Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 3.40M
2: EX-15.1 Letter re: Unaudited Interim Financial Info HTML 38K
3: EX-15.2 Letter re: Unaudited Interim Financial Info HTML 34K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 40K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 40K
6: EX-31.3 Certification -- §302 - SOA'02 HTML 40K
7: EX-31.4 Certification -- §302 - SOA'02 HTML 40K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 35K
9: EX-32.2 Certification -- §906 - SOA'02 HTML 35K
10: EX-32.3 Certification -- §906 - SOA'02 HTML 35K
11: EX-32.4 Certification -- §906 - SOA'02 HTML 35K
56: R1 Document and Entity Information HTML 101K
100: R2 Consolidated Balance Sheets (Unaudited) HTML 191K
87: R3 Consolidated Balance Sheets (Unaudited) HTML 71K
(Parentheticals)
20: R4 Consolidated Statements of Income (Unaudited) HTML 162K
58: R5 Consolidated Statements of Comprehensive Income HTML 62K
(Unaudited)
102: R6 Consolidated Statements of Changes in Equity HTML 265K
(Unaudited)
89: R7 Consolidated Statements of Changes in Equity HTML 36K
(Unaudited) - Parenthetical (Unaudited)
18: R8 Consolidated Statements of Cash Flows (Unaudited) HTML 252K
61: R9 Consolidated Statements of Cash Flows (Unaudited) HTML 43K
(Parentheticals)
119: R10 Organization HTML 37K
80: R11 Basis of Presentation HTML 39K
39: R12 Recently Issued Accounting Literature HTML 46K
53: R13 Revenue Recognition HTML 154K
122: R14 Real Estate Fund Investments HTML 74K
82: R15 Marketable Securities HTML 60K
41: R16 Investments in Partially Owned Entities HTML 154K
55: R17 220 Central Park South 220 CPS HTML 41K
123: R18 Dispositions HTML 37K
79: R19 Identified Intangible Assets and Liabilities HTML 63K
19: R20 Debt HTML 84K
57: R21 Redeemable Noncontrolling Interests/Redeemable HTML 64K
Partnership Units
99: R22 Shareholders' Equity/Partners' Capital HTML 140K
86: R23 Variable Interest Entities HTML 39K
21: R24 Fair Value Measurements HTML 201K
59: R25 Stock-based Compensation HTML 46K
101: R26 Transaction Related Costs, Impairment Losses and HTML 55K
Other
88: R27 Interest and Other Investment Income, Net HTML 69K
17: R28 Interest and Debt Expense HTML 52K
60: R29 Income Per Share/Income Per Class A Unit HTML 194K
52: R30 Leases HTML 161K
37: R31 Commitments and Contingencies HTML 48K
85: R32 Segment Information HTML 169K
125: R33 Recently Issued Accounting Literature (Policies) HTML 70K
51: R34 Revenue Recognition (Tables) HTML 146K
36: R35 Real Estate Fund Investments (Tables) HTML 69K
84: R36 Marketable Securities (Tables) HTML 56K
124: R37 Investments in Partially Owned Entities (Tables) HTML 124K
50: R38 Identified Intangible Assets and Liabilities HTML 66K
(Tables)
38: R39 Debt (Tables) HTML 76K
69: R40 Redeemable Noncontrolling Interests/Redeemable HTML 61K
Partnership Units (Tables)
27: R41 Shareholders' Equity/Partners' Capital (Tables) HTML 142K
92: R42 Fair Value Measurements (Tables) HTML 207K
104: R43 Transaction Related Costs, Impairment Losses and HTML 52K
Other (Tables)
68: R44 Interest and Other Investment Income, Net (Tables) HTML 67K
26: R45 Interest and Debt Expense (Tables) HTML 52K
91: R46 Income Per Share/Income Per Class A Unit (Tables) HTML 195K
103: R47 Leases (Tables) HTML 99K
67: R48 Segment Information (Tables) HTML 170K
28: R49 Organization (Narrative) (Details) HTML 36K
34: R50 Basis of Presentation (Narrative) (Details) HTML 39K
47: R51 Recently Issued Accounting Literature (Narrative) HTML 51K
(Details)
111: R52 Revenue Recognition - Narrative (Details) HTML 34K
71: R53 Revenue Recognition - Revenues by Segment HTML 95K
(Details)
35: R54 Real Estate Fund Investments (Narrative) (Details) HTML 61K
48: R55 Real Estate Fund Investments (Income from the Fund HTML 58K
and the Co-Investment) (Details)
112: R56 Marketable Securities (Narrative) (Details) HTML 51K
72: R57 Marketable Securities (Marketable securities HTML 55K
portfolio) (Details)
33: R58 Investments in Partially Owned Entities - Fifth HTML 114K
Avenue and Times Square JV (Details)
49: R59 Investments in Partially Owned Entities - Related HTML 49K
Party Transactions (Details)
106: R60 Investments in Partially Owned Entities HTML 49K
(Alexander's Inc.) (Details)
96: R61 Investments in Partially Owned Entities (61 Ninth HTML 62K
Avenue) (Details)
23: R62 Investments in Partially Owned Entities (Urban HTML 41K
Edge Properties) (Details)
64: R63 Investments in Partially Owned Entities (512 West HTML 61K
22nd Street) (Details)
107: R64 Investments in Partially Owned Entities (330 HTML 51K
Madison Avenue) (Details)
97: R65 Investments in Partially Owned Entities (825 HTML 59K
Seventh Avenue) (Details)
24: R66 Investments in Partially Owned Entities (Toys R HTML 43K
Us) (Details)
65: R67 Investments in Partially Owned Entities (Summary HTML 64K
of Investments) (Details)
110: R68 Investments in Partially Owned Entities (Summary HTML 68K
of Income (Loss) ) (Details)
94: R69 220 Central Park South 220 CPS - Narrative HTML 66K
(Details)
75: R70 Dispositions - 3040 M Street (Details) HTML 45K
117: R71 Identified Intangible Assets and Liabilities - HTML 48K
Schedule of Identified Intangible Assets and
Intangible Liabilities (Details)
44: R72 Identified Intangible Assets and Liabilities - HTML 43K
Narrative (Details)
31: R73 Identified Intangible Assets and Liabilities - HTML 51K
Schedule of Future Amortization Expense of
Intangible Assets (Details)
74: R74 Debt (Narrative) (Details) HTML 180K
116: R75 Debt (Summary of Debt) (Details) HTML 75K
43: R76 Redeemable Noncontrolling Interests/Redeemable HTML 57K
Partnership Units (Activity of Redeemable
Noncontrolling Interests) (Details)
30: R77 Redeemable Noncontrolling Interests/Redeemable HTML 44K
Partnership Units (Narrative) (Details)
77: R78 Shareholders' Equity/Partners' Capital - Schedule HTML 70K
of Dividends (Details)
113: R79 Shareholders' Equity/Partners' Capital - AOCI by HTML 72K
Component (Details)
76: R80 Variable Interest Entities - Narrative (Details) HTML 44K
118: R81 Fair Value Measurements (Financial Assets and HTML 72K
Liabilities Measured at Fair Value on a Recurring
Basis) (Details)
45: R82 Fair Value Measurements (Narrative) (Details) HTML 44K
32: R83 Fair Value Measurements (Unobervable Quantitative HTML 49K
Input Ratios) (Details)
73: R84 Fair Value Measurements (Changes in the Fair Value HTML 58K
of Real Estate Fund Investments and Deferred
Compensation Plan Assets) (Details)
115: R85 Fair Value Measurements (Fair Value Measurements HTML 44K
on a Nonrecurring Basis) (Details)
42: R86 Fair Value Measurements (Carrying amounts and fair HTML 74K
value of financial instruments) (Details)
29: R87 Stock-based Compensation (Narrative) (Details) HTML 108K
78: R88 Transaction Related Costs, Impairment Losses and HTML 47K
Other - Schedule of Transaction Related Costs,
Impairment Losses and Other (Details)
114: R89 Transaction Related Costs, Impairment Losses and HTML 45K
Other - Narrative (Details)
105: R90 Interest and Other Investment Income, Net HTML 57K
(Details)
95: R91 Interest and Debt Expense (Details) HTML 42K
22: R92 Interest and Debt Expense - Footnote (Details) HTML 42K
63: R93 Income Per Share/Income Per Class A Unit (Details) HTML 139K
108: R94 Income Per Share/Income Per Class A Unit HTML 39K
(Narrative) (Details)
98: R95 Leases - Lessor, Operating Lease, Payments to be HTML 64K
Received (Details)
25: R96 Leases - Components of Fixed and Variable Lease HTML 41K
Revenues (Details)
66: R97 Leases - Narrative (Details) HTML 65K
109: R98 Leases - Schedule of Amounts Included in the HTML 40K
Measurement of Lease Liability (Details)
93: R99 Leases - Schedule of Components of Rent Expense HTML 40K
(Details)
121: R100 Leases - Lessee, Operating Lease, Liability, HTML 59K
Maturity (Details)
81: R101 Leases - Schedule of Future Minimum Lease Payments HTML 51K
(Details)
40: R102 Commitments and Contingencies (Details) HTML 77K
54: R103 Segment Information - Summary of NOI by Segment HTML 61K
(Details)
120: R104 Segment Information (Summary of net income and HTML 76K
EBITDA reconciliation by segment) (Details)
62: XML IDEA XML File -- Filing Summary XML 230K
70: XML XBRL Instance -- vno-093019x10q_htm XML 5.46M
83: EXCEL IDEA Workbook of Financial Reports XLSX 145K
13: EX-101.CAL XBRL Calculations -- vno-20190930_cal XML 365K
14: EX-101.DEF XBRL Definitions -- vno-20190930_def XML 1.64M
15: EX-101.LAB XBRL Labels -- vno-20190930_lab XML 2.68M
16: EX-101.PRE XBRL Presentations -- vno-20190930_pre XML 1.84M
12: EX-101.SCH XBRL Schema -- vno-20190930 XSD 318K
90: JSON XBRL Instance as JSON Data -- MetaLinks 536± 811K
46: ZIP XBRL Zipped Folder -- 0000899689-19-000072-xbrl Zip 606K
(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, 2019, i190,850,321 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, 2019 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 93.1%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/Redeemable Partnership Units
•
Note 13. Shareholders' Equity/Partners' Capital
•
Note 20. Income Per Share/Income 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
i288,135
i99,627
Receivable
arising from the straight-lining of rents
i743,646
i935,131
Deferred
leasing costs, net of accumulated amortization of $191,299 and $207,529
i360,608
i400,313
Identified
intangible assets, net of accumulated amortization of $99,623 and $172,114
i30,773
i136,781
Other
assets
i446,516
i431,938
$
i18,216,099
$
i17,180,794
LIABILITIES,
REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
$
i5,640,895
$
i8,167,798
Senior
unsecured notes, net
i445,668
i844,002
Unsecured
term loan, net
i745,585
i744,821
Unsecured
revolving credit facilities
i655,000
i80,000
Lease
liabilities
i490,978
i—
Moynihan
Train Hall obligation
i791,703
i445,693
Accounts
payable and accrued expenses
i453,331
i430,976
Deferred
revenue
i62,583
i167,730
Deferred
compensation plan
i99,677
i96,523
Other
liabilities
i266,090
i311,806
Total
liabilities
i9,651,510
i11,289,349
Commitments
and contingencies
i
i
Redeemable
noncontrolling interests:
Class A units - 13,346,927 and 12,544,477 units outstanding
i849,798
i778,134
Series
D cumulative redeemable preferred units - 141,401 and 177,101 units outstanding
i4,535
i5,428
Total
redeemable noncontrolling interests
i854,333
i783,562
Shareholders'
equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000 shares; issued and outstanding 36,797,280 and 36,798,580 shares
i891,256
i891,294
Common
shares of beneficial interest: $0.04 par value per share; authorized 250,000,000 shares; issued and outstanding 190,850,321 and 190,535,499 shares
i7,613
i7,600
Additional
capital
i7,872,597
i7,725,857
Earnings
less than distributions
(i1,649,035
)
(i4,167,184
)
Accumulated
other comprehensive (loss) income
(i47,359
)
i7,664
Total
shareholders' equity
i7,075,072
i4,465,231
Noncontrolling
interests in consolidated subsidiaries
i635,184
i642,652
Total
equity
i7,710,256
i5,107,883
$
i18,216,099
$
i17,180,794
See
notes to consolidated financial statements (unaudited).
Adjustments
to reconcile net income to net cash provided by operating activities:
Net gain on transfer to Fifth Avenue and Times Square JV
(i2,571,099
)
i—
Net
gains on disposition of wholly owned and partially owned assets
(i641,664
)
(i164,828
)
Depreciation
and amortization (including amortization of deferred financing costs)
i341,951
i353,761
Non-cash
impairment loss on 608 Fifth Avenue right-of-use asset
i75,220
i—
Distributions
of income from partially owned entities
i66,252
i61,782
Equity
in net income of partially owned entities
(i56,139
)
(i6,059
)
Stock-based
compensation expense
i48,045
i26,190
Real
estate impairment losses
i26,140
i—
Prepayment
penalty on redemption of senior unsecured notes due 2022
i22,058
i—
Net
realized and unrealized loss on real estate fund investments
i16,162
i33,709
Amortization
of below-market leases, net
(i15,561
)
(i31,480
)
Straight-lining
of rents
i8,446
(i10,279
)
Decrease
in fair value of marketable securities
i3,095
i24,801
Return
of capital from real estate fund investments
i—
i20,291
Other
non-cash adjustments
i19,894
i2,242
Changes
in operating assets and liabilities:
Real estate fund investments
(i4,000
)
(i68,950
)
Tenant
and other receivables, net
(i28,110
)
(i11,662
)
Prepaid
assets
(i74,502
)
i74,322
Other
assets
(i10,195
)
(i122,925
)
Accounts
payable and accrued expenses
i1,496
(i3,810
)
Other
liabilities
(i3,104
)
(i13,849
)
Net
cash provided by operating activities
i397,971
i488,038
Cash
Flows from Investing Activities:
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)
i1,248,743
i—
Proceeds
from sale of condominium units at 220 Central Park South
i1,039,493
i—
Proceeds
from redemption of 640 Fifth Avenue preferred equity
i500,000
i—
Development
costs and construction in progress
(i448,281
)
(i274,147
)
Moynihan
Train Hall expenditures
(i352,211
)
i—
Proceeds
from sale of real estate and related investments
i255,534
i219,731
Additions
to real estate
(i189,579
)
(i163,546
)
Proceeds
from sales of marketable securities
i168,314
i—
Distributions
of capital from partially owned entities
i24,880
i98,609
Investments
in partially owned entities
(i16,480
)
(i32,728
)
Acquisitions
of real estate and other
(i3,260
)
(i500,225
)
Proceeds
from repayments of loans receivable
i1,395
i—
Net
cash provided by (used in) investing activities
i2,228,548
(i652,306
)
See
notes to consolidated financial statements (unaudited).
