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Vornado Realty LP – ‘10-K’ for 12/31/02

On:  Tuesday, 3/25/03, at 5:06pm ET   ·   For:  12/31/02   ·   Accession #:  1047469-3-10134   ·   File #:  0-22685

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/25/03  Vornado Realty LP                 10-K       12/31/02    3:611K                                   Merrill Corp/New/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                        164   1.20M 
 2: EX-21       Subsidiaries of the Registrant                         8     40K 
 3: EX-23       Consent of Experts or Counsel                          1      6K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
4Item 1. Business
"Merchandise Mart Properties
"Temperature Controlled Logistics
6Las Catalinas Mall
"Monmouth Mall
7Development and Redevelopment Projects
"Merchandise Mart
9Revolving Credit Agreement
"Notes and Mortgage Loans Receivable
12Office
"Alexander's
13Interstate Properties
"Competition
"Environmental Regulations
14Insurance
15Certain Factors That May Adversely Affect the Company's Business and Operations
16Bankruptcy of tenants may decrease the Company's revenues and available cash
23Item 2. Properties
"New York City Office Properties
26New Jersey
30CESCR Office Properties
31Retail Segment
33Former Bradlees locations
48Retail
50Other
51Hotel Pennsylvania
52Item 3. Legal Proceedings
"Primestone
53Item 4. Submission of Matters to a Vote of Security Holders
"Executive Officers of the Registrant
54Item 5. Market for the Registrant's Common Equity and Related Unitholders Matters
55Item 6. Selected Consolidated Financial Data
56Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Overview
57Critical Accounting Policies
"Real Estate
63Revenues
64Income applicable to Alexander's
65Income from partially-owned entities
66Interest and other investment income
"Interest and debt expense
"Gain on transfer of mortgages
"Gain on Sale of Kinzie Park Condominium Units
"Net gain on sale of air rights
67Primestone foreclosure and impairment losses
68Cumulative effect of change in accounting principle
"Minority interest
"Adjusted EBITDA
73After-tax net gain on sale of Park Laurel condominium units
"Gains on sale of real estate
78Leasing Activity
79Pro forma Operating Results - CESCR Acquisition
"Senior Unsecured Debt Covenant Compliance Ratios
83Liquidity and Capital Resources
"Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
84Acquisitions
87Investments in Partially-Owned Entities
94Item 7A. Quantitative and Qualitative Disclosures about Market Risk
95Item 8. Financial Statements and Supplementary Data
96Independent Auditors' Report
102Notes to Consolidated Financial Statements
1362001
"2000
141Item 9. Changes In and Disagreements With Independent Auditors on Accounting and Financial Disclosure
"Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters
142Material Features of Equity Compensation Arrangements Not Approved by Shareholders
"Item 13. Certain Relationships and Related Transactions
"Item 14. Controls and Procedures
143Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
144Signatures
149Tysons Dulles
152Total
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EXHIBIT INDEX ON PAGE 154 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: DECEMBER 31, 2002 Or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission File Number: 000-22635 VORNADO REALTY L.P. -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 13-3925979 -------------------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 888 SEVENTH AVENUE, NEW YORK, NEW YORK 10019 -------------------------------------------- ----------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (212) 894-7000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Class A Units of Limited Partnership Interest Series A Preferred Units of Limited Partnership Interest Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES /X/ NO / / There is no public market for the Class A units of limited partnership interest of Vornado Realty L.P. Based on the closing price of Vornado Realty Trust's common shares on June 28, 2002, which are issuable upon redemption of the Class A units, the aggregate market value of the Class A units held by non-affiliates of the registrant, i.e. by persons other than Vornado Realty Trust and the officers and trustees of Vornado Realty Trust, was approximately $985,068,000. DOCUMENTS INCORPORATED BY REFERENCE PART III: Portions of Vornado Realty Trust's Proxy Statement for Annual Meeting of Shareholders to be held on May 28, 2003. -1-
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TABLE OF CONTENTS [Enlarge/Download Table] ITEM PAGE ---- ---- PART I. 1. Business............................................................................... 4 2. Properties............................................................................. 23 3. Legal Proceedings...................................................................... 52 4. Submission of Matters to a Vote of Security Holders.................................... 53 Executive Officers of the Registrant................................................... 53 PART II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 54 6. Selected Consolidated Financial Data................................................... 55 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 56 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 94 8. Financial Statements and Supplementary Data............................................ 95 9. Changes In and Disagreements With Independent Auditors on Accounting and Financial Disclosure........................................................................... 141 PART III. 10. Directors and Executive Officers of the Registrant..................................... 141(1) 11. Executive Compensation................................................................. 141(1) 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.............................................................................. 141(1) 13. Certain Relationships and Related Transactions......................................... 142(1) 14. Controls and Procedures................................................................ 142 PART IV. 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 143 SIGNATURES................................................................................................. 144 CERTIFICATIONS............................................................................................. 145 ---------- (1) Vornado Realty Trust, the Registrant's general partner, will file a definitive Proxy Statement pursuant to Regulation 14A involving the election of directors with the Securities and Exchange Commission not later than 120 days after December 31, 2002, which is incorporated by reference herein. Information relating to Executive Officers of Vornado Realty Trust appears on page 53 of this Annual Report on Form 10-K. -2-
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FORWARD LOOKING STATEMENTS Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are not guarantees of performance. 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 "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions in this annual report on Form 10-K. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors, see "Item 1. Business - Certain Factors That May Adversely Affect the Company's Business and Operations" in this annual report on Form 10-K. 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 annual report on Form 10-K 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 after the date of this Form 10-K. -3-
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PART I ITEM 1. BUSINESS THE COMPANY Vornado Realty L.P. (the "Operating Partnership" and/or the "Company") is a Delaware limited partnership. Vornado Realty Trust ("Vornado"), a fully-integrated real estate investment trust ("REIT"), is the sole general partner of, and owned approximately 79% of the common limited partnership interest in, the Operating Partnership at February 3, 2003. All references to the "Company" refer to the Operating Partnership and its consolidated subsidiaries. The Company currently owns directly or indirectly: OFFICE PROPERTIES ("OFFICE"): (i) all or portions of 74 office properties aggregating approximately 27.7 million square feet in the New York City metropolitan area (primarily Manhattan) and in the Washington D.C. and Northern Virginia area; RETAIL PROPERTIES ("RETAIL"): (ii) 62 retail properties in six states and Puerto Rico aggregating approximately 12.5 million square feet, including 1.8 million square feet built by tenants on land leased from the Company; MERCHANDISE MART PROPERTIES: (iii) 8.6 million square feet of showroom and office space, including the 3.4 million square foot Merchandise Mart in Chicago; TEMPERATURE CONTROLLED LOGISTICS: (iv) a 60% interest in the Vornado Crescent Portland Partnership that owns 88 cold storage warehouses nationwide with an aggregate of approximately 441.5 million cubic feet of refrigerated space leased to AmeriCold Logistics; OTHER REAL ESTATE INVESTMENTS: (v) 33.1% of the outstanding common stock of Alexander's, Inc. ("Alexander's"); (vi) the Hotel Pennsylvania in New York City consisting of a hotel portion containing 1.0 million square feet with 1,700 rooms and a commercial portion containing .4 million square feet of retail and office space; (vii) a 21.7% interest in The Newkirk Master Limited Partnership which owns office, retail and industrial properties net leased primarily to credit rated tenants, and various debt interests in such properties; (viii) eight dry warehouse/industrial properties in New Jersey containing approximately 2.0 million square feet; and (ix) other investments, including interests in other real estate, marketable securities and loans and notes receivable. -4-
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OBJECTIVES AND STRATEGY The Company's business objective is to maximize unitholder value. The Company intends to achieve its business objective by continuing to pursue its investment philosophy and executing its operating strategies through: - Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit; - Investing in properties in select markets, such as New York City and Washington, D.C., where the Company believes there is high likelihood of capital appreciation; - Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents; - Investing in retail properties in select under-stored locations such as the New York City metropolitan area; - Investing in fully integrated operating companies that have a significant real estate component with qualified, experienced operating management and strong growth potential which can benefit from the Company's access to efficient capital; - Developing/redeveloping the Company's existing properties to increase returns and maximize value; and - On occasion, providing specialty financing to real estate companies. The Company expects to finance its growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets. 2002 ACQUISITIONS CHARLES E. SMITH COMMERCIAL REALTY L.P. On January 1, 2002, the Company completed the combination of Charles E. Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination, Vornado owned a 34% interest in CESCR. The consideration for the remaining 66% of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly issued Vornado Operating Partnership units and approximately $1 billion of debt (66% of CESCR's total debt). The purchase price paid by the Company was determined based on the weighted average closing price of the equity issued to CESCR unitholders for the period beginning two business days before and two business days after the date the acquisition was agreed to and announced on October 19, 2001. The Company also capitalized as part of the basis of the assets acquired approximately $32,000,000 for third party acquisition related costs, including advisory, legal and other professional fees that were contemplated at the time of the acquisition. The operations of CESCR are consolidated into the accounts of the Company beginning January 1, 2002. Prior to this date the Company accounted for its 34% interest on the equity method. See page 79 for unaudited pro forma financial information for the year ended December 31, 2001. CRYSTAL GATEWAY ONE On July 1, 2002, the Company acquired a 360,000 square foot office building from a limited partnership, which was approximately 50% owned by Mr. Robert H. Smith and Mr. Robert P. Kogod, trustees of the Company, and members of their families, in exchange for approximately 325,700 newly issued Vornado Operating Partnership units (valued at $13,679,000) and the assumption of $58,500,000 of debt. The building is located in the Crystal City complex in Arlington, Virginia where the Company already owns 24 office buildings containing over 6.9 million square feet, which it acquired on January 1, 2002, in connection with the Company's acquisition of CESCR. The operations of Crystal Gateway One are consolidated into the accounts of the Company from the date of acquisition. -5-
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LAS CATALINAS MALL On September 23, 2002, the Company increased its interest in the Las Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by acquiring the 50% of the mall and 25% of the Kmart anchor store it did not already own. The purchase price was $48,000,000, including $32,000,000 of indebtedness. The Las Catalinas Mall, which opened in 1997, contains 492,000 square feet, including a 123,000 square foot Kmart and a 138,000 square foot Sears owned by the tenant. Prior to September 23, 2002, the Company accounted for its investment on the equity method. Subsequent to this date the operations of Las Catalinas are consolidated into the accounts of the Company. MONMOUTH MALL On October 10, 2002, a joint venture in which the Company has a 50% interest acquired the Monmouth Mall, an enclosed super regional shopping center located in Eatontown, New Jersey containing approximately 1.5 million square feet, including four department stores, three of which aggregating 731,000 square feet are owned by the tenants. The purchase price was approximately $164,700,000, including transaction costs of $4,400,000. The Company made a $7,000,000 common equity investment in the venture and provided it with $23,500,000 of preferred equity yielding 14%. The venture financed the purchase of the Mall with $135,000,000 of floating rate debt at LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000,000, a three year term and two one-year extension options. The Company accounts for its investment on the equity method as the Company does not have unilateral control over the joint venture. Further details of the Company's acquisition activities are disclosed in Part II. Management's Discussion and Analysis of Financial Condition and Results of Operations. -6-
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DEVELOPMENT AND REDEVELOPMENT PROJECTS The following table sets forth certain information for development/redevelopment projects: ($ in millions) [Enlarge/Download Table] The Company's Share of --------------------------------------- Actual/ Actual/ Costs Expended Estimated Estimated in Year Ended Estimated Completion Project December 31, Costs to Date Cost 2002 Complete ----------- --------- -------------- --------- COMPLETED IN 2002: Office: GreenPoint site adjacent to One Penn Plaza - redevelopment of Spring 28,000 square feet of retail space................................ 2002 $ 10.6 $ 5.5 175 Lexington Avenue - construction of a 45,000 square foot building containing approximately 41,000 square feet of low income residential housing exchanged for 163,728 square Summer feet of air rights................................................ 2002 16.3 7.2 Retail: 435 Seventh Avenue - demolition of existing buildings and the construction of 43,000 square feet of retail space leased to Hennes & Mauritz.................................................. Fall 2002 21.7 15.0 Merchandise Mart: Wells Kinzie Garage - Chicago (50% interest) - 244,000 square foot Spring parking garage (746 parking spaces) adjacent to 400 North LaSalle. 2002 11.1 4.1 Other: Fort Lee, New Jersey (95% interest) - construction of a 41-story, 855,000 square foot high rise rental apartment complex containing Spring 538 apartments.................................................... 2002 126.9 12.2 -------- -------- $ 186.6 $ 44.0 ======== ======== IN PROCESS: Office: New York City: 640 Fifth Avenue - construction of additional 47,000 square feet of office space and redevelopment of existing building............... Fall 2003 $ 60.6 $ 16.8 $ 43.8 CESCR: Crystal City - construction of additional 57,000 square feet of retail space...................................................... Fall 2004 42.0 2.2 39.8 Retail: 4 Union Square South - redevelopment of 230,000 square foot building of which 48,000 square feet is leased to Whole Foods and 26,000 square feet is leased to Forever 21........................ Fall 2003 46.0 2.4 43.6 Merchandise Mart: 400 North LaSalle, Chicago (85% interest) - construction of 378,000 square foot high rise rental apartment complex containing 453 apartments.................................................... Fall 2003 77.3 37.6 39.7 Other: Penn Plaza Signage District - erection of up to 21 signs at various locations in the Penn Plaza District.............................. Spring 2005 28.0 2.4 24.0 -------- -------- -------- $ 253.9 $ 61.4 $ 190.9 ======== ======== ======== In addition to the projects noted above, the Company is in the process of redeveloping fifteen of its shopping centers, seven of which include locations previously leased to Bradlees. The total cost of this redevelopment program, which includes the demolition of existing buildings, site work and tenant improvements, is estimated to be approximately $40 million. The Company is also in the pre-development phase of a number of projects including: (i) retail space in the Penn Plaza area and at 715 Lexington Avenue, (ii) repositioning of the Hotel Pennsylvania and (iii) expansions of the Green Acres and Monmouth malls. There can be no assurance that the above projects will be commenced or will be successful. The capital requirements of Alexander's and Temperature Controlled Logistics are described in Item 2: Properties. -7-
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VORNADO OPERATING COMPANY ("VORNADO OPERATING") The Company and Vornado Operating are parties to certain agreements described below. AGREEMENT WITH VORNADO OPERATING The Company and Vornado Operating are parties to an Agreement pursuant to which, among other things, (i) the Company will under certain circumstances offer Vornado Operating an opportunity to become the lessee of certain real property owned now or in the future by the Company (under mutually satisfactory lease terms) and (ii) Vornado Operating will not make any real estate investment or other REIT-Qualified investment unless it first offers the Company the opportunity to make such investment and the Company has rejected that opportunity. Under the Agreement, the Company provides Vornado Operating with certain administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. For these services, Vornado Operating compensates the Company in an amount determined in good faith by the Company as the amount an unaffiliated third party would charge Vornado Operating for comparable services and reimburses the Company for certain costs incurred and paid to third parties on behalf of Vornado Operating. Pursuant to the Agreement, compensation for such services was approximately $330,000, $371,000, and $330,000 for the years ended December 31, 2002, 2001, and 2000. Vornado Operating and the Company each have the right to terminate the Agreement if the other party is in material default of the Agreement or upon 90 days written notice to the other party at any time after December 31, 2003. In addition, the Company has the right to terminate the Agreement upon a change in control of Vornado Operating. VORNADO OPERATING'S MANAGEMENT Messrs. Roth, Fascitelli, West and Wight are directors of Vornado Operating. Mr. Roth is also Chairman of the Board and Chief Executive Officer of Vornado Operating, Mr. Fascitelli is also President of Vornado Operating, and certain other members of the Company's senior management hold corresponding positions with Vornado Operating. TEMPERATURE CONTROLLED LOGISTICS BUSINESS On March 11, 1999, the Vornado Crescent Portland Partnership in which the Company has a 60% general partnership interest and Crescent Real Estate Equities has a 40% general partnership interest, sold all of the non-real estate assets of Temperature Controlled Logistics encompassing the operations of the temperature controlled business to a new partnership ("AmeriCold Logistics") owned 60% by Vornado Operating Company and 40% by Crescent Operating Inc. AmeriCold Logistics leases the underlying temperature controlled warehouses used in this business from the Vornado Crescent Portland Partnership ("the Landlord") which continues to own the real estate through its ownership of AmeriCold Realty Trust. The leases, as amended, generally have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on revenue AmeriCold Logistics receives from its customers. The contractual rent for 2002 was $150,000,000. The Landlord's share of annual maintenance capital expenditures is $9,500,000. In accordance with the leases, AmeriCold Logistics deferred payment of $32,248,000 of 2002 rent due to the Landlord, of which the Company's share was $19,349,000. Based on the joint venture's policy of recognizing rental income when earned and collection is assured or cash is received, the joint venture did not recognize this rent in the year ended December 31, 2002. At December 31, 2002, the Company's share of the joint venture's total deferred rent receivable from the tenant is $24,350,000. On December 31, 2001, the Landlord released the tenant from its obligation to pay $39,812,000 of rent deferred in 2001 and 2000, of which the Company's share was $23,887,000. This amount equaled the rent which was not recognized as income by the joint venture and accordingly had no profit and loss effect to the Company. -8-
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REVOLVING CREDIT AGREEMENT Vornado Operating was granted a $75,000,000 unsecured revolving credit facility from the Company which expires on December 31, 2004. Borrowings under the revolving credit facility bear interest at LIBOR plus 3%. The Company receives a commitment fee equal to 1% per annum on the average daily unused portion of the facility. No amortization is required to be paid under the revolving credit facility during its term. The revolving credit facility prohibits Vornado Operating from incurring indebtedness to third parties (other than certain purchase money debt and certain other exceptions) and prohibits Vornado Operating from paying dividends. As of December 31, 2002, $21,989,000 was outstanding under the revolving credit facility after the repayment of $9,500,000 by Vornado Operating, primarily from its share of the proceeds from the sale of AmeriCold's quarries to a new partnership owned 44% by the Company and 56% by Crescent Real Estate Equities. Vornado Operating has disclosed that in the aggregate its investments do not, and for the foreseeable future are not expected to, generate sufficient cash flow to pay all of its debts and expenses. Further, Vornado Operating states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent Real Estate Equities, will need to restructure the leases between the Landlord and the Tenant to provide additional cash flow to the Tenant (the Landlord has previously restructured the leases to provide additional cash flow to the Tenant). Management anticipates a further lease restructuring and the sale and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado Operating is expected to have a source to repay the debt under this facility, which may be extended. Since January 1, 2002, the Company has not recognized interest income on the debt under this facility. OTHER INVESTMENTS The Company's other investments are comprised of: [Enlarge/Download Table] ($ in thousands except per share/unit amounts) As of Other Real Estate Investments: December 31, 2002 ----------------- Carried at Equity: Monmouth Mall Joint Venture (1).................................... $ 31,416 Starwood Ceruzzi Joint Venture (2)................................. 24,959 Prime Group Realty L.P (3)......................................... 23,408 Consolidated: The Palisades Joint Venture (4).................................... 36,368 Student Housing (5)................................................ 5,881 ------------- $ 122,032 ============= Marketable Securities, including $29,212 of Capital Trust, Inc. ("Capital Trust") preferred securities (6)............................ $ 42,525 ============= Notes and Mortgage Loans Receivable: Dearborn Center (7)................................................ $ 23,392 Commonwealth Atlantic Properties, an affiliate of Lazard Freres Real Estate Investors L.L.C. ("CAPI") (8)........................ 41,200 Vornado Operating (see page 8 for further details)................. 21,989 ------------- $ 86,581 ============= The Company does not have direct or indirect control over its unconsolidated partially-owned entities as the Company's joint venture partners have shared Board/Management representation and authority, substantive participating rights on all significant business decisions, including acquisitions and dispositions of any real property assets, financing, operating and capital budgets and the hiring of a Chief Executive Officer and therefore does not consolidate their operations and financial position and applies the equity method of accounting in accordance with generally accepted accounting principles. The Company includes its share of partially-owned entities debt in reporting its exposure to a change in interest rates under Item 7A "Quantitative and Qualitative Disclosures about Market Risk" and in its ratio of debt-to-enterprise value as disclosed on page 96. See Note 4 - "Investments in Partially-Owned Entities" to the consolidated financial statements in this annual report on Form 10-K for details by investment. ---------- See notes on following page. -9-
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(1) MONMOUTH MALL JOINT VENTURE On October 10, 2002, a joint venture in which the Company has a 50% interest acquired the Monmouth Mall, an enclosed super regional shopping center located in Eatontown, New Jersey containing approximately 1.5 million square feet, including four department stores, three of which aggregating 731,000 square feet are owned by the tenants. The purchase price was approximately $164,700, including transaction costs of $4,400. The Company made a $7,000 common equity investment in the venture and provided it with $23,500 of preferred equity yielding 14%. The venture financed the purchase of the Mall with $135,000 of floating rate debt at LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000, a three year term and two one-year extension options. (2) STARWOOD CERUZZI JOINT VENTURE The Starwood Ceruzzi Joint Venture was formed in 2000 by the Company, the 80% non-managing partner, and Starwood Ceruzzi, the 20% managing partner (which has equal Board and Management representation), to acquire fee and leasehold interests in properties formerly occupied by Hechinger Inc., a home improvement retailer which was liquidated. In the first quarter of 2000, the joint venture acquired two fee interests containing 210,000 square feet and four leasehold interests containing 400,000 square feet in properties located in Pennsylvania, Virginia, Maryland and Ohio. Of the two fee interests acquired, one of the fee interests was sold in March 2001 for $8,000, resulting in a gain of $1,744 (of which the Company's share was $1,395) and the other fee interest is available for sale or lease. One of the leasehold interests was net leased to Home Depot in 2002. Two of the other three properties were leased in 2002 to a supermarket tenant that has since filed for bankruptcy protection and rejected the leases. As such, the other three leasehold interests are currently vacant. The venture has no debt. (3) PRIME GROUP REALTY, L.P. On April 30, 2002, the Company and Cadim, inc. ("Cadim") acquired 7,944,893 Prime Group Realty L.P. partnership units at a foreclosure auction. The price paid for the units by application of a portion of Primestone's indebtedness to the Company and Cadim was $8.35 per unit, the April 30, 2002 closing price of shares of Prime Group Realty Trust ("PGE") on the New York Stock Exchange. On June 28, 2002, pursuant to the terms of the participation agreement, the Company transferred 3,972,447 of the partnership units to Cadim. In the second quarter of 2002, in accordance with foreclosure accounting, the Company recorded a loss on the Primestone foreclosure of $17,671 calculated based on (i) the acquisition price of the units and (ii) its valuation of the amounts realizable under the guarantees by affiliates of Primestone, as compared with the net carrying amount of the investment at April 30, 2002. In the third quarter of 2002, the Company recorded a $2,229 write-down on its investment based on costs expended to realize the value of the guarantees. Further, in the fourth quarter of 2002, the Company recorded a $15,857 write-down of its investment consisting of (i) $14,857 to adjust the carrying amount of the Prime Group units to $4.61 per unit, the closing price of PGE shares on December 31, 2002 on the New York Stock Exchange and (ii) $1,000 for estimated costs to realize the value of the guarantees. The Company considered the decline in the value of the units which are convertible into stock to be other than temporary as of December 31, 2002, based on the fact that the market value of the stock has been less than its cost for more than six months, the severity of the decline, market trends, the financial condition and near-term prospects of Prime Group and other relevant factors. At December 31, 2002, the Company's carrying amount of the investment was $23,408, of which $18,313 represents the carrying amount of the 3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100 represents the amount expected to be realized under the guarantees, partially offset by $1,005 representing the Company's share of Prime Group Realty's net loss through September 30, 2002 (see Note 4. Investments in and Advances to Partially-Owned Entities to the consolidated financial statements in this Form 10-K). Prior to April 30, 2002, this investment was in the form of a loan and was included in Notes and Mortgage Loans Receivable on the balance sheet. At February 3, 2003, the closing price of PGE shares on the New York Stock Exchange was $5.30 per share. The ultimate realization of the Company's investment will depend upon the future performance of the Chicago real estate market and the performance of PGE, as well as the ultimate realizable value of the net assets supporting the guarantees and the Company's ability to collect under the guarantees. In addition, the Company will continue to monitor this investment to determine whether additional write-downs are required based on (i) declines in value of the shares of PGE (for which the partnership units are exchangeable) which are "other than temporary" as used in accounting literature and (ii) the amount expected to be realized under the guarantees. (4) THE PALISADES JOINT VENTURE The Palisades Joint Venture was formed in 1999 to develop an 855,000 square foot high-rise residential tower in Fort Lee, New Jersey, containing 538 apartments. The joint venture agreement provides for the Company to contribute 95% of the equity and receive 75% of the net profit after a 10% preferred return. The development of the Palisades residential complex was substantially complete as of March 1, 2002. Accordingly, the Company placed the property into service on March 1, 2002 and discontinued the capitalization of interest and other property specific costs. As of December 31, 2002, the property, which is now in the lease-up phase, is 55% occupied (298 of the 538 total apartments have been leased). (5) STUDENT HOUSING In January 2000, the Company and its joint venture partner acquired a 252-unit student housing complex in Gainesville, Florida, for approximately $27,000. The Company has a 90% interest in the joint venture. (6) CAPITAL TRUST PREFERRED SECURITIES At December 31, 2002, the Company owns $30,000 of 8.25% step-up convertible junior subordinated debentures which are convertible into shares of Class A common stock of Capital Trust (NYSE:CT) at a conversion price of $7.00 per share. The securities are redeemable by Capital Trust, in whole or in part, on or after September 30, 2004. Mr. Roth, the Chairman and Chief Executive Officer of Vornado Realty Trust, is a member of the Board of Directors of Capital Trust, nominated by the Company. (7) DEARBORN CENTER The Company's investment of $23,392 represents a 38.5% interest in $60,758 funded of a $65,000 mezzanine loan to an entity whose sole asset is Dearborn Center, a 1.5 million square foot high-rise office tower under construction in Chicago. The entity is owned by Prime Group Realty L.P. and another investor. The Company is a member of a loan syndicate led by a money center bank. The proceeds of the loan are being used to finance the construction, and are subordinate to a $225,000 first mortgage. The loan is due January 21, 2004, three years from the date of the initial draw, and provides for a 1 year extension at the borrower's option (assuming net operating income at a specified level and a cash reserve sufficient to fund interest for the extension period). The loan bears interest at 12% per annum plus additional interest ranging from a minimum of 9.5% to a maximum of 11.5%. (8) CAPI In March 1999, in connection with the Company's acquisition of land under certain of the CESCR office properties from CAPI, the Company made a $41,200 recourse loan to CAPI, which matures in June 2004. Interest on the loan was 8.5% at December 31, 2002. The loan is secured by approximately 1,100,000 of the Company's Series E-1 convertible preferred units issued to CAPI. Each Series E-1 convertible preferred unit is convertible into 1.1364 shares of the Company's common shares. -10-
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FINANCING ACTIVITIES On June 24, 2002, the Company completed an offering of $500,000,000 aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007. Interest on the notes is payable semi-annually on June 15th and December 15th, commencing December 15, 2002. The net proceeds of approximately $496,300,000, were used to repay the mortgages on 350 North Orleans, Two Park Avenue, the Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into interest rate swaps that effectively converted the interest rate on the $500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate (2.15% at December 31, 2002). On February 25, 2002, Vornado sold 884,543 shares to a closed-end fund and 514,200 shares to a unit investment trust based on the closing price of $42.96 on the NYSE. The net proceeds to the Company were approximately $57,042,000. Further details of the Company's financing activities are disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of this annual report on Form 10-K. At December 31, 2002, the ratio of debt-to-enterprise value (market equity value plus debt less cash) was 45% based on debt of $4.966 billion, including the Company's proportionate share of debt of partially-owned non-consolidated entities. In the future, in connection with the Company's strategy for growth, this percentage may change. The Company's policy concerning the incurrence of debt may be reviewed and modified from time to time without the vote of shareholders. The Company may seek to obtain funds through equity offerings, debt financings or asset sales, although there is no express policy with respect thereto. The Company may offer units in exchange for property and may repurchase or otherwise re-acquire its shares or any other securities in the future. -11-
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ADJUSTED EBITDA BY SEGMENT AND REGION The following table sets forth the percentage of the Company's Adjusted EBITDA(1) by segment and region for the years ended December 31, 2002, 2001, and 2000. The pro forma column gives effect to the January 1, 2002 acquisition by the Company of the remaining 66% interest in CESCR described previously, as if it had occurred on January 1, 2001. [Enlarge/Download Table] PERCENTAGE OF ADJUSTED EBITDA(1) --------------------------------------------- Years Ended December 31, --------------------------------------------- SEGMENT 2002 2001 2001 2000 ------- ---- --------- ---- ---- Office: Pro forma New York........................................... 33% 31% 38% 35% CESCR.............................................. 29% 26% 10% 10% ---- ---- ---- ---- Total.............................................. 62% 57% 48% 45% Retail................................................ 12% 12% 15% 16% Merchandise Mart Properties........................... 12% 12% 14% 12% Temperature Controlled Logistics...................... 8% 8% 10% 13% Other................................................. 6% 11% 13% 14% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== === REGION ------ New York City metropolitan area....................... 41% 42% 52% 50% Washington, D.C./Northern Virginia metropolitan area.. 30% 26% 11% 12% Chicago............................................... 11% 9% 11% 9% Philadelphia metropolitan area........................ 1% --% 1% 3% Puerto Rico........................................... 1% 1% 2% 2% Other (2)............................................. 16% 22% 23% 24% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ==== ---------- (1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on sales of depreciable real estate, the effect of straight-lining of rent escalations, the amortization of below market leases net of above market leases and minority interest. Management considers Adjusted EBITDA a supplemental measure for making decisions and assessing the performance of its segments. Adjusted EBITDA is presented as a measure of "operating performance" which enables the reader to identify trends from period to period and may be used to compare "same store" operating performance to other companies, as well as providing a measure for determining funds available to service debt. Adjusted EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other includes the Temperature Controlled Logistics segment which has cold storage warehouses in 32 states. See page 44 for details. ALEXANDER'S The Company owns 33.1% of the outstanding shares of common stock of Alexander's. See "Interstate Properties" below for a description of Interstate's ownership of the Company and Alexander's. Alexander's has 6 properties (see Item 2. Properties--Alexander's). At December 31, 2002, the Company had loans receivable from Alexander's of $119,000,000, including $24,000,000 drawn under the $50,000,000 line of credit the Company granted to Alexander's on August 1, 2000. The maturity date of the loan and the line of credit is the earlier of January 3, 2006 or the date the Alexander's Lexington Avenue construction loan is repaid. The interest rate on the loan and line of credit, which resets quarterly using the same spread to treasuries as presently exists with a 3% floor for treasuries, is 12.48% at December 31, 2002. The Company believes that although Alexander's has disclosed that it does not have positive cash flow sufficient to repay this loan to the Company currently, Alexander's will be able to repay the loan upon the successful development and permanent financing of its Lexington Avenue development project or through asset sales. The Company manages, develops and leases the Alexander's properties under a management and development agreement and a leasing agreement pursuant to which the Company receives annual fees from Alexander's. Further, the Company has agreed to guarantee, among other things, the lien free, timely completion of the construction of Alexander's Lexington Avenue development project and funding of project costs in excess of a stated budget, if not funded by Alexander's. These agreements are described in Note 4 to the Company's consolidated financial statements. See Item 2 - "Properties" for a description of Alexander's properties and development and redevelopment projects. Messrs. Roth, Fascitelli, Mandelbaum, West and Wight, directors of the Company, are also directors of Alexander's. Mr. Roth is also Chief Executive Officer of Alexander's and Mr. Fascitelli is also President of Alexander's. Joseph Macnow, Executive Vice President - Finance and Administration and Chief Financial Officer of the Company, is also Executive Vice President - Finance and Administration and Chief Financial Officer of Alexander's. Alexander's common stock is listed on the New York Stock Exchange under the symbol "ALX". -12-
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INTERSTATE PROPERTIES As of December 31, 2002, Interstate Properties and its partners owned approximately 12.9% of the common shares of beneficial interest of the Company, 27.5% of Alexander's common stock and beneficial ownership of 7.9% of Vornado Operating (17.0% assuming redemption of 447,017 units of Vornado Operating that are redeemable for cash, or at Vornado Operating's election, common stock of Vornado Operating). Interstate Properties is a general partnership in which Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the partners. Mr. Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties, and the Chief Executive Officer and a director of both Alexander's and Vornado Operating. Mr. Wight is a trustee of the Company and is also a director of both Alexander's and Vornado Operating. Mr. Mandelbaum is a trustee of the Company and is also a director of Alexander's. COMPETITION The Company's business segments - Office, Retail, Merchandise Mart Properties, Temperature Controlled Logistics, and Other -- operate in highly competitive environments. The Company has a large concentration of properties in the New York City metropolitan area and in the Washington, D.C. and Northern Virginia area. The Company competes with a large number of real estate property owners and developers. Principal factors of competition are rent charged, attractiveness of location and quality and breadth of services provided. The Company's success depends upon, among other factors, trends of the national and local economies, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends. TENANTS WHICH ACCOUNTED FOR OVER 10% OF REVENUES The U.S. Government provides a significant proportion of the Company's revenues. In 2002, the U.S. Government accounted for 16.8% of the Office segment's revenues, and 11.4% of the Company's total revenues. The loss of this tenant would have a material adverse effect on the Office segment and the Company's finances as a whole. ENVIRONMENTAL REGULATIONS The Company's operations and properties are subject to various federal, state and local laws and regulations concerning the protection of the environment including air and water quality, hazardous or toxic substances and health and safety. Under certain of these environmental laws a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property. The owner or operator may also be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by those parties because of the contamination. These laws often impose liability without regard to whether the owner or operator knew of the release of the substances or caused the release. The presence of contamination or the failure to remediate contamination may impair the Company's ability to sell or lease real estate or to borrow using the real estate as collateral. Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (PCBs) and underground storage tanks are also regulated by federal and state laws. The Company could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or exposure at or from the Company's properties. Each of the Company's properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental condition. However, identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to the Company. -13-
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INSURANCE The Company carries comprehensive liability and all risk property insurance (fire, flood, extended coverage and rental loss insurance) with respect to its assets. The Company's all risk insurance policies in effect before September 11, 2001 did not expressly exclude coverage for hostile acts, except for acts of war. Since September 11, 2001, insurance companies have for the most part excluded terrorist acts from coverage in all risk policies. The Company has generally been unable to obtain all risk insurance which includes coverage for terrorist acts for policies it has renewed since September 11, 2001, for each of its businesses. In 2002, the Company obtained $200,000,000 of separate aggregate coverage for terrorist acts for each of its New York City Office, Washington, D.C. Office, Retail and Merchandise Mart businesses and $60,000,000 for its Temperature Controlled Logistics business. Therefore, the Company is at risk for financial loss in excess of these limits for terrorist acts (as defined), which loss could be material. The Company's debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its senior unsecured notes due 2007 and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that an exclusion from all risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments that allows the lenders to declare an event of default and accelerate repayment of debt. In the second quarter of 2002, the Company received correspondence from four lenders regarding terrorism insurance coverage, which the Company has responded to. In these letters the lenders took the position that under the agreements governing the loans provided by these lenders the Company was required to maintain terrorism insurance on the properties securing the various loans. The aggregate amount of borrowings under these loans as of December 31, 2002 was approximately $770.4 million, and there was no additional borrowing capacity. Subsequently, the Company obtained an aggregate of $360 million of separate coverage for "terrorist acts". To date, one of the lenders has acknowledged to the Company that it will not raise any further questions based on the Company's terrorism insurance coverage in place, and the other three lenders have not raised any further questions regarding the Company's insurance coverage. If lenders insist on greater coverage for these risks, it could adversely affect the Company's ability to finance and/or refinance its properties and to expand its portfolio. On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed into law. Under this new legislation, through 2004 (with a possible extension through 2005), regulated insurers must offer coverage in their commercial property and casualty policies (including existing policies) for losses resulting from defined "acts of terrorism". As a result of the legislation, in February 2003 the Company obtained $300 million of per occurrence coverage for terrorist acts for its New York City Office, Washington, D.C. Office and Merchandise Mart businesses, of which $240 million is for Certified Acts, as defined in the legislation. The Company maintains $200 million and $60 million of separate aggregate coverage that it had in 2002 for each of its Retail and Temperature Controlled Logistics businesses (which has been renewed as of January 1, 2003). The Company's current Retail property insurance carrier has advised the Company that there will be an additional premium of approximately $11,000 per month through the end of the policy term (June 30, 2003), for "Acts of Terrorism" coverage, as defined in the new legislation and that the situation may change upon renewal. CERTAIN ACTIVITIES Acquisitions and investments are not required to be based on specific allocation by type of property. The Company has historically held its properties for long-term investment; however, it is possible that properties in the portfolio may be sold in whole or in part, as circumstances warrant, from time to time. Further, the Company has not adopted a policy that limits the amount or percentage of assets which would be invested in a specific property. While the Company may seek the vote of its shareholders in connection with any particular material transaction, generally the Company's activities are reviewed and may be modified from time to time by its Board of Trustees without the vote of shareholders. EMPLOYEES As of December 31, 2002, the Company had approximately 1,422 employees consisting of 276 in the Office Properties segment (including 193 as a result of the CESCR acquisition), 58 in the Retail Properties segment, 476 in the Merchandise Mart Properties segment, 417 at the Hotel Pennsylvania and 195 corporate staff. This does not include employees of partially-owned entities. SEGMENT DATA The Company operates in four business segments: Office Properties, Retail Properties, Merchandise Mart Properties and Temperature Controlled Logistics. The Company engages in no foreign operations. Information related to the Company's business segments for the years 2002, 2001 and 2000 is set forth in Note 17 to the Company's consolidated financial statements in this annual report on Form 10-K. -14-
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The Company's principal executive offices are located at 888 Seventh Avenue, New York, New York 10019; telephone (212) 894-7000. INTERNET ACCESS Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as Reports on Forms 3, 4 and 5 regarding Officers, Trustees or 10% Beneficial Owners of the Company, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934 are available free of charge through the Company's website (www.vno.com) as soon as reasonably practicable after the Company electronically files the material with, or furnishes it to, the Securities and Exchange Commission. CERTAIN FACTORS THAT MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS AND OPERATIONS Set forth below are certain factors that may adversely affect the Company's business and operations. REAL ESTATE INVESTMENTS' VALUE AND INCOME FLUCTUATE DUE TO VARIOUS FACTORS. THE VALUE OF REAL ESTATE FLUCTUATES DEPENDING ON CONDITIONS IN THE GENERAL ECONOMY AND THE REAL ESTATE BUSINESS. THESE CONDITIONS MAY ALSO LIMIT THE COMPANY'S REVENUES AND AVAILABLE CASH. The factors that affect the value of the Company's real estate include, among other things, national, regional and local economic conditions; consequences of any armed conflict involving, or terrorist attack against, the United States; the Company's ability to secure adequate insurance; local conditions such as an oversupply of space or a reduction in demand for real estate in the area; competition from other available space; whether tenants consider a property attractive; the financial condition of the Company's tenants, including the extent of tenant bankruptcies or defaults; whether the Company is able to pass some or all of any increased operating costs it experiences through to tenants; how well the Company manages its properties; increased interest rates; increases in real estate taxes and other expenses; decreases in market rental rates; the timing and costs associated with property improvements and rentals; changes in taxation or zoning laws; government regulations; availability of financing on acceptable terms or at all; potential liability under environmental or other laws or regulations; and general competitive factors. The rents the Company receives and the occupancy levels at its properties may decline as a result of adverse changes in any of these factors. If the Company's rental revenues decline, it generally would expect to have less cash available to distribute to its security holders. In addition, some of the Company's major expenses, including mortgage payments, real estate taxes and maintenance costs, generally do not decline when the related rents decline. If rents decline while costs remain the same, the Company's income and funds available for distribution to its security holders would decline. THE COMPANY DEPENDS ON LEASING SPACE TO TENANTS ON ECONOMICALLY FAVORABLE TERMS AND COLLECTING RENT FROM ITS TENANTS, WHO MAY NOT BE ABLE TO PAY. The Company's financial results depend on leasing space in its properties to tenants on economically favorable terms. In addition, because substantially all of the Company's income comes from rentals of real property, its income and funds available for distribution to its security holders will decrease if a significant number of its tenants cannot pay their rent. If a tenant does not pay its rent, the Company might not be able to enforce its rights as landlord without delays and might incur substantial legal costs. For information regarding the bankruptcy of the Company's tenants, see "--Bankruptcy of tenants may decrease the Company's revenues and available cash" below. -15-
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BANKRUPTCY OF TENANTS MAY DECREASE THE COMPANY'S REVENUES AND AVAILABLE CASH. A number of companies, including some of the Company's tenants, have declared bankruptcy in recent years, and other tenants may declare bankruptcy or become insolvent in the future. If a major tenant declares bankruptcy or becomes insolvent, the rental property where it leases space may have lower revenues and operational difficulties, and, in the case of the Company's shopping centers, the Company may have difficulty leasing the remainder of the affected property. The Company's leases generally do not contain restrictions designed to ensure the creditworthiness of its tenants. As a result, the bankruptcy or insolvency of a major tenant could result in a lower level of funds from operations available for distribution to the Company's security holders. U.S. Airways Group Inc. leases 296,000 square feet from the Company for its headquarters in Washington, D.C. U.S. Airways has been adversely affected by the downturn in air travel as a result of the terrorist attacks and economic decline. On August 11, 2002, US Airways filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Effective January 1, 2003, the Company agreed to amend its lease with US Airways at Crystal City to (i) reduce the tenant's space by 90,732 square feet to 205,600 square feet (ii) reduce the annual escalated rent from $36.00 to $29.75 per square foot with 2.5% annual base rent escalations, (iii) provide the tenant with up to $1,200,000 of tenant allowances and (iv) loan the tenant up to $1,000,000 at 9% per annum for additional tenant improvements which is to be repaid over the lease term. This lease modification is subject to a confirmed plan of reorganization by the Bankruptcy Court. In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced that it overstated its 2002 and 2001 earnings by at least $500 million and is under investigation by the U.S. Justice Department and Securities and Exchange Commission. See "Item 2. Properties - Retail Segment - Former Bradlees locations" for information about former Bradlees leases guaranteed by Stop & Shop. The Company cannot predict what effect, if any, this situation may have on Stop & Shop's ability to satisfy its obligation under the Bradlees guarantees and rent for existing Stop & Shop leases aggregating approximately $10.5 million per annum. The risk that some of the Company's tenants may declare bankruptcy is higher because of the September 11, 2001 terrorist attacks and the resulting decline in the economy. SOME OF THE COMPANY'S POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE. For a discussion of risks related to the Company's insurance coverage, see "Item 1. Business - Insurance." THE COMPANY MAY ACQUIRE OR DEVELOP NEW PROPERTIES, AND THIS MAY CREATE RISKS. The Company may acquire or develop properties or acquire other real estate companies when it believes that an acquisition or development is consistent with its business strategies. The Company may not, however, succeed in consummating desired acquisitions or in completing developments on time or within its budget. The Company also might not succeed in leasing newly developed or acquired properties at rents sufficient to cover their costs of acquisition or development and operations. The Company has experienced rapid growth in recent years, increasing its total assets from approximately $565,000,000 at December 31, 1996 to approximately $9 billion at December 31, 2002. This growth included the acquisition of Charles E. Smith Commercial Realty L.P. on January 1, 2002, which increased the Company's total assets as of that date by $2,506,000,000, of which $1,758,000,000 (66%) is attributable to the acquisition of assets and $748,000,000 (34%) is attributable to Charles E. Smith Commercial Realty L.P. becoming a wholly owned subsidiary of the Operating Partnership and therefore being consolidated rather than accounted for under the equity method. The Company may not be able to maintain a similar rate of growth in the future or manage its past and any future growth effectively. The Company's failure to do so may have a material adverse effect on its financial condition and results of operations. Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management's attention. THE COMPANY MAY NOT BE PERMITTED TO DISPOSE OF CERTAIN PROPERTIES OR PAY DOWN THE DEBT ASSOCIATED WITH THOSE PROPERTIES WHEN IT MIGHT OTHERWISE DESIRE TO DO SO WITHOUT INCURRING ADDITIONAL COSTS. As part of an acquisition of a property, the Company may agree with the seller that it will not dispose of the acquired properties or reduce the mortgage indebtedness on them for significant periods of time unless it pays certain of the resulting tax costs of the seller. These agreements could result in the Company holding on to properties that it would otherwise sell and not paying down or refinancing indebtedness that it would otherwise pay down or refinance. -16-
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IT MAY BE DIFFICULT TO BUY AND SELL REAL ESTATE QUICKLY, AND TRANSFER RESTRICTIONS APPLY TO SOME OF THE COMPANY'S MORTGAGED PROPERTIES. Equity real estate investments are relatively difficult to buy and sell quickly. The Company therefore has limited ability to vary its portfolio promptly in response to changes in economic or other conditions. Some of the Company's properties are mortgaged to secure payment of indebtedness. If the Company is unable to meet its mortgage payments, the lender could foreclose on the properties and the Company could incur a loss. In addition, if the Company wishes to dispose of one or more of the mortgaged properties, it might not be able to obtain release of the lien on the mortgaged property. If a lender forecloses on a mortgaged property or if a mortgage lien prevents the Company from selling a property, its funds available for distribution to its security holders could decline. For information relating to the mortgages on the Company's properties, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the notes to the Company's consolidated financial statements in this annual report on Form 10-K. A SIGNIFICANT PROPORTION OF THE COMPANY'S PROPERTIES ARE IN THE NEW YORK CITY/NEW JERSEY AND WASHINGTON, D.C. METROPOLITAN AREAS AND ARE AFFECTED BY THE ECONOMIC CYCLES AND RISKS INHERENT TO THOSE REGIONS. During 2002, 71% of the Company's Adjusted EBITDA came from properties located in New Jersey and the New York City and Washington, D.C. metropolitan areas. The Company may continue to concentrate a significant portion of its future acquisitions in New Jersey and the New York City and Washington, D.C. metropolitan areas. Like other real estate markets, the real estate markets in these areas have experienced economic downturns in the past, and the Company cannot predict how the current economic conditions will impact these markets in both the short and long term. Further declines in the economy or a decline in the real estate markets in these areas could hurt the Company's financial performance and the value of its properties. The factors affecting economic conditions in these regions include: business layoffs or downsizing; industry slowdowns; relocations of businesses; changing demographics; increased telecommuting and use of alternative work places; financial performance and productivity of the publishing, advertising, financial, technology, retail, insurance and real estate industries; infrastructure quality; and any oversupply of or reduced demand for real estate. It is impossible for the Company to assess the future effects of the current uncertain trends in the economic and investment climates of the New York City/New Jersey and Washington, D.C. regions, and more generally of the United States, on the real estate markets in these areas. If these conditions persist, they may adversely affect the Company's businesses and future profitability. ON JANUARY 1, 2002, THE COMPANY COMPLETED THE ACQUISITION OF THE 66% INTEREST IN CHARLES E. SMITH COMMERCIAL REALTY L.P. THAT IT DID NOT PREVIOUSLY OWN. THE TERMS OF THE MERGER RESTRICT THE COMPANY'S ABILITY TO SELL OR OTHERWISE DISPOSE OF, OR TO FINANCE OR REFINANCE, THE PROPERTIES FORMERLY OWNED BY CHARLES E. SMITH COMMERCIAL REALTY L.P., WHICH COULD RESULT IN THE COMPANY'S INABILITY TO SELL THESE PROPERTIES AT AN OPPORTUNE TIME AND INCREASED COSTS TO THE COMPANY. The Company has agreed to restrictions on its ability to sell, finance, refinance and, in some instances, pay down existing financing on the Charles E. Smith Commercial Realty L.P. properties for a period of up to 20 years, under a tax reporting and protection agreement that the Company entered into at the closing of the merger. This agreement prohibits the Company from taking these actions unless the Operating Partnership also pays the contributing partners based on their tax liabilities as a result of the sale. These arrangements may significantly reduce the Company's ability to sell, finance or repay indebtedness secured by the subject properties or assets. In addition, subject to limited exceptions, the Company is restricted from selling or otherwise transferring or disposing of certain properties located in the Crystal City area of Arlington, Virginia or an interest in its division that manages the majority of its office properties in the Washington, D.C. metropolitan area, which we refer to as the "Smith Division," for a period of 12 years with respect to certain properties located in the Crystal City area of Arlington, Virginia or six years with respect to an interest in the Smith Division. These restrictions, which currently cover approximately 13.0 million square feet of space, could result in the Company's inability to sell these properties or an interest in the Smith Division at an opportune time and increased costs to the Company. THE COMPANY MAY INCUR COSTS TO COMPLY WITH ENVIRONMENTAL LAWS. For a discussion of risks related to the Company's compliance with environmental laws, see "Item 1. Business - Environmental Regulations." -17-
