as specified in its charter)
Vornado
Realty Trust
iMaryland
i22-1657560
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Vornado Realty L.P.
iDelaware
i13-3925979
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i888 Seventh Avenue,
iNew
York,
iNew York
i10019
(Address of principal executive offices) (Zip Code)
i(212)
i894-7000
(Registrants’
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.
Vornado Realty Trust: iYes☑
No ☐ Vornado Realty L.P.: iYes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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).
Vornado
Realty Trust: iYes☑ No ☐ Vornado Realty L.P.: iYes☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”"non-accelerated filer,"“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Vornado Realty Trust:
☑
iLarge
Accelerated Filer
☐
Accelerated Filer
☐
Non-Accelerated Filer
i☐
Smaller Reporting Company
i☐
Emerging
Growth Company
Vornado Realty L.P.:
☐
Large Accelerated Filer
☐
Accelerated Filer
☑
iNon-Accelerated Filer
i☐
Smaller Reporting Company
i☐
Emerging
Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Vornado Realty Trust: Yesi☐
No ☑ Vornado Realty L.P.: Yesi☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
Vornado Realty Trust
iCommon Shares of beneficial interest, $.04 par value per share
iVNO
iNew
York Stock Exchange
Cumulative Redeemable Preferred Shares of beneficial interest, liquidation preference $25.00 per share:
Vornado Realty Trust
i5.70% Series K
iVNO/PK
iNew
York Stock Exchange
Vornado Realty Trust
i5.40% Series L
iVNO/PL
iNew
York Stock Exchange
Vornado Realty Trust
i5.25% Series M
iVNO/PM
iNew
York Stock Exchange
As of September 30, 2020, i191,260,981 of Vornado Realty Trust’s common shares of beneficial interest are outstanding.
EXPLANATORY
NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2020 of Vornado Realty Trust and Vornado Realty L.P. Unless stated otherwise or the context otherwise requires, references to “Vornado” refer to Vornado Realty Trust, a Maryland real estate investment trust (“REIT”), and references to the “Operating Partnership” refer to Vornado Realty L.P., a Delaware limited partnership. References to the “Company,”“we,”“us” and “our” mean collectively Vornado, the Operating Partnership and those subsidiaries consolidated by Vornado.
The Operating Partnership is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. Vornado is the sole general partner and
also a 92.7%limited partner of the Operating Partnership. As the sole general partner of the Operating Partnership, Vornado has exclusive control of the Operating Partnership’s day-to-day management.
Under the limited partnership agreement of the Operating Partnership, unitholders may present their Class A units for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time). Class A units may be tendered for redemption to the Operating Partnership for cash; Vornado, at its option, may assume that obligation and pay the holder either cash or Vornado common shares on a one-for-one basis. Because the number of Vornado common shares outstanding at all times equals the number of Class A units owned by Vornado, the redemption value of each Class A unit is equivalent to the market value of one
Vornado common share, and the quarterly distribution to a Class A unitholder is equal to the quarterly dividend paid to a Vornado common shareholder. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. Vornado generally expects that it will elect to issue its common shares in connection with each such presentation for redemption rather than having the Operating Partnership pay cash. With each such exchange or redemption, Vornado’s percentage ownership in the Operating Partnership will increase. In addition, whenever Vornado issues common shares other than to acquire Class A units of the Operating Partnership, Vornado must contribute any net proceeds it receives to the Operating Partnership and the Operating Partnership must issue to Vornado an equivalent number of Class A units of the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.
The
Company believes that combining the quarterly reports on Form 10-Q of Vornado and the Operating Partnership into this single report provides the following benefits:
•enhances investors’ understanding of Vornado and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•eliminates duplicative disclosure and provides a more streamlined and readable presentation because a substantial portion of the disclosure applies to both Vornado and the Operating Partnership; and
•creates time and cost efficiencies in the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few
differences between Vornado and the Operating Partnership in the context of how Vornado and the Operating Partnership operate as a consolidated company. The financial results of the Operating Partnership are consolidated into the financial statements of Vornado. Vornado does not have any significant assets, liabilities or operations, other than its investment in the Operating Partnership. The Operating Partnership, not Vornado, generally executes all significant business relationships other than transactions involving the securities of Vornado. The Operating Partnership holds substantially all of the assets of Vornado. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by Vornado, which are contributed to the capital of the Operating Partnership in exchange for Class A units of partnership in the Operating Partnership, and the net proceeds
of debt offerings by Vornado, which are contributed to the Operating Partnership in exchange for debt securities of the Operating Partnership, as applicable, the Operating Partnership generates all remaining capital required by the Company’s business. These sources may include working capital, net cash provided by operating activities, borrowings under the revolving credit facility, the issuance of secured and unsecured debt and equity securities and proceeds received from the disposition of certain properties.
3
To help investors better understand the key differences between Vornado and the Operating Partnership, certain information for Vornado and the Operating Partnership in this report has been separated, as set forth below:
•Item
1. Financial Statements (unaudited), which includes the following specific disclosures for Vornado Realty Trust and Vornado Realty L.P.:
•Note 12. Redeemable Noncontrolling Interests
•Note 13. Shareholders' Equity/Partners' Capital
•Note 20. Income (Loss) Per Share/Income (Loss) Per Class A Unit
•Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes information specific to each entity, where applicable.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of Vornado and the Operating Partnership in order to establish
that the requisite certifications have been made and that Vornado and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
220
Central Park South condominium units ready for sale
i181,041
i408,918
Receivable
arising from the straight-lining of rents
i678,381
i742,206
Deferred
leasing costs, net of accumulated amortization of $i191,093 and $i196,229
i385,089
i353,986
Identified
intangible assets, net of accumulated amortization of $i95,567 and $i98,587
i25,746
i30,965
Other
assets
i510,955
i355,347
$
i17,562,898
$
i18,287,013
LIABILITIES,
REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
$
i5,639,151
$
i5,639,897
Senior
unsecured notes, net
i446,482
i445,872
Unsecured
term loan, net
i796,499
i745,840
Unsecured
revolving credit facilities
i575,000
i575,000
Lease
liabilities
i425,646
i498,254
Moynihan
Train Hall obligation
i1,223,600
i914,960
Special
dividend/distribution payable
i—
i398,292
Accounts
payable and accrued expenses
i430,446
i440,049
Deferred
revenue
i45,473
i59,429
Deferred
compensation plan
i98,543
i103,773
Other
liabilities
i302,622
i265,754
Total
liabilities
i9,983,462
i10,087,120
Commitments
and contingencies
i
i
Redeemable noncontrolling interests:
Class
A units - i13,670,466 and i13,298,956 units outstanding
i594,934
i884,380
Series
D cumulative redeemable preferred units - ii141,401/
units outstanding
i4,535
i4,535
Total
redeemable noncontrolling partnership units
i599,469
i888,915
Redeemable
noncontrolling interest in a consolidated subsidiary
i94,282
i—
Total
redeemable noncontrolling interests
i693,751
i888,915
Shareholders'
equity:
Preferred shares of beneficial interest: iino/
par value per share; authorized ii110,000,000/
shares; issued and outstanding ii36,793,402/
and ii36,795,640/ shares
i891,156
i891,214
Common
shares of beneficial interest: $ii0.04/
par value per share; authorized ii250,000,000/
shares; issued and outstanding ii191,260,981/
and ii190,985,677/ shares
i7,629
i7,618
Additional
capital
i8,123,524
i7,827,697
Earnings
less than distributions
(i2,463,635)
(i1,954,266)
Accumulated
other comprehensive loss
(i89,834)
(i40,233)
Total
shareholders' equity
i6,468,840
i6,732,030
Noncontrolling
interests in consolidated subsidiaries
i416,845
i578,948
Total
equity
i6,885,685
i7,310,978
$
i17,562,898
$
i18,287,013
See
notes to consolidated financial statements (unaudited).
Adjustments
to reconcile net (loss) income to net cash provided by operating activities:
Equity in net loss (income) of partially owned entities
i353,679
(i56,139)
Net
gains on disposition of wholly owned and partially owned assets
(i338,862)
(i641,664)
Depreciation
and amortization (including amortization of deferred financing costs)
i305,905
i341,951
Net
unrealized loss on real estate fund investments
i225,412
i16,162
Distributions
of income from partially owned entities
i132,850
i66,252
Non-cash
(gain on extinguishment of 608 Fifth Avenue lease liability) impairment loss on 608 Fifth Avenue right-of-use asset
(i70,260)
i75,220
Write-off
of lease receivables deemed uncollectible
i60,766
i16,488
Stock-based
compensation expense
i39,638
i48,045
Straight-lining
of rents
i20,021
i8,446
Credit
losses on loans receivable
i13,369
i—
Amortization
of below-market leases, net
(i13,054)
(i15,561)
Decrease
in fair value of marketable securities
i4,938
i3,095
Net
gain on transfer to Fifth Avenue and Times Square JV
i—
(i2,571,099)
Real
estate impairment losses
i—
i26,140
Prepayment
penalty on redemption of senior unsecured notes due 2022
i—
i22,058
Other
non-cash adjustments
i7,544
i3,406
Changes
in operating assets and liabilities:
Real estate fund investments
(i6,502)
(i4,000)
Tenant
and other receivables, net
(i27,093)
(i28,110)
Prepaid
assets
(i215,645)
(i74,502)
Other
assets
(i41,328)
(i10,195)
Accounts
payable and accrued expenses
(i4,058)
i1,496
Other
liabilities
(i2,841)
(i3,104)
Net
cash provided by operating activities
i191,360
i397,971
Cash
Flows from Investing Activities:
Proceeds from sale of condominium units at 220 Central Park South
i939,292
i1,039,493
Development
costs and construction in progress
(i448,167)
(i448,281)
Moynihan
Train Hall expenditures
(i277,128)
(i352,211)
Additions
to real estate
(i112,906)
(i189,579)
Proceeds
from sales of marketable securities
i28,375
i168,314
Investments
in partially owned entities
(i6,156)
(i16,480)
Distributions
of capital from partially owned entities
i1,090
i24,880
Acquisitions
of real estate and other
(i985)
(i3,260)
Proceeds
from transfer of interest in Fifth Avenue and Times Square JV (net of $i35,562 of transaction costs and $i10,899
of deconsolidated cash and restricted cash)
i—
i1,248,743
Proceeds
from redemption of 640 Fifth Avenue preferred equity
i—
i500,000
Proceeds
from sale of real estate and related investments
i—
i255,534
Proceeds
from repayments of loans receivable
i—
i1,395
Net
cash provided by investing activities
i123,415
i2,228,548
See
notes to consolidated financial statements (unaudited).
Moynihan
Train Hall reimbursement from Empire State Development
i277,128
i352,211
Contributions
from noncontrolling interests
i98,626
i9,223
Distributions
to noncontrolling interests
(i76,759)
(i65,084)
Dividends
paid on preferred shares
(i50,123)
(i37,598)
Proceeds
received from exercise of employee share options and other
i5,567
i2,403
Debt
issuance costs
(i1,357)
(i15,328)
Repurchase
of shares related to stock compensation agreements and related tax withholdings and other
(i137)
(i8,692)
Purchase
of marketable securities in connection with defeasance of mortgage payable
i—
(i407,126)
Prepayment
penalty on redemption of senior unsecured notes due 2022
i—
(i22,058)
Redemption
of preferred shares
i—
(i893)
Net
cash used in financing activities
(i431,568)
(i2,097,868)
Net
(decrease) increase in cash and cash equivalents and restricted cash
(i116,793)
i528,651
Cash
and cash equivalents and restricted cash at beginning of period
i1,607,131
i716,905
Cash
and cash equivalents and restricted cash at end of period
$
i1,490,338
$
i1,245,556
Reconciliation
of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
$
i1,515,012
$
i570,916
Restricted
cash at beginning of period
i92,119
i145,989
Cash
and cash equivalents and restricted cash at beginning of period
$
i1,607,131
$
i716,905
Cash
and cash equivalents at end of period
$
i1,411,047
$
i1,132,491
Restricted
cash at end of period
i79,291
i113,065
Cash
and cash equivalents and restricted cash at end of period
$
i1,490,338
$
i1,245,556
Supplemental
Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $i30,649 and $i55,186
$
i164,752
$
i227,310
Cash
payments for income taxes
$
i14,252
$
i47,345
Non-Cash
Investing and Financing Activities:
Reclassification of condominium units from "development costs and construction in progress" to "220 Central Park South condominium units ready for sale"
$
i370,850
$
i825,520
Redeemable
Class A unit measurement adjustment
i272,436
i123,635
Accrued
capital expenditures included in accounts payable and accrued expenses
i118,672
i117,205
Write-off
of fully depreciated assets
(i111,863)
(i113,261)
Investments
received in exchange for transfer to Fifth Avenue and Times Square JV:
Preferred equity
i—
i2,327,750
Common
equity
i—
i1,449,495
Lease
liabilities arising from the recognition of right-of-use assets
i—
i526,866
Marketable
securities transferred in connection with the defeasance of mortgage payable
i—
(i407,126)
Defeasance
of mortgage payable
i—
i390,000
Amounts
related to our investment in Pennsylvania Real Estate Investment Trust reclassified from "investments in partially owned entities" and "accumulated other comprehensive loss" to "marketable securities" upon conversion of operating partnership units to common shares
i—
i54,962
See
notes to consolidated financial statements (unaudited).
Adjustments
to reconcile net (loss) income to net cash provided by operating activities:
Equity in net loss (income) of partially owned entities
i353,679
(i56,139)
Net
gains on disposition of wholly owned and partially owned assets
(i338,862)
(i641,664)
Depreciation
and amortization (including amortization of deferred financing costs)
i305,905
i341,951
Net
unrealized loss on real estate fund investments
i225,412
i16,162
Distributions
of income from partially owned entities
i132,850
i66,252
Non-cash
(gain on extinguishment of 608 Fifth Avenue lease liability) impairment loss on 608 Fifth Avenue right-of-use asset
(i70,260)
i75,220
Write-off
of lease receivables deemed uncollectible
i60,766
i16,488
Stock-based
compensation expense
i39,638
i48,045
Straight-lining
of rents
i20,021
i8,446
Credit
losses on loans receivable
i13,369
i—
Amortization
of below-market leases, net
(i13,054)
(i15,561)
Decrease
in fair value of marketable securities
i4,938
i3,095
Net
gain on transfer to Fifth Avenue and Times Square JV
i—
(i2,571,099)
Real
estate impairment losses
i—
i26,140
Prepayment
penalty on redemption of senior unsecured notes due 2022
i—
i22,058
Other
non-cash adjustments
i7,544
i3,406
Changes
in operating assets and liabilities:
Real estate fund investments
(i6,502)
(i4,000)
Tenant
and other receivables, net
(i27,093)
(i28,110)
Prepaid
assets
(i215,645)
(i74,502)
Other
assets
(i41,328)
(i10,195)
Accounts
payable and accrued expenses
(i4,058)
i1,496
Other
liabilities
(i2,841)
(i3,104)
Net
cash provided by operating activities
i191,360
i397,971
Cash
Flows from Investing Activities:
Proceeds from sale of condominium units at 220 Central Park South
i939,292
i1,039,493
Development
costs and construction in progress
(i448,167)
(i448,281)
Moynihan
Train Hall expenditures
(i277,128)
(i352,211)
Additions
to real estate
(i112,906)
(i189,579)
Proceeds
from sales of marketable securities
i28,375
i168,314
Investments
in partially owned entities
(i6,156)
(i16,480)
Distributions
of capital from partially owned entities
i1,090
i24,880
Acquisitions
of real estate and other
(i985)
(i3,260)
Proceeds
from transfer of interest in Fifth Avenue and Times Square JV (net of $i35,562 of transaction costs and $i10,899
of deconsolidated cash and restricted cash)
i—
i1,248,743
Proceeds
from redemption of 640 Fifth Avenue preferred equity
i—
i500,000
Proceeds
from sale of real estate and related investments
i—
i255,534
Proceeds
from repayments of loans receivable
i—
i1,395
Net
cash provided by investing activities
i123,415
i2,228,548
See
notes to consolidated financial statements (unaudited).