Purchase
of marketable securities in connection with defeasance of mortgage payable
(i407,126
)
i—
Dividends
paid on common shares
(i377,750
)
(i359,456
)
Moynihan
Train Hall reimbursement from Empire State Development
i352,211
i—
Distributions
to noncontrolling interests
(i65,084
)
(i63,110
)
Dividends
paid on preferred shares
(i37,598
)
(i42,582
)
Prepayment
penalty on redemption of senior unsecured notes due 2022
(i22,058
)
i—
Debt
issuance costs
(i15,328
)
(i7,451
)
Contributions
from noncontrolling interests
i9,223
i59,924
Repurchase
of shares related to stock compensation agreements and related tax withholdings and other
(i8,692
)
(i784
)
Proceeds
received from exercise of employee share options and other
i2,403
i5,262
Redemption
of preferred shares
(i893
)
(i470,000
)
Debt
prepayment and extinguishment costs
i—
(i818
)
Net
cash used in financing activities
(i2,097,868
)
(i830,734
)
Net
increase (decrease) in cash and cash equivalents and restricted cash
i528,651
(i995,002
)
Cash
and cash equivalents and restricted cash at beginning of period
i716,905
i1,914,812
Cash
and cash equivalents and restricted cash at end of period
$
i1,245,556
$
i919,810
Reconciliation
of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
$
i570,916
$
i1,817,655
Restricted
cash at beginning of period
i145,989
i97,157
Cash
and cash equivalents and restricted cash at beginning of period
$
i716,905
$
i1,914,812
Cash
and cash equivalents at end of period
$
i1,132,491
$
i772,524
Restricted
cash at end of period
i113,065
i147,286
Cash
and cash equivalents and restricted cash at end of period
$
i1,245,556
$
i919,810
Supplemental
Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $55,186 and $45,292
$
i227,310
$
i245,628
Cash
payments for income taxes
$
i47,345
$
i61,047
Non-Cash
Investing and Financing Activities:
Investments received in exchange for transfer to Fifth Avenue and Times Square JV:
Preferred equity
$
i2,327,750
$
i—
Common
equity
i1,449,495
i—
Reclassification
of condominium units from "development costs and construction in progress" to "220 Central Park South condominium units ready for sale"
i825,520
i307,552
Lease
liabilities arising from the recognition of right-of-use assets
i526,866
i—
Marketable
securities transferred in connection with the defeasance of mortgage payable
(i407,126
)
i—
Defeased
mortgage payable
i390,000
i—
Adjustments
to carry redeemable Class A units at redemption value
i123,635
i57,970
Accrued
capital expenditures included in accounts payable and accrued expenses
i117,205
i74,185
Write-off
of fully depreciated assets
(i113,261
)
(i61,120
)
Amounts
related to our investment in Pennsylvania Real Estate Investment Trust reclassified from "investments in partially owned entities" and "accumulated other comprehensive (loss) income" to "marketable securities" upon conversion of operating partnership units to common shares
i54,962
i—
See
notes to consolidated financial statements (unaudited).
Adjustments
to reconcile net income to net cash provided by operating activities:
Net gain on transfer to Fifth Avenue and Times Square JV
(i2,571,099
)
i—
Net
gains on disposition of wholly owned and partially owned assets
(i641,664
)
(i164,828
)
Depreciation
and amortization (including amortization of deferred financing costs)
i341,951
i353,761
Non-cash
impairment loss on 608 Fifth Avenue right-of-use asset
i75,220
i—
Distributions
of income from partially owned entities
i66,252
i61,782
Equity
in net income of partially owned entities
(i56,139
)
(i6,059
)
Stock-based
compensation expense
i48,045
i26,190
Real
estate impairment losses
i26,140
i—
Prepayment
penalty on redemption of senior unsecured notes due 2022
i22,058
i—
Net
realized and unrealized loss on real estate fund investments
i16,162
i33,709
Amortization
of below-market leases, net
(i15,561
)
(i31,480
)
Straight-lining
of rents
i8,446
(i10,279
)
Decrease
in fair value of marketable securities
i3,095
i24,801
Return
of capital from real estate fund investments
i—
i20,291
Other
non-cash adjustments
i19,894
i2,242
Changes
in operating assets and liabilities:
Real estate fund investments
(i4,000
)
(i68,950
)
Tenant
and other receivables, net
(i28,110
)
(i11,662
)
Prepaid
assets
(i74,502
)
i74,322
Other
assets
(i10,195
)
(i122,925
)
Accounts
payable and accrued expenses
i1,496
(i3,810
)
Other
liabilities
(i3,104
)
(i13,849
)
Net
cash provided by operating activities
i397,971
i488,038
Cash
Flows from Investing Activities:
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)
i1,248,743
i—
Proceeds
from sale of condominium units at 220 Central Park South
i1,039,493
i—
Proceeds
from redemption of 640 Fifth Avenue preferred equity
i500,000
i—
Development
costs and construction in progress
(i448,281
)
(i274,147
)
Moynihan
Train Hall expenditures
(i352,211
)
i—
Proceeds
from sale of real estate and related investments
i255,534
i219,731
Additions
to real estate
(i189,579
)
(i163,546
)
Proceeds
from sales of marketable securities
i168,314
i—
Distributions
of capital from partially owned entities
i24,880
i98,609
Investments
in partially owned entities
(i16,480
)
(i32,728
)
Acquisitions
of real estate and other
(i3,260
)
(i500,225
)
Proceeds
from repayments of loans receivable
i1,395
i—
Net
cash provided by (used in) investing activities
i2,228,548
(i652,306
)
See
notes to consolidated financial statements (unaudited).
Purchase
of marketable securities in connection with defeasance of mortgage payable
(i407,126
)
i—
Distributions
to Vornado
(i377,750
)
(i359,456
)
Moynihan
Train Hall reimbursement from Empire State Development
i352,211
i—
Distributions
to redeemable security holders and noncontrolling interests in consolidated subsidiaries
(i65,084
)
(i63,110
)
Distributions
to preferred unitholders
(i37,598
)
(i42,582
)
Prepayment
penalty on redemption of senior unsecured notes due 2022
(i22,058
)
i—
Debt
issuance costs
(i15,328
)
(i7,451
)
Contributions
from noncontrolling interests in consolidated subsidiaries
i9,223
i59,924
Repurchase
of Class A units related to stock compensation agreements and related tax withholdings and other
(i8,692
)
(i784
)
Proceeds
received from exercise of Vornado stock options and other
i2,403
i5,262
Redemption
of preferred units
(i893
)
(i470,000
)
Debt
prepayment and extinguishment costs
i—
(i818
)
Net
cash used in financing activities
(i2,097,868
)
(i830,734
)
Net
increase (decrease) in cash and cash equivalents and restricted cash
i528,651
(i995,002
)
Cash
and cash equivalents and restricted cash at beginning of period
i716,905
i1,914,812
Cash
and cash equivalents and restricted cash at end of period
$
i1,245,556
$
i919,810
Reconciliation
of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
$
i570,916
$
i1,817,655
Restricted
cash at beginning of period
i145,989
i97,157
Cash
and cash equivalents and restricted cash at beginning of period
$
i716,905
$
i1,914,812
Cash
and cash equivalents at end of period
$
i1,132,491
$
i772,524
Restricted
cash at end of period
i113,065
i147,286
Cash
and cash equivalents and restricted cash at end of period
$
i1,245,556
$
i919,810
Supplemental
Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $55,186 and $45,292
$
i227,310
$
i245,628
Cash
payments for income taxes
$
i47,345
$
i61,047
Non-Cash
Investing and Financing Activities:
Investments received in exchange for transfer to Fifth Avenue and Times Square JV:
Preferred equity
$
i2,327,750
$
i—
Common
equity
i1,449,495
i—
Reclassification
of condominium units from "development costs and construction in progress" to "220 Central Park South condominium units ready for sale"
i825,520
i307,552
Lease
liabilities arising from the recognition of right-of-use assets
i526,866
i—
Marketable
securities transferred in connection with the defeasance of mortgage payable
(i407,126
)
i—
Defeased
mortgage payable
i390,000
i—
Adjustments
to carry redeemable Class A units at redemption value
i123,635
i57,970
Accrued
capital expenditures included in accounts payable and accrued expenses
i117,205
i74,185
Write-off
of fully depreciated assets
(i113,261
)
(i61,120
)
Amounts
related to our investment in Pennsylvania Real Estate Investment Trust reclassified from "investments in partially owned entities" and "accumulated other comprehensive (loss) income" to "marketable securities" upon conversion of operating partnership units to common shares
i54,962
i—
See
notes to consolidated financial statements (unaudited).
23
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
i
Organization
Vornado Realty Trust (“Vornado”) is a fully-integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Vornado is the sole general partner of, and owned approximatelyi93.1%
of the common limited partnership interest in the Operating Partnership as of September 30, 2019. All references to the “Company,”“we,”“us” and “our” mean, collectively, Vornado, the Operating Partnership and those entities/subsidiaries consolidated by Vornado.
2.
i
Basis
of Presentation
i
The 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, 2018, as filed with the SEC.
We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three
and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full year.
Certain prior year balances have been reclassified in order to conform to the current period presentation. For the three and nine months ended September 30, 2018, "property rentals" of $i437,560,000
and $i1,322,265,000, respectively, and "tenant expense reimbursements" of $i66,387,000
and $i185,009,000, respectively, were grouped into "rental revenues" on our consolidated statements of income in accordance with Accounting Standards Codification ("ASC") Topic 205, Presentation of Financial Statements.
/
3.
i
Recently
Issued Accounting Literature
i
In February 2016, the Financial Accounting Standards Board ("FASB") issued an update (“ASU 2016-02”) establishing ASC Topic 842, Leases ("ASC 842"), as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach,
classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use ("ROU") asset and a lease liability for all leases with a term of greater than 12 months. Lease liabilities equal the present value of future lease payments. Right-of-use assets equal the lease liabilities adjusted for accrued rent expense, initial direct costs, lease incentives and prepaid lease payments. Leases with a term of 12 months or less will be accounted for similar to the previously existing lease guidance under ASC Topic 840, Leases ("ASC 840"). Lease expense is recognized based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under ASC 840. We adopted this standard effective January
1, 2019. We have completed our evaluation of the overall impact of the adoption of ASU 2016-02 on our consolidated financial statements and accounting policies. In transitioning to ASC 842, we elected to use the practical expedient package available to us and did not elect to use hindsight. As of January 1, 2019, we had i12 ground leases classified as operating leases, for which we were required to record a right-of-use asset and a lease liability
equal to the present value of the future lease payments. We will continue to recognize expense on a straight-line basis for these leases. We recorded an aggregate of $i526,866,000 of ROU assets and a corresponding $i526,866,000
of lease liabilities as a result of the adoption of this standard (see Note 21 - Leases).
/
24
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
3.
Recently
Issued Accounting Literature - continued
Under ASU 2016-02, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, beginning January 1, 2019, we no longer capitalize internal leasing costs and instead expense these costs as incurred, as a component of "general and administrative" expense on our consolidated statements of income. For the three and nine months ended September 30, 2018, we capitalized $i1,444,000
and $i3,883,000, respectively, of internal leasing costs. In addition, we have made changes to our provision policy for lease receivables. Under ASC 842, we must assess on an individual lease basis whether it is probable that we will collect the future lease payments. We consider the tenant's payment history and current credit status when assessing collectability. When collectability is not deemed probable we write-off the tenant's receivables, including straight-line rent receivable, and limit
lease income to cash received. Changes to the collectability of our operating leases are recorded as adjustments to "rental revenues" on our consolidated statements of income, which resulted in a decrease in income of $i1,106,000 and $i16,488,000
for the three and nine months ended September 30, 2019, respectively.
In February 2016, the FASB issued an update (“ASU 2016-13”) Measurement of Credit Losses on Financial Instruments establishing ASC Topic 326, Financial Instruments - Credit Losses, as amended by subsequent ASUs on the topic. ASU 2016-13 changes how entities will 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. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements, but do not believe the adoption of this standard will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued an update (“ASU 2018-13”) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement to ASC Topic 820, Fair Value Measurement (“ASC 820”). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. We elected
to early adopt ASU 2018-13 effective January 1, 2019. The adoption of this update did not have a material impact on our consolidated financial statements and disclosures.
In October 2018, the FASB issued an update ("ASU 2018-16") Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes to ASC Topic 815, Derivatives and Hedging. ASU 2018-16 expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on SOFR as an eligible benchmark interest rate. ASU 2018-16 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We adopted
this update effective January 1, 2019. The adoption of this update did not have an impact on our consolidated financial statements.
25
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
4.
i
Revenue
Recognition
i
Our revenues primarily consist of rental revenues and fee and other income. We operate in itwo
reportable segments: New York and Other, with a significant portion of our revenues included in the New York segment. We have the following revenue sources and revenue recognition policies:
•
Rental revenues include revenues from the leasing of space at our properties to tenants, lease termination income, revenues from the Hotel Pennsylvania, trade shows and tenant services.
◦
Revenues from the leasing of space at our properties to tenants includes (i) lease components, including fixed and variable lease payments, and nonlease components
which include reimbursement of common area maintenance expenses, and (ii) reimbursement of real estate taxes and insurance expenses. As lessor, we have elected to combine the lease and nonlease components of our operating lease agreements and account for the components as a single lease component in accordance with ASC 842. Lease revenues and reimbursement of common area maintenance, real estate taxes and insurance are presented on the following page as "property rentals." Revenues derived from fixed lease payments are recognized on a straight-line basis over the non-cancelable period of the lease, together with renewal options that are reasonably certain of being exercised. We commence rental revenue recognition when the underlying asset is available for use by the lessee. Revenue derived from the reimbursement of real estate taxes, insurance expenses and common area maintenance expenses are generally recognized in the same period as the related expenses are
incurred.
◦
Lease termination income is recognized immediately if a tenant vacates or is recognized on a straight-line basis over the shortened remaining lease term in accordance with ASC 842.
◦
Hotel revenue arising from the operation of Hotel Pennsylvania consists of room revenue, food and beverage revenue, and banquet revenue. Room revenue is recognized when the rooms are made available for the guest, in accordance with ASC 842.
◦
Trade
shows revenue arising from the operation of trade shows is primarily booth rentals. This revenue is recognized upon the occurrence of the trade shows when the trade show booths are made available for use by the exhibitors, in accordance with ASC 842.
◦
Tenant services revenue arises from sub-metered electric, elevator, trash removal and other services provided to tenants at their request. This revenue is recognized as the services are transferred in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606").
/
•
Fee
and other income includes management, leasing and other revenue arising from contractual agreements with third parties or with partially owned entities and includes Building Maintenance Service (“BMS”) cleaning, engineering and security services. This revenue is recognized as the services are transferred in accordance with ASC 606.
26
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
4.
Revenue
Recognition - continued
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, 2019 and 2018 is set forth in Note 23 - Segment Information.
(1) Represents
the elimination of theMART and 555 California Street BMS cleaning fees which are included as income in the New York segment.
/
27
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
5.
i
Real
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 eight-year term ending February 2019. On January 29, 2018,
the Fund's term was extended to February 2023. The Fund's three-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 also 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.
As of September 30, 2019, we have ifour real estate fund investments
through the Fund and the Crowne Plaza Joint Venture with an aggregate fair value of $i306,596,000, or $i22,968,000
below our cost, and had remaining unfunded commitments of $i44,194,000, of which our share was $i13,969,000.
As of December 31, 2018, we had ifour real estate fund investments with an aggregate fair value of $i318,758,000.
iBelow is a summary of income (loss) from the Fund and the Crowne Plaza Joint Venture for the three and nine months ended September 30, 2019 and 2018.
New
York City real property transfer tax (the "Transfer Tax")
i—
i—
i—
(i10,630
)
(1)
Income
(loss) from real estate fund investments
i2,190
(i190
)
(i13,780
)
(i37,973
)
Less
(income) loss attributable to noncontrolling interests in consolidated subsidiaries
(i735
)
(i558
)
(i8,427
)
i34,338
Income
(loss) from real estate fund investments attributable to the Operating Partnership
i1,455
(i748
)
(i22,207
)
(i3,635
)
Less
(income) loss attributable to noncontrolling interests in the Operating Partnership
(i95
)
i46
i1,403
i224
Income
(loss) from real estate fund investments attributable to Vornado
$
i1,360
$
(i702
)
$
(i20,804
)
$
(i3,411
)
____________________
(1)
Due
to the disputed additional Transfer Tax related to the March 2011 acquisition of One Park Avenue which was recorded as a result of the New York City Tax Appeals Tribunal (the "Tax Tribunal") decision in the first quarter of 2018. We appealed the Tax Tribunal's decision to the New York State Supreme Court, Appellate Division, First Department ("Appellate Division"). Our appeal was heard on April 2, 2019, and on April 25, 2019 the Appellate Division entered a unanimous decision and order that confirmed the decision of the Tax Tribunal and dismissed our appeal. On June 20, 2019, we filed a motion to reargue the Appellate Division's decision with the appellate court.