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REAL ESTATE IS A COMPETITIVE BUSINESS. For a discussion of risks related to competition in the real estate business, see "Item 1. Business - Competition." THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001 IN NEW YORK CITY AND THE WASHINGTON, D.C. AREA MAY ADVERSELY AFFECT THE VALUE OF THE COMPANY'S PROPERTIES AND ITS ABILITY TO GENERATE CASH FLOW. THERE MAY BE A DECREASE IN DEMAND FOR SPACE IN LARGE METROPOLITAN AREAS THAT ARE CONSIDERED AT RISK FOR FUTURE TERRORIST ATTACKS, AND THIS DECREASE MAY REDUCE THE COMPANY'S REVENUES FROM PROPERTY RENTALS. The Company has significant investments in large metropolitan areas, including the New York/New Jersey, Washington, D.C. and Chicago metropolitan areas. In the aftermath of the terrorist attacks, tenants in these areas may choose to relocate their business to less populated, lower-profile areas of the United States that are not as likely to be targets of future terrorist activity. This in turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in the Company's properties and force it to lease its properties on less favorable terms. As a result, the value of the Company's properties and the level of its revenues could decline materially. THE COMPANY'S INVESTMENT IN HOTEL PENNSYLVANIA IS DEPENDENT ON THE TRAVEL INDUSTRY, AND THAT INVESTMENT HAS BEEN AND MAY CONTINUE TO BE IMPACTED SEVERELY BY THE TERRORIST ATTACKS AND THE CURRENT ECONOMIC DOWNTURN. The Company's investment in Hotel Pennsylvania is directly dependent on the travel industry generally and the number of visitors to New York City in particular. Since September 11, 2001, there has been a substantial decline in travel and tourism generally, and in particular New York City. Accordingly, there has been a significant reduction in occupancy at Hotel Pennsylvania. As a result, revenues generated by this investment have been impacted severely by that decline, and the Company expects this impact on revenues to continue. ALL OF THE COMPANY'S TEMPERATURE CONTROLLED LOGISTICS WAREHOUSES ARE LEASED TO ONE TENANT, AND THAT TENANT IS EXPERIENCING OPERATING DIFFICULTIES. The Operating Partnership owns a 60% general partnership interest in a partnership, which we refer to as the "Vornado Crescent Portland Partnership," that owns 88 cold storage warehouses nationwide with an aggregate of approximately 441.5 million cubic feet of refrigerated, frozen and dry storage space. The Vornado Crescent Portland Partnership sold all of the non-real estate assets encompassing the operations of the temperature controlled business to a new partnership named AmeriCold Logistics, owned 60% by Vornado Operating Company, which we refer to as "Vornado Operating," and 40% by Crescent Operating Inc. AmeriCold Logistics leases the underlying temperature controlled warehouses used in this business from the Vornado Crescent Portland Partnership, which continues to own the real estate. During 2002, AmeriCold Logistics generated approximately 8% of the Company's Adjusted EBITDA. The leases, as amended, generally have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on revenue AmeriCold Logistics receives from its customers. The contractual rent for 2002 was $150,000,000. The Landlord's share of annual maintenance capital expenditures is $9,500,000. In accordance with the leases, AmeriCold Logistics deferred payment of $32,248,000 of 2002 rent due to the Landlord, of which the Company's share was $19,349,000. Based on the joint venture's policy of recognizing rental income when earned and collection is assured or cash is received, the joint venture did not recognize this rent in the year ended December 31, 2002. At December 31, 2002, the Company's share of the joint venture's total deferred rent receivable from the tenant is $24,350,000. On December 31, 2001, the Landlord released the tenant from its obligation to pay $39,812,000 of rent deferred in 2001 and 2000, of which the Company's share was $23,887,000. This amount equaled the rent which was not recognized as income by the joint venture and accordingly had no profit and loss effect to the Company. To the extent that the operations of AmeriCold Logistics may affect its ability to pay rent, including percentage rent due under the leases, the Company indirectly bears the risks associated with AmeriCold Logistics' cold storage business. The cold storage business is extremely competitive. Factors affecting AmeriCold Logistics' ability to compete include, among others, (a) warehouse locations, (b) customer mix and (c) availability, quality and price of additional services. -18-
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THE COMPANY MAY NOT BE ABLE TO OBTAIN CAPITAL TO MAKE INVESTMENTS. Vornado depends primarily on external financing to fund the growth of its business. This is because one of the requirements of the Internal Revenue Code of 1986, as amended, for a REIT is that it distributes 90% of its net taxable income, excluding net capital gains, to its shareholders. The Company's partnership agreement requires it to make reasonable efforts to make distributions that are sufficient for Vornado to meet its 90% distribution requirement. The Company's access to debt or equity financing depends on banks' willingness to lend and on conditions in the capital markets. The Company and other companies in the real estate industry have experienced limited availability of bank loans and capital markets financing from time to time. Although the Company believes that it will be able to finance any investments it may wish to make in the foreseeable future, financing other than what it already has available might not be available on acceptable terms. For information about the Company's available sources of funds, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the notes to the consolidated financial statements in this annual report on Form 10-K. THE COMPANY'S OWNERSHIP STRUCTURE AND RELATED-PARTY TRANSACTIONS MAY GIVE RISE TO CONFLICTS OF INTEREST. STEVEN ROTH AND INTERSTATE PROPERTIES MAY EXERCISE SUBSTANTIAL INFLUENCE OVER THE COMPANY. THEY AND SOME OF VORNADO'S OTHER TRUSTEES AND OFFICERS HAVE INTERESTS OR POSITIONS IN OTHER ENTITIES THAT MAY COMPETE WITH THE COMPANY. As of December 31, 2002, Interstate Properties, a New Jersey general partnership, and its partners owned approximately 12.9% of the common shares of Vornado, the Company's general partner, and approximately 27.5% of the common stock of Alexander's, Inc. and beneficially owned approximately 7.9% of the common stock of Vornado Operating (approximately 17.0% assuming redemption of 447,017 units of Vornado Operating L.P., the operating subsidiary of Vornado Operating, that are beneficially owned by Interstate Properties and redeemable for common stock of Vornado Operating). Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the three partners of Interstate Properties. Mr. Roth is the Chairman of the Board and Chief Executive Officer of Vornado, the managing general partner of Interstate Properties, the Chief Executive Officer and a director of Alexander's and the Chairman of the Board and Chief Executive Officer of Vornado Operating. Mr. Wight is a trustee of Vornado and is also a director of both Alexander's and Vornado Operating. Mr. Mandelbaum is a trustee of Vornado and is also a director of Alexander's. As of December 31, 2002, the Company owned 33.1% of the outstanding common stock of Alexander's. Alexander's is a REIT engaged in leasing, managing, developing and redeveloping properties, focusing primarily on the locations where its department stores operated before they ceased operations in 1992. Alexander's has six properties, which are located in the New York City metropolitan area. Mr. Roth and Michael D. Fascitelli, the President and a trustee of Vornado, are directors of Alexander's. Messrs. Mandelbaum, Richard R. West and Wight are trustees of Vornado and are also directors of Alexander's. Because of these overlapping interests, Mr. Roth and Interstate Properties may have substantial influence over Vornado, Alexander's and Vornado Operating and on the outcome of any matters submitted to Vornado, Alexander's or Vornado Operating's shareholders for approval. In addition, certain decisions concerning the Company's operations or financial structure may present conflicts of interest among Messrs. Roth, Mandelbaum and Wight and Interstate Properties and the Company's other security holders. In addition, Mr. Roth and Interstate Properties may in the future engage in a wide variety of activities in the real estate business which may result in conflicts of interest with respect to matters affecting the Company, Alexander's or Vornado Operating, such as which of these entities or persons, if any, may take advantage of potential business opportunities, the business focus of these entities, the types of properties and geographic locations in which these entities make investments, potential competition between business activities conducted, or sought to be conducted, by the Company, Interstate Properties, Alexander's and Vornado Operating, competition for properties and tenants, possible corporate transactions such as acquisitions and other strategic decisions affecting the future of these entities. The Company currently manages and leases the real estate assets of Interstate Properties under a management agreement for which the Company receives an annual fee equal to 4% of base rent and percentage rent and certain other commissions. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on 60 days' notice at the end of the term. The Company earned $1,655,000 and $1,450,000 of management fees -19-
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under the management agreement for the years ended December 31, 2001 and 2002. Because the Company and Interstate Properties are controlled by the same persons, as described above, the terms of the management agreement and any future agreements between the Company and Interstate Properties may not be comparable to those the Company could have negotiated with an unaffiliated third party. THE COMPANY ENGAGES IN TRANSACTIONS WITH VORNADO OPERATING ON TERMS THAT MAY OR MAY NOT BE COMPARABLE TO THOSE IT COULD NEGOTIATE WITH UNAFFILIATED THIRD PARTIES. In October 1998, Vornado Operating was spun off from the Company in order to own assets that the Company could not itself own and conduct activities that the Company could not itself conduct. In addition to being trustees of Vornado, the Company's general partner, Messrs. Roth, Fascitelli, West and Wight are directors of Vornado Operating. Mr. Roth is also Chairman of the Board and Chief Executive Officer of Vornado Operating, Mr. Fascitelli is also President of Vornado Operating, and certain other members of Vornado's senior management hold corresponding positions with Vornado Operating. The Operating Partnership entered into a $75,000,000 unsecured revolving credit facility with Vornado Operating that expires on December 31, 2004. Borrowings under the revolving credit agreement bear interest at LIBOR plus 3%. The Operating Partnership receives an annual commitment fee equal to 1% on the average daily unused portion of the facility. Vornado Operating is not required to pay any amortization under the revolving credit agreement during its term. The revolving credit agreement prohibits Vornado Operating from incurring indebtedness to third parties, other than certain purchase money debt and certain other exceptions, and prohibits Vornado Operating from paying dividends. As of December 31, 2002, $21,989,000 was outstanding under the revolving credit agreement. The Operating Partnership and Vornado Operating are parties to an agreement under which, among other things, (a) the Operating Partnership will offer Vornado Operating, under certain circumstances, an opportunity to become the lessee of certain real property owned now or in the future by the Operating Partnership under mutually satisfactory lease terms and (b) Vornado Operating will not make any real estate investment or other investments known as REIT-qualified investments unless it first offers the Operating Partnership the opportunity to make the investment and the Operating Partnership has rejected that opportunity. Under this agreement, the Operating Partnership provides Vornado Operating with administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. For these services, Vornado Operating compensates the Operating Partnership in an amount determined in good faith by the Operating Partnership as the amount an unaffiliated third party would charge Vornado Operating for comparable services and reimburses the Operating Partnership for certain costs incurred and paid to third parties on behalf of Vornado Operating. Under this agreement, compensation for these services was approximately $330,000, $371,000 and $330,000 for the years ended December 31, 2000, 2001 and 2002. Vornado Operating and the Operating Partnership each have the right to terminate this agreement if the other party is in material default of the agreement or upon 90 days' written notice to the other party at any time after December 31, 2003. In addition, the Operating Partnership has the right to terminate this agreement upon a change in control of Vornado Operating. Vornado Operating's restated certificate of incorporation specifies that one of its corporate purposes is to perform this agreement and, for so long as the agreement remains in effect, prohibits Vornado Operating from making any real estate investment or other REIT-qualified investment without first offering the opportunity to the Operating Partnership in the manner specified in this agreement. The Company and Vornado Operating may enter into additional transactions in the future. Because Vornado and Vornado Operating share common senior management and because a majority of Vornado's trustees also constitute the majority of the directors of Vornado Operating, the terms of the foregoing agreements and any future agreements between the Company and Vornado Operating may not be comparable to those the Company could have negotiated with an unaffiliated third party. -20-
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THERE MAY BE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ALEXANDER'S. As of December 31, 2002, the Company owned 33.1% of the outstanding common stock of Alexander's. Alexander's is a REIT engaged in leasing, managing, developing and redeveloping properties, focusing primarily on the locations where its department stores operated before they ceased operations in 1992. Alexander's has six properties. Interstate Properties, which is further described above, owned an additional 27.5% of the outstanding common stock of Alexander's as of December 31, 2002. Mr. Roth, Chairman of the Board and Chief Executive Officer of Vornado, the Company's general partner, is Chief Executive Officer and a director of Alexander's, and Mr. Fascitelli, President and a trustee of Vornado, is President and a director of Alexander's. Messrs. Mandelbaum, West and Wight, trustees of Vornado, are also directors of Alexander's. Alexander's common stock is listed on the New York Stock Exchange under the symbol "ALX." At December 31, 2002, the Operating Partnership had loans receivable from Alexander's of $119,000,000 at an interest rate of 12.48%. These loans mature on the earlier of January 3, 2006 or the date that Alexander's Lexington Avenue construction loan is repaid in full. The Operating Partnership manages, develops and leases the Alexander's properties under management and development agreements and leasing agreements under which the Operating Partnership receives annual fees from Alexander's. These agreements have a one-year term expiring in March of each year, except that the Lexington Avenue management and development agreements have a term lasting until substantial completion of development of the Lexington Avenue property, and are all automatically renewable. Because Vornado and Alexander's share common senior management and because a majority of the trustees of Vornado also constitute the majority of the directors of Alexander's, the terms of the foregoing agreements and any future agreements between the Company and Alexander's may not be comparable to those the Company could have negotiated with an unaffiliated third party. For a description of Interstate Properties' ownership of Vornado, Vornado Operating and Alexander's, see "--Steven Roth and Interstate Properties may exercise substantial influence over the Company. They and some of Vornado's other trustees and officers have interests or positions in other entities that may compete with the Company" above. ARCHSTONE-SMITH TRUST PROVIDES SERVICES TO THE COMPANY UNDER AGREEMENTS THAT WERE NOT NEGOTIATED AT ARM'S LENGTH. The Company has agreements with Archstone-Smith Trust under which the Company leases office space to Archstone-Smith Trust and shares the cost of certain office-related services with it that were not negotiated at arm's length. These agreements were entered into by Charles E. Smith Commercial Realty in 1997, before the Company's January 1, 2002 acquisition of Charles E. Smith Commercial Realty, at a time when Mr. Smith and Mr. Kogod were in control of both Charles E. Smith Commercial and the Charles E. Smith Residential Division of Archstone-Smith. Mr. Smith and Mr. Kogod, who became members of Vornado's board of trustees on January 1, 2002, are also trustees and shareholders of Archstone-Smith Trust. THE COMPANY'S ORGANIZATIONAL AND FINANCIAL STRUCTURE GIVES RISE TO OPERATIONAL AND FINANCIAL RISKS. THE COMPANY DEPENDS ON ITS SUBSIDIARIES' DIVIDENDS AND DISTRIBUTIONS, AND THESE SUBSIDIARIES' CREDITORS AND PREFERRED SECURITY HOLDERS ARE ENTITLED TO PAYMENT OF AMOUNTS PAYABLE TO THEM BY THE SUBSIDIARIES BEFORE THE SUBSIDIARIES MAY PAY ANY DIVIDENDS OR DISTRIBUTIONS TO THE COMPANY. The Operating Partnership holds substantially all of its properties and assets through subsidiaries. The Operating Partnership therefore depends for substantially all of its cash flow on cash distributions to it by its subsidiaries. The creditors of each subsidiary are entitled to payment of that subsidiary's obligations to them, when due and payable, before distributions may be made by that subsidiary to the Company. Thus, the Operating Partnership's ability to make distributions to holders of its securities, including its notes, depends on its subsidiaries' ability first to satisfy their obligations to their creditors and then to make distributions to the Operating Partnership. In addition, the Company may participate in any distribution of the assets of any of its subsidiaries upon the liquidation, reorganization or insolvency of the subsidiary, only after the claims of the creditors, including trade creditors, and preferred security holders, if any, of the subsidiary are satisfied. -21-
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THE COMPANY HAS INDEBTEDNESS, AND THIS INDEBTEDNESS MAY INCREASE. As of December 31, 2002, the Company had approximately $4.966 billion in total debt outstanding. The Company's ratio of total debt to total enterprise value was 45%. When we say "enterprise value" in the preceding sentence, we mean market equity value of the Company plus debt less cash. In the future, the Company may incur additional debt, and thus increase its ratio of total debt to total enterprise value, to finance acquisitions or property developments. The Indenture limits the Company's total outstanding debt, as defined, other than certain debt between Vornado Realty Trust, Vornado Realty L.P. or a subsidiary of either of them, to 60% of total assets, as defined, and also requires any entity resulting from certain business combinations with the Company to assume the Company's obligations on the notes under the Indenture, and that such business combinations not result in a default under the Indenture. Except for such limitations and requirements, the Indenture does not contain any provisions that would limit the Company's ability to incur indebtedness or that would afford its security holders protection in the event of: a highly leveraged or similar transaction involving us or any of our affiliates; a change of control of the Company; or a reorganization, restructuring, merger or similar transaction involving us or Vornado that may adversely affect the Company's security holders. LOSS OF THE COMPANY'S KEY PERSONNEL COULD HARM ITS OPERATIONS. The Company is dependent on the efforts of Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, and Michael D. Fascitelli, the President of Vornado. While the Company believes that it could find replacements for these key personnel, the loss of their services could harm its operations. -22-
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ITEM 2. PROPERTIES The Company currently owns, directly or indirectly, Office properties, Retail properties, Merchandise Mart properties and Temperature Controlled Logistics refrigerated warehouses. The Company also owns or has investments in Alexander's, Hotel Pennsylvania, The Newkirk Master Limited Partnership, and dry warehouses and industrial buildings. OFFICE SEGMENT The Company currently owns all or a portion of 74 office properties containing approximately 27.7 million square feet. Of these properties, 21 contain 14.3 million square feet and are located in the New York City metropolitan area (primarily Manhattan) (the "New York City Office Properties") and 53 contain 13.4 million square feet and are located in the Washington, D.C. and Northern Virginia area (the "CESCR Office Properties"). Prior to January 1, 2002, the Company owned a 34% interest in CESCR. On January 1, 2002, the Company acquired the remaining 66% interest. The following data on pages 23 to 26 covers the New York City Office Properties. The CESCR Office Properties are described on pages 27 to 30. NEW YORK CITY OFFICE PROPERTIES: The New York City Office Properties contain: (i) 13,164,000 square feet of office space, (ii) 805,000 square feet of retail space and (iii) 332,000 square feet of garage space (6 garages). The following table sets forth the percentage of the New York City Office Properties 2002 revenue by tenants' industry: [Download Table] Industry Percentage -------- ---------- Retail...................... 10% Publishing.................. 9% Government.................. 6% Media and Entertainment..... 6% Legal....................... 6% Insurance................... 5% Technology.................. 5% Finance..................... 4% Pharmaceuticals............. 4% Service Contractors......... 4% Apparel..................... 3% Not-for-Profit.............. 3% Advertising................. 3% Bank Branches............... 3% Other....................... 29% --- 100% === The Company's New York City Office property lease terms generally range from five to seven years for smaller tenant spaces to as long as 20 years for major tenants. Leases typically provide for step-ups in rent periodically over the term of the lease and pass through to tenants the tenant's share of increases in real estate taxes and operating expenses over a base year. Electricity is provided to tenants on a submetered basis or included in rent based on surveys and adjusted for subsequent utility rate increases. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant's initial construction costs of its premises. No tenant in the New York City office segment accounted for more than 10% of the Company's total revenue. Below is a listing of tenants which accounted for 2% or more of the New York City Office Properties revenues in 2002: [Enlarge/Download Table] Percentage of New York City Percentage Square Feet 2002 Office Properties of Total Tenant Leased Revenues Revenues Revenues ------ ----------- ------------ ----------------- ---------- VNU Inc................................ 515,000 $ 18,750,000 3.4% 1.3% The McGraw-Hill Companies, Inc......... 518,000 18,714,000 3.3% 1.3% Sterling Winthrop, Inc.................. 429,000 18,453,000 3.3% 1.3% Madison Square Garden L.P./ Rainbow Media Holdings, Inc........................ 283,000 14,442,000 2.6% 1.0% -23-
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The following tables set forth lease expirations for the office and retail portions of the New York City Office Properties as of December 31, 2002, for each of the next 10 years assuming that none of the tenants exercise their renewal options. OFFICE SPACE: [Enlarge/Download Table] Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased ------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot ---- --------------- --------------- ------------------- ------------ ---------------- 2003...................... 151 565,000 4.7% $ 20,581,000 $ 36.44 2004...................... 111 780,000 6.5% 26,916,000 34.49 2005...................... 104 625,000 5.2% 24,813,000 39.69 2006...................... 79 1,138,000 9.5% 39,291,000 34.51 2007...................... 73 849,000 7.1% 32,963,000 38.84 2008...................... 46 1,175,000 (1) 9.8% 40,757,000 34.69 2009...................... 44 580,000 4.8% 21,980,000 37.91 2010...................... 37 1,328,000 11.1% 48,394,000 36.45 2011...................... 21 926,000 7.7% 44,851,000 48.43 2012...................... 17 849,000 7.1% 27,112,000 31.95 ---------- (1) Excludes 492,000 square feet at 909 Third Avenue leased to the U.S. Post Office. The annual escalated rent is $3,533,000 or $7.18 per square foot. The U.S. Post Office has 6 five-year renewal options remaining. RETAIL SPACE: [Enlarge/Download Table] Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased ------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot ---- --------------- --------------- ------------------- ------------ ---------------- 2003...................... 17 56,000 7.2% $ 4,440,000 $ 78.80 2004...................... 9 55,000 7.0% 6,448,000 117.77 2005...................... 6 30,000 3.8% 2,119,000 70.47 2006...................... 11 62,000 7.8% 2,849,000 46.30 2007...................... 4 10,000 1.2% 985,000 100.65 2008...................... 10 32,000 4.0% 1,600,000 50.60 2009...................... 7 23,000 2.9% 1,465,000 64.70 2010...................... 6 14,000 1.7% 2,249,000 164.15 2011...................... 3 9,000 1.1% 607,000 69.11 2012...................... 4 32,000 4.0% 951,000 30.05 The following table sets forth the occupancy rate and the average annual escalated rent per square foot for the New York City Office properties at the end of each of the past five years. [Download Table] Average Annual As of Rentable Escalated Rent December 31, Square Feet Occupancy Rate Per Square Foot ---------------------- ----------- -------------- --------------- 2002.................. 14,304,000 95.9% $ 37.36 2001.................. 14,300,000 97.4% 35.53 2000.................. 14,396,000 96.3% 32.18 1999.................. 14,028,000 89.8% 30.16 1998.................. 12,437,000 91.0% 28.14 -24-
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During 2002, 609,000 square feet of New York City office space was leased at a weighted average initial rent per square foot of $44.70. The Company's ownership interest in the leased square footage is 579,000 square feet at a weighted average initial rent per square foot of $44.82, a 30.0% increase over the weighted average escalated rent per square foot of $34.11 for the expiring leases. Following is the detail by building: [Download Table] 2002 Leases --------------------------------- Average Initial Rent Per Square Location Square Feet Foot(1) -------- ----------- --------------- One Penn Plaza...................... 151,000 $ 48.73 Two Penn Plaza...................... 87,000 44.27 150 East 58th Street................ 58,000 46.77 595 Madison Avenue.................. 54,000 54.06 40 Fulton Street.................... 51,000 30.00 Eleven Penn Plaza................... 40,000 41.93 888 Seventh Avenue.................. 40,000 52.12 20 Broad Street (60%)............... 34,000 28.39 90 Park Avenue...................... 32,000 50.22 866 UN Plaza........................ 31,000 40.28 330 Madison Avenue (25%)............ 21,000 52.76 Paramus............................. 10,000 17.47 ---------- Total.................................. 609,000 44.70 ========== Vornado's Ownership Interest........... 579,000 44.82 ========== ---------- (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. In addition to the office space noted above, the Company leased 48,000 square feet of retail space at a weighted average initial rent of $112.01 per square foot. Further, the Company leased 140,000 square feet of garage space at a weighted average initial rent per square foot of $19.02. -25-
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New York City Office Properties The following table sets forth the New York City Office Properties owned by the Company as of December 31, 2002: [Enlarge/Download Table] APPROXIMATE LEASABLE BUILDING SQUARE PERCENT ENCUMBRANCES LOCATION FEET LEASED (IN THOUSANDS) (2) --------------------------------------------- --------------- ------- ------------------ NEW YORK (Manhattan) One Penn Plaza (1)....................... 2,509,000 96.7% $ 275,000 Two Penn Plaza........................... 1,525,000 95.4% 154,669 909 Third Avenue (1)..................... 1,305,000 96.2% 105,837 770 Broadway............................. 1,046,000 99.6% 83,314 Eleven Penn Plaza........................ 1,024,000 97.0% 50,383 Two Park Avenue.......................... 964,000 98.6% -- 90 Park Avenue........................... 890,000 92.9% -- 888 Seventh Avenue (1)................... 877,000 92.1% 105,000 330 West 34th Street (1)................. 637,000 99.9% -- 1740 Broadway............................ 567,000 99.8% -- 150 East 58th Street (1)................. 559,000 88.8% -- 866 United Nations Plaza................. 391,000 98.1% 33,000 595 Madison (Fuller Building)............ 305,000 91.4% 70,345 640 Fifth Avenue......................... 268,000 99.4%(3) -- 40 Fulton Street......................... 238,000 85.4% -- 689 Fifth Avenue......................... 89,000 74.3% -- 7 West 34th Street....................... 424,000 100.0% -- 330 Madison Avenue (25% Interest)........ 784,000 88.8% 60,000 20 Broad Street (60% Interest) (1)....... 466,000 93.6% -- 825 Seventh Avenue (50% Interest)........ 165,000 100.0% 23,315 NEW JERSEY Paramus (1).............................. 128,000 91.7% -- -------------- ------------- TOTAL OFFICE BUILDINGS....................... 15,161,000 95.6% $ 960,863 ============== ============= VORNADO'S OWNERSHIP INTEREST................. 14,304,000 95.9% $ 904,206 ============== ============= ---------- (1) These properties are 100% ground leased with the exception of 150 East 58th Street where less than 10% is ground leased. (2) See Note 6 to the consolidated financial statements in this annual report on Form 10-K for further details. (3) Excludes portion of the building under development. -26-
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CHARLES E. SMITH COMMERCIAL REALTY ("CESCR") OFFICE PROPERTIES: CESCR owns 53 office buildings in the Washington D.C. and Northern Virginia area containing 13.4 million square feet. As of December 31, 2002, 45 percent of CESCR's property portfolio is leased to various agencies of the U.S. government (General Services Administration "GSA"). CESCR office leases are typically for three to five year terms, and may provide for extension options at either pre-negotiated or market rates. Most leases provide for annual rental escalations throughout the lease term, plus recovery of increases in real estate taxes and certain property operating expenses. Annual rental escalations are typically based upon either fixed percentage increases or the consumer price index. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant's initial construction costs of its premises. The following table sets forth the percentage of CESCR's Office properties 2002 revenue by tenants' industry: [Download Table] Industry Percentage ---------------------- ---------- United States Government ("GSA").......... 39% Government Contractors.................... 26% Transportation............................ 6% Communication............................. 4% Legal..................................... 4% Retail.................................... 4% Business Services......................... 4% Real Estate............................... 2% Trade Associations........................ 2% Printing/Publishing....................... 1% Health Services........................... 1% Other..................................... 7% ------- 100% ======= Below is a listing of tenants which accounted for 2% or more of the CESCR Office properties revenues during 2002: [Enlarge/Download Table] Percentage of CESCR Office Percentage Square Feet 2002 Properties of Total Tenant Leased Revenues Revenues Revenues ------ ----------- ------------- ------------- ---------- GSA (115 separate leases)................... 5,934,000 $ 164,009,000 39.0% 11.4% Science Applications International Corp..... 411,000 12,175,000 2.9% .8% US Airways, Inc (1)......................... 296,000 10,721,000 2.5% .7% ---------- (1) On August 11, 2002, US Airways filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Effective January 1, 2003, the Company agreed to amend its lease with US Airways at Crystal City to (i) reduce the tenant's space by 90,732 square feet to 205,600 square feet (ii) reduce the annual escalated rent from $36.00 to $29.75 per square foot with 2.5% annual base rent escalations, (iii) provide the tenant with up to $1,200,000 of tenant allowances and (iv) loan the tenant up to $1,000,000 at 9% per annum for additional tenant improvements which is to be repaid over the lease term. This lease modification is subject to a confirmed plan of reorganization by the Bankruptcy Court. -27-
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The following table sets forth as of December 31, 2002 CESCR lease expirations for each of the next 10 years, assuming that none of the tenants exercise their renewal options. [Enlarge/Download Table] Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased ------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot ---- --------------- --------------- ------------------- ------------ ---------------- 2003...................... 385 2,868,000(1) 22.9% $ 85,531,000 $ 29.82 2004...................... 223 3,147,000 25.1% 88,487,000 28.12 2005...................... 166 1,594,000 12.7% 46,441,000 29.14 2006...................... 117 1,290,000 10.3% 40,171,000 31.15 2007...................... 96 783,000 6.2% 23,339,000 29.81 2008...................... 33 577,000 4.6% 19,218,000 33.29 2009...................... 35 495,000 3.9% 12,258,000 24.78 2010...................... 30 264,000 2.1% 8,259,000 31.28 2011...................... 39 869,000 6.9% 25,559,000 29.40 2012...................... 21 500,000 4.0% 16,101,000 32.23 ---------- (1) Of the square feet expiring in 2003, 626,000 square feet has been renewed or is currently in negotiations to be renewed. Included in the above table are U.S. Patent and Trademark Office leases expiring from 2003 through 2006 as follows: 139,000 square feet in 2003, 1,179,000 square feet in 2004, 513,000 square feet in 2005 and 107,000 square feet in 2006. The U.S. Patent and Trademark Office is scheduled to relocate its offices beginning in the second half of 2004. The Company expects that all leases expiring prior to March 2004 will be extended or renewed to 2004 or 2005. The following table sets forth the occupancy rate and the average annual escalated rent per square foot for the CESCR properties at the end of each of the past five years: [Download Table] Average Annual As of Rentable Escalated Rent December 31, Square Feet Occupancy Rate Per Square Foot ---------------------- ----------- -------------- --------------- 2002.................. 13,395,000 93.6% $ 29.38 2001.................. 12,899,000 94.8% 28.59 2000.................. 12,495,000 97.9% 27.38 1999.................. 10,657,000 98.6% 26.46 1998.................. 10,657,000 97.8% 25.22 -28-
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During 2002, CESCR leased 2,025,047 square feet of space at a weighted average initial rent per square foot of $31.29, a 5.5% increase over the weighted average escalated rent per square foot of $29.66 for the expiring leases. Following is the detail by building and/or complex: [Download Table] Average Initial Rent Location Square Feet Per Square Foot (1) ---------------------- ----------- -------------------- 1101 17th Street................. 16,610 $ 34.72 1730 M Street.................... 20,675 31.18 1140 Connecticut Avenue.......... 45,694 33.14 1150 17th Street................. 76,383 35.24 Crystal Mall..................... 430 24.23 Crystal Plaza.................... 82,624 29.38 Crystal Square................... 308,229 32.81 Crystal Gateway.................. 213,541 31.84 Crystal Park..................... 662,464 32.58 1919 South Eads Street........... 7,904 32.27 Skylines......................... 247,566 25.60 Arlington Plaza.................. 8,731 23.53 Democracy Plaza.................. 70,896 33.60 Courthouse Plaza................. 239,683 29.91 Reston Executive................. 1,677 26.35 Tysons Dulles.................... 5,749 27.27 Commerce Executive............... 9,061 26.69 Fairfax Square (20% interest).... 7,130 27.86 ----------- 2,025,047 31.29 =========== ---------- (1) Most leases include periodic step-ups in rent which are not reflected in the initial rent per square foot leased. The above table excludes 317,000 square feet leased at an average initial rent of $29.21 that was vacant at the time of the Company's acquisition of CESCR or had been vacant for more than 9 months. CESCR manages an additional 5.1 million square feet of office and other commercial properties in the Washington, D.C. area for third parties. -29-
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CESCR Office Properties The following table sets forth the CESCR Office Properties as of December 31, 2002: [Enlarge/Download Table] APPROXIMATE NUMBER LEASABLE OF BUILDING SQUARE PERCENT ENCUMBRANCES Location/Complex BUILDINGS FEET LEASED (IN THOUSANDS) (2) -------------------- --------- --------------- ------- ------------------ Crystal Mall...................... 4 1,066,000 98.9% $ 65,877 Crystal Plaza..................... 7 1,226,000 99.2% 70,356 Crystal Square.................... 4 1,386,000 97.9% 195,048 Crystal Gateway................... 5 1,443,000 94.4% 208,118 Crystal Park...................... 5 2,160,000 97.0% 276,534 Arlington Plaza................... 1 173,000 86.5% 17,531 1919 S. Eads Street............... 1 96,000 87.6% 13,148 Skyline Place..................... 7 2,016,000 86.6% 139,900 One Skyline Tower................. 1 476,000 100.0% 65,764 Courthouse Plaza (1).............. 2 615,000 99.1% 80,062 1101 17th Street.................. 1 205,000 87.5% 27,248 1730 M Street (1)................. 1 189,000 92.1% 17,012 1140 Connecticut Avenue........... 1 175,000 91.5% 20,153 1150 17th Street.................. 1 225,000 95.6% 32,904 1750 Pennsylvania Avenue.......... 1 262,000 97.9% 49,794 Democracy Plaza I (1)............. 1 207,000 98.0% 27,640 Tysons Dulles..................... 3 473,000 89.6% 69,507 Commerce Executive................ 3 413,000 56.0% 53,307 Reston Executive.................. 3 484,000 93.5% 73,844 Fairfax Square (20% interest)..... 1 105,000 83.6% 13,780 ----- ---------- -------------- TOTAL OFFICE BUILDINGS (VORNADO'S INTEREST)...................... 53 13,395,000 93.6% $ 1,517,527 ===== ========== ============== NOTES: (1) These properties are 100% ground leased. (2) See note 6 to the consolidated financial statements in this annual report on Form 10-K for further details. -30-
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RETAIL SEGMENT The Company owns 62 retail properties of which 51 are strip shopping centers primarily located in the Northeast and Mid-Atlantic states, two are regional malls located in San Juan, Puerto Rico, two are super-regional malls located in Nassau County, Long Island, New York and in Monmouth County, New Jersey and seven are retail sites located in Manhattan. The Company's strip shopping centers and malls are generally located on major regional highways in mature, densely populated areas. The Company believes these properties attract consumers from a regional, rather than a neighborhood market place because of their location on regional highways. The Company's strip shopping centers which contain an aggregate of 9.3 million square feet, are substantially (over 80%) leased to large stores (over 20,000 square feet). Tenants include destination retailers such as discount department stores, supermarkets, home improvement stores, discount apparel stores, membership warehouse clubs and "category killers." Category killers are large stores which offer a complete selection of a category of items (e.g., toys, office supplies, etc.) at low prices, often in a warehouse format. Tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price. The Company's two regional malls are the Montehiedra Mall which contains 554,000 square feet and is anchored by Home Depot, Kmart and Marshalls and the Las Catalinas Mall which contains 354,000 square feet and is anchored by Kmart and Sears, which owns its store. On September 23, 2002, the Company increased its interest in the Las Catalinas Mall to 100% by acquiring the 50% of the mall and the 25% of Kmart's anchor store it did not already own. The Green Acres Mall is a 1.6 million square foot super-regional mall located in Long Island, New York. The Green Acres Mall is anchored by four major department stores: three of which, Sears, Roebuck and Co., J.C. Penney Company, Inc. and Federated Department Stores, Inc. ("Federated") doing business as Macy's, are operating and the fourth, also leased to Federated (previously occupied by Stern's), is currently dark, however, Federated continues to pay the rent. The complex also includes The Plaza at Green Acres, a 188,000 square foot strip shopping center which is anchored by National Wholesale Liquidators. The Company has entered into a lease with Wal-Mart for the other anchor store at the Plaza, which is subject to governmental approvals. The Monmouth Mall, located in Eatontown, New Jersey was acquired on October 10, 2002, by a joint venture in which the Company has a 50% interest. The mall is a super regional mall containing 1.5 million square feet and anchored by four department store tenants (Macy's, Lord & Taylor, J.C. Penney's and Boscovs), three of which own 731,000 square feet of the 1.5 million square feet. The following table sets forth the percentage of the Retail Portfolio 2002 rentals by type of retailer: [Download Table] Industry Percentage --------------------- -------------- Discount Department Stores........ 11% Supermarkets...................... 7% Home Improvement.................. 7% Family Apparel.................... 6% Electronics stores................ 4% Restaurants....................... 4% Women's Apparel................... 3% Other............................. 58% --- 100% === The Manhattan retail sites include six operating properties containing 127,000 square feet, including 43,000 square feet of new retail space at 435 Seventh Avenue leased to Hennes & Mauritz. The seventh property, 4 Union Square South, is currently under development. -31-
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The following tables set forth the occupancy rate and the average annual base rent per square foot for the retail properties at the end of each of the past five years. STRIP SHOPPING CENTERS: [Download Table] Average Annual Rentable Base Rent As of December 31, Square Feet Occupancy Rate Per Square Foot ------------------ ----------- -------------- --------------- 2002.............. 9,295,000 85.7% $ 11.11 2001.............. 9,008,000 89.0% 10.60 2000.............. 9,000,000 91.1% 10.72 1999.............. 8,212,000 91.0% 10.20 1998.............. 8,332,000 91.1% 9.87 REGIONAL AND SUPER REGIONAL MALLS: [Download Table] Average Annual Base Rent Per Square Foot ------------------------ Rentable As of December 31, Square Feet Occupancy Rate Mall Tenants Total ------------------ ----------- -------------- ------------ -------- 2002.............. 2,875,000 95.4% $ 27.79 $ 17.15 2001.............. 2,293,000 98.7% 34.04 16.02 2000.............. 2,293,000 95.5% 32.05 14.84 1999.............. 2,293,000 95.5% 31.66 14.50 1998.............. 2,293,000 95.2% 29.40 13.90 The aggregate occupancy rate for the 12.5 million square feet of retail properties at December 31, 2002 is 88.3%. The occupancy rate includes leases for 490,000 square feet at five locations (4%) which have not commenced at December 31, 2002. Three of these locations aggregating 268,000 square feet are ground leased to Lowe's which plans to demolish the existing buildings and construct its own stores at the sites and two locations containing 223,000 square feet are leased to Wal-Mart, which plans to demolish an existing building and construct its own store at one of the sites and occupy the existing store at the other site. All of these redevelopment projects are subject to governmental approvals and in some cases, the relocation of existing tenants. The Company's shopping center lease terms range from 5 years or less in some instances for smaller tenant spaces to as long as 25 years for major tenants. Leases generally provide for additional rents based on a percentage of tenants' sales and pass through to tenants of the tenants' share of all common area charges (including roof and structure in strip shopping centers, unless it is the tenant's direct responsibility), real estate taxes and insurance costs and certain capital expenditures. Percentage rent accounted for less than 1% of total shopping center revenues in 2002. None of the tenants in the Retail Segment accounted for more than 10% of the Company's total revenues. Below is a listing of tenants which accounted for 2% or more of the Retail property revenues in 2002: [Enlarge/Download Table] Percentage of Square Feet 2002 Retail Properties Percentage of Tenant Leased Revenues Revenues Total Revenues ------ ----------- ------------ ----------------- -------------- Stop & Shop Companies, Inc. (Stop & Shop)......................... 981,000 $ 12,772,000 9.7% .9% The Home Depot, Inc....................... 630,000 6,987,000 5.3% .5% The TJX Companies, Inc.................... 414,000 5,288,000 4.0% .4% Kohl's.................................... 697,000 4,250,000 3.2% .3% Wal-Mart/Sam's Wholesale.................. 959,000 3,593,000 2.7% .3% Staples, Inc.............................. 222,000 3,427,000 2.6% .2% Shop Rite................................. 381,000 3,329,000 2.5% .2% Toys "R" Us/Kids "R" Us................... 287,000 2,697,000 2.1% .2% -32-
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FORMER BRADLEES LOCATIONS: The Company previously leased 18 locations to Bradlees which closed all of its stores in February 2001. The leases for four former Bradlees locations were assigned by Bradlees to other retailers. The Company has re-leased nine of the other former Bradlees locations; three to Kohl's, two each to Lowe's and Haynes Furniture, and one each to Home Depot and Wal-Mart. Lowe's and Wal-Mart will demolish the existing properties and construct their own stores, subject to the receipt of various governmental approvals and the relocation of existing tenants. Of the remaining five locations which are currently vacant, two of the leases are guaranteed and the rent is being paid by Stop & Shop, a wholly-owned subsidiary of Koninklijke Ahold NV (formerly Royal Ahold NV), an international food retailer. Stop & Shop remains contingently liable for rent at a number of the former Bradlees locations for the term of the Bradlees leases. Property rentals for the year ended December 31, 2002, include $5,000,000 of additional rent which, effective December 31, 2002, was re-allocated to the former Bradlees locations in Marlton, Turnersville, Bensalem and Broomall and is payable by Stop & Shop, pursuant to the Master Agreement and Guaranty, dated May 1, 1992. This amount is in addition to all other rent guaranteed at the former Bradlees locations. On January 8, 2003, Stop & Shop filed a complaint with the United States District Court claiming the Company has no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. The additional rent provision of the guaranty expires at the earliest in 2012. The Company intends to vigorously contest Stop & Shop's position. In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced that it overstated its 2002 and 2001 earnings by at least $500 million and is under investigation by the U.S. Justice Department and Securities and Exchange Commission. The Company cannot predict what effect, if any, this situation may have on Stop & Shop's ability to satisfy its obligation under the Bradlees guarantees and rent for existing Stop & Shop leases aggregating approximately $10.5 million per annum. The following table sets forth as of December 31, 2002 lease expirations for each of the next 10 years assuming that none of the tenants exercise their renewal options. [Enlarge/Download Table] Annual Rent of Expiring Leases Number of Square Feet Percentage of --------------------------- Expiring of Expiring Total Leased Per Square Year Leases Leases Square Feet Total Foot ---- --------- ----------- ------------- ------------ ---------- 2003................. 104 492,000 4.7% $ 9,050,000 $ 18.39 2004................. 88 650,000 6.2% 9,798,000 15.08 2005................. 120 568,000 5.4% 11,224,000 19.77 2006................. 84 873,000 8.4% 7,583,000 8.68 2007................. 117 867,000 8.3% 11,388,000 13.14 2008................. 58 469,000 4.5% 6,225,000 13.27 2009................. 51 409,000 3.9% 6,176,000 15.09 2010................. 31 381,000 3.7% 4,781,000 13.34 2011................. 33 712,000 6.8% 5,082,000 9.12 2012................. 14 350,000 3.4% 3,254,000 9.31 -33-
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During 2002, approximately 902,000 square feet of retail space was leased at a weighted average rent per square foot of $13.58, a 33.8% increase over the weighted average rent per square foot of $10.15 for the expiring leases and 1,117,000 square feet of land was ground leased to retailers at a weighted average rent per square foot of $6.69. Following is the detail by property: [Download Table] 2002 Leases ---------------------------------- Average Initial Rent Square Per Square Location Feet Foot (1) ------------------ ----------- --------------- Space Leases: Valley Stream....................... 171,000 $ 21.49 East Brunswick...................... 142,000 14.00 Hackensack.......................... 115,000 16.14 Levittown........................... 105,000 6.10 Middletown.......................... 101,000 10.29 Turnersville........................ 89,000 6.10 Dundalk............................. 40,000 6.09 Manalapan........................... 38,000 14.50 Hanover Conrans..................... 36,000 18.26 Newington........................... 19,000 12.25 Bricktown........................... 16,000 17.10 East Hanover........................ 10,000 9.96 Morris Plains....................... 7,000 25.57 North Bergen........................ 3,000 31.10 Towson.............................. 3,000 24.00 Allentown........................... 3,000 17.50 North Plainfield.................... 2,000 15.50 Cherry Hill......................... 2,000 12.73 ----------- Total............................... 902,000 13.58 =========== Land Leases: Rochester........................... 205,000 3.08 Lancaster........................... 170,000 2.50 Jersey City (2)..................... 170,000 7.54 Dover (2)........................... 169,000 7.67 Union (2)........................... 159,000 15.15 Newington........................... 132,000 4.92 Chicopee (2)........................ 112,000 6.93 ----------- 1,117,000 6.69 =========== ---------- (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. (2) Lowe's will demolish the existing buildings and construct its own buildings in Jersey City, Dover and Union and Wal-Mart will demolish the existing building and construct its own building in Chicopee. These leases are expected to commence within the next 12 to 24 months upon receipt of various governmental approvals, and the relocation of existing tenants. -34-
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Retail Properties The following table sets forth the Retail Properties as of December 31, 2002: [Enlarge/Download Table] APPROXIMATE LEASABLE BUILDING SQUARE FOOTAGE ----------------------------- OWNED BY OWNED/ TENANT ON LAND LEASED BY LEASED FROM PERCENT ENCUMBRANCES LOCATION COMPANY COMPANY LEASED (IN THOUSANDS) (2) ----------- ---------- -------------- ------- ------------------ NEW JERSEY Bordentown................ 179,000 -- 95.0% $ 8,111 Bricktown................. 260,000 3,000 95.7% 16,390 Cherry Hill............... 231,000 64,000 70.6% 15,075 Delran.................... 169,000 3,000 100.0% 6,461 Dover..................... 173,000 -- 98.7% 7,388 East Brunswick............ 221,000 10,000 100.0% 22,887 East Hanover I............ 271,000 -- 97.6% 20,579 East Hanover II........... 77,000 -- 99.2% 6,860 Hackensack................ 209,000 60,000 100.0% 25,144 Jersey City............... 222,000 3,000 95.7% 19,249 Kearny.................... 40,000 66,000 100.0% 3,758 Lawnside.................. 142,000 3,000 100.0% 10,651 Lodi...................... 171,000 -- 100.0% 9,439 Manalapan................. 196,000 2,000 57.2% 12,597 Marlton................... 174,000 7,000 86.6% 12,249 Middletown................ 180,000 52,000 91.9% 16,535 Monmouth Mall (50% interest).............. 743,000 -- 96.3% 135,000 Morris Plains............. 176,000 1,000 100.0% 12,104 North Bergen.............. 7,000 55,000 100.0% 3,985 North Plainfield (1)...... 219,000 -- 89.9% 10,942 Totowa.................... 178,000 139,000 100.0% 29,694 Turnersville.............. 89,000 7,000 100.0% 4,108 Union..................... 263,000 -- 82.6% 33,722 Vineland.................. 143,000 5.6% -- Watchung.................. 50,000 116,000 98.2% 13,606 Woodbridge................ 231,000 4,000 50.9% 22,227 ---------- ---------- ---------- Total New Jersey....... 5,014,000 595,000 90.1% 478,761 ---------- ---------- ---------- NEW YORK Manhattan: 1135 Third Avenue......... 25,000 -- 100.0% -- 4 Union Square South (in development)....... 230,000 -- --(4) -- 424 Sixth Avenue.......... 10,000 -- 100.0% -- 435 Seventh Avenue........ 43,000 -- 100.0% -- 484 Eighth Avenue......... 14,000 -- 100.0% -- 715 Lexington Avenue...... 32,000 -- 72.3%(4) -- 825 Seventh Avenue........ 3,000 -- 100.0% -- Other: Albany (Menands).......... 140,000 -- 74.0% 6,251 Buffalo (Amherst) (1)..... 185,000 112,000 81.1% 7,044 Freeport.................. 167,000 -- 100.0% 14,879 New Hyde Park (1)......... 101,000 -- 100.0% 7,510 North Syracuse............ 98,000 -- 100.0% -- Rochester................. -- 205,000 100.0% -- Rochester (Henrietta) (1) 148,000 -- 0.0% -- Valley Stream (Green Acres) (1)............. 1,535,000 61,000 97.1% 150,717 ---------- ---------- ---------- Total New York......... 2,731,000 378,000 89.8% 186,401 ---------- ---------- ---------- PENNSYLVANIA Allentown................. 267,000 354,000 98.1% 23,367 Bensalem.................. 118,000 8,000 98.4% 6,457 Bethlehem................. 159,000 -- 74.4% 4,087 Broomall.................. 147,000 22,000 100.0% 9,827 Glenolden................. 102,000 -- 10.1% 7,370 Lancaster................. 58,000 170,000 93.6% -- Levittown................. 105,000 -- 100.0% -- 10th and Market Streets, Philadelphia.. 271,000 -- 73.7% 9,001 Upper Moreland............ 122,000 -- 100.0% 6,986 York...................... 111,000 -- 24.6% 4,132 ---------- ---------- ---------- Total Pennsylvania..... 1,460,000 554,000 84.3% 71,227 ---------- ---------- ---------- -35-
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[Enlarge/Download Table] APPROXIMATE LEASABLE BUILDING SQUARE FOOTAGE ----------------------------- OWNED BY OWNED/ TENANT ON LAND LEASED BY LEASED FROM PERCENT ENCUMBRANCES LOCATION COMPANY COMPANY LEASED (IN THOUSANDS) (2) ----------- ---------- -------------- ------- ------------------ MARYLAND Baltimore (Belair Rd.) (3) -- -- -- -- Baltimore (Towson)........ 152,000 -- 79.3% 11,451 Baltimore (Dundalk)....... 181,000 3,000 81.9% 6,205 Glen Burnie............... 65,000 56,000 100.0% 5,893 Hagerstown................ 149,000 -- 35.5% 3,302 ---------- ---------- ---------- Total Maryland......... 547,000 59,000 73.4% 26,851 ---------- ---------- ---------- CONNECTICUT Newington................. 43,000 140,000 100.0% 6,581 Waterbury................. 146,000 -- 64.8% -- ---------- ---------- ---------- Total Connecticut...... 189,000 140,000 84.4% 6,581 ---------- ---------- ---------- MASSACHUSETTS Chicopee.................. 112,000 4,000 100.0% -- Milford (1)............... 83,000 -- 100.0% -- Springfield............... 8,000 117,000 100.0% 3,142 ---------- ---------- ---------- Total Massachusetts.... 203,000 121,000 100.0% 3,142 ---------- ---------- ---------- PUERTO RICO (SAN JUAN) Montehiedra Mall.......... 554,000 -- 91.8% 59,638 Las Catalinas Mall........ 354,000 -- 96.6% 67,692 ---------- ---------- ---------- Total.................. 908,000 -- 93.6% 127,330 ---------- ---------- ---------- Total Shopping Centers....... 11,052,000 1,847,000 88.8% $ 900,293 ========== ========== ========== VORNADO'S OWNERSHIP INTEREST. 10,681,000 1,847,000 88.3% $ 832,793 ========== ========== ========== (1) These properties are ground leased. (2) See note 6 to the consolidated financial statements in this annual report on Form 10-K for further details. (3) On January 9, 2003, this property was sold for $4.5 million, which resulted in a gain of $2.6 million to be recognized in the first quarter of 2003. (4) Under development. -36-
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MERCHANDISE MART SEGMENT The Merchandise Mart Properties are a portfolio of 9 properties containing an aggregate of 8.6 million square feet. Below is a breakdown of square feet by location and use as of December 31, 2002. [Enlarge/Download Table] Showroom ---------------------------------- Temporary Total Office Total Permanent Trade Show Retail --------- --------- --------- --------- ---------- --------- Chicago, Illinois Merchandise Mart ........................... 3,453,000 1,150,000 2,149,000 1,862,000 287,000 154,000 350 N. Orleans ............................. 1,149,000 862,000 287,000 287,000 -- -- 33 N. Dearborn ............................. 326,000 314,000 -- -- -- 12,000 --------- --------- --------- --------- --------- --------- Total Chicago, Illinois ..................... 4,928,000 2,326,000 2,436,000 2,149,000 287,000 166,000 --------- --------- --------- --------- --------- --------- HighPoint, North Carolina Market Square Complex ...................... 1,747,000 -- 1,747,000 1,113,000 634,000 -- National Furniture Mart .................... 259,000 -- 259,000 259,000 -- -- --------- --------- --------- --------- --------- --------- Total HighPoint, North Carolina ............. 2,006,000 -- 2,006,000 1,372,000 634,000 -- --------- --------- --------- --------- --------- --------- L.A. Mart .................................. 757,000 -- 757,000 757,000 -- -- --------- --------- --------- --------- --------- --------- Total Los Angeles, California ............... 757,000 -- 757,000 757,000 -- -- --------- --------- --------- --------- --------- --------- Washington, D.C Washington Design Center ................... 387,000 58,000 329,000 329,000 -- -- Washington Office Center ................... 396,000 360,000 -- -- -- 36,000 South Capitol .............................. 94,000 94,000 -- -- -- -- --------- --------- --------- --------- --------- --------- Total Washington, D.C ....................... 877,000 512,000 329,000 329,000 -- 36,000 --------- --------- --------- --------- --------- --------- Total Merchandise Mart Properties ........... 8,568,000 2,838,000 5,528,000 4,607,000 921,000 202,000 ========= ========= ========= ========= ========= ========= Occupancy rate .............................. 89.2% 95.2% 83.9% ========= ========= ========= OFFICE SPACE The following table sets forth the percentage of the Merchandise Mart Properties office revenues by tenants' industry during 2002: [Download Table] Industry Percentage -------- ---------- Government........................ 33% Service........................... 24% Telecommunications................ 13% Banking........................... 12% Insurance......................... 10% Pharmaceutical.................... 4% Other............................. 4% -37-
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The average lease term ranges from three to five years for smaller tenants to as long as 15 years for large tenants. Leases typically provide for step-ups in rent periodically over the term of the lease and pass through to tenants the tenants' share of increases in real estate taxes and operating expenses for a building over a base year. Electricity is provided to tenants on a submetered basis or included in rent and adjusted for subsequent utility rate increases. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant's initial construction of its premises. None of the tenants in the Merchandise Mart Properties segment accounted for more than 10% of the Company's total revenue. Below is a listing of the Merchandise Mart Properties office tenants which accounted for 2% or more of the Merchandise Mart Properties' revenues in 2002: [Enlarge/Download Table] Percentage of Percentage of Square Feet 2002 Segment Total Company Tenant Leased Revenues Revenues Revenues --------- ----------- ------------ -------------- ------------- General Services Administration... 307,000 $ 10,247,000 4.8% .7% Ameritech......................... 234,000 6,533,000 3.2% .5% Bankers Life and Casualty......... 303,000 5,861,000 2.7% .4% Bank of America................... 202,000 4,299,000 2.0% .3% Chicago Transit Authority......... 251,000 4,247,000 2.0% .3% On December 30, 2002, the Company entered into a lease modification agreement with Bankers Life and Casualty ("Bankers") to (i) extend the term for 107,000 square feet from November 30, 2008 (the date it was scheduled to expire) to November 30, 2018, (ii) maintain 70,000 square feet through November 30, 2008, (iii) surrender 83,000 square feet on March 1, 2003, (which the Company has re-leased to RBC Mortgage Company for a 15-year term) and (iv) vacate the remaining 43,000 square feet. Bankers is not part of the bankruptcy filing of its parent company, Conseco. On November 25, 2002, the Chicago Transit Authority notified the Company that it is exercising its right to terminate its lease as of November 30, 2004, which was scheduled to expire on November 30, 2007. In connection with the termination, the Company received a payment of $794,000 in November 2002 and will receive an additional $750,000 in 2004. The following table sets forth the occupancy rate and the average escalated rent per square foot for the Merchandise Mart Properties' office space at the end of each of the past five years. [Download Table] Average Annual As of Rentable Escalated Rent December 31, Square Feet Occupancy Rate Per Square Foot --------------- ----------- -------------- --------------- 2002........... 2,838,000 89.2% $ 24.00 2001........... 2,841,000 89.2% 23.84 2000........... 2,869,000 90.2% 23.52 1999........... 2,414,000 93.3% 20.12 1998........... 2,274,000 96.9% 19.68 -38-
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The following table sets forth as of December 31, 2002 office lease expirations for each of the next 10 years assuming that none of the tenants exercise their renewal options. [Enlarge/Download Table] Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased ----------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot ---- --------------- --------------- ------------------- ----------- --------------- 2003...................... 12 37,000 1.6% $ 953,000 $ 25.82 2004...................... 19 349,000 14.9% 7,043,000 20.15 2005...................... 17 176,000 7.5% 4,214,000 23.90 2006...................... 11 101,000 4.3% 2,492,000 24.75 2007...................... 14 223,000 9.5% 5,192,000 23.25 2008...................... 12 552,000 23.6% 11,716,000 21.22 2009...................... 5 276,000 11.8% 6,058,000 21.98 2010...................... 2 357,000 15.2% 11,893,000 33.36 2011...................... 1 193,000 8.3% 5,620,000 29.07 2012...................... 12 77,000 3.3% 1,851,000 23.93 During 2002, 164,000 square feet of office space was leased at a weighted average initial rent per square foot of $26.97, an increase of 1.2% over the weighted average escalated rent per square foot of $26.66 for the leases expiring. Following is the detail by building: [Download Table] 2002 Leases ----------------------------- Average Initial Rent Per Square Feet Square Foot(1) ----------- ----------------- 33 North Dearborn Street.............. 80,000 $ 24.67 Washington Office Center.............. 56,000 31.11 Merchandise Mart...................... 14,000 17.42 Washington Design Center.............. 14,000 33.41 ---------- Total............................... 164,000 26.97 ========== ---------- (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. SHOWROOM SPACE The showrooms provide manufacturers and wholesalers with permanent and temporary space in which to display products for buyers, specifiers and end users. The showrooms are also used for hosting trade shows for the contract furniture, casual furniture, gifts, carpet, residential furnishings, building products, crafts, apparel and design industries. Merchandise Mart Properties own and operate five of the leading furniture and gifts trade shows including the contract furniture industry's largest annual trade show, NeoCon, which attracts over 50,000 attendees each June and is hosted at the Merchandise Mart building in Chicago. The Market Square Complex co-hosts the home furniture industry's semi-annual (April and October) market weeks which occupy over 11,500,000 square feet in the High Point, North Carolina region. The following table sets forth the percentage of the Merchandise Mart properties showroom revenues by tenants' industry during 2002: [Download Table] Industry Percentage --------------------------- ----------- Residential Design......... 25% Gift....................... 19% Residential Furnishings.... 16% Contract Furnishings....... 15% Market Suites.............. 15% Apparel.................... 4% Casual Furniture........... 4% Building Products.......... 2% -39-