Moynihan
Train Hall reimbursement from Empire State Development
i277,128
i352,211
Contributions
from noncontrolling interests in consolidated subsidiaries
i98,626
i9,223
Distributions
to redeemable security holders and noncontrolling interests in consolidated subsidiaries
(i76,759)
(i65,084)
Distributions
to preferred unitholders
(i50,123)
(i37,598)
Proceeds
received from exercise of Vornado stock options and other
i5,567
i2,403
Debt
issuance costs
(i1,357)
(i15,328)
Repurchase
of Class A units related to stock compensation agreements and related tax withholdings and other
(i137)
(i8,692)
Purchase
of marketable securities in connection with defeasance of mortgage payable
i—
(i407,126)
Prepayment
penalty on redemption of senior unsecured notes due 2022
i—
(i22,058)
Redemption
of preferred units
i—
(i893)
Net
cash used in financing activities
(i431,568)
(i2,097,868)
Net
(decrease) increase in cash and cash equivalents and restricted cash
(i116,793)
i528,651
Cash
and cash equivalents and restricted cash at beginning of period
i1,607,131
i716,905
Cash
and cash equivalents and restricted cash at end of period
$
i1,490,338
$
i1,245,556
Reconciliation
of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
$
i1,515,012
$
i570,916
Restricted
cash at beginning of period
i92,119
i145,989
Cash
and cash equivalents and restricted cash at beginning of period
$
i1,607,131
$
i716,905
Cash
and cash equivalents at end of period
$
i1,411,047
$
i1,132,491
Restricted
cash at end of period
i79,291
i113,065
Cash
and cash equivalents and restricted cash at end of period
$
i1,490,338
$
i1,245,556
Supplemental
Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $i30,649 and $i55,186
$
i164,752
$
i227,310
Cash
payments for income taxes
$
i14,252
$
i47,345
Non-Cash
Investing and Financing Activities:
Reclassification of condominium units from "development costs and construction in progress" to "220 Central Park South condominium units ready for sale"
$
i370,850
$
i825,520
Redeemable
Class A unit measurement adjustment
i272,436
i123,635
Accrued
capital expenditures included in accounts payable and accrued expenses
i118,672
i117,205
Write-off
of fully depreciated assets
(i111,863)
(i113,261)
Investments
received in exchange for transfer to Fifth Avenue and Times Square JV:
Preferred equity
i—
i2,327,750
Common
equity
i—
i1,449,495
Lease
liabilities arising from the recognition of right-of-use assets
i—
i526,866
Marketable
securities transferred in connection with the defeasance of mortgage payable
i—
(i407,126)
Defeasance
of mortgage payable
i—
i390,000
Amounts
related to our investment in Pennsylvania Real Estate Investment Trust reclassified from "investments in partially owned entities" and "accumulated other comprehensive loss" to "marketable securities" upon conversion of operating partnership units to common shares
i—
i54,962
See
notes to consolidated financial statements (unaudited)
23
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. iOrganization
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 approximatelyi92.7%
of the common limited partnership interest in the Operating Partnership as of September 30, 2020. All references to the “Company,”“we,”“us” and “our” mean, collectively, Vornado, the Operating Partnership and those subsidiaries consolidated by Vornado.
2. iCOVID-19 Pandemic
Our
business has been adversely affected as a result of the COVID-19 pandemic and the preventive measures taken to curb the spread of the virus. Some of the effects on us include the following:
•With the exception of grocery stores and other "essential" businesses, many of our retail tenants closed their stores in March 2020 and began reopening when New York City entered phase two of its state-mandated reopening plan on June 22, 2020.
•While our buildings remain open, many of our office tenants are working remotely.
•We have closed the Hotel Pennsylvania. In connection with the closure, we accrued $ii9,246,000/
of severance for furloughed Hotel Pennsylvania union employees and recognized a corresponding $ii3,145,000/
income tax benefit for the three and nine months ended September 30, 2020.
•We have cancelled trade shows at theMART for the remainder of 2020.
•Because certain of our development projects were deemed "non-essential," they were temporarily paused in March 2020 due to New York State executive orders and resumed once New York City entered phase one of its state mandated reopening plan on June 8, 2020.
•As of April 30, 2020, we placedi1,803
employees on furlough, which included i1,293 employees of Building Maintenance Services LLC ("BMS"), a wholly owned subsidiary, which provides cleaning, security and engineering services primarily to our New York properties, i414
employees at the Hotel Pennsylvania and i96 corporate staff employees. As of October 31, 2020, i40% of the furloughed employees have returned to work.
•Effective
April 1, 2020, our executive officers waived portions of their annual base salary for the remainder of 2020.
•Effective April 1, 2020, each non-management member of our Board of Trustees agreed to forgo their $i75,000 annual cash retainer for the remainder of 2020.
While we believe our tenants are required to pay rent under their leases, in limited circumstances, we have
agreed to and may continue to agree to rent deferrals and rent abatements for certain of our tenants. We have made a policy election in accordance with the Financial Accounting Standards Board (“FASB”) Staff Q&A which provides relief in accounting for leases during the COVID-19 pandemic, allowing us to continue recognizing rental revenue on a straight-line basis for rent deferrals, with no impact to revenue recognition, and to recognize rent abatements as a reduction to rental revenue in the period granted. See Note 4 - Recently Issued Accounting Literature for additional information.
For the quarter ended September 30, 2020, we collected i93%
(i95% including rent deferrals) of rent due from our tenants, comprised of i95% (i97%
including rent deferrals) from our office tenants and i82% (i85% including rent deferrals) from our retail tenants. Rent deferrals generally require repayment in monthly installments over a period not to exceed twelve months.
Based
on our assessment of the probability of rent collection of our lease receivables, we have written off $i13,873,000 and $i50,170,000 of receivables
arising from the straight-lining of rents for the three and nine months ended September 30, 2020, respectively, including the JCPenney retail lease at Manhattan Mall and the New York & Company, Inc. office lease at 330 West 34th Street. Both tenants have filed for Chapter 11 bankruptcy. In addition, we have written off $i12,364,000 and $i21,186,000
of tenant receivables deemed uncollectible for the three and nine months ended September 30, 2020, respectively. These write-offs resulted in a reduction of lease revenues and our share of income from partially owned entities. Prospectively, revenue recognition for these tenants will be based on actual amounts received. See Note 5 - Revenue Recognition and Note 8 - Investments in Partially Owned Entities for additional information.
3. iBasis
of Presentation
iThe accompanying consolidated financial statements are unaudited and include the accounts of Vornado and the Operating Partnership and their consolidated subsidiaries. All inter-company amounts have been eliminated and 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 (“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, 2019, as filed with the SEC.
24
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
3. Basis
of Presentation - continued
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, 2020 are not necessarily indicative of the operating results for the full year.
4. iiRecently
Issued Accounting Literature /
In June 2016, the FASB issued an update ("ASU 2016-13") Measurement of Credit Losses on Financial Instruments establishing Accounting Standards Codification ("ASC") Topic 326, Financial Instruments - Credit Losses ("ASC 326"), as amended by subsequent ASUs on the topic. ASU 2016-13 changes how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current “incurred loss” model with an “expected loss” model that requires consideration of a broader range of information
to estimate expected credit losses over the lifetime of the financial asset. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. In May 2019, the FASB issued ASU 2019-05 Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that were previously recorded at amortized cost and are within the scope of ASC Subtopic 326-20 if the instruments are eligible for the fair value option under ASC Subtopic 825-10, Financial Instruments ("ASC 825-10"). We elected to apply the fair value option on an instrument-by-instrument basis to our loans receivable. We adopted this standard effective January
1, 2020 and recorded a $i16,064,000 cumulative-effect adjustment to beginning accumulated deficit to recognize credit losses on loans receivable recorded on our consolidated balance sheets. For the nine months ended September 30, 2020, we recorded $i13,369,000
of credit losses on our loans receivable which are included in "interest and other investment income (loss), net" on our consolidated statements of income.
In March 2020, the FASB issued an update ("ASU 2020-04") establishing ASC Topic 848, Reference Rate Reform. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding
derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB issued a Staff Q&A on accounting for leases during the COVID-19 pandemic, focused on the application of lease guidance in ASC Topic 842, Leases ("ASC 842"). The Q&A states that it would be acceptable to make a policy election regarding rent concessions resulting from COVID-19, which would not require entities to account for these rent concessions as lease modifications when total cash flows resulting from the modified contract are “substantially the same or less” than the cash flows in the original contract. During the three and nine months ended September
30, 2020, in limited circumstances, we granted rent deferrals and rent abatements for certain of our tenants. We have made a policy election in accordance with the Staff Q&A for our portfolio allowing us to not account for the concessions as lease modifications. Accordingly, rent abatements are recognized as reductions to “rental revenues” during the period in which they were granted. Rent deferrals result in an increase to "tenant and other receivables" during the deferral period with no impact on rental revenue recognition. For any concessions that do not meet the guidance contained in the Q&A, the modification guidance in accordance with ASC 842 will be applied. See Note 2 - COVID-19 Pandemic for further details.
In August 2020, the FASB issued an update ("ASU 2020-06") Debt - Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and also simplifies the diluted earnings per share calculation in certain areas.ASU 2020-06 is effective for reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2020-06 on our consolidated financial statements, but do not believe the adoption of this standard will have a material impact on our consolidated financial statements.
25
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
5. iRevenue Recognition
i
Below
is a summary of our revenues by segment. Additional financial information related to these reportable segments for the three and nine months ended September 30, 2020 and 2019 is set forth in Note 22 - Segment Information.
(1)Reduced
by $i22,135 and $i1,106 for the
three months ended September 30, 2020 and 2019, respectively, and $i60,766 and $i16,488
for the nine months ended September 30, 2020 and 2019, respectively, for the write-off of lease receivables deemed uncollectible (primarily write-offs of receivables arising from the straight-lining of rents).
(2)Closed since April 1, 2020 as a result of the pandemic.
(3)Cancelled trade shows at theMART from late March 2020 through the remainder of the year as a result of the pandemic.
(4)iThe
components of lease revenues were as follows:
(5)Represents
the elimination of theMART and 555 California Street BMS cleaning fees which are included as income in the New York segment.
/
26
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
6. iReal
Estate Fund Investments
We are the general partner and investment manager of Vornado Capital Partners Real Estate Fund (the “Fund”) and own a i25.0% interest in the Fund, which had an initial ieight-year
term ending February 2019. On January 29, 2018, the Fund's term was extended to February 2023. The Fund's ithree-year investment period ended in July 2013. iThe Fund is accounted for under ASC Topic 946, Financial
Services – Investment Companies (“ASC 946”) 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.
We are the general partner and investment manager of the Crowne Plaza Times Square Hotel Joint Venture (the “Crowne Plaza Joint Venture”) and own a i57.1% interest in the joint venture which owns
the i24.7% interest in the Crowne Plaza Times Square Hotel not owned by the Fund. The Crowne Plaza Joint Venture is also accounted for under ASC 946 and we consolidate the accounts of the joint venture into our consolidated financial statements, retaining the fair value basis of accounting. On June 9, 2020, the joint venture between the Fund and the Crowne Plaza Joint Venture defaulted on the $i274,355,000
non-recourse loan on the Crowne Plaza Times Square Hotel. The interest-only loan, which bears interest at a floating rate of LIBOR plus i3.69% (i3.90% as of
September 30, 2020) and provides for additional default interest of i3.00%, was scheduled to mature on July 9, 2020. We are in negotiations with the lenders and there can be no assurance as to the timing and ultimate resolution of these negotiations.
As of September 30, 2020, we had ifour
real estate fund investments through the Fund and the Crowne Plaza Joint Venture with an aggregate fair value of $i3,739,000, $i338,327,000
below cost, and had remaining unfunded commitments of $i28,692,000, of which our share was $i9,140,000. As of December 31, 2019, those ifour
real estate fund investments had an aggregate fair value of $i222,649,000.
iBelow is a summary
of (loss) income from the Fund and the Crowne Plaza Joint Venture.
Less
loss (income) attributable to noncontrolling interests in consolidated subsidiaries
i11,299
(i735)
i160,557
(i8,427)
(Loss)
income from real estate fund investments net of noncontrolling interests in consolidated subsidiaries
$
(i2,524)
$
i1,455
$
(i64,771)
$
(i22,207)
7. iMarketable
Securities
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
On January 23, 2020, we sold all of our i6,250,000 common shares of PREIT, realizing net proceeds of $i28,375,000.
We recorded a $i4,938,000 loss (mark-to-market decrease) for the nine months ended September 30, 2020.
i
The
table below summarizes the changes of our investment in PREIT.
(1)Included in “interest and other investment income (loss), net” on our consolidated statements of income (see Note 18 - Interest and Other Investment Income (Loss), Net).
/
27
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
8. iInvestments in Partially Owned Entities
Fifth Avenue and Times Square JV
As of September 30, 2020, we own a i51.5%
common interest in a joint venture ("Fifth Avenue and Times Square JV") which owns interests in properties located at 640 Fifth Avenue, 655 Fifth Avenue, 666 Fifth Avenue, 689 Fifth Avenue, 697-703 Fifth Avenue, 1535 Broadway and 1540 Broadway (collectively, the "Properties"). The remaining i48.5% common interest in the joint venture is owned by a group of institutional investors (the "Investors"). Our i51.5%
common interest in the joint venture represents an effective i51.0% interest in the Properties. The i48.5% common interest in the joint venture owned by the Investors
represents an effective i47.2% interest in the Properties.
We also own $i1.828 billion of preferred
equity interests in certain of the properties. All of the preferred equity has an annual coupon of i4.25% for the first five years, increasing to i4.75% for the next
five years and thereafter at a formulaic rate. It can be redeemed under certain conditions on a tax deferred basis.
Fifth Avenue and Times Square JV was formed in April 2019, when we contributed our interests in the Properties to the joint venture and transferred a i48.5% common interest in the joint venture to the Investors (the “Transaction”). The Transaction valued the Properties at $i5.556
billion, resulting in a $i2.571 billion net gain, before noncontrolling interests of $i11,945,000,
including a gain related to the step up in our basis of the retained portion of the assets to fair value. Subsequent to the Transaction, Manhattan street retail suffered negative market conditions and was further stressed by the COVID-19 pandemic. This has resulted in a decrease in cash flows. On June 30, 2020, we estimated that the fair value of our investment in Fifth Avenue and Times Square JV was approximately $i2,955,957,000, or $i306,326,000
less than the carrying amount, and concluded that the decline in the value of our investment was "other-than-temporary," resulting in the recognition of a non-cash impairment loss of $i306,326,000, before noncontrolling interests of $i467,000,
for the three months ended June 30, 2020. On September 30, 2020, we estimated that the fair value of our investment in Fifth Avenue and Times Square JV was approximately $i2,811,374,000, or $i107,023,000
less than the carrying amount as of September 30, 2020 (after recognition of the June 30, 2020 impairment loss), and further concluded that the decline in the value of our investment was "other-than-temporary." Our conclusions were based on, among other factors, the significant challenges facing the retail sector and our inability to forecast a recovery over our anticipated holding period. Accordingly, we recognized a non-cash impairment loss of $i107,023,000, before
noncontrolling interests of $i3,822,000, for the three months ended September 30, 2020 and $i413,349,000,
before noncontrolling interests of $i4,289,000, for the nine months ended September 30, 2020. In determining the fair value of our investment, we considered, among other inputs, a discounted cash flow analysis based upon market conditions and expectations of growth. The impairment losses are included in “(loss) income from partially owned entities” on our consolidated statements of income for the three and nine months ended September
30, 2020.
We provide various services to Fifth Avenue and Times Square JV in accordance with management, development, leasing and other agreements. We recognized property management fee income, included in "fee and other income" on our consolidated statements of income, of $i1,219,000 and $i1,104,000
for the three months ended September 30, 2020 and 2019, respectively, and $i2,880,000 and $i1,934,000
for the nine months ended September 30, 2020 and 2019, respectively.