28
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
6. iMarketable Securities
Lexington Realty Trust ("Lexington") (NYSE: LXP)
On March 1, 2019,
we sold all of our i18,468,969 common shares of Lexington, realizing net proceeds of $i167,698,000.
We recorded a $i16,068,000 mark-to-market increase in the fair value of our common shares for the period from January 1, 2019 through the date of sale, which is included in "interest and other investment income, net" on our consolidated statements of income for the nine months ended September 30, 2019.
Pennsylvania
Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
On March 12, 2019 (the "Conversion Date"), we converted all of our i6,250,000 PREIT operating partnership units into common shares and began accounting for our investment as a marketable security in accordance with ASC Topic 321,
Investments - Equity Securities ("ASC 321"). Prior to the Conversion Date, we accounted for our investment under the equity method. For the three and nine months ended September 30, 2019, we recorded a decrease of $i4,875,000 and $i19,211,000,
respectively, in the value of our investment based on PREIT's September 30, 2019 quarter ended closing share price, which is included in "interest and other investment income, net" on our consolidated statements of income.
i
The table below summarizes the changes to our marketable securities portfolio for the nine months ended September 30, 2019.
Included
in “interest and other investment income, net” on our consolidated statements of income (see Note 18 - Interest and Other Investment Income, Net).
29
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
7.
i
Investments
in Partially Owned Entities
Fifth Avenue and Times Square JV
On April 18, 2019 (the “Closing Date”), we entered into a transaction agreement (the “Transaction Agreement”) with a group of institutional investors (the “Investors”). The Transaction Agreement provides for a series of transactions (collectively, the “Transaction”) pursuant to which (i) prior to the Closing Date, we contributed our 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”) to subsidiaries of a newly formed joint venture (“Fifth Avenue and Times Square JV”) and (ii) on the Closing Date, transferred a i48.5%
common interest in Fifth Avenue and Times Square JV to the Investors. The i48.5% common interest in the joint venture represents an effective i47.2%
interest in the Properties (of which i45.4% was transferred from Vornado). The Properties include approximately i489,000
square feet of retail space, i327,000 square feet of office space, signage associated with 1535 and 1540 Broadway, the parking garage at 1540 Broadway and the theater at 1535 Broadway.
We retained the remaining i51.5%
common interest in Fifth Avenue and Times Square JV which represents an effective i51.0% interest in the Properties and an aggregate $i1.828
billion of preferred equity interests in certain of the properties. We also provided $i500,000,000 of temporary preferred equity on 640 Fifth Avenue until May 23, 2019 when mortgage financing was completed. 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.
Net cash proceeds from the Transaction were $i1.179 billion, after
(i) deductions for the defeasance of a $i390,000,000 mortgage loan on 666 Fifth Avenue and the repayment of a $i140,000,000
mortgage loan on 655 Fifth Avenue, (ii) proceeds from a $i500,000,000 mortgage loan on 640 Fifth Avenue, described below, (iii) approximately $i23,000,000
used to purchase noncontrolling investors' interests and (iv) approximately $i53,000,000 of transaction costs (including $i17,000,000
of costs related to the defeasance of the 666 Fifth Avenue mortgage loan).
We continue to manage and lease the Properties. We share control with the Investors over major decisions of the joint venture, including decisions regarding leasing, operating and capital budgets, and refinancings. Accordingly, we no longer hold a controlling financial interest in the Properties which has been transferred to the joint venture. As a result, our investment in Fifth Avenue and Times Square JV is accounted for under the equity method from the date of transfer. The Transaction valued the Properties at $i5,556,000,000resulting in a financial statement net gain of $i2,571,099,000, before noncontrolling interest of $i11,945,000,
including the related step-up in our basis of the retained portion of the assets to fair value. The net gain is included in "net gain on transfer to Fifth Avenue and Times Square JV" on our consolidated statements of income for the nine months ended September 30, 2019. The gain for tax purposes was approximately $i735,000,000.
On
May 23, 2019, we received $i500,000,000 from the redemption of our temporary preferred equity in 640 Fifth Avenue. The temporary preferred equity was redeemed from the proceeds of a $i500,000,000
mortgage financing that was completed on the property. The five year loan, which is guaranteed by us, is interest only at LIBOR plus i1.01%. The interest rate was swapped
for four years to a fixed rate of i3.07%.
Related Party Transactions
We provide various services to Fifth Avenue and Times Square JV in accordance
with management, development, leasing and other agreements, as described below.
We receive an annual fee for managing the Properties equal to i2% of the gross revenues from the Properties. In addition, we are entitled to a development fee of i5%
of development costs, plus reimbursement of certain costs, for development projects performed by us. We are entitled to i1.5% of development costs, plus reimbursement of certain costs, as a supervisory fee for development projects not performed by us. We provide leasing services for fees calculated based on a percentage of rents, less any commissions paid to third-party
real estate brokers, if applicable. We jointly provide leasing services for the retail space with Crown Acquisitions Inc. ("Crown"), and exclusively provide leasing services for the office space. During the three and nine months ended September 30, 2019, we recognized $i1,104,000
and $i1,934,000, respectively, of property management fee income which is included in "fee and other income" on our consolidated statements of income.
BMS, our wholly-owned subsidiary, supervises cleaning, security and engineering services at certain of the
Properties. During the three and nine months ended September 30, 2019, we recognized $i1,161,000 and $i1,952,000,
respectively, of income for these services which is included in "fee and other income" on our consolidated statements of income.
We believe, based on comparable fees charged by other real estate companies, that the fees described above are at fair market value.
Haim Chera, Executive Vice President - Head of Retail, has an investment in Crown, a company controlled by Mr. Chera's family. Crown has a nominal minority interest in Fifth Avenue and Times Square JV. Additionally, we have other investments with Crown.
30
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
7.
Investments
in Partially Owned Entities - continued
Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX)
As of September 30, 2019, we own i1,654,068 Alexander’s common shares, or approximately i32.4%
of Alexander’s common equity. We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.
As of September 30, 2019, the market value ("fair value" pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s September 30, 2019 quarter ended closing share price of $i348.41,
was $i576,294,000, or $i475,066,000
in excess of the carrying amount on our consolidated balance sheet. As of September 30, 2019, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander’s by approximately $i38,882,000.
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.
61 Ninth Avenue
On January 28, 2019, a joint venture, in which we have a i45.1%
interest, completed a $i167,500,000 refinancing of 61 Ninth Avenue, a i166,000
square foot office and retail property in the Meatpacking district of Manhattan which is fully leased to Aetna and Starbucks. The seven-year interest only loan carries a rate of LIBOR plus i1.35%
(i3.40% as of September 30, 2019) and matures in January 2026. We realized net proceeds of approximately $i31,000,000.
The loan replaces the previous $i90,000,000 construction loan that bore interest at LIBOR plus i3.05%
and was scheduled to mature in 2021.
Urban Edge Properties (“UE”) (NYSE: UE)
On March 4, 2019, we converted to common shares and sold all of our i5,717,184 partnership units of UE, realizing net proceeds of $i108,512,000.
The sale resulted in a net gain of $i62,395,000 which is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income for the nine months ended September 30, 2019.
512
West 22nd Street
On June 28, 2019, a joint venture, in which we have a i55% interest, completed a $i145,700,000
refinancing of 512 West 22nd Street, a i173,000 square foot office building in the West Chelsea submarket of Manhattan, of which $i106,425,000
was outstanding as of September 30, 2019. The four-year interest only loan carries a rate of LIBOR plus i2.00% (i4.05%as of September 30, 2019) and matures in June 2023 with a one-year extension option. The loan replaces the previous $i126,000,000 construction loan that bore interest at LIBOR plus i2.65%
and was scheduled to mature in 2019.
330 Madison Avenue
On July 11, 2019, we sold our i25% interest in 330 Madison Avenue to our joint
venture partner. We received net proceeds of approximately$i100,000,000 after deducting our share of the existing $i500,000,000mortgage loan resulting in a financial statement net gain of $i159,292,000. The net gain is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income for the three and nine months ended September 30, 2019. The gain for tax purposes was
approximately $i139,000,000.
825 Seventh Avenue
On July 25, 2019, a joint venture, in which we have a i50%
interest, completed a $i60,000,000 refinancing of 825 Seventh Avenue, a i165,000
square foot office building on the corner of 53rd Street and Seventh Avenue, of which $i28,882,000 was outstanding as of September 30, 2019. The interest-only loan carries a rate of LIBOR plus i1.65%
(i3.78% as of September 30, 2019) and matures in 2022 with a one-year extension option. The loan replaces the previous $i20,500,000
loan that bore interest at LIBOR plus i1.40% and was scheduled to mature in September 2019.
31
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
7.
Investments in Partially Owned Entities - continued
Toys "R" Us, Inc. ("Toys")
On September 18, 2017, Toys filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. In the second quarter of 2018, Toys ceased U.S. operations. On February 1, 2019, the plan of reorganization
for Toys, in which we owned a i32.5% interest, was declared effective and our stock in Toys was canceled. As of December 31, 2018, we carried our Toys investment at izero.
The canceling of our stock in Toys resulted in a $i420,000,000 capital loss deduction for tax purposes in 2019 (which if not offset by capital gains will result in a capital loss carry over available for five years).
i
Below
is a schedule summarizing our investments in partially owned entities.
Fifth Avenue and Times Square JV (see page 30 for details)
i51.5%
$
i3,308,363
$
i—
Partially
owned office buildings/land(1)
Various
i467,787
i499,005
Alexander’s
i32.4%
i101,228
i107,983
PREIT(2)
N/A
i—
i59,491
UE(3)
N/A
i—
i45,344
Other
investments(4)
Various
i146,442
i146,290
$
i4,023,820
$
i858,113
Investments
in partially owned entities included in other liabilities(5):
330 Madison Avenue(6)
N/A
$
i—
$
(i58,117
)
7
West 34th Street
i53.0%
(i52,222
)
(i51,579
)
85
Tenth Avenue
i49.9%
(i5,814
)
i—
$
(i58,036
)
$
(i109,696
)
____________________
(1)
Includes
interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 512 West 22nd Street, 61 Ninth Avenue and others.
(2)
On March 12, 2019, we converted all of our PREIT operating partnership units into common shares and began accounting for our investment as a marketable security in accordance with ASC 321 (see Note 6 - Marketable Securities).
Fifth Avenue and Times Square JV (see page 30 for details):
Equity
in net income
i51.5%
$
i9,891
$
i—
$
i21,108
$
i—
Return
on preferred equity, net of our share of the expense
i9,545
i—
i18,131
i—
i19,436
i—
i39,239
i—
Alexander's
(see page 31 for details):
Equity in net income(1)
i32.4%
i5,393
i4,278
i14,707
i7,215
Management,
leasing and development fees
i1,299
i1,149
i3,478
i3,378
i6,692
i5,427
i18,185
i10,593
Partially
owned office buildings(2)
Various
(i186
)
i735
(i1,531
)
(i1,546
)
Other
investments(3)
Various
i4
i1,044
i246
(i2,988
)
$
i25,946
$
i7,206
$
i56,139
$
i6,059
____________________
(1)
The
nine months endedSeptember 30, 2018includes our $i7,708 share of Alexander's disputed additional Transfer Tax related to the November 2012 sale of Kings Plaza Regional Shopping Center. Alexander's recorded this expense based on the precedent
established by the Tax Tribunal's decision regarding One Park Avenue (see Note 5 - Real Estate Fund Investments).
(2)
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. The nine months endedSeptember 30, 2019 includes a $i1,079
reduction in income from the non-cash write-off of straight-line rent receivable related to The Four Seasons Restaurant at 280 Park Avenue. The nine months endedSeptember 30, 2018 includes our $i4,978 share of disputed additional Transfer Tax related to the March 2011 acquisition of One Park Avenue (see Note 5
- Real Estate Fund Investments).
(3)
Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, 666 Fifth Avenue Office Condominium (sold on August 3, 2018), UE (sold on March 4, 2019), PREIT (accounted as a marketable security from March 12, 2019) and others.
8.
i
220
Central Park South ("220 CPS")
We are constructing 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 $i1.4
billion, of which $i1.3 billion has been expended as of September 30, 2019.
During the three months ended September 30, 2019, we closed on the sale of i14
condominium units at 220 CPS for net proceeds aggregating $i348,759,000 resulting in a financial statement net gain of $i130,888,000
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, $i21,853,000 of income tax expense was recognized on our consolidated statements of income. During the nine months ended September 30, 2019, we closed on the sale of i37
condominium units at 220 CPS for net proceeds of $i1,039,493,000 resulting in a financial statement net gain of $i400,500,000
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, $i71,590,000 of income tax expense was recognized on our consolidated statements of income. From inception to September 30, 2019, we closed on the sale of i48
units for aggregate net proceeds of $i1,254,269,000. During the third quarter of 2019, we repaid the remaining $i48,883,000
ofthe $i950,000,000 220 CPS loan. Of the condominium units closed, ione
was sold to a limited liability company owned by the spouse of a related party, David Mandelbaum, a Trustee of Vornado and a Director of Alexander’s, and another was sold to Mr. Mandelbaum's brother. The net proceeds were $i23,357,000 and $i16,099,000,
respectively.
9.
i
Dispositions
On September 18,
2019, we completed the $i49,750,000 sale of 3040 M Street, a i44,000
square foot retail building in Washington, DC, which resulted in a net gain of $i19,477,000which is included in “net gains on disposition of wholly owned and partially owned assets” on our consolidated statements of income for the three and nine months ended September 30, 2019. The gain for tax purposes was approximately $i19,000,000.
33
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
10.
i
Identified Intangible Assets and Liabilities
i
The
following summarizes our identified intangible assets (primarily above-market leases) and liabilities (primarily acquired below-market leases) as of September 30, 2019 and December 31, 2018.
Identified
intangible liabilities (included in deferred revenue):
Gross amount
$
i321,838
$
i503,373
Accumulated
amortization
(i265,388
)
(i341,779
)
Total,
net
$
i56,450
$
i161,594
/
Amortization
of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental revenues of $i4,393,000 and $i10,373,000
for the three months ended September 30, 2019 and 2018, respectively, and $i15,561,000 and $i31,480,000
for the nine months ended September 30, 2019 and 2018, 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, 2020 is as follows:
(Amounts in thousands)
2020
$
i16,643
2021
i11,934
2022
i8,792
2023
i6,261
2024
i2,518
Amortization
of all other identified intangible assets (a component of depreciation and amortization expense) was $i1,597,000 and $i4,822,000
for the three months ended September 30, 2019 and 2018, respectively, and $i7,077,000 and $i14,557,000
for the nine months ended September 30, 2019 and 2018, respectively. iEstimated annual amortization of all other identified intangible assets including acquired in-place leases for
each of the five succeeding years commencing January 1, 2020 is as follows:
(Amounts in thousands)
2020
$
i6,300
2021
i4,763
2022
i3,050
2023
i2,964
2024
i2,351
34
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
11.
i
Debt
On February 4, 2019, we completed
a $i95,700,000 refinancing of 435 Seventh Avenue, a i43,000
square foot Manhattan retail property. The interest-only loan carries a rate of LIBOR plus i1.30% (i3.37%
as of September 30, 2019) and matures in 2024. The recourse loan replaces the previous $i95,700,000 loan that bore interest at LIBOR plus i2.25%
and was scheduled to mature in August 2019.