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The following table sets forth the occupancy rate and the average escalated rent per square foot for this space at the end of each of the past five years. [Download Table] Average Annual As of Rentable Occupancy Escalated Rent December 31, Square Feet Rate Per Square Foot ----------------- ----------- --------- --------------- 2002............. 5,528,000 95.2% $ 21.46 2001............. 5,532,000 95.5% 22.26 2000............. 5,044,000 97.6% 22.85 1999............. 4,174,000 98.1% 21.29 1998............. 4,266,000 95.3% 21.97 The following table sets forth as of December 31, 2002 showroom lease expirations for each of the next 10 years assuming that none of the tenants exercise their renewal options. [Enlarge/Download Table] Annual Escalated Percentage of Total Rent of Expiring Leases Number of Square Feet of Leased ---------------------------------- Year Expiring Leases Expiring Leases Square Feet Total Per Square Foot ---- --------------- --------------- ------------------- -------------- --------------- 2003...................... 296 614,000 14.9% $ 14,073,000 $ 22.91 2004...................... 281 736,000 17.9% 14,757,000 20.04 2005...................... 254 690,000 16.8% 15,343,000 22.22 2006...................... 168 581,000 14.1% 13,593,000 23.41 2007...................... 158 768,000 18.7% 15,588,000 20.29 2008...................... 36 202,000 4.9% 5,693,000 28.18 2009...................... 37 161,000 3.9% 4,546,000 28.17 2010...................... 31 174,000 4.2% 4,826,000 27.82 2011...................... 20 121,000 3.0% 2,893,000 23.89 2012...................... 19 61,000 1.5% 1,204,000 19.66 In 2002, 911,000 square feet of showroom space was leased at a weighted average initial rent per square foot of $18.99, a 2.0% increase over the weighted average escalated rent per square foot of $18.63 for the leases expiring. Following is the detail by building: [Download Table] 2002 Leases --------------------------------- Average Initial Rent Per Square Feet Square Foot(1) -------------- --------------- Market Square Complex.................... 430,000 $ 14.97 Merchandise Mart......................... 199,000 29.39 L.A. Mart................................ 233,000 16.01 Washington Design Center................. 25,000 29.05 350 North Orleans........................ 24,000 23.29 ------- Total.............................. 911,000 18.99 ======= ---------- (1) Most leases include periodic step-ups in rent which are not reflected in the initial rent per square foot leased. RETAIL STORES The Merchandise Mart Properties' portfolio also contains approximately 202,000 square feet of retail stores which was 83.9% occupied at December 31, 2002. -40-
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Merchandise Mart Properties: The following table sets forth the Merchandise Mart Properties owned by the Company as of December 31, 2002: [Enlarge/Download Table] APPROXIMATE LEASABLE BUILDING PERCENT ENCUMBRANCES LOCATION SQUARE FEET LEASED (IN THOUSANDS)(1) --------------------------------------------------- ------------- ------- ----------------- ILLINOIS Merchandise Mart, Chicago.......................... 3,435,000 94.9% $ -- 350 North Orleans, Chicago......................... 1,149,000 83.8% -- 33 North Dearborn Street, Chicago.................. 325,000 88.2% 18,926 Other.............................................. 19,000 76.7% 25,821 ------------- ---------- Total Illinois............................. 4,928,000 44,747 ------------- ---------- WASHINGTON, D.C. Washington Office Center........................... 396,000 98.7% 44,924 Washington Design Center........................... 388,000 96.4% 48,542 Other.............................................. 93,000 62.0% -- ------------- ---------- Total Washington, D.C...................... 877,000 93,466 ------------- ---------- HIGH POINT, NORTH CAROLINA Market Square Complex.............................. 2,006,000 99.4% 115,206 CALIFORNIA L.A. Mart.......................................... 757,000 86.7% -- ------------- ---------- TOTAL MERCHANDISE MART PROPERTIES .................... 8,568,000 93.6% $ 253,419 ============= ========== ---------- (1) See Note 6 to the consolidated financial statements in this annual report on Form 10-K for further details. -41-
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TEMPERATURE CONTROLLED LOGISTICS SEGMENT The Company has a 60% interest in Vornado Crescent Portland Partnership ("the Landlord") that owns 88 cold storage warehouses, through a wholly-owned subsidiary (AmeriCold Realty Trust), with an aggregate of approximately 441.5 million cubic feet. AmeriCold Logistics leases all of the partnerships' facilities. The Temperature Controlled Logistics segment is headquartered in Atlanta, Georgia. AmeriCold Logistics provides the food industry with refrigerated warehousing and transportation management services. Refrigerated warehouses are comprised of production, distribution and public facilities. Production facilities typically serve one or a small number of customers, generally food processors which are located nearby. These customers store large quantities of processed or partially processed products in the facilities until they are shipped to the next stage of production or distribution. Distribution facilities primarily warehouse a wide variety of customers' finished products until future shipment to end-users. Each distribution facility generally services the surrounding regional market. Public facilities generally serve the needs of local and regional customers under short-term agreements. Food manufacturers and processors use these facilities to store capacity overflow from their production facilities or warehouses. AmeriCold Logistics' transportation management services include freight routing, dispatching, freight rate negotiation, backhaul coordination, freight bill auditing, network flow management, order consolidation and distribution channel assessment. AmeriCold Logistics' temperature controlled logistics expertise and access to both frozen food warehouses and distribution channels enable its customers to respond quickly and efficiently to time-sensitive orders from distributors and retailers. AmeriCold Logistics' customers consist primarily of national, regional and local frozen food manufacturers, distributors, retailers and food service organizations. A breakdown of AmeriCold Logistics' largest customers during 2002 include: [Download Table] % of 2002 Revenue ----------- H.J. Heinz & Co.......................... 16% Con-Agra Foods, Inc...................... 11% Philip Morris Companies, Inc............. 8% Sara Lee Corp............................ 5% Tyson Foods, Inc......................... 5% General Mills............................ 4% McCain Foods, Inc........................ 4% J.R. Simplot............................. 3% Flowers Industries, Inc.................. 3% Farmland Industries, Inc................. 2% Other.................................... 39% ------ 100% ====== On December 31, 2002, AmeriCold Logistics sold its Carthage, Missouri and Kansas City, Kansas quarries for $20,000,000 in cash (appraised value) to a joint venture owned 44% by the Company and 56% by Crescent Real Estate Equities. -42-
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Temperature Controlled Logistics Properties The following table sets forth certain information for the Temperature Controlled Logistics properties as of December 31, 2002: [Download Table] CUBIC FEET SQUARE FEET PROPERTY (IN MILLIONS) (IN THOUSANDS) ------------------------------------- --------------- --------------- ALABAMA Birmingham ....................... 2.0 85.6 Montgomery ....................... 2.5 142.0 Gadsden (1) ...................... 4.0 119.0 Albertville ...................... 2.2 64.5 --------------- --------------- 10.7 411.1 --------------- --------------- ARIZONA Phoenix .......................... 2.9 111.5 --------------- --------------- ARKANSAS Fort Smith ....................... 1.4 78.2 West Memphis ..................... 5.3 166.4 Texarkana ........................ 4.7 137.3 Russellville ..................... 5.6 164.7 Russellville ..................... 9.5 279.4 Springdale ....................... 6.6 194.1 --------------- --------------- 33.1 1,020.1 --------------- --------------- CALIFORNIA Ontario(1) ...................... 8.1 279.6 --------------- --------------- Burbank .......................... 0.8 33.3 Fullerton(1)...................... 2.8 107.7 Pajaro(1) ........................ 1.4 53.8 Turlock .......................... 2.5 108.4 Watsonville(1). .................. 5.4 186.0 Turlock .......................... 3.0 138.9 Ontario .......................... 1.9 55.9 --------------- --------------- 17.8 684.0 --------------- --------------- COLORADO Denver ........................... 2.8 116.3 --------------- --------------- FLORIDA Tampa ............................ 0.4 22.2 Plant City ....................... 0.8 30.8 Bartow ........................... 1.4 56.8 Tampa ............................ 2.9 106.0 Tampa(1) ......................... 1.0 38.5 --------------- --------------- 6.5 254.3 --------------- --------------- GEORGIA Atlanta .......................... 11.1 476.7 Atlanta .......................... 2.9 157.1 Augusta .......................... 1.1 48.3 Atlanta .......................... 11.4 334.7 Atlanta .......................... 5.0 125.7 Montezuma ........................ 4.2 175.8 Atlanta .......................... 6.9 201.6 Thomasville ...................... 6.9 202.9 --------------- --------------- 49.5 1,722.8 --------------- --------------- IDAHO Burley ........................... 10.7 407.2 Nampa ............................ 8.0 364.0 --------------- --------------- 18.7 771.2 --------------- --------------- ILLINOIS Rochelle ......................... 6.0 179.7 East Dubuque ..................... 5.6 215.4 --------------- --------------- 11.6 395.1 --------------- --------------- INDIANA Indianapolis ..................... 9.1 311.7 --------------- --------------- IOWA Fort Dodge ....................... 3.7 155.8 Bettendorf ....................... 8.8 336.0 --------------- --------------- 12.5 491.8 --------------- --------------- KANSAS Wichita .......................... 2.8 126.3 Garden City ...................... 2.2 84.6 --------------- --------------- 5.0 210.9 --------------- --------------- KENTUCKY Sebree ........................... 2.7 79.4 --------------- --------------- MAINE Portland ......................... 1.8 151.6 --------------- --------------- MASSACHUSETTS Gloucester ....................... 1.9 95.5 Gloucester ....................... 0.3 13.6 Gloucester ....................... 2.8 95.2 Gloucester ....................... 2.4 126.4 Boston ........................... 3.1 218.0 --------------- --------------- 10.5 548.7 --------------- --------------- MISSOURI Marshall ......................... 4.8 160.8 Carthage ......................... 42.0 2,564.7 --------------- --------------- 46.8 2,725.5 --------------- --------------- MISSISSIPPI West Point ....................... 4.7 180.8 --------------- --------------- NEBRASKA Fremont .......................... 2.2 84.6 Grand Island ..................... 2.2 105.0 --------------- --------------- 4.4 189.6 --------------- --------------- NEW YORK Syracuse ......................... 11.8 447.2 --------------- --------------- 43
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[Download Table] CUBIC FEET SQUARE FEET PROPERTY (IN MILLIONS) (IN THOUSANDS) ------------------------------------- --------------- --------------- NORTH CAROLINA Charlotte ........................ 1.0 58.9 Charlotte ........................ 4.1 164.8 Tarboro .......................... 4.9 147.4 --------------- --------------- 10.0 371.1 --------------- --------------- OHIO Massillon ........................ 5.5 163.2 --------------- --------------- OKLAHOMA Oklahoma City .................... 0.7 64.1 Oklahoma City .................... 1.4 74.1 --------------- --------------- 2.1 138.2 --------------- --------------- OREGON Hermiston ........................ 4.0 283.2 Milwaukee ........................ 4.7 196.6 Salem ............................ 12.5 498.4 Woodburn ......................... 6.3 277.4 Brooks ........................... 4.8 184.6 Ontario .......................... 8.1 238.2 --------------- --------------- 40.4 1,678.4 --------------- --------------- PENNSYLVANIA Leesport ......................... 5.8 168.9 Fogelsville ...................... 21.6 683.9 --------------- --------------- 27.4 852.8 --------------- --------------- SOUTH CAROLINA Columbia ......................... 1.6 83.7 --------------- --------------- SOUTH DAKOTA Sioux Falls ...................... 2.9 111.5 --------------- --------------- TENNESSEE Memphis .......................... 5.6 246.2 Memphis .......................... 0.5 36.8 Murfreesboro ..................... 4.5 106.4 --------------- --------------- 10.6 389.4 --------------- --------------- TEXAS Amarillo ......................... 3.2 123.1 Ft. Worth ........................ 3.4 102.0 --------------- --------------- 6.6 225.1 --------------- --------------- UTAH Clearfield ....................... 8.6 358.4 --------------- --------------- VIRGINIA Norfolk .......................... 1.9 83.0 Strasburg ........................ 6.8 200.0 --------------- --------------- 8.7 283.0 --------------- --------------- WASHINGTON Burlington ....................... 4.7 194.0 Moses Lake ....................... 7.3 302.4 Walla Walla ...................... 3.1 140.0 Connell .......................... 5.7 235.2 Wallula .......................... 1.2 40.0 Pasco ............................ 6.7 209.0 --------------- --------------- 28.7 1,120.6 --------------- --------------- WISCONSIN Tomah ............................ 4.6 161.0 Babcock .......................... 3.4 111.1 Plover ........................... 9.4 358.4 --------------- --------------- 17.4 630.5 --------------- --------------- TOTAL TEMPERATURE CONTROLLED LOGISTICS PROPERTIES ........................ 441.5 17,509.1 =============== =============== ---------- (1) Leasehold interest -44-
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ALEXANDER'S PROPERTIES The Company owns 33.1% of Alexander's outstanding common shares. The following table shows the location, approximate size and leasing status of each of the properties owned by Alexander's as of December 31, 2002. [Enlarge/Download Table] APPROXIMATE LEASABLE SQUARE APPROXIMATE FOOTAGE/ AREA IN SQUARE NUMBER PERCENT LOCATION FEET OR ACREAGE OF FLOORS LEASED --------- --------------- ---------------------- ------- OPERATING PROPERTIES NEW YORK: Kings Plaza Regional Shopping Center--Brooklyn...................... 24.3 acres 759,000/2 and 4(1)(2) 98% Rego Park I--Queens..................... 4.8 acres 351,000/3(1) 100% Flushing--Queens (3).................... 44,975 SF 177,000/4(1) 0% NEW JERSEY: Paramus--New Jersey..................... 30.3 acres --(4) 100% ------------ 1,287,000 ============ DEVELOPMENT PROPERTIES NEW YORK: 59th Street and Lexington Avenue--Manhattan (see below)........................... 84,420 SF 1,297,000/55 Rego Park II--Queens.................... 6.6 acres -- ---------- (1) Excludes parking garages. (2) Excludes 339,000 square foot Macy's store, owned and operated by Federated Department Stores, Inc. (3) Leased by Alexander's through January 2027. Classified as an asset held for sale by Alexander's at December 31, 2002. (4) Ground leased to IKEA. The development plans at Lexington Avenue consist of an approximately 1.3 million square foot multi-use building. The building will contain approximately 154,000 net rentable square feet of retail (45,000 square feet of which has been leased to Hennes & Mauritz), approximately 878,000 net rentable square feet of office (695,000 square of which has been leased to Bloomberg L.P.) and 248,000 square feet of residential condominium units (through a taxable REIT subsidiary). Construction is expected to be completed in 2004. On July 3, 2002 Alexander's finalized a $490,000,000 loan with HVB Real Estate Capital (Hypo Vereinsbank) to finance the construction of the Lexington Avenue property (the "Construction Loan"). The estimated construction costs in excess of the construction loan of approximately $140,000,000 will be provided by Alexander's. The Construction Loan has an interest rate of LIBOR plus 2.5% (currently 3.94%) and a term of forty-two months subject to two one-year extensions. Alexander's received an initial funding of $55,500,000 under the Construction Loan of which $25,000,000 was used to repay the Alexander's term loan to a bank in the amount of $10,000,000 and a secured note in the amount of $15,000,000. Of the total construction budget of approximately $630,000,000, $162,000,000 has been extended through December 31, 2002 and an additional $184,000,000 has been committed. Pursuant to the Construction Loan, the Company has agreed to guarantee among other things, the lien free, timely completion of the construction of the project and funding of project costs in excess of a stated loan budget, if not funded by Alexander's (the "Completion Guarantee"). The $6,300,000 estimated fee payable by Alexander's to the Company for the Completion Guarantee is 1% of construction costs (as defined). In addition, if the Company should advance any funds under the Completion Guarantee in excess of the $26,000,000 currently available under the secured line of credit, interest on those advances is at 15% per annum. On August 30, 2002, Alexander's sold its Third Avenue property located in the Bronx, New York. The 173,000 square foot property was sold for $15,000,000 resulting in a gain of $10,366,000, of which the Company's share was $3,524,000. -45-
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THE NEWKIRK MASTER LIMITED PARTNERSHIP In 1998, the Company and affiliates of Apollo Real Estate Investment Fund III, L.P. ("Apollo") formed a joint venture to acquire general and limited partnership interests in the Newkirk real estate partnerships. Since its formation, the joint venture has acquired equity interests in 91 partnerships which own approximately 19.6 million square feet of real estate and first and second mortgages secured by a portion of these properties. The Company owned a 30% interest in the joint venture with the balance owned by Apollo. On January 1, 2002, the Newkirk partnerships were merged into The Newkirk Master Limited Partnership (the "MLP") to create a vehicle to enable the partners to have greater access to capital and future investment opportunities. In connection with the merger, the Company received limited partner interests in the MLP equal to an approximate 21.1% interest and Apollo received limited partner interests in the MLP equal to an approximate 54.5% interest. At December 31, 2002, the Company has a 21.7% interest in the MLP and Apollo has a 55.9% interest. Further, the joint venture is the general partner of the MLP. Simultaneously, the MLP completed a $225,000,000 secured financing collateralized by its interests in the entities that own the properties, subject to the existing first and certain second mortgages on those properties. The loan bears interest at LIBOR plus 5.5% with a LIBOR floor of 3% (8.5% at December 31, 2002) and matures on January 31, 2005, with two one-year extension options. As a result of the financing, on February 6, 2002 the MLP repaid approximately $28,200,000 of existing joint venture debt and distributed approximately $37,000,000 to the Company. The Company's equity investment in the joint venture at December 31, 2002 was comprised of: [Download Table] Investments in limited partnerships... $ 134,200,000 Mortgages and loans receivable........ 39,511,000 Other................................. 8,754,000 --------------- $ 182,465,000 =============== The Company's share of the joint venture debt was approximately $312,679,000 at December 31, 2002. The following table sets forth a summary of the real estate owned by the MLP: [Download Table] Number of Properties Square Feet -------------- --------------- Office............. 35 8,075,000 Retail............. 169 6,447,000 Other.............. 34 5,082,000 ------- ------------ 238 19,604,000 ======= ============ As of December 31, 2002, the occupancy rate of the properties is 99.9%. -46-
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The primary lease terms range from 20 to 25 years from their original commencement dates with rents, typically above market, which fully amortize the first mortgage debt on the properties. In addition, tenants generally have multiple renewal options, with rents, on average, below market. Below is a listing of tenants which accounted for 2% or more of the MLP's revenues in 2002: [Download Table] Square Feet 2002 Tenant Leased Revenues Percentage ----------------------------------- ----------- -------------- ------------ Raytheon........................... 2,286,000 $ 38,665,000 12.6% Albertson's Inc.................... 2,763,000 27,060,000 8.8% The Saint Paul Co.................. 530,000 25,410,000 8.3% Kaiser Alum & Chemical Corp(1)..... 911,000 23,794,000 7.8% Honeywell.......................... 728,000 19,420,000 6.3% Cummins Engine Company, Inc........ 390,000 14,405,000 4.7% Federal Express.................... 592,000 13,546,000 4.4% Owens-Illinois..................... 707,000 13,363,000 4.4% Entergy Gulf States................ 490,000 12,089,000 3.9% Stater Bros Markets................ 734,000 10,354,000 3.4% ---------- (1) On February 12, 2002, Kaiser Aluminum, which leases an office building located in Oakland, California, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. To date, this lease has not been assumed or rejected. The following table sets forth lease expirations for each of the next 10 years, as of December 21, 2002, assuming that none of the tenants exercise their renewal options. [Enlarge/Download Table] Annual Escalated Number of Percentage of Rent of Expiring Leases Expiring Square Feet of Total Leased ---------------------------------- Year Leases Expiring Leases Square Feet Total Per Square Foot ---- ------------ ------------------- --------------- ------------- ----------------- 2003...................... 3 158,000 0.8% $ 2,149,000 $ 13.60 2004...................... 6 280,000 1.4% 6,281,000 22.43 2005...................... 29 1,310,000 6.9% 7,935,000 6.06 2006...................... 31 2,420,000 12.8% 32,398,000 13.39 2007...................... 33 2,992,000 15.8% 38,021,000 12.07 2008...................... 101 7,797,000 41.2% 94,083,000 17.51 2009...................... 30 2,678,000 14.1% 72,195,000 26.96 2010...................... 1 821,000 4.3% 2,780,000 3.39 2011...................... 2 155,000 0.8% 2,177,000 14.05 2012...................... 2 325,000 1.7% 2,038,000 6.27 -47-
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Newkirk Master Limited Partnership Properties The following table sets forth The Newkirk Master Limited Partnership Properties as of December 31, 2002: [Download Table] APPROXIMATE LEASABLE BUILDING SQUARE LOCATION FOOTAGE --------------------- -------------------- OFFICE: ARKANSAS Little Rock........... 36,000 Pine Bluff............ 27,000 ------------ 63,000 ------------ CALIFORNIA El Segundo (1)........ 185,000 El Segundo (1)........ 959,000 El Segundo (1)........ 185,000 Oakland (1)........... 911,000 Walnut Creek (1)...... 55,000 ------------ 2,295,000 ------------ COLORADO Colorado Springs...... 71,000 ------------ FLORIDA Orlando (1)........... 184,000 Orlando (1)........... 357,000 ------------ 541,000 ------------ INDIANA Columbus (1).......... 390,000 ------------ MARYLAND Baltimore (1)......... 530,000 ------------ FLORIDA Bridgeton (1)......... 54,000 ------------ NEW JERSEY Carteret.............. 96,000 Elizabeth (1)......... 30,000 Morris Township (1)... 225,000 Morris Township (1)... 50,000 Morris Township (1)... 137,000 Morris Township....... 141,000 Morristown (1)........ 316,000 Plainsboro (1)........ 2,000 ------------ 997,000 ------------ NEVADA Las Vegas............. 282,000 ------------ OHIO Miamisburg (1)........ 61,000 Miamisburg (1)........ 86,000 Toledo (1)............ 707,000 ------------ 854,000 ------------ PENNSYLVANIA Allentown............. 71,000 ------------ TENNESSEE Johnson City.......... 64,000 Kingport.............. 43,000 Memphis (1)........... 521,000 ------------ 628,000 ------------ TEXAS Beaumont (1).......... 426,000 Beaumont (1).......... 50,000 Bedford (1)........... 207,000 Dallas (1)............ 185,000 Dallas................ 152,000 Garland (1)........... 279,000 ------------ 1,299,000 ------------ Total Office............. 8,075,000 ------------ [Download Table] APPROXIMATE LEASABLE BUILDING LOCATION SQUARE FOOTAGE --------------------- ----------------- RETAIL: ALABAMA Dothan (1)............ 54,000 Hunstville (1)........ 60,000 Huntsville (1)........ 58,000 Montgomery (1)........ 56,000 Montgomery............ 66,000 Tuscaloosa (1)........ 56,000 ------------ 350,000 ------------ ARIZONA Bisbee (1)............ 30,000 Tucson (1)............ 37,000 ------------ 67,000 ------------ CALIFORNIA Anaheim (1)........... 26,000 Barstow............... 30,000 Beaumont.............. 29,000 Calimesa.............. 29,000 Colton................ 73,000 Colton................ 26,000 Corona (1)............ 33,000 Corona (1)............ 9,000 Costa Mesa (1)........ 18,000 Costa Mesa (1)........ 17,000 Desert Hot Springs (1) 29,000 Downey................ 39,000 Fontana............... 26,000 Garden Grove (1)...... 26,000 Glen Avon Heights (1). 42,000 Huntington Beach...... 44,000 Indio (1)............. 10,000 Lancaster............. 42,000 Livermore (1)......... 53,000 Lomita (1)............ 33,000 Mammoth Lakes (1)..... 44,000 Mojave (1)............ 34,000 Ontario (1)........... 24,000 Orange (1)............ 26,000 Pinole (1)............ 58,000 Pleasanton............ 175,000 Rancho Cucamonga...... 24,000 Rialto................ 29,000 Rubidoux.............. 39,000 San Bernadino......... 30,000 San Bernadino......... 40,000 San Diego (1)......... 226,000 Santa Ana (1)......... 26,000 Santa Monica.......... 150,000 Santa Rosa (1)........ 22,000 Simi Valley (1)....... 40,000 Sunnymead............. 30,000 Ventura (1)........... 40,000 Westminster........... 26,000 Yucaipa............... 31,000 ------------ 1,748,000 ------------ COLORADO Aurora (1)............ 41,000 Aurora................ 29,000 Aurora................ 42,000 Aurora................ 24,000 Littleton............. 29,000 Littleton............. 39,000 ------------ 204,000 ------------ -48-
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[Download Table] APPROXIMATE LEASABLE BUILDING LOCATION SQUARE FOOTAGE --------------------- -------------------- RETAIL-CONTINUED FLORIDA Bradenton (1)......... 60,000 Cape Coral............ 30,000 Casselberry (1)....... 68,000 Gainsville............ 41,000 Largo................. 54,000 Largo................. 40,000 Largo................. 30,000 Orlando (1)........... 58,000 Pinellas Park......... 60,000 Port Richey (1)....... 54,000 Stuart (1)............ 54,000 Tallahassee (1)....... 54,000 Venice (1)............ 42,000 ------------ 645,000 ------------ GEORGIA Atlanta (1)........... 6,000 Atlanta (1)........... 4,000 Chamblee (1).......... 5,000 Cumming (1)........... 14,000 Duluth (1)............ 9,000 Forest Park (1)....... 15,000 Jonesboro (1)......... 5,000 Stone Mountain (1).... 6,000 ------------ 64,000 ------------ IDAHO Boise (1)............. 37,000 Boise (1)............. 43,000 ------------ 80,000 ------------ ILLINOIS Champaign............. 31,000 Freeport.............. 30,000 Rock Falls............ 28,000 ------------ 89,000 ------------ INDIANA Carmel (1)............ 39,000 Lawrence (1).......... 29,000 ------------ 68,000 ------------ KENTUCKY Louisville............ 10,000 Louisville............ 40,000 ------------ 50,000 ------------ LOUISIANA Baton Rouge........... 58,000 Minden................ 35,000 ------------ 93,000 ------------ MONTANA Billings (1).......... 41,000 Bozeman (1)........... 21,000 ------------ 62,000 ------------ NORTH CAROLINA Jacksonville.......... 23,000 Jefferson (1)......... 23,000 Lexington (1)......... 23,000 ------------ 69,000 ------------ NEBRASKA Omaha................. 73,000 Omaha................. 66,000 Omaha................. 67,000 ------------ 206,000 ------------ NEW JERSEY Garwood (1)........... 52,000 ------------ NEW MEXICO Albuquerque (1)....... 35,000 Las Cruces (1)........ 30,000 ------------ 65,000 ------------ NEVADA Las Vegas............. 38,000 Las Vegas (1)......... 60,000 ------------ 98,000 ------------ NEW YORK Portchester (1)....... 59,000 ------------ OHIO Cincinnati (1)........ 26,000 Columbus (1).......... 34,000 Franklin (1).......... 29,000 ------------ 89,000 ------------ OKLAHOMA Lawton (1)............ 31,000 Oklahoma City (1)..... 32,000 ------------ 63,000 ------------ OREGON Beaverton............. 42,000 Grants Pass (1)....... 34,000 Portland.............. 42,000 Salem................. 52,000 ------------ 170,000 ------------ PENNSYLVANIA Doylestown............ 4,000 Lansdale.............. 4,000 Lima.................. 4,000 Philadelphia.......... 50,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Philadelphia.......... 4,000 Richboro.............. 4,000 Wayne................. 4,000 ------------ 106,000 ------------ SOUTH CAROLINA Moncks Corner (1)..... 23,000 ------------ SOUTH DAKOTA Sioux Falls (1)....... 60,000 ------------ TEXAS Allen................. 41,000 Carrolton (1)......... 61,000 Dallas (1)............ 68,000 Ennis................. 44,000 Fort Worth (1)........ 44,000 Garland (1)........... 40,000 Granbury (1).......... 35,000 Grand Prairie (1)..... 49,000 Greenville (1)........ 48,000 Hillsboro (1)......... 35,000 Houston (1)........... 52,000 Huntsville............ 62,000 Lubbock (1)........... 54,000 Midland............... 60,000 Rockdale.............. 44,000 Rockwell.............. 43,000 Taylor................ 62,000 Texarkana (1)......... 46,000 Waxahachie............ 62,000 Woodville............. 44,000 ------------ 994,000 ------------ UTAH Bountiful (1)......... 50,000 Sandy (1)............. 42,000 ------------ 92,000 ------------ VIRGINIA Staunton (1).......... 23,000 ------------ -49-
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[Download Table] APPROXIMATE LEASABLE BUILDING SQUARE LOCATION FOOTAGE --------------------- -------------------- RETAIL-CONTINUED TENNESSEE Chattanooga (1)....... 42,000 Memphis (1)........... 75,000 Las Vegas (1)......... 38,000 Reno (1).............. 42,000 ------------ 197,000 ------------ WASHINGTON Bothell (1)........... 28,000 Edmonds (1)........... 35,000 Everett (1)........... 35,000 Federal Way........... 42,000 Graham (1)............ 45,000 Kent.................. 42,000 Milton (1)............ 45,000 Port Orchard (1)...... 28,000 Redmond (1)........... 45,000 Spokane............... 42,000 Spokane (1)........... 39,000 Woodinville (1)....... 30,000 ------------ 456,000 ------------ WYOMING Cheyenne.............. 12,000 Cheyenne (1).......... 31,000 Douglas............... 12,000 Evanston.............. 28,000 Evanston.............. 10,000 Torrington............ 12,000 ------------ 105,000 ------------ ------------ Total Retail 6,447,000 ------------ [Download Table] APPROXIMATE LEASABLE BUILDING LOCATION SQUARE FOOTAGE --------------------- ----------------- OTHER ALABAMA Florence (1).......... 42,000 ------------ ARIZONA Flagstaff (1)......... 114,000 Flagstaff (1)......... 10,000 Sun City (1).......... 10,000 ------------ 134,000 ------------ CALIFORNIA Colton................ 668,000 Long Beach (1)........ 478,000 Long Beach (1)........ 201,000 Palo Alto (1)......... 123,000 ------------ 1,470,000 ------------ COLORADO Arvada (1)............ 10,000 Ft. Collins (1)....... 10,000 Lakewood (1).......... 10,000 ------------ 30,000 ------------ FLORIDA Orlando (1)........... 205,000 ------------ MAINE North Berwick......... 821,000 ------------ NEW MEXICO Carlsbad (1).......... 10,000 ------------ NORTH CAROLINA Charlotte (1)......... 34,000 Concord (1)........... 32,000 Mint Hill (1)......... 23,000 New Bern (1).......... 21,000 Thomasville (1)....... 21,000 ------------ 131,000 ------------ PENNSYLVANIA New Kingston (1)...... 430,000 ------------ SOUTH CAROLINA N. Myrtle Beach (1)... 37,000 ------------ TENNESSEE Paris (1)............. 31,000 Franklin (1).......... 289,000 Memphis (1)........... 780,000 ------------ 1,100,000 ------------ TEXAS Lewisville............ 256,000 Corpus Christi (1).... 10,000 El Paso (1)........... 10,000 Euless (1)............ 10,000 Lewisville (1)........ 10,000 McAllen (1)........... 10,000 Victoria (1).......... 10,000 ------------ 316,000 ------------ WISCONSIN Windsor (1)........... 356,000 ------------ Total Other.............. 5,082,000 ------------ GRAND TOTAL.............. 19,604,000 ============ ---------- (1) leasehold interest. -50-
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HOTEL PENNSYLVANIA The Hotel Pennsylvania is located in New York City on Seventh Avenue opposite Madison Square Garden and consists of a hotel portion containing 1,000,000 square feet of hotel space with 1,700 rooms and a commercial portion containing 400,000 square feet of retail and office space. The Hotel is dependent on tourism and was severely impacted by the events of September 11, 2001, accelerating a trend which began in the first quarter of 2001. The following table presents rental information for the Hotel: [Download Table] Year Ended December 31, -------------------------------------------- 2002 2001 2000 1999 -------- -------- -------- -------- Average occupancy rate......... 65% 63% 76% 80% Average daily rate............. $ 89 $ 110 $ 114 $ 105 Revenue per available room..... $ 58 $ 70 $ 87 $ 84 As of December 31, 2002, the property's retail and office space was 47% and 53% occupied compared to 56% and 61% as of December 2001. 25 tenants occupy the retail and office space. Annual rent per square foot of retail and office space in 2002 was $40 and $12 compared to $50 and $21 in 2001 and $45 and $17 in 2000. DRY WAREHOUSE/INDUSTRIAL PROPERTIES The Company's dry warehouse/industrial properties consist of eight buildings in New Jersey containing approximately 2.0 million square feet. The average term of a tenant's lease is three to five years. The following table sets forth the occupancy rate and average annual rent per square foot at the end of each of the past four years. [Download Table] Average Annual As of Occupancy Rent Per December 31, Rate Square Foot ----------------- -------------- ---------------- 2002............. 95% $ 3.81 2001............. 100% 3.67 2000............. 90% 3.52 1999............. 92% 3.37 In November 2002, the Company entered into an agreement to ground lease its East Brunswick industrial property to Lowe's. Lowe's will demolish the existing warehouse containing 326,000 square feet and construct its own retail store. This lease is subject to various governmental approvals. -51-
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ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters, including in respect of the matter referred to below, is not expected to have a material adverse effect on the Company's financial position or results of operation. PRIMESTONE As previously disclosed, Primestone filed an amended counterclaim against the Company in Delaware Chancery Court on July 31, 2002, alleging, among other things, that Vornado's April 30, 2002 foreclosure on the collateral pledged by Primestone did not comply with the Uniform Commercial Code. On December 19, 2002, the Delaware Chancery Court dismissed all of Primestone's counterclaims. On January 17, 2003, Primestone filed a notice of appeal. In its brief filed on February 14, 2003, Primestone asked the Delaware Supreme Court to reverse the Delaware Chancery court's decision that (1) Vornado's foreclosure auction was held in a commercially reasonable manner, and (2) Vornado did not tortiously interfere with Primestone business relations. This litigation is continuing. Primestone and several affiliates commenced an action against the Company on May 3, 2002 in New York Supreme Court, alleging substantially the same causes of action as in its amended counterclaim in the Delaware Chancery Court. On June 10, 2002, Vornado moved to dismiss this action. This litigation is continuing. On May 9, 2002, five affiliates of Primestone asserted counterclaims in an action which the Company had commenced against them on March 28, 2002 in New York Supreme Court. The counterclaims are virtually identical to the claims asserted in the May 3, 2002 action. On May 29, 2002, Vornado filed an answer denying the essential allegations of the counterclaims. This litigation is continuing. STOP & SHOP On January 8, 2003, Stop & Shop filed a complaint with the United States District Court claiming the Company has no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty, because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. The additional rent provision of the guaranty expires at the earliest in 2012. The Company intends to vigorously contest Stop & Shop's position. -52-
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2002. EXECUTIVE OFFICERS OF THE REGISTRANT The Operating Partnership is managed by Vornado, its general partner. The following is a list of the names, ages, principal occupations and positions with Vornado of the executive officers of Vornado and the positions held by such officers during the past five years. All executive officers of Vornado have terms of office which run until the next succeeding meeting of the Board of Trustees of Vornado following the Annual Meeting of Shareholders unless they are removed sooner by the Board. [Enlarge/Download Table] PRINCIPAL OCCUPATION, POSITION AND OFFICE (CURRENT AND NAME AGE DURING PAST FIVE YEARS WITH VORNADO UNLESS OTHERWISE STATED) ---- --- -------------------------------------------------------------------------------------- Steven Roth................ 61 Chairman of the Board, Chief Executive Officer and Chairman of the Executive Committee of the Board; the Managing General Partner of Interstate Properties, an owner of shopping centers and an investor in securities and partnerships; Chief Executive Officer of Alexander's, Inc. since March 1995 and a Director since 1989; Chairman and CEO of Vornado Operating since 1998. Michael D. Fascitelli...... 46 President and a Trustee since December 1996; President of Alexander's Inc. since August 2000 and Director since December 1996; Director of Vornado Operating since 1998; Partner at Goldman, Sachs & Co. in charge of its real estate practice from December 1992 to December 1996; and Vice President at Goldman, Sachs & Co., prior to December 1992. Melvyn H. Blum............. 56 Executive Vice President--Development since January 2000; Senior Managing Director at Tishman Speyer Properties in charge of its development activities in the United States from July 1998 to January 2000; and Managing Director of Development and Acquisitions at Tishman Speyer Properties prior to July 1998. Michelle Felman............ 40 Executive Vice President--Acquisitions since September 2000; Independent Consultant to Vornado from October 1997 to September 2000; Managing Director-Global Acquisitions and Business Development of GE Capital from 1991 to July 1997. David R. Greenbaum......... 51 President of the New York City Office Division since April 1997 (date of the Company's acquisition); President of Mendik Realty (the predecessor to the New York City Office Properties Division) from 1990 until April 1997. Christopher Kennedy........ 39 President of the Merchandise Mart Division since September 2000; Executive Vice President of the Merchandise Mart from April 1998 to September 2000; Executive Vice President of Merchandise Mart Properties, Inc. from 1994 to April 1998. Paul Larner................ 47 Executive Vice President -- Chief Administrative Officer and Secretary since October 2002; Chief Operating Officer and Chief Financial Officer of Charles E. Smith Commercial Realty, a division of Vornado Realty Trust from January 2002 (date acquired by the Company) to October 2002; Chief Financial Officer of Charles E. Smith Commercial Realty L.P. (the predecessor to Charles E. Smith Commercial Realty) from October 1997 until January 2002. Joseph Macnow.............. 57 Executive Vice President--Finance and Administration since January 1998 and Chief Financial Officer since March 2001; Executive Vice President -- Finance and Administration of Vornado Operating since 1998; Vice President-Chief Financial Officer of the Company from 1985 to January 1998; Executive Vice President and Chief Financial Officer of Alexander's, Inc. since August 1995. Sandeep Mathrani........... 40 Executive Vice President--Retail Real Estate since March 2002; Executive Vice President, Forest City Ratner from 1994 to February 2002. Wendy Silverstein.......... 42 Executive Vice President--Capital Markets since April 1998; Senior Credit Officer of Citicorp Real Estate and Citibank, N.A. from 1986 to 1998. Robert H. Smith............ 74 Chairman of Charles E. Smith Commercial Realty, a division of Vornado Realty Trust, and Trustee of the Company since January 2002 (date acquired by the Company); Co-Chief Executive Officer and Co-Chairman of the Board of Charles E. Smith Commercial Realty L.P. (the predecessor to Charles E. Smith Commercial Realty) prior to January 2002. -53-
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PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDERS MATTERS There is no established trading market for the units of the Operating Partnership. At December 31, 2002, there were 1,633 Class A unitholders of record. DIVIDENDS AND DISTRIBUTIONS During the year ended December 31, 2002, the Company declared four quarterly unit distributions in the amounts of $0.66, $0.66, $0.66 and $0.68 per unit from the first to the fourth quarter, respectively. During the year ended December 31, 2001, the Company declared four quarterly unit distributions in the amounts of $0.53, $0.53, $0.60 and $0.97 per unit from the first to the fourth quarter, respectively. RECENT SALES OF UNREGISTERED SECURITIES In 2000, the Company issued 244,247 Class A units in connection with the acquisition of equity investments in certain limited partnerships that own real estate. The Class A units were issued without registration under the Securities Act of 1933 in reliance on Regulation D promulgated under that Act. During 2000, the Company also issued 840,000 Series D-6 Preferred Units, 7,200,000 Series D-7 Preferred Units and 360,000 Series D-8 Preferred Units to institutional investors for net proceeds of $20,475,000, $175,500,000 and $8,775,000, respectively. These preferred units were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) of that Act. In 2001, the Company issued 205,823 Class A units in connection with the acquisition of equity investments in certain limited partnerships that own real estate. The Class A units were issued without registration under the Securities Act of 1933 in reliance on Regulation D promulgated under that Act. On July 1, 2001, the Company issued 29,092 Class A units in connection with the acquisition of real estate. The Class A units were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) of that Act. On September 21, 2001, the Company issued 1,800,000 Series D-9 Preferred Units to an institutional investor for net proceeds of approximately $43,875,000. The Series D-9 Preferred Units were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) of that Act. During 2001, the Company also issued 400,000 F-1 Preferred Units in connection with the acquisition of a leasehold interest in real estate. The Series F-1 Preferred Units were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) of that Act. In 2002, the Company issued 15,967,651 Class A units in connection with the acquisition of interests in limited partnerships that own real estate. The Class A units were issued without registration under the Securities Act of 1933 in reliance on Regulation D promulgated under that Act. -54-
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- (in thousands, except unit and per unit amounts) OPERATING DATA Revenues: Rentals.............................................. $ 1,248,903 $ 841,999 $ 695,078 $ 591,270 $ 425,496 Expense reimbursements............................... 159,978 133,114 120,056 96,842 74,737 Other income......................................... 26,189 10,660 10,838 8,251 9,627 ----------- ----------- ----------- ----------- ----------- Total Revenues............................................ 1,435,070 985,773 825,972 696,363 509,860 ----------- ----------- ----------- ----------- ----------- Expenses: Operating............................................ 541,596 398,969 318,360 282,118 207,171 Depreciation and amortization........................ 205,826 123,862 99,846 83,585 59,227 General and administrative........................... 98,458 72,572 47,911 40,151 28,610 Amortization of officer's deferred compensation expense............................... 27,500 -- -- -- -- Costs of acquisitions and development not consummated.................................... 6,874 5,223 -- -- -- ----------- ----------- ----------- ----------- ----------- Total Expenses............................................ 880,254 600,626 466,117 405,854 295,008 ----------- ----------- ----------- ----------- ----------- Operating Income.......................................... 554,816 385,147 359,855 290,509 214,852 Income applicable to Alexander's.......................... 29,653 25,718 17,363 11,772 3,123 Income from partially-owned entities...................... 44,458 80,612 86,654 78,560 32,025 Interest and other investment income...................... 31,685 54,385 32,926 18,359 24,074 Interest and debt expense................................. (239,525) (173,076) (171,398) (141,683) (114,686) Net (loss) gain on disposition of wholly-owned and partially-owned assets other than real estate.......... (17,471) (8,070) -- -- 9,649 Minority interest......................................... (3,185) (2,520) (1,965) (1,840) (651) ----------- ----------- ----------- ----------- ----------- Income before gains on sales of real estate and cumulative effect of change in accounting principle............... 400,431 362,196 323,435 255,677 168,386 Gains on sale of real estate.............................. -- 15,495 10,965 -- -- Cumulative effect of change in accounting principle....... (30,129) (4,110) -- -- -- ----------- ----------- ----------- ----------- ----------- Net income................................................ 370,302 373,581 334,400 255,677 168,386 Preferred unit distributions.............................. (119,214) (130,815) (124,736) (78,250) (35,233) ----------- ----------- ----------- ----------- ----------- Net income applicable to Class A units.................... $ 251,088 $ 242,766 $ 209,664 $ 117,427 $ 133,153 =========== =========== =========== =========== =========== Income per Class A unit--basic.......................... $ 1.97 $ 2.55 $ 2.26 $ 1.97 $ 1.62 Income per Class A unit--diluted........................ $ 1.92 $ 2.47 $ 2.20 $ 1.94 $ 1.59 Cash distributions declared for Class A units.......... $ 2.66 $ 2.63 $ 1.97 $ 1.80 $ 1.64 BALANCE SHEET DATA Total assets........................................... $ 9,018,179 $ 6,777,343 $ 6,403,210 $ 5,479,218 $ 4,425,779 Real estate, at cost................................... 7,559,694 4,690,211 4,354,392 3,921,507 3,315,891 Accumulated depreciation............................... 737,426 506,225 393,787 308,542 226,816 Debt................................................... 4,071,320 2,477,173 2,688,308 2,048,804 2,051,000 Partners' capital...................................... 4,644,206 4,024,235 3,519,417 3,262,630 2,203,054 -55-
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Index to Management's Discussion and Analysis of Financial Condition and Results of Operations. [Enlarge/Download Table] PAGE ---- Overview........................................................................ 56 Critical Accounting Policies.................................................. 57 Results of Operations: Years Ended December 31, 2002 and 2001.................................... 63 Years Ended December 31, 2001 and 2000.................................... 69 Supplemental Information: Summary of Net Income and Adjusted EBITDA for the Three Months Ended December 31, 2002 and 2001............................................. 75 Changes by segment in Adjusted EBITDA for the Three Months Ended December 31, 2002 and 2001............................................. 77 Changes by segment in Adjusted EBITDA for the Three Months Ended December 31, 2002 as compared to September 30, 2002.................... 77 Leasing Activity.......................................................... 78 Pro forma Operating Results - CESCR Acquisition........................... 79 Senior Unsecured Debt Covenant Compliance Ratios.......................... 79 Related Party Disclosure.................................................. 80 Liquidity and Capital Resources: Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........... 83 OVERVIEW Management's Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of the Company's consolidated financial statements for the years ended December 31, 2002, 2001 and 2000. Operating results for the year ended December 31, 2002, reflect the Company's January 1, 2002 acquisition of the remaining 66% of Charles E. Smith Commercial Realty L.P. ("CESCR") and the resulting consolidation of CESCR's operations. See Supplemental Information, page 79, for Condensed Pro Forma Operating Results for the year ended December 31, 2001 giving effect to the CESCR acquisition as if it had occurred on January 1, 2001. -56-
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CRITICAL ACCOUNTING POLICIES In preparing the consolidated financial statements management has made estimates and assumptions that affect the reported amounts of 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. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. The summary should be read in conjunction with the more complete discussion of the Company's accounting policies included in Note 2 to the consolidated financial statements in this annual report on Form 10-K. REAL ESTATE Real estate is carried at cost, net of accumulated depreciation and amortization. As of December 31, 2002, the Company's carrying amount of its real estate, net of accumulated depreciation is $6.8 billion. Maintenance and repairs are charged to operations as incurred. Depreciation requires an estimate by management of the useful life of each property as well as an allocation of the costs associated with a property to its various components. If the Company does not allocate these costs appropriately or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated. Upon acquisitions of real estate, the Company assesses the fair value of acquired assets (including land, buildings, tenant improvements and acquired above and below market leases and the origination cost of acquired in-place leases in accordance with SFAS No. 141) and acquired liabilities, and allocate purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. The Company's properties are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. If the Company incorrectly estimates the values at acquisition or the undiscounted cash flows, initial allocations of purchase price and future impairment charges may be different. The impact of the Company's estimates in connection with acquisitions and future impairment analysis could be material to the Company's financial statements. NOTES AND MORTGAGE LOANS RECEIVABLE The Company evaluates the collectibility of both interest and principal of each of its notes and mortgage loans receivable ($86.6 million as of December 31, 2002) if circumstances warrant to determine whether it is impaired. If the Company fails to identify that the investee or borrower are unable to perform, the Company's bad debt expense may be different. PARTIALLY-OWNED ENTITIES The Company accounts for its investments in partially-owned entities ($997.7 million as of December 31, 2002) under the equity method when the Company's ownership interest is more than 20% but less than 50% and the Company does not exercise direct or indirect control. When partially-owned investments are in partnership form, the 20% threshold may be reduced. Factors that the Company considers in determining whether or not it exercises control include substantive participating rights of partners on significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representation and authority and other contractual rights of its partners. To the extent that the Company is deemed to control these entities, these entities would have to be consolidated and therefore impact the balance sheet, operations and related ratios. On a periodic basis the Company evaluates whether there are any indicators that the value of the Company's investments in partially-owned entities are impaired. An investment is impaired if management's estimate of the value of the investment is less than the carrying amount. The ultimate realization of the Company's investment in partially-owned entities is dependent on a number of factors including the performance of the investee and market conditions. If the Company determines that a decline in the value of its investee is other than temporary, then an impairment charge would be recorded. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company periodically evaluates the collectibility of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreement. The Company also maintains an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. If estimates differ from actual results this would impact reported results. -57-
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REVENUE RECOGNITION The Company has the following revenue sources and revenue recognition policies: - Base Rents -- income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and free rent abatements under the leases. - Percentage Rents -- income arising from retail tenant leases which are contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accordance with SAB 101, which states that this income is to be recognized only after the contingency has been removed (i.e. sales thresholds have been achieved). - Hotel Revenues -- income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is recognized when rooms are occupied. Food and beverage and banquet revenue are recognized when the services have been rendered. - Trade Show Revenues -- income arising from the operation of trade shows, including rentals of booths. This revenue is recognized in accordance with the booth rental contracts when the trade shows have occurred. - Expense Reimbursement Income -- income arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This income is accrued in the same periods as the expenses are incurred. Before the Company recognizes revenue, it assesses among other things, its collectibility. If the Company incorrectly determines the collectibility of its revenue, its net income and assets could be overstated. -58-
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Below is a summary of Net income and Adjusted EBITDA(1) by segment for the years ended December 31, 2002, 2001 and 2000. Prior to 2001, income from the Company's preferred stock affiliates ("PSAs") was included in income from partially-owned entities. On January 1, 2001, the Company acquired the common stock of its PSAs and converted these entities to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel Pennsylvania and the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated effective January 1, 2001. Amounts for the year ended December 31, 2000 have been reclassified to give effect to the consolidation of these entities, as if consolidated as of January 1, 2000 (see page 61 for the details of the reclassifications by line item). In addition, the Company has revised Adjusted EBITDA as previously reported for the year ended December 31, 2001 and 2000 to include income from the early extinguishment of debt of $1,170,000 in 2001 and expense from the early extinguishment of debt of $1,125,000 in 2000 because such items are no longer treated as extraordinary items in accordance with Generally Accepted Accounting Principles. [Enlarge/Download Table] ($ in thousands) December 31, 2002 ------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----------- ---------- --------- ----------- ----------- --------- Rentals....................................... $ 1,248,903 $ 867,938 $ 127,561 $ 195,899 $ -- $ 57,505 Expense reimbursements........................ 159,978 89,890 51,750 14,754 -- 3,584 Other income.................................. 26,189 21,221 1,653 2,951 -- 364 ----------- ---------- --------- --------- --------- --------- Total revenues................................ 1,435,070 979,049 180,964 213,604 -- 61,453 ----------- ---------- --------- --------- --------- --------- Operating expenses............................ 541,596 343,723 65,455 86,022 -- 46,396 Depreciation and amortization................. 205,826 146,746 15,507 26,716 -- 16,857 General and administrative.................... 98,458 34,346 5,036 20,382 -- 38,694 Costs of acquisitions and development not consummated............................. 6,874 -- -- -- -- 6,874 Amortization of officer's deferred compensation expense........................ 27,500 -- -- -- -- 27,500 ----------- ---------- --------- --------- --------- --------- Total expenses................................ 880,254 524,815 85,998 133,120 -- 136,321 ----------- ---------- --------- --------- --------- --------- Operating income.............................. 554,816 454,234 94,966 80,484 -- (74,868) Income applicable to Alexander's.............. 29,653 -- -- -- -- 29,653 Income from partially-owned entities.......... 44,458 1,966 (687) (339) 9,707 33,811 Interest and other investment income.......... 31,685 6,472 323 507 -- 24,383 Interest and debt expense..................... (239,525) (141,044) (56,643) (22,948) -- (18,890) Net (loss) gain on disposition of wholly- owned and partially-owned assets other than real estate............................ (17,471) -- -- 2,156 -- (19,627) Minority interest............................. (3,185) (3,526) -- -- -- 341 ----------- ---------- --------- --------- --------- --------- Income before gains on sale of real estate and cumulative effect of change in accounting principle........................ 400,431 318,102 37,959 59,860 9,707 (25,197) Gains on sale of real estate.................. -- -- -- -- -- -- Cumulative effect of change in accounting principle................................... (30,129) -- -- -- (15,490) (14,639) ----------- ---------- --------- --------- --------- --------- Net income.................................... 370,302 318,102 37,959 59,860 (5,783) (39,836) Cumulative effect of change in accounting principle................................... 30,129 -- -- -- 15,490 14,639 Interest and debt expense(3).................. 302,009 139,157 58,409 23,461 25,617 55,365 Depreciation and amortization(3).............. 257,707 149,361 17,532 27,006 34,474 29,334 ----------- ---------- --------- --------- --------- --------- EBITDA........................................ 960,147 606,620 113,900 110,327 69,798 59,502 Adjustments: Minority interest............................. 3,185 3,526 -- -- -- (341) Gains (losses) on sale of real estate(3)...... (1,405) -- -- -- 2,026 (3,431) Straight-lining of rents(3)................... (29,837) (24,352) (1,863) (1,772) -- (1,850) Amortization of below market leases, net...... (12,634) (12,469) (165) -- -- -- Other......................................... 1,549 -- 860 323 -- 366 ----------- ---------- --------- --------- --------- --------- Adjusted EBITDA(1)............................ $ 921,005 $ 573,325 $ 112,732 $ 108,878 $ 71,824 $ 54,246 =========== ========== ========= ========= ========= ========= ---------- See Notes on page 62. -59-
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[Enlarge/Download Table] ($ in thousands) December 31, 2001 --------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----------- ---------- --------- ----------- ----------- --------- Rentals.................................... $ 841,999 $ 461,606 $ 121,023 $ 197,668 $ -- $ 61,702 Expense reimbursements..................... 133,114 67,470 49,436 13,801 -- 2,407 Other income............................... 10,660 3,775 1,154 3,324 -- 2,407 ----------- ---------- --------- --------- --------- --------- Total revenues............................. 985,773 532,851 171,613 214,793 -- 66,516 ----------- ---------- --------- --------- --------- --------- Operating expenses......................... 398,969 217,581 56,547 83,107 -- 41,734 Depreciation and amortization.............. 123,862 71,425 14,767 25,397 -- 12,273 General and administrative................. 72,572 12,421 3,576 18,081 -- 38,494 Costs of acquisitions not consummated...... 5,223 -- -- -- -- 5,223 ----------- ---------- --------- --------- --------- --------- Total expenses............................. 600,626 301,427 74,890 126,585 -- 97,724 ----------- ---------- --------- --------- --------- --------- Operating income........................... 385,147 231,424 96,723 88,208 -- (31,208) Income applicable to Alexander's........... 25,718 -- -- -- -- 25,718 Income from partially-owned entities....... 80,612 32,746 1,914 149 17,447(4) 28,356 Interest and other investment income....... 54,385 6,866 608 2,045 -- 44,866 Interest and debt expense.................. (173,076) (54,667) (55,358) (33,354) -- (29,697) Net (loss) gain on disposition of wholly-owned and partially-owned assets other than real estate............ (8,070) -- -- 160 -- (8,230) Minority interest.......................... (2,521) (2,466) -- (40) -- (15) ----------- ---------- --------- --------- --------- --------- Income before gains on sales of real estate and cumulative effect of change in accounting principle........... 362,195 213,903 43,887 57,168 17,447 29,790 Gains on sale of real estate............... 15,495 12,445 3,050 -- -- -- Cumulative effect of change in accounting principle..................... (4,110) -- -- -- -- (4,110) ----------- ---------- --------- --------- --------- --------- Net income................................. 373,580 226,348 46,937 57,168 17,447 25,680 Cumulative effect of change in accounting principle..................... 4,110 -- -- -- -- 4,110 Interest and debt expense(3)............... 266,784 92,410 57,915 33,354 26,459 56,646 Depreciation and amortization(3)........... 188,859 91,085 18,957 25,397 33,815 19,605 ----------- ---------- --------- --------- --------- --------- EBITDA .................................... 833,333 409,843 123,809 115,919 77,721 106,041 Adjustments: Gains on sale of real estate(3)............ (21,793) (12,445) (3,050) -- -- (6,298) Minority interest.......................... 2,521 2,466 -- 40 -- 15 Net gain on disposition of wholly-owned and partially-owned assets other than real estate......................... (160) -- -- (160) -- -- Straight-lining of rents(3) ............... (26,134) (20,064) 727 (4,997) -- (1,800) Other...................................... (2,715) -- (2,337) -- 716 (1,094) ----------- ---------- --------- --------- --------- --------- Adjusted EBITDA(1)......................... $ 785,052 $ 379,800 $ 119,149 $ 110,802 $ 78,437 $ 96,864 =========== ========== ========= ========= ========= ========= ---------- See Notes on page 62. -60-