BMS, our wholly-owned subsidiary, supervises cleaning, security and engineering services at certain of the Properties. We recognized income for these services, included in "fee and other income" on our consolidated statements of income, of $i792,000 and $i1,161,000
for the three months ended September 30, 2020 and 2019, respectively, and $i2,565,000 and $i1,952,000
for the nine months ended September 30, 2020 and 2019, respectively.
i
Below is a summary of financial information for Fifth Avenue and Times Square JV.
Net
(loss) income attributable to Fifth Avenue and Times Square JV (after allocation to our preferred equity interests)
(i13,008)
(i1,559)
(i41,412)
i2,520
/
28
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
8. Investments in Partially Owned Entities - continued
Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX)
As of September 30, 2020, we own i1,654,068 Alexander’s common shares, or
approximately i32.4% of Alexander’s common equity. We manage, develop and lease Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.
As of September 30, 2020, the market value ("fair value" pursuant to ASC Topic 820, Fair Value Measurements ("ASC 820")) of our investment in Alexander’s, based on Alexander’s September
30, 2020 closing share price of $i245.22, was$i405,611,000,or $i321,077,000
in excess of the carrying amount on our consolidated balance sheet. As of September 30, 2020, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeded our share of the equity in the net assets of Alexander’s by approximately $i38,511,000. 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.
On September 14, 2020, Alexander's amended and extended the $i350,000,000
mortgage loan on the retail condominium of 731 Lexington Avenue. Under the terms of the agreement, Alexander's paid down the loan by $i50,000,000 to $i300,000,000, extended the maturity date
to August 2025 and guaranteed the interest payments and certain leasing costs. The principal of the loan is non-recourse to Alexander's. The interest-only loan remains at the same rate, LIBOR plus i1.40% (i1.56%
as of September 30, 2020).
On October 23, 2020, Alexander's completed a $i94,000,000 financing of The Alexander, a i312-unit
residential building that is part of Alexander's residential and retail complex located in Rego Park, Queens, New York. The interest-only loan has a fixed rate of i2.63% and matures in November 2027.
Below is a schedule summarizing our investments in partially owned entities.
(2)Includes a $i10,047 reduction in income related to a Forever 21 lease modification at 1540 Broadway and $i2,997
of write-offs of lease receivables deemed uncollectible during 2020.
(3)The three and nine months ended September 30, 2020 include $i3,139 and $i4,846,
respectively, of our share of write-offs of lease receivables deemed uncollectible.
(4)Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 7 West 34th Street, 330 Madison Avenue (sold on July 11, 2019), 512 West 22nd Street, 61 Ninth Avenue, 85 Tenth Avenue and others.
(5)Includes interests in Independence Plaza, Rosslyn Plaza, Urban Edge Properties (sold on March 4, 2019), PREIT (accounted for as a marketable security from March 12, 2019 and sold on January 23, 2020) and others.
9. i220
Central Park South ("220 CPS")
We are completing construction of a residential condominium tower containing i397,000 salable square feet at 220 CPS. The development cost of this project (exclusive of land cost) is estimated to be approximately $i1.450
billion, of which $i1.436 billion has been expended as of September 30, 2020.
During the three months ended September 30, 2020, we closed on the sale of i19
condominium units at 220 CPS for net proceeds of $i591,104,000 resulting in a financial statement net gain of $i214,578,000
which is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income. In connection with these sales, $i27,669,000 of income tax expense was recognized on our consolidated statements of income. During the nine months ended September 30, 2020, we closed on the sale of i30
condominium units at 220 CPS for net proceeds of $i939,292,000 resulting in a financial statement net gain of $i338,862,000.
In connection with these sales, $i43,037,000 of income tax expense was recognized on our consolidated statements of income. From inception to September 30, 2020, we have closed on the sale of i95
units for net proceeds of $i2,759,424,000 resulting in financial statement net gains of $i1,024,479,000.
30
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
10. iIdentified Intangible Assets and Liabilities
i
The
following summarizes our identified intangible assets (primarily above-market leases) and liabilities (primarily below-market leases).
Identified
intangible liabilities (included in deferred revenue):
Gross amount
$
i292,730
$
i316,119
Accumulated
amortization
(i252,554)
(i262,580)
Total,
net
$
i40,176
$
i53,539
/
Amortization
of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental revenues of $i3,648,000 and $i4,393,000 for the three months ended
September 30, 2020 and 2019, respectively, and $i13,054,000 and $i15,561,000
for the nine months ended September 30, 2020 and 2019, respectively. iEstimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2021 is as follows:
(Amounts
in thousands)
2021
$
i10,909
2022
i9,366
2023
i6,837
2024
i3,092
2025
i1,539
Amortization
of all other identified intangible assets (a component of depreciation and amortization expense) was $i1,838,000 and $i1,597,000 for the three
months ended September 30, 2020 and 2019, respectively, and $i4,919,000 and $i7,077,000
for the nine months ended September 30, 2020 and 2019, respectively. Estimated annual amortization of all other identified intangible assets including acquired in-place leases for each of the five succeeding years commencing January 1, 2021 is as follows:
(Amounts in thousands)
2021
$
i4,327
2022
i3,789
2023
i3,703
2024
i3,089
2025
i2,173
31
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
11. iDebt
On February 28, 2020, we increased our unsecured term loan balance to $i800,000,000
(from $i750,000,000) by exercising an accordion feature. Pursuant to an existing swap agreement, $i750,000,000 of the loan
bears interest at a fixed rate of i3.87% through October 2023, and the balance of $i50,000,000 floats at a rate of
LIBOR plus i1.00% (i1.15% as of September 30, 2020). The entire $i800,000,000
will float thereafter for the duration of the loan through February 2024.
On August 12, 2020, we amended the $i700,000,000 mortgage loan on 770 Broadway, a i1.2
million square foot Manhattan office building, to extend the term one year through March 2022.
On October 15, 2020, we completed a $i500,000,000 refinancing of PENN11, a i1.2 million
square foot Manhattan office building. The interest-only loan carries a rate of LIBOR plus i2.75% (currently i2.90%) and matures in October 2023, with itwoone-year extension options. The loan replaces the previous $i450,000,000 loan that bore interest at a fixed rate of i3.95% and was scheduled to mature
in December 2020.
On November 2, 2020, we repaid the $i52,476,000 mortgage loan on our land under a portion of the Borgata Hotel and Casino complex. The i10-year fixed rate
amortizing loan bore interest at i5.14% and was scheduled to mature in February 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
12. iRedeemable Noncontrolling Interests
Redeemable Noncontrolling Partnership Units
iRedeemable
noncontrolling partnership units are primarily comprised of Class A Operating Partnership units held by third parties and 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 Vornado’s consolidated statements of changes in equity and to “partners’ capital” on the consolidated balance sheets of the Operating Partnership.
i
Below
is a table summarizing the activity of redeemable noncontrolling partnership units.
Redemption
of Class A units for Vornado common shares, at redemption value
(i3,586)
(i1,999)
(i6,050)
(i8,128)
Redeemable
Class A unit measurement adjustment
(i23,557)
(i24,228)
(i272,436)
(i123,635)
Other,
net
i5,776
i5,363
i27,958
i34,700
Ending
balance
$
i599,469
$
i854,333
$
i599,469
$
i854,333
/
As
of September 30, 2020 and December 31, 2019, the aggregate redemption value of redeemable Class A units of the Operating Partnership, which are those units held by third parties, was $i460,831,000 and $i884,380,000,
respectively, based on Vornado's quarter-end closing common share price.
Redeemable noncontrolling partnership units 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 Topic 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 $i49,947,000
and $i50,561,000 as of September 30, 2020 and December 31, 2019, respectively. Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income.
Redeemable Noncontrolling Interest in a Consolidated Subsidiary
The consolidated
joint venture in which we own a i95% interest (the remaining i5% is owned by the Related Companies ("Related")) is developing Farley Office
and Retail (the "Project"). During the second quarter of 2020, a historic tax credit investor (the "Tax Credit Investor") funded $i92,400,000 of capital contributions. The Tax Credit Investor is projected to have $i142,000,000
of net capital contributed after making an estimated $i185,000,000 in total contributions and receiving an estimated $i43,000,000
in distributions from the joint venture, which includes amounts paid upon the potential exercise of their put option, as discussed below.
The arrangement includes a put option whereby the joint venture may be obligated to purchase the Tax Credit Investor’s ownership interest in the Project at a future date. The put price is calculated based on a pre-determined formula. As exercise of the put option is outside of the joint venture’s control, the Tax Credit Investor’s interest, together with the put option, have been recorded to “redeemable noncontrolling interest in a consolidated subsidiary” on our consolidated balance sheet as of September 30, 2020. The redeemable noncontrolling interest is recorded at the greater of the 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 Vornado’s consolidated statements of changes in equity and to “partners’ capital” on the consolidated balance sheets of the Operating Partnership. There was no adjustment required for the three and nine months ended September 30, 2020.
Below is a table summarizing the activity of redeemable noncontrolling interest in a consolidated subsidiary.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
13. iShareholders' Equity/Partners' Capital
Common Shares (Vornado Realty Trust)
On December 18, 2019, Vornado's Board of Trustees declared a special dividend of $i1.95
per share, or $i372,380,000 in the aggregate, which was paid on January 15, 2020 to common shareholders of record on December 30, 2019 (the "Record Date").
Class A Units (Vornado Realty L.P.)
On January 15, 2020, distributions of $i1.95
per unit, or $i398,292,000 in the aggregate, were paid to Class A unitholders of the Operating Partnership as of the Record Date, of which $i372,380,000
was distributed to Vornado, in connection with the special dividend declared on December 18, 2019 by Vornado's Board of Trustees.
i
The following table sets forth the details of our dividends/distributions per common share/Class A unit and dividends/distributions per share/unit for each class of preferred shares/units of beneficial interest.
Common
shares/Class A units held by Vornado: authorized ii250,000,000/
shares/units
$
ii0.53/
$
ii0.66/
$
ii1.85/
$
ii1.98/
Convertible
Preferred(1):
ii6.5/%
Series A: authorized i13,402 and i83,977 shares/units(2)
i0.8125
i0.8125
i2.4375
i2.4375
Cumulative
Redeemable Preferred(1):
ii5.70/%
Series K: authorized ii12,000,000/
shares/units(3)
i0.3563
i0.3563
i1.0689
i1.0689
ii5.40/%
Series L: authorized ii13,800,000/
shares/units(3)
i0.3375
i0.3375
i1.0125
i1.0125
ii5.25/%
Series M: authorized ii13,800,000/
shares/units(3)
i0.3281
i0.3281
i0.9843
i0.9843
____________________
(1)Dividends
on preferred shares and distributions on preferred units are cumulative and are payable quarterly in arrears.
(2)Redeemable at the option of Vornado under certain circumstances, at a redemption price of i1.9531 common shares/Class A units per Series A Preferred Share/Unit plus accrued and unpaid dividends/distributions through the date of redemption, or convertible at any time at the option of the holder for i1.9531
common shares/Class A units per Series A Preferred Share/Unit.
(3)Redeemable at Vornado's option at a redemption price of $i25.00 per share/unit, plus accrued and unpaid dividends/distributions through the date of redemption.
/
34
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
13. Shareholders' Equity/Partners' Capital - continued
Accumulated Other Comprehensive Loss
i
The following tables set forth the changes in accumulated other comprehensive loss by component.
(Amounts
in thousands)
Total
Accumulated other comprehensive income (loss) of nonconsolidated subsidiaries
As of September 30, 2020 and December 31, 2019, we have several unconsolidated VIEs. 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 8 – Investments in Partially Owned Entities). As of September 30, 2020 and December 31, 2019, the net carrying amount of our investments in these entities was $i222,924,000
and $i217,451,000, respectively, and our maximum exposure to loss in these entities is limited to the carrying amount of our investments.
Consolidated VIEs
Our most significant consolidated VIEs are the Operating Partnership (for Vornado), the Farley joint venture and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. We consolidate these entities because we control all significant business activities.
As
of September 30, 2020, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $i5,254,102,000 and $i2,962,558,000, respectively. As of December
31, 2019, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $i4,923,656,000 and $i2,646,623,000, respectively.
35
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
15. iFair Value Measurements
iASC
820 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 on our consolidated balance sheets 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
sheets), (iv) loans receivable (for which we have elected the fair value option under ASC 825-10), (v) interest rate swaps and (vi) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units). iThe tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy.
Deferred
compensation plan assets ($i11,819 included in restricted cash and $i91,954 in other assets)
i103,773
i71,338
i—
i32,435
Interest
rate swaps (included in other assets)
i4,327
i—
i4,327
i—
Total
assets
$
i364,062
$
i104,651
$
i4,327
$
i255,084
Mandatorily
redeemable instruments (included in other liabilities)
$
i50,561
$
i50,561
$
i—
$
i—
Interest
rate swaps (included in other liabilities)
i40,354
i—
i40,354
i—
Total
liabilities
$
i90,915
$
i50,561
$
i40,354
$
i—
36
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
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
As of September 30, 2020, we had ifour
real estate fund investments with an aggregate fair value of $i3,739,000, $i338,327,000 below cost. These
investments are classified as Level 3.
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, current and anticipated market conditions, industry publications and from the experience of our Acquisitions and Capital Markets departments. iSignificant
unobservable quantitative inputs in the table below were utilized in determining the fair value of these real estate fund investments.
Range
Weighted Average (based on fair value of investments)
The
inputs above 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.
i
The
table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3.
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 period of time over which these underlying assets are expected to be liquidated is unknown. 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.
i
The
table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3.
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
Loans Receivable
Loans receivable consist of loan investments in real estate related assets for which we have elected the fair value option under ASC 825-10 as of January 1, 2020. These investments are classified as Level 3.
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, current and anticipated market conditions, industry publications and from the experience of our Acquisitions and Capital Markets departments. iSignificant unobservable quantitative inputs in the table below were utilized in determining the fair value of these loans receivable.
We 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. We recognize the fair values of all derivatives in "other assets" or "other liabilities" on our consolidated balance sheets. Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedge asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. Reported net income and equity may increase or decrease prospectively, depending on future levels of interest rates and other
variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
ii
The
following tables summarize our consolidated derivative instruments, all of which hedge variable rate debt, as of September 30, 2020 and December 31, 2019.
As of September 30, 2020, assets measured at fair value on a nonrecurring basis (for impairment purposes) on our consolidated balance sheet consisted of our investment in Fifth Avenue and Times Square JV. There were no assets measured at fair value on a nonrecurring basis on our consolidated balance sheet as of December 31, 2019.
Our estimate of the fair value of our investment in Fifth Avenue and Times Square JV was measured using a discounted cash flow analysis based upon market conditions and expectations of growth and utilized unobservable quantitative inputs, including a capitalization rate of i4.50%
and discount rate of i6.25%. See Note 8 - Investments in Partially Owned Entities for details of non-cash impairment losses recognized during the three and nine months ended September 30, 2020.
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), 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 unsecured revolving credit facilities and unsecured term loan are classified as Level
1. The fair value of our secured debt and unsecured debt are classified as Level 2. iThe table below summarizes the carrying amounts and fair value of these financial instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
16. iStock-based
Compensation
iWe account for all equity-based compensation in accordance with ASC Topic 718, Compensation - Stock Compensation. Stock-based compensation expense, a component of "general and administrative" expense on our consolidated statements of income, was $i6,170,000
and $i5,871,000 for the three months ended September 30, 2020 and 2019, respectively, and $i39,638,000
and $i48,045,000 for the nine months ended September 30, 2020 and 2019, respectively./
2020 Outperformance Plan ("2020 OPP")
On March 30, 2020,
the Compensation Committee of Vornado's Board of Trustees (the "Committee") approved the 2020 OPP, a multi-year, $i35,000,000 performance-based equity compensation plan of which $i32,930,000
was granted to senior executives. The fair value of the 2020 OPP granted was $i11,686,000, of which $i7,583,000
was immediately expensed due to the acceleration of vesting for employees who are retirement eligible (have reached age i65 or age i60 with at least i20
years of service). The remaining $i4,103,000 is being amortized into expense over a ifive-year
period from the date of grant using a graded vesting attribution model.