On February 12, 2019, we completed a $i580,000,000 refinancing of 100 West 33rd Street, a i1.1
million square foot Manhattan property comprised of i859,000 square feet of office space and the i256,000
square foot Manhattan Mall. The interest-only loan carries a rate of LIBOR plus i1.55% (i3.62%
as of September 30, 2019) and matures in April 2024, with itwoone-year extension options. The loan replaces the previous $i580,000,000
loan that bore interest at LIBOR plus i1.65% and was scheduled to mature in July 2020.
On May
24, 2019, we extended our $i375,000,000 mortgage loan on 888 Seventh Avenue, a i886,000
square foot Manhattan office building, from December 2020 to December 2025. The interest rate on the extended mortgage loan is LIBOR plus i1.70% (i3.73%
as of September 30, 2019). Pursuant to an existing swap agreement, the interest rate on the $i375,000,000 mortgage loan has been swapped to i3.25%
through December 2020.
On September 5, 2019, a consolidated joint venture, in which we have a i50% interest, completed a $i75,000,000
refinancing of 606 Broadway, a i35,000 square foot office and retail building on the northeast corner of Broadway and Houston Street in Manhattan, of which $i67,500,000
was outstanding as of September 30, 2019. The interest-only loan carries a rate of LIBOR plus i1.80% (i3.85%
as of September 30, 2019) and matures in 2024. In connection therewith, the joint venture purchased an interest rate cap that caps LIBOR at a rate of i4.00%.
The loan replaces the previous $i65,000,000 construction loan. The construction loan bore interest at LIBOR plus i3.00%
and was scheduled to mature in May 2021.
On September 27, 2019, we repaid the $i575,000,000 mortgage loan on PENN2 with proceeds from our unsecured revolving credit facilities. The mortgage loan was scheduled to mature in December 2021, as fully extended. PENN2 is a i1,795,000
square foot office building located on the west side of 7th Avenue between 31st and 33rd Street currently under redevelopment.
Senior Unsecured Notes
On March 1, 2019, we called for redemption all of our $i400,000,000i5.00% senior unsecured notes. The notes, which were scheduled to mature in January 2022, were redeemed on April 1, 2019 at a redemption price of i105.51%
of the principal amount plus accrued interest. In connection therewith, we expensed $i22,540,000 relating to debt prepayment costs which is included in "interest and debt expense" on our consolidated statements of income for the nine months ended September 30, 2019.
Unsecured Revolving Credit Facility
On March 26, 2019, we increased to $i1.5 billion (from $i1.25
billion) and extended to March 2024 (as fully extended) from February 2022 one of our itwo unsecured revolving credit facilities. The interest rate on the extended facility was lowered from LIBOR plus i1.00%
to LIBOR plus i0.90%. Thefacility fee remains unchanged at 20 basis points.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
12.
i
Redeemable Noncontrolling Interests/Redeemable Partnership Units
i
Redeemable
noncontrolling interests on Vornado’s consolidated balance sheets and redeemable partnership units on the consolidated balance sheets of the Operating Partnership 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.
Redemption
of Class A units for Vornado common shares, at redemption value
(i1,999
)
(i1,843
)
(i8,128
)
(i14,089
)
Adjustments
to carry redeemable Class A units at redemption value
(i24,228
)
(i21,520
)
(i123,635
)
(i57,970
)
Other,
net
i5,363
i5,155
i34,700
i15,666
Ending
balance
$
i854,333
$
i924,582
$
i854,333
$
i924,582
/
As
of September 30, 2019 and December 31, 2018, the aggregate redemption value of redeemable Class A units of the Operating Partnership, which are those units held by third parties, was $i849,798,000 and $i778,134,000,
respectively.
Redeemable noncontrolling interests/redeemable 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 $i50,561,000
as of September 30, 2019 and December 31, 2018. Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income.
36
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
13.
i
Shareholders'
Equity/Partners' Capital
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 for the three and nine months endedSeptember 30, 2019 and 2018.
Common
shares/Class A units held by Vornado: authorized 250,000,000 shares/units
$
i0.66
$
i0.63
$
i1.98
$
i1.89
Convertible
Preferred(1):
6.5% Series A: authorized 83,977 shares/units(2)
i0.8125
i0.8125
i2.4375
i2.4375
Cumulative
Redeemable Preferred(1):
5.70% Series K: authorized 12,000,000 shares/units(3)
i0.3563
i0.3563
i1.0689
i1.0689
5.40%
Series L: authorized 12,000,000 shares/units(3)
i0.3375
i0.3375
i1.0125
i1.0125
5.25%
Series M: authorized 12,780,000 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.
Accumulated Other Comprehensive (Loss) Income
i
The
following tables set forth the changes in accumulated other comprehensive (loss) income by component.
Amount
reclassified related to the conversion of our PREIT operating partnership units into common shares.
37
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
14.
i
Variable
Interest Entities ("VIEs")
Unconsolidated VIEs
As of September 30, 2019 and December 31, 2018, 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 7 – Investments in Partially Owned Entities). As of September 30,
2019 and December 31, 2018, the net carrying amount of our investments in these entities was $i216,276,000 and $i257,882,000,
respectively. 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 Fund and the Crowne Plaza Joint Venture, 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, 2019, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $i4,898,971,000
and $i2,612,681,000, respectively. As of December 31, 2018, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $i4,445,436,000
and $i2,533,753,000, respectively.
38
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
15.
i
Fair Value Measurements
i
ASC
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) interest rate swaps and (v) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units). iThe tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy as of September 30, 2019 and December
31, 2018, respectively.
Deferred
compensation plan assets ($8,402 included in restricted cash and $88,122 in other assets)
i96,524
i58,716
i—
i37,808
Interest
rate swaps (included in other assets)
i27,033
i—
i27,033
i—
Total
assets
$
i594,513
$
i210,914
$
i27,033
$
i356,566
Mandatorily
redeemable instruments (included in other liabilities)
$
i50,561
$
i50,561
$
i—
$
i—
Interest
rate swaps (included in other liabilities)
i15,236
i—
i15,236
i—
Total
liabilities
$
i65,797
$
i50,561
$
i15,236
$
i—
39
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, 2019,
we have ifour real estate fund investments with an aggregate fair value of $i306,596,000,
or $i22,968,000 below our 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 as of September
30, 2019 and December 31, 2018.
The
above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.
i
The
table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3, for the three and nine months ended September 30, 2019 and 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
15.
Fair Value Measurements - continued
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Deferred Compensation Plan Assets
Deferred compensation plan assets that are classified as Level 3 consist of investments in limited
partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The 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, for the three and nine months ended September 30, 2019 and 2018.
Assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consist primarily of real estate assets required to be measured for impairment as of December 31, 2018. The fair value of real estate assets required to be measured for impairment were determined using comparable sales activity. There were ino
assets measured at fair value on a nonrecurring basis on our consolidated balance sheet as of September 30, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
15.
Fair Value Measurements - continued
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), 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 values of cash equivalents and borrowings under our unsecured revolving credit facilities and unsecured term loan are classified as Level 1. The fair values of our secured and unsecured debt are classified as Level 2. iThe
table below summarizes the carrying amounts and fair value of these financial instruments as of September 30, 2019 and December 31, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
16.
i
Stock-based
Compensation
On January 14, 2019, the Compensation Committee of the Board (the “Committee”) approved the issuance of performance conditioned appreciation-only long-term incentive plan units ("Performance Conditioned AO LTIP Units") pursuant to the 2010 Omnibus Share Plan to our named executive officers ("NEOs") in our 2019 proxy statement. Performance Conditioned AO LTIP Units are AO LTIP Units that require the achievement of certain performance conditions by a specified date or they are forfeited. The performance-based condition is met if Vornado common shares trade at or above i110%
of the $i64.48 grant price per share for any i20
consecutive days on or before the fourth anniversary following the date of grant. If the performance conditions are not met, the awards are forfeited. If the performance conditions are met, once vested, the awards may be converted into Class A Operating Partnership units in the same manner as AO LTIP Units until ten years from the date of grant. The fair value of the Performance Conditioned AO LTIP Units on the date of grant was $i8,983,000,
of which $i7,481,000 was immediately expensed due to the acceleration of vesting for employees who are retirement eligible. The remaining $i1,502,000
is being amortized into expense over a four-year period from the date of grant using a graded vesting attribution model.
On May 16, 2019, our shareholders approved the 2019 Omnibus Share Plan (the “Plan"), which replaces the 2010 Omnibus Share Plan. Under the Plan, the Committee may grant incentive and non-qualified Vornado stock options, restricted stock, 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 to certain of our employees and officers. Awards may be granted up to a maximum i5,500,000
shares, if all awards granted are Full Value awards, as defined in the Plan, and up to i11,000,000 shares, if all of the awards granted are Not Full Value Awards, as defined in the Plan. Full Value Awards are awards of securities, such as restricted shares, that, if all vesting requirements are met, do not require
the payment of an exercise price or strike price to acquire the securities. Not Full Value Awards are awards of securities, such as options, that do require the payment of an exercise price or strike price.
We 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 $i5,871,000
and $i5,545,000 for the three months ended September 30, 2019 and 2018, respectively, and $i48,045,000
and$i26,190,000 for the nine months ended September 30, 2019 and 2018, respectively.
Stock-based compensation expense for the three months ended March 31, 2019 included $i16,211,000
from the accelerated vesting of previously issued OP units and Vornado restricted stock due to the removal of the time-based vesting requirement for participants who have reached 65 years of age. The right to sell such awards remains subject to original terms of grant. The increase in expense in the first quarter of 2019 was partially offset by lower stock-based compensation expense of $i2,578,000 in each of the second and third quarter of 2019; and will be completely offset by lower stock-based compensation expense of
$i2,578,000 in the fourth quarter of 2019 and $i8,477,000
thereafter.
Stock-based compensation expense also includes $i1,413,000 and $i6,729,000
for the three and nine months ended September 30, 2019, respectively, for OP units granted outside of the Plan to an executive officer in connection with his employment in reliance on the employment inducement exception to shareholder approval provided under the New York Stock Exchange Listing Rule 303A.08; and $i988,000
and $i1,317,000 for the three and nine months ended September 30, 2019, respectively, for OP units granted under the Plan to certain executive officers as a result of promotions. The award granted outside of the Plan has a grant date fair
value of $i25,500,000 and vests i20%
on the grant date, i40% on the three-year anniversary of the date of grant, and i40%
on the four-year anniversary of the date of grant. The awards granted under the Plan have an aggregate grant date fair value of $i15,000,000 and cliff vest after four years. Compensation expense
related to OP unit grants are recognized ratably over the vesting period. Additional non-cash expense associated with these awards will be $i2,401,000 in the fourth quarter of 2019, $i9,603,000
in each of 2020 and 2021, $i7,718,000 in 2022 and $i2,655,000
in 2023.
43
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
17.
i
Transaction
Related Costs, Impairment Losses and Other
i
The following table sets forth the details of transaction related costs, impairment losses and other:
Non-cash
impairment losses, substantially 608 Fifth Avenue (see below)
i—
i—
i101,360
i—
Transfer
tax(1)
i—
i—
i—
i13,103
$
i1,576
$
i2,510
$
i103,315
$
i16,683
____________________
/
(1)
Disputed
additional Transfer Tax recorded in the first quarter 2018 related to the December 2012 acquisition of Independence Plaza. The joint venture, in which we have a i50.1% economic interest, that owns Independence Plaza recorded this expense based on the precedent established by the Tax Tribunal's decision regarding One Park Avenue (see Note 5 - Real Estate
Fund Investments).
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 is subject to a land and building lease which expires in 2033. The non-recourse lease calls for fixed lease payments through the term, plus payments for real estate taxes, insurance and operating expenses. Based on current market rental rates, the cash flows of the property would not be sufficient to cover the operating expenses, including the fixed lease payments. Consequently, we concluded that the carrying amount of the property,
which includes our right-of-use asset, was not recoverable resulting in a write-down to zero. Our estimate of fair value of the property was derived from a discounted cash flow model based upon market conditions and expectations of growth. We recognized a $i93,860,000 non-cash impairment loss on our consolidated statements of income in the second quarter of 2019, of which $i75,220,000
resulted from the impairment of our right-of-use asset. As of September 30, 2019, a $i72,088,000 lease liability remains, which will be recognized as income when the non-recourse lease is terminated. In August 2019, we delivered the required nine month notice to the ground lessor that we will terminate the lease in May 2020.
18.
i
Interest
and Other Investment Income, Net
i
The following table sets forth the details of interest and other investment income, net:
(Decrease)
increase in fair value of marketable securities:
PREIT (see page 29 for details)
$
(i4,875
)
$
i—
$
(i19,211
)
$
i—
Lexington(see
page 29 for details)
i—
(i7,942
)
i16,068
(i24,934
)
Other
i7
i243
i48
i133
(i4,868
)
(i7,699
)
(i3,095
)
(i24,801
)
Interest
on cash and cash equivalents and restricted cash
i4,060
i4,306
i8,753
i12,370
Interest
on loans receivable(1)
i1,604
i2,004
i4,845
i8,952
Dividends
on marketable securities
i1,312
i3,354
i2,625
i10,060
Other,
net
i937
i928
i2,802
i2,820
$
i3,045
$
i2,893
$
i15,930
$
i9,401
____________________
/
(1)
The
three and nine months ended September 30, 2018 include $i1,250 and $i6,707,
respectively, of profit participation in connection with an investment in a mezzanine loan which was previously repaid to us.
19.
i
Interest and Debt Expense
i
The
following table sets forth the details of interest and debt expense:
The
nine months ended September 30, 2019 includes $i22,540 debt prepayment costs in connection with the redemption of $i400,000i5.00% senior unsecured notes which were scheduled to mature in January 2022.
44
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
20.
i
Income Per Share/Income Per Class A Unit
i
Vornado
Realty Trust
The following table presents the calculations of (i) basic income per common share which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares and (ii) diluted income per common share which includes the weighted average common shares and dilutive share equivalents. 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 restricted stock awards, based on the two-class method. Other potential dilutive share equivalents such as our employee stock options, OP Units, OPPs, 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
from continuing operations, net of income attributable to noncontrolling interests
$
i335,445
$
i203,122
$
i2,942,267
$
i336,570
(Loss)
income from discontinued operations, net of income attributable to noncontrolling interests
(i7
)
i57
(i80
)
i357
Net
income attributable to Vornado
i335,438
i203,179
i2,942,187
i336,927
Preferred
share dividends
(i12,532
)
(i12,534
)
(i37,598
)
(i38,103
)
Preferred
share issuance costs
i—
i—
i—
(i14,486
)
Net
income attributable to common shareholders
i322,906
i190,645
i2,904,589
i284,338
Earnings
allocated to unvested participating securities
(i33
)
(i17
)
(i291
)
(i33
)
Numerator
for basic income per share
i322,873
i190,628
i2,904,298
i284,305
Impact
of assumed conversions:
Convertible preferred share dividends
i14
i15
i43
i47
Earnings
allocated to Out-Performance Plan units
i—
i—
i9
i127
Numerator
for diluted income per share
$
i322,887
$
i190,643
$
i2,904,350
$
i284,479
Denominator:
Denominator
for basic income per share – weighted average shares
i190,814
i190,245
i190,762
i190,176
Effect
of dilutive securities(1):
Employee stock options and restricted stock awards
i176
i1,045
i227
i972
Convertible
preferred shares
i34
i37
i35
i38
Out-Performance
Plan units
i—
i—
i3
i106
Denominator
for diluted income per share – weighted average shares and assumed conversions
i191,024
i191,327
i191,027
i191,292
INCOME
PER COMMON SHARE – BASIC:
Income from continuing operations, net
$
i1.69
$
i1.00
$
i15.22
$
i1.50
Net
income per common share
$
i1.69
$
i1.00
$
i15.22
$
i1.50
INCOME
PER COMMON SHARE – DILUTED:
Income from continuing operations, net
$
i1.69
$
i1.00
$
i15.20
$
i1.49
Net
income per common share
$
i1.69
$
i1.00
$
i15.20
$
i1.49
____________________
/
(1)
The
effect of dilutive securities excludes an aggregate of i13,431 and i12,372
weighted average common share equivalents, for the three months ended September 30, 2019 and 2018, respectively, and i13,067 and i12,220
weighted average common share equivalents for the nine months endedSeptember 30, 2019 and 2018, respectively, as their effect was anti-dilutive.