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[Enlarge/Download Table] ($ in thousands) December 31, 2000 (after giving effect to consolidation of PSA's - see reclassifications below) ------------------------------------------------------------------------------------ Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ------------ ------------ ------------ ------------- ------------ ---------- Rentals............................. $ 788,469 $ 406,261 $ 129,902 $ 171,001 $ -- $ 81,305 Expense reimbursements.............. 120,074 60,767 45,490 10,654 -- 3,163 Other income........................ 17,608 5,499 2,395 4,661 -- 5,053 ------------ ------------ ------------ ------------- ------------ ---------- Total revenues...................... 926,151 472,527 177,787 186,316 -- 89,521 ------------ ------------ ------------ ------------- ------------ ---------- Operating expenses.................. 379,524 199,424 55,671 74,553 -- 49,876 Depreciation and amortization....... 108,109 58,074 17,464 21,984 -- 10,587 General and administrative.......... 63,468 10,401 667 16,330 -- 36,070 ------------ ------------ ------------ ------------- ------------ ---------- Total expenses...................... 551,101 267,899 73,802 112,867 -- 96,533 ------------ ------------ ------------ ------------- ------------ ---------- Operating income.................... 375,050 204,628 103,985 73,449 -- (7,012) Income applicable to Alexander's.... 17,363 -- -- -- -- 17,363 Income from partially-owned entities.......................... 79,694 29,210 667 -- 28,778(4) 21,039 Interest and other investment income............................ 33,798 6,162 -- 2,346 -- 25,290 Interest and debt expense .......... (180,505) (62,162) (54,305) (38,569) -- (25,469) Minority interest................... (1,965) (1,933) -- -- -- (32) ------------ ------------ ------------ ------------- ------------ ---------- Income before gains on sales of real estate....................... 323,435 175,905 50,347 37,226 28,778 31,179 Gains on sales of real estate ...... 10,965 8,405 2,560 -- -- -- ------------ ------------ ------------ ------------- ------------ ---------- Net income.......................... 334,400 184,310 52,907 37,226 28,778 31,179 Interest and debt expense(3)........ 260,573 96,224 55,741 38,566 27,424 42,618 Depreciation and amortization(3).... 167,268 76,696 18,522 20,627 34,015 17,408 ------------ ------------ ------------ ------------- ------------ ---------- EBITDA.............................. 762,241 357,230 127,170 96,419 90,217 91,205 Adjustments: Minority interest................... 1,965 1,933 -- -- -- 32 Gains on sale of real estate(3)..... (10,965) (8,405) (2,560) -- -- -- Straight-lining of rents(3)......... (30,001) (19,733) (2,295) (5,919) (1,121) (933) Other............................... 14,510 -- (1,654) 1,358 4,064(2) 10,742(5) ------------ ------------ ------------ ------------- ------------ ---------- Adjusted EBITDA(1).................. $ 737,750 $ 331,025 $ 120,661 $ 91,858 $ 93,160 $ 101,046 ============ ============ ============ ============= ============ ========== ---------- See Notes on page 62. Prior to 2001, income from the Company's investments in preferred stock affiliates ("PSAs") was included in income from partially-owned entities. On January 1, 2001, the Company acquired the common stock of its PSAs and converted these entities to taxable REIT subsidiaries. Accordingly, the operations of the Hotel portion of the Hotel Pennsylvania and the operations of the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated effective January 1, 2001. Amounts for the year ended December 31, 2000 have been reclassified to give effect to the consolidation of these entities, as of January 1, 2000. The effect of these reclassifications in 2000 was as follows: [Download Table] (i) reduction in equity in income of partially-owned entities $ (8,599,000) (ii) increase in rental revenues 64,501,000 (iii) increase in other income 8,325,000 (iv) increase in operating expenses (41,233,000) (v) increase in depreciation and amortization (6,906,000) (vi) increase in general and administrative expenses (6,984,000) (vii) increase in interest and debt expense (9,104,000) ---------------- (viii) net impact $ -- ================ These reclassifications had no effect on reported Net Income or Adjusted EBITDA for the year ended December 31, 2000 and no impact to any other year. -61-
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NOTES: (1) Adjusted EBITDA represents income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of depreciable real estate, the effect of straight-lining of rent escalations, amortization of acquired below market leases net of above market leases and minority interest. Management considers Adjusted EBITDA a supplemental measure for making decisions and assessing the performance of its segments. Adjusted EBITDA should not be considered a substitute for net income or a substitute for cash flow as a measure of liquidity. Adjusted EBITDA is presented as a measure of "operating performance" which enables the reader to identify trends from period to period and may be used to compare "same store" operating performance to other companies, as well as providing a measure for determining funds available to service debt. Adjusted EBITDA may not be comparable to similarly titled measures employed by other companies. In addition, the Company has revised Adjusted EBITDA as previously reported for the year ended December 31, 2001 and 2000 to include income from the early extinguishment of debt of $1,170 in 2001 and expense from the early extinguishment of debt of $1,125 in 2000 because such items are no longer treated as Extraordinary Items in accordance with Generally Accepted Accounting Principles. (2) Adjusted EBITDA - Other is comprised of: [Enlarge/Download Table] (amounts in thousands) For the Year Ended December 31, ------------------------------------- 2002 2001 2000 --------- -------- --------- Newkirk Master Limited Partnership: Equity in income...................................................... $ 60,756 $ 54,695 $ 43,685 Interest and other income............................................. 8,795 8,700 7,300 Hotel Pennsylvania...................................................... 7,636 16,978 26,866 Alexander's............................................................. 34,381 19,362 18,330 Investment income and other............................................. 31,261 44,097 34,990 Corporate general and administrative expenses........................... (34,743) (33,515) (30,125) Primestone foreclosure and impairment losses............................ (35,757) -- -- Amortization of Officer's deferred compensation expense................. (27,500) -- -- Write-off of 20 Times Square pre-development costs (2002) and World Trade Center acquisition costs (2001)................................. (6,874) (5,223) -- Net gain on sale of marketable securities............................... 12,346 -- -- Gain on transfer of mortgages........................................... 2,096 -- -- Net gain on sale of air rights.......................................... 1,688 -- -- Palisades............................................................... 161 -- -- After-tax net gain on sale of Park Laurel condominium units............. -- 15,657 -- Write-off of net investment in Russian Tea Room......................... -- (7,374) -- Write-off of investments in technology companies........................ -- (16,513) -- --------- -------- --------- Total.......................................................... $ 54,246 $ 96,864 $ 101,046 ========= ======== ========= (3) Interest and debt expense, depreciation and amortization, straight-lining of rents and gains on sale of real estate included in the reconciliation of net income to EBITDA or Adjusted EBITDA include amounts which are netted in income from partially-owned entities. (4) Excludes rent not recognized of $19,348, $15,281 and $9,787 for the years ended December 31, 2002, 2001 and 2000. (5) Includes the reversal of $1,266 and $4,765 of expenses in 2001 and 2000 representing the non-cash appreciation in value of shares held in a rabbi trust in connection with a deferred compensation arrangement for the Company's President. The following table sets forth the percentage of the Company's Adjusted EBITDA by segment for the years ended December 31, 2002, 2001 and 2000. The pro forma column gives effect to the January 1, 2002 acquisition by the Company of the remaining 66% interest in CESCR described previously as if it had occurred on January 1, 2001. [Enlarge/Download Table] PERCENTAGE OF ADJUSTED EBITDA ------------------------------------------ Year Ended December 31, ------------------------------------------ 2002 2001 2001 2000 -------- -------- -------- -------- Office: (Pro forma) New York City...................................... 33% 31% 38% 35% CESCR.............................................. 29% 26% 10% 10% ---- ---- ---- ---- Total.............................................. 62% 57% 48% 45% Retail................................................ 12% 12% 15% 16% Merchandise Mart Properties........................... 12% 12% 14% 12% Temperature Controlled Logistics...................... 8% 8% 10% 13% Other................................................. 6% 11% 13% 14% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ==== -62-
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RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001 REVENUES The Company's revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of above and below market leases acquired under SFAS No. 141, and other income, were $1,435,070,000 for the year ended December 31, 2002, compared to $985,773,000 in the year ended December 31, 2001, an increase of $449,297,000 of which $423,128,000 resulted from the acquisition of the remaining 66% of CESCR and the resulting consolidation of its operations. Below are the details of the increase (decrease) by segment: (amounts in thousands) [Enlarge/Download Table] Date of Merchandise Acquisition Total Office Retail Mart Other -------------- --------- --------- -------- --------- --------- PROPERTY RENTALS: Acquisitions, dispositions and non same store revenue: CESCR (acquisition of remaining 66% and consolidation vs. equity method accounting for 34%)...................... January 2002 $ 393,506 $ 393,506 $ -- $ -- $ -- Palisades................................. March 2002 4,109 -- -- -- 4,109 715 Lexington Avenue...................... July 2001 976 -- 976 -- -- Las Catalinas (acquisition of remaining 50% and consolidation vs. equity method accounting for 50%)............... September 2002 3,108 -- 3,108 -- -- 435 Seventh Avenue (placed in service).... August 2002 2,541 -- 2,541 -- -- 424 Sixth Avenue.......................... July 2002 320 -- 320 -- -- Properties taken out of service for redevelopment............................. (767) -- (767) -- -- Same Store: Hotel activity............................ (7,645)(1) -- -- -- (7,645)(1) Trade Shows activity...................... (3,908)(2) -- -- (3,908)(2) -- Leasing activity (3)...................... 14,664 12,826 360 2,139 (661) --------- --------- -------- --------- --------- Total increase (decrease) in property rentals................................... 406,904 406,332 6,538 (1,769) (4,197) --------- --------- -------- --------- --------- TENANT EXPENSE REIMBURSEMENTS: Increase due to acquisitions............... 15,319 14,398 921 -- -- Same Store................................. 11,545 8,022 1,393 953 1,177 --------- --------- -------- --------- --------- Total increase (decrease) in tenant expense reimbursements.................... 26,864 22,420 2,314 953 1,177 --------- --------- -------- --------- --------- OTHER INCOME: Increase due to acquisitions............... 15,379 15,224 11 -- 144 Same Store................................. 150 2,222 488 (373) (2,187) --------- --------- -------- --------- --------- Total increase (decrease) in other income... 15,529 17,446 499 (373) (2,043) --------- --------- -------- --------- --------- Total increase (decrease) in revenues....... $ 449,297 $ 446,198 $ 9,351 $ (1,189) $ (5,063) ========= ========= ======== ========= ========= ---------- (1) Average occupancy and REVPAR for the Hotel Pennsylvania were 65% and $58 for the year ended December 31, 2002 compared to 63% and $70 for the prior year. (2) Reflects a decrease of $3,580 resulting from the rescheduling of two trade shows from the fourth quarter in which they were previously held to the first quarter of 2003. See supplemental information on page 78, for details of leasing activity and corresponding changes in occupancy. -63-
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EXPENSES The Company's expenses were $880,254,000 for the year ended December 31, 2002, compared to $600,626,000 in the year ended December 31, 2001, an increase of $279,628,000 of which $202,852,000 resulted from the acquisition of the remaining 66% of CESCR and the resulting consolidation of its operations. Below are the details of the increase by segment: [Enlarge/Download Table] (amounts in thousands) Merchandise Total Office Retail Mart Other --------- --------- --------- ----------- --------- Operating: Acquisitions: CESCR (acquisition of remaining 66% and consolidation vs. equity method accounting for 34%) .................................. $ 114,438 $ 114,438 $ -- $ -- $ -- Palisades .................................... 5,158 -- -- -- 5,158 715 Lexington Avenue ......................... 588 -- 588 -- -- 435 Seventh Avenue ........................... 198 -- 198 -- -- 424 Sixth Avenue ............................. 50 -- 50 -- -- Las Catalinas (acquisition of remaining 50% and consolidation vs ........... equity method accounting for 50%) ..................................... 1,341 -- 1,341 -- -- Hotel activity ............................... 503 -- -- -- 503 Trade Shows activity ......................... (2,108) -- -- (2,108)(3) -- Same store operations ........................ 22,459 11,704(1) 6,731(2) 5,023(4) (999) --------- --------- --------- --------- --------- 142,627 126,142 8,908 2,915 4,662 --------- --------- --------- --------- --------- Depreciation and amortization: Acquisitions ................................. 71,435 67,470 1,015 -- 2,950 Same store operations ........................ 10,529 7,851 (275) 1,319 1,634 --------- --------- --------- --------- --------- 81,964 75,321 740 1,319 4,584 --------- --------- --------- --------- --------- General and administrative: Acquisitions ................................... 20,944 20,944 -- -- -- Other expenses ................................. 4,942 981 1,460 2,301(5) 200 --------- --------- --------- --------- --------- Total increase (decrease) in general and administrative ........................... 25,886 21,925 1,460 2,301 200 --------- --------- --------- --------- --------- Amortization of officer's deferred compensation expense .................. 27,500 -- -- -- 27,500 --------- --------- --------- --------- --------- Costs of acquisitions and development not consummated ................................ 1,651 -- -- -- 1,651(6) --------- --------- --------- --------- --------- $ 279,628 $ 223,388 $ 11,108 $ 6,535 $ 38,597 ========= ========= ========= ========= ========= ---------- (1) Results primarily from (i) a $9,725 increase in insurance, security and real estate taxes, largely reimbursed by tenants, and (ii) $2,639 for an allowance for straight-line rent receivables. (2) Results primarily from (i) increases in insurance costs which are reimbursed by tenants, (ii) a $402 payment of Puerto Rico taxes related to the prior year, (iii) $2,280 in bad debt allowances for accounts receivable and receivables arising from the straight-lining of rents in 2002 and (iv) lease termination fees and real estate tax refunds netted against expenses in 2001, which aggregated $1,500. (3) Results primarily from the rescheduling of two trade shows from the fourth quarter in which they were previously held to the first quarter of 2003. (4) Reflects (i) increased insurance costs of $1,366, (ii) a charge of $312 from the settlement of a 1998 utility assessment, and (iii) an increase in real estate taxes of $1,725. (5) Reflects a charge of $954 in connection with the termination of a contract and the write-off of related deferred costs. (1) Reflects a charge in 2002 of $6,874 for the write-off of pre-development costs at the 20 Times Square project and a charge in 2001 of $5,223 in connection with the World Trade Center acquisition not consummated. INCOME APPLICABLE TO ALEXANDER'S Income applicable to Alexander's (loan interest income, management, leasing, development and commitment fees, and equity in income) was $29,653,000 in the year ended December 31, 2002, compared to $25,718,000 in the year ended December 31, 2001, an increase of $3,935,000. This increase resulted from (i) $6,915,000 of development and commitment fees in connection with Alexander's Lexington Avenue development project, (ii) the Company's $3,524,000 share of Alexander's gain on sale of its Third Avenue property, partially offset by (iii) the Company's $6,298,000 share of Alexander's gain on the sale of its Fordham Road property in the prior year. -64-
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INCOME FROM PARTIALLY-OWNED ENTITIES In accordance with accounting principles generally accepted in the United States of America, the Company reflects the income it receives from (i) entities it owns less than 50% of and (ii) entities it owns more than 50% of, but which have a partner who has shared board and management representation and authority and substantive participating rights on all significant business decisions, on the equity method of accounting resulting in such income appearing on one line in the Company's consolidated statements of income. Below is the detail of income from partially-owned entities by investment as well as the increase (decrease) in income from partially-owned entities for the year ended December 31, 2002 as compared to the prior year: [Enlarge/Download Table] (amounts in thousands) Temperature Newkirk Las Controlled Joint Catalinas Monmouth Total CESCR(1) Logistics Venture Mall(2) Mall(3) --------- --------- ----------- --------- --------- -------- YEAR ENDED DECEMBER 31, 2002: Revenues ..................... $ 480,363 $ 117,663 $ 295,369 $ 10,671 $ 5,760 Expenses: Operating, general and administrative .......... (46,098) (7,904) (8,490) (3,102) (2,510) Depreciation ............... (106,287) (59,328) (34,010) (1,482) (943) Interest expense ........... (180,431) (42,695) (121,219) (3,643) (1,520) Other, net ................. (12,505) (2,150) (9,790) (802) 48 --------- --------- --------- -------- -------- Net income/(loss) ............ $ 135,042 $ 5,586 $ 121,860 $ 1,642 $ 835 ========= ========= ========= ======== ======== Vornado's interest ........... 60% 22% 50% 50% Equity in net income/(loss) .. $ 29,872 $ 3,352 $ 26,500 $ 851 $ 791(4) Interest and other income .... 8,306 306 8,000 -- -- Fee income ................... 6,280 6,049 -- -- 231 --------- --------- --------- -------- -------- Income from partially-owned entities .................... $ 44,458 $ --(1) $ 9,707 $ 34,500 $ 851 $ 1,022 ========= ========= ========= ========= ======== ======== YEAR ENDED DECEMBER 31, 2001: Revenues ..................... $ 747,902 $ 382,502 $ 126,957 $ 179,551 $ 14,377 Expenses: Operating, general and administrative .......... (180,337) (135,133) (8,575) (13,630) (2,844) Depreciation ............... (141,594) (53,936) (58,855) (20,352) (2,330) Interest expense ........... (236,996) (112,695) (44,988) (65,611) (5,705) Other, net ................. 11,059 1,975 2,108 4,942 -- --------- --------- --------- --------- -------- Net income ................... $ 200,034 $ 82,713 $ 16,647 $ 84,900 $ 3,498 ========= ========= ========= ========= ======== Vornado's interest ........... 34% 60% 30% 50% Equity in net income/(loss) .. $ 67,679 $ 28,653 $ 9,988 $ 25,470 $ 1,749 Interest and other income .... 7,579 -- 2,105 5,474 -- Fee income ................... 5,354 -- 5,354 -- -- --------- --------- --------- -------- Income from partially-owned entities ................... $ 80,612 $ 28,653 $ 17,447 $ 30,944 $ 1,749 $ -- ========= ========= ========= ========= ======== ======== (DECREASE) INCREASE IN INCOME FROM PARTIALLY-OWNED ENTITIES.. $ (36,154) $ (28,653)(1) $ (7,740) $ 3,556 $ (898)(2) $ 1,022(3) ========= ========= ========= ========= ======== ======== (amounts in thousands) Starwood Partially- Ceruzzi Owned Joint Office Venture Buildings Other --------- ---------- -------- YEAR ENDED DECEMBER 31, 2002: Revenues ..................... $ 695 $ 50,205 Expenses: Operating, general and administrative .......... (2,265) (21,827) Depreciation ............... (1,430) (9,094) Interest expense ........... -- (11,354) Other, net ................. (200) 389 --------- --------- Net income/(loss) ............ $ (3,200) $ 8,319 ========= ========= Vornado's interest ........... 80% 24% Equity in net income/(loss) .. $ (2,560) $ 1,966 $ (1,028) Interest and other income .... -- -- -- Fee income ................... -- -- -- --------- --------- -------- Income from partially-owned entities .................... $ (2,560) $ 1,966 $ (1,028) ========= ========= ======== YEAR ENDED DECEMBER 31, 2001: Revenues ..................... $ 1,252 $ 43,263 Expenses: Operating, general and administrative .......... (820) (19,335) Depreciation ............... (501) (5,620) Interest expense ........... -- (7,997) Other, net ................. 275 1,759 --------- --------- Net income ................... $ 206 $ 12,070 ========= ========= Vornado's interest ........... 80% 34% Equity in net income/(loss) .. $ 165 $ 4,093 $ (2,439) Interest and other income .... -- -- -- Fee income ................... -- -- -- --------- --------- -------- Income from partially-owned entities ................... $ 165 $ 4,093 $ (2,439) ========= ========= ======== (DECREASE) INCREASE IN INCOME FROM PARTIALLY-OWNED ENTITIES.. $ (2,725)(5) $ (2,127)(6) $ 1,411(7) ========= ========= ======== ---------- (1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did not previously own. Accordingly, CESCR is consolidated as of January 1, 2002. (2) On September 20, 2002, the Company acquired the remaining 50% of the Mall and 25% of the Kmart anchor store that it did not previously own. Accordingly, Las Catalinas is consolidated for the period from September 20, 2002 to December 31, 2002. (3) On October 10, 2002, a joint venture, in which the Company has a 50% interest, acquired the Monmouth Mall. (4) Vornado's interest in the equity in net income of the Monmouth Mall includes a preferred return of $748 for the year ended December 31, 2002. (5) The prior year includes $1,394 for the Company's share of a gain on sale of a property. (6) The year ended December 31, 2002 excludes 570 Lexington Avenue which was sold in May 2001. (7) The prior year includes $2,000 for the Company's share of equity in loss of its Russian Tea Room ("RTR") investment. In the third quarter of 2001, the Company wrote-off its entire net investment in RTR based on the operating losses and an assessment of the value of the real estate. -65-
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INTEREST AND OTHER INVESTMENT INCOME Interest and other investment income (interest income on mortgage loans receivable, other interest income and dividend income) was $31,685,000 for the year ended December 31, 2002, compared to $54,385,000 in the year ended December 31, 2001, a decrease of $22,700,000. This decrease resulted primarily from a decrease of (i) $12,347,000 due to the non-recognition of income on the mortgage loan to Primestone, which was foreclosed on April 30, 2002, (ii) $4,626,000 due to a lower yield on the investment of the proceeds received from the May 2002 repayment of the Company's loan to NorthStar Partnership L.P. (22% yield in 2001) and (iii) $2,269,000 due to the non-recognition of income on the loan to Vornado Operating. INTEREST AND DEBT EXPENSE Interest and debt expense was $239,525,000 for the year ended December 31, 2002, compared to $173,076,000 in the year ended December 31, 2001, an increase of $66,449,000. This increase was comprised of (i) $100,013,000 from the acquisition of the remaining 66% of CESCR and the resulting consolidation of its operations, partially offset by (ii) a $32,035,000 savings from a 202 basis point reduction in weighted average interest rates of the Company's variable rate debt and (iii) lower average outstanding debt balances. NET (LOSS) GAIN ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER THAN DEPRECIABLE REAL ESTATE The following table sets forth the details of net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate for the years ended December 31, 2002 and 2001: [Enlarge/Download Table] For the Year Ended (amounts in thousands) December 31, -------------------------- Wholly-owned Assets: 2002 2001 ---------- ---------- Gain on transfer of mortgages........................................... $ 2,096 $ -- Gain on sale of Kinzie Park condominiums units.......................... 2,156 -- Net gain on sale of air rights.......................................... 1,688 -- Net gain on sale of marketable securities............................... 12,346 -- Primestone foreclosure and impairment losses............................ (35,757) -- Write-off of investments in technology companies........................ -- (16,513) Partially-owned Assets: After-tax net gain on sale of Park Laurel condominium units............. -- 15,657 Write-off of net investment in Russian Tea Room......................... -- (7,374) Other................................................................... -- 160 ---------- ---------- $ (17,471) $ (8,070) ========== ========== GAIN ON TRANSFER OF MORTGAGES In the year ended December 31, 2002, the Company recorded a net gain of $2,096,000 resulting from payments to the Company by third parties that assumed certain of the Company's mortgages. Under these transactions the Company paid to the third parties that assumed the Company's obligations the outstanding amounts due under the mortgages and the third parties paid the Company for the benefit of assuming the mortgages. The Company has been released by the creditors underlying these loans. GAIN ON SALE OF KINZIE PARK CONDOMINIUM UNITS The Company recognized a gain of $2,156,000 during 2002, from the sale of residential condominiums in Chicago, Illinois. NET GAIN ON SALE OF AIR RIGHTS The Company recognized a net gain of $1,688,000 in the year ended December 31, 2002. See Note 3 to the consolidated financial statements in this annual report on form 10-K for further details. -66-
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PRIMESTONE FORECLOSURE AND IMPAIRMENT LOSSES On September 28, 2000, the Company made a $62,000,000 loan to Primestone Investment Partners, L.P. ("Primestone"). The Company received a 1% up-front fee and was entitled to receive certain other fees aggregating approximately 3% upon repayment of the loan. The loan bore interest at 16% per annum. Primestone defaulted on the repayment of this loan on October 25, 2001. The loan was subordinate to $37,957,000 of other debt of the borrower that liened the Company's collateral. On October 31, 2001, the Company purchased the other debt for its face amount. The loans were secured by 7,944,893 partnership units in Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust (NYSE:PGE) and the partnership units are exchangeable for the same number of common shares of PGE. The loans are also guaranteed by affiliates of Primestone. On November 19, 2001, the Company sold, pursuant to a participation agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50% participation in both loans at par for approximately $50,000,000 reducing the Company's net investment in the loans at December 31, 2001 to $56,768,000 including unpaid interest and fees of $6,790,000. The participation did not meet the criteria for "sale accounting" under SFAS 140 because Cadim was not free to pledge or exchange the assets. Accordingly, the Company was required to account for this transaction as a borrowing secured by the loan, rather than as a sale of the loan by classifying the participation as an "Other Liability" and continuing to report the outstanding loan balance at 100% in "Notes and Mortgage Loans Receivable" on the balance sheet. Under the terms of the participation agreement, cash payments received shall be applied (i) first, to the reimbursement of reimbursable out-of-pocket costs and expenses incurred in connection with the servicing, administration or enforcement of the loans after November 19, 2001, and then to interest and fees owed to the Company through November 19, 2001, (ii) second, to the Company and Cadim, pro rata in proportion to the amount of interest and fees owed following November 19, 2001 and (iii) third, 50% to the Company and 50% to Cadim as recovery of principal. On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership units at a foreclosure auction. The price paid for the units by application of a portion of Primestone's indebtedness to the Company and Cadim was $8.35 per unit, the April 30, 2002 closing price of shares of PGE on the New York Stock Exchange. On June 28, 2002, pursuant to the terms of the participation agreement, the Company transferred 3,972,447 of the partnership units to Cadim. In the second quarter, in accordance with foreclosure accounting, the Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated based on (i) the acquisition price of the units and (ii) its valuation of the amounts realizable under the guarantees by affiliates of Primestone, as compared with the net carrying amount of the investment at April 30, 2002. In the third quarter of 2002, the Company recorded a $2,229,000 write-down on its investment based on costs expended to realize the value of the guarantees. Further, in the fourth quarter of 2002, the Company recorded a $15,857,000 write-down of its investment in Prime Group consisting of (i) $14,857,000 to adjust the carrying amount of the Prime Group units to $4.61 per unit, the closing price of PGE shares on the New York Stock Exchange at December 31, 2002 and (ii) $1,000,000 for estimated costs to realize the value of the guarantees. The Company considered the decline in the value of the units which are convertible into stock to be other than temporary as of December 31, 2002, based on the fact that the market value of the stock has been less than its cost for more than six months, the severity of the decline, market trends, the financial condition and near-term prospects of Prime Group and other relevant factors. At December 31, 2002, the Company's carrying amount of the investment was $23,908,000, of which $18,313,000 represents the carrying amount of the 3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100,000 represents the amount expected to be realized under the guarantees, partially offset by $1,005,000 representing the Company's share of Prime Group Realty's net loss through September 30, 2002 (see Note 4. Investments in and Advances to Partially-Owned Entities). At February 3, 2003, the closing price of PGE shares on the New York Stock Exchange was $5.30 per share. The ultimate realization of the Company's investment will depend upon the future performance of the Chicago real estate market and the performance of PGE, as well as the ultimate realizable value of the net assets supporting the guarantees and the Company's ability to collect under the guarantees. In addition, the Company will continue to monitor this investment to determine whether additional write-downs are required based on (i) declines in value of the shares of PGE (for which the partnership units are exchangeable) which are "other than temporary" as used in accounting literature and (ii) the amount expected to be realized under the guarantees. -67-
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Upon the adoption of SFAS No. 142 - Goodwill and Other Intangible Assets, on January 1, 2002, the Company wrote-off all of the goodwill associated with the Hotel Pennsylvania and the Temperature Controlled Logistics businesses aggregating $30,129,000. This write-off was reflected as a cumulative effect of a change in accounting principle in 2002. MINORITY INTEREST Minority interest was $3,185,000 for the year ended December 31, 2002 compared to $2,520,000 for the prior year, an increase of $665,000. ADJUSTED EBITDA Below are the details of the changes by segment in Adjusted EBITDA. [Enlarge/Download Table] Temperature Merchandise Controlled ($ in thousands) Total Office Retail Mart Logistics Other --------- ---------- ---------- ----------- ----------- ---------- Year ended December 31, 2001....... $ 785,052 $ 379,800 $ 119,149 $ 110,802 $ 78,437 $ 96,864 2002 Operations: Same store operations(1)......... 1,811 18,165 (3,131)(3) (1,354)(5) (6,613)(6) (5,256)(7) Acquisitions, dispositions and non-recurring income and expenses....................... 134,142 175,360 (3,286)(4) (570) -- (37,362)(8) --------- ---------- ---------- --------- --------- ---------- Year ended December 31, 2002....... $ 921,005 $ 573,325(2) $ 112,732 $ 108,878 $ 71,824 $ 54,246 ========= ========== ========== ========= ========= ========== % increase (decrease) in same store operations............... .2% 4.8%(2) (2.6%)(3) (1.2%)(5) (8.4%)6) (5.4%)(7) ---------- (1) Represents operations which were owned for the same period in each year and excludes non-recurring income and expenses. (2) Adjusted EBITDA and the same store percentage increase was $303,368 and 5.0% for the New York City office portfolio and $269,957 and 4.1% for the CESCR portfolio. (3) Primarily due to lower occupancy and increases in allowances for bad debt expense as a result of the K-Mart and other bankruptcies and the expiration of the Stop & Shop guarantees of several former Bradlees locations. Average occupancy for the year ended December 31, 2002 was 88.3% (84.0% excluding leases which have not commenced as described in the following sentences) as compared to 92% at December 31, 2001. The 88.3% occupancy rate includes leases for 490,000 square feet at five locations which have not commenced as of December 31, 2002. Three of these locations aggregating 268,000 square feet are ground leased to Lowe's which plans to demolish the existing buildings and construct its own stores at the sites and two locations containing 223,000 square feet are leased to Wal-Mart, which plans to demolish an existing building and construct its own store at one of the sites and occupy the existing store at the other site. All of these redevelopment projects are subject to governmental approvals and in some cases, the relocation of existing tenants. (4) Primarily due to the Company's share of losses from the Starwood Ceruzzi venture in 2002 of $1,416 (before depreciation) from properties placed in service, as compared to a gain of $1,394 from the sale of one of the venture's assets in 2001. Adjusted EBITDA aggregating $2,600 from the acquisitions in the fourth quarter of 2002 of a 50% interest in the Monmouth Mall and the remaining 50% interest in the Las Catalinas Mall the Company did not previously own, was offset by lease termination fees and other refunds in the fourth quarter of 2001. (5) The net of a $1,685 or 1.5% same store increase in the core portfolio and a $3,300 or a 66% decline at the LA Mart as a result of rent reductions and increased marketing expenditures. (6) The Company reflects its 60% share of Vornado Crescent Portland Partnership's ("the Landlord") rental income it receives from AmeriCold Logistics, its tenant, which leases the underlying temperature controlled warehouses used in its business. The Company's joint venture does not recognize rental income unless earned and collection is assured or cash is received. The Company did not recognize its $19,349 share of the rent the joint venture was due for the year ended December 31, 2002. The tenant has advised the Landlord that (i) its revenue for the year ended December 31, 2002 from the warehouses it leases from the Landlord, is lower than last year by .1%, and (ii) its gross profit before rent at these warehouses for the corresponding period decreased by $614 (a .001% decrease). The decrease in revenue is primarily attributable to a reduction in customer inventory turns, a rate reduction with a significant customer and temporary plant shut-downs. The decrease in gross profit is primarily attributable to higher insurance and workers' compensation. In addition, the tenant's cash requirements for capital expenditures, debt service and a non-recurring pension funding were $8,293 higher in the current year than in the prior year, which impacted the ability of the tenant to pay rent. (7) The decrease in same store operations was primarily due to (i) a $14,973 reduction in investment income and (ii) a $9,342 reduction in operating results at the Hotel Pennsylvania, partially offset by (iii) additional development and commitment fees from Alexander's and (iv) income from the Newkirk MLP. The reduction in investment income is primarily due to the reinvestment of the proceeds received from the repayment of the Company's $75,000 loan to NorthStar Partnership LP. in May 2002 at lower yields (1.5% vs. 22%) and not recognizing income on the Company's foreclosed loan to Primestone and outstanding loan to Vornado Operating. The Hotel Pennsylvania's operating results reflect a reduction in average occupancy and REVPAR to 65% and $58 for the year ended December 31, 2002, compared to 63% and $70 for the year ended December 31, 2001. (8) Reflects net non-recurring items included in Adjusted EBITDA (see page 64 footnote 2 for details) -68-
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YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 REVENUES The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income, were $985,773,000 in the year ended December 31, 2001 compared to $926,151,000 in the prior year, an increase of $59,622,000. These increases by segment resulted from: [Enlarge/Download Table] Date of Merchandise ($ in thousands) Acquisition Total Office Retail Mart Other --------------- --------- --------- --------- ----------- --------- Property Rentals: Acquisitions: 7 West 34th Street............... November 2000 $ 12,162 $ 12,162 $ -- $ -- $ -- 33 North Dearborn Street......... September 2000 3,928 -- -- 3,928 -- L.A. Mart........................ October 2000 8,622 -- -- 8,622 -- 715 Lexington Avenue............. July 2001 861 -- 861 -- -- Plaza Suites on Main Street September 2001 expansion........................ 2,784 -- -- 2,784 -- Dispositions....................... (8,343) (8,343)(1) Hotel Activity..................... (18,234) -- -- -- (18,234)(3) Trade Show Activity................ 4,490 -- -- 4,490 -- Leasing activity................... 47,260 43,183 (1,397)(4) 6,843 (1,369)(2) --------- --------- --------- --------- --------- Total increase in property rentals. 53,530 55,345 (8,879) 26,667 (19,603) --------- --------- --------- --------- --------- Tenant expense reimbursements: Increase in tenant expense reimbursements due to acquisitions/dispositions........ 5,730 2,502 624 2,604 -- Other.............................. 7,310 4,201 3,322 543 (756) --------- --------- --------- --------- --------- Total increase in tenant expense reimbursements................... 13,040 6,703 3,946 3,147 (756) --------- --------- --------- --------- --------- Other income......................... (6,948) (1,724) (1,241) (1,337) (2,646) --------- --------- --------- --------- --------- Total increase in revenues........... $ 59,622 $ 60,324 $ (6,174) $ 28,477 $ (23,005) ========= ========= ========= ========= ========= ---------- (1) Results primarily from the 14th Street and Union Square property being taken out of service for redevelopment on February 9, 2001 and the sale of the Company's Texas properties on March 2, 2000. (2) Results primarily from the termination of the Sports Authority lease at the Hotel Pennsylvania in January 2001. (3) Average occupancy and REVPAR for the Hotel Pennsylvania were 63% and $70 for the year ended December 31, 2001 and 76% and $87 for the year ended December 31, 2000. (4) Reflects a decrease of $2,514 in property rentals arising from the straight-lining of rent escalations. See Supplemental Information on page 78 for details of leasing activity. -69-
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EXPENSES The Company's expenses were $600,626,000 in the year ended December 31, 2001, compared to $551,101,000 in the prior year, an increase of $49,525,000. This increase by segment resulted from: [Enlarge/Download Table] ($ in thousands) Merchandise Total Office Retail Mart Other ----------- --------- --------- ----------- ---------- Operating: Acquisitions, dispositions and non-recurring items...................... $ 8,938 $ 5,115 $ (253) $ 6,199 $ (2,123) Hotel activity............................. (3,331) -- -- -- (3,331)(1) Same store operations...................... 13,838 13,042 1,129 2,355 (2,688) ----------- --------- --------- ----------- ---------- 19,445 18,157 876 8,554 (8,142) ----------- --------- --------- ----------- ---------- Depreciation andamortization: Acquisitions, dispositions and non-recurring items...................... 1,206 2,563 (2,859) 1,502 -- Hotel activity............................. 1,121 -- -- -- 1,121 Same store operations...................... 13,426 10,788 162 1,911 565 ----------- --------- --------- ----------- ---------- 15,753 13,351 (2,697) 3,413 1,686 ----------- --------- --------- ----------- ---------- General and Administrative: Other expenses............................. 8,815 2,020 2,909 1,751 2,135 Donations to Twin Towers Fund and NYC Fireman's Fund........................... 1,250 -- -- -- 1,250 Hotel activity............................. (1,605) -- -- -- (1,605) Appreciation in value of Vornado shares and other securities held in officer's deferred compensation trust.............. 644 -- -- -- 644 ----------- --------- --------- ----------- ---------- 9,104 2,020 2,909 1,751 2,424 ----------- --------- --------- ----------- ---------- Costs of acquisitions and development not consummated.............................. 5,223 -- -- -- 5,223 ----------- --------- --------- ----------- ---------- $ 49,525 $ 33,528 $ 1,088 $ 13,718 $ 1,191 =========== ========= ========= =========== ========== ---------- (1) Includes $1,900 for the collection of a receivable from a commercial tenant of the Hotel in 2001 which was previously fully reserved. INCOME APPLICABLE TO ALEXANDER'S Income applicable to Alexander's (loan interest income, management, leasing and development fees, and equity in income) was $25,718,000 in the year ended December 31, 2001, compared to $17,363,000 in the prior year, an increase of $8,355,000. This increase resulted primarily from the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001. -70-
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INCOME FROM PARTIALLY-OWNED ENTITIES In accordance with generally accepted accounting principles, the Company reflects the income it receives from (i) entities it owns less than 50% of and (ii) entities it owns more than 50% of, but which have a partner who has shared board and management representation and authority and substantive participating rights on all significant business decisions, on the equity method of accounting resulting in such income appearing on one line in the Company's consolidated statements of income. Below is the detail of income from partially-owned entities by investment as well as the increase (decrease) in income from partially-owned entities for the year ended December 31, 2001 as compared to the prior year: [Enlarge/Download Table] ($ in thousands) Temperature Newkirk Las Controlled Joint Catalinas Total CESCR Logistics Venture Mall -------------- ----------- ------------- -------------- ------------- YEAR ENDED DECEMBER 31, 2001: Revenues....................... $ 747,902 $ 382,502 $ 126,957 $ 179,551 $ 14,377 Expenses: Operating, general and administrative............. (180,337) (135,133) (8,575) (13,630) (2,844) Depreciation................. (141,594) (53,936) (58,855) (20,352) (2,330) Interest expense............. (236,996) (112,695) (44,988) (65,611) (5,705) Other, net................... 6,181 1,975 2,108 4,942 -- -------------- ----------- ------------- -------------- ------------- Net Income..................... $ 195,156 $ 82,713 $ 16,647 $ 84,900 $ 3,498 -------------- ----------- ------------- -------------- ------------- Vornado's interest............. 34% 60% 30% 50% Equity in net income........... $ 67,679 $ 28,653 $ 9,988 $ 25,470 $ 1,749 Interest and other income...... 7,579 -- 2,105 5,474 -- Fee income..................... 5,354 -- 5,354 -- -- -------------- ----------- ------------- -------------- ------------- Income from partially-owned entities.................... $ 80,612 $ 28,653 $ 17,447 $ 30,944 $ 1,749 ============== =========== ============= ============== ============= YEAR ENDED DECEMBER 31, 2000: Revenues....................... $ 698,712 $ 344,084 $ 154,467 $ 143,272 $ 14,386 Expenses: Operating, general and administrative............. (175,135) (129,367) (9,029) (10,652) (3,817) Depreciation................. (126,221) (42,998) (57,848) (14,786) (2,277) Interest expense............. (218,234) (98,565) (46,639) (58,284) (4,812) Other, net................... 2,113 3,553 (3,667) 2,557 -- -------------- ----------- ------------- -------------- ------------- Net Income..................... $ 181,235 $ 76,707 $ 37,284 $ 62,107 $ 3,480 -------------- ----------- ------------- -------------- ------------- Vornado's interest............. 34% 60% 30% 50% Equity in net income........... $ 67,392 $ 25,724 $ 22,370 $ 18,632 $ 1,817 Interest and other income...... 6,768 -- 874 5,894 -- Fee income..................... 5,534 -- 5,534 -- -- -------------- ----------- ------------- -------------- ------------- Income from partially-owned entities.................... $ 79,694 $ 25,724 $ 28,778 $ 24,526 $ 1,817 ============== =========== ============= ============== ============= INCREASE (DECREASE) IN INCOME FROM PARTIALLY-OWNED ENTITIES $ 918 $ 2,929 $ (11,331) $ 6,418 $ (68) ============== =========== ============= ============== ============= ($ in thousands) Starwood Partially- Ceruzzi Owned Joint Office Venture Buildings Other ------------- ------------- -------------- YEAR ENDED DECEMBER 31, 2001: Revenues....................... $ 1,252 $ 43,263 $ -- Expenses: Operating, general and administrative............. (820) (19,335) -- Depreciation................. (501) (5,620) -- Interest expense............. -- (7,997) -- Other, net................... 275 1,759 (4,878) ------------- ------------- ------------- Net Income..................... $ 206 $ 12,070 $ (4,878) ------------- ------------- ------------- Vornado's interest............. 80% 34% 50% Equity in net income........... $ 165 $ 4,093 $ (2,439) Interest and other income...... -- -- -- Fee income..................... -- -- -- ------------- ------------- ------------- Income from partially-owned entities.................... $ 165 $ 4,093 $ (2,439) ============= ============= ============= YEAR ENDED DECEMBER 31, 2000: Revenues....................... $ 303 $ 42,200 $ -- Expenses: Operating, general and administrative............. (1,740) (20,530) -- Depreciation................. (153) (8,159) -- Interest expense............. -- (9,934) -- Other, net................... -- 2,561 (2,891) ------------- ------------- ------------- Net Income..................... $ (1,590) $ 6,138 $ (2,891) ------------- ------------- ------------- Vornado's interest............. 80% 46% 98% Equity in net income........... $ (1,150) $ 2,832 $ (2,833) Interest and other income...... -- -- -- Fee income..................... -- -- -- ------------- ------------- ------------- Income from partially-owned entities.................... $ (1,150) $ 2,832 $ (2,833) ============= ============= ============= INCREASE (DECREASE) IN INCOME FROM PARTIALLY-OWNED ENTITIES $ 1,315 $ 1,261 $ 394 ============= ============= ============= -71-
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INTEREST AND OTHER INVESTMENT INCOME Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains on marketable securities) was $54,385,000 for the year ended December 31, 2001, compared to $33,798,000 in the prior year, an increase of $20,587,000. This increase resulted primarily from the acquisition of NorthStar subordinated unsecured debt (22% effective rate) on September 19, 2000 and a loan to Primestone Investment Partners, L.P. on September 28, 2000 (20% effective rate). On September 28, 2000, the Company made a $62,000,000 loan to Primestone Investment Partners, L.P. The Company received a 1% upfront fee and is entitled to receive certain other fees aggregating approximately 3% upon repayment of the loan. The loan bears interest at 16% per annum. Primestone Investment Partners, L.P. defaulted on the repayment of this loan on October 25, 2001. The Company's loan was subordinate to $37,957,000 of other debt of the borrower that liened the Company's collateral. On October 31, 2001, the Company purchased the other debt for its face amount. The loans are secured by 7,944,893 partnership units in Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust (NYSE:PGE), which units are exchangeable for the same number of shares of PGE. The loans are also guaranteed by affiliates of the borrower. The Company has commenced foreclosure proceedings with respect to the collateral. On November 19, 2001 the Company sold, pursuant to a participation agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50% participation in both loans at par for approximately $50,000,000 reducing the Company's net investment in the loans at December 31, 2001 to $56,768,000 including unpaid interest and fees of $6,790,000. Under the terms of the participation agreement, cash payments received shall be applied (i) first, to the reimbursement of reimbursable out-of-pocket costs and expenses incurred in connection with the servicing, administration or enforcement of the loans after November 19, 2001, (ii) second, to the Company and Cadim pro rata in proportion to the amount of interest and fees owed to them (all of such fees and interest accrued through November 19, 2001 are for the account of Vornado and all of such fees and interest accrued after November 19, 2001 accrue on a 50/50 basis to the Company and Cadim) and (iii) third, 50% to the Company and 50% to Cadim. The Company has agreed that in the event the Company acquires the collateral in a foreclosure proceeding it will, upon the request of Cadim, deliver 50% of such collateral to Cadim. For financial reporting at December 31, 2002, purposes, the gross amount of the loan, $106,768,000, is included in "Notes and mortgage loans receivable" and Cadim's 50% participation, $50,000,000, is reflected in "Other liabilities". The Company did not recognize income on these loans for the period from November 19, 2001 through December 31, 2001, and will not recognize income until such time that cash is received or foreclosure proceedings have been consummated. Included in interest and other investment income for the year ended December 31, 2001, is $2,422,000 of interest income from the $31,424,000 note receivable the Company has from Vornado Operating. Vornado Operating has only one significant asset, its investment in AmeriCold Logistics and does not generate positive cash flow sufficient to cover all of its expenses. Accordingly, commencing January 1, 2002, the Company will no longer recognize the interest income due on the $31,424,000 loan until Vornado Operating is cash flow positive in an amount sufficient to fund the interest due to the Company. INTEREST AND DEBT EXPENSE Interest and debt expense was $173,076,000 for the year ended December 31, 2001, compared to $180,505,000 in the prior year, a decrease of $7,429,000. This decrease resulted primarily from a $36,270,000 savings from a 289 basis point reduction in weighted average interest rate on variable rate debt partially offset by interest on higher average outstanding loan balances. Interest and debt expense includes amortization of debt issuance costs of $8,458,000 and $8,423,000 for the years ended December 31, 2001 and 2000. -72-
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NET LOSS ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER THAN DEPRECIABLE REAL ESTATE The following table sets forth the details of net loss on disposition of wholly-owned and partially-owned assets other than depreciable real estate for the year ended December 31, 2001 (no gains/losses in 2000): [Download Table] ($ in thousands) WHOLLY-OWNED ASSETS: Write-off of investments in technology companies........... $ (16,513) PARTIALLY-OWNED ASSETS: After-tax net gain on sale of Park Laurel condominium units 15,657 Write-off of net investment in the Russian Tea Room ("RTR") (7,374) Other...................................................... 160 ------------- $ (8,070) ============= WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES In the first quarter of 2001, the Company recorded a charge of $4,723,000 resulting from the write-off of an equity investment in a technology company. In the second quarter of 2001, the Company recorded an additional charge of $13,561,000 resulting from the write-off of all of its remaining equity investments in technology companies due to both the deterioration of the financial condition of these companies and the lack of acceptance by the market of certain of their products and services. In the fourth quarter of 2001, the Company recorded $1,481,000 of income resulting from the reversal of a deferred rent liability relating to the termination of an agreement permitting one of the technology companies access to its properties. AFTER-TAX NET GAIN ON SALE OF PARK LAUREL CONDOMINIUM UNITS In the third and fourth quarters of 2001, the Park Laurel Joint Venture (69% interest owned by the Company) completed the sale of 52 condominium units of the total 53 units and received proceeds of $139,548,000. The Company's share of the after tax net gain was $15,657,000 and is after a charge of $3,953,000 (net of tax benefit of $1,826,000) for awards accrued under the venture's incentive compensation plan. WRITE-OFF OF NET INVESTMENT IN RTR In the third quarter of 2001, the Company wrote-off its entire net investment of $7,374,000 in RTR based on the operating losses and an assessment of the value of the real estate. GAINS ON SALE OF REAL ESTATE In September 1998, Atlantic City condemned the Company's property. In the third quarter of 1998, the Company recorded a gain of $1,694,000, which reflected the condemnation award of $3,100,000, net of the carrying value of the property of $1,406,000. The Company appealed the amount and on June 27, 2001, was awarded an additional $3,050,000, which has been recorded as a gain in the quarter ended June 30, 2001. On August 6, 2001, the Company sold its leasehold interest in 550/600 Mamaroneck Avenue for $22,500,000, which approximated its net book value. On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue for $60,000,000, resulting in a gain of $12,445,000. During 2000, the Company sold (i) its three shopping centers located in Texas for $25,750,000, resulting in a gain of $2,560,000 and (ii) its Westport, Connecticut office property for $24,000,000, resulting in a gain of $8,405,000. -73-
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OTHER The Company recorded the cumulative effect of a change in accounting principle of $4,110,000 in the first quarter of 2001. The Company had previously marked-to-market changes in the value of stock purchase warrants through accumulated other comprehensive loss. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, those changes are recognized through earnings, and accordingly, the Company has reclassified $4,110,000 from accumulated other comprehensive loss to the consolidated statement of income as of January 1, 2001. Future changes in value of such securities will be recorded through earnings. Minority interest was $2,520,000 for the year ended December 31, 2001, compared to $1,965,000 for the prior year, an increase of $555,000. ADJUSTED EBITDA Below are the details of the changes by segment in Adjusted EBITDA. ($ in thousands) [Enlarge/Download Table] Temperature Merchandise Controlled Total Office Retail Mart Logistics Other ---------- ---------- ---------- ----------- ----------- --------- Year ended December 31, 2000...... $ 737,750 $ 331,025 $ 120,661 $ 91,858 $ 93,160 $ 101,046 2001 Operations: Same store operations(1)...... 32,485 37,731 3,305 7,508 (14,723)(3) (1,336) Acquisitions, dispositions and non-recurring income and expenses.................... 14,817 11,044 (4,817) 11,436 -- (2,846) ---------- ---------- ---------- ---------- ----------- --------- Year ended December 31, 2001...... $ 785,052 $ 379,800(2) $ 119,149 $ 110,802 $ 78,437 $ 96,864(4) ========== ========== ========== ========== =========== ========= % increase (decrease) in same store operations............ 4.4% 11.4%(2) 2.7% 8.2% (15.8%)(3) (1.3%)(4) ========== ========== ========== ========== =========== ========= ---------- (1) Represents operations which were owned for the same period in each year. (2) Adjusted EBITDA and the same store percentage increase was $295,222 and 13.7% for the New York City office portfolio and $84,943 and 3.6% for the CESCR portfolio. (3) The tenant has reported that (i) its revenue for the year ended December 31, 2001 from the warehouses it leases from the Landlord, is lower than last year by 4.2% and (ii) its gross profit before rent at these warehouses for the corresponding period is lower than last year by $26,764 (a 14.4% decline). This decrease is attributable to a reduction in total customer inventory stored at the warehouses and customer inventory turns. Based on the Landlord's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $15,281 and $8,606 of the rent it was due in the years ended December 31, 2001 and 2000. On December 31, 2001 the Landlord released the tenant from its obligation to pay $39,812 of deferred rent of which the Company's share was $23,887. This amount equals the rent which was not recognized as income by the Company and accordingly had no profit and loss effect to the Company. (4) Included in "Other" is $2,422 of interest income from the $31,424 note receivable the Company has from Vornado Operating. Vornado Operating has only one significant asset, its investment in AmeriCold Logistics and does not generate positive cash flow sufficient to cover all of its expenses. Accordingly, commencing January 1, 2002, the Company no longer recognizes interest income due on the $31,424 loan until Vornado Operating is cash flow positive in an amount sufficient to fund the interest due to the Company. -74-
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SUPPLEMENTAL INFORMATION THREE MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001 Below is a summary of Net Income and Adjusted EBITDA by segment for the three months ended December 31, 2002 and 2001. [Enlarge/Download Table] ($ in thousands) For The Three Months Ended December 31, 2002 -------------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ------------ ------------- ------------ ------------- ------------ ------------- Rentals ............................ $ 317,475 $ 217,807 $ 35,033 $ 47,579 $ -- $ 17,056 Expense reimbursements ............. 41,540 21,500 14,561 4,885 -- 594 Other income ....................... 7,816 6,640 558 554 -- 64 ------------ ------------- ------------ ------------- ------------ ------------- Total revenues ..................... 366,831 245,947 50,152 53,018 -- 17,714 ------------ ------------- ------------ ------------- ------------ ------------- Operating expenses ................. 144,095 89,600 19,636 21,491 -- 13,368 Depreciation and amortization ...... 55,388 39,755 4,740 6,435 -- 4,458 General and administrative ......... 26,115 7,535 1,258 5,090 -- 12,232 Cost of acquisitions and development not consummated ................... 6,874 -- -- -- -- 6,874 Amortization of officer's deferred compensation expense .............. 6,875 -- -- -- -- 6,875 ------------ ------------- ------------ ------------- ------------ ------------- Total expenses ..................... 239,347 136,890 25,634 33,016 -- 43,807 ------------ ------------- ------------ ------------- ------------ ------------- Operating income ................... 127,484 109,057 24,518 20,002 -- (26,093) Income applicable to Alexander's ... 7,044 -- -- -- -- 7,044 Income from partially-owned entities 14,312 92 116 (119) 3,920(4) 10,303 Interest and other investment income 5,702 1,401 78 83 -- 4,140 Interest and debt expense .......... (60,595) (35,384) (15,499) (3,789) -- (5,923) Net loss on disposition of ......... wholly-owned and partially-owned assets other than real estate ..... (16,295) -- -- -- -- (16,295) Minority interest .................. (1,239) (953) -- (373) -- 87 ------------ ------------- ------------ ------------- ------------ ------------- Net income ......................... 76,413 74,213 9,213 15,804 3,920 (26,737) Cumulative effect of change in accounting principle .............. -- -- -- -- -- -- Interest and debt expense(3) ....... 76,861 35,079 15,499 4,022 6,223 16,038 Depreciation and amortization(3) ... 69,250 41,020 5,202 6,725 8,832 7,471 ------------ ------------- ------------ ------------- ------------ ------------- EBITDA ............................. 222,524 150,312 29,914 26,551 18,975 (3,228) Adjustments: Minority interest .................. 1,239 953 -- 373 -- (87) Straight-lining of rents net of a $4,071 allowance for uncollectible rents(3) .......................... (2,357) (3,448) 481 1,065 -- (455) Amortization of below market leases, net ............................... (3,283) (3,118) (165) -- -- -- Other .............................. (1,454) -- -- -- 103 (1,557) ------------ ------------- ------------ ------------- ------------ ------------- Adjusted EBITDA(1) ................. $ 216,669 $ 144,699 $ 30,230 $ 27,989 $ 19,078 $ (5,327) ============ ============= ============ ============= ============ ============= ---------- See notes on following page. -75-