Under the 2020 OPP, participants have the opportunity to earn compensation payable in the form of equity awards if Vornado common shares outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to relative total TSR during the ithree-year performance period (the “Performance Period”) from March 30, 2020 to March 30, 2023 (the “Measurement
Date”). Specifically, awards under the 2020 OPP may potentially be earned if Vornado (i) achieves a TSR above a benchmark weighted index (the “Index”) comprised i80% of the SNL US Office REIT Index and i20%
of the SNL US Retail Index over the Performance Period (the “Relative Component”), and/or (ii) achieves a TSR greater than i21% over the Performance Period (the “Absolute Component”). The value of awards under the Relative Component and Absolute Component will be calculated separately and will each be subject to an aggregate $i35,000,000
maximum award cap for all participants. The itwo components will be added together to determine the aggregate award size, which shall also be subject to the aggregate $i35,000,000
maximum award cap for all participants. In the event awards are earned under the Absolute Component, but Vornado underperforms the Index by more than i200 basis points per annum over the Performance Period (i600
basis points over the ithree years), the amount earned under the Absolute Component will be reduced based on the degree by which the Index exceeds Vornado’s TSR with the maximum payout being i50%
under the Absolute Component. In the event awards are earned under the Relative Component, but Vornado fails to achieve a TSR of at least i2% per annum, awards earned under the Relative Component will be reduced on a ratable sliding scale based on Vornado’s absolute TSR performance, with awards earned under the Relative Component being reduced by a maximum of i50%
in the event Vornado’s TSR during the Measurement Period is i0% or negative. If the designated performance objectives are achieved, awards earned under the 2020 OPP will vest ratably on the Measurement Date and the first and second anniversary of the Measurement Date. In addition, all of Vornado’s Named Executive Officers (as defined in Vornado’s Proxy Statement filed on Schedule 14A with the Securities and Exchange Commission on April 3, 2020) are required to hold any earned
and vested awards for one year following each such vesting date. Dividends on awards granted under the 2020 OPP accrue during the Performance Period and are paid to participants if awards are ultimately earned based on the achievement of the designated performance objectives.
40
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
17. i(Expense
from Transaction Related Costs and Impairment Losses) and Gain from Lease Liability Extinguishment, Net
i
The following table sets forth the details of (expense from transaction related costs and impairment losses) and gain from lease liability extinguishment, net:
608
Fifth Avenue non-cash lease liability extinguishment gain (impairment
loss) (see below for details)
i—
i—
i70,260
(i93,860)
Other
non-cash impairment losses
i—
i—
i—
(i7,500)
$
(i584)
$
(i1,576)
$
i68,566
$
(i103,315)
/
608
Fifth Avenue
During the second quarter of 2019, Arcadia Group US Ltd ("Arcadia Group"), the operator of Topshop, our retail tenant at 608 Fifth Avenue, filed for Chapter 15 bankruptcy protection in the United States. On June 28, 2019, Arcadia Group closed all of its stores in the United States. 608 Fifth Avenue was subject to a land and building lease which was set to expire in 2033. During the second quarter of 2019, we concluded that the carrying amount of the property was not recoverable and recognized a $i93,860,000
non-cash impairment loss on our consolidated statements of income, of which $i75,220,000 resulted from the impairment of our right-of-use asset.
On May 20, 2020, we entered into an agreement with the land and building lessor at 608 Fifth Avenue to surrender the property. Per the terms of the agreement, we were released from our obligations under the lease and assigned all of our right, title and interest in the tenant leases of 608 Fifth Avenue to the land and building
lessor. In connection therewith, we removed the lease liability from our consolidated balance sheets which resulted in a $i70,260,000 gain recorded on our consolidated statements of income during the nine months ended September 30, 2020.
18. iInterest
and Other Investment Income (Loss), Net
i
The following table sets forth the details of interest and other investment income (loss), net:
(1)Thenine months ended September 30, 2019 includes $i22,540 of debt prepayment costs in connection with the redemption of $i400,000i5.00% senior unsecured notes which were scheduled to mature in January 2022.
/
41
VORNADO REALTY TRUST AND VORNADO
REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
20. iIncome (Loss) Per Share/Income (Loss) Per Class A Unit
i
Vornado
Realty Trust
The following table presents the calculations of (i) basic income (loss) per common share which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares and (ii) diluted income (loss) per common share which includes the weighted average common shares and dilutive share equivalents. Unvested share-based payment awards that contain nonforfeitable rights to dividends, whether paid or unpaid, are accounted for as participating securities. Earnings are allocated to participating securities, which include restricted stock awards, based on the two-class method. Other potential dilutive share equivalents such as our employee stock options, restricted Operating Partnership units ("OP Units"), out-performance plan awards ("OPPs"), appreciation-only long term incentive plan units ("AO LTIP Units") and Performance Conditioned AO LTIP Units are
included in the computation of diluted Earnings Per Share ("EPS") using the treasury stock method, while the dilutive effect of our Series A convertible preferred shares is reflected in diluted EPS by application of the if-converted method.
Income (loss) from continuing operations, net of (income) loss attributable to noncontrolling interests
$
i65,700
$
i335,445
$
(i102,026)
$
i2,942,267
Loss
from discontinued operations
i—
(i7)
i—
(i80)
Net
income (loss) attributable to Vornado
i65,700
i335,438
(i102,026)
i2,942,187
Preferred
share dividends
(i12,530)
(i12,532)
(i37,591)
(i37,598)
Net
income (loss) attributable to common shareholders
i53,170
i322,906
(i139,617)
i2,904,589
Earnings
allocated to unvested participating securities
(i15)
(i33)
(i84)
(i291)
Numerator
for basic income (loss) per share
i53,155
i322,873
(i139,701)
i2,904,298
Impact
of assumed conversions:
Convertible preferred share dividends
i—
i14
i—
i43
Earnings
allocated to Out-Performance Plan units
i—
i—
i—
i9
Numerator
for diluted income (loss) per share
$
i53,155
$
i322,887
$
(i139,701)
$
i2,904,350
Denominator:
Denominator
for basic income (loss) per share – weighted average shares
i191,162
i190,814
i191,102
i190,762
Effect
of dilutive securities(1):
Employee stock options and restricted stock awards
i—
i176
i—
i227
Convertible
preferred shares
i—
i34
i—
i35
Out-Performance
Plan units
i—
i—
i—
i3
Denominator
for diluted income (loss) per share – weighted average shares and assumed conversions
i191,162
i191,024
i191,102
i191,027
INCOME
(LOSS) PER COMMON SHARE - BASIC:
Net income (loss) per common share
$
i0.28
$
i1.69
$
(i0.73)
$
i15.22
INCOME
(LOSS) PER COMMON SHARE - DILUTED:
Net income (loss) per common share
$
i0.28
$
i1.69
$
(i0.73)
$
i15.20
____________________
(1)The
effect of dilutive securities excluded an aggregate of i14,159 and i13,431
weighted average common share equivalents for the three months ended September 30, 2020 and 2019, respectively, and i14,007 and i13,067
weighted average common share equivalents for the nine months ended September 30, 2020 and 2019, respectively, as their effect was anti-dilutive.
/
42
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
20. Income (Loss) Per Share/Income (Loss) Per Class A Unit - continued
i
Vornado
Realty L.P.
The following table presents the calculations of (i) basic income (loss) per Class A unit which includes the weighted average number of Class A units outstanding without regard to dilutive potential Class A units and (ii) diluted income (loss) per Class A unit which includes the weighted average Class A unit and dilutive Class A unit equivalents. Unvested share-based payment awards that contain non-forfeitable rights to dividends, whether paid or unpaid, are accounted for as participating securities. Earnings are allocated to participating securities, which include Vornado restricted stock awards, OP Units and OPPs, based on the two-class method. Other potential dilutive unit equivalents such as Vornado stock options, AO LTIP Units and Performance Conditioned AO LTIP Units are included in the computation of diluted income per unit ("EPU") using the treasury stock method, while the dilutive effect of our
Series A convertible preferred units is reflected in diluted EPU by application of the if-converted method.
Income
(loss) from continuing operations, net of (income) loss attributable to noncontrolling interests in consolidated subsidiaries
$
i69,584
$
i358,083
$
(i112,116)
$
i3,139,626
Loss
from discontinued operations
i—
(i8)
i—
(i85)
Net
income (loss) attributable to Vornado Realty L.P.
i69,584
i358,075
(i112,116)
i3,139,541
Preferred
unit distributions
(i12,572)
(i12,574)
(i37,715)
(i37,722)
Net
income (loss) attributable to Class A unitholders
i57,012
i345,501
(i149,831)
i3,101,819
Earnings
allocated to unvested participating securities
(i734)
(i2,449)
(i4,685)
(i14,807)
Numerator
for basic income (loss) per Class A unit
i56,278
i343,052
(i154,516)
i3,087,012
Impact
of assumed conversions:
Convertible preferred unit distributions
i—
i14
i—
i43
Numerator
for diluted income (loss) per Class A unit
$
i56,278
$
i343,066
$
(i154,516)
$
i3,087,055
Denominator:
Denominator
for basic income (loss) per Class A unit – weighted average units
i203,554
i203,009
i203,480
i202,903
Effect
of dilutive securities(1):
Vornado stock options, Vornado restricted stock awards, OP Units, AO LTIP Units and OPPs
i—
i507
i—
i478
Convertible
preferred units
i—
i34
i—
i35
Denominator
for diluted income (loss) per Class A unit – weighted average units and assumed conversions
i203,554
i203,550
i203,480
i203,416
INCOME
(LOSS) PER CLASS A UNIT - BASIC:
Net income (loss) per Class A unit
$
i0.28
$
i1.69
$
(i0.76)
$
i15.21
INCOME
(LOSS) PER CLASS A UNIT - DILUTED:
Net income (loss) per Class A unit
$
i0.28
$
i1.69
$
(i0.76)
$
i15.18
____________________
(1)The
effect of dilutive securities excluded an aggregate of i1,767 and i905
weighted average Class A unit equivalents for the three months ended September 30, 2020 and 2019, respectively, and i1,629 and i678
weighted average Class A unit equivalents for the nine months ended September 30, 2020 and 2019, respectively, as their effect was anti-dilutive.
/
43
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
21. iCommitments
and Contingencies
Insurance
For our properties except Farley Office and Retail, we maintain general liability insurance with limits of $ii300,000,000/
per occurrence and per property, of which $i235,000,000 includes communicable disease coverage, and all risk property and rental value insurance with limits of $i2.0 billion per occurrence,
with sub-limits for certain perils such as flood and earthquake. Our California properties have earthquake insurance with coverage of $ii350,000,000/
per occurrence and in the aggregate, subject to a deductible in the amount of i5% of the value of the affected property. We maintain coverage for certified terrorism acts with limits of $ii6.0/
billion per occurrence and in the aggregate (as listed below), $i1.2 billion for non-certified acts of terrorism, and $ii5.0/
billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by the Terrorism Risk Insurance Act of 2002, as amended to date and which has been extended through December 2027.
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 NBCR acts. 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. For NBCR acts, PPIC is responsible for a deductible of $i1,430,413
and i20% of the balance of a covered loss and the Federal government is responsible for the remaining portion of a covered loss. We are ultimately responsible for any loss incurred by PPIC.
For Farley Office and Retail, we maintain general liability insurance with limits of $i100,000,000
per occurrence, and builder’s risk insurance including coverage for existing property and development activities of $ii2.8/
billion per occurrence and in the aggregate. We maintain coverage for certified and non-certified terrorism acts with limits of $iiii1.0///
billion per occurrence and in the aggregate.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism and other events. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for uninsured losses and for deductibles and losses in excess of our insurance coverage, which could be material.
Our debt instruments, consisting of mortgage loans secured by our properties, 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 or refinance our properties and expand our portfolio.
Farley Office and Retail
The consolidated joint venture in which we own a i95% ownership interest was designated by Empire State Development ("ESD") to develop Farley Office and Retail. The joint venture entered into a development agreement with ESD and a design-build contract with Skanska Moynihan Train Hall Builders. Under the development
agreement with ESD, the joint venture is obligated to build the Moynihan Train Hall, with Vornado and Related each guaranteeing the joint venture’s obligations. Under the design-build agreement, Skanska Moynihan Train Hall Builders is obligated to fulfill all of the joint venture’s obligations. The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bear a full guaranty from Skanska AB.
In connection with the development of the property, the joint venture took in a historic tax credit investor partner. Under the terms of the historic tax credit arrangement, the joint venture is required to comply with various laws, regulations, and contractual provisions. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, may require a refund or reduction of the Tax Credit Investor’s capital contributions. As of September
30, 2020, the Tax Credit Investor has made $i92,400,000 in capital contributions. Vornado and Related have guaranteed certain of the joint venture’s obligations to the Tax Credit Investor.
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 currently 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.
44
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
21. Commitments and Contingencies - continued
Other Commitments and Contingencies - continued
In July 2018, we leased i78,000 square feet at 345 Montgomery Street in San Francisco, CA, to a subsidiary of Regus PLC, for an initial term of i15
years. The obligations under the lease were guaranteed by Regus PLC in an amount of up to $i90,000,000. The tenant purported to terminate the lease prior to space delivery. We commenced a suit on October 23, 2019 seeking to enforce the lease and the guarantee. On October 9, 2020, the successor to Regus PLC filed for bankruptcy in Luxembourg.
In November 2011, we entered into an agreement with the New York City
Economic Development Corporation ("EDC") to lease Piers 92 and 94 (the "Piers") for a i49-year term with ifivei10-year
renewal options. The non-recourse lease with a single-purpose entity calls for current annual rent payments of $i2,000,000 with fixed rent steps through the initial term. We operate trade shows and special events at the Piers (and sublease to others for the same uses). In February 2019, an inspection revealed that the piles supporting Pier 92 were structurally unsound (an obligation of EDC to maintain) and we were issued an order by EDC to vacate the property. We continued to make the required lease payments through February 2020, with no abatement provided by EDC for the loss
of our right to use Pier 92 or reimbursement for lost revenues. Beginning March 2020, as no resolution had been reached with EDC, we have not paid the monthly rents due under the non-recourse lease. As of September 30, 2020, we have a $i46,911,000 lease liability and a $i34,563,000
right-of-use asset recorded for this lease.
Our mortgage loans are non-recourse to us, except for the mortgage loans secured by 640 Fifth Avenue, 7 West 34th Street and 435 Seventh Avenue, which we guaranteed and therefore are part of our tax basis. 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 underlying loans. In addition, we have guaranteed the rent and payments in lieu of real estate taxes due to ESD, an entity of New York State, for Farley Office and Retail. As of September 30, 2020, the aggregate dollar amount of these guarantees and master leases is approximately $i1,745,000,000.
As
of September 30, 2020, $i14,080,000 of letters of credit were outstanding under one of our unsecured revolving credit facilities. Our unsecured revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our unsecured revolving credit facilities also contain customary conditions precedent to borrowing, including representations
and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.
As investment manager of the Fund we are entitled to an incentive allocation after the limited partners have received a preferred return on their invested capital. The incentive allocation is subject to catch-up and clawback provisions.Accordingly, based on the September 30, 2020 fair value of the Fund assets, at liquidation we would be required to make a$i33,900,000
payment to the limited partners representing a clawback of previously paid incentive allocations, which would have no income statement impact as it was previously accrued.
As of September 30, 2020, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $i11,000,000.
As of September
30, 2020, we have construction commitments aggregating approximately $i504,000,000.
45
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
22. iSegment
Information
We operate in itwo reportable segments, New York and Other, which is based on how we manage our business.
Net operating income ("NOI") at share represents total revenues less operating expenses including our share of partially owned entities. NOI at share - cash basis represents NOI at share adjusted to exclude straight-line rental income and expense, amortization of acquired below and above market leases, net and other non-cash adjustments.
We consider NOI at share - cash basis to be the primary non-GAAP financial 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 NOI at share - cash basis, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. NOI at share and NOI at share - cash basis should not be considered alternatives to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies. NOI at share - cash basis includes rent that has been deferred as a result of the COVID-19 pandemic. Rent deferrals generally require repayment in monthly installments over a period of time not to exceed twelve months.
i
Below
is a reconciliation of net income (loss) to NOI at share and NOI at share - cash basis for the three and nine months ended September 30, 2020 and 2019.