45
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
20.
Income
Per Share/Income Per Class A Unit - continued
i
Vornado Realty L.P.
The following table presents the calculations of (i) basic income 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 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 share equivalents such as Vornado stock options, AO LTIP Units and Performance Conditioned AO LTIP Units are included in the computation of diluted income per share 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
from continuing operations, net of income attributable to noncontrolling interests in consolidated subsidiaries
$
i358,083
$
i215,789
$
i3,139,626
$
i355,538
(Loss)
income from discontinued operations
(i8
)
i61
(i85
)
i381
Net
income attributable to Vornado Realty L.P.
i358,075
i215,850
i3,139,541
i355,919
Preferred
unit distributions
(i12,574
)
(i12,582
)
(i37,722
)
(i38,248
)
Preferred
unit issuance costs
i—
i—
i—
(i14,486
)
Net
income attributable to Class A unitholders
i345,501
i203,268
i3,101,819
i303,185
Earnings
allocated to unvested participating securities
(i2,449
)
(i997
)
(i14,807
)
(i2,259
)
Numerator
for basic income per Class A unit
i343,052
i202,271
i3,087,012
i300,926
Impact
of assumed conversions:
Convertible preferred unit distributions
i14
i15
i43
i47
Numerator
for diluted income per Class A unit
$
i343,066
$
i202,286
$
i3,087,055
$
i300,973
Denominator:
Denominator
for basic income per Class A unit – weighted average units
i203,009
i202,103
i202,903
i202,033
Effect
of dilutive securities(1):
Vornado stock options, Vornado restricted stock awards, OP Units and OPPs
i507
i1,454
i478
i1,329
Convertible
preferred units
i34
i37
i35
i38
Denominator
for diluted income per Class A unit – weighted average units and assumed conversions
i203,550
i203,594
i203,416
i203,400
INCOME
PER CLASS A UNIT – BASIC:
Income from continuing operations, net
$
i1.69
$
i1.00
$
i15.21
$
i1.49
Net
income per Class A unit
$
i1.69
$
i1.00
$
i15.21
$
i1.49
INCOME
PER CLASS A UNIT – DILUTED:
Income from continuing operations, net
$
i1.69
$
i0.99
$
i15.18
$
i1.48
Net
income per Class A unit
$
i1.69
$
i0.99
$
i15.18
$
i1.48
____________________
/
(1)
The
effect of dilutive securities excludes an aggregate of i905 and i105
weighted average Class A unit equivalents, for the three months ended September 30, 2019 and 2018 respectively, and i678 and i112
weighted average Class A unit equivalents for the nine months ended September 30, 2019 and 2018, respectively, as their effect was anti-dilutive.
46
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
21.
ii
Leases
/
As lessor
We lease space to tenants under operating leases. Most of the leases provide for the payment of fixed base rent payable monthly in advance. Office building leases generally require tenants to reimburse us for operating costs and real estate taxes above their base year costs. Certain leases provide for pass-through to tenants for their share of real estate taxes, insurance and common area maintenance. Certain leases also require additional variable rent payments based on a percentage of the tenants’ sales. None of our tenants accounted for more than 10% of total revenues for the three and nine months ended September 30, 2019
and 2018. We have elected to account for lease revenues (including base and variable rent) and the reimbursement of common area maintenance expenses as a single lease component recorded as "rental revenues" on our consolidated statements of income. iAs of September 30, 2019, under ASC 842, future undiscounted cash flows under non-cancelable
operating leases were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
21. Leases - continued
As lessee
We have a number of ground leases which are classified as operating leases. On January 1, 2019, we recorded $i526,866,000
of ROU assets and lease liabilities. Our ROU assets were reduced by $i37,269,000 of accrued rent expense reclassified from “other liabilities” and $i4,267,000
of acquired above-market lease liabilities, net, reclassified from “deferred revenue” and increased by $i23,665,000 of acquired below-market lease assets, net, reclassified from “identified intangible assets, net of accumulated amortization” and $i1,584,000
of prepaid lease payments reclassified from "other assets." As of September 30, 2019, our ROU assets and lease liabilities were $i370,604,000 and $i490,978,000,
respectively.
The discount rate applied to measure each ROU asset and lease liability is based on our incremental borrowing rate ("IBR"). We consider the general economic environment and our credit rating and factor in various financing and asset specific adjustments to ensure the IBR is appropriate to the intended use of the underlying lease. As we did not elect to apply hindsight, lease term assumptions determined under ASC 840 were carried forward and applied in calculating the lease liabilities recorded under ASC 842. Certain of our ground leases offer renewal options which we assess against relevant economic factors to determine whether we are reasonably certain of exercising or not exercising the option. Lease payments associated with renewal periods that we are reasonably certain will be exercised are included in the measurement of the corresponding lease liability and ROU asset.
i
The
following table sets forth information related to the measurement of our lease liabilities as of September 30, 2019:
We
recognize rent expense as a component of "operating" expenses on our consolidated statements of income. Rent expense is comprised of fixed and variable lease payments. Variable lease payments include percentage rent and rent resets based on an index or rate. iThe following table sets forth the details of rent expense for the three and nine months ended September 30, 2019:
Certain
of our ground leases are subject to fair market rent resets based on a percentage of the appraised value of the underlying assets at specified future dates. Fair market rent resets do not give rise to remeasurement of the related right-of-use assets and lease liabilities. Fair market rent resets, which may be material, will be recognized in the periods in which they are incurred.
Farley Office and Retail Building
The future lease payments detailed previously exclude the ground and building lease at the Farley Office and Retail Building (the "Project"). We have a i95.0%
ownership interest in a joint venture with the Related Companies ("Related") which was designated by Empire State Development ("ESD"), an entity of New York State, to develop the Project. The Project will include a new Moynihan Train Hall and approximately i845,000 rentable square feet of commercial space, comprised of approximately i725,000
square feet of office space and approximately i120,000 square feet of retail space. The joint venture has a i99-year
triple-net lease with ESD for the commercial space at the Project. The lease has not yet commenced since construction of the Project is ongoing.
The joint venture has entered into a development agreement with ESD 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. As a result of our involvement in the construction of the asset, we have been deemed the accounting owner of the property in accordance with ASC 842-40-55. iFuture
undiscounted cash flows for the lease, including fixed payments in lieu of real estate taxes, as of September 30, 2019 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
22.
i
Commitments and Contingencies
Insurance
For our properties except the Farley Office and Retail Building, we maintain general liability insurance with limits of $i300,000,000 per occurrence and per property, 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 $i350,000,000 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 $i4.0 billion per occurrence and in the aggregate (as limited below), $i760,000,000
for non-certified acts of terrorism, and $i2.0 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 Program Reauthorization Act of 2015, which expires in December 2020.
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 $i1,456,071 and i19%
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 the Farley Office and Retail Building, 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 $i2.8 billion per occurrence and in the aggregate. We maintain coverage for certified and non-certified terrorism acts with limits of $i1.0
billion per occurrence and in the aggregate.
We continue to monitor the state of the insurance market and the scope and cost of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible 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 a reasonable cost 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.
50
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
22.
Commitments and Contingencies - continued
Other
Commitments and Contingencies
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not 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 cost to us.
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 the underlying loans. As of September 30, 2019, the aggregate dollar amount of these guarantees and master leases is approximately $i978,000,000.
As of September 30, 2019, $i15,880,000of letters of credit was outstanding under one of our unsecured revolving credit facilities. Our unsecured revolving credit facilities contain financial covenants that require us to maintain minimum interest rate 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 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.
The joint venture in which we own a i95.0%
ownership interest was designated by ESD, an entity of New York State, to develop the Farley Office and Retail Building. 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.
As of September 30, 2019, we expect to fund additional capital to
certain of our partially owned entities aggregating approximately $i15,400,000.
As of September 30, 2019, we have construction commitments aggregating approximately $i746,000,000.
51
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
23.
i
Segment
Information
We operate in the following reportable segments, New York and Other, which is based on how we manage our business.
Net Operating Income (“NOI”)represents total revenues less operating expenses. We consider NOI 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, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. NOI should not be considered a substitute for net income. NOI may not be comparable to similarly titled measures employed by other companies.
i
Below
is a summary of NOI at share and NOI at share - cash basisby segment for the three and nine months ended September 30, 2019 and 2018.
Deduct:
NOI attributable to noncontrolling interests in consolidated subsidiaries
(i51,415
)
(i34,653
)
(i16,762
)
Add:
NOI from partially owned entities
i193,359
i146,730
i46,629
NOI
at share
i1,053,089
i881,791
i171,298
Non-cash
adjustments for straight-line rents, amortization of acquired below-market leases, net and other
(i39,172
)
(i39,161
)
(i11
)
NOI
at share - cash basis
$
i1,013,917
$
i842,630
$
i171,287
/
52
VORNADO
REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
23.
Segment Information - continued
Below is a reconciliation of net income, the most directly comparable GAAP financial measure, to NOI at share and NOI at share - cash basis for the three and nine months ended September 30, 2019 and 2018.
Transaction
related costs, impairment losses and other
i1,576
i2,510
i103,315
i16,683
Income
from partially owned entities
(i25,946
)
(i7,206
)
(i56,139
)
(i6,059
)
(Income)
loss from real estate fund investments
(i2,190
)
i190
i13,780
i37,973
Interest
and other investment income, net
(i3,045
)
(i2,893
)
(i15,930
)
(i9,401
)
Interest
and debt expense
i61,448
i88,951
i226,940
i264,774
Net
gain on transfer to Fifth Avenue and Times Square JV
i—
i—
(i2,571,099
)
i—
Net
gains on disposition of wholly owned and partially owned assets
(i309,657
)
(i141,269
)
(i641,664
)
(i164,828
)
Income
tax expense
i23,885
i1,943
i80,542
i4,964
Loss
(income) from discontinued operations
i8
(i61
)
i85
(i381
)
NOI
from partially owned entities
i86,024
i60,094
i236,400
i193,359
NOI
attributable to noncontrolling interests in consolidated subsidiaries
(i18,096
)
(i16,943
)
(i51,915
)
(i51,415
)
NOI
at share
i307,530
i349,624
i954,211
i1,053,089
Non
cash adjustments for straight-line rents, amortization of acquired below-market leases, net and other
(i4,037
)
(i8,743
)
i530
(i39,172
)
NOI
at share - cash basis
$
i303,493
$
i340,881
$
i954,741
$
i1,013,917
53
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, 2019, the related consolidated statements of income, comprehensive income, and changes in equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and cash flows, for the nine-month periods ended September 30, 2019 and 2018, 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, 2018, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended; and in our report dated February 11, 2019, 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, 2018, 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 review 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, 2019, the related consolidated statements of income, comprehensive income, and changes in equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and cash flows, for the nine-month periods ended September 30, 2019 and 2018, 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, 2018, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended; and in our report dated February 11, 2019, 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, 2018, 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 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 review 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. 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, 2018. 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, 2019. 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, 2019 are not necessarily indicative of the operating results for the full year. Certain prior year balances have been reclassified in order to conform to the current year presentation.
56
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 93.1% of the common limited partnership interest in the Operating Partnership as of September 30, 2019. All references to the “Company,”“we,”“us” and “our” mean, collectively, Vornado, the Operating Partnership and those entities/subsidiaries consolidated by Vornado.
We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments.
Principal factors of competition are rents charged, 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, 2018 for additional information regarding these factors.
Net income attributable to common shareholders for the quarter ended September 30, 2019 was $322,906,000, or $1.69 per diluted share, compared to $190,645,000, or $1.00 per diluted share, for the prior year’s quarter. The quarters ended September 30, 2019 and 2018 include certain items that impact the comparability of period to period net income attributable
to common shareholders, which are listed in the table on page 59. 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, 2019 by $270,282,000, or $1.41 per diluted share, and $125,839,000, or $0.66 per diluted share, for the quarter ended September 30, 2018.
Funds From Operations (“FFO”) attributable to common shareholders plus assumed
conversions for the quarter ended September 30, 2019 was $279,509,000, or $1.46 per diluted share, compared to $189,987,000, or $0.99 per diluted share, for the prior year’s quarter. FFO attributable to common shareholders plus assumed conversions for the quarters ended September 30, 2019 and 2018 include certain items that impact the comparability of period to period FFO, which are listed in the table on page 60. 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, 2019 by $108,543,000, or $0.57 per diluted share, and $5,707,000, or $0.03 per diluted share, for the quarter ended September 30, 2018.
Net income attributable to common shareholders for the nine months ended September 30, 2019 was $2,904,589,000, or $15.20 per diluted share, compared to $284,338,000, or $1.49 per diluted share, for the nine months ended September 30, 2018. The nine months ended September
30, 2019 and 2018 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 nine months ended September 30, 2019 by $2,784,217,000, or $14.57 per diluted share, and $95,031,000, or $0.50 per diluted share for the nine
months endedSeptember 30, 2018.
The increase in net income attributable to common shareholders was partially offset by (i) $8,986,000, or $0.04 per diluted share, of our share of the non-cash write-off of straight-line rent receivables, (ii) $8,046,000, or $0.04 per diluted share, of non-cash expense for the time-based equity compensation granted in connection with the new leadership group announced in April 2019 and (iii) $11,055,000, or $0.05 per share, of non-cash expense for the accelerated vesting of previously issued OP Units and Vornado restricted stock due to the removal of the time-based vesting requirement for participants who have reached 65 years of age.
FFO attributable to common shareholders plus assumed conversions for the nine
months ended September 30, 2019 was $691,522,000, or $3.62 per diluted share, compared to $519,640,000, or $2.72 per diluted share, for the nine months ended September 30, 2018. FFO attributable to common shareholders plus assumed conversions for the nine months ended September 30, 2019 and 2018 include certain items that impact the comparability of period to period FFO, which are listed in the table page 60. 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, 2019 by $196,586,000, or $1.03 per diluted share, and decreased FFO attributable to common shareholders plus assumed conversions for the nine months ended September 30, 2018 by $23,891,000, or $0.12 per diluted share.
The increase in FFO attributable to common shareholders was partially offset
by (i) $8,986,000, or $0.04 per diluted share, of our share of the non-cash write-off of straight-line rent receivables, (ii) $8,046,000, or $0.04 per diluted share, of non-cash expense for the time-based equity compensation granted in connection with the new leadership group announced in April 2019 and (iii) $11,055,000, or $0.05 per share, of non-cash expense for the accelerated vesting of previously issued OP Units and Vornado restricted stock due to the removal of the time-based vesting requirement for participants who have reached 65 years of age.