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[Enlarge/Download Table] ($ in thousands) For The Three Months Ended December 31, 2001 ------------------------------------------------------------------------------------------ Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ------------- ------------ ------------- ------------- ------------- ------------ Rentals ............................ $ 213,488 $ 117,107 $ 30,445 $ 52,151 $ -- $ 13,785 Expense reimbursements ............. 30,263 11,327 14,147 3,635 -- 1,154 Other income ....................... 3,072 1,588 (488) 882 -- 1,090 ------------- ------------ ------------- ------------ ------------- ------------ Total revenues ..................... 246,823 130,022 44,104 56,668 -- 16,029 ------------- ------------ ------------- ------------ ------------- ------------ Operating expenses ................. 99,533 52,988 15,557 20,680 -- 10,308 Depreciation and amortization ...... 32,636 18,659 4,374 7,141 -- 2,462 General and administrative ......... 20,866 3,665 263 4,795 -- 12,143 Costs of acquisitions and development not consummated ....... 223 -- -- -- -- 223 ------------- ------------ ------------- ------------ ------------- ------------ Total expenses ..................... 153,258 75,312 20,194 32,616 -- 25,136 ------------- ------------ ------------- ------------ ------------- ------------ Operating income ................... 93,565 54,710 23,910 24,052 -- (9,107) Income applicable to Alexander's ... 3,126 -- -- -- -- 3,126 Income from partially-owned entities 18,538 8,057 (1,095) (70) 4,538(4) 7,108 Interest and other investment income 10,454 1,100 88 268 -- 8,998 Interest and debt expense .......... (36,633) (10,550) (13,983) (7,488) -- (4,612) Net gain on disposition of wholly-owned and partially-owned assets other than real estate ..... 3,719 -- -- 160 -- 3,559 Minority interest .................. (1,027) (987) -- (40) -- -- ------------- ------------ ------------- ------------ ------------- ------------ Net income ......................... 91,742 52,330 8,920 16,882 4,538 9,072 Interest and debt expense(3) ....... 64,180 20,663 14,592 7,488 6,261 15,176 Depreciation and amortization(3) ... 52,386 24,012 5,066 7,141 8,604 7,563 ------------- ------------ ------------- ------------ ------------- ------------ EBITDA ............................. 208,308 97,005 28,578 31,511 19,403 31,811 Adjustments: Minority interest .................. 1,027 987 -- 40 -- -- Net gain on disposition of wholly-owned and partially-owned assets other than real estate ..... (160) -- -- (160) -- -- Straight-lining of rents(3) ........ (3,458) (3,817) 1,871 (1,126) -- (386) Other .............................. (3,697) 218 -- -- 494 (4,409) ------------- ------------ ------------- ------------ ------------- ------------ Adjusted EBITDA(1) ................. $ 202,020 $ 94,393 $ 30,449 $ 30,265 $ 19,897 $ 27,016 ============= ============ ============= ============ ============= ============ ---------- (1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on sales of depreciable real estate, the effect of straight-lining of rent escalations, amortization of acquired below market leases net of above market leases and minority interest. Management considers Adjusted EBITDA a supplemental measure for making decisions and assessing the performance of its segments. Adjusted EBITDA is presented as a measure of "operating performance" which enables the reader to identify trends from period to period and may be used to compare "same store" operating performance to other companies, as well as providing a measure for determining funds available to service debt. Adjusted EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Adjusted EBITDA - Other is comprised of: [Enlarge/Download Table] ($ in thousands) 2002 2001 -------- -------- Newkirk Joint Ventures (30% interest): Equity in income of limited partnerships...................... $ 14,827 $ 14,238 Interest and other income..................................... 2,124 4,155 Alexander's (33.1% interest).................................... 7,832 3,417 Hotel Pennsylvania.............................................. 3,015 2,671 Net gain on sale of condominium units........................... 30 1,788 Corporate general and administrative expenses................... (11,183) (12,143) Investment income and other..................................... 6,288 12,890 Primestone impairment loss...................................... (15,857) -- Officer's deferred compensation................................. (6,875) -- Palisades....................................................... 1,346 -- Write-off of 20 Times Square pre-development costs.............. (6,874) -- --------- --------- Total.................................................. $ (5,327) $ 27,016 --------- --------- (3) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA or Adjusted EBITDA reflects amounts which are netted in income from partially-owned entities. (4) Net of $6,987 and $7,630 of rent not recognized as income for the fourth quarter of 2002 and 2001, respectively. -76-
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Below are the details of the changes by segment in Adjusted EBITDA. [Enlarge/Download Table] ($ in thousands) Temperature Merchandise Controlled Total Office Retail Mart Logistics Other ----------- -------------- ------------ ------------ ------------- ----------- Three months ended December 31, 2001 ....................... $ 202,020 $ 94,393 $ 30,449 $ 30,265 $ 19,897 $ 27,016 2002 Operations: Same store operations(1) ... (4,899) 3,558 (1,519)(3) (1,794)(5) (819) (4,325)(6) Acquisitions, dispositions and non-recurring income and expenses .............. 19,548 46,748 1,300(4) (482) -- (28,018)(7) ----------- -------------- ------------ ------------ ----------- ----------- Three months ended December 31, 2002 ....................... $ 216,669 $ 144,699(2) $ 30,230 $ 27,989 $ 19,078 $ (5,327) =========== ============== ============ ============ =========== =========== % (decrease) increase in same store operations ..... (2.4%) 3.8%(2) (5.0%)(3) (5.9%)(5) (4.1%) (16.0%) ----------- -------------- ------------ ------------ ----------- ----------- ---------- (1) Represents operations, which were owned for the same period in each year. (2) Adjusted EBITDA and same store percentage increase was $75,303 and 3.8% for the New York City office portfolio and $69,396 and 3.6% for the CESCR portfolio. (3) Primarily due to lower occupancy and increases in allowances for bad debt expense as a result of the K-Mart and other bankruptcies and the expiration of the Stop & Shop guarantees of several former Bradlees locations. Average occupancy for the quarter ended December 31, 2002 was 86%, (82% excluding leases which have not commenced) as compared to 92% at December 31, 2001. (4) Primarily due to Adjusted EBITDA aggregating $2,600 from the acquisitions in the fourth quarter of 2002 of a 50% interest in the Monmouth Mall and the remaining 50% interest in the Las Catalinas Mall the Company did not previously own, offset by lease termination fees and other refunds in the fourth quarter of 2001. (5) Primarily due to rescheduling of two trade shows from the fourth quarter of 2002 to the first quarter of 2003. (6) Primarily due to the reinvestment of the proceeds received from the repayment of the Company's $75,000 loan to NorthStar Partnership L.P. in May 2002 at lower yields and from not recognizing income on the Company's foreclosed loan to Primestone and loan to Vornado Operating. (7) Reflects net non-recurring items included in Adjusted EBITDA. In comparing the financial results of the Company's segments on a quarterly basis, the following should be noted: - The third quarter financial results of the Office and Merchandise Mart segments have historically been impacted by higher net utility costs than in each other quarter of the year; - The fourth quarter financial results of the Retail segment have historically been higher than the first three quarters due to the recognition of percentage rental income in that quarter; and - The second and fourth quarter financial results of the Merchandise Mart segment have historically been higher than the first and third quarters due to major trade shows occurring in those quarters. Below are the details of the changes by segment in Adjusted EBITDA for the three months ended December 31, 2002 compared to the three months ended September 30, 2002: [Enlarge/Download Table] ($ in thousands) Temperature Merchandise Controlled Total Office Retail Mart Logistics Other --------- ----------- ---------- ----------- ------------- --------- Three months ended September 30, 2002 .......................... $ 230,599 $ 140,248 $ 29,277 $ 23,424 $ 14,864 $ 22,786 2002 Operations: Same store operations(1) ...... 10,537 5,851 (2,047) 3,331(2) 4,214(3) (812) Acquisitions, dispositions and non-recurring income and expenses ..................... (24,467) (1,400) 3,000 1,234 -- (27,301) --------- ----------- ---------- ----------- ----------- --------- Three months ended December 31, 2002 .......................... $ 216,669 $ 144,699 $ 30,230 $ 27,989 $ 19,078 $ (5,327) ========= =========== ========== =========== =========== ========= % increase (decrease) in same store operations ............. 4.6% 4.2%(1) (7.0%) 14.2%(2) 28.4%(3) (3.6%) ========= =========== ========== =========== =========== ========= ---------- (1) Adjusted EBITDA and same store percentage increase was $75,303 and 6.1% for the New York City office portfolio and $69,396 and 2.2% for the CESCR portfolio. (2) Reflects higher income due to timing of trade shows. (3) Primarily due to seasonality of tenant's operations. -77-
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LEASING ACTIVITY The following table sets forth certain information for the properties the Company owns directly or indirectly, including leasing activity: [Enlarge/Download Table] (square feet and cubic feet in thousands) Office Merchandise Mart ---------------------- ------------------------ Temperature AS OF DECEMBER 31, 2002: New York Controlled City CESCR Retail Office Showroom Logistics ---------- ---------- ---------- ---------- ----------- ----------- Square feet .............................. 14,304 13,395 12,528 2,838 5,528 17,509 Cubic feet ............................... -- -- -- -- -- 441,500 Number of properties ..................... 21 53 62 9 9 88 Occupancy rate ........................... 95.9% 93.6% 88.3% 89.2% 95.2% 78.5% Leasing Activity: Quarter ended December 31, 2002: Square feet ........................ 138 516 890 63 121 -- Initial rent(1) .................... $ 44.15 $ 30.21 $ 11.17 $ 30.20 $ 22.89 -- Rent per square foot on relet space: Square feet ....................... 124 419 776 63 121 -- Initial rent (1) .................. $ 44.58 $ 30.79 $ 11.43 $ 30.20 $ 22.89 -- Prior escalated rent .............. $ 36.10 $29.22 $ 8.67 $ 31.85 $ 21.68 -- Percentage increase (decrease) .... 23.5% 5.4% 31.8% (5.2%) 5.6% -- Rent per square foot on space previously vacant: Square feet ....................... 14 97 114 -- -- -- Initial rent (1) .................. $ 41.94 $ 31.01 $ 9.46 -- -- -- Year Ended December 31, 2002: Square feet ........................ 579 2,342 1,960 164 911 -- Initial rent(1) .................... $ 44.82 $ 31.01 $ 9.73 $ 26.97 $ 18.99 -- Rent per square foot on relet space: Square feet ....................... 457 2,025 1,339 164 911 -- Initial Rent(1) ................... $ 44.34 $ 31.29 $ 12.17 $ 26.97 $ 18.99 -- Prior escalated rent .............. $ 34.11 $ 29.66 $ 9.19 $ 26.66 $ 18.63 -- Percentage increase ............... 30.0% 5.5% 32.4% 1.2% 2.0% -- Tenant improvements per square foot $ 39.00 $ 14.23 -- $ 18.74 $ 2.65 -- Leasing commissions per square foot $ 16.47 $ 3.39 -- $ 5.08 -- -- Rent per square foot on space previously vacant: Square feet ....................... 122 317 621(2) -- -- -- Initial rent (1) .................. $ 46.80 $ 29.21 $ 4.48 -- -- -- AS OF DECEMBER 31, 2001: Square feet .............................. 14,300 4,386 11,301 2,841 5,532 17,695 Cubic feet ............................... -- -- -- -- -- 445,200 Number of properties ..................... 22 52 55 9 9 89 Occupancy rate ........................... 97.4% 94.8% 92.0% 89.2% 95.5% 80.7% AS OF DECEMBER 31, 2000: Square feet .............................. 14,396 4,248 11,293 2,869 5,044 17,495 Cubic feet ............................... -- -- -- -- -- 438,900 Number of properties ..................... 22 51 55 9 9 88 Occupancy rate ........................... 96.3% 97.9% 92.0% 90.2% 97.6% 82.0% ---------- (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. (2) Ground leases. In addition to the above, 48,000 square feet of retail space included in the NYC office properties was leased at an initial rent of $112.01 per square foot for the year ended December 31, 2002. Further, the Company leased 140,000 square feet of garage space at a weighted average initial rent per square foot of $19.02. -78-
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PRO FORMA OPERATING RESULTS - CESCR ACQUISITION Below is a summary of net income and Adjusted EBITDA for the years ended December 31, 2002 and 2001, giving effect to the following transactions as if they had occurred on January 1, 2001: (i) the acquisition of the remaining 66% of CESCR on January 1, 2002 and (ii) the Company's November 21, 2001 sale of 9,775,000 common units and the use of proceeds to repay indebtedness. [Enlarge/Download Table] Year Ended December 31, ----------------------------- (amounts in thousands, 2001 except per unit amounts) 2002 (Pro Forma) ------------- ------------- Revenues........................................................... $ 1,435,070 $ 1,384,933 ------------- ------------- Net income......................................................... $ 370,302 $ 442,592 Preferred unit distributions....................................... (119,214) (130,815) ------------- ------------- Net income applicable to Class A units............................. $ 251,088 $ 311,777 ============= ============= Net income per Class A unit - diluted.............................. $ 1.92 $ 2.89 ============= ============= Adjusted EBITDA.................................................... $ 921,005 $ 949,613 ============= ============= SENIOR UNSECURED DEBT COVENANT COMPLIANCE RATIOS The following ratios as of and for the three months ended December 31, 2002, are computed pursuant to the covenants and definitions of the Company's senior unsecured notes due 2007. [Enlarge/Download Table] Actual Required ------ ----------------- Total Outstanding Debt/Total Assets....................... 48% Less than 60% Secured Debt/Total Assets................................. 43% Less than 55% Interest coverage (Annualized Combined EBITDA to Annualized Interest Expense)....................................... 2.97 Greater than 1.50 Unencumbered Assets/ Unsecured Debt....................... 674% Greater than 150% The covenants and definitions of the Company's senior unsecured notes due 2007 are described in Exhibit 4.2 to the quarterly report on Form 10-Q for the three months ended September 30, 2002. -79-
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RELATED PARTIES LOAN AND COMPENSATION AGREEMENTS At December 31, 2002, the loan due from Mr. Roth, in accordance with his employment arrangement, was $13,122,500 ($4,704,500 of which is shown as a reduction in shareholders' equity). The loan bears interest at 4.49 % per annum (based on the applicable Federal rate) and matures in January 2006. The Company also provided Mr. Roth with the right to draw up to $15,000,000 of additional loans on a revolving basis. Each additional loan will bear interest, payable quarterly, at the applicable Federal rate on the date the loan is made and will mature on the sixth anniversary of the loan. On May 29, 2002, Mr. Roth replaced common shares of the Company securing the Company's outstanding loan to Mr. Roth with options to purchase common shares of the Company with a value of not less than two times the loan amount. As a result of the decline in the value of the options, Mr. Roth supplemented the collateral with cash and marketable securities. At December 31, 2002, loans due from Mr. Fascitelli, in accordance with his employment agreement, aggregated $8,600,000. The loans, which were scheduled to mature in 2003, have been extended to 2006 in connection with the extension of Mr. Fascitelli's employment agreement (discussed below) and bear interest, payable quarterly at a weighted average interest rate of 3.97% (based on the applicable Federal rate). Pursuant to his 1996 employment agreement, Mr. Fascitelli became entitled to a deferred payment consisting of $5 million in cash and a convertible obligation payable November 30, 2001, at the Company's option, in either 919,540 Company common shares or the cash equivalent of their appreciated value, so long as such appreciated value is not less than $20 million. The Company delivered 919,540 shares to a rabbi trust upon execution of the 1996 employment agreement. The Company accounted for the stock compensation as a variable arrangement in accordance with Plan B of EITF No. 97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" as the agreement permitted settlement in either cash or common shares. Following the guidance in EITF 97-14, the Company recorded changes in fair value of its compensation obligation with a corresponding increase in the liability "Officer's Deferred Compensation". Effective as of June 7, 2001, the payment date was deferred until November 30, 2004. Effective as of December 14, 2001, the payment to Mr. Fascitelli was converted into an obligation to deliver a fixed number of shares (919,540 shares), establishing a measurement date for the Company's stock compensation obligation, accordingly the Company ceased accounting for the Rabbi Trust under Plan B of the EITF and began Plan A accounting. Under Plan A, the accumulated liability representing the value of the shares on December 14, 2001, was reclassified as a component of Partners' Capital as "Deferred compensation shares earned but not yet delivered." In addition, future changes in the value of the shares are no longer recognized as additional compensation expense. The fair value of this obligation was $34,207,000 at December 31, 2002. The Company has reflected this liability as Deferred Compensation Shares Not Yet Delivered in the Partners' Capital section of the balance sheet. For the years ended December 31, 2001 and 2000, the Company recognized approximately $4,744,000 and $3,733,000 of compensation expense of which $2,612,000 and $1,968,000 represented the appreciation in value of the shares in each period and $2,132,000 and $1,765,000 represented dividends paid on the shares. Effective January 1, 2002, the Company extended its employment agreement with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant to the extended employment agreement, Mr. Fascitelli is entitled to receive a deferred payment on December 31, 2006 of 626,566 Vornado common shares which are valued for compensation purposes at $27,500,000 (the value of the shares on March 8, 2002, the date the extended employment agreement was executed). The shares are held in a rabbi trust for the benefit of Mr. Fascitelli and vested 100% on December 31, 2002. The extended employment agreement does not permit diversification, allows settlement of the deferred compensation obligation by delivery of these shares only, and permits the deferred delivery of these shares. The value of these shares was amortized ratably over the one year vesting period as compensation expense. Pursuant to the Company's annual compensation review in February 2002 with Joseph Macnow, the Company's Chief Financial Officer, the Compensation Committee approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable federal rate of 4.65% per annum and due January 1, 2006. The loan, which was funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002 exercise of options to purchase 225,000 Vornado common shares. The loan is collateralized by assets with a value of not less than two times the loan amount. As a result of the decline in the value of the options, Mr. Macnow supplemented the collateral with cash and marketable securities. One other executive officer of the Company has a loan outstanding pursuant to an employment agreement totaling $1,500,000 at December 31, 2002. The loan matures in April 2005 and bears interest at the applicable Federal rate provided (4.5% at December 31, 2002). -80-
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TRANSACTIONS WITH AFFILIATES AND OFFICERS AND TRUSTEES OF THE COMPANY Alexander's The Company owns 33.1% of Alexander's. Mr. Roth and Mr. Fascitelli are Officers and Directors of Alexander's, the Company provides various services to Alexander's in accordance with management, development and leasing agreements and the Company has made loans to Alexander's aggregating $119,000,000 at December 31, 2002. These agreements and the loans are described in Note 4 to the Company's consolidated financial statements - Investments in Partially-Owned Entities in this annual report on form 10-K. The Company constructed a $16.3 million community facility and low-income residential housing development (the "30th Street Venture"), in order to receive 163,728 square feet of transferable development rights, generally referred to as "air rights". The Company donated the building to a charitable organization. The Company sold 106,796 square feet of these air rights to third parties at an average price of $120 per square foot. An additional 28,821 square feet of air rights was sold to Alexander's at a price of $120 per square foot for use at Alexander's 59th Street development project (the "59th Street Project"). In each case, the Company received cash in exchange for air rights. The Company identified third party buyers for the remaining 28,111 square feet of air rights related to the 30th Street Venture. These third party buyers wanted to use the air rights for the development of two projects located in the general area of 86th Street which was not within the required geographical radius of the construction site nor in the same Community Board as the low-income housing and community facility project. The 30th Street Venture asked Alexander's to sell 28,111 square feet of the air rights it already owned to the third party buyers (who could use them) and the 30th Street Venture would replace them with 28,111 square feet of air rights. In October 2002, the Company sold 28,111 square feet of air rights to Alexander's for an aggregate sales price of $3,059,000 (an average of $109 per square foot). Alexander's then sold an equal amount of air rights to the third party buyers for an aggregate sales price of $3,339,000 (an average of $119 per square foot). Interstate Properties The Company manages and leases the real estate assets of Interstate Properties pursuant to a management agreement for which the Company receives an annual fee equal to 4% of base rent and percentage rent and certain other commissions. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on sixty days' notice at the end of the term. Although the management agreement was not negotiated at arms length, the Company believes based upon comparable fees charged by other real estate companies that its terms are fair to the Company. For the years ended December 31, 2002, 2001 and 2000, $1,450,000, $1,655,000, and $1,418,000 of management fees were earned by the Company pursuant to the management agreement. Building Maintenance Service Company ("BMS") On January 1, 2003, the Company acquired BMS, a company which provides cleaning and related services primarily to the Company's Manhattan office properties, for $13,000,000 in cash from the estate of Bernard Mendik and certain other individuals including Mr. Greenbaum, one of the Company's executive officers. The Company paid BMS $53,024,000, $51,280,000, and $47,493,000 for the years ended December 31, 2002, 2001 and 2000 for services rendered at the Company's Manhattan office properties. Although the terms and conditions of the contracts pursuant to which these services were provided were not negotiated at arms length, the Company believes based upon comparable amounts charged to other real estate companies that the terms and conditions of the contracts were fair to the Company. Vornado Operating Company and AmeriCold Logistics In October 1998, Vornado Operating was spun off from the Company in order to own assets that the Company could not itself own and conduct activities that the Company could not itself conduct. The Company granted Vornado Operating a $75,000,000 unsecured revolving credit facility which expires on December 31, 2004. Borrowings under the revolving credit facility bear interest at LIBOR plus 3%. The Company receives a commitment fee equal to 1% per annum on the average daily unused portion of the facility. No amortization is required to be paid under the revolving credit facility during its term. The revolving credit facility prohibits Vornado Operating from incurring indebtedness to third parties (other than certain purchase money debt and certain other exceptions) and prohibits Vornado Operating from paying dividends. As of December 31, 2002, $21,989,000 was outstanding under the revolving credit facility. -81-
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Vornado Operating has disclosed that in the aggregate its investments do not, and for the foreseeable future are not expected to, generate sufficient cash flow to pay all of its debts and expenses. Further, Vornado Operating states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent Real Estate Equities, will need to restructure the leases between the Landlord and the Tenant to provide additional cash flow to the Tenant (the Landlord has previously restructured the leases to provide additional cash flow to the Tenant). Management anticipates a further lease restructuring and the sale and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado Operating is expected to have a source to repay the debt under this facility, which may be extended. Since January 1, 2002, the Company has not recognized interest income on the debt under this facility. On December 31, 2002, the Company and Crescent Real Estate Equities formed a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas quarries from AmeriCold Logistics, the Company's tenant at the cold storage warehouses (Temperature Controlled Logistics), for $20,000,000 in cash (appraised value). The Company contributed cash of $8,800,000 to the joint venture representing its 44% interest. AmeriCold Logistics used the proceeds from the sale to repay a portion of a loan to Vornado Operating. Vornado Operating then repaid $9,500,000 of the amount outstanding under the Company's revolving credit facility. On December 31, 2002, the joint venture purchased $5,720,000 of trade receivables from AmeriCold at a 2% discount, of which the Company's share was $2,464,000. Other The Company owns preferred securities in Capital Trust, Inc. ("Capital Trust") totaling $29,212,000 at December 31, 2002. Mr. Roth, the Chairman and Chief Executive Officer of Vornado Realty Trust, is a member of the Board of Directors of Capital Trust nominated by the Company. On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue to the other venture partner, an entity controlled by the late Bernard Mendik, a former trustee and executive officer of the Company, for $60,000,000, resulting in a gain to the Company of $12,445,000. The sale was initiated by the Company's partner and was based on a competitive bidding process handled by an independent broker. The Company believes that the terms of the sale was at arm's length and were fair to the Company. During 2002 and 2001, the Company paid approximately $147,000 and $136,000 for legal services to a firm in which one of the Company's trustees is a member. On January 1, 2001, the Company acquired the common stock of various preferred stock affiliates which was owned by Officers and Trustees of the Company and converted the affiliates to taxable REIT subsidiaries. The total acquisition price was $5,155,000. The purchase price, which was the estimated fair value, was determined by both independent appraisal and by reference to the individuals' pro rata share of the earnings of the preferred stock affiliates during the three-year period that these investments were held. -82-
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LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 YEAR ENDED DECEMBER 31, 2002 Cash and cash equivalents were $208,200,000 at December 31, 2002, as compared to $265,584,000 at December 31, 2001, a $57,384,000 decrease. Cash flow provided by operating activities of $499,825,000 was primarily comprised of (i) income of $370,302,000, (ii) adjustments for non-cash items of $167,762,000, partially offset by (iii) the net change in operating assets and liabilities of $38,239,000. The adjustments for non-cash items were comprised of (i) a cumulative effect of change in accounting principle of $30,129,000, (ii) amortization of Officer's deferred compensation expense of $27,500,000, (iii) depreciation and amortization of $205,826,000, (iv) minority interest of $3,185,000, (v) the write-off of $6,874,000 of 20 Times Square pre-development costs, (vi) impairment losses on Primestone of $35,757,000, partially offset by (vii) the effect of straight-lining of rental income of $36,478,000, (viii) equity in net income of partially-owned entities and income applicable to Alexander's of $74,111,000 and (ix) amortization of below market leases, net of $12,634,000. Net cash used in investing activities of $24,117,000 was comprised of (i) recurring capital expenditures of $52,728,000, (ii) non-recurring capital expenditures of $42,227,000, (iii) development and redevelopment expenditures of $63,619,000, (iv) investment in notes and mortgages receivable of $56,935,000, (v) investments in partially-owned entities of $100,882,000, (vi) acquisitions of real estate of $23,665,000, (vii) cash restricted, primarily mortgage escrows of $21,471,000 partially offset by proceeds from (viii) distributions from partially-owned entities of $126,077,000, (ix) repayments on notes receivable of $124,500,000 and (x) proceeds from the sale of marketable securities of $87,896,000. Net cash used in financing activities of $533,092,000 was primarily comprised of (i) Class A unit distributions of $364,730,000, (ii) preferred unit distributions of $119,214,000, (iii) repayments of borrowings of $731,238,000, (iv) redemption of perpetual preferred units of $25,000,000, partially offset by proceeds from (v) the issuance of Class A units of $56,453,000, (vi) proceeds from borrowings of $628,335,000, of which $499,280,000 was from the issuance of the Company's senior unsecured notes on June 24, 2002, and (vii) the exercise of employee unit options of $26,272,000. Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures for the year ended December 31, 2002. [Enlarge/Download Table] (Amounts in thousands) New York Merchandise Total City Office CESCR Retail Mart Other --------- ----------- --------- --------- ------------- -------- Capital Expenditures: Expenditures to maintain the assets: Recurring ................... $ 27,881 $ 9,316 $ 13,686 $ 1,306 $ 2,669 $ 904 Non-recurring ............... 35,270 6,840 16,455 -- 11,975 -- --------- ----------- --------- --------- ------------- -------- $ 63,151 $ 16,156 $ 30,141 $ 1,306 $ 14,644 $ 904 ========= =========== ========= ========= ============= ======== Tenant improvements: Recurring ................... $ 24,847 $ 12,017 $ 5,842 $ 2,309 $ 4,679 -- Non-recurring ............... 6,957 2,293 4,664 -- -- -- --------- ----------- --------- --------- ------------- -------- $ 31,804 $ 14,310 $ 10,506 $ 2,309 $ 4,679 -- ========= =========== ========= ========= ============= ======== Leasing Commissions: Recurring ................... $ 14,345 $ 8,854 $ 4,416 $ 353 $ 614 $ 108 Non-recurring ............... 4,205 2,067 2,138 -- -- -- --------- ----------- --------- --------- ------------- -------- $ 18,550 $ 10,921 $ 6,554 $ 353 $ 614 $ 108 ========= =========== ========= ========= ============= ======== Total Capital Expenditures and Leasing Commissions: Recurring ................... $ 67,073 $ 30,187 $ 23,944 $ 3,968 $ 7,962 $ 1,012 Non-recurring ............... 46,432 11,200 23,257 -- 11,975 -- --------- ----------- --------- --------- ------------- -------- $ 113,505 $ 41,387 $ 47,201 $ 3,968 $ 19,937 $ 1,012 ========= =========== ========= ========= ============= ======== Development and Redevelopment Expenditures: Palisades-Fort Lee, NJ ..... $ 16,750 $ -- $ -- $ -- $ -- $ 16,750 640 Fifth Avenue ........... 16,749 16,749 -- -- -- -- 435 7th Avenue ............. 12,353 12,353 -- -- -- -- Other 17,767 12,664 1,496 (596)(1) 1,529 2,674 --------- ----------- --------- --------- ------------- -------- $ 63,619 $ 41,766 $ 1,496 $ (596) $ 1,529 $ 19,424 ========= =========== ========= ========= ============= ======== ---------- (1) Includes reimbursements from tenants for expenditures incurred in the prior year. -83-
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Capital expenditures are categorized as follows: Recurring -- capital improvements expended to maintain a property's competitive position within the market and tenant improvements and leasing commissions for costs to re-lease expiring leases or renew or extend existing leases. Non-recurring -- capital improvements completed in the year of acquisition and the following two years which were planned at the time of acquisition and tenant improvements and leasing commissions for space which was vacant at the time of acquisition of a property. Development and redevelopment expenditures include all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions and capitalized interest and operating costs until the property is substantially complete and ready for its intended use. ACQUISITIONS Acquisitions of individual properties are recorded as acquisitions of real estate assets. Acquisitions of businesses are accounted for under the purchase method of accounting. The purchase price for property acquisitions and businesses acquired is allocated to acquired assets and assumed liabilities using their relative fair values as of the acquisition date based on valuations and other studies. Initial valuations are subject to change until such information is finalized no later than 12 months from the acquisition date. CHARLES E. SMITH COMMERCIAL REALTY L.P. On January 1, 2002, the Company completed the combination of Charles E. Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination, Vornado owned a 34% interest in CESCR. The consideration for the remaining 66% of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly issued Vornado Operating Partnership units and approximately $1 billion of debt (66% of CESCR's total debt). The purchase price paid by the Company was determined based on the weighted average closing price of the equity issued to CESCR unitholders for the period beginning two business days before and ending two business days after the date the acquisition was agreed to and announced on October 19, 2001. The Company also capitalized as part of the basis of the assets acquired approximately $32,000,000 for third party acquisition related costs, including advisory, legal and other professional fees that were contemplated at the time of the acquisition. The operations of CESCR are consolidated into the accounts of the Company beginning January 1, 2002. Prior to this date the Company accounted for its 34% interest on the equity method. See page 84 for unaudited pro forma financial information for the year ended December 31, 2001. CRYSTAL GATEWAY ONE On July 1, 2002, the Company acquired a 360,000 square foot office building from a limited partnership, which is approximately 50% owned by Mr. Robert H. Smith and Mr. Robert P. Kogod and members of the Smith and Kogod families, trustees of the Company, in exchange for approximately 325,700 newly issued Vornado Operating Partnership units (valued at $13,679,000) and the assumption of $58,500,000 of debt. The building is located in the Crystal City complex in Arlington, Virginia where the Company already owns 24 office buildings containing over 6.9 million square feet, which it acquired on January 1, 2002, in connection with the Company's acquisition of CESCR. The operations of Crystal Gateway One are consolidated into the accounts of the Company from the date of acquisition. BUILDING MAINTENANCE SERVICE COMPANY ("BMS") On January 1, 2003, the Company acquired BMS, a company which provides cleaning and related services primarily to the Company's Manhattan office properties, for $13,000,000 in cash from the estate of Bernard Mendik and certain other individuals including Mr. Greenbaum, one of the Company's executive officers. LAS CATALINAS MALL On September 23, 2002, the Company increased its interest in the Las Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by acquiring the 50% of the mall and 25% of the Kmart anchor store it did not already own. The purchase price was $48,000,000, including $32,000,000 of indebtedness. The Las Catalinas Mall, which opened in 1997, contains 492,000 square feet, including a 123,000 square foot Kmart and a 138,000 square foot Sears owned by the tenant. -84-
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MONMOUTH MALL On October 10, 2002, a joint venture in which the Company has a 50% interest, acquired the Monmouth Mall, an enclosed super regional shopping center located in Eatontown, New Jersey containing approximately 1.5 million square feet, including four department stores, three of which aggregating 731,000 square feet are owned by the tenants. The purchase price was approximately $164,700,000, including transaction costs of $4,400,000. The Company made a $7,000,000 common equity investment in the venture and provided it with $23,500,000 of preferred equity yielding 14%. The venture financed the purchase of the Mall with $135,000,000 of floating rate debt at LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000,000, a three year term and two one-year extension options. The Company's investment in the Monmouth will be accounted for under the equity method as the Company does not have unilateral control over the joint venture. CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES On December 31, 2002, the Company and Crescent Real Estate Equities formed a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas quarries from AmeriCold Logistics', the Company's tenant at the cold storage warehouses (Temperature Controlled Logistics) for $20,000,000 in cash (appraised value). The Company contributed cash of $8,800,000 to the joint venture representing its 44% interest. The Company's future success will be affected by its ability to integrate the assets and businesses it acquires and to effectively manage those assets and businesses. The Company currently expects to continue to grow. However, its ability to do so will be dependent on a number of factors, including, among others, (a) the availability of reasonably priced assets that meet the Company's acquisition criteria and (b) the price of the Company's common shares, the rates at which the Company is able to borrow money and, more generally, the availability of financing on terms that, in the Company's view, make such acquisitions financially attractive. -85-
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YEAR ENDED DECEMBER 31, 2001 Cash flow provided by operating activities of $387,685,000 was primarily comprised of (i) income of $373,581,000, (ii) adjustments for non-cash items of $2,155,000, and (iii) the net change in operating assets and liabilities of $19,374,000. The adjustments for non-cash items were primarily comprised of (i) a cumulative effect of change in accounting principle of $4,110,000, (ii) the write-off of the Company's remaining equity investments in technology companies of $16,513,000, (iii) the write-off of its entire net investment of $7,374,000 in the Russian Tea Room, (iv) depreciation and amortization of $123,862,000, (v) minority interest of $2,520,000, partially offset by (vi) the effect of straight-lining of rental income of $27,230,000, and (vii) equity in net income of partially-owned entities and income applicable to Alexander's of $106,330,000. Net cash used in investing activities of $79,722,000 was primarily comprised of (i) recurring capital expenditures of $41,093,000, (ii) non-recurring capital expenditures of $25,997,000, (iii) development and redevelopment expenditures of $145,817,000, (iv) investment in notes and mortgages receivable of $83,879,000, (v) investments in partially-owned entities of $109,332,000, (vi) acquisitions of real estate of $11,574,000, offset by, (vii) proceeds from the sale of real estate of $162,045,000, and (viii) distributions from partially-owned entities of $114,218,000. Net cash used in financing activities of $179,368,000 was primarily comprised of (i) proceeds from borrowings of $554,115,000, (ii) proceeds from the issuance of Class A units of $377,193,000, (iii) proceeds from the issuance of preferred units of $52,673,000, offset by, (iv) repayments of borrowings of $835,257,000, (v) Class A unit distributions of $201,813,000, and (vi) preferred unit distributions of $134,141,000. Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures. [Enlarge/Download Table] ($ in thousands) Funded by the Company ----------------------------------------------------------- New York Merchandise CESCR Total City Office Retail Mart Other (34% Interest) ---------- ----------- ---------- ----------- ----------- -------------- Capital Expenditures: Expenditures to maintain the assets: Recurring .............................. $ 14,423 $ 7,684 $ 1,253 $ 5,287 $ 199 $ 3,121 Non-recurring .......................... 20,751 13,635 -- 7,116 -- 6,678 ---------- ---------- ---------- ---------- ----------- ----------- $ 35,174 $ 21,319 $ 1,253 $ 12,403 $ 199 $ 9,799 ========== ========== ========== ========== =========== =========== Tenant Improvements: Recurring .............................. $ 26,670 $ 21,452 $ 271 $ 4,858 $ 89 $ 5,979 Non-recurring .......................... 5,246 5,246 -- -- -- 190 ---------- ---------- ---------- ---------- ----------- ----------- $ 31,916 $ 26,698 $ 271 $ 4,858 $ 89 $ 6,169 ========== ========== ========== ========== =========== =========== Leasing Commissions: Recurring .............................. $ 19,536 $ 18,546 $ 336 $ 381 $ 273 $ 1,142 Non-recurring .......................... 7,902 7,902 -- -- -- 28 ---------- ---------- ---------- ---------- ----------- ----------- $ 27,438 $ 26,448 $ 336 $ 381 $ 273 $ 1,170 ========== ========== ========== ========== =========== =========== Total Capital Expenditures and Leasing Commissions: Recurring .............................. $ 60,629 $ 47,682 $ 1,860 $ 10,526 $ 561 $ 10,242 Non-recurring .......................... $ 33,899 $ 26,783 $ -- $ 7,116 $ -- $ 6,896 Development and Redevelopment Expenditures: Palisades--Fort Lee, NJ .............. $ 66,173 $ -- $ -- $ -- $ 66,173 $ -- Market Square on Main Street ......... 29,425 -- -- 29,425 -- -- Other ................................ 50,219 25,703 6,378 4,350 13,788 14,067 ---------- ---------- ---------- ---------- ----------- ----------- $ 145,817 $ 25,703 $ 6,378 $ 33,775 $ 79,961 $ 14,067 ========== ========== ========== ========== =========== =========== -86-
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YEAR ENDED DECEMBER 31, 2000 Cash flow provided by operating activities of $249,921,000 was primarily comprised of (i) income of $334,400,000 and (ii) adjustments for non-cash items of $34,412,000 offset by (iii) the net change in operating assets and liabilities of $39,102,000 and (iv) the net gain on sale of real estate of $10,965,000. The adjustments for non-cash items were primarily comprised of (i) depreciation and amortization of $99,846,000 and (ii) minority interest of $1,965,000, partially offset by (iii) the effect of straight-lining of rental income of $32,206,000 and (iv) equity in net income of partially-owned entities and income applicable to Alexander's of $104,017,000. Net cash used in investing activities of $699,375,000 was primarily comprised of (i) capital expenditures of $171,782,000, (ii) investment in notes and mortgages receivable of $144,225,000, (iii) acquisitions of real estate of $199,860,000, (iv) investments in partially-owned entities of $99,974,000, (v) cash restricted of $183,788,000, of which $173,500,000 represents funds escrowed in connection with a mortgage financing, partially offset by (vi) proceeds from the sale of real estate of $47,945,000 and distributions from partially-owned entities of $68,799,000. Below are the details of acquisitions of real estate, investments in partially-owned entities, investments in notes and mortgages receivable and capital expenditures. ($ in thousands) [Enlarge/Download Table] Debt Value of Cash Assumed Units Issued Investment --------- ---------- ------------- ------------- Acquisitions of Real Estate: Student Housing Complex (90% Interest)................ $ 6,660 $ 17,640 $ -- $ 24,300 33 North Dearborn Street.............................. 16,000 19,000 -- 35,000 7 West 34th Street.................................... 128,000 -- -- 128,000 L.A. Mart............................................. 44,000 10,000 -- 54,000 Other................................................. 5,200 -- -- 5,200 --------- ---------- ------------- ------------- $ 199,860 $ 46,640 $ -- $ 246,500 ========= ========== ============= ============= Investments in Partially-Owned Entities: Vornado Ceruzzi Joint Venture (80% interest).......... $ 21,940 $ -- $ -- $ 21,940 Additional investment in Newkirk Joint Ventures....... 1,334 -- 9,192 10,526 Loan to Alexander's................................... 15,000 -- -- 15,000 Alexander's - increase in investment to 33% 3,400 -- -- 3,400 Funding of Development Expenditures: Fort Lee (75% interest)............................. 10,400 -- -- 10,400 Park Laurel (80% interest).......................... 47,900 -- -- 47,900 --------- ---------- ------------- ------------- $ 99,974 $ -- $ 9,192 $ 109,166 ========= ========== ============= ============= Investments in Notes and Mortgages receivable: Loan to NorthStar Partnership L.P..................... $ 65,000 $ -- $ -- $ 65,000 Loan to Primestone Investment Partners, L.P........... 62,000 -- -- 62,000 Advances to Vornado Operating Company................. 15,251 -- -- 15,251 Other................................................. 1,974 -- -- 1,974 --------- ---------- ------------- ------------- $ 144,225 $ -- $ -- $ 144,225 ========= ========== ============= ============= [Enlarge/Download Table] New York Merchandise Total City Office Retail Mart Other ---------- ----------- --------- ----------- -------- Capital expenditures: Expenditures to maintain the assets....... $ 33,113 $ 15,661 $ 414 $ 11,437 $ 5,601 Tenant allowances......................... 60,850 51,017 3,307 6,301 225 ---------- --------- --------- --------- -------- Total recurring capital expenditures...... 93,963 66,678 3,721 17,738 5,826 Redevelopment and development expenditures............................ 63,348 40,124 3,600 19,624 -- Corporate................................. 14,471 -- -- -- 14,471 ---------- --------- --------- --------- -------- $ 171,782 $ 106,802 $ 7,321 $ 37,362 $ 20,297 ========== ========= ========= ========= ======== In addition to the expenditures noted above, the Company recorded leasing commissions of $26,133,000 in the year ended December 31, 2000, of which $24,333,000 was attributable to New York City Office properties, $647,000 was attributable to Retail properties and $1,153,000 was attributable to Merchandise Mart properties. Net cash provided by financing activities of $473,813,000 was primarily comprised of (i) proceeds from borrowings of $1,195,108,000, (ii) proceeds from issuance of preferred units of $204,750,000, partially offset by, (iii) repayments of borrowings of $633,655,000, (iv) Class A unit distributions of $168,688,000 and (v) preferred unit distributions of $116,212,000. -87-
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Below are the cash flows provided by (used in) operating, investing and financing activities: [Download Table] ($ in thousands) For the Year Ended December 31, ------------------------------- 2002 2001 ----------- ----------- Operating activities................. $ 499,825 $ 387,685 =========== =========== Investing activities................. $ (24,117) $ (79,722) =========== =========== Financing activities................. $ (533,092) $ (179,368) =========== =========== CERTAIN FUTURE CASH REQUIREMENTS For 2003, the Company has budgeted approximately $197.3 million for capital expenditures (excluding acquisitions) and leasing commissions as follows: [Enlarge/Download Table] Temperature ($ and square feet in thousands) New York CESCR Merchandise Controlled Total Office Office Retail Mart Logistics Other ---------- --------- --------- --------- ----------- ----------- -------- Expenditures to maintain the assets.................. $ 71,900 $ 23,100 $ 21,800 $ -- $ 20,200 $ 5,700(1) $ 1,100(2) ========== ========= ========= ========= =========== ======== ======== Tenant improvements........... $ 98,195 $ 32,500 $ 40,300 $ 5,095 $ 20,300 $ -- $ -- ========== ========= ========= ========= =========== ======== ======== Per square foot............ $ 38.33 $ 16.36 $ 7.34 $ 15.32 ========= ========= ========= =========== Leasing Commissions........... $ 27,221 $ 15,000 $ 9,100 $ 821 $ 2,300 ========== ========= ========= ========= =========== Per square foot............ $ 17.69 $ 3.69 $ -- $ 1.74 ========= ========= ========= =========== Total Capital Expenditures and Leasing Commissions........... $ 197,316 $ 70,600 $ 71,200 $ 5,916 $ 42,800 $ 5,700 $ 1,100 ========== ========= ========= ========= =========== ======== ======== Square feet leased............ 848 2,463 694 1,325 ========= ========= ========= =========== ---------- (1) Represents the Company's 60% share of the Vornado Crescent Portland Partnership's obligation to fund $9,500 of capital expenditures per annum. (2) Primarily for the Hotel Pennsylvania. In addition to the capital expenditures reflected above, the Company is currently engaged in certain development and redevelopment projects for which it has budgeted approximately $230.9 million to be expended as outlined in the "Development and Redevelopment Projects" section of Item 1--Business. The $230.9 million does not include amounts for other projects which are also included in the "Development and Redevelopment Projects" section of Item 1 -Business, as no budgets for them have been finalized. There can be no assurance that any of the above projects will be ultimately completed, completed on time or completed for the budgeted amount. No cash requirements have been budgeted for the capital expenditures and amortization of debt of Alexander's, The Newkirk MLP, or any other entity that is partially owned by the Company. These investees are expected to fund their own cash requirements. -88-
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FINANCING ACTIVITIES AND CONTRACTUAL OBLIGATIONS Below is a schedule of the Company's contractual obligations and commitments at December 31, 2002: ($ in thousands) [Enlarge/Download Table] 2 - 3 4 - 5 Total 1 Year Years Years Thereafter ---------- --------- --------- ----------- ----------- Contractual Cash Obligations: Mortgages and Notes Payable........... $3,537,720(1) $ 449,526(1) $ 705,589 $ 550,321 $ 1,832,284 Senior Unsecured Notes due 2007....... 533,600 -- -- 533,600 -- Unsecured Revolving Credit Facility... -- -- -- -- -- Operating Leases...................... 1,029,171 15,347 29,285 29,559 954,980 ---------- --------- --------- ----------- ----------- Total Contractual Cash Obligations.. $5,100,491 $ 464,873 $ 734,874 $ 1,113,480 $ 2,787,264 ========== ========= ========= =========== =========== Commitments: Standby Letters of Credit............. $ 16,779 $ 16,779 $ -- $ -- $ -- Other Guarantees...................... -- -- -- -- -- ---------- --------- --------- ----------- ----------- Total Commitments................... $ 16,779 $ 16,779 $ -- $ -- $ -- ========== ========= ========= =========== =========== ---------- (1)Includes $153,659, which is offset by an equivalent amount of cash held in a restricted mortgage escrow amount. The Company is reviewing various alternatives for the repayment or refinancing of debt coming due during 2003. The Company has $1 billion available under its revolving credit facility which matures in July 2003 and a number of properties which are unencumbered. The Company's credit facility contains customary conditions precedent to borrowing such as the bring down of customary representations and warranties as well as compliance with financial covenants such as minimum interest coverage and maximum debt to market capitalization. The facility provides for higher interest rates in the event of a decline in the Company's ratings below Baa3/BBB. This facility also contains customary events of default which could give rise to acceleration and include such items as failure to pay interest or principal and breaches of financial covenants such as maintenance of minimum capitalization and minimum interest coverage. The Company carries comprehensive liability and all risk property insurance (fire, flood, extended coverage and rental loss insurance) with respect to its assets. The Company's all risk insurance policies in effect before September 11, 2001 do not expressly exclude coverage for hostile acts, except for acts of war. Since September 11, 2001, insurance companies have for the most part excluded terrorist acts from coverage in all risk policies. The Company has generally been unable to obtain all risk insurance which includes coverage for terrorist acts for policies it has renewed since September 11, 2001, for each of its businesses. In 2002, the Company obtained $200,000,000 of separate coverage for terrorist acts for each of its New York City Office, Washington, D.C. Office, Retail and Merchandise Mart businesses and $60,000,000 for its Temperature Controlled Logistics business. Therefore, the Company is at risk for financial loss in excess of these limits for terrorist acts (as defined), which loss could be material. The Company's debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its senior unsecured notes due 2007 and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that an exclusion from all risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments that allows the lenders to declare an event of default and accelerate repayment of debt. The Company has received correspondence from four lenders regarding terrorism insurance coverage, which the Company has responded to. In these letters the lenders took the position that under the agreements governing the loans provided by these lenders the Company was required to maintain terrorism insurance on the properties securing the various loans. The aggregate amount of borrowings under these loans as of December 31, 2002 was approximately $770.4 million, and there was no additional borrowing capacity. Subsequently, the Company obtained an aggregate of $360 million of separate coverage for "terrorist acts". To date, one of the lenders has acknowledged to the Company that it will not raise any further questions based on the Company's terrorism insurance coverage in place, and the other three lenders have not raised any further questions regarding the Company's insurance coverage. If lenders insist on greater coverage for these risks, it could adversely affect the Company's ability to finance and/or refinance its properties and to expand its portfolio. -89-
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On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed into law. Under this new legislation, through 2004 (with a possible extension through 2005), regulated insurers must offer coverage in their commercial property and casualty policies (including existing policies) for losses resulting from defined "acts of terrorism". The Company cannot currently anticipate whether the scope and cost of such coverage will be commercially reasonable. As a result of the legislation, in February 2003 the Company obtained $300 million of per occurrence coverage for terrorist acts for its New York City Office, Washington, D.C. Office and Merchandise Mart businesses, of which $240 million is for Certified Acts, as defined in the legislation. The Company maintains $200 million and $60 million of separate aggregate coverage that it had in 2002 for each of its Retail and Temperature Controlled Logistics businesses (which has been renewed as of January 1, 2003). The Company's current Retail property insurance carrier has advised the Company that there will be an additional premium of approximately $11,000 per month through the end of the policy term (June 30, 2003) for "Acts of Terrorism" coverage, as defined in the new legislation and that the situation may change upon renewal. In addition, many of the Company's non-recourse mortgages contain debt service covenants which if not satisfied could require cash collateral. These covenants are not "ratings" related. In conjunction with the closing of Alexander's Lexington Avenue construction loan on July 3, 2002, the Company agreed to guarantee, among other things, the lien free, timely completion of the construction of the project and funding of all project costs in excess of a stated budget, as defined in the loan agreement, if not funded by Alexander's. CORPORATE On June 24, 2002, the Company completed an offering of $500,000,000 aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007. Interest on the notes is payable semi-annually on June 15th and December 15th, commencing December 15, 2002. The net proceeds of approximately $496,300,000 were used to repay the mortgages on 350 North Orleans, Two Park Avenue, the Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into interest rate swaps that effectively converted the interest rate on the $500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate (2.5% if set on December 31, 2002). On February 25, 2002, Vornado sold 884,543 common shares to a closed-end fund and 514,200 shares to a unit investment trust based on the closing price of $42.96 on the NYSE. An equivalent amount of Class A units were issued by the Operating Partnership to Vornado for net proceeds of approximately $57,042,000. The Company and Vornado have an effective shelf registration under which Vornado can offer an aggregate of approximately $895,479,000 of equity securities and Vornado Realty L.P. can offer an aggregate of $500,720,000 of debt securities. The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an on-going basis for more than the next twelve months; however, capital outlays for significant acquisitions will require funding from borrowings or equity offerings. -90-
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RECENTLY ISSUED ACCOUNTING STANDARDS SFAS NO. 141 - BUSINESS COMBINATIONS SFAS No. 141 - BUSINESS COMBINATIONS requires companies to account for the value of leases acquired and the costs of acquiring such leases separately from the value of the real estate for all acquisitions subsequent to July 1, 2001. Accordingly, the Company has evaluated the leases in place for (i) the remaining 66% of CESCR it did not previously own which it acquired on January 1, 2002, (ii) the remaining 50% of the Las Catalinas Mall it did not previously own which it acquired on September 23, 2002 and (iii) a 50% interest in the Monmouth Mall which it acquired on October 10, 2002; to determine whether they were acquired at market, above market or below market. The Company's evaluations were based on (i) the differences between contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company's history of providing tenant improvements and paying leasing commissions. As a result of its evaluations, as of December 31, 2002, the Company has recorded a deferred credit of $48,430,000 representing the value of acquired below market leases, deferred charges of $15,976,000, for the value of acquired above market leases and $3,621,000 for origination costs. In addition, in the year ended December 31, 2002 the Company has recognized property rentals of $12,634,000 for the amortization of below market leases net of above market leases, and depreciation expense of $1,214,000 for the amortization of the lease origination costs and additional building depreciation resulting from the reallocation of the purchase price of the applicable properties. SFAS NO. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead be subject to periodic impairment testing. SFAS No. 142 provides specific guidance for impairment testing of these assets and removes them from the scope of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Company's goodwill balance on December 31, 2001 of $30,129,000 consisted of $14,639,000 related to the Hotel Pennsylvania acquisition and $15,490,000 related to the acquisition of the Temperature Controlled Logistics businesses. Prior to January 1, 2002, the Company performed impairment testing in accordance with SFAS 121. The Company reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Given the decrease in the estimated market values and the deteriorating performance of Hotel Pennsylvania and Temperature Controlled Logistics, the Company performed a review for recoverability estimating the future cash flows expected to result from the use of the assets and their eventual disposition. As of December 31, 2001, the sum of the expected cash flows (undiscounted and without interest charges) exceeded the carrying amounts of goodwill, and therefore no impairments were recognized. Upon adoption of SFAS 142 on January 1, 2002, the Company tested the goodwill for impairment at the reporting level unit utilizing the prescribed two-step method. The first step compared the fair value of the reporting unit (determined based on a discounted cash flow approach) with its carrying amount. As the carrying amount of the reporting unit exceeded its fair value, the second step of the impairment test was performed to measure the impairment loss. The second step compared the implied fair value of goodwill with the carrying amount of the goodwill. As the carrying amounts of the goodwill exceeded the fair values, on January 1, 2002 the Company wrote-off all of the goodwill of the Hotel and the Temperature Controlled Logistics business as an impairment loss totaling $30,129,000. The write-off has been reflected as a cumulative effect of change in accounting principle on the income statement. Previously reported "Income before gains on sale of real estate and cumulative effect of change in accounting principle" and "Net income applicable to Class A units" for the year ended December 31, 2001 would have been approximately $1,230,000 higher, or $2.35 and $2.48 per Class A unit diluted, if such goodwill was not amortized in the prior year. -91-
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SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS AND SFAS NO. 144 - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002). SFAS No. 143 requires the recording of the fair value of a liability for an asset retirement obligation in the period which it is incurred. SFAS No. 144 supersedes current accounting literature and now provides for a single accounting model for long-lived assets to be disposed of by sale and requires discontinued operations presentation for disposals of a "component" of an entity. The adoption of these statements did not have a material effect on the Company's financial statements; however under SFAS No. 144, if the Company were to dispose of a material operating property, such property's results of operations will have to be separately disclosed as discontinued operations in the Company's financial statements. SFAS NO. 145 - RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 requires, among other things, (i) that the modification of a lease that results in a change of the classification of the lease from capital to operating under the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction and (ii) the reporting of gains or losses from the early extinguishment of debt as extraordinary items only if they met the criteria of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS. The rescission of SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is effective for transactions occurring on or after May 15, 2002. The adoption of this statement did not have a material effect on the Company's financial statements. SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company does not anticipate that the adoption of this statement will have a material effect on the Company's financial statements. SFAS NO. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 On August 7, 2002, the Company announced that beginning January 1, 2003, it will expense the cost of employee stock options in accordance with the SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued SFAS No. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 to amend the transition and disclosure provisions of SFAS No. 123. Specifically, SFAS No. 123, as amended, would permit two additional transition methods for entities that adopt the fair value method of accounting for stock based employee compensation. The Company will adopt SFAS No. 123 prospectively by valuing and accounting for employee stock options granted in 2003 and thereafter. The Company will utilize a binomial valuation model and appropriate market assumptions to determine the value of each grant. Stock-based compensation expense will be recognized on a straight-line basis over the vesting period of the respective grants. FASB Interpretation No. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. In November 2002, the FASB issued Interpretation No. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, Including Indirect Guarantees of Indebtedness of Others, which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company believes that the adoption of this interpretation will not have a material effect to the Company's financial statements. -92-