Deduct:
NOI attributable to noncontrolling interests in consolidated subsidiaries
(i51,915)
(i31,011)
(i20,904)
Add:
NOI from partially owned entities
i236,400
i211,394
i25,006
NOI
at share
i954,211
i806,544
i147,667
Non-cash
adjustments for straight-line rents, amortization of acquired below-market leases, net, and other
i530
(i3,741)
i4,271
NOI
at share - cash basis
$
i954,741
$
i802,803
$
i151,938
47
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Trustees of Vornado Realty Trust
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust and subsidiaries (the "Company") as of September 30, 2020, the related consolidated statements of income, comprehensive income, and changes in equity for the three-month and nine-month periods ended September 30, 2020 and 2019, and of cash flows for the nine-month periods ended September 30, 2020
and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, 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 18, 2020, 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, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our
reviews in accordance with standards of the PCAOB. 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 PCAOB, 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.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Vornado Realty L.P.
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheet of Vornado Realty L.P. and subsidiaries (the "Partnership") as of September 30, 2020, the related consolidated statements of income, comprehensive income, and changes in equity for the three-month and nine-month periods ended September 30, 2020 and 2019, and of cash flows for the nine-month periods ended September 30, 2020 and 2019,
and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Partnership as of December 31, 2019, 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 18, 2020, 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, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Partnership’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the
PCAOB. 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 PCAOB, 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.
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. We also note the following forward-looking statements: in the case of our development and redevelopment projects, the estimated completion date, estimated project cost and cost to complete; and estimates of future capital expenditures, dividends to common and preferred shareholders and operating partnership distributions. 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.
Currently, one of the most significant factors is the ongoing adverse effect of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows, operating performance and the effect it has had and may continue to have on our tenants, the global, national, regional and local economies and financial markets and the real estate market in general. The extent of the impact of the COVID-19 pandemic will depend on future
developments, including the duration of the pandemic, which are highly uncertain at this time but that impact could be material. Moreover, you are cautioned that the COVID-19 pandemic will heighten many of the risks identified in "Item 1A. Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, as well as the risks set forth herein.
For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, and "Item 1A. Risk Factors" in Part II of this Quarterly Report on Form 10-Q. 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, 2020. 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, 2020 are not necessarily indicative of the operating results for the full year.
50
Overview
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 92.7% of the common limited partnership interest in the Operating Partnership as of September 30, 2020. All references to the “Company,”“we,”“us” and “our” mean, collectively, Vornado, the Operating Partnership and those subsidiaries consolidated by Vornado.
We compete with a large number of real estate investors, property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, sales prices, 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 global, 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, population and employment trends. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for additional information regarding these factors.
Our business has been adversely affected as a result of the COVID-19 pandemic and the preventive measures taken to curb the spread of the virus. Some of the effects on us include the following:
•With the exception of grocery stores and other "essential" businesses, many of our retail tenants closed their stores in March 2020 and began reopening when New York City entered phase two of its state-mandated reopening plan on June 22, 2020.
•While our buildings remain open, many of our office tenants are working remotely.
•We have closed the Hotel Pennsylvania. In connection with the closure, we accrued $9,246,000 of severance for furloughed Hotel Pennsylvania union employees and recognized a corresponding $3,145,000 income tax benefit for the three and nine months ended September 30, 2020.
•We
have cancelled trade shows at theMART for the remainder of 2020.
•Because certain of our development projects were deemed "non-essential," they were temporarily paused in March 2020 due to New York State executive orders and resumed once New York City entered phase one of its state mandated reopening plan on June 8, 2020.
•As of April 30, 2020, we placed1,803 employees on furlough, which included 1,293 employees of Building Maintenance Services LLC ("BMS"), a wholly owned subsidiary, which provides cleaning, security and engineering services primarily to our New York properties, 414 employees at the Hotel Pennsylvania and 96 corporate staff employees. As of October
31, 2020, 40% of the furloughed employees have returned to work.
•Effective April 1, 2020, our executive officers waived portions of their annual base salary for the remainder of 2020.
•Effective April 1, 2020, each non-management member of our Board of Trustees agreed to forgo their $75,000 annual cash retainer for the remainder of 2020.
While we believe our tenants are required to pay rent under their leases, in limited circumstances, we have agreed to and may continue to agree to rent deferrals and rent abatements for certain of our tenants. We have made a policy election in accordance with the Financial Accounting Standards Board (“FASB”) Staff Q&A which provides relief
in accounting for leases during the COVID-19 pandemic, allowing us to continue recognizing rental revenue on a straight-line basis for rent deferrals, with no impact to revenue recognition, and to recognize rent abatements as a reduction to rental revenue in the period granted.
For the quarter ended September 30, 2020, we collected 93% (95% including rent deferrals) of rent due from our tenants, comprised of 95% (97% including rent deferrals) from our office tenants and 82% (85% including rent deferrals) from our retail tenants. Rent deferrals generally require repayment in monthly installments over a period not to exceed twelve months.
51
Overview
- continued
Based on our assessment of the probability of rent collection of our lease receivables, we have written off $13,873,000 and $50,170,000 of receivables arising from the straight-lining of rents for the three and nine months ended September 30, 2020, respectively, including the JCPenney retail lease at Manhattan Mall and the New York & Company, Inc. office lease at 330 West 34th Street. Both tenants have filed for Chapter 11 bankruptcy. In addition, we have written off $12,364,000 and $21,186,000 of tenant receivables deemed uncollectible for the three and nine months ended September 30, 2020, respectively. These write-offs resulted in a reduction of lease revenues and our share of income from partially owned entities. Prospectively, revenue recognition for these tenants will be based on actual amounts received.
We
have not experienced any material impact to our internal control over financial reporting to date as a result of most of our employees working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact to their design and operating effectiveness.
In light of the evolving health, social, economic, and business environment, governmental regulation or mandates, and business disruptions that have occurred and may continue to occur, the impact of the COVID-19 pandemic on our financial condition and operating results remains highly uncertain but the impact could be material. The impact on us includes lower rental income and potentially lower occupancy levels at our properties which will result in less cash flow available for operating costs, to pay our indebtedness and for distribution to our shareholders.During
2020, we have experienced a decrease in cash flow from operations due to the COVID-19 pandemic, including reduced collections of rents billed to certain of our tenants, the closure of Hotel Pennsylvania, the cancellation of trade shows at theMART through 2020, and lower revenues from BMS and signage. In addition, we have concluded that our investment in Fifth Avenue and Times Square JV is "other-than-temporarily" impaired and recorded non-cash impairment losses, net of noncontrolling interests, of $103,201,000 and $409,060,000, respectively, during the three and nine months ended September 30, 2020. The impairment losses are included in “(loss) income from partially owned entities” on our consolidated statements of income. The value of our real estate assets may continue to decline, which may result in additional non-cash impairment charges in future periods and that impact could be material.
Net income attributable to common shareholders for the quarter ended September 30, 2020 was $53,170,000, or $0.28 per diluted share, compared to $322,906,000, or $1.69 per diluted share, for the prior year’s quarter. The quarters ended September 30, 2020 and 2019 include certain items that impact the comparability of period to period net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the quarter ended September
30, 2020 by $69,783,000, or $0.37 per diluted share, and $270,282,000, or $1.41 per diluted share, for the quarter ended September 30, 2019.
Funds From Operations (“FFO”) attributable to common shareholders plus assumed conversions for the quarter ended September 30, 2020 was $278,507,000, or $1.46 per diluted share, compared to $279,509,000, or $1.46 per diluted share, for the prior year’s quarter. FFO attributable to common shareholders plus assumed conversions for the quarters ended September 30, 2020 and 2019 include certain items that impact the comparability of period to period FFO, which are
listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO attributable to common shareholders plus assumed conversions for the quarter ended September 30, 2020 by $165,912,000, or $0.87 per diluted share, and $108,543,000, or $0.57 per diluted share, for the quarter ended September 30, 2019.
Net loss attributable to common shareholders for the nine months ended September 30, 2020 was $139,617,000, or $0.73 per diluted
share, compared to net income attributable to common shareholders of $2,904,589,000, or $15.20 per diluted share, for the nine months ended September 30, 2019. The nine months ended September 30, 2020 and 2019 include certain items that impact the comparability of period to period net (loss) income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net loss attributable to common shareholders for the nine months ended September 30, 2020 by $133,094,000, or $0.70 per diluted share, and increased net income attributable to common shareholders by $2,784,217,000, or $14.57 per diluted share, for the nine months ended September
30, 2019.
FFO attributable to common shareholders plus assumed conversions for the nine months ended September 30, 2020 was $612,123,000, or $3.20 per diluted share, compared to $691,522,000, or $3.62 per diluted share, for the nine months ended September 30, 2019. FFO attributable to common shareholders plus assumed conversions for the nine months ended September 30, 2020 and 2019 include certain items that impact the comparability of period to period FFO, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO attributable to common shareholders plus assumed conversions for the nine months ended September
30, 2020 by $256,058,000, or $1.34 per diluted share, and $196,586,000, or $1.03 per diluted share for the nine months ended September 30, 2019.
52
Overview - continued
The following table reconciles the difference between our net income (loss) attributable to common shareholders and our net (loss) income attributable to common shareholders, as adjusted:
Certain (income) expense items that impact net income (loss) attributable to common shareholders:
After-tax
net gain on sale of 220 Central Park South ("220 CPS") condominium units
$
(186,909)
$
(109,035)
$
(295,825)
$
(328,910)
Non-cash impairment loss on our investment in Fifth Avenue and Times Square JV, net of $3,822 and $4,289 attributable to noncontrolling interests
103,201
—
409,060
—
Severance
accrual related to Hotel Pennsylvania closure, net of $3,145 of income tax benefit
6,101
—
6,101
—
Our share of loss (income) from real estate fund investments
2,524
(1,455)
64,771
22,207
Net
gains on sale of real estate (primarily our 25% interest in 330 Madison Avenue in 2019)
—
(178,769)
—
(178,769)
Mark-to-market decrease in Pennsylvania Real Estate Investment Trust ("PREIT") common shares (accounted for as a marketable security from March 12, 2019 and sold on January 23, 2020)
—
4,875
4,938
19,211
608
Fifth Avenue non-cash (lease liability extinguishment gain) impairment loss and related write-offs
—
—
(70,260)
101,092
Credit losses on loans receivable resulting from a new GAAP accounting standard effective January 1, 2020
—
—
13,369
—
Net
gain on transfer to Fifth Avenue and Times Square retail JV, net of $11,945 attributable to noncontrolling interests
—
—
—
(2,559,154)
Net gain from sale of Urban Edge Properties ("UE") common shares (sold on March 4, 2019)
—
—
—
(62,395)
Prepayment
penalty in connection with redemption of $400 million 5.00% senior unsecured notes due January 2022
—
—
—
22,540
Mark-to-market increase in Lexington Realty Trust ("Lexington") common shares (sold on March 1, 2019)
—
—
—
(16,068)
Real
estate impairment losses
—
—
—
7,500
Other
766
(4,811)
10,681
(857)
(74,317)
(289,195)
142,835
(2,973,603)
Noncontrolling
interests' share of above adjustments
4,534
18,913
(9,741)
189,386
Total of certain (income) expense items that impact net income (loss) attributable to common shareholders
$
(69,783)
$
(270,282)
$
133,094
$
(2,784,217)
The
following table reconciles the difference between our FFO attributable to common shareholders plus assumed conversions and our FFO attributable to common shareholders plus assumed conversions, as adjusted:
Certain (income) expense items that impact FFO attributable to common shareholders plus assumed conversions:
After-tax net gain on sale of 220 CPS condominium units
$
(186,909)
$
(109,035)
$
(295,825)
$
(328,910)
Severance
accrual related to Hotel Pennsylvania closure, net of $3,145 of income tax benefit
6,101
—
6,101
—
Our share of loss (income) from real estate fund investments
2,524
(1,455)
64,771
22,207
608
Fifth Avenue non-cash (lease liability extinguishment gain) impairment loss and related write-offs
—
—
(70,260)
77,156
Credit losses on loans receivable resulting from a new GAAP accounting standard effective January 1, 2020
—
—
13,369
—
Prepayment
penalty in connection with redemption of $400 million 5.00% senior unsecured notes due January 2022
—
—
—
22,540
Other
381
(5,229)
7,045
(2,931)
(177,903)
(115,719)
(274,799)
(209,938)
Noncontrolling
interests' share of above adjustments
11,991
7,176
18,741
13,352
Total of certain (income) expense items that impact FFO attributable to common shareholders plus assumed conversions, net
$
(165,912)
$
(108,543)
$
(256,058)
$
(196,586)
53
Overview
- continued
Vornado Realty Trust and Vornado Realty L.P.
Same Store Net Operating Income (“NOI”) At Share
The percentage (decrease) increase in same store NOI at share and same store NOI at share - cash basis of our New York segment, theMART and 555 California Street are summarized below.
Calculations
of same store NOI at share, reconciliations of our net income (loss) to NOI at share, NOI at share - cash basis 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 Financial Condition and Results of Operations.
Dispositions
PREIT
On January 23, 2020, we sold all of our 6,250,000 common shares of PREIT, realizing net proceeds of $28,375,000. We recorded a $4,938,000 loss (mark-to-market decrease) for the nine months ended September 30, 2020.
220 CPS
During
the three months ended September 30, 2020, we closed on the sale of 19 condominium units at 220 CPS for net proceeds of $591,104,000 resulting in a financial statement net gain of $214,578,000 which is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income. In connection with these sales, $27,669,000 of income tax expense was recognized on our consolidated statements of income. During the nine months ended September 30, 2020, we closed on the sale of 30 condominium units at 220 CPS for net proceeds of $939,292,000 resulting in a financial statement net gain of $338,862,000. In connection with these sales, $43,037,000 of income tax expense was recognized on our consolidated statements of income. From inception to September 30, 2020, we have closed
on the sale of 95 units for net proceeds of $2,759,424,000 resulting in financial statement net gains of $1,024,479,000.
54
Overview - continued
Financings
On February 28, 2020, we increased our unsecured term loan balance to $800,000,000 (from $750,000,000) by exercising an accordion feature. Pursuant to an existing swap agreement, $750,000,000 of the loan bears interest at a fixed rate of 3.87% through October 2023, and the balance of $50,000,000 floats at a rate of LIBOR plus 1.00% (1.15% as of September 30, 2020). The entire $800,000,000
will float thereafter for the duration of the loan through February 2024.
On August 12, 2020, we amended the $700,000,000 mortgage loan on 770 Broadway, a 1.2 million square foot Manhattan office building, to extend the term one year through March 2022.
On September 14, 2020, Alexander's, Inc. (NYSE: ALX) ("Alexander's"), in which we have a 32.4% ownership interest, amended and extended the $350,000,000 mortgage loan on the retail condominium of 731 Lexington Avenue. Under the terms of the agreement, Alexander's paid down the loan by $50,000,000 to $300,000,000, extended the maturity date to August 2025 and guaranteed the interest payments and certain leasing costs. The principal of the loan is non-recourse to Alexander's. The interest-only loan remains at the same rate, LIBOR
plus 1.40% (1.56% as of September 30, 2020).
On October 15, 2020, we completed a $500,000,000 refinancing of PENN11, a 1.2 million square foot Manhattan office building. The interest-only loan carries a rate of LIBOR plus 2.75% (currently 2.90%) and matures in October 2023, with two one-year extension options. The loan replaces the previous $450,000,000 loan that bore interest at a fixed rate of 3.95% and was scheduled to mature in December 2020.
On October 23, 2020, Alexander's completed a $94,000,000 financing of The Alexander, a 312-unit residential building that is part of Alexander's residential and retail complex located in Rego Park, Queens, New York. The interest-only loan has a fixed rate of 2.63% and matures in November 2027.
On
November 2, 2020, we repaid the $52,476,000 mortgage loan on our land under a portion of the Borgata Hotel and Casino complex. The 10-year fixed rate amortizing loan bore interest at 5.14% and was scheduled to mature in February 2021.