58
Overview - continued
The following table reconciles
the difference between our net income attributable to common shareholders and our net income attributable to common shareholders, as adjusted:
Certain (income) expense items that impact net income attributable to common shareholders:
Net
gains on sale of real estate (primarily our 25% interest in 330 Madison Avenue in 2019)
$
(178,769
)
$
(3,350
)
$
(178,769
)
$
(27,786
)
After-tax
net gain on sale of 220 Central Park South ("220 CPS") condominium units
(109,035
)
—
(328,910
)
—
Mark-to-market decrease in Pennsylvania Real Estate
Investment Trust ("PREIT") common shares (accounted for as a marketable security from March 12, 2019)
4,875
—
19,211
—
Our
share of (income) loss from real estate fund investments
(1,455
)
748
22,207
(617
)
Net gain on sale of our ownership interests in 666 Fifth Avenue Office
Condominium
—
(134,032
)
—
(134,032
)
Mark-to-market decrease (increase) in Lexington Realty Trust ("Lexington") common shares (sold on March
1, 2019)
—
7,942
(16,068
)
24,934
Previously capitalized internal leasing costs(1)
—
(1,444
)
—
(3,883
)
Net
gain on transfer to Fifth Avenue and Times Square retail JV, net of $11,945 attributable to noncontrolling interests
—
—
(2,559,154
)
—
Non-cash impairment
losses and related write-offs, substantially 608 Fifth Avenue
—
—
108,592
—
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
—
Our share of disputed additional New York City transfer taxes
—
—
—
23,503
Preferred
share issuance costs
—
—
—
14,486
Other
(4,811
)
(4,035
)
(857
)
2,061
(289,195
)
(134,171
)
(2,973,603
)
(101,334
)
Noncontrolling
interests' share of above adjustments
18,913
8,332
189,386
6,303
Total of certain (income) expense items that impact net income attributable to
common shareholders
$
(270,282
)
$
(125,839
)
$
(2,784,217
)
$
(95,031
)
_______________________________________
(1)
The
three and nine months endedSeptember 30, 2018 have been reduced by $1,444 and $3,883, respectively, for previously capitalized internal leasing costs to present 2018 “as adjusted” financial results on a comparable basis with the current year as a result of the January 1, 2019 adoption of a new GAAP accounting standard under which internal leasing costs can no longer be capitalized.
59
Overview - continued
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
$
(109,035
)
$
—
$
(328,910
)
$
—
Our
share of (income) loss from real estate fund investments
(1,455
)
748
22,207
(617
)
Previously capitalized internal leasing costs(1)
—
(1,444
)
—
(3,883
)
Non-cash
impairment loss and related write-offs on 608 Fifth Avenue
—
—
77,156
—
Prepayment penalty in connection with redemption of $400 million 5.00% senior
unsecured notes due January 2022
—
—
22,540
—
Our share of disputed additional New York City transfer taxes
—
—
—
23,503
Preferred
share issuance costs
—
—
—
14,486
Other
(5,229
)
(5,389
)
(2,931
)
(7,854
)
(115,719
)
(6,085
)
(209,938
)
25,635
Noncontrolling
interests' share of above adjustments
7,176
378
13,352
(1,744
)
Total of certain (income) expense items that impact FFO attributable to common shareholders
plus assumed conversions, net
$
(108,543
)
$
(5,707
)
$
(196,586
)
$
23,891
_______________________________________
(1)
The
three and nine months endedSeptember 30, 2018 have been reduced by $1,444 and $3,883, respectively, for previously capitalized internal leasing costs to present 2018 “as adjusted” financial results on a comparable basis with the current year as a result of the January 1, 2019 adoption of a new GAAP accounting standard under which internal leasing costs can no longer be capitalized.
Vornado Realty Trust and Vornado Realty L.P.
Same Store Net Operating Income (“NOI”) At Share
The percentage increase (decrease) 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 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 the Financial Condition and Results of Operations.
60
Overview - continued
Dispositions
220 CPS
During the three months ended September
30, 2019, we closed on the sale of 14 condominium units at 220 CPS for net proceeds aggregating $348,759,000 resulting in a financial statement net gain of $130,888,000 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, $21,853,000 of income tax expense was recognized on our consolidated statements of income. During the nine months ended September 30, 2019, we closed on the sale of 37 condominium units at 220 CPS for net proceeds of $1,039,493,000 resulting in a financial statement net gain of $400,500,000
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, $71,590,000 of income tax expense was recognized on our consolidated statements of income. From inception to September 30, 2019, we closed on the sale of 48 units for aggregate net proceeds of $1,254,269,000. During the third quarter of 2019, we repaid the remaining $48,883,000 ofthe $950,000,000 220 CPS loan.
Lexington
On March
1, 2019, we sold all of our 18,468,969 common shares of Lexington, realizing net proceeds of $167,698,000. We recorded a $16,068,000 mark-to-market increase in the fair value of our common shares for the period from January 1, 2019 through the date of sale, which is included in "interest and other investment income, net" on our consolidated statements of income for the nine months ended September 30, 2019.
UE
On March 4, 2019, we converted to common shares and sold all of our 5,717,184 partnership units of UE, realizing
net proceeds of $108,512,000. The sale resulted in a net gain of $62,395,000 which is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income for the nine months ended September 30, 2019.
-
Fifth Avenue and Times Square JV
On April 18, 2019 (the “Closing Date”), we entered into a transaction agreement (the “Transaction Agreement”) with a group of institutional investors (the “Investors”). The Transaction Agreement provides for a series of transactions (collectively,
the “Transaction”) pursuant to which (i) prior to the Closing Date, we contributed our 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”) to subsidiaries of a newly formed joint venture (“Fifth Avenue and Times Square JV”) and (ii) on the Closing Date, transferred a 48.5% common interest in Fifth Avenue and Times Square JV to the Investors. The 48.5% common interest in the joint venture represents an effective 47.2% interest in the Properties (of which 45.4% was transferred from Vornado). The Properties include approximately 489,000 square feet of retail space, 327,000
square feet of office space, signage associated with 1535 and 1540 Broadway, the parking garage at 1540 Broadway and the theater at 1535 Broadway.
We retained the remaining 51.5% common interest in Fifth Avenue and Times Square JV which represents an effective 51.0% interest in the Properties and an aggregate $1.828 billion of preferred equity interests in certain of the properties. We also provided $500,000,000 of temporary preferred equity on 640 Fifth Avenue until May 23, 2019 when mortgage financing was completed. All of the preferred equity has an annual coupon of 4.25% for the first five years, increasing to 4.75%
for the next five years and thereafter at a formulaic rate. It can be redeemed under certain conditions on a tax deferred basis.
Net cash proceeds from the Transaction were $1.179 billion, after (i) deductions for the defeasance of a $390,000,000 mortgage loan on 666 Fifth Avenue and the repayment of a $140,000,000 mortgage loan on 655 Fifth Avenue, (ii) proceeds from a $500,000,000 mortgage loan on 640 Fifth Avenue, described below, (iii) approximately $23,000,000 used to purchase noncontrolling investors' interests and (iv) approximately $53,000,000 of transaction costs (including $17,000,000
of costs related to the defeasance of the 666 Fifth Avenue mortgage loan).
We continue to manage and lease the Properties. We share control with the Investors over major decisions of the joint venture, including decisions regarding leasing, operating and capital budgets, and refinancings. Accordingly, we no longer hold a controlling financial interest in the Properties which has been transferred to the joint venture. As a result, our investment in Fifth Avenue and Times Square JV is accounted for under the equity method from the date of transfer. The Transaction valued the Properties at $5,556,000,000resulting in a financial statement net gain of $2,571,099,000, before noncontrolling interest of $11,945,000,
including the related step-up in our basis of the retained portion of the assets to fair value. The net gain is included in "net gain on transfer to Fifth Avenue and Times Square JV" on our consolidated statements of income for the nine months ended September 30, 2019. The gain for tax purposes was approximately $735,000,000.
61
Overview - continued
Dispositions - continued
Fifth
Avenue and Times Square JV - continued
On May 23, 2019, we received $500,000,000 from the redemption of our temporary preferred equity in 640 Fifth Avenue. The temporary preferred equity was redeemed from the proceeds of a $500,000,000 mortgage financing that was completed on the property. The five year loan, which is guaranteed by us, is interest only at LIBOR plus 1.01%. The interest rate was swapped for four years to a fixed rate of 3.07%.
330 Madison Avenue
On July
11, 2019, we sold our 25% interest in 330 Madison Avenue to our joint venture partner. We received net proceeds of approximately$100,000,000 after deducting our share of the existing $500,000,000mortgage loan resulting in a financial statement net gain of $159,292,000. The net gain is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income for the three and nine months ended September 30, 2019. The gain for tax purposes was approximately $139,000,000.
3040
M Street
On September 18, 2019, we completed the $49,750,000 sale of 3040 M Street, a 44,000 square foot retail building in Washington, DC, which resulted in a net gain of $19,477,000which is included in “net gains on disposition of wholly owned and partially owned assets” on our consolidated statements of income for the three and nine months ended September 30, 2019. The gain for tax purposes was approximately $19,000,000.
Financings
On January
28, 2019, a joint venture, in which we have a 45.1% interest, completed a $167,500,000 refinancing of 61 Ninth Avenue, a 166,000 square foot office and retail property in the Meatpacking district of Manhattan which is fully leased to Aetna and Starbucks. The seven-year interest only loan carries a rate of LIBOR plus 1.35% (3.40% as of September 30, 2019) and matures in January 2026. We realized net proceeds of approximately $31,000,000. The loan replaces the previous $90,000,000 construction loan that bore
interest at LIBOR plus 3.05% and was scheduled to mature in 2021.
On February 4, 2019, we completed a $95,700,000 refinancing of 435 Seventh Avenue, a 43,000 square foot Manhattan retail property. The interest-only loan carries a rate of LIBOR plus 1.30% (3.37% as of September 30, 2019) and matures in 2024. The recourse loan replaces the previous $95,700,000 loan that bore interest at LIBOR plus 2.25% and was scheduled to mature in August 2019.
On
February 12, 2019, we completed a $580,000,000 refinancing of 100 West 33rd Street, a 1.1 million square foot Manhattan property comprised of 859,000 square feet of office space and the 256,000 square foot Manhattan Mall. The interest-only loan carries a rate of LIBOR plus 1.55% (3.62% as of September 30, 2019) and matures in April 2024, with twoone-year extension options. The loan replaces the previous $580,000,000 loan that bore interest at LIBOR plus 1.65%
and was scheduled to mature in July 2020.
On March 1, 2019, we called for redemption all of our $400,000,0005.00% senior unsecured notes. The notes, which were scheduled to mature in January 2022, were redeemed on April 1, 2019 at a redemption price of 105.51% of the principal amount plus accrued interest. In connection therewith, we expensed $22,540,000 relating to debt prepayment costs which is included in "interest and debt expense" on our consolidated statements of income for the nine months ended September 30, 2019.
On March
26, 2019, we increased to $1.5 billion (from $1.25 billion) and extended to March 2024 (as fully extended) from February 2022 one of our two unsecured revolving credit facilities. The interest rate on the extended facility was lowered from LIBOR plus 1.00% to LIBOR plus 0.90%. Thefacility fee remains unchanged at 20 basis points.
On May 24, 2019, we extended our $375,000,000 mortgage loan on 888 Seventh Avenue, a 886,000 square foot Manhattan office building, from December 2020 to
December 2025. The interest rate on the extended mortgage loan is LIBOR plus 1.70% (3.73%as of September 30, 2019). Pursuant to an existing swap agreement, the interest rate on the $375,000,000 mortgage loan has been swapped to 3.25% through December 2020.
On June 28, 2019, a joint venture, in which we have a 55% interest, completed a $145,700,000 refinancing of 512 West 22nd Street, a 173,000 square foot office building in the West Chelsea
submarket of Manhattan, of which $106,425,000 was outstanding as of September 30, 2019. The four-year interest only loan carries a rate of LIBOR plus 2.00% (4.05%as of September 30, 2019) and matures in June 2023 with a one-year extension option. The loan replaces the previous $126,000,000 construction loan that bore interest at LIBOR plus 2.65% and was scheduled to mature in 2019.
62
Overview
- continued
Financings - continued
On July 25, 2019, a joint venture, in which we have a 50% interest, completed a $60,000,000 refinancing of 825 Seventh Avenue, a 165,000 square foot office building on the corner of 53rd Street and Seventh Avenue, of which $28,882,000 was outstanding as of September 30, 2019. The interest-only loan carries a rate of LIBOR plus 1.65% (3.78% as of September 30, 2019)
and matures in 2022 with a one-year extension option. The loan replaces the previous $20,500,000 loan that bore interest at LIBOR plus 1.40% and was scheduled to mature in September 2019.
On September 5, 2019, a consolidated joint venture, in which we have a 50% interest, completed a $75,000,000 refinancing of 606 Broadway, a 35,000 square foot office and retail building on the northeast corner of Broadway and Houston Street in Manhattan, of which $67,500,000 was outstanding as of September 30, 2019. The interest-only
loan carries a rate of LIBOR plus 1.80% (3.85% as of September 30, 2019) and matures in 2024. In connection therewith, the joint venture purchased an interest rate cap that caps LIBOR at a rate of 4.00%. The loan replaces the previous $65,000,000 construction loan. The construction loan bore interest at LIBOR plus 3.00% and was scheduled to mature in May 2021.
On September 27, 2019, we repaid the $575,000,000 mortgage loan on PENN2 with proceeds
from our unsecured revolving credit facilities. The mortgage loan was scheduled to mature in December 2021, as fully extended. PENN2 is a 1,795,000 square foot office building located on the west side of 7th Avenue between 31st and 33rd Street currently under redevelopment.
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.
Represents
the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.
(2)
Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases and includes the effect of free rent and periodic step-ups in rent.
A summary of our critical
accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2018. For the nine months ended September 30, 2019, there were no material changes to these policies, other than the adoption of Accounting Standards Codification Topic 842, Leases, described in Note 3 - Recently Issued Accounting Literature and Note21 - Leases to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Reporton Form 10-Q.
Recently
Issued Accounting Literature
Refer to Note 3 - 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.
65
Net Operating Income At Share by Segment for the Three Months Ended September 30, 2019 and 2018
NOI represents total revenues less operating expenses. We consider NOI 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, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. NOI should not be considered a substitute for net income. NOI may not be comparable to similarly titled measures employed by other companies.
Below is a summary of NOI at share and NOI at share - cash basisby segment for the three months ended September
30, 2019 and 2018.
Reflects the transfer of 45.4% of common equity in the properties contributed to the Fifth Avenue and Times Square JV on April 18, 2019.
(2)
The
three months ended September 30, 2018 includes $1,737 from 666 Fifth Avenue Office Condominium (sold on August 3, 2018), $5,119 from PREIT (accounted for as a marketable security beginning March 12, 2019) and $2,859 from UE (sold on March 4, 2019).
The elements of our New York and Other NOI at share - cash basis for the three months ended September 30, 2019 and 2018 are summarized below.
Reflects the transfer of 45.4% of common equity in the properties contributed to the Fifth Avenue and Times Square JV on April
18, 2019.
(2)
The three months ended September 30, 2018 includes $1,704 from 666 Fifth Avenue Office Condominium (sold on August 3, 2018), $5,157 from PREIT (accounted for as a marketable security beginning March 12, 2019) and $2,553 from UE (sold on March 4, 2019).
67
Reconciliation
of Net Income to Net Operating Income At Share for the Three Months Ended September 30, 2019 and 2018
Below is a reconciliation of net income to NOI at share and NOI at share - cash basis for the three months ended September 30, 2019 and 2018.