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FASB Interpretation No. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued Interpretation No. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES, which requires the consolidation of an entity by an enterprise (i) if that enterprise, known as a "primary beneficiary", has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both and (ii) if the entity is a variable interest entity, as defined by Interpretation No. 46. An entity is a variable interest entity if (a) the total equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (b) the equity investors do not have the characteristics of a controlling financial interest in the entity. Interpretation No. 46 applies immediately to all variable interest entities created after January 31, 2003. For variable interest entities created by public companies before February 1, 2003, Interpretation No. 46 must be applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The initial determination of whether an entity is a variable interest entity shall be made as of the date at which a primary beneficiary becomes involved with the entity and reconsidered as of the date one of three triggering events described by Interpretation No. 46 occur. The Company does not believe that the adoption of this Interpretation will have a material effect on its financial statements. -93-
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to fluctuations in market interest rates. Market interest rates are highly sensitive to many factors, beyond the control of the Company. Various financial vehicles exist which would allow management to mitigate the impact of interest rate fluctuations on the Company's cash flows and earnings. As of December 31, 2002 the Company has entered into an interest rate swap described in footnote 1 to the table below. Management may engage in additional hedging strategies in the future, depending on management's analysis of the interest rate environment and the costs and risks of such strategies. The Company's exposure to a change in interest rates on its wholly-owned and partially-owned debt (all of which arises out of non-trading activity) is as follows: ($ in thousands, except per unit amounts) [Enlarge/Download Table] 2002 2001 -------------------------------------------- --------------------------- Weighted Effect of 1% Weighted December 31, Average Change In December 31, Average Balance Interest Rate Base Rates Balance Interest Rate ------------ ------------- ------------ ------------ ------------- Wholly-owned debt: Variable rate................... $ 1,358,126(1) 2.69% $ 12,045(2) $ 1,182,605 3.39% Fixed rate...................... 2,713,194 7.17% -- 1,294,568 7.53% ------------ ------------ ------------ $ 4,071,320 5.61% 12,045 $ 2,477,173 ============ ------------ ============ Debt of partially-owned entities: Variable rate................... $ 131,100 4.54% 1,310(3) $ 85,516 5.63% Fixed rate...................... 917,008 8.41% -- 1,234,019 8.29% ------------ ------------ ------------ $ 1,048,108 7.92% 1,310 $ 1,319,535 ============ ------------ ============ Total decrease in the Company's annual net income......... $ 13,355 ============ per Class A unit-diluted.......... $ .10 ============ ---------- (1) Includes $533,600 for the Company's senior unsecured notes due 2007, as the Company entered into interest rate swap agreements that effectively converted the interest rate from a fixed rate of 5.625% to a floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate (2.18% if set on December 31, 2002). In accordance with SFAS 133, as amended, accounting for these swaps requires the Company to fair value the debt at each reporting period. At December 31, 2002, the fair value adjustment was $34,245, and is included in the balance of the senior unsecured notes above. (2) The effect of a 1% change in wholly-owned debt base rates shown above excludes $153,659 of variable rate mortgage financing, cross-collateralized by the Company's 770 Broadway and 595 Madison Avenue office properties, as the proceeds are held in a restricted mortgage escrow account which bears interest at the same rate as the loans. (3) The effect of a 1% change in partially-owned debt base rates shown above is calculated after including $45,229 representing the Company's 14.9% share of Prime Group Realty L.P.'s ("PGE") outstanding variable rate debt as at September 30, 2002. PGE has not filed its annual report on Form 10-K for the year ended December 31, 2002, prior to the filing of this annual report on Form 10-K. The fair value of the Company's debt, based on 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, exceeds the aggregate carrying amount by approximately $178,566,000 at December 31, 2002. -94-
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS [Enlarge/Download Table] PAGE ---- Independent Auditors' Report.................................................................................. 96 Consolidated Balance Sheets at December 31, 2002 and 2001..................................................... 97 Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 ...................... 98 Consolidated Statements of Partners' Capital for the years ended December 31, 2002, 2001, and 2000............ 99 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000................... 101 Notes to Consolidated Financial Statements.................................................................... 102 -95-
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INDEPENDENT AUDITORS' REPORT Partners Vornado Realty L.P. New York, New York We have audited the accompanying consolidated balance sheets of Vornado Realty L.P. as of December 31, 2002 and 2001, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty L.P. at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS." DELOITTE & TOUCHE LLP Parsippany, New Jersey March 6, 2003 -96-
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VORNADO REALTY L.P. CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] DECEMBER 31, -------------------------- 2002 2001 ----------- ----------- (Amounts in thousands, except unit and per unit amounts) ASSETS Real estate, at cost: Land................................................................................... $ 1,491,808 $ 895,831 Buildings and improvements............................................................. 5,948,255 3,480,249 Development costs and construction in progress......................................... 51,965 258,357 Leasehold improvements and equipment................................................... 67,666 55,774 ----------- ----------- Total............................................................................. 7,559,694 4,690,211 Less accumulated depreciation and amortization......................................... (737,426) (506,225) ----------- ----------- Real estate, net.................................................................. 6,822,268 4,183,986 Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $33,393 and $15,235 .......................................... 208,200 265,584 Escrow deposits and restricted cash....................................................... 263,125 204,463 Marketable securities..................................................................... 42,525 126,774 Investments and advances to partially-owned entities, including Alexander's of $193,879 and $188,522 .................................................. 997,711 1,270,195 Due from officers......................................................................... 20,643 18,197 Accounts receivable, net of allowance for doubtful accounts of $13,887 and $8,831.................................................................. 65,754 47,406 Notes and mortgage loans receivable....................................................... 86,581 258,555 Receivable arising from the straight-lining of rents, net of allowance of $4,071 in 2002.. 240,449 202,754 Other assets.............................................................................. 270,923 199,429 ----------- ----------- $ 9,018,179 $ 6,777,343 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Notes and mortgages payable............................................................... $ 3,537,720 $ 2,477,173 Senior Unsecured Notes due 2007, at fair value ($34,245 in excess of accreted note balance in 2002)......................................................... 533,600 -- Revolving credit facility................................................................. -- -- Accounts payable and accrued expenses..................................................... 202,756 179,597 Officers compensation payable............................................................. 16,997 6,708 Deferred credit........................................................................... 59,362 11,940 Other liabilities......................................................................... 3,030 51,895 ----------- ----------- Total liabilities...................................................................... 4,353,465 2,727,313 ----------- ----------- Minority interest......................................................................... 20,508 25,795 ----------- ----------- Commitments and contingencies Partners' Capital: Equity.................................................................................... 4,774,901 4,089,313 Distributions in excess of net income.................................................. (176,458) (95,647) ----------- ----------- 4,598,443 3,993,666 Deferred compensation units earned but not yet delivered.............................. 66,660 38,253 Deferred compensation units issued but not yet earned.................................. (2,629) -- Accumulated other comprehensive loss................................................... (13,564) (2,980) Due from officers for purchase of Class A units of beneficial interest................. (4,704) (4,704) ----------- ----------- Total partners' capital........................................................... 4,644,206 4,024,235 ----------- ----------- $ 9,018,179 $ 6,777,343 =========== =========== See notes to consolidated financial statements. -97-
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VORNADO REALTY L.P. CONSOLIDATED STATEMENTS OF INCOME [Enlarge/Download Table] YEAR ENDED DECEMBER 31, --------------------------------------- 2002 2001 2000 ----------- ---------- ---------- (Amounts in thousands, except per unit amounts) Revenues: Rentals ................................................................. $ 1,248,903 $ 841,999 $ 695,078 Expense reimbursements .................................................. 159,978 133,114 120,056 Other income (including fee income from related parties of $1,450, $1,655, and $1,418) ...................... 26,189 10,660 10,838 ----------- ---------- ---------- Total revenues .............................................................. 1,435,070 985,773 825,972 ----------- ---------- ---------- Expenses: Operating ............................................................... 541,596 398,969 318,360 Depreciation and amortization ........................................... 205,826 123,862 99,846 General and administrative .............................................. 98,458 72,572 47,911 Amortization of officer's deferred compensation expense ................. 27,500 -- -- Costs of acquisitions and development not consummated ................... 6,874 5,223 -- ----------- ---------- ---------- Total expenses .............................................................. 880,254 600,626 466,117 ----------- ---------- ---------- Operating income ............................................................ 554,816 385,147 359,855 Income applicable to Alexander's ............................................ 29,653 25,718 17,363 Income from partially-owned entities ........................................ 44,458 80,612 86,654 Interest and other investment income ........................................ 31,685 54,385 32,926 Interest and debt expense (including amortization of deferred financing costs of $8,339, $8,458, and $7,298) .................................... (239,525) (173,076) (171,398) Net loss on disposition of wholly-owned and partially-owned assets other than real estate ............................................................. (17,471) (8,070) -- Minority interest ........................................................... (3,185) (2,520) (1,965) ----------- ---------- ---------- Income before gains on sale of real estate and cumulative effect of change in accounting principle .................................................... 400,431 362,196 323,435 Gains on sale of real estate ................................................ -- 15,495 10,965 Cumulative effect of change in accounting principle ......................... (30,129) (4,110) -- ----------- ---------- ---------- Net income .................................................................. 370,302 373,581 334,400 Preferred unit distributions (including accretion of issuance expenses of $958 in 2001 and $2,875 in 2000) ............................ (119,214) (130,815) (124,736) ----------- ---------- ---------- NET INCOME applicable to Class A units ...................................... $ 251,088 $ 242,766 $ 209,664 =========== ========== ========== INCOME PER CLASS A UNIT - BASIC: Income before gains on sale of real estate and cumulative effect of change in accounting principle ............................ $ 2.21 $ 2.42 $ 2.14 Gains on sale of real estate .......................................... -- .17 .12 Cumulative effect of change in accounting principle ........................................................... (.24) (.04) -- ----------- ---------- ---------- Net income per Class A unit ........................................... $ 1.97 $ 2.55 $ 2.26 =========== ========== ========== INCOME PER CLASS A UNIT - DILUTED: Income before gains on sale of real estate and cumulative effect of change in accounting principle ............................ $ 2.15 $ 2.34 $ 2.08 Gains on sale of real estate .......................................... -- .17 .12 Cumulative effect of change in accounting principle ................... (.23) (.04) -- ----------- ---------- ---------- Net income per Class A unit ........................................... $ 1.92 $ 2.47 $ 2.20 =========== ========== ========== See notes to consolidated financial statements. -98-
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VORNADO REALTY L.P. CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL [Enlarge/Download Table] DISTIBUTIONS ACCUMULATED LIMITED GENERAL IN EXCESS OTHER TOTAL PREFERRED PARTNERSHIP PARTNER'S OF COMPREHENSIVE PARTNERS' COMPREHENSIVE UNITS UNITS UNITS NET INCOME LOSS OTHER CAPITAL INCOME --------- ----------- ---------- ------------ ------------- ------- ---------- ------------- (amounts in thousands, except per unit amounts) BALANCE, JANUARY 1, 2000........... $478,585 $1,207,262 $1,700,010 $(116,979) $(1,448) $(4,800) $3,262,630 Net Income......................... -- -- -- 334,400 -- -- 334,400 $334,400 Distributions paid on Preferred units Series A Preferred units ($3.25 per unit).............. -- -- -- (21,689) -- -- (21,689) -- Series B Preferred units ($1.68 per unit).............. -- -- -- (7,225) -- -- (7,225) -- Series C Preferred units ($1.31 per unit).............. -- -- -- (9,776) -- -- (9,776) -- Net proceeds from issuance of limited partnership units....... -- 204,750 -- -- -- -- 204,750 -- Distributions paid on Class A units ($1.97 per unit).......... -- -- -- (183,051) -- -- (183,051) -- Class A units issued under employees' share plan........... -- -- 9,928 -- -- 9,928 -- Preferential allocations to unitholders..................... -- 21,285 -- (86,046) -- -- (64,761) -- Limited partnership units issued in connection with acquisitions. -- 9,192 -- -- -- -- 9,192 -- Conversion of limited partnership units to Class A units.......... -- (1,792) 1,792 -- -- -- -- -- Accretion of issuance expenses on preferred units................. 2,875 -- -- -- -- -- 2,875 -- Class A units issued in connection with dividend reinvestment plan............... -- -- 1,026 -- -- -- 1,026 -- Change in unrealized net loss on securities available for sale... -- -- -- -- (18,399) -- (18,399) (18,399) Appreciation of securities held in officer's deferred compensation trust.............. -- -- -- -- (579) -- (579) (579) Forgiveness of amount due from officers........................ -- -- -- -- -- 96 96 -- -------- ---------- ---------- --------- -------- ------- ---------- -------- BALANCE DECEMBER 31, 2000.......... $481,460 $1,440,697 $1,712,756 $ (90,366) $(20,426) $(4,704) $3,519,417 $315,422 ======== ========== ========== ========= ======== ======= ========== ======== Net Income......................... -- -- -- 373,581 -- -- 373,581 $373,581 Distributions paid on Preferred units Series A Preferred units ($3.25 per unit).............. -- -- -- (19,505) -- -- (19,505) -- Series B Preferred units ($1.68 per unit).............. -- -- -- (7,225) -- -- (7,225) -- Series C Preferred units ($1.31 per unit).............. -- -- -- (9,775) -- -- (9,775) -- Distributions paid on Class A units ($2.32 per unit).......... -- -- -- (215,541) -- -- (215,541) -- Distributions payable on Class A units ($.31 per unit)........... -- -- -- (32,506) -- -- (32,506) -- Net proceeds from issuance of limited partnership units....... -- 62,673 -- -- -- -- 62,673 -- Net of proceeds from isssuance of Class A units................... -- -- 376,933 -- -- -- 376,933 -- Class A units issued under employees' share plan........... -- -- 9,959 -- -- -- 9,959 -- Preferential allocations to unitholders..................... -- 2,580 -- (94,310) -- -- (91,730) -- Conversion of Preferred units to limited partnership units....... (13,441) -- 13,441 -- -- -- -- -- Conversion of limited partnership units to Class A units.......... -- (52,087) 52,087 -- -- -- -- -- Accretion of issuance expenses on preferred units................. 958 -- -- -- -- -- 958 -- Class A units issued in connection with dividend reinvestment plan............... -- -- 1,297 -- -- -- 1,297 -- Change in unrealized net loss on securities available for sale... -- -- -- -- 18,178 -- 18,178 18,178 Deferred compensation units earned but not yet delivered.... -- -- -- -- -- 38,253 38,253 -- Pension obligations................ -- -- -- -- (732) -- (732) (732) -------- ---------- ---------- --------- -------- ------- ---------- -------- BALANCE DECEMBER 31, 2001.......... $468,977 $1,453,863 $2,166,473 $ (95,647) $ (2,980) $33,549 $4,024,235 $391,027 ======== ========== ========== ========= ======== ======= ========== ======== See notes to consolidated financial statements. -99-
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VORNADO REALTY L.P. CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL [Enlarge/Download Table] DISTIBUTIONS ACCUMULATED LIMITED GENERAL IN EXCESS OTHER TOTAL PREFERRED PARTNERSHIP PARTNER'S OF COMPREHENSIVE PARTNERS' COMPREHENSIVE UNITS UNITS UNITS NET INCOME LOSS OTHER CAPITAL INCOME --------- ----------- ---------- ----------- ------------- ------- ---------- ------------- (amounts in thousands, except per unit amounts) BALANCE, DECEMBER 31, 2001......... $ 468,977 $1,453,863 $2,166,473 $ (95,647) $ (2,980) $33,549 $4,024,235 Net Income......................... -- -- -- 370,302 -- -- 370,302 $370,302 Distributions to Preferred unitholders: Series A Preferred Units ($3.25 per unit).............. -- -- -- (6,167) -- -- (6,167) -- Series B Preferred Units ($2.125 per unit)............. -- -- -- (7,225) -- -- (7,225) -- Series C Preferred Units ($2.125 per unit)............. -- -- -- (9,775) -- -- (9,775) -- Other........................... -- -- -- (96,047) -- -- (96,047) -- Redemption of perpetual preferred units........................... -- -- (25,000) -- -- -- (25,000) -- Distributions paid on Class A units ($2.97 per unit including $.31 for 2001)........ -- -- -- (364,405) -- -- (364,405) -- Reversal of distributions payable on Class A units in 2001........ -- -- -- 32,506 -- -- 32,506 -- Class A units issued under employees' share plan........... -- -- 24,385 -- -- -- 24,385 -- Class A units issued in 2002....... -- 625,234 56,453 -- -- -- 681,687 -- Conversion of Series A preferred units to Class A units.......... (203,489) -- 203,489 -- -- -- -- -- Deferred compensation units........ -- -- 2,629 -- -- 25,778 28,407 -- Class A units issued in connection with reinvestment plan............................ -- -- 1,887 -- -- -- 1,887 -- Conversion of Limited Partnership units to General Partner's units -- (30,418) 30,418 -- -- -- -- -- Change in unrealized net loss on securities available for sale... -- -- -- -- (8,936) -- (8,936) (8,936) Other non-cash charges, primarily pension obligations............. -- -- -- -- (1,648) -- (1,648) (1,648) --------- ---------- ---------- --------- -------- ------- ---------- -------- BALANCE, DECEMBER 31,2002.......... $ 265,488 $2,048,679 $2,460,734 $(176,458) $(13,564) $59,327 $4,644,206 $359,718 ========= ========== ========== ========= ======== ======= ========== ======== See notes to consolidated financial statements. -100-
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VORNADO REALTY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................................... $ 370,302 $ 373,581 $ 334,400 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle............ 30,129 4,110 -- Minority interest.............................................. 3,185 2,520 1,965 Amortization of officer's deferred compensation................ 27,500 -- -- Net loss on dispositions of wholly-owned and partially-owned assets other than real estate................ 17,471 8,070 -- Costs of acquisitions and development not consummated.......... 6,874 5,223 -- Gains on sale of real estate................................... -- (15,495) (10,965) Depreciation and amortization (including debt issuance costs).. 205,826 123,862 99,846 Straight-lining of rental income............................... (36,478) (27,230) (32,206) Amortization of below market leases, net....................... (12,634) -- -- Equity in income of Alexander's................................ (29,653) (25,718) (17,363) Equity in income of partially-owned entities................... (44,458) (80,612) (86,654) Changes in operating assets and liabilities.................... (38,239) 19,374 (39,102) ----------- ----------- ----------- Net cash provided by operating activities.............................. 499,825 387,685 249,921 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Development costs and construction in progress..................... (63,619) (145,817) (35,701) Acquisitions of real estate and other.............................. (23,665) (11,574) (199,860) Additions to real estate........................................... (96,018) (67,090) (136,081) Investments in partially-owned entities............................ (100,882) (109,332) (99,974) Proceeds from sale of real estate.................................. -- 162,045 47,945 Investments in notes and mortgage loans receivable................. (56,935) (83,879) (144,225) Repayment of notes and mortgage loans receivable................... 124,500 64,206 5,222 Cash restricted, primarily mortgage escrows........................ (21,471) 9,896 (183,788) Distributions from partially-owned entities........................ 126,077 114,218 68,799 Real estate deposits............................................... -- -- 4,819 Purchases of marketable securities................................. -- (14,325) (26,531) Proceeds from sale or maturity of securities available for sale.... 87,896 1,930 -- ----------- ----------- ----------- Net cash used in investing activities.................................. (24,117) (79,722) (699,375) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings........................................... 628,335 554,115 1,195,108 Repayments of borrowings........................................... (731,238) (835,257) (633,655) Costs of refinancing debt.......................................... (3,970) (3,394) (18,445) Redemption of perpetual preferred units............................ (25,000) -- -- Proceeds from issuance of preferred units.......................... -- 52,673 204,750 Proceeds from issuance of Class A units............................ 56,453 377,193 -- Class A unit distributions......................................... (364,730) (201,813) (168,688) Preferred unit distributions....................................... (119,214) (134,141) (116,212) Exercise of unit options........................................... 26,272 11,256 10,955 ----------- ----------- ----------- Net cash (used in) provided by financing activities.................... (533,092) (179,368) 473,813 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents................... (57,384) 128,595 24,359 Cash and cash equivalents at beginning of year......................... 265,584 136,989 112,630 ----------- ----------- ----------- Cash and cash equivalents at end of year............................... $ 208,200 $ 265,584 $ 136,989 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash payments for interest (including capitalized interest of $6,677, $12,171 and $12,269)..................................... $ 247,048 $ 171,166 $ 165,325 =========== =========== =========== NON-CASH TRANSACTIONS: Financing assumed in acquisitions.................................. $ 1,596,903 $ -- $ 46,640 Class A units issued in connection with acquisitions............... 625,234 18,798 9,192 Unrealized (loss) gain on securities available for sale............ 860 9,495 (18,399) (Appreciation) depreciation of securities held in officer's deferred compensation trust...................................... -- (3,023) (579) See notes to consolidated financial statements. -101-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Vornado Realty L.P. (the "Operating Partnership" and/or the "Company") is a Delaware limited partnership. Vornado Realty Trust ("Vornado"), a fully-integrated real estate investment trust ("REIT"), is the sole general partner of, and owned approximately 79% of the common limited partnership interest in, the Operating Partnership at February 3, 2003. All references to the "Company" refer to the Operating Partnership and its consolidated subsidiaries. The Company currently owns directly or indirectly: OFFICE PROPERTIES ("OFFICE"): (i) all or portions of 74 office properties aggregating approximately 27.7 million square feet in the New York City metropolitan area (primarily Manhattan) and in the Washington D.C. and Northern Virginia area; RETAIL PROPERTIES ("RETAIL"): (ii) 62 retail properties in six states and Puerto Rico aggregating approximately 12.5 million square feet, including 1.8 million square feet built by tenants on land leased from the Company; MERCHANDISE MART PROPERTIES: (iii) 8.6 million square feet of showroom and office space, including the 3.4 million square foot Merchandise Mart in Chicago; TEMPERATURE CONTROLLED LOGISTICS: (iv) a 60% interest in the Vornado Crescent Portland Partnership that owns 88 cold storage warehouses nationwide with an aggregate of approximately 441.5 million cubic feet of refrigerated space leased to AmeriCold Logistics; OTHER REAL ESTATE INVESTMENTS: (v) 33.1% of the outstanding common stock of Alexander's, Inc. ("Alexander's"); (vi) the Hotel Pennsylvania in New York City consisting of a hotel portion containing 1.0 million square feet with 1,700 rooms and a commercial portion containing .4 million square feet of retail and office space; (vii) a 21.7% interest in The Newkirk Master Limited Partnership which owns office, retail and industrial properties net leased primarily to credit rated tenants, and various debt interests in such properties; (viii) eight dry warehouse/industrial properties in New Jersey containing approximately 2.0 million square feet; and (ix) other investments, including interests in other real estate, marketable securities and loans and notes receivable. -102-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Vornado Realty L.P. and entities in which the Company has a 50% or greater interest, provided that the Company exercises direct or indirect control. All significant intercompany amounts have been eliminated. The Company considers the guidance in APB 18, SOP 78-9 and EITF 96-16 in determining whether it does or does not control joint ventures on a case-by-case basis, taking into account board representation, management representation and authority and the contractual and substantive participating rights of its partners/members. If the approval of all of the partners/members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of any real property assets, the hiring of a Chief Executive Officer, the commencement, compromise or settlement of any lawsuit, legal proceeding or arbitration or the placement of any new or additional financing secured by any assets of the joint venture, then the Company does not control the venture and therefore will not consolidate the entity, despite the fact that it may own 50% or more of the relevant entity. This is the case with respect to Temperature Controlled Logistics, Monmouth Mall, 400 North LaSalle, MartParc Orleans, MartParc Wells, 825 Seventh Avenue and Starwood Ceruzzi. If the Company is able to unilaterally make major decisions for the partially owned entity and owns an interest greater than 50%, the Company has control and therefore consolidates the entity. The Company accounts for investments under the equity method when the Company's ownership interest is more than 20% but less than 50% and the Company does not exercise direct or indirect control. When partially-owned investments are in partnership form, the 20% threshold may be reduced. For all other investments, the Company uses the cost method. Equity investments are recorded initially at cost and subsequently adjusted for the Company's share of the net income or loss and cash contributions and distributions to or from these entities. Prior to January 1, 2001, the Company's equity interests in partially-owned entities also included investments in preferred stock affiliates (corporations in which the Company owned all of the preferred stock and none of the common equity). Ownership of the preferred stock entitled the Company to substantially all of the economic benefits in the preferred stock affiliates. On January 1, 2001, the Company acquired the common stock of the preferred stock affiliates, which was owned by the Officers and Trustees of the Company, and converted them to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel Pennsylvania and the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated beginning January 1, 2001. Management has made estimates and assumptions that affect the reported amounts of assets and liabilities 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. RECLASSIFICATIONS: Certain prior year balances have been reclassified in order to conform to current year presentation. REAL ESTATE: Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. For redevelopment of existing operating properties, the net book value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete. If the cost of the redeveloped property, including the undepreciated net book value of the property carried forward, exceeds the estimated fair value of redeveloped property, the excess is charged to expense. Depreciation is provided on a straight-line basis over the assets' estimated useful lives which range from 7 to 40 years. Tenant allowances are amortized on a straight-line basis over the lives of the related leases, which approximates the useful lives of the assets. Additions to real estate include interest expense capitalized during construction of $6,677,000, $12,171,000, and $12,269,000 for the years ended December 31, 2002, 2001, and 2000. -103-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Upon acquisitions of real estate, the Company assesses the fair value of acquired assets (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases in accordance with SFAS No. 141) and acquired liabilities, and allocate purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. The Company's properties are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. If the Company incorrectly estimates the values at acquisition or the undiscounted cash flows, initial allocations of purchase price and future impairment charges may be different. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Cash and cash equivalents does not include cash escrowed under loan agreements and cash restricted in connection with an officer's deferred compensation payable. ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company periodically evaluates the collectibility of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. The Company also maintains an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. MARKETABLE SECURITIES: The Company has classified debt and equity securities which it intends to hold for an indefinite period of time (including warrants to acquire equity securities) as securities available for sale; equity securities it intends to buy and sell on a short term basis as trading securities; and preferred stock investments as securities held to maturity. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses on securities available for sale are included as a component of Partners' Capital and other comprehensive income. Realized gains or losses on the sale of securities are recorded based on specific identification. A portion of the Company's preferred stock investments are redeemable and accounted for in accordance with EITF 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Income is recognized by applying the prospective method of adjusting the yield to maturity based on an estimate of future cash flows. If the value of the investment based on the present value of the future cash flows is less than the Company's carrying amount, the investments will be written-down to fair value through earnings. Investments in securities of non-publicly traded companies are reported at cost, as they are not considered marketable under SFAS No. 115. At December 31, 2002 and 2001, marketable securities had an aggregate cost of $41,665,000 and $117,284,000 and an aggregate market value of $42,525,000 and $126,774,000 (of which $0 and $13,888,000 represents trading securities; $2,020,000 and $49,763,000 represents securities available for sale; and $40,505,000 and $63,123,000 represent securities held to maturity). Gross unrealized gains and losses were $860,000 and $0 at December 31, 2002, and $14,738,000 and $5,243,000 at December 31, 2001. NOTES AND MORTGAGE LOANS RECEIVABLE: The Company's policy is to record mortgages and notes receivable at the stated principal amount less any discount or premiums. The Company accretes or amortizes any discounts or premiums over the life of the related loan receivable utilizing the effective interest method. The Company evaluates the collectibility of both interest and principal of each of its loans, if circumstances warrant, to determine whether it is impaired. A loan is considered to be impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the loss accrual is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan's effective interest rate or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. DEFERRED CHARGES: Direct financing costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis, which approximates the effective interest rate method, in accordance with the terms of the agreements to which they relate. -104-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS: All financial instruments of the Company are reflected in the accompanying consolidated balance sheets at amounts which, in management's estimation, based upon an interpretation of available market information and valuation methodologies (including discounted cash flow analyses with regard to fixed rate debt) are considered appropriate. The fair value of the Company's debt is approximately $178,566,000 in excess of the aggregate carrying amount at December 31, 2002. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of the Company's financial instruments. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The cumulative effect of implementing SFAS No. 133 on January 1, 2001, was $4,110,000. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges. On June 27, 2002, the Company entered into interest rate swaps that effectively converted the interest rate on the $500,000,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a floating rate of LIBOR plus ..7725%, based upon the trailing 3 month LIBOR rate (2.18% at December 31, 2002). These swaps were designated and effective as fair value hedges, with a fair value of $34,245,000 at December 31, 2002, which is included in Other Assets on the Company's balance sheet. Accounting for these swaps also requires the Company to recognize changes in the fair value of the debt during each reporting period. At December 31, 2002, the fair value adjustment of $34,245,000, based on the fair value of the swaps, is included in the balance of the Senior Unsecured Notes. Because the hedging relationship qualifies for the "short-cut" method, no hedge ineffectiveness on these fair value hedges was recognized during 2002. REVENUE RECOGNITION: The Company has the following revenue sources and revenue recognition policies: Base Rents -- income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and free rent abatements under the leases. Percentage Rents -- income arising from retail tenant leases which are contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accordance with SAB 101, which states that this income is to be recognized only after the contingency has been removed (i.e. sales thresholds have been achieved). Hotel Revenues -- income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is recognized when rooms are occupied. Food and beverage and banquet revenue are recognized when the services have been rendered. Trade Show Revenues -- income arising from the operation of trade shows, including rentals of booths. This revenue is recognized in accordance with the booth rental contracts when the trade shows have occurred. Expense Reimbursement Income -- income arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This income is accrued in the same periods as the expenses are incurred. Contingent rents are not recognized until realized. -105-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) INCOME TAXES: No provision has been made for income taxes in the accompanying consolidated financial statements of the Operating Partnership since such taxes, if any, are the responsibility of the partners. The Company owns stock in corporations that have elected to be treated for Federal income tax purposes, as taxable REIT subsidiaries ("TRS"). The value of the combined TRS stock cannot and does not exceed 20% of the value of the Company's total assets. A TRS is taxable on its net income at regular corporate tax rates. For the 2002 tax year, the total income tax is approximately $1,430,000. The net basis of the Company's assets and liabilities for tax purposes is approximately $2,822,000,000 lower than the amount reported for financial statement purposes. At December 31, 2002, the Company had a capital loss carryover of approximately $73,000,000. The capital loss carryover is available to offset future capital gains that would otherwise be required to be distributed as dividends to shareholders. AMOUNTS PER CLASS A UNIT: Basic earnings per Class A Unit is computed based on weighted average units outstanding. Diluted earnings per Class A unit considers the effect of outstanding options, warrants and convertible or redeemable securities. STOCK BASED COMPENSATION: In 2002 and prior years, the Company accounted for stock-based compensation using the intrinsic value method. Under the intrinsic value method compensation cost is measured as the excess, if any, of the quoted market price of Vornado's stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. The Company's policy is to grant options with an exercise price equal to the quoted market price of Vornado's stock on the grant date. An equivalent number of Class A units are issued when options are exercised. Accordingly, no compensation cost has been recognized for the Company's stock option plans. See Note 8 - Employees' Share Option Plan for details of the Company's outstanding employee share options and the related pro forma stock-based employee compensation cost. Effective January 1, 2003, the Company adopted SFAS No. 123 "Accounting for Stock Based Compensation" as amended by SFAS No. 148 "Accounting for Stock - Based Compensation - Transition and Disclosure." The Company will adopt SFAS No. 123 prospectively by valuing and accounting for employee stock options granted in 2003 and thereafter. The Company will utilize a binomial valuation model and appropriate market assumptions to determine the value of each grant. Stock-based compensation expense will be recognized on a straight-line basis over the vesting period of the respective grants. In addition to employee stock option grants, the Company has also granted restricted shares to certain of its employees that vest over a three to five year period. The Company records the value of each restricted share award as stock-based compensation expense based on the Company's closing stock price on the NYSE on the date of grant on a straight-line basis over the vesting period. As of December 31, 2002, the Company has 250,927 restricted shares or rights to receive restricted shares outstanding to employees of the Company, excluding 626,566 shares issued to the Company's President in connection with his employment agreement. The Company recognized $1,868,000 of stock-based compensation expense in 2002 for the portion of these shares that vested during the year. -106-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS SFAS No. 141 - BUSINESS COMBINATIONS requires companies to account for the value of leases acquired and the costs of acquiring such leases separately from the value of the real estate for all acquisitions subsequent to July 1, 2001. Accordingly, the Company has evaluated the leases in place for (i) the remaining 66% of CESCR it did not previously own which it acquired on January 1, 2002, (ii) the remaining 50% of the Las Catalinas Mall it did not previously own which it acquired on September 23, 2002 and (iii) a 50% interest in the Monmouth Mall which it acquired on October 10, 2002, to determine whether they were acquired at market, above market or below market. The Company's evaluations were based on (i) the differences between contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company's history of providing tenant improvements and paying leasing commissions. As a result of its evaluations, as of December 31, 2002, the Company has recorded a deferred credit of $48,430,000 representing the value of acquired below market leases, deferred charges of $15,976,000 for the value of acquired above market leases and $3,621,000 for origination costs. In addition, in the year ended December 31, 2002 the Company has recognized property rentals of $12,634,000, for the amortization of below market leases net of above market leases, and depreciation expense of $1,214,000 for the amortization of the lease origination costs and additional building depreciation resulting from the reallocation of the purchase price of the applicable properties. SFAS NO. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead be subject to periodic impairment testing. SFAS No. 142 provides specific guidance for impairment testing of these assets and removes them from the scope of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Company's goodwill balance on December 31, 2001 of $30,129,000 consisted of $14,639,000 related to the Hotel Pennsylvania acquisition and $15,490,000 related to the acquisition of the Temperature Controlled Logistics businesses. Prior to January 1, 2002, the Company performed impairment testing in accordance with SFAS 121. The Company reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Given the decrease in the estimated market values and the deteriorating performance of Hotel Pennsylvania and Temperature Controlled Logistics, the Company performed a review for recoverability estimating the future cash flows expected to result from the use of the assets and their eventual disposition. As of December 31, 2001, the sum of the expected cash flows (undiscounted and without interest charges) exceeded the carrying amounts of goodwill, and therefore no impairments were recognized. Upon adoption of SFAS 142 on January 1, 2002, the Company tested the goodwill for impairment at the reporting level unit utilizing the prescribed two-step method. The first step compared the fair value of the reporting unit (determined based on a discounted cash flow approach) with its carrying amount. As the carrying amount of the reporting unit exceeded its fair value, the second step of the impairment test was performed to measure the impairment loss. The second step compared the implied fair value of goodwill with the carrying amount of the goodwill. As the carrying amounts of the goodwill exceed the fair values, on January 1, 2002 the Company wrote-off all of the goodwill of the Hotel and the Temperature Controlled Logistics businesses as an impairment loss totaling $30,129,000. The write-off has been reflected as a cumulative effect of change in accounting principle on the income statement. Previously reported "Income before gains on sale of real estate and cumulative effect of change in accounting principle" and "Net income applicable to Class A units" for the year ended December 31, 2001 would have been approximately $1,230,000 higher, or $2.35 and $2.48 per Class A unit diluted, if such goodwill was not amortized in the prior year. -107-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS AND SFAS NO. 144 - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002). SFAS No. 143 requires the recording of the fair value of a liability for an asset retirement obligation in the period which it is incurred. SFAS No. 144 supersedes current accounting literature and now provides for a single accounting model for long-lived assets to be disposed of by sale and requires discontinued operations presentation for disposals of a "component" of an entity. The adoption of these statements did not have a material effect on the Company's financial statements; however under SFAS No. 144, if the Company were to dispose of a material operating property, such property's results of operations will have to be separately disclosed as discontinued operations in the Company's financial statements. SFAS NO. 145 - RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 requires, among other things, (i) that the modification of a lease that results in a change of the classification of the lease from capital to operating under the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction and (ii) the reporting of gains or losses from the early extinguishment of debt as extraordinary items only if they met the criteria of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS. The rescission of SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is effective for transactions occurring on or after May 15, 2002. The adoption of this statement did not have a material effect on the Company's financial statements. SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company does not anticipate that the adoption of this statement will have a material effect on the Company's financial statements. SFAS NO. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 On August 7, 2002, the Company announced that beginning January 1, 2003, it will expense the cost of employee stock options in accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued Statement No. 148 - ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO. 123 to amend the transition and disclosure provisions of SFAS No. 123. Specifically, SFAS No. 123, as amended, would permit two additional transition methods for entities that adopt the fair value method of accounting for stock based employee compensation. The Company will adopt SFAS No. 123 prospectively by valuing and accounting for employee stock options granted in 2003 and thereafter. The Company will utilize a binomial valuation model and appropriate market assumptions to determine the value of each grant. Stock-based compensation expense will be recognized on a straight-line basis over the vesting period of the respective grants. FASB INTERPRETATION NO. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS In November 2002, the FASB issued Interpretation No. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company believes that the adoption of this interpretation will not have a material effect to the financial statements. -108-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) FASB INTERPRETATION NO. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued Interpretation No. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES, which requires the consolidation of an entity by an enterprise (i) if that enterprise, known as a "primary beneficiary", has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both and (ii) if the entity is a variable interest entity, as defined by Interpretation No. 46. An entity is a variable interest entity if (a) the total equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (b) the equity investors do not have the characteristics of a controlling financial interest in the entity. Interpretation No. 46 applies immediately to all variable interest entities created after January 31, 2003. For variable interest entities created by public companies before February 1, 2003, Interpretation No. 46 must be applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The initial determination of whether an entity is a variable interest entity shall be made as of the date at which a primary beneficiary becomes involved with the entity and reconsidered as of the date one of three triggering events described by Interpretation No. 46 occur. The Company does not believe that the adoption of this Interpretation will have a material effect on its financial statements. -109-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. ACQUISITIONS AND DISPOSITIONS The Company completed approximately $1,834,600,000 of real estate acquisitions or investments in 2002 and $19,200,000 in 2001. These acquisitions were consummated through subsidiaries or preferred stock affiliates of the Company. Acquisitions of business were recorded under the purchase method of accounting. Related net assets and results of operations have been included in these financial statements since their respective dates of acquisition. The pro forma effect of the individual acquisitions and in the aggregate other than Charles E. Smith Commercial Realty, were not material to the Company's historical results of operations. Acquisitions of individual properties are recorded as acquisitions of real estate assets. Acquisitions of businesses are accounted for under the purchase method of accounting. The purchase price for property acquisitions and businesses acquired is allocated to acquired assets and assumed liabilities using their relative fair values as of the acquisition date based on valuations and other studies. Initial valuations are subject to change until such information is finalized no later than 12 months from the acquisition date. OFFICE: CHARLES E. SMITH COMMERCIAL REALTY INVESTMENT ("CESCR") On January 1, 2002, the Company completed the combination of CESCR with Vornado. CESCR has a dominant market position in the Washington, D.C. and Northern Virginia area, owning approximately 12.4 million square feet in 53 office properties as well as a highly competent management team. In the Company's opinion, the assets were acquired at below replacement cost and with below market leases. As a result of the combination, the Company will be in position to capitalize on the favorable supply/demand characteristics of the Washington, D.C office markets. Prior to the combination, Vornado owned a 34% interest in CESCR. The consideration for the remaining 66% of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly issued Vornado Operating Partnership units and approximately $1 billion of debt (66% of CESCR's total debt). The purchase price paid by the Company was determined based on the weighted average closing price of the equity issued to CESCR unitholders for the period beginning two business days before and ending two business days after the date the acquisition was agreed to and announced on October 19, 2001. The Company also capitalized as part of the basis of the assets acquired approximately $32,000,000 for third party acquisition related costs, including advisory, legal and other professional fees that were contemplated at the time of the acquisition. The following table summarizes the estimated fair value of assets acquired and liabilities assumed at January 1, 2002, the date of acquisition. (Amounts in thousands) [Download Table] Land, buildings and improvements.............. $ 1,681,000 Intangible deferred charges................... 36,000 Working capital............................... 41,000 ------------- Total Assets Acquired......................... 1,758,000 ------------- Mortgages and notes payable................... 1,023,000 Intangible deferred credit.................... 62,000 Other liabilities............................. 34,000 ------------- Total Liabilities Assumed..................... 1,119,000 ------------- Net Assets Acquired........................... $ 639,000 ============= The Company's estimate of the weighted average useful life of acquired intangibles is approximately three years. This acquisition was recorded as a business combination under the purchase method of accounting. The purchase price was allocated to acquired assets and assumed liabilities using their relative fair values as of January 1, 2002 based on valuations and other studies. The operations of CESCR are consolidated into the accounts of the Company beginning January 1, 2002. Prior to this date the Company accounted for its 34% interest on the equity method. -110-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The unaudited pro forma information set forth below presents the condensed consolidated statements of income for the Company for the year ended December 31, 2001 as if the following transactions had occurred on January 1, 2001, (i) the acquisition of CESCR described above and (ii) the Company's November 21, 2001 sale of 9,775,000 Class A units and the use of proceeds to repay indebtedness. [Enlarge/Download Table] Condensed Consolidated Statements of Income For the Year Ended (in thousands, except per unit amounts) December 31, ---------------------------- Pro Forma 2002 2001 ----------- ----------- Revenues............................................................... $ 1,435,070 $ 1,384,933 =========== =========== Income before gains on sale of real estate and cumulative effect of change in accounting principle....................................... $ 400,431 $ 431,207 Gains on sale of real estate........................................... -- 15,495 Cumulative effect of change in accounting principle.................... (30,129) (4,110) ----------- ----------- Net income............................................................. 370,302 442,592 Preferred unit distributions........................................... (119,214) (130,815) ----------- ----------- Net income applicable to Class A units................................. $ 251,088 $ 311,777 =========== =========== Net income per Class A unit - basic.................................... $ 1.97 $ 2.97 =========== =========== Net income per Class A unit - diluted.................................. $ 1.92 $ 2.89 =========== =========== CRYSTAL GATEWAY ONE On July 1, 2002, the Company acquired a 360,000 square foot office building from a limited partnership, which is approximately 50% owned by Mr. Robert H. Smith and Mr. Robert P. Kogod and members of the Smith and Kogod families, trustees of the Company, in exchange for approximately 325,700 newly issued Vornado Operating Partnership units (valued at $13,679,000) and the assumption of $58,500,000 of debt. The building is located in the Crystal City complex in Arlington, Virginia where the Company already owns 24 office buildings containing over 6.9 million square feet, which it acquired on January 1, 2002, in connection with the Company's acquisition of CESCR. The operations of Crystal Gateway One are consolidated into the accounts of the Company from the date of acquisition. BUILDING MAINTENANCE SERVICE COMPANY On January 1, 2003, the Company acquired the Building Maintenance Service Company for $13,000,000 in cash, which provides cleaning and related services and security services to office properties, including the Company's Manhattan office properties. This company was previously owned by the estate of Bernard Mendik and certain other individuals including Mr. Greenbaum, one of the Company's executive officers. This acquisition was recorded as a business combination under the purchase method of accounting. RETAIL: LAS CATALINAS MALL On September 23, 2002, the Company increased its interest in the Las Catalinas Mall located in Caguas, Puerto Rico (San Juan area) to 100% by acquiring the 50% of the mall and 25% of the Kmart anchor store it did not already own. The purchase price was $48,000,000, of which $16,000,000 was paid in cash and $32,000,000 was debt assumed. The Las Catalinas Mall, which opened in 1997, contains 492,000 square feet, including a 123,000 square foot Kmart and a 138,000 square foot Sears owned by the tenant. Prior to September 23, 2002, the Company accounted for its investment on the equity method. Subsequent to this date the operations of Las Catalinas are consolidated into the accounts of the Company. MONMOUTH MALL On October 10, 2002, a joint venture in which the Company has a 50% interest, acquired the Monmouth Mall, an enclosed super regional shopping center located in Eatontown, New Jersey containing approximately 1.5 million square feet, including four department stores, three of which aggregating 731,000 square feet are owned by the tenants. The purchase price was approximately $164,700,000, including transaction costs of $4,400,000. The Company made a $7,000,000 cash investment in the form of common equity to the venture and provided it with cash of $23,500,000 representing preferred equity yielding 14%. The venture financed the purchase of the Mall with $135,000,000 of floating rate debt at LIBOR plus 2.05%, with a LIBOR floor of 2.50% on $35,000,000, a three- year term and two one-year extension options. The Company accounts for its investment on the equity method. -111-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) OTHER: On December 31, 2002, the Company and Crescent Real Estate Equities formed a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas quarries from AmeriCold Logistics, the Company's tenant at the cold storage warehouses (Temperature Controlled Logistics) facilities for $20,000,000 in cash (appraised value). The Company contributed cash of $8,800,000 to the joint venture representing its 44% interest. The Company accounts for its investment in the venture on the equity method. DISPOSITIONS: The following table sets forth the details of sales, dispositions, write-offs and other similar transactions for the years ended December 31, 2002, 2001 and 2000: ($ in thousands) [Enlarge/Download Table] 2002 2001 2000 ---------- --------- ---------- WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS OTHER THAN DEPRECIABLE REAL ESTATE: WHOLLY-OWNED ASSETS: Gain on transfer of mortgages........................................ $ 2,096 $ -- $ -- Net gain on sale of air rights....................................... 1,688 -- -- Gain on sale of Kinzie Park Condominium units........................ 2,156 -- -- Net gain on sale of marketable securities............................ 