55
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.
(1)Primarily 730 square feet (694 at our share) for the new Facebook lease at Farley Office and 633 square feet (348 at our share) for the New York University long-term renewal at One Park Avenue.
(2)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.
(3)Excludes the rent on 90 square feet (63 square feet at share) as the starting rent will be determined in 2021 based on fair market value.
(4)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.
(5)Excludes the rent on 174 square feet as the starting rent will be determined in 2021 based on fair market value.
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2019. For the nine months ended September 30, 2020, there were no material changes to these policies.
Recently Issued Accounting Literature
Refer
to Note 4 - Recently Issued Accounting Literature to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements that may affect us.
NOI at share represents total revenues less operating expenses including our share of partially owned entities. NOI at share - cash basis represents
NOI at share adjusted to exclude straight-line rental income and expense, amortization of acquired below and above market leases, net and other non-cash adjustments. We consider NOI at share - cash basis to be the primary non-GAAP financial 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 NOI at share - cash basis, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. NOI at share and NOI at share - cash basis should not be considered alternatives to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies. NOI at share - cash basis includes rent that has been deferred as a result of the COVID-19 pandemic. Rent deferrals generally require repayment in monthly installments
over a period of time not to exceed twelve months.
Below is a summary of NOI at share and NOI at share - cash basisby segment for the three months ended September 30, 2020 and 2019.
(1)2020
includes $5,112 of write-offs of tenant receivables deemed uncollectible and $4,368 of non-cash write-offs of receivables arising from the straight-lining of rents.
(2)2020 includes $4,688 of non-cash write-offs of receivables arising from the straight-lining of rents and $4,668 of write-offs of tenant receivables deemed uncollectible.
(3)The decrease in NOI at share is primarily due to the effects of the COVID-19 pandemic. The Hotel Pennsylvania has been closed since April 1, 2020 as a result of the pandemic. 2020 includes a $9,246 severance accrual for furloughed union employees.
(4)The decrease in NOI at share is primarily due to the effects of the COVID-19 pandemic, causing trade shows to be cancelled from late March
2020 through the remainder of the year.
The elements of our New York and Other NOI at share - cash basis for the three months ended September 30, 2020 and 2019 are summarized below.
(1)2020
includes $5,112 of write-offs of tenant receivables deemed uncollectible.
(2)2020 includes $4,668 of write-offs of tenant receivables deemed uncollectible.
(3)The decrease in NOI at share - cash basis is primarily due to the effects of the COVID-19 pandemic. The Hotel Pennsylvania has been closed since April 1, 2020 as a result of the pandemic. 2020 includes a $9,246 severance accrual for furloughed union employees.
(4)The decrease in NOI at share - cash basis is primarily due to the effects of the COVID-19 pandemic, causing trade shows to be cancelled from late March 2020 through the remainder of the year.
59
Reconciliation
of Net Income to NOI At Share and NOI At Share - Cash Basis for the Three Months Ended September 30, 2020 and 2019
Below is a reconciliation of net income to NOI at share and NOI at share - cash basis for the three months ended September 30, 2020 and 2019.
Our revenues were $363,962,000 for the three months ended September 30, 2020 compared to $465,961,000 for the prior year’s quarter, a decrease of $101,999,000. Below are the details of the decrease by segment:
(Amounts
in thousands)
Total
New York
Other
(Decrease) increase due to:
Rental revenues:
Acquisitions, dispositions and other
$
(11,505)
$
(11,548)
$
43
Development
and redevelopment
(24,880)
(24,533)
(347)
Hotel Pennsylvania(1)
(25,605)
(25,605)
—
Trade shows(2)
(8,282)
—
(8,282)
Same
store operations
(35,113)
(3)
(26,171)
(8,942)
(105,385)
(87,857)
(17,528)
Fee
and other income:
BMS cleaning fees
(6,623)
(7,195)
(4)
572
Management and leasing fees
8,323
7,986
337
Other
income
1,686
(357)
2,043
3,386
434
2,952
Total
decrease in revenues
$
(101,999)
$
(87,423)
$
(14,576)
______________________
See notes below.
Expenses
Our expenses were $339,990,000 for the three months ended September 30, 2020, compared to $358,583,000 for the prior year’s quarter, a decrease of $18,593,000. Below are the details of the decrease by segment:
(Amounts
in thousands)
Total
New York
Other
(Decrease) increase due to:
Operating:
Acquisitions, dispositions and other
$
(3,894)
$
(3,901)
$
7
Development
and redevelopment
(10,218)
(10,372)
154
Non-reimbursable expenses
(804)
(843)
39
Hotel Pennsylvania(1)
(5,772)
(5,772)
—
Trade
shows(2)
(2,816)
—
(2,816)
BMS expenses
(4,605)
(5,178)
(4)
573
Same
store operations
(2,605)
(707)
(1,898)
(30,714)
(26,773)
(3,941)
Depreciation and amortization:
Acquisitions,
dispositions and other
(44)
(46)
2
Development and redevelopment
(1,407)
(1,411)
4
Same
store operations
12,027
12,646
(619)
10,576
11,189
(613)
General
and administrative
(830)
(542)
(288)
Expense from deferred compensation plan liability
3,367
—
3,367
Transaction
related costs
(992)
—
(992)
Total decrease in expenses
$
(18,593)
$
(16,126)
$
(2,467)
____________________
(1)Closed
since April 1, 2020 as a result of the COVID-19 pandemic. Operating expense for 2020 includes a $9,246 severance accrual for furloughed union employees.
(2)Cancelled trade shows at theMART from late March 2020 through the remainder of the year as a result of the pandemic.
(3)2020 includes $11,248 for the non-cash write-off of receivables arising from the straight-lining of rents and $10,887 for the write-off of tenant receivables deemed uncollectible.
(4)Primarily due to a decrease in third party cleaning services provided to retail and office tenants as a result of the pandemic.
Return on preferred equity, net of our share of the expense
9,430
9,545
Equity in net income
51.5%
7,694
9,891
(89,899)
19,436
Alexander's(2)
32.4%
3,371
6,692
Partially
owned office buildings(3)
Various
6,418
(186)
Other investments(4)
Various
(799)
4
$
(80,909)
$
25,946
____________________
(1)See
Note 8 - Investments in Partially Owned Entities to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
(2)2020 includes our $3,139 share of write-offs of lease receivables deemed uncollectible.
(3)Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 7 West 34th Street, 512 West 22nd Street, 61 Ninth Avenue, 85 Tenth Avenue and others.
(4)Includes interests in Independence Plaza, Rosslyn Plaza and others.
Loss (Income) from Real Estate Fund Investments
Below
are the components of the (loss) income from our real estate fund investments for the three months ended September 30, 2020 and 2019.
Interest and debt expense for the three months ended September 30, 2020 was $57,371,000 compared to $61,448,000 for the prior year’s quarter, a decrease of $4,077,000. This decrease was primarily due to (i) $6,532,000 of lower interest expense resulting from lower average interest rates on our variable rate loans, (ii) $5,489,000 of lower interest expense resulting from the repayment of the mortgage payable of PENN2, and (iii) $96,000 of lower interest expense resulting from paydowns of the 220 CPS loan, partially offset by $6,719,000 of lower capitalized interest and debt expense.
Net
Gains on Disposition of Wholly Owned and Partially Owned Assets
Net gains on disposition of wholly owned and partially owned assets of $214,578,000 for the three months ended September 30, 2020 consisted of net gains on the sale of 19 condominium units at 220 CPS. Net gains on disposition of wholly owned and partially owned assets of $309,657,000 for the three months ended September 30, 2019 consisted of (i) a $159,292,000 net gain on sale of our 25% interest in 330 Madison Avenue, (ii) $130,888,000 of net gains on the sale of 14 condominium units at 220 CPS, and (iii) a $19,477,000 net gain on sale of 3040 M Street.
Income Tax Expense
Income
tax expense for the three months ended September 30, 2020 was $23,781,000 compared to $23,885,000 for the prior year’s quarter, a decrease of $104,000.
Net Loss (Income) Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net loss attributable to noncontrolling interests in consolidated subsidiaries was $848,000 for the three months ended September 30, 2020, compared to income of $5,774,000 for the prior year’s quarter, a decrease in income of $6,622,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests of our real estate fund investments. The three months ended September
30, 2020 includes $3,822,000 allocated to noncontrolling interests for the non-cash impairment loss recorded on our investment in Fifth Avenue and Times Square JV.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $3,884,000 for the three months ended September 30, 2020, compared to $22,637,000 for the prior year’s quarter, a decrease of $18,753,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred
Share Dividends of Vornado Realty Trust
Preferred share dividends were $12,530,000 for the three months ended September 30, 2020, compared to $12,532,000 for the prior year’s quarter, a decrease of $2,000.
Preferred Unit Distributions of Vornado Realty L.P.
Preferred unit distributions were $12,572,000 for the three months ended September 30, 2020, compared to $12,574,000 for the prior year’s quarter, a decrease of $2,000.
Same store NOI at share represents NOI at share from operations which are in service in both the current and prior year reporting periods. Same store NOI at share - cash basis is same store NOI at share adjusted to exclude straight-line rental income and expense, amortization of acquired below and above market leases, net 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 NOI at share and same store NOI at share - cash basis should not be considered alternatives 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 NOI at share to same store NOI at share for our New York segment, theMART, 555 California Street and other investments for the three months ended September 30, 2020 compared to September 30, 2019.
Same Store Net Operating Income At Share - continued
Below are reconciliations of NOI at share - cash basis to same store NOI at share - cash basis for our New York segment, theMART, 555 California Street and other investments for the three months ended September 30, 2020 compared to September 30, 2019.
(1)Reflects the transfer of 45.4% of common equity in the properties contributed to Fifth Avenue and Times Square JV on April 18, 2019.
(2)2020 includes $17,588 of non-cash write-offs of receivables arising from the straight-lining of rents, including the New York & Company, Inc. lease at 330 West 34th Street, and $6,052 of write-offs of tenant receivables deemed uncollectible.
(3)2020
includes $25,124 of non-cash write-offs of receivables arising from the straight-lining of rents, including the JCPenney lease at Manhattan Mall, and $11,399 of write-offs of tenant receivables deemed uncollectible. 2019 includes $13,832 of non-cash write-offs of receivables arising from the straight-lining of rents.
(4)The decrease in NOI at share is primarily due to the effects of the COVID-19 pandemic. The Hotel Pennsylvania has been closed since April 1, 2020 as a result of the pandemic. 2020 includes a $9,246 severance accrual for furloughed union employees.
(5)The decrease in NOI at share is primarily due to the effects of the COVID-19 pandemic, causing trade shows to be cancelled from late March 2020 through the remainder of the year.
(1)Reflects the transfer of 45.4% of common equity in the properties contributed to Fifth Avenue and Times Square JV on April 18, 2019.
(2)2020 includes $6,052 of write-offs of tenant receivables deemed uncollectible.
(3)2020 includes $11,399 of write-offs of tenant receivables deemed uncollectible.
(4)The
decrease in NOI at share - cash basis is primarily due to the effects of the COVID-19 pandemic. The Hotel Pennsylvania has been closed since April 1, 2020 as a result of the pandemic. 2020 includes a $9,246 severance accrual for furloughed union employees.
(5)The decrease in NOI at share - cash basis is primarily due to the effects of the COVID-19 pandemic, causing trade shows to be cancelled from late March 2020 through the remainder of the year.
Our revenues were $1,151,520,000 for the nine months ended September 30, 2020, compared to $1,463,732,000 for the prior year’s nine months, a decrease of $312,212,000. Below are the details of the decrease by segment:
(Amounts
in thousands)
Total
New York
Other
Increase (decrease) due to:
Rental revenues:
Acquisitions, dispositions and other
$
1,173
$
1,038
$
135
Development
and redevelopment
(55,367)
(54,817)
(550)
Hotel Pennsylvania(1)
(55,238)
(55,238)
—
Trade shows(2)
(25,343)
—
(25,343)
Properties
transferred to Fifth Avenue and Times Square JV
(100,554)
(100,554)
—
Same store operations
(74,764)
(3)
(61,328)
(13,436)
(310,093)
(270,899)
(39,194)
Fee
and other income:
BMS cleaning fees
(15,397)
(17,062)
(4)
1,665
Management and leasing fees
6,290
5,838
452
Properties
transferred to Fifth Avenue and Times Square JV
Our expenses were $943,829,000 for the nine months ended September 30, 2020, compared to $1,261,353,000 for the prior year’s nine months, a decrease of $317,524,000. Below are the details of the decrease by segment:
(Amounts in thousands)
Total
New
York
Other
(Decrease) increase due to:
Operating:
Acquisitions, dispositions and other
$
(8,670)
$
(8,624)
$
(46)
Development
and redevelopment
(26,565)
(26,573)
8
Non-reimbursable expenses
454
274
180
Hotel Pennsylvania(1)
(19,329)
(19,329)
—
Trade
shows(2)
(8,978)
—
(8,978)
BMS expenses
(9,521)
(11,187)
(4)
1,666
Properties transferred to Fifth Avenue and Times Square JV
(21,615)
(21,615)
—
Same
store operations
295
(2,395)
2,690
(93,929)
(89,449)
(4,480)
Depreciation and amortization:
Acquisitions,
dispositions and other
(3,824)
(3,833)
9
Development and redevelopment
(279)
(1,071)
792
Properties transferred to Fifth Avenue and Times Square JV
(25,119)
(25,119)
—
Same
store operations
(4,348)
(3,386)
(962)
(33,570)
(33,409)
(161)
General and administrative
(9,874)
(5)
(4,147)
(5,727)
(Benefit)
expense from deferred compensation plan liability
(8,270)
—
(8,270)
(Gain from lease liability extinguishment) and expense from transaction related costs and impairment losses, net
(171,881)
(171,620)
(6)
(261)
Total
decrease in expenses
$
(317,524)
$
(298,625)
$
(18,899)
___________________
(1)Closed since April 1, 2020 as a result of the COVID-19 pandemic. Operating expense for 2020 includes a $9,246 severance accrual for furloughed union employees.
(2)Cancelled trade shows at theMART from late March 2020 through the remainder of the year as a result of the pandemic.
(3)2020
includes $45,258 for the non-cash write-off of receivables arising from the straight-lining of rent, including the JCPenney retail lease at Manhattan Mall and the New York & Company, Inc. office lease at 330 West 34th Street, and $15,508 for the write-off of tenant receivables deemed uncollectible.
(4)Primarily due to a decrease in third party cleaning services provided to retail and office tenants as a result of the pandemic.
(5)Primarily due to $8,444 non-cash stock-based compensation expense for the accelerated vesting of previously issued Operating Partnership units and Vornado restricted stock in 2019 due to the removal of the time-based vesting requirements for participants who have reached 65 years of age and $844 of lower non-cash stock-based compensation expense for the time-based compensation granted in connection with
the new leadership group announced in April 2019.
(6)Due to $101,360 of non-cash impairment losses, substantially 608 Fifth Avenue, recognized in the second quarter of 2019 and $70,260 of lease liability extinguishment gain related to 608 Fifth Avenue recognized in the second quarter of 2020.
(2)See Note 8 - Investments in Partially Owned Entities to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
(3)2020 includes a $10,047 reduction in income related to a Forever 21 lease modification at 1540 Broadway and $2,997 of write-offs of lease receivables deemed uncollectible during 2020.
(4)2020 includes our $4,846 share of write-offs of lease receivables deemed uncollectible.
(5)Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 7 West 34th Street, 330 Madison Avenue (sold
on July 11, 2019), 512 West 22nd Street, 61 Ninth Avenue, 85 Tenth Avenue and others.
(6)Includes interests in Independence Plaza, Rosslyn Plaza, UE (sold on March 4, 2019), PREIT (accounted for as a marketable security from March 12, 2019 and sold on January 23, 2020) and others.
Loss from Real Estate Fund Investments
Below are the components of loss from our real estate fund investments for the nine months ended September 30, 2020 and 2019.