Our revenues, which consist of rental revenues and fee and other income, were $465,961,000 for the three months ended September 30, 2019 compared to $542,048,000 for the prior year’s quarter, a decrease of $76,087,000. Below are the details of the (decrease) increase by segment:
(Amounts
in thousands)
Total
New York
Other
(Decrease) increase due to:
Rental revenues:
Acquisitions,
dispositions and other
$
5,453
$
5,750
$
(297
)
Development and redevelopment
(8,108
)
(8,197
)
89
Hotel
Pennsylvania
(1,371
)
(1,371
)
—
Trade shows
(246
)
—
(246
)
Properties
transferred to Fifth Avenue and Times Square JV
(76,383
)
(76,383
)
—
Same store operations
4,346
(2,109
)
6,455
(76,309
)
(82,310
)
6,001
Fee
and other income:
BMS cleaning fees
1,804
1,459
345
Management
and leasing fees
(1,408
)
(693
)
(715
)
Properties transferred to Fifth Avenue and Times Square JV
(300
)
(300
)
—
Other
income
126
(34
)
160
222
432
(210
)
Total
(decrease) increase in revenues
$
(76,087
)
$
(81,878
)
$
5,791
Expenses
Our expenses, which consist
of operating, depreciation and amortization, general and administrative, expense from deferred compensation plan liability, and transaction related costs, impairment losses and other, were $358,583,000 for the three months ended September 30, 2019, compared to $385,092,000 for the prior year’s quarter, a decrease of $26,509,000. Below are the details of the (decrease) increase by segment:
(Amounts
in thousands)
Total
New York
Other
(Decrease) increase due to:
Operating:
Acquisitions,
dispositions and other
$
270
$
(455
)
$
725
Development and redevelopment
(2,011
)
(2,079
)
68
Non-reimbursable
expenses
(1,536
)
(1,417
)
(119
)
Hotel Pennsylvania
112
112
—
Trade
shows
55
—
55
BMS expenses
1,443
1,443
—
Properties
transferred to Fifth Avenue and Times Square JV
(11,741
)
(11,741
)
—
Same store operations
4,192
1,347
2,845
(9,216
)
(12,790
)
3,574
Depreciation
and amortization:
Acquisitions, dispositions and other
(671
)
(671
)
—
Development
and redevelopment
(918
)
(978
)
60
Properties transferred to Fifth Avenue and Times Square JV
(21,044
)
(21,044
)
—
Same
store operations
5,901
5,708
193
(16,732
)
(16,985
)
253
General
and administrative
1,260
3,129
(1,869
)
Expense
from deferred compensation plan liability
(887
)
—
(887
)
Transaction
related costs, impairment losses and other
Return
on preferred equity, net of our share of the expense
9,545
—
19,436
—
Alexander's
32.4%
6,692
5,427
Partially
owned office buildings(2)
Various
(186
)
735
Other investments(3)
Various
4
1,044
$
25,946
$
7,206
____________________
(1)
The
three months ended September 30, 2019 includes our 51.5% ownership in the Fifth Avenue and Times Square JV. See Note 7 - 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)
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.
(3)
Includes
interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, 666 Fifth Avenue Office Condominium (sold on August 3, 2018), UE (sold on March 4, 2019), PREIT (accounted as a marketable security from March 12, 2019) and others.
Income (loss) from Real Estate Fund Investments
Below are the components of the income (loss) from our real estate fund investments for the three months ended September 30, 2019 and 2018.
Interest and debt expense for the three months ended September 30, 2019 was $61,448,000
compared to $88,951,000 for the prior year’s quarter, a decrease of $27,503,000. This decrease was primarily due to (i) $9,906,000 of lower interest expense resulting from paydowns of the 220 CPS loan, (ii) $9,867,000 of lower interest expense resulting from the deconsolidation of mortgages payable on the properties contributed to Fifth Avenue and Times Square JV, (iii) $5,045,000 of lower interest from the redemption of our $400,000,000 5.00% senior unsecured notes, and (iv) $4,135,000 of lower capital lease interest, partially offset by (v) $2,191,000 of lower capitalized interest and debt expense, and (vi) $1,237,000 of higher interest attributable to the interest rate swap on our $750,000,000 unsecured term loan.
Net Gains on Disposition of Wholly Owned and Partially Owned Assets
Net
gains on disposition of wholly owned and partially owned assets of $309,657,000 for the three months ended September 30, 2019 consist of (i) a $159,292,000 net gain on sale of our 25% interest in 330 Madison Avenue, (ii) $130,888,000 ofnet gains on sale of 220 CPS condominium units, and (iii) a $19,477,000 net gain on sale of 3040 M Street. Net gains of $141,269,000 for the three months ended September 30, 2018 primarily consist of (i) a $134,032,000 net gain on the sale of our 49.5% interests in 666 Fifth Avenue Office Condominium and (ii) a $7,308,000 net gain from the repayment of our interest in the mortgage loan held by us on 666 Fifth
Avenue Office Condominium.
Income Tax Expense
Income tax expense for the three months ended September 30, 2019 was $23,885,000 compared to $1,943,000 for the prior year’s quarter, an increase of $21,942,000. This increase resulted primarily from $21,853,000 of income tax expense on the sale of 220 CPS condominium units in the three months ended September 30, 2019.
(Loss) Income from Discontinued Operations
Loss
from discontinued operations for the three months ended September 30, 2019 was $8,000 compared to income of $61,000 for the prior year’s quarter, a decrease in income of $69,000.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $5,774,000 for the three months ended September 30, 2019, compared to $3,312,000
for the prior year’s quarter, an increase of $2,462,000. The increase resulted primarily from income allocated to the noncontrolling interest in the Farley Office and Retail Building for its share of the development fee income.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $22,637,000 for the three months ended September 30, 2019, compared to $12,671,000 for the prior year’s quarter, an increase of $9,966,000. This
increase resulted primarily from higher net income subject to allocation to unitholders.
Preferred Share Dividends of Vornado Realty Trust
Preferred share dividends were $12,532,000 for the three months ended September 30, 2019, compared to $12,534,000 for the prior year’s quarter, a decrease of $2,000.
Preferred Unit Distributions of Vornado Realty L.P.
Preferred unit distributions were $12,574,000 for the three months ended September
30, 2019, compared to $12,582,000 for the prior year’s quarter, a decrease of $8,000.
Same store NOI at share represents NOI
at share from property operations which are owned by us and in service in both the current and prior year reporting periods. Same store NOI at share - cash basis is NOI at share from operations before straight-line rental income and expense, amortization of acquired below and above market leases, net and other non-cash adjustments which are owned by us and in service in both the current and prior year reporting periods. 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 as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies.
Below
are reconciliations of 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, 2019 compared to September 30, 2018.
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, 2019 compared to September 30, 2018.
%
increase (decrease) in same store NOI at share - cash basis
1.0
%
0.3
%
(1)
(1.0
)%
17.7
%
—
%
____________________
(1)
Excluding
Hotel Pennsylvania, same store NOI at share - cash basis increased by 1.0%.
73
Net Operating Income At Share by Segment for the Nine Months Ended September 30, 2019 and 2018
NOI represents total revenues less operating expenses. We consider NOI 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, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. NOI should not be considered a substitute for net income. NOI may not be comparable to similarly titled measures employed by other companies.
Below is a summary of NOI at share and NOI at share - cash basisby segment for the nine months ended September 30, 2019 and 2018.
Reflects the transfer of 45.4% of common equity in the properties contributed to the Fifth Avenue and Times Square JV on April 18, 2019.
(2)
The
nine months ended September 30, 2018 includes $12,145 from 666 Fifth Avenue Office Condominium (sold on August 3, 2018), $15,349 from PREIT (accounted for as a marketable security beginning March 12, 2019) and $8,624 from UE (sold on March 4, 2019).
The elements of our New York and Other NOI at share - cash basis for the nine months ended September 30, 2019 and 2018 are summarized below.
Reflects the transfer of 45.4% of common equity in the properties contributed to the Fifth Avenue and Times Square JV on April
18, 2019.
(2)
The nine months ended September 30, 2018 includes $12,025 from 666 Fifth Avenue Office Condominium (sold on August 3, 2018), $15,155 from PREIT (accounted for as a marketable security beginning March 12, 2019) and $8,108 from UE (sold on March 4, 2019).
75
Reconciliation of Net Income to Net Operating Income
At Share for the Nine Months Ended September 30, 2019 and 2018
Below is a reconciliation of net income to NOI at share and NOI at share - cash basis for the nine months ended September 30, 2019 and 2018.
Our revenues, which consist of rental revenues and fee and other income, were $1,463,732,000 for the nine months ended September 30, 2019, compared to $1,620,303,000 for the prior year’s nine months, a decrease of $156,571,000. Below are the details of the (decrease) increase by
segment:
(Amounts in thousands)
Total
New York
Other
(Decrease) increase due to:
Rental
revenues:
Acquisitions, dispositions and other
$
(5,015
)
$
(4,671
)
$
(344
)
Development
and redevelopment
(12,879
)
(13,128
)
249
Hotel Pennsylvania
(4,733
)
(4,733
)
—
Trade
shows
(1,965
)
—
(1,965
)
Properties transferred to Fifth Avenue and Times Square JV
(139,013
)
(139,013
)
—
Same
store operations
5,145
(12,093
)
(1)
17,238
(158,460
)
(173,638
)
15,178
Fee
and other income:
BMS cleaning fees
4,937
4,600
337
Management
and leasing fees
(142
)
1,085
(1,227
)
Properties transferred to Fifth Avenue and Times Square JV
(532
)
(532
)
—
Other
income
(2,374
)
(763
)
(1,611
)
1,889
4,390
(2,501
)
Total
(decrease) increase in revenues
$
(156,571
)
$
(169,248
)
$
12,677
___________________
(1)
Includes
a $5,967 reduction in income from the non-cash write-off of straight-line rent receivables related to Topshop at 478-486 Broadway in the second quarter of 2019.
Our expenses, which consist of operating, depreciation and amortization, general and administrative, expense from deferred compensation plan liability, and transaction related
costs, impairment losses and other, were $1,261,353,000 for the nine months ended September 30, 2019, compared to $1,172,013,000 for the prior year’s nine months, an increase of $89,340,000. Below are the details of the increase by segment:
(Amounts
in thousands)
Total
New York
Other
Increase (decrease) due to:
Operating:
Acquisitions,
dispositions and other
$
1,980
$
386
$
1,594
Development and redevelopment
(2,655
)
(3,091
)
436
Non-reimbursable
expenses
(10,522
)
(9,487
)
(1,035
)
Hotel Pennsylvania
5
5
—
Trade
shows
548
—
548
BMS expenses
4,073
4,073
—
Properties
transferred to Fifth Avenue and Times Square JV
(27,458
)
(27,458
)
—
Same store operations
18,877
9,877
9,000
(15,152
)
(25,695
)
10,543
Depreciation
and amortization:
Acquisitions, dispositions and other
1,452
1,444
8
Development
and redevelopment
(5,523
)
(5,640
)
117
Properties transferred to Fifth Avenue and Times Square JV
(37,094
)
(37,094
)
—
Same
store operations
33,645
31,835
1,810
(7,520
)
(9,455
)
1,935
General
and administrative
21,192
(1)
15,116
6,076
Expense
from deferred compensation plan liability
4,188
—
4,188
Transaction
related costs, impairment losses and other
86,632
88,257
(2)
(1,625
)
Total
increase in expenses
$
89,340
$
68,223
$
21,117
___________________
(1)
2019
includes (i) $11,055 of non-cash stock-based compensation expense for the accelerated vesting of previously issued OP Units and Vornado restricted stock due to the removal of the time-based vesting requirement for participants who have reached 65 years of age, and (ii) $8,046 of non-cash stock-based compensation expense for the time-based equity compensation granted in connection with the new leadership group announced in April 2019 (additional non-cash expense associated with these awards will be $2,401 in the fourth quarter of 2019, $9,603 in each of 2020 and 2021, $7,718 in 2022 and $2,655 in 2023).
(2)
2019 includes $101,360 of non-cash impairment losses, substantially 608 Fifth Avenue, partially offset by $13,103 disputed additional New
York City real property transfer tax ("Transfer Tax") recorded in the first quarter of 2018 related to the December 2012 acquisition of Independence Plaza. The joint venture, in which we have a 50.1% economic interest, that owns Independence Plaza recorded this expense based on the precedent established by the New York City Tax Appeals Tribunal (the "Tax Tribunal") decision regarding One Park Avenue. See Note 5 - Real Estate Fund Investments to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information regarding this matter.
Return
on preferred equity, net of our share of the expense
18,131
—
39,239
—
Alexander's(2)
32.4%
18,185
10,593
Partially
owned office buildings(3)
Various
(1,531
)
(1,546
)
Other investments(4)
Various
246
(2,988
)
$
56,139
$
6,059
____________________
(1)
The
nine months endedSeptember 30, 2019 includes our 51.5% ownership in the Fifth Avenue and Times Square JV. See Note 7 - 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)
2018 includes our $7,708 share of Alexander’s disputed additional Transfer Tax related to the November 2012 sale of Kings Plaza Regional Shopping Center. Alexander's recorded this expense based on the precedent established by the Tax Tribunal's decision regarding
One Park Avenue. See Note 5 - Real Estate Fund Investments to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information regarding this matter.
(3)
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. 2019 includes a $1,079 reduction in income from the non-cash write-off of straight-line rent receivable related to The Four Seasons Restaurant at 280 Park Avenue. 2018 includes our $4,978 share of disputed additional Transfer Tax
related to the March 2011 acquisition of One Park Avenue. See Note 5 - Real Estate Fund Investments to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information regarding this matter.
(4)
Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, 666 Fifth Avenue Office Condominium (sold on August 3, 2018), UE (sold on March 4, 2019), PREIT (accounted as a marketable security from March 12, 2019) and others.
Loss
from Real Estate Fund Investments
Below are the components of the loss from our real estate fund investments for the nine months ended September 30, 2019 and 2018.
Interest on cash and cash equivalents and restricted cash
$
8,753
$
12,370
Interest
on loans receivable(1)
4,845
8,952
Decrease in fair value of marketable securities(2)
(3,095
)
(24,801
)
Dividends
on marketable securities
2,625
10,060
Other, net
2,802
2,820
$
15,930
$
9,401
____________________
(1)
2018
includes $6,707 of of profit participation in connection with an investment in a mezzanine loan which was previously repaid to us.
(2)
2019 includes a $19,211 decrease in the value of our investment in PREIT, partially offset by a $16,068 mark-to-market increase in fair value of our Lexington common shares through March 1, 2019, the date of sale of our investment.
Interest and Debt Expense
Interest and debt expense was $226,940,000 for the nine months ended September 30, 2019,
compared to $264,774,000 for the prior year’s nine months, a decrease of $37,834,000. This decrease was primarily due to (i) $20,956,000 of lower interest expense resulting from paydowns of the 220 CPS loan, (ii) $19,253,000 of lower interest expense resulting from the deconsolidation of mortgages payable on the properties contributed to Fifth Avenue and Times Square JV, (iii) $13,040,000 of lower capital lease interest, (iv) $10,091,000 of lower interest from the redemption of our $400,000,000 5.00% senior unsecured notes, and (v) $9,466,000 of higher capitalized interest and debt expense, partially offset by (vi) $22,540,000 of debt prepayment costs relating to redemption of our $400,000,000 5.00% senior unsecured notes, (vii) $6,811,000 of higher interest expense resulting from higher
average interest rates on our variable rate loans, (viii) $4,795,000 of higher interest attributable to the interest rate swap on our $750,000,000 unsecured term loan, and (ix) $2,599,000 of higher interest expense for revolver borrowings.