12,346 -- -- Primestone foreclosure and impairment losses......................... (35,757) -- -- Write-off of investments in technology companies..................... -- (16,513) -- PARTIALLY-OWNED ASSETS: After-tax net gain on sale of Park Laurel condominium units.......... -- 15,657 -- Write-off of net investment in the Russian Tea Room ("RTR")...................................................... -- (7,374) -- Other................................................................. -- 160 -- ---------- --------- ---------- Net loss on disposition of wholly-owned and partially-owned assets other than real estate..................................... $ (17,471) $ (8,070) $ -- ========== ========= ========== NET GAINS ON SALE OF REAL ESTATE Condemnation proceedings.............................................. $ -- $ 3,050 $ -- Sale of 570 Lexington Avenue.......................................... -- 12,445 -- Sale of other real estate............................................. -- -- 10,965 ---------- ---------- ---------- Net gain on sale of real estate....................................... $ -- $ 15,495 $ 10,965 ========== ========== ========== GAIN ON TRANSFER OF MORTGAGES In the year ended December 31, 2002, the Company recorded a net gain of approximately $2.1 million resulting from payments to the Company by third parties that assumed certain of the Company's mortgages. Under these transactions the Company paid to the third parties that assumed the Company's obligations the outstanding amounts due under the mortgages and the third parties paid the Company for the benefit of assuming the mortgages. The Company has been released by the creditors underlying these loans. NET GAIN ON SALE OF AIR RIGHTS The Company constructed a $16.3 million community facility and low-income residential housing development (the "30th Street Venture"), in order to receive 163,728 square feet of transferable development rights, generally referred to as "air rights". The Company donated the building to a charitable organization. The Company sold 106,796 square feet of these air rights to third parties at an average price of $120 per square foot. An additional 28,821 square feet of air rights was sold to Alexander's at a price of $120 per square foot for use at Alexander's 59th Street development project (the "59th Street Project"). In each case, the Company received cash in exchange for air rights. The Company identified third party buyers for the remaining 28,111 square feet of air rights of the 30th Street Venture. These third party buyers wanted to use the air rights for the development of two projects located in the general area of 86th Street which was not within the required geographical radius of the construction site nor in the same Community Board as the low-income housing and community facility project. The 30th Street Venture asked Alexander's to sell 28,111 square feet of the air rights it already owned to the third party buyers (who could use them) and the 30th Street Venture would replace them with 28,111 square feet of air rights. In October 2002, the Company sold 28,111 square feet of air rights to Alexander's for an aggregate sales price of $3,059,000 (an average of $109 per square foot). Alexander's then sold an equal amount of air rights to the third party buyers for an aggregate sales price of $3,339,000 (an average of $119 per square foot). -112-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GAIN ON SALE OF KINZIE PARK CONDOMINIUM UNITS The Company recognized a gain of $2,156,000 during 2002, from the sale of residential condominiums in Chicago, Illinois. PRIMESTONE FORECLOSURE AND IMPAIRMENT LOSSES On September 28, 2000, the Company made a $62,000,000 loan to Primestone Investment Partners, L.P. ("Primestone"). The Company received a 1% up-front fee and was entitled to receive certain other fees aggregating approximately 3% upon repayment of the loan. The loan bore interest at 16% per annum. Primestone defaulted on the repayment of this loan on October 25, 2001. The loan was subordinate to $37,957,000 of other debt of the borrower that liened the Company's collateral. On October 31, 2001, the Company purchased the other debt for its face amount. The loans were secured by 7,944,893 partnership units in Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust (NYSE:PGE) and the partnership units are exchangeable for the same number of common shares of PGE. The loans are also guaranteed by affiliates of Primestone. On November 19, 2001, the Company sold, pursuant to a participation agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50% participation in both loans at par for approximately $50,000,000 reducing the Company's net investment in the loans at December 31, 2001 to $56,768,000 including unpaid interest and fees of $6,790,000. The participation did not meet the criteria for "sale accounting" under SFAS 140 because Cadim was not free to pledge or exchange the assets. Accordingly, the Company was required to account for this transaction as a borrowing secured by the loan, rather than as a sale of the loan by classifying the participation as an "Other Liability" and continuing to report the outstanding loan balance at 100% in "Notes and Mortgage Loans Receivable" on the balance sheet. Under the terms of the participation agreement, cash payments received shall be applied (i) first, to the reimbursement of reimbursable out-of-pocket costs and expenses incurred in connection with the servicing, administration or enforcement of the loans after November 19, 2001, and then to interest and fees owed to the Company through November 19, 2001, (ii) second, to the Company and Cadim, pro rata in proportion to the amount of interest and fees owed following November 19, 2001 and (iii) third, 50% to the Company and 50% to Cadim as recovery of principal. On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership units at a foreclosure auction. The price paid for the units by application of a portion of Primestone's indebtedness to the Company and Cadim was $8.35 per unit, the April 30, 2002 closing price of shares of PGE on the New York Stock Exchange. On June 28, 2002, pursuant to the terms of the participation agreement, the Company transferred 3,972,447 of the partnership units to Cadim. In the second quarter, in accordance with foreclosure accounting, the Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated based on (i) the acquisition price of the units and (ii) its valuation of the amounts realizable under the guarantees by affiliates of Primestone, as compared with the net carrying amount of the investment at April 30, 2002. In the third quarter of 2002, the Company recorded a $2,229,000 write-down on its investment based on costs expended to realize the value of the guarantees. Further, in the fourth quarter of 2002, the Company recorded a $15,857,000 write-down of its investment in Prime Group consisting of (i) $14,857,000 to adjust the carrying amount of the Prime Group units to $4.61 per unit, the closing price of PGE shares on December 31, 2002 on the New York Stock Exchange and (ii) $1,000,000 for estimated costs to realize the value of the guarantees. The Company considered the decline in the value of the units which are convertible into stock to be other than temporary as of December 31, 2002, based on the fact that the market value of the units which are convertible into stock has been less than its cost for more than six months, the severity of the decline, market trends, the financial condition and near-term prospects of Prime Group and other relevant factors. At December 31, 2002, the Company's carrying amount of the investment was $23,408,000, of which $18,313,000 represents the carrying amount of the 3,972,447 partnership units owned by the Company ($4.61 per unit), $6,100,000 represents the amount expected to be realized under the guarantees, offset by $1,005,000 representing the Company's share of Prime Group Realty's net loss through September 30, 2002 (see Note 4. Investments in and Advances to Partially-Owned Entities). Prior to April 30, 2002, this investment was in the form of a loan and was included in Notes and Mortgage Loans Receivable on the balance sheet. -113-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At February 3, 2003, the closing price of PGE shares on the New York Stock Exchange was $5.30 per share. The ultimate realization of the Company's investment will depend upon the future performance of the Chicago real estate market and the performance of PGE, as well as the ultimate realizable value of the net assets supporting the guarantees and the Company's ability to collect under the guarantees. In addition, the Company will continue to monitor this investment to determine whether additional write-downs are required based on (i) declines in value of the shares of PGE (for which the partnership units are exchangeable) which are "other than temporary" as used in accounting literature and (ii) the amount expected to be realized under the guarantees. WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES In the first quarter of 2001, the Company recorded a charge of $4,723,000 resulting from the write-off of an equity investment in a technology company. In the second quarter of 2001, the Company recorded an additional charge of $13,561,000 resulting from the write-off of all of its remaining equity investments in technology companies due to both the deterioration of the financial condition of these companies and the lack of acceptance by the market of certain of their products and services. In the fourth quarter of 2001, the Company recorded $1,481,000 of income resulting from the reversal of a deferred liability relating to the termination of an agreement permitting one of the technology companies access to its properties. PARK LAUREL CONDOMINIUM PROJECT In the third quarter of 2001, the Park Laurel joint venture (69% interest owned by the Company) completed the sale of 52 condominium units of the total 53 units and received proceeds of $139,548,000. The Company's share of the after tax net gain was $15,657,000. The Company's share of the after-tax net gain reflects $3,953,000 (net of tax benefit of $1,826,000) awards accrued under the venture's incentive compensation plan. WRITE-OFF OF NET INVESTMENT IN RTR In the third quarter of 2001, the Company wrote-off its entire net investment of $7,374,000 in RTR based on the operating losses and an assessment of the value of the real estate. NET GAINS ON SALE OF REAL ESTATE: On August 6, 2001, the Company sold its leasehold interest in 550/600 Mamaroneck Avenue for $22,500,000, which approximated book value. In September 1998, Atlantic City condemned the Company's property. In the third quarter of 1998, the Company recorded a gain of $1,694,000, which reflected the condemnation award of $3,100,000, net of the carrying value of the property of $1,406,000. The Company appealed the amount and on June 27, 2001, was awarded an additional $3,050,000, which has been recorded as a gain in the quarter ended June 30, 2001. On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue for $60,000,000, resulting in a gain of $12,445,000. During 2000, the Company sold (i) its three shopping centers located in Texas for $25,750,000, resulting in a gain of $2,560,000 and (ii) its Westport, Connecticut office property for $24,000,000, resulting in a gain of $8,405,000. -114-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. INVESTMENTS IN PARTIALLY-OWNED ENTITIES The Company's investments in partially-owned entities and income recognized from such investments is disclosed below. Summarized financial data is provided for (i) investments in entities which exceed 10% of the Company's total assets and (ii) investments in which the Company's share of partially-owned entities pre-tax income exceeds 10% of the Company's net income. BALANCE SHEET DATA: [Enlarge/Download Table] ($ in thousands) 100% OF THESE ENTITIES COMPANY'S --------------------------------------------------------- INVESTMENT TOTAL ASSETS TOTAL LIABILITIES PERCENTAGE ------------------------- -------------------------- ---------------------------- OWNERSHIP 2002 2001 2002 2001 2002 2001 ---------- ---------- ----------- ----------- ----------- ----------- ----------- INVESTMENTS: Temperature Controlled Logistics................. 60% $ 448,295 474,862 $ 1,347,382 $ 1,379,212 $ 584,510 $ 610,727 =========== =========== =========== =========== Charles E. Smith Commercial Realty L.P.(1). 34% --(1) 347,263 (1) $ 1,308,297 (1) $ 1,503,057 =========== =========== =========== Alexander's................ 33.1% 193,879 188,522 $ 64,770 $ 583,339 $ 596,247 $ 538,258 =========== =========== =========== =========== Newkirk Joint Ventures (2).............. 21.7% 182,465 191,534 $ 1,472,349 $ 722,293 $ 1,322,719 $ 879,840 =========== =========== =========== =========== Partially - Owned Office Buildings (4)...... 34% 29,421 23,346 Starwood Ceruzzi Joint Venture............. 80% 24,959 25,791 Monmouth Mall(3)........... 50% 31,416 -- Park Laurel................ 80% 3,481 (4,745)(5) Prime Group Realty, L.P. and other guarantees...... 14.9% 23,408 -- Other...................... 60,387 23,622 ---------- ----------- $ 997,711 $ 1,270,195 ========== =========== 100% OF THESE ENTITIES ------------------------ TOTAL EQUITY ------------------------ 2002 2001 --------- ---------- INVESTMENTS: Temperature Controlled Logistics................. $ 731,240 $ 768,485 ========= ========== Charles E. Smith Commercial Realty L.P.(1). (1) $ (307,584) ========== Alexander's................ $ 68,665 $ 45,081 ========= ========== Newkirk Joint Ventures (2).............. $ 20,385 $ (157,547) ========= ========== Partially - Owned Office Buildings (4)...... Starwood Ceruzzi Joint Venture............. Monmouth Mall(3)........... Park Laurel................ Prime Group Realty, L.P.... and other guarantees...... Other...................... ---------- (1) Vornado owned a 34% interest in CESCR in 2001. On January 1, 2002, the Company acquired the remaining 66% of CESCR. See Note 3 - "Acquisitions and Dispositions" for details of the acquisition. (2) The Company's investment in and advances to Newkirk Joint Ventures is comprised of [Download Table] December 31, 2002 December 31, 2001 ----------------- ----------------- Investments in limited partnerships.. $ 134,200 $ 143,269 Mortgages and loans receivable....... 39,511 39,511 Other................................ 8,754 8,754 ---------- ---------- Total................................ 182,465 191,534 ========== ========== On January 2, 2002, the Newkirk Joint Ventures' partnership interests were merged into a master limited partnership (the "MLP") in which the Company has a 21.7% interest. In conjunction with the merger, the MLP completed a $225,000 mortgage financing collateralized by its properties, subject to the existing first and certain second mortgages on those properties. The loan bears interest at LIBOR plus 5.5% with a LIBOR floor of 3% (8.5% at February 3, 2003) and matures on January 31, 2005, with two one-year extension options. As a result of the financing on February 6, 2002, the MLP repaid approximately $28,200 of existing debt and distributed approximately $37,000 to the Company. In 2003, the Company expects to receive distributions of approximately $9,000 from the Newkirk MLP. (3) On October 10, 2002, a joint venture in which the Company owns a 50% interest acquired the Monmouth Mall. See Note 3 - "Acquisitions and Dispositions" for further details. (4) As at December 31, 2002, includes a 20% interest in a property which was part of the CESCR acquisition in January 2002. (5) The credit balance at December 31, 2001, is a result of the accrual of awards under the ventures incentive compensation plan. -115-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Below is a summary of the debt of partially owned entities as of December 31, 2002 and 2001, none of which is guaranteed by the Company. (Amounts in thousands) [Enlarge/Download Table] 100% OF PARTIALLY-OWNED ENTITIES DEBT -------------------------------- DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ Alexander's (33.1% interest) (see "Alexander's" on page 118 for further details): Term loan: Portion financed by the Company due on January 3, 2006 with interest at 12.48%................................................................. $ 95,000 $ 95,000 Portion financed by a bank, due March 15, 2003, with interest at LIBOR + 1.85% (repaid on July 3, 2002)............................................ -- 10,000 Line of Credit financed by the Company, due on January 3, 2006 with interest at 12.48% (prepayable without penalty)............................................ 24,000 24,000 Lexington Avenue construction loan payable, due on January 3, 2006, plus two one-year extensions, with interest at LIBOR plus 2.50% (3.88% at December 31, 2002).......................................................................... 55,500 -- Rego Park mortgage payable, due in June 2009, with interest at 7.25%.............. 82,000 82,000 Kings Plaza Regional Shopping Center mortgage payable, due in June 2011, with interest at 7.46% (prepayable with yield maintenance)..................... 219,308 221,831 Paramus mortgage payable, due in October 2011, with interest at 5.92% (prepayable without penalty)................................................... 68,000 68,000 Other notes and mortgages payable (repaid on July 3, 2002)........................ -- 15,000 Temperature Controlled Logistics (60% interest): Mortgage notes payable collateralized by 58 temperature controlled warehouses, due in May 2008, requires amortization based on a 25 year term with interest at 6.94% (prepayable with yield maintenance)................ 537,716 563,782 Other notes and mortgages payable................................................. 37,789 38,748 Newkirk Joint Ventures (21.7% interest): Portion of first mortgages and contract rights, collateralized by the partnerships' real estate, due from 2002 to 2024, with a weighted average interest rate of 10.62% at December 31, 2002 (various prepayment rights)........................ 1,432,438 1,336,989 Charles E. Smith Commercial Realty L.P. (34% interest in 2001): 29 mortgages payable.............................................................. -- 1,470,057 Prime Group Realty L.P. (14.9% interest) (1): 24 mortgages payable.............................................................. 868,374 -- Partially Owned Office Buildings: 330 Madison Avenue (25% interest) mortgage note payable, due in April 2008, with interest at 6.52% (prepayable with yield maintenance)..................... 60,000 60,000 Fairfax Square (20% interest) mortgage note payable due in August 2009, with interest at 7.50%.............................................................. 68,900 -- 825 Seventh Avenue (50% interest) mortgage payable, due in October 2014, with interest at 8.07% (prepayable with yield maintenance).......................... 23,295 23,552 Orleans Hubbard (50% interest) mortgage note payable, due in March 2009, with interest at 7.03%.............................................................. 9,961 -- Wells/Kinzie Garage (50% interest) mortgage note payable, due in May 2009, with interest at 7.03%.............................................................. 15,860 -- Monmouth Mall (50% interest): Mortgage note payable, due in November 2005, with interest at LIBOR + 2.05% (3.49% at December 31, 2002)................................................... 135,000 -- Las Catalinas Mall (50% interest): Mortgage notes payable (2)..................................................... -- 68,591 Russian Tea Room (50% interest) mortgages payable (3)................................. -- 13,000 Based on the Company's ownership interest in the partially-owned entities above, the Company's share of the debt of these partially-owned entities was $1,048,108,000 and $1,319,535,000 as of December 31, 2002 and 2001. ---------- (1) Balance as of September 30, 2002, as Prime Group's annual report on Form 10-K for the year ended December 31, 2002, has not been filed prior to the filing of this annual report on Form 10-K. (2) The Company increased its interest in Las Catalinas to 100% on September 23, 2002. Accordingly, Las Catalinas is consolidated as of September 30, 2002. (3) On November 18, 2002 the Russian Tea Room mortgage loans were repaid with proceeds from the sale of the property. -116-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) INCOME STATEMENT DATA: [Enlarge/Download Table] COMPANY'S INCOME 100% OF THESE ENTITIES FROM PARTIALLY OWNED ----------------------------------------------------------------- ENTITIES TOTAL REVENUES NET INCOME (LOSS) ----------------------------- -------------------------------- -------------------------------- 2002 2001 2000 2002 2001 2000 2002 2001 2000 -------- -------- --------- --------- --------- --------- --------- -------- -------- ($ in thousands) Alexander's: Equity in income (1)........... $ 7,556 $ 8,465 $ 1,105 $ 76,193 $ 69,343 $ 63,965 $ 23,584 $ 27,386 $ 5,197 ========= ========= ========= ========= ======== ======== Interest income (2)............ 10,401 11,899 11,948 Development and guarantee fees (2) 6,915 -- -- Management and leasing fee income (1)................... 4,781 5,354 4,310 -------- -------- --------- $ 29,653 $ 25,718 $ 17,363 -------- -------- --------- Temperature Controlled Logistics: Equity in net income (loss).... $ 4,144 $ 12,093 $ 23,244 $ 117,663 $ 126,957 $ 154,341 $ (20,231) $ 16,647 $ 37,284 ========= ========= ========= ========= ======== ======== Management fees income (1)................... 5,563 5,354 5,534 -------- -------- --------- 9,707 17,447 28,778 CESCR (3)........................ -- 28,653 25,724 (3) $ 382,502 $ 344,084 (3) $ 82,713 $ 76,707 ========= ========= ======== ======== Newkirk MLP: Equity in income............. 26,499 25,470 18,632 $ 295,369 $ 179,551 $ 121,860 $ 84,900 ========= ========= ========= ======== Interest and other income.... 8,001 5,474 5,894 Partially-Owned Office Buildings (4).................. 1,966 4,093 2,832 Monmouth Mall.................... 1,022 -- -- Prime Group Realty LP (5)........ (1,005) -- -- Other............................ (1,732) (525) 4,794 -------- -------- --------- $ 44,458 $ 80,612 $ 86,654 ======== ======== ========= ---------- (1) Equity in income in 2002 includes the Company's $3,524 share of Alexander's gain on sale of its Third Avenue property. Equity in income in 2001 includes (i) the Company's $6,298 share of Alexander's gain on sale of its Fordham Road property, (ii) a charge of $1,684 representing the Company's share of abandoned development costs and (iii) $1,170 representing the Company's share of Alexander's gain on the early extinguishment of debt on its Fordham Road property. Management and leasing fee income include fees of $350 and $520 paid to the Company in 2002 and 2001 in connection with sales of real estate. (2) Alexander's capitalizes the fees and interest charged by the Company. Because the Company owns 33.1% of Alexander's, the Company recognizes 66.9% of such amounts as income and the remainder is reflected as a reduction of the Company's carrying amount of the investment in Alexander's. (3) The Company owned a 34% interest in CESCR. On January 1, 2002, the Company acquired the remaining 66% of CESCR it did not previously own. Accordingly, CESCR is consolidated as of January 1, 2002. (4) Represents the Company's interests in 330 Madison Avenue (24.8%), 825 Seventh Avenue (50%) and 570 Lexington Avenue (50%). On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue for $60,000, resulting in a gain of $12,445 which is not included in income in the table above. (5) Represents the Company's share of net loss for the period from April 30, 2002 (date of acquisition) to September 30, 2002, which includes (i) a loss of $357 from discontinued operations and (ii) a loss of $147 from the sale of real estate. The Company's share of equity in income or loss for the period from October 1, 2002 to December 31, 2002 will be recognized in earnings in the quarter ended March 31, 2003, as the investee has not released its earnings for the year ended December 31, 2002 prior to the filing of the Company's annual report on Form 10-K. -117-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) ALEXANDER'S OWNERSHIP The Company owns 1,655,000 common shares or 33.1% of the outstanding common stock of Alexander's at December 31, 2002. Alexander's is managed by and its properties are leased and developed by the Company pursuant to management, leasing and development agreements with one-year terms expiring in March of each year, which are automatically renewable. In conjunction with the closing of the Alexander's Lexington Avenue construction loan on July 3, 2002, these agreements were revised to cover the Alexander's Lexington Avenue property separately. Further, the Lexington Avenue management and development agreements were amended to provide for a term lasting until substantial completion of the development of the property, with automatic renewals, and for the payment of the development fee upon the earlier of January 3, 2006, or the payment in full of the construction loan encumbering the property. The Company is entitled to a development fee estimated to be approximately $26,300,000, based on 6% of construction costs, as defined, of which $7,667,000 has been recognized as income during the year ended December 31, 2002. DEBT At December 31, 2002, the Company had loans receivable from Alexander's of $119,000,000, including $24,000,000 drawn under the $50,000,000 line of credit the Company granted to Alexander's on August 1, 2000. The maturity date of the loan and the line of credit is the earlier of January 3, 2006 or the date the Alexander's Lexington Avenue construction loan is repaid. The interest rate on the loan and line of credit, which resets quarterly using the same spread to treasuries as presently exists with a 3% floor for treasuries, is 12.48% at December 31, 2002. The Company believes that although Alexander's has disclosed that it does not have positive cash flow sufficient to repay this loan to the Company currently, Alexander's will be able to repay the loan upon the successful development and permanent financing of its Lexington Avenue development project or through asset sales. On July 3, 2002, Alexander's finalized a $490,000,000 loan with HVB Real Estate Capital (HYPO Vereinsbank) to finance the construction of its approximately 1.3 million square foot multi-use building at its 59th Street and Lexington Avenue location. The estimated construction costs in excess of the construction loan of approximately $140,000,000 will be provided by Alexander's. The loan has an interest rate of LIBOR plus 2.5% and a term of forty-two months plus two one-year extensions. Alexander's has received an initial funding of $55,500,000 under the loan of which $25,000,000 was used to repay existing loans and notes payable. Pursuant to this loan, Vornado has agreed to guarantee, among other things, the lien free, timely completion of the construction of the project and funding of project costs in excess of a stated budget, as defined in the loan agreement, if not funded by Alexander's (the "Completion Guarantee"). The $6,300,000 estimated fee payable by Alexander's to the Company for the Completion Guarantee is 1% of construction costs (as defined) and is payable at the same time that the development fee is payable. In addition, if the Company should advance any funds under the Completion Guarantee in excess of the $26,000,000 currently available under the secured line of credit, interest on those advances is at 15% per annum. AGREEMENTS WITH ALEXANDER'S Alexander's is managed by and its properties are leased by the Company, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable. The annual management fee payable to the Company by Alexander's is equal to the sum of (i) $3,000,000, (ii) 3% of the gross income from the Kings Plaza Mall, and (iii) 6% of development costs with minimum guaranteed fees of $750,000 per annum. The leasing agreement provides for the Company to generally receive a fee of (i) 3% of sales proceeds and (ii) 3% of lease rent for the first ten years of a lease term, 2% of lease rent for the eleventh through the twentieth years of a lease term and 1% of lease rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by Alexander's tenants. Such amount is receivable annually in an amount not to exceed $2,500,000 until the present value of such installments (calculated at a discount rate of 9% per annum) equals the amount that would have been paid at the time the transactions which gave rise to the commissions occurred. At December 31, 2002, $410,000 is due to the Company under this agreement. -118-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) ALEXANDER'S OTHER The Company constructed a $16.3 million community facility and low-income residential housing development (the "30th Street Venture"), in order to receive 163,728 square feet of transferable development rights, generally referred to as "air rights". The Company donated the building to a charitable organization. The Company sold 106,796 square feet of these air rights to third parties at an average price of $120 per square foot. An additional 28,821 square feet of air rights was sold to Alexander's at a price of $120 per square foot for use at Alexander's 59th Street development project (the "59th Street Project"). In each case, the Company received cash in exchange for air rights. The Company identified third party buyers for the remaining 28,111 square feet of air rights related to the 30th Street Venture. These third party buyers wanted to use the air rights for the development of two projects located in the general area of 86th Street which was not within the required geographical radius of the construction site nor in the same Community Board as the low-income housing and community facility project. The 30th Street Venture asked Alexander's to sell 28,111 square feet of the air rights it already owned to the third party buyers (who could use them) and the 30th Street Venture would replace them with 28,111 square feet of air rights. In October 2002, the Company sold 28,111 square feet of air rights to Alexander's for an aggregate sales price of $3,059,000 (an average of $109 per square foot). Alexander's then sold an equal amount of air rights to the third party buyers for an aggregate sales price of $3,339,000 (an average of $119 per square foot). On October 5, 2001, Alexander's entered into a ground lease for its Paramus, N.J. property with IKEA Property, Inc. The lease has a 40-year term with an option to purchase at the end of the 20th year for $75,000,000. Further, Alexander's has obtained a $68,000,000 interest only, non-recourse mortgage loan on the property from a third party lender. The interest rate on the debt is 5.92% with interest payable monthly until maturity in October 2011. The triple net rent each year is the sum of $700,000 plus the amount of debt service on the mortgage loan. If the purchase option is not exercised at the end of the 20th year, the triple net rent for the last 20 years must include debt service sufficient to fully amortize the $68,000,000 over the remaining 20 year lease period. On May 1, 2001, Alexander's entered into a lease agreement with Bloomberg L.P., for approximately 695,000 square feet of office space. The initial term of the lease is for 25 years, with one ten-year renewal option. Base annual net rent is $34,529,000 in each of the first four years and $38,533,000 in the fifth year with similar percentage increases each four years. There can be no assurance that this project ultimately will be completed, completed on time or completed for the budgeted amount. If the project is not completed on a timely basis, the lease may be cancelled and significant penalties may apply. On August 30, 2002, Alexander's sold its Third Avenue property, located in the Bronx, New York, which resulted in a gain of $10,366,000. On January 12, 2001, Alexander's sold its Fordham Road property located in the Bronx, New York, for $25,500,000, which resulted in a gain of $19,026,000. In addition, Alexander's paid off the mortgage on its Fordham Road property at a discount, which resulted in a gain from early extinguishment of debt of $3,534,000 in the first quarter of 2001. -119-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. NOTES AND MORTGAGE LOANS RECEIVABLE LOAN TO COMMONWEALTH ATLANTIC PROPERTIES ("CAPI") On March 4, 1999 the Company made an additional $242,000,000 investment in Charles E. Smith Commercial Realty L.P. ("CESCR") by contributing to CESCR the land under certain CESCR office properties in Crystal City, Arlington, Virginia and partnership interests in certain CESCR subsidiaries. The Company acquired these assets from Commonwealth Atlantic Properties, Inc. ("CAPI"), an affiliate of Lazard Freres Real Estate Investors L.L.C., for $242,000,000, immediately prior to the contribution to CESCR. In addition, the Company acquired from CAPI for $8 million the land under a Marriott Hotel located in Crystal City. The Company paid the $250,000,000 purchase price to CAPI by issuing 4,998,000 of the Company's Series E-1 convertible preferred units. In connection with these transactions, the Company agreed to make a five-year $41,200,000 loan to CAPI with interest at 8%, increasing to 9% ratably over the term. The loan is secured by approximately 1.1 million of the Company's Series E-1 convertible preferred units issued to CAPI. Each Series E-1 convertible preferred unit is convertible into 1.1364 of the Company's common shares. The total value of these units, on an as-converted basis, was $46,500,000 based on a closing price of $37.20 per common share on December 31, 2002. LOAN TO VORNADO OPERATING COMPANY ("VORNADO OPERATING") At December 31, 2002, the amount outstanding under the revolving credit agreement with Vornado Operating was $21,989,000. Vornado Operating has disclosed that in the aggregate its investments do not, and for the foreseeable future are not expected to, generate sufficient cash flow to pay all of its debts and expenses. Further, Vornado Operating states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent Real Estate Equities, will need to restructure the leases between the Landlord and the Tenant to provide additional cash flow to the Tenant (the Landlord has previously restructured the leases to provide additional cash flow to the Tenant). Management anticipates a further lease restructuring and the sale and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado Operating is expected to have a source to repay the debt under this facility, which may be extended. Since January 1, 2002, the Company has not recognized interest income on the debt under this facility. The Company has assessed the collectibility of this loan as of December 31, 2002 and determined that it is not impaired. DEARBORN CENTER MEZZANINE CONSTRUCTION LOAN As of December 31, 2002, $60,758,000 is outstanding under the Dearborn Center Mezzanine Construction Loan to a special purpose entity, of which $23,392,000 has been funded by the Company, representing a 38.5% interest. The special purpose entity's sole asset is Dearborn Center, a 1.5 million square foot high-rise office tower under construction in Chicago. The entity is owned by Prime Group Realty L.P. and another investor. The Company is a member of a loan syndicate led by a money center bank. The proceeds of the loan are being used to finance the construction, and are subordinate to a $225,000,000 first mortgage. The loan is due January 21, 2004, three years from the date of the initial draw, and provides for a 1-year extension at the borrower's option (assuming net operating income at a specified level and a cash reserve sufficient to fund interest for the extension period). The loan bears interest at 12% per annum plus additional interest upon repayment ranging from a minimum of 9.5% to 11.5%. -120-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. DEBT Following is a summary of the Company's debt: (Amounts in thousands) [Enlarge/Download Table] INTERST RATE BALANCE AS OF AS AT ------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, MATURITY 2002 2002 2001 --------- ------------- ----------- ------------ Notes and Mortgages Payable: Fixed Interest: Office: NYC Office: Two Penn Plaza.......................... 03/04 7.08% $ 154,669 $ 157,697 888 Seventh Avenue (1).................. 02/06 6.63% 105,000 105,000 Eleven Penn Plaza....................... 05/07 8.39% 50,383 51,376 866 UN Plaza............................ 04/04 7.79% 33,000 33,000 CESCR Office (2): Crystal Park 1-5........................ 07/06-08/13 6.66%-8.39% 264,441 (2) Crystal Gateway 1-4 Crystal Square 5.... 07/12-01/25 6.75%-7.09% 215,978 (2) Crystal Square 2, 3 and 4............... 10/10-11/14 7.08%-7.14% 146,081 (2) Skyline Place........................... 08/06-12/09 6.6%-6.93% 139,212 (2) 1101 17th , 1140 Connecticut, 1730 M & 1150 17th............................. 08/10 6.74% 97,318 (2) Courthouse Plaza 1 and 2................ 01/08 7.05% 80,062 (2) Crystal Gateway N., Arlington Plaza and 1919 S. Eads.......................... 11/07 6.77% 72,721 (2) Reston Executive I, II & III............ 01/06 6.75% 73,844 (2) Crystal Plaza 1-6....................... 10/04 6.65% 70,356 (2) One Skyline Tower....................... 06/08 7.12% 65,764 (2) Crystal Malls 1-4....................... 12/11 6.91% 65,877 (2) 1750 Pennsylvania Avenue................ 06/12 7.26% 49,794 (2) One Democracy Plaza..................... 02/05 6.75% 27,640 (2) Retail: Cross collateralized mortgages payable on 42 shopping centers................ 03/10 7.93% 487,246 492,156 Green Acres Mall........................ 02/08 6.75% 150,717 152,894 Montehiedra Town Center................. 05/07 8.23% 59,638 60,359 Las Catalinas Mall (3).................. 11/13 6.97% 67,692 -- Merchandise Mart: Market Square Complex (4)............... 07/11 7.95% 48,213 49,702 Washington Design Center (5)............ 10/11 6.95% 48,542 48,959 Washington Office Center................ 02/04 6.80% 44,924 46,572 Other................................... 10/10-06/13 7.52%-7.71% 18,703 18,951 Other: Industrial Warehouses (6)............... 10/11 6.95% 49,423 50,000 Student Housing Complex................. 11/07 7.45% 19,019 19,243 Other................................... 08/21 9.90% 6,937 8,659 ----------- ----------- Total Fixed Interest Notes and Mortgages Payable.......................... 7.17% 2,713,194 1,294,568 ----------- ----------- -121-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) [Enlarge/Download Table] INTERST RATE BALANCE AS OF (Amounts in thousands) SPREAD AS AT --------------------------- OVER DECEMBER 31, DECEMBER 31, DECEMBER 31, MATURITY LIBOR 2002 2002 2001 -------- ------------ ------------ ------------ ------------ Notes and Mortgages Payable: Variable Interest: Office: NYC Office: One Penn Plaza (7) .................................... 06/05 L+125 2.67% $ 275,000 $ 275,000 770 Broadway/595 Madison Avenue cross-collateralized mortgage (8) ................... 04/03 L+40 1.78% 153,659 123,500 909 Third Avenue ...................................... 08/03 L+165 3.09% 105,837 105,253 Two Park Avenue (9) ................................... 03/03 L+145 -- -- 90,000 CESCR Office: Tyson Dulles Plaza .................................... 06/03 L+130 2.72% 69,507 (2) Commerce Executive III, IV & V ........................ 07/03 L+150 2.92% 53,307 (2) Merchandise Mart: Merchandise Mart (9) .................................. 10/02 L+150 -- -- 250,000 Furniture Plaza ....................................... 02/03 L+200 3.44% 48,290 43,524 33 North Dearborn Street .............................. 09/03 L+175 3.13% 18,926 19,000 350 North Orleans (9) ................................. 06/02 L+165 -- -- 70,000 Other ................................................. 01/03 Prime-50 3.75% -- 294 Other: Palisades construction loan ........................... 02/04 L+185 3.17% 100,000 90,526 Hotel Pennsylvania .................................... 10/02 L+160 -- -- 115,508 ------------ ------------ Total Variable Interest Notes and Mortgages Payable .............................. 3.07% 824,526 1,182,605 ------------ ------------ Total Notes and Mortgages Payable ......................... $ 3,537,720 $ 2,477,173 ============ ============ Senior unsecured debt due 2007 at fair value ($34,245 in excess of accreted note balance) (9) ........................................... 06/07 L+77 2.15% $ 533,600 $ -- ============ ============ Unsecured revolving credit facility ....................... 07/03 L+90 -- $ -- $ -- ============ ============ ---------- (1) On January 11, 2001, the Company completed a $105,000 refinancing of its 888 Seventh Avenue office building. The loan bears interest at a fixed rate of 6.63% and matures on February 1, 2006. A portion of the proceeds received was used to repay the then existing mortgage of $55,000. (2) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did not previously own. Prior to January 1, 2002, the Company's share of CESCR's debt was included in Investments in and Advances to Partially-Owned Entities. In connection with the acquisition, CESCR's fixed rate debt of $1,282,780 was fair valued at $1,317,428 under purchase accounting. (3) On September 23, 2002, the Company acquired the 50% of the Mall and the 25% of Kmart's anchor store it did not already own. Prior to this date, the Company accounted for its investment on the equity method and the Company's share of the debt was included in Investments in and Advances to Partially-Owned Entities. (4) On July 11, 2001, the Company completed a $50,000 refinancing of its Market Square Complex. The loan bears interest at a fixed rate of 7.95% per annum and matures in July 2011. The proceeds received were used to repay the then existing mortgage of $49,000. (5) On October 16, 2001, the Company completed a $49,000 refinancing of its Washington Design Center property. The loan bears interest at a fixed rate of 6.95% and matures on October 16, 2011. A portion of the proceeds received was used to repay the then existing mortgage of $23,000. (6) On September 20, 2001, the Company completed a $50,000 mortgage financing, cross collateralized by its eight industrial warehouse properties. The loan bears interest at a fixed rate of 6.95% per annum and matures on October 1, 2011. (7) On June 21, 2002, one of the lenders purchased the other participant's interest in the loan. At the same time, the loan was extended for one year, with certain modifications including, (i) making the risk of a loss due to terrorism (as defined) not covered by insurance recourse to the Company and (ii) the granting of two 1-year renewal options to the Company. (8) On April 1, 2002, the Company increased its mortgage financing cross collateralized by its 770 Broadway/595 Madison Avenue properties by $115,000. On July 15, 2002, the Company repaid $84,841 with proceeds received from a third party which resulted in a gain on transfer of mortgages of $2,096. The proceeds of the loan are in a restricted mortgage escrow account which bears interest at the same rate as the loan, and at December 31, 2002 totals $153,659. (9) On June 24, 2002, the Company completed an offering of $500,000 aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007. Interest on the notes is payable semi-annually on June 15th and December 15th, commencing December 15, 2002. The notes were priced at 99.856% of their face amount to yield 5.659%. The net proceeds of approximately $496,300 were used to repay the mortgage payable on 350 North Orleans, Two Park Avenue, the Merchandise Mart and Seven Skyline. On June 27, 2002, the Company entered into interest rate swaps that effectively converted the interest rate on the $500,000 senior unsecured notes due 2007 from a fixed rate of 5.625% to a floating rate of LIBOR plus .7725%, based upon the trailing 3 month LIBOR rate (2.15% if set on December 31, 2002). As a result of the hedge accounting for the interest rate swap on the Company's senior unsecured debt, the Company recorded a fair value adjustment of $34,245, as of December 31, 2002 which is equal to the fair value of the interest rate swap asset. -122-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The net carrying amount of properties collateralizing the notes and mortgages amounted to $4,938,012,000 at December 31, 2002. As at December 31, 2002, the principal repayments for the next five years and thereafter are as follows: ($ in thousands) [Download Table] YEAR ENDING DECEMBER 31, AMOUNT ------------------------ ------------ 2003........................................... $ 449,526(1) 2004........................................... 402,949 2005........................................... 302,640 2006........................................... 261,385 2007........................................... 822,536 Thereafter..................................... 1,832,284 ---------- (1) Includes $153,659 which is offset by an equivalent amount of cash held in a restricted mortgage escrow account. The Company's debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its revolving credit agreement and its senior unsecured notes due 2007, contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that an exclusion from all risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments that allows the lenders to declare an event of default and accelerate repayment of debt. The Company has received correspondence from four lenders regarding terrorism insurance coverage, to which the Company has responded. In these letters the lenders took the position that under the agreements governing the loans provided by these lenders the Company was required to maintain terrorism insurance on the properties securing the various loans. The aggregate amount of borrowings under these loans as of December 31, 2002 was approximately $770.4 million, and there was no additional borrowing capacity. Subsequently, the Company obtained an aggregate of $360 million of separate coverage for "terrorist acts". To date, one of the lenders has acknowledged to the Company that it will not raise any further questions based on the Company's terrorism insurance coverage in place, and the other three lenders have not raised any further questions regarding the Company's insurance coverage. If lenders insist on greater coverage for these risks, it could adversely affect the Company's ability to finance and/or refinance its properties and to expand its portfolio. -123-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. PARTNERS' CAPITAL [Enlarge/Download Table] Outstanding Units at Preferred or ------------------------- Per Unit Annual Conversion December 31, December 31, Liquidation Distribution Rate Info Unit Series 2002 2001 Preference Rate Class A Units ------------------- ----------- ----------- ------------ ------------ ------------- Convertible Preferred: Series A ....................... 1,450,623 5,520,435 $ 50.00 $ 3.25 1.38504 Series B ....................... 3,400,000 3,400,000 $ 25.00 $ 2.125 -- Series C ....................... 4,600,000 4,600,000 $ 25.00 $ 2.125 -- 5.0% B-1 Convertible Preferred . 899,566 899,566 $ 50.00 $ 2.50 .914 8.0% B-2 Convertible Preferred . 449,783 449,783 $ 50.00 $ 4.00 .914 6.5% C-1 Convertible Preferred . 747,912 747,912 $ 50.00 $ 3.25 1.1431 6.5% E-1 Convertible Preferred . 4,998,000 4,998,000 $ 50.00 $ 3.25(1) 1.1364 9.00% F-1 Preferred ............ 400,000 400,000 $ 25.00 $ 2.25 (2) Perpetual Preferred: (3) 8.5% D-1 Cumulative Redeemable Preferred ......... 3,500,000 3,500,000 $ 25.00 $ 2.125 N/A 8.375% D-2 Cumulative Redeemable Preferred .................... 549,336 549,336 $ 50.00 $ 4.1875 N/A 8.25% D-3 Cumulative Redeemable Preferred .................... 8,000,000 8,000,000 $ 25.00 $ 2.0625 N/A 8.25% D-4 Cumulative Redeemable Preferred .................... 5,000,000 5,000,000 $ 25.00 $ 2.0625 N/A 8.25% D-5 Cumulative Redeemable Preferred .................... 6,480,000 7,480,000 $ 25.00 $ 2.0625 N/A 8.25% D-6 Cumulative Redeemable Preferred .................... 840,000 840,000 $ 25.00 $ 2.0625 N/A 8.25% D-7 Cumulative Redeemable Preferred .................... 7,200,000 7,200,000 $ 25.00 $ 2.0625 N/A 8.25% D-8 Cumulative Redeemable Preferred .................... 360,000 360,000 $ 25.00 $ 2.0625 N/A 8.25% D-9 Cumulative Redeemable Preferred .................... 1,800,000 1,800,000 $ 25.00 $ 2.0625 N/A General Partnership Interest(4) Limited Partnership Interest: Class A (5)................... 129,586,182 104,858,442 N/A $ 2.72 N/A ---------- (1) Increases to $3.38 in March 2006. (2) Holders have the right to require the Company to redeem the outstanding F-1 units for cash equal to the Liquidation Preference of $25.00 per unit. (3) Convertible at the option of the holder for an equivalent amount of the Company's preferred units and redeemable at the Company's option after the 5th anniversary of the date of issuance (ranging from December 1998 to September 2001). (4) Included in Class A units are 108,629,736 and 99,035,023 units owned by the general partner at December 31, 2002 and 2001, respectively. (5) Class A units are redeemable at the option of the holder for common shares of beneficial interest in Vornado, on a one-for-one basis, or at the Company's option for cash. -124-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. EMPLOYEES' SHARE OPTION PLAN The Company grants various officers and employees incentive share options and non-qualified options to purchase common shares of Vornado. Options granted are at prices equal to 100% of the market price of Vornado's shares at the date of grant. Shares vest on a graduated basis, becoming fully vested 36 months after grant. All options expire ten years after grant. An equivalent number of Class A units are issued when options are exercised. The Plan also provides for the award of Stock Appreciation Rights, Performance Shares and Restricted Stock, as defined. As of December 31, 2002, there were 250,927 restricted shares or rights to receive restricted shares outstanding, excluding 626,566 shares issued to the Company's President in connection with his employment agreement. In 2002 and prior years, the Company accounted for stock-based compensation using the intrinsic value method. Accordingly, no stock-based compensation was recognized in the Company's financial statements for these years. If compensation cost for Plan awards had been determined based on fair value at the grant dates, net income and income per Class A unit would have been reduced to the pro-forma amounts below, for the years ended December 31, 2002, 2001, and 2000: [Enlarge/Download Table] DECEMBER 31, ------------------------------------------- 2002 2001 2000 --------- --------- --------- (Amounts in thousands, except unit and per unit amounts) Net income applicable to Class A units: As reported................................................... $ 251,088 $ 242,766 $ 209,664 Stock-based compensation cost................................. (10,244) (13,425) (18,311) --------- --------- --------- Pro-forma $ 240,844 $ 229,341 $ 191,353 ========= ========= ========= Net income per Class A unit: Basic: As reported................................................. $ 1.97 $ 2.55 $ 2.26 Pro-forma................................................... 1.89 2.41 2.06 Diluted: As reported................................................. $ 1.92 $ 2.47 $ 2.20 Pro forma................................................... 1.84 2.34 2.01 -125-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions used for grants in the periods ending December 31, 2002, 2001 and 2000. [Enlarge/Download Table] DECEMBER 31, ------------------------------ 2002 2001 2000 ------- ------ ------ Expected volatility.............................................. 17% 17% 17% Expected life.................................................... 5 years 5 years 5 years Risk-free interest rate.......................................... 3.0% 4.38% 5.0% Expected dividend yield.......................................... 6.0% 6.0% 6.0% A summary of the Plan's status and changes during the years then ended, is presented below: [Enlarge/Download Table] 2002 2001 2000 --------------------------- ----------------------------- ------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------------- ----------- -------------- -------------- -------------- Outstanding at January 1 ........... 15,453,100 $ 32.25 15,861,260 $ 32.25 11,472,352 $ 32.65 Granted ............................ 3,655,500 42.14 26,000 35.88 4,863,750 31.02 Exercised .......................... (114,181) 28.17 (314,965) 31.91 (377,440) 26.29 Cancelled .......................... (198,053) 39.64 (119,195) 34.12 (97,402) 34.86 ---------- ----------- -------------- Outstanding at December 31.......... 18,796,366 34.60 15,453,100 32.25 15,861,260 32.26 ========== ============== ========== ============== ============== ============== Options exercisable at December 31.. 13,674,177 $ 33.00 11,334,124 7,272,878 ========== ============== =========== ============== Weighted-average fair value of options granted during the year ended December 31 (per option).. $ 3.06 $ 3.46 $ 2.98 ========== =========== ============== -126-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table summarizes information about options outstanding under the Plan at December 31, 2002: [Enlarge/Download Table] OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------- --------------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE EXERCISE PRICE DECEMBER 31, 2002 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2002 EXERCISE PRICE -------------- ----------------- ------------------- ---------------- ----------------- ---------------- $ 0 - $ 12 26,308 0.1 Years $ 11.42 26,308 $ 11.42 $12 - $ 19 74,500 2.3 Years $ 17.89 74,500 $ 17.89 $19 - $ 24 3,500,000 3.9 Years $ 23.47 3,500,000 $ 23.47 $24 - $ 27 149,570 4.1 Years $ 26.28 149,570 $ 26.28 $27 - $ 32 4,969,502 6.7 Years $ 30.72 3,543,983 $ 30.70 $32 - $ 36 2,856,725 6.1 Years $ 33.68 2,772,740 $ 33.65 $36 - $ 40 211,170 4.8 Years $ 38.92 204,735 $ 39.00 $40 - $ 44 4,235,591 8.7 Years $ 42.26 664,341 $ 43.05 $44 - $ 46 2,508,000 5.0 Years $ 45.31 2,473,000 $ 45.31 $46 - $ 49 265,000 5.1 Years $ 48.41 265,000 $ 48.41 ----------- ---------- $ 0 - $ 49 18,796,366 6.2 Years $ 34.60 13,674,177 $ 33.00 =========== ========== Shares available for future grant under the Plan at December 31, 2002 were 9,963,500, of which 2,500,000 are subject to shareholder approval. 9. RETIREMENT PLAN In December 1997, benefits under the Company's Retirement Plan were frozen. Prior to December 31, 1997, the Company's qualified plan covered all full-time employees. The Plan provided annual pension benefits that were equal to 1% of the employee's annual compensation for each year of participation. The funding policy is in accordance with the minimum funding requirements of ERISA. Pension expense includes the following components: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 --------- -------- -------- (Amounts in thousands, except percentages) Interest cost on projected benefit obligation................. $ 587 $ 565 $ 567 Expected return on assets..................................... (235) (412) (374) Net amortization and deferral................................. (56) 32 30 ------- ------- ------- Net pension expense........................................... $ 296 $ 185 $ 223 ======= ======= ======= Assumptions used in determining the net pension expense: Discount rate................................................. 6.25% 7.25% 7.75% Rate of increase in compensation levels....................... --* --* --* Expected rate of return on assets............................. 7.00% 7.00% 7.00% * Not applicable, as benefits under the Plan were frozen in December 1997. -127-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table sets forth the Plan's funded status and the amount recognized in the Company's balance sheet: ($ in thousands) [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 --------- --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 7,950 $ 7,530 $ 7,918 Interest cost 587 565 567 Benefit payments (970) (793) (637) Experience loss/(gain) 1,451 648 (318) --------- --------- --------- Benefit obligation at end of year 9,018 7,950 7,530 --------- --------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 6,056 5,732 5,284 Employer contribution 667 821 698 Benefit payments (970) (793) (637) Actual return on assets 235 295 387 --------- --------- --------- Fair value of plan assets at end of year 5,988 6,055 5,732 --------- --------- --------- Funded status (3,030) (1,895) (1,798) Unrecognized loss 3,517 2,011 1,279 --------- --------- --------- NET AMOUNT RECOGNIZED $ 487 $ 116 $ (519) ========= ========= ========= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Accrued benefit liability $ (3,030) $ (1,895) $ (1,798) Accumulated other comprehensive loss 3,517 2,011 1,279 --------- --------- --------- NET AMOUNT RECOGNIZED $ 487 $ 116 $ (519) ========= ========= ========= Plan assets are invested in U.S. government obligations and securities backed by U.S. government guaranteed mortgages. -128-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. LEASES AS LESSOR: The Company leases space to tenants in office buildings and shopping centers under operating leases. Most of the leases provide for the payment of fixed base rentals payable monthly in advance. Shopping center leases provide for the pass-through to tenants of real estate taxes, insurance and maintenance. Office building leases generally require the tenants to reimburse the Company for operating costs and real estate taxes above their base year costs. Shopping center leases also provide for the payment by the lessee of additional rent based on a percentage of the tenants' sales. As of December 31, 2002, future base rental revenue under non-cancelable operating leases, excluding rents for leases with an original term of less than one year and rents resulting from the exercise of renewal options, is as follows: [Download Table] ($ in thousands) YEAR ENDING DECEMBER 31: AMOUNT ----------------------- ------------ 2003................................................................ $ 1,078,251 2004................................................................ 980,075 2005................................................................ 856,829 2006................................................................ 755,350 2007................................................................ 679,393 Thereafter.......................................................... 3,427,665 These amounts do not include rentals based on tenants' sales. These percentage rents approximated $1,832,000, $2,157,000, and $4,825,000 for the years ended December 31, 2002, 2001, and 2000. FORMER BRADLEES LOCATIONS The Company previously leased 18 locations to Bradlees which closed all of its stores in February 2001. The Company has re-leased nine of the former Bradlees locations; three to Kohl's, two each to Lowe's and Haynes Furniture, and one each to Home Depot and Wal-Mart. Lowe's and Wal-Mart will construct their own stores, subject to the receipt of various governmental approvals and the relocation of existing tenants. In addition, the leases for four other former Bradlees locations were assigned by Bradlees to other retailers. Of the remaining five locations which are currently vacant, two of the leases are guaranteed and the rent is being paid by Stop & Shop, a wholly-owned subsidiary of Koninklijke Ahold NV (formerly Royal Ahold NV), an international food retailer. Stop & Shop remains contingently liable for rent at a number of the former Bradlees locations for the term of the Bradlees leases. Property rentals for the year ended December 31, 2002, include $5,000,000 of additional rent which was re-allocated to the former Bradlees locations in Marlton, Turnersville, Bensalem and Broomall and is payable by Stop & Shop, pursuant to the Master Agreement and Guaranty, dated May 1, 1992. This amount is in addition to all other rent guaranteed at the former Bradlees locations. On January 8, 2003, Stop & Shop filed a complaint with the United States District Court claiming the Company has no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. The additional rent provision of the guaranty expires at the earliest in 2012. The Company intends to vigorously contest Stop & Shop's position. In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced that it overstated its 2002 and 2001 earnings by at least $500 million and is under investigation by the U.S. Justice Department and Securities and Exchange Commission. The Company cannot predict what effect, if any, this situation involving Koninklijke Ahold NV may have on Stop & Shop's ability to satisfy its obligation under the Bradlees guarantees and rent for existing Stop & Shop leases aggregating approximately $10,500,000 million per annum. -129-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Except for the U.S. Government, which accounted for 11.4% of the Company's revenue, none of the Company's other tenants represented more than 10% of total revenues for the year ended December 31, 2002. AS LESSEE: The Company is a tenant under operating leases for certain properties. These leases will expire principally during the next thirty years. Future minimum lease payments under operating leases at December 31, 2002, are as follows: [Download Table] ($ in thousands) YEAR ENDING DECEMBER 31: AMOUNT ------------------------ ---------- 2003.................................................................. $ 15,347 2004.................................................................. 14,641 2005.................................................................. 14,644 2006.................................................................. 14,797 2007.................................................................. 14,762 Thereafter............................................................ 