Interest on cash and cash equivalents and restricted cash
5,717
8,753
Decrease in fair value of marketable securities(2)
(4,938)
(3,095)
Interest
on loans receivable
2,810
4,845
Dividends on marketable securities
—
2,625
Other, net
2,712
2,802
$
(7,068)
$
15,930
____________________
(1)See
Note 4 - Recently Issued Accounting Literature to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
(2)The nine months ended September 30, 2020 includes a $4,938 mark-to-market decrease in the fair value of our PREIT common shares (sold on January 23, 2020). The nine months ended September 30, 2019 includes (i) a $19,211 decrease in the fair value of our investment in PREIT, partially offset by (ii) a $16,068 mark-to-market increase in the fair value of our Lexington common shares (sold on March 1, 2019).
Interest and debt expense was $174,618,000 for the nine months ended September 30, 2020, compared to $226,940,000 for the prior year’s nine months, a decrease of $52,322,000. This decrease was primarily due to (i) $22,540,000 of lower interest expense relating to debt prepayment costs relating to the redemption of our $400,000,000 5.00% senior unsecured notes in 2019, (ii) $17,459,000 of lower interest expense resulting from the repayment of the mortgage payable of PENN2, (iii) $16,210,000 of lower interest expense resulting from lower average interest rates on our
variable rate loans, (iv) $12,530,000 of lower interest expense resulting from the deconsolidation of mortgages payable of the properties contributed to Fifth Avenue and Times Square JV, (v) $7,680,000 of lower interest expense resulting from the paydowns of the 220 CPS loan, and (vi) $5,045,000 of lower interest from the redemption of the $400,000,000 5.00% senior unsecured notes in 2019, partially offset by $28,355,000 of lower capitalized interest and debt expense.
Net Gain on Transfer to Fifth Avenue and Times Square JV
During the nine months ended September 30, 2019, we recognized a $2,571,099,000 net gain from the transfer of common equity in the properties contributed to Fifth Avenue and Times Square JV,
including the related step-up in our basis of the retained portion of the assets to fair value.
Net Gains on Disposition of Wholly Owned and Partially Owned Assets
Net gains on disposition of wholly owned and partially owned assets of $338,862,000 for the nine months ended September 30, 2020 consisted of net gains on the sale of 30 condominium units at 220 CPS. Net gains on disposition of wholly owned and partially owned assets of $641,664,000 for the nine months ended September 30, 2019 consisted of (i) $400,500,000 of net gains on the sale of 37 condominium units at 220 CPS, (ii) a $159,292,000 net gain on sale of our 25% interest in 330 Madison Avenue, (iii)
a $62,395,000 net gain from the sale of all our UE partnership units, and (iv) a $19,477,000 net gain on sale of 3040 M Street.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2020 was $38,431,000 compared to $80,542,000 for the prior year’s nine months, a decrease of $42,111,000. This decrease was primarily due to lower income tax expense from the sale of 220 CPS condominium units.
Net Loss (Income) Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net
loss attributable to noncontrolling interests in consolidated subsidiaries was $141,003,000 for the nine months ended September 30, 2020, compared to income of $34,045,000 for the prior year’s nine months, a decrease in income of $175,048,000. This decrease resulted primarily from the higher allocation of net loss to the noncontrolling interests in our real estate fund investments. The nine months ended September 30, 2020 includes $4,289,000 allocated to noncontrolling interests for the non-cash impairment loss recognized on our investment in Fifth Avenue and Times Square JV.
Net (Loss) Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net
loss attributable to noncontrolling interests in the Operating Partnership was $10,090,000 for the nine months ended September 30, 2020, compared to net income of $197,354,000 for the prior year’s nine months, a decrease in income of $207,444,000. This decrease resulted primarily from lower net income subject to allocation to Class A unitholders.
Preferred share dividends were $37,591,000 for the nine months ended September 30, 2020, compared to $37,598,000 for the prior year’s nine months, a decrease of $7,000.
Preferred Unit Distributions of Vornado Realty L.P.
Preferred unit distributions were $37,715,000 for the nine months ended September 30, 2020, compared to $37,722,000 for the prior year’s nine months, a decrease of $7,000.
Same Store Net Operating Income At Share
Below are reconciliations of NOI at share to same store NOI
at share for our New York segment, theMART, 555 California Street and other investments for the nine months ended September 30, 2020 compared to September 30, 2019.
Same Store Net Operating Income At Share - continued
Below are reconciliations of NOI at share - cash basis to same store NOI at share - cash basis for our New York segment, theMART, 555 California Street and other investments for the nine months ended September 30, 2020 compared to September 30, 2019.
(1)The
three months ended September 30, 2020 includes $5,112 of write-offs of tenant receivables deemed uncollectible and $4,368 of non-cash write-offs of receivables arising from the straight-lining of rents.The three months ended June 30, 2020 includes $13,220 of non-cash write-offs of receivables arising from the straight-lining of rents, primarily for the New York & Company, Inc. lease at 330 West 34th Street, and $940 of write-offs of tenant receivables deemed uncollectible.
(2)The three months ended September 30, 2020 includes $4,688 of non-cash write-offs of receivables arising from the straight-lining of rents and $4,668 of write-offs of tenant receivables deemed uncollectible. The three months ended June
30, 2020 includes $20,436 of non-cash write-offs of receivables arising from the straight-lining of rents, primarily for the JCPenney lease at Manhattan Mall, and $6,731 of write-offs of tenant receivables deemed uncollectible.
(3)The Hotel Pennsylvania has been closed since April 1, 2020 as a result of the COVID-19 pandemic. The three months ended September 30, 2020 includes a $9,246 severance accrual for furloughed union employees.
(4)The decrease in NOI at share is primarily due to the effects of the COVID-19 pandemic, causing trade shows to be cancelled from late March 2020 through the remainder of the year.
The elements of our New York and Other NOI at share - cash basis for the three
months ended September 30, 2020 and June 30, 2020 are summarized below.
(1)Includes
$5,112 and $940, respectively, of write-offs of tenant receivables deemed uncollectible.
(2)Includes $4,668 and $6,731, respectively, of write-offs of tenant receivables deemed uncollectible.
(3)The Hotel Pennsylvania has been closed since April 1, 2020 as a result of the COVID-19 pandemic. The three months ended September 30, 2020 includes a $9,246 severance accrual for furloughed union employees.
(4)The decrease in NOI at share - cash basis is primarily due to the effects of the COVID-19 pandemic, causing trade shows to be cancelled from late March 2020 through the remainder of the year.
76
SUPPLEMENTAL
INFORMATION - CONTINUED
Reconciliation of Net Income (Loss) to NOI At Share and NOI At Share - Cash Basis for the Three Months Ended September 30, 2020 and June 30, 2020
Below is a reconciliation of net income (loss) to NOI at share and NOI at share - cash basis for the three months ended September 30, 2020 and June 30, 2020.
Below are reconciliations of NOI at share to same store NOI at share for our New York segment, theMART, 555 California Street and other investments for the three months ended September 30, 2020 compared to June 30, 2020.
Same Store Net Operating Income At Share - continued
Below are reconciliations of NOI at share - cash basis to same store NOI at share - cash basis for our New York segment, theMART, 555 California Street and other investments for the three months ended September 30, 2020 compared to June 30, 2020.
Same store NOI at share - cash basis for the three months ended June 30, 2020
$
243,105
$
210,292
$
17,765
$
15,048
$
—
(Decrease)
increase in same store NOI at share - cash basis for the three months ended September 30, 2020 compared to June 30, 2020
$
(7,337)
$
(7,661)
$
(190)
$
514
$
—
%
(decrease) increase in same store NOI at share - cash basis
(3.0)
%
(3.6)
%
(1.1)
%
3.4
%
—
%
78
Liquidity
and Capital Resources
Rental revenue 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, debt service, leasing commissions, dividends to shareholders and distributions to unitholders of the Operating Partnership, as well as acquisition and development costs. During 2020, we have experienced a decrease in cash flow from operations due to the COVID-19 pandemic, including reduced collections of rents billed to certain of our tenants, the closure of Hotel Pennsylvania, the cancellation of trade shows at theMART through 2020, and lower revenues from BMS and signage. For the quarter ended September 30, 2020,
we collected 93% (95% including rent deferrals) of rent due from our tenants, comprised of 95% (97% including rent deferrals) from our office tenants and 82% (85% including rent deferrals) from our retail tenants. Rent deferrals generally require repayment in monthly installments over a period not to exceed twelve months. While we believe that our tenants are required to pay rent under their leases, we have implemented and will continue to consider rent deferrals on a case-by-case basis. Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, unsecured term loans and unsecured revolving credit facilities; proceeds from the issuance of common and preferred equity; and asset sales.
As of September 30, 2020, we have $3.7 billion of liquidity comprised of $1.5 billion of cash and cash equivalents
and restricted cash and $2.2 billion available on our $2.75 billion revolving credit facilities. The challenges posed by COVID-19 could adversely impact our cash flow from continuing operations but we anticipate that cash flow from continuing operations over the next twelve months together with cash balances on hand 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 may require funding from borrowings and/or equity offerings. Consequently, the Company will continue to evaluate its liquidity and financial position on an ongoing basis.
During the third quarter of 2020, we closed on the sale of 19 condominium units at 220 Central Park South for net proceeds of $591,104,000; and in October 2020, we closed on the sale
of four condominium units for net proceeds of $105,000,000.
We may from time to time purchase, retire or redeem our outstanding debt securities or 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.
Our
cash flow activities are summarized as follows:
(Amounts in thousands)
For the Nine Months Ended September 30,
(Decrease) Increase in Cash Flow
2020
2019
Net
cash provided by operating activities
$
191,360
$
397,971
$
(206,611)
Net cash provided by investing activities
123,415
2,228,548
(2,105,133)
Net cash used in financing activities
(431,568)
(2,097,868)
1,666,300
Cash
and cash equivalents and restricted cash was $1,490,338,000 as of September 30, 2020, a $116,793,000 decrease from the balance as of December 31, 2019.
Net cash provided by operating activities of $191,360,000 for the nine months ended September 30, 2020 was comprised of $488,827,000 of cash from operations, including distributions of income from partially owned entities of $132,850,000, and a net decrease of $297,467,000 in cash due to the timing of cash receipts and payments related to changes in operating assets and liabilities.
The following table details the net cash provided by investing activities:
(Amounts
in thousands)
For the Nine Months Ended September 30,
(Decrease) Increase in Cash Flow
2020
2019
Proceeds from sale of condominium units at 220 Central Park South
$
939,292
$
1,039,493
$
(100,201)
Development
costs and construction in progress
(448,167)
(448,281)
114
Moynihan Train Hall expenditures
(277,128)
(352,211)
75,083
Additions to real estate
(112,906)
(189,579)
76,673
Proceeds
from sales of marketable securities
28,375
168,314
(139,939)
Investments in partially owned entities
(6,156)
(16,480)
10,324
Distributions of capital from partially owned entities
1,090
24,880
(23,790)
Acquisitions
of real estate and other
(985)
(3,260)
2,275
Proceeds from transfer of interest in Fifth Avenue and Times Square JV (net of $35,562 of transaction costs and $10,899 of deconsolidated cash and restricted cash)
—
1,248,743
(1,248,743)
Proceeds from redemption of 640 Fifth Avenue preferred equity
—
500,000
(500,000)
Proceeds
from sale of real estate and related investments
—
255,534
(255,534)
Proceeds from repayments of loans receivable
—
1,395
(1,395)
Net cash provided by investing activities
$
123,415
$
2,228,548
$
(2,105,133)
The
following table details the net cash used in financing activities:
(Amounts in thousands)
For the Nine Months Ended September 30,
(Decrease) Increase in Cash Flow
2020
2019
Dividends
paid on common shares/Distributions to Vornado
$
(725,938)
$
(377,750)
$
(348,188)
Proceeds from borrowings
555,918
1,107,852
(551,934)
Repayments of borrowings
(514,493)
(2,635,028)
2,120,535
Moynihan
Train Hall reimbursement from Empire State Development
277,128
352,211
(75,083)
Contributions from noncontrolling interests in consolidated subsidiaries
98,626
9,223
89,403
Distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries
(76,759)
(65,084)
(11,675)
Dividends
paid on preferred shares/Distributions to preferred unitholders
(50,123)
(37,598)
(12,525)
Proceeds received from exercise of Vornado stock options and other
5,567
2,403
3,164
Debt issuance costs
(1,357)
(15,328)
13,971
Repurchase
of shares/Class A units related to stock compensation agreements and related tax withholdings and other
(137)
(8,692)
8,555
Purchase of marketable securities in connection with defeasance of mortgage payable
—
(407,126)
407,126
Prepayment penalty on redemption of senior unsecured notes due 2022
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 amounts paid for capital expenditures and leasing commissions for the nine months ended September 30, 2020.
(Amounts in thousands)
Total
New York
theMART
555
California Street
Expenditures to maintain assets
$
46,771
$
39,920
$
5,674
$
1,177
Tenant improvements
45,150
38,900
4,041
2,209
Leasing
commissions
15,569
11,624
3,173
772
Recurring tenant improvements, leasing commissions and other capital expenditures
107,490
90,444
12,888
4,158
Non-recurring
capital expenditures
61,171
60,961
210
—
Total capital expenditures and leasing commissions
$
168,661
$
151,405
$
13,098
$
4,158
Development
and Redevelopment Expenditures for the Nine Months Ended September 30, 2020
Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including capitalized interest, debt and operating costs until the property is substantially completed and ready for its intended use. Our development project estimates below include initial leasing costs, which are reflected as non-recurring capital expenditures in the table above.
220 CPS
We are completing construction of a residential condominium tower containing 397,000 salable square feet at 220 CPS. The development cost of this project (exclusive of land cost) is estimated to be approximately $1.450 billion, of which $1.436 billion has been
expended as of September 30, 2020.
PENN District
We are redeveloping PENN1, a 2,545,000 square foot office building located on 34th Street between Seventh and Eighth Avenue. The development cost of this project is estimated to be $325,000,000,of which $137,048,000 has been expended as of September 30, 2020.
We are redeveloping PENN2, a 1,795,000 square foot (as expanded) office building located on the west side of Seventh Avenue between 31st and 33rd Street. The development cost of this project is estimated to be $750,000,000, of which $80,684,000 has been expended as of September
30, 2020.
We are also making districtwide improvements within the Penn District. The development cost of these improvements is estimated to be $100,000,000, of which $15,538,000 has been expended as of September 30, 2020.
Our 95% joint venture is developing Farley Office and Retail (the "Project"), which will include approximately 844,000 rentable square feet of commercial space, comprised of approximately 730,000 square feet of office space and approximately 114,000 square feet of retail space. The total development cost of the Project is estimated to be approximately $1,030,000,000. As of September 30, 2020, $736,155,000 has been expended, which has been reduced by $88,000,000 of historic tax credit investor contributions (at our share).
The
joint venture has entered into a development agreement with Empire State Development (“ESD”), an entity of New York State, to build the adjacent Moynihan Train Hall, with Vornado and Related each guaranteeing the joint venture's obligations. The joint venture has entered into a design-build contract with Skanska Moynihan Train Hall Builders pursuant to which they will build the Moynihan Train Hall, thereby fulfilling all of the joint venture's obligations to ESD. The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bear a full guaranty from Skanska AB. The development expenditures for the Moynihan Train Hall are estimated to be approximately $1.6 billion, which will be funded by governmental agencies.
On December 19, 2019, we paid Kmart Corporation $34,000,000, of which $10,000,000 is expected to be reimbursed, to early terminate
their 141,000 square foot retail space lease at PENN1 which was scheduled to expire in January 2036.
We entered into a development agreement with the Metropolitan Transportation Authority to oversee the development of the Long Island Rail Road 33rd Street entrance at Penn Station which Skanska USA Civil Northeast, Inc. will construct under a fixed price contract for $126,197,000.
81
Liquidity and Capital Resources - continued
Development and Redevelopment Expenditures for the Nine Months Ended September 30, 2020 - continued
Other
We
are redeveloping a 78,000 square foot Class A office building at 345 Montgomery Street, a part of our 555 California Street complex in San Francisco (70.0% interest) located at the corner of California and Pine Street. The development cost of this project is estimated to be approximately $66,000,000, of which our share is $46,000,000. As of September 30, 2020, $55,207,000 has been expended, of which our share is $38,645,000.