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 $641,664,000 for the nine months ended September 30, 2019 consist of (i) $400,500,000 of net gains on sale of 220 CPS condominium units, (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. Net gains of $164,828,000 for the nine months ended September 30, 2018 primarily consist of (i) a $134,032,000 net gain on the sale of our 49.5% interests in 666 Fifth Avenue Office Condominium, (ii) a $23,559,000 net gain on sale of 27 Washington
Square North, and (iii) a $7,308,000 net gain from the repayment of our interest on the mortgage loan held by us on 666 Fifth Avenue Office Condominium.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2019 was $80,542,000 compared to $4,964,000 for the prior year’s nine months, an increase of $75,578,000. This increase resulted primarily from$71,590,000 of income tax expense on the sale of 220 CPS condominium units.
Loss
(Income) from Discontinued Operations
Loss from discontinued operations for the nine months ended September 30, 2019 was $85,000 compared to income of $381,000 for the prior year’s nine months, a decrease in income of $466,000.
Net (Income) Loss Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $34,045,000 for the nine months ended September 30, 2019, compared to a loss of $31,137,000 for the prior year’s nine months, an increase in income of $65,182,000. This increase resulted primarily from (i) $42,765,000 increase from the lower net loss subject to allocation to the noncontrolling interest of our real estate fund, (ii) $11,945,000 resulting from the net gain on transfer to Fifth Avenue and
Times Square JV attributable to noncontrolling interests for the nine months ended September 30, 2019, and (iii) $6,538,000 of disputed additional Transfer Tax allocated to noncontrolling interests related to the December 2012 acquisition of Independence Plaza for the nine months ended September 30, 2018.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $197,354,000 for the nine months ended September 30, 2019, compared to $18,992,000 for the prior year’s nine
months, an increase of $178,362,000.The increase resulted primarily fromhighernet income subject to allocation to Class A unitholders due to the net gain on transfer to Fifth Avenue and Times Square JV.
Preferred Share Dividends of Vornado Realty Trust
Preferred share dividends were $37,598,000 for the nine months ended September 30, 2019, compared to $38,103,000 for the prior year’s nine months,
a decrease of $505,000.
Preferred Unit Distributions of Vornado Realty L.P.
Preferred unit distributions were $37,722,000 for the nine months ended September 30, 2019, compared to $38,248,000 for the prior year’s nine months, a decrease of $526,000.
Preferred Share/Unit Issuance Costs
Preferred share/unit issuance cost for the nine months ended September
30, 2018 were $14,486,000 representing the write-off of issuance cost upon redemption of all the outstanding Series G and Series I cumulative redeemable preferred shares/units in January 2018.
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, 2019 compared to September 30, 2018.
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, 2019 compared to September 30, 2018.
NOI represents total revenues less operating expenses. We consider NOI 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, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. NOI should not be considered a substitute for net income. NOI may not be comparable to similarly titled measures employed by other companies.
Below is a summary of NOIat share and NOI at share - cash basis by segment for the three
months ended September 30, 2019 and June 30, 2019.
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, 2019 compared to June 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, 2019 compared to June 30, 2019.
%
decrease in same store NOI at share - cash basis
(2.7
)%
(0.4
)%
(1)
(19.3
)%
(2.2
)%
—
%
____________________
(1)
Excluding
Hotel Pennsylvania, same store NOI at share - cash basis increased by 0.1%.
88
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. 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.
We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures. Capital requirements for development expenditures and acquisitions may require funding from borrowings and/or equity offerings.
We expect to generate net cash of approximately $2 billion resulting from the sales of 100% of the 220 CPS condominium units, including $1 billion of after-tax net gain, of which $396,246,000 was recognized in our consolidated statements
of income from inception to September 30, 2019.
We may from time to time purchase or retire outstanding debt securities or redeem our equity securities. Such purchases, if any, will depend on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Our cash flow activities for the nine months endedSeptember
30, 2019 and 2018 are summarized as follows:
(Amounts in thousands)
For the Nine Months Ended September 30,
(Decrease) Increase in Cash Flow
2019
2018
Net
cash provided by operating activities
$
397,971
$
488,038
$
(90,067
)
Net cash provided by (used in) investing activities
2,228,548
(652,306
)
2,880,854
Net
cash used in financing activities
(2,097,868
)
(830,734
)
(1,267,134
)
Cash and cash equivalents and restricted cash was $1,245,556,000 as of September 30, 2019, a $528,651,000increase from the balance as of December 31, 2018.
Net cash provided by operating activities of $397,971,000 for the nine months endedSeptember 30, 2019 was comprised of $516,386,000 of cash from operations, including distributions of income from partially owned entities of $66,252,000, and a net decrease of $118,415,000 in cash due to the timing of cash receipts and payments related to changes in operating assets and
liabilities.
The following table details the cash provided by (used in) investing activities for the nine months endedSeptember 30, 2019 and 2018:
(Amounts in thousands)
For the Nine Months Ended September 30,
Increase
(Decrease) in Cash Flow
2019
2018
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 sale of condominium units at 220 Central Park South
1,039,493
—
1,039,493
Proceeds from redemption of 640 Fifth Avenue preferred equity
500,000
—
500,000
Development
costs and construction in progress
(448,281
)
(274,147
)
(174,134
)
Moynihan Train Hall expenditures
(352,211
)
—
(352,211
)
Proceeds
from sale of real estate and related investments
255,534
219,731
35,803
Additions to real estate
(189,579
)
(163,546
)
(26,033
)
Proceeds
from sales of marketable securities
168,314
—
168,314
Distributions of capital from partially owned entities
24,880
98,609
(73,729
)
Investments
in partially owned entities
(16,480
)
(32,728
)
16,248
Acquisitions of real estate and other
(3,260
)
(500,225
)
496,965
Proceeds
from repayments of loans receivable
1,395
—
1,395
Net cash provided by (used in) investing activities
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, 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
90
Liquidity
and Capital Resources - continued
Development and Redevelopment Expenditures for the Nine Months Ended September 30, 2019
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 on the previous page.
We are constructing a residential condominium tower containing 397,000 salable square feet at 220 CPS. The development cost of this project (exclusive of land cost
of $515.4 million) is estimated to be approximately $1.4 billion, of which$1.3 billion has been expended as of September 30, 2019.
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 $46,000,000, of which our share is $32,200,000. As of September 30, 2019, $39,760,000 has been expended, of which our share is $27,832,000.
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, 2019, $22,623,000 has been expended, of which our share is $11,311,000.
We are redeveloping PENN1, a 2,544,000 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 $57,355,000 has been expended as of September 30, 2019.
We are redeveloping PENN2, a 1,795,000 square foot office building located on the west side of 7th Avenue between
31st and 33rd Street. The development cost of this project is estimated to be $750,000,000, of which $34,372,000 has been expended as of September 30, 2019.
We recently entered into a development agreement with 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 $120,805,000.
Farley Office and Retail Building and Moynihan Train Hall
Our 95.0% joint venture (the remaining 5.0% is owned by the Related Companies ("Related")) is developing the Farley Office and Retail Building (the "Project"), which will include approximately
845,000 rentable square feet of commercial space, comprised of approximately 725,000 square feet of office space and approximately 120,000 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, 2019, $528,080,000 has been expended.
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. Pursuant to Accounting Standards Codification 842-40-55, the joint venture, which we consolidate on our consolidated balance sheets, is required to recognize all development expenditures for the Moynihan Train Hall. Accordingly, the development expenditures paid for by governmental agencies through September 30, 2019 and December 31, 2018of $791,703,000 and $445,693,000, respectively, are shown as “Moynihan Train Hall development expenditures” with a corresponding obligation recorded in “Moynihan Train Hall obligation” on our consolidated
balance sheets. Upon completion of the development, the "Moynihan Train Hall development expenditures" and the offsetting “Moynihan Train Hall obligation” will be removed from our consolidated balance sheets.
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.
91
Liquidity
and Capital Resources - continued
Development and Redevelopment Expenditures for the Nine Months Ended September 30, 2019 - continued
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.
Below is a summary of amounts paid for capital expenditures and leasing commissions for the nine months ended September 30, 2018.
(Amounts in thousands)
Total
New
York
theMART
555 California
Street
Expenditures to maintain assets
$
66,167
$
48,227
$
10,232
$
7,708
Tenant
improvements
67,972
49,423
10,855
7,694
Leasing commissions
27,389
24,683
413
2,293
Recurring
tenant improvements, leasing commissions and other capital expenditures
161,528
122,333
21,500
17,695
Non-recurring capital expenditures
28,882
20,579
82
8,221
Total
capital expenditures and leasing commissions
$
190,410
$
142,912
$
21,582
$
25,916
Development
and Redevelopment Expenditures for the Nine Months Ended September 30, 2018
Below is a summary of amounts paid for development and redevelopment expenditures for the nine months ended September 30, 2018. These expenditures include interest and debt expense of $49,718,000, payroll of $7,996,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $32,969,000, which were capitalized in connection with the development and redevelopment of these projects.
(Amounts
in thousands)
Total
New York
theMART
555 California
Street
Other
220 CPS
$
204,727
$
—
$
—
$
—
$
204,727
606
Broadway
13,141
13,141
—
—
—
345
Montgomery Street
10,497
—
—
10,497
—
1535
Broadway
7,558
7,558
—
—
—
PENN2
4,793
4,793
—
—
—
PENN1
3,901
3,901
—
—
—
Other
29,530
18,439
8,421
430
2,240
$
274,147
$
47,832
$
8,421
$
10,927
$
206,967
92
Liquidity
and Capital Resources - continued
Other Commitments and Contingencies
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not 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 cost to us.
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 the underlying loans. As of September 30, 2019, the aggregate dollar amount of these guarantees and master leases is approximately $978,000,000.
As of September 30, 2019, $15,880,000of letters of credit was outstanding under one of our unsecured revolving credit facilities. Our unsecured revolving credit facilities contain financial covenants that require us to maintain minimum interest rate 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 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.
The joint venture in which we own a 95.0% ownership interest was designated by ESD, an entity of New York State, to develop the Farley Office and Retail Building. 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.
As of September 30, 2019, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $15,400,000.
As of September
30, 2019, we have construction commitments aggregating approximately $746,000,000.
93
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 per share are disclosed in Note 20 – Income Per Share/Income Per Class A Unit, in our consolidated financial statements on page 45 of this Quarterly Report on Form 10-Q.
In accordance with the NAREIT December 2018 restated definition of FFO, we have elected to exclude the mark-to-market adjustments of marketable equity securities from the calculation of FFO. FFO for the three months ended September 30, 2018 has been adjusted to exclude the $7,966,000, or $0.04 per share, decrease in fair value of
marketable equity securities previously reported. FFO for the nine months ended September 30, 2018 has been adjusted to exclude the $26,602,000, or $0.13 per share, decrease in fair value of marketable equity securities previously reported.
FFO attributable to common shareholders plus assumed conversions was $279,509,000, or $1.46 per diluted share for the three months ended September 30, 2019, compared to $189,987,000, or $0.99 per diluted share, for the prior year’s three months. FFO attributable to common shareholders plus assumed conversions was $691,522,000,
or $3.62 per diluted share for the nine months endedSeptember 30, 2019, compared to $519,640,000, or $2.72 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”.
94
Funds From Operations (“FFO”)
- continued
Below is a reconciliation of net income attributable to common shareholders to FFO attributable to common shareholders plus assumed conversions for the three and nine months endedSeptember 30, 2019 and 2018.
Proportionate
share of adjustments to equity in net income of partially owned entities to arrive at FFO:
Depreciation and amortization of real property
37,696
23,688
97,317
77,282
Net
gains on sale of real estate
—
(3,421
)
—
(3,998
)
Decrease in fair value of marketable securities
291
267
1,988
1,801
(46,435
)
(713
)
(2,363,067
)
250,772
Noncontrolling
interests' share of above adjustments
3,024
40
149,957
(15,517
)
FFO adjustments, net
$
(43,411
)
$
(673
)
$
(2,213,110
)
$
235,255
FFO
attributable to common shareholders
$
279,495
$
189,972
$
691,479
$
519,593
Convertible
preferred share dividends
14
15
43
47
FFO attributable to common shareholders plus assumed conversions
$
279,509
$
189,987
$
691,522
$
519,640
Per
diluted share
$
1.46
$
0.99
$
3.62
$
2.72
Reconciliation
of Weighted Average Shares
Weighted average common shares outstanding
190,814
190,245
190,762
190,176
Effect
of dilutive securities:
Employee stock options and restricted share awards
176
1,045
227
972
Convertible
preferred shares
34
37
35
38
Denominator for FFO per diluted share
191,024
191,327
191,024
191,186
95
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)
2019
2018
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
$
1,723,196
3.39%
$
17,232
$
3,292,382
4.31%
Fixed
rate
5,805,475
3.57%
—
6,603,465
3.65%
$
7,528,671
3.53%
17,232
$
9,895,847
3.87%
Pro
rata share of debt of non-consolidated entities(1)(2):
Variable rate
$
1,479,819
3.68%
14,798
$
1,237,388
4.06%
Fixed
rate
1,327,368
4.08%
—
1,382,068
4.19%
$
2,807,187
3.87%
14,798
$
2,619,456
4.13%
Noncontrolling
interests' share of consolidated subsidiaries
(338
)
Total change in annual net income attributable to the Operating Partnership
31,692
Noncontrolling
interests’ share of the Operating Partnership
(2,073
)
Total change in annual net income attributable to Vornado
$
29,619
Total
change in annual net income attributable to the Operating Partnership per diluted Class A unit
$
0.16
Total change in annual net income attributable to Vornado per diluted share
$
0.16
____________________
(1) As
a result of Toys “R” Us (“Toys”) filing a voluntary petition under chapter 11 of the United States Bankruptcy Code, we determined the Company no longer has the ability to exercise significant influence over Toys. Accordingly, we have excluded our share of Toys debt in 2018. The voluntary petition was declared effective in 2019 and our stock was canceled. As a result, we no longer hold an investment in Toys.
(2)
Our pro rata share of debt of non-consolidated entities as of September 30, 2019 and December 31, 2018 is net of our $63,409 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.
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of September 30, 2019, we have an interest rate swap on a $375,000,000 mortgage loan on 888 Seventh Avenue that swapped the rate from LIBOR plus 1.70% (3.73% as of September 30, 2019) to a fixed rate of 3.25% through December 2020; an interest rate swap on a $700,000,000 mortgage loan on 770 Broadway that swapped the rate from LIBOR plus
1.75% (3.79% as of September 30, 2019) to a fixed rate of 2.56% through September 2020; an interest rate swap on a $100,000,000 mortgage loan on 33-00 Northern Boulevard that swapped the rate from LIBOR plus 1.80% (3.85% as ofSeptember 30, 2019) to a fixed rate of 4.14% through January 2025; and an interest rate swap on our $750,000,000 unsecured term loan that swapped the rate fromLIBOR plus 1.00% (3.04% as of September 30, 2019) to a fixed rate of 3.87% through October 2023.
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, 2019, the estimated fair value of our consolidated debt was $7,595,000,000.
96
Item 4. Controls and Procedures
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, 2019, 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 and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, 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, 2019, 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 and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
97
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
There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
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, 2019, we issued 5,876 Class 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 $356,820 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.INS
—
XBRL Instance Document of Vornado Realty
Trust and Vornado Realty L.P. - the instance document does
not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.
101.SCH
—
XBRL Taxonomy Extension Schema of Vornado Realty Trust and Vornado Realty L.P.
101.CAL
—
XBRL
Taxonomy Extension Calculation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.DEF
—
XBRL Taxonomy Extension Definition Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.LAB
—
XBRL Taxonomy Extension Label Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.PRE
—
XBRL
Taxonomy Extension Presentation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
99
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)
100
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.