We are redeveloping a 165,000 square foot office building at 825 Seventh Avenue, located at the corner of 53rd Street and Seventh Avenue (50.0% interest). The redevelopment cost of this project is estimated to be approximately $30,000,000, of which our share is $15,000,000. As of September 30, 2020, $25,818,000 has been expended, of which our share is $12,909,000.
We
are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including, in particular, the Penn District.
There can be no assurance that the above projects will be completed, completed on schedule or within budget.
Below is a summary of amounts paid for development and redevelopment expenditures for the nine months ended September 30, 2020. These expenditures include interest and debt expense of $30,829,000, payroll of $11,696,000and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating$92,008,000,
which were capitalized in connection with the development and redevelopment of these projects.
Below is a summary of amounts paid for capital expenditures and leasing commissions for the nine months ended September 30, 2019.
(Amounts in thousands)
Total
New
York
theMART
555 California Street
Expenditures to maintain assets
$
75,190
$
66,061
$
6,720
$
2,409
Tenant improvements
78,738
67,503
8,021
3,214
Leasing
commissions
17,051
15,251
714
1,086
Recurring tenant improvements, leasing commissions and other capital expenditures
170,979
148,815
15,455
6,709
Non-recurring
capital expenditures
26,393
24,588
166
1,639
Total capital expenditures and leasing commissions
$
197,372
$
173,403
$
15,621
$
8,348
82
Liquidity
and Capital Resources - continued
Development and Redevelopment Expenditures for the Nine Months Ended September 30, 2019
Below is a summary of amounts paid for development and redevelopment expenditures for the nine months ended September 30, 2019. These expenditures include interest and debt expense of $59,184,000, payroll of $12,673,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $51,587,000, which were capitalized in connection with the development and redevelopment of these projects.
(Amounts
in thousands)
Total
New York
theMART
555 California Street
Other
Farley Office and Retail
$
190,991
$
190,991
$
—
$
—
$
—
220
CPS
142,439
—
—
—
142,439
PENN1
34,476
34,476
—
—
—
345
Montgomery Street
18,844
—
—
18,844
—
PENN2
17,404
17,404
—
—
—
606
Broadway
7,181
7,181
—
—
—
1535 Broadway
1,031
1,031
—
—
—
Other
35,915
30,488
1,610
3,817
—
$
448,281
$
281,571
$
1,610
$
22,661
$
142,439
Commitments
and Contingencies
Farley Office and Retail
The consolidated joint venture in which we own a 95% ownership interest was designated by ESD to develop Farley Office and Retail. The joint venture entered into a development agreement with ESD and a design-build contract with Skanska Moynihan Train Hall Builders. Under the development agreement with ESD, the joint venture is obligated to build the Moynihan Train Hall, with Vornado and Related each guaranteeing the joint venture’s obligations. Under the design-build agreement, Skanska Moynihan Train Hall Builders is obligated to fulfill all of the joint venture’s obligations. The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bear a full guaranty from Skanska AB.
In connection with the development of the property, the joint venture took in a historic
tax credit investor partner. Under the terms of the historic tax credit arrangement, the joint venture is required to comply with various laws, regulations, and contractual provisions. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, may require a refund or reduction of the Tax Credit Investor’s capital contributions. As of September 30, 2020, the Tax Credit Investor has made $92,400,000 in capital contributions. Vornado and Related have guaranteed certain of the joint venture’s obligations to the Tax Credit Investor.
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 currently 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.
In July 2018, we leased 78,000 square feet at 345 Montgomery Street in San Francisco, CA, to a subsidiary of Regus PLC, for an initial term of 15 years. The obligations under the lease were guaranteed by Regus PLC in an amount of up to $90,000,000. The tenant purported to terminate the lease prior to space delivery. We commenced a suit on October
23, 2019 seeking to enforce the lease and the guarantee. On October 9, 2020, the successor to Regus PLC filed for bankruptcy in Luxembourg.
In November 2011, we entered into an agreement with the New York City Economic Development Corporation ("EDC") to lease Piers 92 and 94 (the "Piers") for a 49-year term with five 10-year renewal options. The non-recourse lease with a single-purpose entity calls for current annual rent payments of $2,000,000 with fixed rent steps through the initial term. We operate trade shows and special events at the Piers (and sublease to others for the same uses). In February 2019, an inspection revealed that the piles supporting Pier 92 were structurally unsound (an obligation of EDC to maintain) and we were issued an order by EDC to vacate the property. We continued to make the required lease payments through February 2020, with
no abatement provided by EDC for the loss of our right to use Pier 92 or reimbursement for lost revenues. Beginning March 2020, as no resolution had been reached with EDC, we have not paid the monthly rents due under the non-recourse lease. As of September 30, 2020, we have a $46,911,000 lease liability and a $34,563,000 right-of-use asset recorded for this lease.
83
Liquidity and Capital Resources - continued
Other Commitments and Contingencies - continued
Our mortgage loans are non-recourse to us, except for the mortgage loans secured by 640 Fifth Avenue, 7 West 34th Street and 435 Seventh
Avenue, which we guaranteed and therefore are part of our tax basis. 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 underlying loans. In addition, we have guaranteed the rent and payments in lieu of real estate taxes due to ESD, an entity of New York State, for Farley Office and Retail. As of September 30, 2020, the aggregate dollar amount of these guarantees and master leases is approximately $1,745,000,000.
As of September 30, 2020, $14,080,000 of letters of credit were outstanding under one of our unsecured revolving credit facilities. Our unsecured revolving 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 unsecured revolving 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.
As investment manager of Vornado Capital Partners Real Estate Fund (the "Fund") we are entitled to an incentive allocation after the limited partners have received a preferred return on their invested capital. The incentive allocation is subject to catch-up and clawback provisions.Accordingly, based on the September 30, 2020 fair value of the Fund assets, at liquidation we would be required to make a$33,900,000 payment to the limited partners representing a clawback of previously paid incentive allocations, which would have no income statement impact as it was previously accrued.
As of September 30, 2020, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $11,000,000.
As of September 30, 2020, we have construction commitments aggregating approximately $504,000,000.
Funds From Operations (“FFO”)
Vornado Realty Trust
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 gains from sales of depreciable real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets and other specified items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are non-GAAP financial measures 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 flow 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 (loss) per share are disclosed in Note 20 – Income (Loss) Per Share/Income (Loss) Per Class A Unit, in our consolidated financial statements on page 42 of this Quarterly Report on Form 10-Q.
FFO attributable to common shareholders plus assumed conversions was $278,507,000, or $1.46 per diluted share for the three months ended September 30, 2020, compared to $279,509,000, or $1.46 per diluted share, for the prior year’s three months. FFO
attributable to common shareholders plus assumed conversions was $612,123,000, or $3.20 per diluted share for the nine months ended September 30, 2020, compared to $691,522,000, or $3.62 per diluted share, for the prior year’s nine months. Details of certain adjustments to FFO are discussed in the financial results summary of our “Overview”.
Proportionate
share of adjustments to equity in net income of partially owned entities to arrive at FFO:
Non-cash impairment loss on our investment in Fifth Avenue and Times Square JV, net of $3,822and $4,289 of noncontrolling interests
103,201
—
409,060
—
Depreciation
and amortization of real property
38,987
37,696
119,146
97,317
Decrease in fair value of marketable securities
385
291
3,511
1,988
241,618
(46,435)
806,015
(2,363,067)
Noncontrolling
interests' share of above adjustments
(16,292)
3,024
(54,311)
149,957
FFO adjustments, net
$
225,326
$
(43,411)
$
751,704
$
(2,213,110)
FFO
attributable to common shareholders
$
278,496
$
279,495
$
612,087
$
691,479
Convertible preferred share dividends
11
14
36
43
FFO
attributable to common shareholders plus assumed conversions
$
278,507
$
279,509
$
612,123
$
691,522
Per diluted share
$
1.46
$
1.46
$
3.20
$
3.62
Reconciliation
of weighted average shares outstanding:
Weighted average common shares outstanding
191,162
190,814
191,102
190,762
Effect of dilutive securities:
Convertible
preferred shares
26
34
28
35
Employee stock options and restricted share awards
—
176
25
227
Denominator
for FFO per diluted share
191,188
191,024
191,155
191,024
85
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 and per unit
amounts)
2020
2019
September 30, Balance
Weighted Average Interest Rate
Effect of 1% Change in Base Rates
December 31, Balance
Weighted Average Interest Rate
Consolidated debt:
Variable
rate
$
2,399,418
1.61%
$
23,994
$
1,643,500
3.09%
Fixed rate
5,086,714
3.70%
—
5,801,516
3.57%
$
7,486,132
3.03%
23,994
$
7,445,016
3.46%
Pro
rata share of debt of non-consolidated entities(1):
Variable rate
$
1,479,094
1.78%
14,791
$
1,441,690
3.34%
Fixed
rate
1,360,915
3.93%
—
1,361,169
3.93%
$
2,840,009
2.81%
14,791
$
2,802,859
3.62%
Noncontrolling
interests' share of consolidated subsidiaries
(369)
Total change in annual net income attributable to the Operating Partnership
38,416
Noncontrolling interests’ share of the Operating Partnership
(2,620)
Total
change in annual net income attributable to Vornado
$
35,796
Total change in annual net income attributable to the Operating Partnership per diluted Class A unit
$
0.19
Total
change in annual net income attributable to Vornado per diluted share
$
0.19
____________________
(1)Our pro rata share of debt of non-consolidated entities as of September 30, 2020 and December 31, 2019 is net of $16,200 and $63,409, respectively, of our share of Alexander's participation in its Rego Park II shopping center mortgage loan which is considered partially extinguished as the participation interest
is a reacquisition of 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 current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of September 30, 2020, the estimated fair value of our consolidated debt was $7,503,000,000.
Derivatives and Hedging
We 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. The following tables
summarize our consolidated derivative instruments, all of which hedge variable rate debt, as of September 30, 2020 and December 31, 2019.
Evaluation of Disclosure Controls and Procedures (Vornado Realty Trust)
Disclosure Controls and Procedures: Our management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our 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, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2020, such disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There have not been any changes in our internal
control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities 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, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures (Vornado Realty L.P.)
Disclosure Controls and Procedures: Vornado Realty L.P.’s management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our 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, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September
30, 2020, such disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities 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, our internal control over financial reporting.
87
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 currently expected to have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
Except as set forth below, there were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Our business, financial condition, results of operations and cash flows have been and are expected to continue to be adversely
affected by the recent COVID-19 pandemic and the impact could be material to us.
Our business has been adversely affected as a result of the COVID-19 pandemic and the preventive measures taken to curb the spread of the virus. Some of the effects on us include the following:
•With the exception of grocery stores and other "essential" businesses, many of our retail tenants closed their stores in March 2020 and began reopening when New York City entered phase two of its state-mandated reopening plan on June 22, 2020.
•While our buildings remain open, many of our office tenants are working remotely.
•We have closed the Hotel Pennsylvania. In connection with the closure,
we accrued $9,246,000 of severance for furloughed Hotel Pennsylvania union employees and recognized a corresponding $3,145,000 income tax benefit for the three and nine months ended September 30, 2020.
•We have cancelled trade shows at theMART for the remainder of 2020.
•Because certain of our development projects were deemed "non-essential," they were temporarily paused in March 2020 due to New York State executive orders and resumed once New York City entered phase one of its state mandated reopening plan on June 8, 2020.
•As of April 30, 2020, we placed1,803
employees on furlough, which included 1,293 employees of Building Maintenance Services LLC ("BMS"), a wholly owned subsidiary, which provides cleaning, security and engineering services primarily to our New York properties, 414 employees at the Hotel Pennsylvania and 96 corporate staff employees. As of October 31, 2020, 40% of the furloughed employees have returned to work.
•Effective April 1, 2020, our executive officers waived portions of their annual base salary for the remainder of 2020.
•Effective April 1, 2020, each non-management member of our Board of Trustees agreed to forgo their $75,000 annual cash retainer for the remainder of 2020.
While
we believe our tenants are required to pay rent under their leases, in limited circumstances, we have agreed to and may continue to agree to rent deferrals and rent abatements for certain of our tenants. We have made a policy election in accordance with the Financial Accounting Standards Board (“FASB”) Staff Q&A which provides relief in accounting for leases during the COVID-19 pandemic, allowing us to continue recognizing rental revenue on a straight-line basis for rent deferrals, with no impact to revenue recognition, and to recognize rent abatements as a reduction to rental revenue in the period granted.
For the quarter ended September 30, 2020, we collected 93% (95% including rent deferrals) of rent due from our tenants, comprised of 95% (97% including rent deferrals) from our office tenants and 82% (85% including rent deferrals) from our retail tenants. Rent
deferrals generally require repayment in monthly installments over a period not to exceed twelve months.
88
Item 1A. Risk Factors - continued
Numerous Federal, state, local and industry-initiated efforts may also affect our ability to collect rent or enforce remedies for the failure to pay rent. Certain of our tenants have incurred and may continue to incur significant costs or losses as a result of the COVID-19 pandemic and/or incur other liabilities related to shelter-in-place orders, quarantines, infection or other related factors that may adversely impact their ability to pay us timely or at all.
The
COVID-19 pandemic has also caused, and is likely to continue to cause, severe economic, market or other disruptions worldwide. Conditions in the bank lending, capital and other financial markets may deteriorate as a result of the pandemic, our access to capital and other sources of funding may become constrained and the ratios of our debt to asset values may deteriorate, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. In addition, the deterioration of global, national, regional and local economic conditions as a result of the pandemic may ultimately decrease occupancy levels and/or rent levels across our portfolio as tenants reduce or defer their spending, which may result in less cash flow available for operating costs, to pay our indebtedness and for distribution to our shareholders and the impact could be material. In addition, we have concluded that our investment in Fifth Avenue and Times Square JV is "other-than-temporarily"
impaired and recorded non-cash impairment losses, net of noncontrolling interests, of $103,201,000 and $409,060,000, respectively, during the three and nine months ended September 30, 2020. The impairment losses are included in “(loss) income from partially owned entities” on our consolidated statements of income. The value of our real estate assets may continue to decline, which may result in additional non-cash impairment charges in future periods and that impact could be material. The extent of the COVID-19 pandemic's effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak and governmental responses thereto, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, we are not able at this time to estimate the ultimate effect of these factors on our business but the
adverse impact on our business, results of operations, financial condition and cash flows could be material. The potential effects of COVID-19 also could impact many of our risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2019 and give rise to additional risks and uncertainties currently not known to us or that we currently deem to be immaterial. However, the potential impact remains uncertain but that impact could be material to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Vornado Realty Trust
None.
Vornado Realty L.P.
During
the quarter ended September 30, 2020, we issued 8,536Class A units in connection with equity awards issued pursuant to Vornado’s omnibus share plan, including with respect to grants of restricted Vornado common shares and restricted units of the Operating Partnership and upon conversion, surrender or exchange of the Operating Partnership’s units or Vornado stock options, and consideration received included $299,272 in cash proceeds. Such units were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
Section 1350 Certification of the Chief Financial Officer of Vornado Realty L.P.
101
—
The following financial information from Vornado Realty Trust and Vornado Realty L.P. Quarterly Report
on Form
10-Q for the quarter ended September 30, 2020 formatted in Inline Extensible Business Reporting
Language (iXBRL) includes: (i) consolidated balance sheets, (ii) consolidated statements of income,
(iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in equity,
(v) consolidated statements of cash flows, and (vi) the notes to consolidated financial statements.
104
—
The
cover page from the Vornado Realty Trust and Vornado Realty L.P. Quarterly Report on Form 10-Q for
the quarter ended September 30, 2020, formatted as iXBRL and contained in Exhibit 101
90
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.
authorized officer and principal accounting officer)
91
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.
Matthew Iocco, Chief Accounting Officer of Vornado Realty Trust, sole General Partner of Vornado Realty L.P. (duly authorized officer and principal accounting officer)
92
Dates Referenced Herein and Documents Incorporated by Reference