954,980 Rent expense was $17,157,000, $15,433,000, and $15,248,000 for the years ended December 31, 2002, 2001, and 2000. -130-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES At December 31, 2002, the Company's $1,000,000,000 revolving credit facility had a zero balance, and the Company utilized $9,112,000 of availability under the facility for letters of credit and guarantees. In addition there were $7,667,000 of other letters of credit outstanding. In conjunction with the closing of Alexander's Lexington Avenue construction loan on July 3, 2002, the Company agreed to guarantee, among other things, the lien free, timely completion of the construction of the project and funding of all project costs in excess of a stated budget, as defined in the loan agreement, if not funded by Alexander's (see note 4 - Investments in and Advances to Partially-Owned Entities). Each of the Company's properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to the Company. The Company carries comprehensive liability and all risk property insurance (fire, flood, extended coverage and rental loss insurance) with respect to its assets. The Company's all risk insurance policies in effect before September 11, 2001 do not expressly exclude coverage for hostile acts, except for acts of war. Since September 11, 2001, insurance companies have for the most part excluded terrorist acts from coverage in all risk policies. The Company has generally been unable to obtain all risk insurance which includes coverage for terrorist acts for policies it has renewed since September 11, 2001, for each of its businesses. In 2002, the Company obtained $200,000,000 of separate coverage for terrorist acts for each of its New York City Office, Washington, D.C. Office, Retail and Merchandise Mart businesses and $60,000,000 for its Temperature Controlled Logistics business. Therefore, the Company is at risk for financial loss in excess of these limits for terrorist acts (as defined), which loss could be material. The Company's debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its senior unsecured notes due 2007 and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that an exclusion from all risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments that allows the lenders to declare an event of default and accelerate repayment of debt. In the second quarter of 2002, the Company received correspondence from four lenders regarding terrorism insurance coverage, which the Company has responded to. In these letters the lenders took the position that under the agreements governing the loans provided by these lenders the Company was required to maintain terrorism insurance on the properties securing the various loans. The aggregate amount of borrowings under these loans as of December 31, 2002 was approximately $770.4 million, and there was no additional borrowing capacity. Subsequently, the Company obtained an aggregate of $360 million of separate coverage for "terrorist acts". To date, one of the lenders has acknowledged to the Company that it will not raise any further questions based on the Company's terrorism insurance coverage in place, and the other three lenders have not raised any further questions regarding the Company's insurance coverage. If lenders insist on greater coverage for these risks, it could adversely affect the Company's ability to finance and/or refinance its properties and to expand its portfolio. From time to time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness. There are various legal actions against the Company in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition, results of operations or cash flow. The Company enters into agreements for the purchase and resale of U.S. government obligations for periods of up to one week. The obligations purchased under these agreements are held in safekeeping in the name of the Company by various money center banks. The Company has the right to demand additional collateral or return of these invested funds at any time the collateral value is less than 102% of the invested funds plus any accrued earnings thereon. The Company had $33,393,000 and $15,235,000 of cash invested in these agreements at December 31, 2002 and 2001. -131-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. RELATED PARTY TRANSACTIONS LOAN AND COMPENSATION AGREEMENTS On May 29, 2002, Mr. Roth replaced common shares of the Company securing the Company's outstanding loan to Mr. Roth with options to purchase common shares of the Company with a value of not less than two times the loan amount. As a result of the decline in the value of the options, Mr. Roth supplemented the collateral with cash and marketable securities. At December 31, 2002, the loan due from Mr. Roth in accordance with his employment arrangement was $13,122,500 ($4,704,500 of which is shown as a reduction in partners' capital). The loan bears interest at 4.49 % per annum (based on the applicable Federal rate) and matures in January 2006. The Company also provided Mr. Roth with the right to draw up to $15,000,000 of additional loans on a revolving basis. Each additional loan will bear interest, payable quarterly, at the applicable Federal rate on the date the loan is made and will mature on the sixth anniversary of the loan. At December 31, 2002, loans due from Mr. Fascitelli, in accordance with his employment agreement, aggregated $8,600,000. The loans which were scheduled to mature in 2003 have been extended to 2006 in connection with the extension of Mr. Fascitelli's employment agreement (discussed below), and bear interest, payable quarterly at a weighted average interest rate of 3.97% (based on the applicable Federal rate). Pursuant to his 1996 employment agreement, Mr. Fascitelli became entitled to a deferred payment consisting of $5 million in cash and a convertible obligation payable November 30, 2001, at the Company's option, in either 919,540 Company common shares or the cash equivalent of their appreciated value, so long as such appreciated value is not less than $20 million. The Company delivered 919,540 shares to a rabbi trust upon execution of the 1996 employment agreement. The Company accounted for the stock compensation as a variable arrangement in accordance with Plan B of EITF No. 97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" as the agreement permitted settlement in either cash or common shares. Following the guidance in EITF 97-14, the Company recorded changes in fair value of its compensation obligation with a corresponding increase in the liability "Officer's Deferred Compensation". Effective as of June 7, 2001, the payment date was deferred until November 30, 2004. Effective as of December 14, 2001, the payment to Mr. Fascitelli was converted into an obligation to deliver a fixed number of shares (919,540 shares) establishing a measurement date for the Company's stock compensation obligation; accordingly the Company ceased accounting for the Rabbi Trust under Plan B of the EITF and began Plan A accounting. Under Plan A, the accumulated liability representing the value of the shares on December 14, 2001, was reclassified as a component of Partners' Capital as "Deferred compensation shares earned but not yet delivered." In addition, future changes in the value of the shares are no longer recognized as additional compensation expense. The fair value of this obligation was $34,207,000 at December 31, 2002. The Company has reflected this liability as Deferred Compensation Shares Not Yet Delivered in the Partners' Capital section of the balance sheet. For the years ended December 31, 2001 and 2000, the Company recognized approximately $4,744,000 and $3,733,000 of compensation expense of which $2,612,000 and $1,968,000 represented the appreciation in value of the shares in each period and $2,132,000 and $1,765,000 represented dividends paid on the shares. Effective January 1, 2002, the Company extended its employment agreement with Mr. Fascitelli for a five-year period through December 31, 2006. Pursuant to the extended employment agreement, Mr. Fascitelli is entitled to receive a deferred payment on December 31, 2006 of 626,566 Vornado common shares which are valued for compensation purposes at $27,500,000 (the value of the shares on March 8, 2002, the date the extended employment agreement was executed). The shares are being held in a rabbi trust for the benefit of Mr. Fascitelli and vested 100% on December 31, 2002. The extended employment agreement does not permit diversification, allows settlement of the deferred compensation obligation by delivery of these shares only, and permits the deferred delivery of these shares. The value of these shares is being amortized ratably over the one year vesting period as compensation expense. Pursuant to the Company's annual compensation review in February 2002 with Joseph Macnow, the Company's Chief Financial Officer, the Compensation Committee approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable federal rate of 4.65% per annum and due January 1, 2006. The loan, which was funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002 exercise of options to purchase 225,000 Vornado common shares. The loan is collateralized by assets with a value of not less than two times the loan amount. As a result of the decline in the value of the options, Mr. Macnow supplemented the collateral with cash and marketable securities. -132-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) One other executive officer of the Company has a loan outstanding pursuant to an employment agreement totaling $1,500,000 at December 31, 2002. The loan matures in April 2005 and bears interest at the applicable Federal rate provided (4.5% at December 31, 2002). TRANSACTIONS WITH AFFILIATES AND OFFICERS AND TRUSTEES OF THE COMPANY ALEXANDER'S The Company owns 33.1% of Alexander's. Mr. Roth and Mr. Fascitelli are Officers and Directors of Alexander's and the Company provides various services to Alexander's in accordance with management and leasing agreements. See Note 4 "Investments in Partially-Owned Entities" for further details. The Company constructed a $16.3 million community facility and low-income residential housing development (the "30th Street Venture"), in order to receive 163,728 square feet of transferable development rights, generally referred to as "air rights". The Company donated the building to a charitable organization. The Company sold 106,796 square feet of these air rights to third parties at an average price of $120 per square foot. An additional 28,821 square feet of air rights was purchased by Alexander's at a price of $120 per square foot for use at Alexander's 59th Street development project (the "59th Street Project"). In each case, the Company received cash in exchange for air rights. The Company identified third party buyers for the remaining 28,111 square feet of air rights related to the 30th Street Venture. These third party buyers wanted to use the air rights for the development of two projects located in the general area of 86th Street which was not within the required geographical radius of the construction site nor in the same Community Board as the low-income housing and community facility project. The 30th Street Venture asked Alexander's to sell 28,111 square feet of the air rights it already owned to the third party buyers (who could use them) and the 30th Street Venture would replace them with 28,111 square feet of air rights. In October 2002, the Company sold 28,111 square feet of air rights to Alexander's for an aggregate purchase price of $3,059,000 (an average of $109 per square foot). Alexander's then sold an equal amount of air rights to the third party buyers for an aggregate purchase price of $3,339,000 (an average of $119 per square foot). INTERSTATE PROPERTIES The Company currently manages and leases the real estate assets of Interstate Properties pursuant to a management agreement for which the Company receives an annual fee equal to 4% of base rent and percentage rent and certain other commissions. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on sixty days' notice at the end of the term. Although the management agreement was not negotiated at arm's length, the Company believes based upon comparable fees charged by other real estate companies, that its terms are fair to the Company. For the years ended December 31, 2002, 2001, and 2000, $1,450,000, $1,655,000, and $1,418,000 of management fees were earned by the Company pursuant to the management agreement. BUILDING MAINTENANCE SERVICE COMPANY ("BMS") On January 1, 2003, the Company acquired BMS, a company which provides cleaning and related services primarily to the Company's Manhattan office properties, for $13,000,000 in cash from the estate of Bernard Mendik and certain other individuals including Mr. Greenbaum, an executive officer of the Company. The Company paid BMS $53,024,000, $51,280,000, and $47,493,000 for the years ended December 31, 2002, 2001 and 2000 for services rendered to the Company's Manhattan office properties. Although the terms and conditions of the contracts pursuant to which these services were provided were not negotiated at arms length, the Company believes based upon comparable amounts charged to other real estate companies that the terms and conditions of the contracts were fair to the Company. -133-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) VORNADO OPERATING COMPANY In October 1998, Vornado Operating Company ("Vornado Operating") was spun off from the Company in order to own assets that the Company could not itself own and conduct activities that the Company could not itself conduct. The Company granted Vornado Operating a $75,000,000 unsecured revolving credit facility (the "Revolving Credit Agreement") which expires on December 31, 2004. Borrowings under the Revolving Credit Agreement bear interest at LIBOR plus 3%. The Company receives a commitment fee equal to 1% per annum on the average daily unused portion of the facility. No amortization is required to be paid under the Revolving Credit Agreement during its term. The Revolving Credit Agreement prohibits Vornado Operating from incurring indebtedness to third parties (other than certain purchase money debt and certain other exceptions) and prohibits Vornado Operating from paying dividends. Vornado Operating has disclosed that in the aggregate its investments do not, and for the foreseeable future are not expected to, generate sufficient cash flow to pay all of its debts and expenses. Further, Vornado Operating states that its only investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent Real Estate Equities, will need to restructure the leases between the Landlord and the Tenant to provide additional cash flow to the Tenant (the Landlord has previously restructured the leases to provide additional cash flow to the Tenant). Management anticipates a further lease restructuring and the sale and/or financing of assets by AmeriCold Logistics, and accordingly, Vornado Operating is expected to have a source to repay the debt under this facility, which may be extended. Since January 1, 2002, the Company has not recognized interest income on the debt under this facility. CARTHAGE, MISSOURI AND KANSAS CITY, KANSAS QUARRIES On December 31, 2002, the Company and Crescent Real Estate Equities formed a joint venture to acquire the Carthage, Missouri and Kansas City, Kansas quarries from AmeriCold Logistics, the tenant of the Temperature Controlled Logistics facilities for $20,000,000 in cash. The Company contributed cash of $8,800,000 to the joint venture representing its 44% interest. AmeriCold Logistics used the proceeds from the sale to repay a portion of a loan to Vornado Operating. Vornado Operating then repaid $9,500,000 of the amount outstanding under the Company's Revolving Credit Facility. On December 31, 2002, the joint venture purchased $5,720,000 of trade receivables from AmeriCold Logistics at a 2% discount, of which the Company's share was $2,464,000. OTHER The Company owns preferred securities in Capital Trust, Inc. ("Capital Trust") totaling $29,212,000 at December 31, 2002. Mr. Roth, the Chairman and Chief Executive Officer of Vornado Realty Trust, is a member of the Board of Directors of Capital Trust. On May 17, 2001, the Company sold its 50% interest in 570 Lexington Avenue to the other venture partner, an entity controlled by the late Bernard Mendik, a former trustee and executive officer of the Company, for $60,000,000, resulting in a gain to the Company of $12,445,000. The sale was initiated by the Company's partner and was based on a competitive bidding process handled by an independent broker. The Company believes that the terms of the sale were at arm's length and were fair to the Company. During 2002 and 2001, the Company paid $147,000 and $136,000 for legal services to a firm in which one of the Company's trustees is a member. On January 1, 2001, the Company acquired the common stock of various preferred stock affiliates which was owned by Officers and Trustees of the Company and converted them to taxable REIT subsidiaries. The total acquisition price was $5,155,000. The purchase price, which was the estimated fair value, was determined by both independent appraisal and by reference to the individuals' pro rata share of the earnings of the preferred stock affiliates during the three-year period that these investments were held. In connection with the Park Laurel condominium project, in 2001 the joint venture accrued $5,779,000 of awards under the venture's incentive compensation plan. -134-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 13. INCOME PER CLASS A UNIT The following table sets forth the computation of basic and diluted income per Class A unit: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, -------------------------------------------- 2002 2001 2000 -------------- ----------- ------------ (Amounts in thousands, except per unit amounts) Numerator: Income before gains on sale of real estate and cumulative effect of change in accounting principle.................... $ 400,431 $ 362,196 $ 323,435 Gains on sale of real estate.................................. -- 15,495 10,965 Cumulative effect of change in accounting principle................................................... (30,129) (4,110) -- -------------- ----------- ------------ Net income.................................................... 370,302 373,581 334,400 Preferred unit distributions.................................. (119,214) (130,815) (124,736) -------------- ----------- ------------ Numerator for basic and diluted income per Class A units - net income applicable to Class A units.......... $ 251,088 $ 242,766 $ 209,664 ============== =========== ============ Denominator: Denominator for basic income per Class A unit - weighted average units............................................... 127,158 95,241 92,941 Effect of dilutive securities: Employee unit options and restricted unit awards............ 3,780 2,964 2,171 -------------- ----------- ------------ Denominator for diluted income per Class A unit - adjusted weighted average units and assumed conversions......................................... 130,938 98,205 95,112 ============== =========== ============ INCOME PER CLASS A UNIT - BASIC: Income before gains on sale of real estate and cumulative effect of change in accounting principle.................. $ 2.21 $ 2.42 $ 2.14 Gains on sale of real estate................................ -- .17 .12 Cumulative effect of change in accounting principle................................................. (.24) (.04) -- -------------- ----------- ------------ Net income per Class A unit................................. $ 1.97 $ 2.55 $ 2.26 ============== =========== ============ INCOME PER CLASS A UNIT - DILUTED: Income before gains on sale of real estate and cumulative effect of change in accounting principle.................. $ 2.15 $ 2.34 $ 2.08 Gains on sale of real estate................................ -- .17 .12 Cumulative effect of change in accounting principle................................................ (.23) (.04) -- -------------- ----------- ------------ Net income per Class A unit................................. $ 1.92 $ 2.47 $ 2.20 ============== =========== ============ -135-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summary represents the results of operations for each quarter in 2002, 2001 and 2000: [Enlarge/Download Table] NET INCOME NET INCOME PER APPLICABLE TO CLASS A UNIT(1) CLASS A ---------------------- REVENUE UNITS BASIC DILUTED ------------ ------------- -------- -------- (Amounts in thousands, except unit amounts) 2002 March 31 ......................................... $ 348,905(2) $ 54,704(2) $ .44(2) $ .42(2) June 30 .......................................... 355,763(2) 77,894(2) .61(2) .59(2) September 30 ..................................... 363,571(2) 70,833(2) .55(2) .54(2) December 31 ...................................... 366,831 47,657 .37 .36 2001 March 31 ......................................... $ 242,610 $ 50,482 $ .54 $ .52 June 30 .......................................... 246,075 61,284 .65 .64 September 30 ..................................... 250,265 72,136 .76 .74 December 31 ...................................... 246,823 58,864 .59 .57 2000 March 31 ......................................... $ 195,279 $ 50,523 $ .55 $ .54 June 30 .......................................... 198,745 50,291 .55 .53 September 30 ..................................... 215,655 62,823 .68 .65 December 31 ...................................... 216,293 46,027 .48 .47 ---------- (1) The total for the year may differ from the sum of the quarters as a result of weighting. (2) Restated to include the effect of SFAS 141 - Business Combinations, for the amortization of above and below market leases acquired in 2002. The effect of restatement on each of the first three quarters on net income and net income per Class A unit was $940 or $.02 per diluted Class A unit. 16. COSTS OF ACQUISITIONS AND DEVELOPMENT NOT CONSUMMATED The Company has a 70% interest in a joint venture to develop an office tower over the Port Authority Bus Terminal in New York City. Current market conditions have resulted in the joint venture writing off $9,700,000 in the fourth quarter of 2002, representing all pre-development costs capitalized to date, of which the Company's share is $6,874,000. In 2001, the Company was unable to reach a final agreement with the Port Authority of NY & NJ to conclude a net lease of the World Trade Center. Accordingly, the Company wrote-off costs of $5,223,000 primarily associated with the World Trade Center. -136-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 17. SEGMENT INFORMATION The Company has four business segments: Office, Retail, Merchandise Mart Properties and Temperature Controlled Logistics. Prior to 2001, income from the Company's preferred stock affiliates ("PSAs") was included in income from partially-owned entities. On January 1, 2001, the Company acquired the common stock of its PSAs and converted these entities to taxable REIT subsidiaries. Accordingly, the Hotel portion of the Hotel Pennsylvania and the management companies (which provide services to the Company's business segments and operate the Trade Show business of the Merchandise Mart division) have been consolidated effective January 1, 2001. Amounts for the years ended December 31, 2000 have been reclassified to give effect to the consolidation of these entities as if consolidated as of January 1, 2000. In addition, the Company has revised Adjusted EBITDA as previously reported for the year ended December 31, 2001 and 2000 to include income from the early extinguishment of debt of $1,170,000 in 2001 and expense from the early extinguishment of debt of $1,125,000 in 2000 because such items are no longer treated as extraordinary items in accordance with Generally Accepted Accounting Principles. [Enlarge/Download Table] ($ in thousands) December 31, 2002 -------------------------------------------------------- Merchandise Total Office Retail Mart ----------- ----------- ----------- ----------- Rentals................................................. $ 1,248,903 $ 867,938 $ 127,561 $ 195,899 Expense reimbursements.................................. 159,978 89,890 51,750 14,754 Other income............................................ 26,189 21,221 1,653 2,951 ----------- ----------- ----------- ----------- Total revenues.......................................... 1,435,070 979,049 180,964 213,604 ----------- ----------- ----------- ----------- Operating expenses...................................... 541,596 343,723 65,455 86,022 Depreciation and amortization........................... 205,826 146,746 15,507 26,716 General and administrative.............................. 98,458 34,346 5,036 20,382 Costs of acquisitions and development not consummated..................................... 6,874 -- -- -- Amortization of officers deferred compensation expense................................ 27,500 -- -- -- ----------- ----------- ----------- ----------- Total expenses.......................................... 880,254 524,815 85,998 133,120 ----------- ----------- ----------- ----------- Operating income........................................ 554,816 454,234 94,966 80,484 Income applicable to Alexander's........................ 29,653 -- -- -- Income from partially-owned entities.................... 44,458 1,966 (687) (339) Interest and other investment income.................... 31,685 6,472 323 507 Interest and debt expense............................... (239,525) (141,044) (56,643) (22,948) Net gain on disposition of wholly-owned and partially-owned assets other than real estate......... (17,471) -- -- 2,156 Minority interest....................................... (3,185) (3,526) -- -- ----------- ----------- ----------- ----------- Income before gains on sale of real estate and cumulative effect of change in accounting principle... 400,431 318,102 37,959 59,860 Gains on sale of real estate............................ -- -- -- -- Cumulative effect of change in accounting principle..... (30,129) -- -- -- ----------- ----------- ----------- ----------- Net income.............................................. 370,302 318,102 37,959 59,860 Cumulative effect of change in accounting principle..... 30,129 -- -- -- Interest and debt expense(3)............................ 302,009 139,157 58,409 23,461 Depreciation and amortization(3)........................ 257,707 149,361 17,532 27,006 ----------- ----------- ----------- ----------- EBITDA.................................................. 960,147 606,620 113,900 110,327 Adjustments: Minority interest....................................... 3,185 3,526 -- -- Gains (losses) on sale of real estate(3)................ (1,405) -- -- -- Straight-lining of rents(3)............................. (29,837) (24,352) (1,863) (1,772) Amortization of below market leases, net................ (12,634) (12,469) (165) -- Other................................................... 1,549 -- 860 323 ----------- ----------- ----------- ----------- Adjusted EBITDA(1)...................................... $ 921,005 $ 573,325 $ 112,732 $ 108,878 ----------- ----------- ----------- ----------- Balance sheet data: Real estate, net.................................... $ 6,822,268 $ 5,012,626 $ 575,085 $ 891,701 Investments and advances to partially-owned entities.......................... 997,711 29,421 56,375 42,497 Capital expenditures: Acquisitions...................................... 2,739,746 2,650,298 89,448 -- Other............................................. 164,162 114,375 3,019 20,852 December 31, 2002 -------------------------- Temperature Controlled Logistics Other(2) ----------- ----------- Rentals................................................. $ -- $ 57,505 Expense reimbursements.................................. -- 3,584 Other income............................................ -- 364 ----------- ----------- Total revenues.......................................... -- 61,453 ----------- ----------- Operating expenses...................................... -- 46,396 Depreciation and amortization........................... -- 16,857 General and administrative.............................. -- 38,694 Costs of acquisitions and development not consummated..................................... -- 6,874 Amortization of officers deferred compensation expense................................ -- 27,500 ----------- ----------- Total expenses.......................................... -- 136,321 ----------- ----------- Operating income........................................ -- (74,868) Income applicable to Alexander's........................ -- 29,653 Income from partially-owned entities.................... 9,707 33,811 Interest and other investment income.................... -- 24,383 Interest and debt expense............................... -- (18,890) Net gain on disposition of wholly-owned and partially-owned assets other than real estate......... -- (19,627) Minority interest....................................... -- 341 ----------- ----------- Income before gains on sale of real estate and cumulative effect of change in accounting principle... 9,707 (25,197) Gains on sale of real estate............................ -- -- Cumulative effect of change in accounting principle..... (15,490) (14,639) ----------- ----------- Net income.............................................. (5,783) (39,836) Cumulative effect of change in accounting principle..... 15,490 14,639 Interest and debt expense(3)............................ 25,617 55,365 Depreciation and amortization(3)........................ 34,474 29,334 ----------- ----------- EBITDA.................................................. 69,798 59,502 Adjustments: Minority interest....................................... -- (341) Gains (losses) on sale of real estate(3)................ 2,026 (3,431) Straight-lining of rents(3)............................. -- (1,850) Amortization of below market leases, net................ -- -- Other................................................... -- 366 ----------- ----------- Adjusted EBITDA(1)...................................... $ 71,824 $ 54,246 ----------- ----------- Balance sheet data: Real estate, net.................................... $ -- $ 342,856 Investments and advances to partially-owned entities.......................... 448,295 421,123 Capital expenditures: Acquisitions...................................... -- -- Other............................................. 5,588 20,328 See notes on page 140. -137-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) [Enlarge/Download Table] ($ in thousands) December 31, 2001 -------------------------------------------------------- Merchandise Total Office Retail Mart ----------- ----------- ----------- ----------- Rentals ............................................... $ 841,999 $ 461,606 $ 121,023 $ 197,668 Expense reimbursements ................................ 133,114 67,470 49,436 13,801 Other income .......................................... 10,660 3,775 1,154 3,324 ----------- ----------- ----------- ----------- Total revenues ........................................ 985,773 532,851 171,613 214,793 ----------- ----------- ----------- ----------- Operating expenses .................................... 398,969 217,581 56,547 83,107 Depreciation and amortization ......................... 123,862 71,425 14,767 25,397 General and administrative ............................ 72,572 12,421 3,576 18,081 Costs of acquisitions and development not consummated ................................... 5,223 -- -- -- ----------- ----------- ----------- ----------- Total expenses ........................................ 600,626 301,427 74,890 126,585 ----------- ----------- ----------- ----------- Operating income ...................................... 385,147 231,424 96,723 88,208 Income applicable to Alexander's ...................... 25,718 -- -- -- Income from partially-owned entities .................. 80,612 32,746 1,914 149 Interest and other investment income .................. 54,385 6,866 608 2,045 Interest and debt expense ............................. (173,076) (54,667) (55,358) (33,354) Net loss disposition of wholly-owned and partially-owned assets other than real estate ....... (8,070) -- -- 160 Minority interest ..................................... (2,521) (2,466) -- (40) ----------- ----------- ----------- ----------- Income before gains on sale of real estate and cumulative effect of change in accounting ............ 362,195 213,903 43,887 57,168 Gains on sales of real estate ......................... 15,495 12,445 3,050 -- Cumulative effect of change in accounting principle ... (4,110) -- -- -- ----------- ----------- ----------- ----------- Net income ............................................ 373,580 226,348 46,937 57,168 Cumulative effect of change in accounting principle ............................................ 4,110 -- -- -- Interest and debt expense(3) .......................... 266,784 92,410 57,915 33,354 Depreciation and amortization(3) ...................... 188,859 91,085 18,957 25,397 ----------- ----------- ----------- ----------- EBITDA ................................................ 833,333 409,843 123,809 115,919 Adjustments: Gains on sale of real estate(3) ....................... (21,793) (12,445) (3,050) -- Minority interest ..................................... 2,521 2,466 -- 40 Net gain on disposition of wholly-owned and partially-owned assets other than real estate ....... (160) -- -- (160) Straight-lining of rents(3) ........................... (26,134) (20,064) 727 (4,997) Other ................................................. (2,715) -- (2,337) -- ----------- ----------- ----------- ----------- Adjusted EBITDA(1) .................................... $ 785,052 $ 379,800 $ 119,149 $ 110,802 =========== =========== =========== =========== Balance sheet data: Real estate, net .................................. $ 4,183,986 $ 2,446,534 $ 503,923 $ 911,067 Investments and advances to partially-owned entities ........................ 1,270,195 374,371 28,213 9,764 Capital expenditures: Acquisitions .................................... 11,574 11,574 -- -- Other ........................................... 158,343 79,117 7,597 51,036 ($ in thousands) December 31, 2001 ----------------------------- Temperature Controlled Logistics Other ----------- ----------- Rentals ............................................... $ -- $ 61,702 Expense reimbursements ................................ -- 2,407 Other income .......................................... -- 2,407 ----------- ----------- Total revenues ........................................ -- 66,516 ----------- ----------- Operating expenses .................................... -- 41,734 Depreciation and amortization ......................... -- 12,273 General and administrative ............................ -- 38,494 Costs of acquisitions and development not consummated ................................... -- 5,223 ----------- ----------- Total expenses ........................................ -- 97,724 ----------- ----------- Operating income ...................................... -- (31,208) Income applicable to Alexander's ...................... -- 25,718 Income from partially-owned entities .................. 17,447(4) 28,356 Interest and other investment income .................. -- 44,866 Interest and debt expense ............................. -- (29,697) Net loss disposition of wholly-owned and partially-owned assets other than real estate ....... -- (8,230) Minority interest ..................................... -- (15) ----------- ----------- Income before gains on sale of real estate and cumulative effect of change in accounting ............ 17,447 29,790 Gains on sales of real estate ......................... -- -- Cumulative effect of change in accounting principle ... -- (4,110) ----------- ----------- Net income ............................................ 17,447 25,680 Cumulative effect of change in accounting principle ............................................ -- 4,110 Interest and debt expense(3) .......................... 26,459 56,646 Depreciation and amortization(3) ...................... 33,815 19,605 ----------- ----------- EBITDA ................................................ 77,721 106,041 Adjustments: Gains on sale of real estate(3) ....................... -- (6,298) Minority interest ..................................... -- 15 Net gain on disposition of wholly-owned and partially-owned assets other than real estate ....... -- -- Straight-lining of rents(3) ........................... -- (1,800) Other ................................................. 716 (1,094) ----------- ----------- Adjusted EBITDA(1) .................................... $ 78,437 $ 96,864 =========== =========== Balance sheet data: Real estate, net .................................. $ -- $ 322,462 Investments and advances to partially-owned entities ........................ 474,862 382,985 Capital expenditures: Acquisitions .................................... -- -- Other ........................................... 5,700 14,893 See notes on page 140. -138-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) [Enlarge/Download Table] ($ in thousands) December 31, 2001 (after giving effect to consolidation of PSAs) ----------------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) ----------- ----------- ----------- ----------- ----------- ----------- Rentals ........................ $ 788,469 $ 406,261 $ 129,902 $ 171,001 $ -- $ 81,305 Expense reimbursements ......... 120,074 60,767 45,490 10,654 -- 3,163 Other income ................... 17,608 5,499 2,395 4,661 -- 5,053 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues ................. 926,151 472,527 177,787 186,316 -- 89,521 ----------- ----------- ----------- ----------- ----------- ----------- Operating expenses ............. 379,524 199,424 55,671 74,553 -- 49,876 Depreciation and amortization .. 108,109 58,074 17,464 21,984 -- 10,587 General and administrative ..... 63,468 10,401 667 16,330 -- 36,070 ----------- ----------- ----------- ----------- ----------- ----------- Total expenses ................. 551,101 267,899 73,802 112,867 -- 96,533 ----------- ----------- ----------- ----------- ----------- ----------- Operating income ............... 375,050 204,628 103,985 73,449 -- (7,012) Income applicable to Alexander's 17,363 -- -- -- -- 17,363 Income from partially-owned entities .................... 79,694 29,210 667 -- 28,778(4) 21,039 Interest and other investment income ...................... 33,798 6,162 -- 2,346 -- 25,290 Interest and debt expense ...... (180,505) (62,162) (54,305) (38,569) -- (25,469) Minority interest .............. (1,965) (1,933) -- -- -- (32) ----------- ----------- ----------- ----------- ----------- ----------- Income before gains on sale of real estate ................. 323,435 175,905 50,347 37,226 28,778 31,179 Gains on sale of real estate ... 10,965 8,405 2,560 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net income ..................... 334,400 184,310 52,907 37,226 28,778 31,179 Interest and debt expense(3) ... 260,573 96,224 55,741 38,566 27,424 42,618 Depreciation and amortization(3) 167,268 76,696 18,522 20,627 34,015 17,408 ----------- ----------- ----------- ----------- ----------- ----------- EBITDA ......................... 762,241 357,230 127,170 96,419 90,217 91,205 Adjustments: Minority interest .............. 1,965 1,933 -- -- -- 32 Gains on sale of real estate(3) (10,965) (8,405) (2,560) -- -- -- Straight-lining of rents(3) .... (30,001) (19,733) (2,295) (5,919) (1,121) (933) Other .......................... 14,510 -- (1,654) 1,358 4,064(2) 10,742(5) ----------- ----------- ----------- ----------- ----------- ----------- Adjusted EBITDA(1) ............. $ 737,750 $ 331,025 $ 120,661 $ 91,858 $ 93,160 $ 101,046 =========== =========== =========== =========== =========== =========== Balance sheet data: Real estate, net ............ $ 3,960,605 $ 2,388,393 $ 551,183 $ 862,003 $ -- $ 159,026 Investments and advances to partially-owned entities .. 1,459,211 394,089 31,660 41,670 469,613 522,179 Capital expenditures: Acquisitions .............. 246,500 128,000 -- 89,000 -- 29,500 Other ..................... 212,907 106,689 7,251 37,362 28,582 33,023 ---------- See notes on following page. -139-
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VORNADO REALTY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTES: (1) Adjusted EBITDA represents EBITDA adjusted for gains or losses on sales of depreciable real estate, the effect of straight-lining of rent escalations, amortization of acquired above and below market leases and minority interest. Management considers Adjusted EBITDA a supplemental measure for making decisions and assessing the performance of its segments. Adjusted EBITDA should not be considered a substitute for net income or a substitute for cash flow as a measure of liquidity. Adjusted EBITDA is presented as a measure of "operating performance" which enables the reader to identify trends from period to period and may be used to compare "same store" operating performance to other companies, as well as providing a measure for determining funds available to service debt. Adjusted EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Adjusted EBITDA - Other is comprised of: [Enlarge/Download Table] (Amounts in thousands) For the Year Ended December 31, -------------------------------------- 2002 2001 2000 --------- --------- -------- Hotel Pennsylvania................................................. $ 7,636 $ 16,978 $ 26,866 Newkirk Joint Ventures: Equity in income of limited partnerships......................... 60,756 54,695 43,685 Interest and other income........................................ 8,795 8,700 7,300 Alexander's........................................................ 34,381 19,362 18,330 Investment income and other........................................ 31,261 44,097 34,990 Unallocated general and administrative expenses.................... (34,743) (33,515) (30,125) Primestone foreclosure and impairment loss......................... (35,757) -- -- Amortization of Officer's deferred compensation expense............ (27,500) -- -- Net gain on sale of marketable securities.......................... 12,346 -- -- Write-off of 20 Times Square pre-development costs (2002) and World Trade Center acquisition costs (2001).................... (6,874) (5,223) -- Net gain on sale of air rights..................................... 1,688 -- -- Gain on transfer of mortgages...................................... 2,096 -- -- Palisades.......................................................... 161 -- -- After-tax net gain on sale of Park Laurel condominium units........ -- 15,657 -- Write-off of net investment in Russian Tea Room ("RTR")............ -- (7,374) -- Write-off of investments in technology companies................... -- (16,513) -- --------- --------- --------- Total..................................................... $ 54,246 $ 96,864 $ 101,046 ========= ========= ========= (3) Interest and debt expense, depreciation and amortization, straight-lining of rents and gains on sale of real estate included in the reconciliation of net income to EBITDA or Adjusted EBITDA reflects amounts which are netted in income from partially-owned entities. (4) Excludes rent not recognized of $19,348, $15,281 and $9,787 for the years ended December 31, 2002, 2001 and 2000. (5) Includes the reversal of $1,266 and $4,765 of expenses in 2001 and 2000 representing the non-cash appreciation in the value of shares held in a rabbi trust in connection with a deferred compensation arrangement for the Company's President. -140-
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to trustees of Vornado, the Company's general partner, will be contained in a definitive Proxy Statement involving the election of trustees under the caption "Election of Trustees", which Vornado will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after December 31, 2002, and such information is incorporated herein by reference. Information relating to Executive Officers of Vornado appears at page 53 of this Annual Report on Form 10-K. Also incorporated herein by reference is the information under the caption ("Other Matters - 16(a) Beneficial Ownership") of the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation of Vornado, the Company's general partner, will be contained in the Proxy Statement referred to above in Item 10, "Directors and Executive Officers of the Registrant", under the captions "Executive Compensation" and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS Information relating to security ownership of certain beneficial owners and management of Vornado, the Company's general partner, will be contained in the Proxy Statement referred to in Item 10, "Directors and Executive Officers of the Registrant", under the caption "Principal Security Holders" and such information is incorporated herein by reference. EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2002, regarding Vornado's equity compensation plans. [Enlarge/Download Table] Number of securities remaining Number of securities to be available for future issuance issued upon exercise of Weighted-average exercise under equity compensation outstanding options, warrants price of outstanding options, plans (excluding securities Plan Category and rights warrants and rights reflected in the second column) ---------------------------- ----------------------------- ----------------------------- ------------------------------- Equity compensation plans approved by security holders......... 18,796,366 $ 34.60 9,963,500(1) Equity compensation awards not approved by security holders...... None(2) -- -- ------------- --------- ------------- Total 18,796,366 $ 34.60 9,963,500 ============= ========= ============= ---------- (1) All of the shares remaining available for future issuance under plans approved by the security holders may be issued as restricted stock units or performance shares. (2) Does not include common shares issuable in exchange for deferred stock units pursuant to the compensation agreements described below under the heading "Material Features of Equity Compensation Arrangements Not Approved by Shareholders." -141-
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MATERIAL FEATURES OF EQUITY COMPENSATION ARRANGEMENTS NOT APPROVED BY SHAREHOLDERS The Company has awarded deferred stock units under individual arrangements with two of its employees. Shareholder approval was not required for these awards under the current rules of the New York Stock Exchange because the awards were made as an inducement to these employees to enter into employment contracts with the Company. The Company awarded Sandeep Mathrani 23,798 deferred stock units pursuant to an agreement dated as of March 4, 2002. Under this agreement, Mr. Mathrani's deferred stock units vest over a three-year period and he is entitled to dividend equivalent payments with regard to each vested unit. On March 4, 2005, Mr. Mathrani will receive one common share for each of his deferred stock units, subject to deferral at the election of Mr. Mathrani in accordance with the terms of the agreement. The Company awarded Melvyn Blum 148,148 deferred stock units pursuant to an agreement dated as of December 29, 2000. Under this agreement, Mr. Blum's deferred stock units vest over a five-year period and he is entitled to dividend equivalent payments with regard to each vested unit. In addition, Mr. Blum's agreement requires the Company to provide an effective registration statement covering any common shares distributed to Mr. Blum. Pursuant to an amendment to this agreement dated as of February 13, 2003, the Company agreed to pay Mr. Blum an amount in cash equal to the market value of 88,889 common shares in respect of the deferred units that had vested under his agreement as of such date. The amendment also provides that Mr. Blum will receive one common share in respect of each remaining deferred stock unit on the vesting date of such unit, subject to deferral at the election of Mr. Blum in accordance with the terms of the agreement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain relationships and related transactions will be contained in the Proxy Statement referred to in Item 10, "Directors and Executive Officers of the Registrant", under the caption "Certain Relationships and Related Transactions" and such information is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the management of Vornado Realty Trust, or sole general partner, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. -142-
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PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. The consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K. The following financial statement schedules should be read in conjunction with the financial statements included in Item 8 of this Annual Report on Form 10-K. [Enlarge/Download Table] PAGES IN THIS ANNUAL REPORT ON FORM 10-K ------------- II--Valuation and Qualifying Accounts--years ended December 31, 2002, 2001 and 2000............................................................ 147 III--Real Estate and Accumulated Depreciation as of December 31, 2002........ 148 Schedules other than those listed above are omitted because they are not applicable or the information required is included in the consolidated financial statements or the notes thereto. The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10-K. EXHIBIT NO. 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors (b) Reports on Form 8-K and Form 8-K/A - During the last quarter of the period covered by this Annual Report on Form 10-K the Company did not file any reports on Form 8-K. -143-
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SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VORNADO REALTY L.P. (Registrant) By: Vornado Realty Trust, its General Partner By: /s/ Joseph Macnow Joseph Macnow, Executive Vice President- Finance and Administration and Chief Financial Officer Date: March 25, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: [Enlarge/Download Table] SIGNATURE TITLE DATE --------- ----- ---- By: /s/ Steven Roth Chairman of the Board of March 25, 2003 ----------------------------------- Trustees (Principal Executive (Steven Roth) Officer) of the General Partner of the Registrant By: /s/ Michael D. Fascitelli President and Trustee of the General March 25, 2003 ----------------------------------- Partner of the Registrant (Michael D. Fascitelli) By: /s/ Robert P. Kogod Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (Robert P. Kogod) By: /s/ Joseph Macnow Executive Vice President - Finance and March 25, 2003 ----------------------------------- Administration and Chief Financial (Joseph Macnow) Officer (Principal Financial and Accounting Officer) of the General Partner of the Registrant By: /s/ David Mandelbaum Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (David Mandelbaum) By: /s/ Stanley Simon Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (Stanley Simon) By: /s/ Robert H. Smith Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (Robert H. Smith) By: /s/ Ronald G. Targan Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (Ronald G. Targan) By: /s/ Richard R. West Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (Richard R. West) By: /s/ Russell B. Wight, Jr. Trustee of the General Partner of the March 25, 2003 ----------------------------------- Registrant (Russell B. Wight, Jr.) -144-
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CERTIFICATION I, Steven Roth, certify that: 1. I have reviewed this annual report on Form 10-K of Vornado Realty L.P.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 25, 2003 /s/ Steven Roth -------------------------------------------- Steven Roth, Chief Executive Officer of Vornado Realty Trust, sole general partner of Vornado Realty L.P. -145-
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CERTIFICATION I, Joseph Macnow, certify that: 1. I have reviewed this annual report on Form 10-K of Vornado Realty L.P.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 25, 2003 /s/ Joseph Macnow -------------------------------------------- Joseph Macnow, Chief Financial Officer of Vornado Realty Trust, sole general partner of Vornado Realty L.P. -146-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS [Enlarge/Download Table] COLUMN A COLUMN B COLUMN C COLUMN E ------------------------------------------------------------- ADDITIONS BALANCE AT CHARGED UNCOLLECTIBLE BALANCE BEGINNING AGAINST ACCOUNTS AT END DESCRIPTION OF YEAR OPERATIONS WRITTEN-OFF OF YEAR ----------- ----------- ----------- ------------- ----------- YEAR ENDED DECEMBER 31, 2002 Allowance for doubtful accounts........... $ 9,922 $ 11,634 $ (3,514) $ 18,042 =========== =========== =========== =========== YEAR ENDED DECEMBER 31, 2001: Allowance for doubtful accounts........... $ 9,343 $ 5,379 $ (5,891) $ 8,831 =========== =========== =========== =========== YEAR ENDED DECEMBER 31, 2000: Allowance for doubtful accounts........... $ 7,292 $ 2,957 $ (906) $ 9,343 =========== =========== =========== =========== -147-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) [Enlarge/Download Table] COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------------------------------------------------------------------------------------------------------------------------- GROSS AMOUNT AT WHICH COSTS CARRIED AT CLOSE OF PERIOD INITIAL COST TO COMPANY(1) CAPITALIZED --------------------------------------- --------------------------- SUBSEQUENT BUILDINGS BUILDINGS AND TO AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL(2) -------------------------------- --------------- --------------------------- ----------- ----------- ------------ ---------- Office Buildings NEW YORK Manhattan One Penn Plaza $ 275,000 $ -- $ 412,169 $ 78,273 $ -- $ 490,442 $ 490,442 Two Penn Plaza 154,669 53,615 164,903 58,066 52,689 223,895 276,584 909 Third Avenue 105,837 -- 120,723 14,917 -- 135,640 135,640 770 Broadway 83,314 52,898 95,686 74,295 52,898 169,981 222,879 Eleven Penn Plaza 50,383 40,333 85,259 22,398 40,333 107,657 147,990 Two Park Avenue -- 43,609 69,715 6,139 43,609 75,854 119,463 90 Park Avenue -- 8,000 175,890 13,938 8,000 189,828 197,828 888 Seventh Avenue 105,000 -- 117,269 32,614 -- 149,883 149,883 330 West 34th Street -- -- 8,599 6,063 -- 14,662 14,662 1740 Broadway -- 26,971 102,890 9,044 26,971 111,934 138,905 150 East 58th Street -- 39,303 80,216 12,603 39,303 92,819 132,122 866 United Nations Plaza 33,000 32,196 37,534 7,032 32,196 44,566 76,762 595 Madison (Fuller Building) 70,345 62,731 62,888 7,441 62,731 70,329 133,060 640 Fifth Avenue -- 38,224 25,992 49,099 38,224 75,091 113,315 40 Fulton Street -- 15,732 26,388 3,235 15,732 29,623 45,355 689 Fifth Avenue -- 19,721 13,446 3,299 19,721 16,745 36,466 20 Broad Street -- -- 28,760 8,900 -- 37,660 37,660 7 West 34th Street -- 34,595 93,703 1,018 34,614 94,702 129,316 ---------- ---------- ----------- -------- --------- ----------- --------- Total New York 877,548 467,928 1,722,030 408,374 467,021 2,131,311 2,598,332 ---------- ---------- ----------- -------- --------- ----------- --------- WASHINGTON, DC Crystal Mall (4 buildings) $ 65,877 $ 49,664 $ 156,654 $ (789) $ 49,664 $ 157,443 $ 207,107 Crystal Plaza (6 buildings) 70,356 57,213 131,206 2,612 57,213 133,818 191,031 Crystal Square (4 buildings) 195,983 64,817 218,330 7,909 64,817 226,239 291,056 Crystal Gateway (4 buildings) 149,839 47,594 177,373 3,079 47,594 180,452 228,046 Crystal Park (5 buildings) 264,440 100,935 409,920 3,819 100,935 413,739 514,674 Arlington Plaza 17,531 6,227 28,590 708 6,227 29,298 35,525 1919 S. Eads Street 13,148 3,979 18,610 208 3,979 18,818 22,797 Skyline Place (6 buildings) 139,212 41,986 221,869 5,281 41,986 227,150 269,136 Seven Skyline Place -- 10,292 58,351 1,950 10,292 60,301 70,593 One Skyline Tower 65,764 12,266 75,343 142 12,266 75,485 87,751 Courthouse Plaza (2 buildings) 80,062 -- 105,475 376 -- 105,851 105,851 1101 17th Street 27,248 20,666 20,112 2,968 20,666 23,080 43,746 1730 M. Street 17,013 10,095 17,541 1,617 10,095 19,158 29,253 1140 Connecticut Avenue 20,153 19,017 13,184 3,107 19,017 16,291 35,308 1150 17th Street 32,904 23,359 24,876 3,345 23,359 28,221 51,580 1750 Penn Avenue 49,794 20,020 30,032 857 20,020 30,889 50,909 Democracy Plaza I 27,640 -- 33,628 751 -- 34,379 34,379 COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I --------------------------------------------------------------------------------------- LIFE ON WHICH DEPRECIATION ACCUMULATED IN LATEST DEPRECIATION INCOME AND DATE OF DATE STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED -------------------------------- ------------- -------------- --------- ------------- Office Buildings NEW YORK Manhattan One Penn Plaza $ 58,634 1972 1998 39 Years Two Penn Plaza 35,354 1968 1997 39 Years 909 Third Avenue 13,107 1969 1999 39 Years 770 Broadway 18,537 1907 1998 39 Years Eleven Penn Plaza 16,143 1923 1997 39 Years Two Park Avenue 12,867 1928 1998 39 Years 90 Park Avenue 26,683 1964 1997 39 Years 888 Seventh Avenue 15,018 1980 1998 39 Years 330 West 34th Street 1,294 1925 1998 39 Years 1740 Broadway 17,138 1950 1997 39 Years 150 East 58th Street 10,952 1969 1998 39 Years 866 United Nations Plaza 7,723 1966 1997 39 Years 595 Madison (Fuller Building) 5,400 1968 1999 39 Years 640 Fifth Avenue 9,112 1950 1997 39 Years 40 Fulton Street 4,019 1987 1998 39 Years 689 Fifth Avenue 1,617 1925 1998 39 Years 20 Broad Street 3,650 1956 1998 39 Years 7 West 34th Street 5,142 1901 2000 40 Years --------- Total New York 262,390 --------- WASHINGTON, DC Crystal Mall (4 buildings) $ 7,182 1968 2002 10 - 40 Years Crystal Plaza (6 buildings) 7,488 1964-1969 2002 10 - 40 Years Crystal Square (4 buildings) 11,113 1974 - 1980 2002 10 - 40 Years Crystal Gateway (4 buildings) 8,846 1983 - 1987 2002 10 - 40 Years Crystal Park (5 buildings) 22,092 1984 - 1989 2002 10 - 40 Years Arlington Plaza 1,307 1985 2002 10 - 40 Years 1919 S. Eads Street 983 1990 2002 10 - 40 Years Skyline Place (6 buildings) 11,134 1973 - 1984 2002 10 - 40 Years Seven Skyline Place 2,522 2001 2002 10 - 40 Years One Skyline Tower 3,573 1988 2002 10 - 40 Years Courthouse Plaza (2 buildings) 5,157 1988 - 1989 2002 10 - 40 Years 1101 17th Street 1,834 1963 2002 10 - 40 Years 1730 M. Street 1,648 1963 2002 10 - 40 Years 1140 Connecticut Avenue 1,435 1966 2002 10 - 40 Years 1150 17th Street 1,657 1970 2002 10 - 40 Years 1750 Penn Avenue 1,236 1964 2002 10 - 40 Years Democracy Plaza I 1,651 1987 2002 10 - 40 Years -148-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) [Enlarge/Download Table] COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------------------------------------------------------------------------------------------------------------------------- GROSS AMOUNT AT WHICH COSTS CARRIED AT CLOSE OF PERIOD INITIAL COST TO COMPANY(1) CAPITALIZED --------------------------------------- --------------------------- SUBSEQUENT BUILDINGS BUILDINGS AND TO AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL(2) -------------------------------- --------------- ---------------------------- ----------- ----------- ------------ ---------- Tysons Dulles (3 buildings) 69,507 19,146 79,095 488 19,146 79,583 98,729 Commerce Executive (3 buildings) 53,307 13,401 58,705 691 13,401 59,396 72,797 Reston Executive (3 buildings) 73,844 15,424 85,722 261 15,424 85,983 101,407 Crystal Gateway 1 58,279 15,826 53,884 37 15,826 53,931 69,757 Other -- -- 51,768 1,496 -- 53,264 53,264 ---------- ---------- ----------- -------- --------- ----------- --------- Total Washington, DC Office Buildings 1,491,901 551,927 2,070,278 42,491 551,927 2,112,769 2,664,696 ---------- ---------- ----------- -------- --------- ----------- --------- NEW JERSEY Paramus -- -- 8,345 10,008 -- 18,353 18,353 ---------- ---------- ----------- -------- --------- ----------- --------- Total New Jersey -- -- 8,345 10,008 -- 18,353 18,353 ---------- ---------- ----------- -------- --------- ----------- --------- -- Total Office Buildings 2,369,449 1,019,855 3,800,653 460,873 1,018,948 4,262,433 5,281,381 ---------- ---------- ----------- -------- --------- ----------- --------- Shopping Centers NEW JERSEY Bordentown 8,111 * 498 3,176 1,090 713 4,051 4,764 Bricktown 16,390 * 929 2,175 9,252 929 11,427 12,356 Cherry Hill 15,075 * 915 3,926 3,320 915 7,246 8,161 Delran 6,461 * 756 3,184 2,325 756 5,509 6,265 Dover 7,388 * 224 2,330 2,464 244 4,774 5,018 East Brunswick 22,887 * 319 3,236 6,215 319 9,451 9,770 East Hanover I 20,579 * 376 3,063 5,007 476 7,970 8,446 East Hanover II (4) 6,860 * 1,756 8,706 (152) 2,195 8,115 10,310 Hackensack 25,144 * 536 3,293 7,322 536 10,615 11,151 Jersey City 19,249 * 652 2,962 1,868 652 4,830 5,482 Kearny (4) 3,758 * 279 4,429 (278) 309 4,121 4,430 Lawnside 10,651 * 851 2,222 1,359 851 3,581 4,432 Lodi 9,439 * 245 9,339 110 245 9,449 9,694 Manalapan 12,597 * 725 2,447 5,212 725 7,659 8,384 Marlton 12,249 * 1,514 4,671 789 1,611 5,363 6,974 Middletown 16,535 * 283 1,508 3,938 283 5,446 5,729 Morris Plains 12,104 * 1,254 3,140 3,230 1,104 6,520 7,624 North Bergen (4) 3,985 * 510 3,390 (956) 2,308 636 2,944 North Plainfield 10,942 * 500 13,340 694 500 14,034 14,534 Totowa 29,694 * 1,097 5,359 10,964 1,099 16,321 17,420 Turnersville 4,108 * 900 2,132 65 900 2,197 3,097 Union 33,722 * 1,014 4,527 2,951 1,329 7,163 8,492 Vineland -- 290 1,594 1,281 290 2,875 3,165 Watchung (4) 13,606 * 451 2,347 6,865 4,178 5,485 9,663 COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I --------------------------------------------------------------------------------------- LIFE ON WHICH DEPRECIATION ACCUMULATED IN LATEST DEPRECIATION INCOME AND DATE OF DATE STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED -------------------------------- ------------- -------------- -------- ------------- Tysons Dulles (3 buildings) 3,522 1986 - 1990 2002 10 - 40 Years Commerce Executive (3 buildings) 2,728 1985 - 1989 2002 10 - 40 Years Reston Executive (3 buildings) 3,526 1987 - 1989 2002 10 - 40 Years Crystal Gateway 1 678 1981 2002 10 - 40 Years Other 5,775 --------- Total Washington, DC Office Buildings 107,087 --------- NEW JERSEY Paramus 5,714 1967 1987 26 - 40 Years --------- Total New Jersey 5,714 --------- Total Office Buildings 375,191 --------- Shopping Centers NEW JERSEY Bordentown 3,917 1958 1958 7 - 40 Years Bricktown 6,123 1968 1968 22 -40 Years Cherry Hill 6,221 1964 1964 12 - 40 Years Delran 3,555 1972 1972 16 - 40 Years Dover 3,497 1964 1964 16 - 40 Years East Brunswick 6,698 1957 1957 8 - 33 Years East Hanover I 5,578 1962 1962 9 -40 Years East Hanover II (4) 672 1979 1998 40 Years Hackensack 6,098 1963 1963 15 - 40 Years Jersey City 4,252 1965 1965 11 - 40 Years Kearny (4) 1,534 1938 1959 23 - 29 Years Lawnside 2,599 1969 1969 17 - 40 Years Lodi 766 1999 1975 40 Years Manalapan 4,858 1971 1971 14 - 40 Years Marlton 4,107 1973 1973 16 - 40 Years Middletown 3,386 1963 1963 19 - 40 Years Morris Plains 5,953 1961 1985 7 - 19 Years North Bergen (4) 185 1993 1959 30 Years North Plainfield 6,238 1955 1989 21 - 30 Years Totowa 7,427 1957/1999 1957 19 - 40 Years Turnersville 1,810 1974 1974 23 - 40 Years Union 5,872 1962 1962 6 - 40 Years Vineland 2,159 1966 1966 18 -40 Years Watchung (4) 1,484 1994 1959 27 - 30 Years -149-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) [Enlarge/Download Table] COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------------------------------------------------------------------------------------------------------------------------- GROSS AMOUNT AT WHICH COSTS CARRIED AT CLOSE OF PERIOD INITIAL COST TO COMPANY(1) CAPITALIZED --------------------------------------- --------------------------- SUBSEQUENT BUILDINGS BUILDINGS AND TO AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL(2) -------------------------------- --------------- ---------------------------- ----------- ----------- ------------ ---------- Woodbridge 22,227 * 190 3,047 817 319 3,735 4,054 ---------- ---------- ----------- -------- --------- ----------- -------- Total New Jersey 343,761 17,064 99,543 75,752 23,786 168,573 192,359 ---------- ---------- ----------- -------- --------- ----------- -------- NEW YORK Albany (Menands) 6,251 * 460 1,677 2,693 460 4,370 4,830 Buffalo (Amherst) 7,044 * 402 2,019 2,276 636 4,061 4,697 Freeport 14,879 * 1,231 3,273 2,886 1,231 6,159 7,390 New Hyde Park 7,510 * -- -- 122 -- 122 122 North Syracuse -- -- -- 23 -- 23 23 Rochester (Henrietta) -- -- 2,124 1,154 -- 3,278 3,278 Rochester (4) -- 443 2,870 (929) 2,068 316 2,384 Valley Stream (Green Acres) 157,654 140,069 99,586 6,475 139,910 106,220 246,130 715 Lexington Avenue -- -- 11,574 39 -- 11,613 11,613 14th Street and Union Square, Manhattan -- 12,566 4,044 20,512 24,079 13,043 37,122 424 6th Avenue -- 5,900 5,675 -- 5,900 5,675 11,575 Riese -- 19,135 7,294 18,718 25,233 19,914 45,147 1135 Third Avenue -- 7,844 7,844 1 7,845 7,844 15,689 ---------- ---------- ----------- -------- --------- ----------- -------- Total New York 193,338 188,050 147,980 53,970 207,362 182,638 390,000 ---------- ---------- ----------- -------- --------- ----------- -------- PENNSYLVANIA Allentown 23,367 * 70 3,446 10,195 334 13,377 13,711 Bensalem (4) 6,457 * 1,198 3,717 674 2,727 2,862 5,589 Bethlehem 4,087 * 278 1,806 3,920 278 5,726 6,004 Broomall 9,827 * 734 1,675 1,341 850 2,900 3,750 Glenolden 7,370 * 850 1,295 721 850 2,016 2,866 Lancaster (4) -- 606 2,312 555 3,043 430 3,473 Levittown -- 193 1,231 125 183 1,366 1,549 10th and Market Streets, Philadelphia 9,001 * 933 3,230 6,537 933 9,767 10,700 Upper Moreland 6,986 * 683 2,497 565 683 3,062 3,745 York 4,132 * 421 1,700 1,270 409 2,982 3,391 ---------- ---------- ----------- -------- --------- ----------- -------- Total Pennsylvania 71,227 5,966 22,909 25,903 10,290 44,488 54,778 ---------- ---------- ----------- -------- --------- ----------- -------- MARYLAND Baltimore (Belair Rd.) -- 785 1,333 3,401 785 4,734 5,519 Baltimore (Towson) 11,451 * 581 2,756 785 581 3,541 4,122 Baltimore (Dundalk) 6,205 * 667 1,710 3,264 667 4,974 5,641 Glen Burnie 5,893 * 462 1,741 1,459 462 3,200 3,662 Hagerstown 3,302 * 168 1,453 1,073 168 2,526 2,694 ---------- ---------- ----------- ------- -------- ----------- -------- Total Maryland 26,851 2,663 8,993 9,982 2,663 18,975 21,638 ---------- ---------- ----------- ------- -------- ----------- -------- COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I ----------------------------------------------------------------------------------------- LIFE ON WHICH DEPRECIATION ACCUMULATED IN LATEST DEPRECIATION INCOME AND DATE OF DATE STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED -------------------------------- ------------- -------------- ---------- --------------- Woodbridge 3,291 1959 1959 11 - 40 Years --------- Total New Jersey 98,280 --------- NEW YORK Albany (Menands) 2,459 1965 1965 22 - 40 Years Buffalo (Amherst) 3,088 1968 1968 13 - 40 Years Freeport 3,478 1981 1981 15 - 40 Years New Hyde Park 124 1970 1976 6 - 10 Years North Syracuse 23 1967 1976 11 - 12 Years Rochester (Henrietta) 2,415 1971 1971 15 - 40 Years Rochester (4) 213 1966 1966 10 - 40 Years Valley Stream (Green Acres) 13,747 1956 1997 39 - 40 Years 715 Lexington Avenue 412 1923 2001 40 Years 14th Street and Union Square, Manhattan 1,188 1965 1993 40 Years 424 6th Avenue 64 2002 40 Years Riese 359 1923-1987 1997 39 Years 1135 Third Avenue 981 1997 39 Years --------- Total New York 28,551 --------- PENNSYLVANIA Allentown 6,772 1957 1957 20 - 42 Years Bensalem (4) 1,364 1972/1999 1972 40 Years Bethlehem 4,479 1966 1966 9 - 40 Years Broomall 2,419 1966 1966 9 - 40 Years Glenolden 1,278 1975 1975 18 - 40 Years Lancaster (4) 367 1966 1966 12 - 40 Years Levittown 1,293 1964 1964 7 - 40 Years 10th and Market Streets, Philadelphia 2,164 1977 1994 27 - 30 Years Upper Moreland 2,161 1974 1974 15 - 40 Years York 2,042 1970 1970 15 - 40 Years --------- Total Pennsylvania 24,339 --------- MARYLAND Baltimore (Belair Rd.) 3,491 1962 1962 10 - 33 Years Baltimore (Towson) 2,583 1968 1968 13 - 40 Years Baltimore (Dundalk) 3,593 1966 1966 12 - 40 Years Glen Burnie 2,065 1958 1958 16 - 33 Years Hagerstown 1,681 1966 1966 9 - 40 Years --------- Total Maryland 13,413 --------- -150-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) [Enlarge/Download Table] COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------------------------------------------------------------------------------------------------------------------------- GROSS AMOUNT AT WHICH COSTS CARRIED AT CLOSE OF PERIOD INITIAL COST TO COMPANY(1) CAPITALIZED --------------------------------------- --------------------------- SUBSEQUENT BUILDINGS BUILDINGS AND TO AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL(2) -------------------------------- --------------- ---------------------------- ----------- ----------- ------------ ---------- CONNECTICUT Newington (4) 6,581 * 502 1,581 1,606 2,421 1,268 3,689 Waterbury -- -- 2,103 1,669 667 3,105 3,772 ---------- ---------- ----------- -------- --------- ----------- -------- Total Connecticut 6,581 502 3,684 3,275 3,088 4,373 7,461 ---------- ---------- ----------- -------- --------- ----------- -------- MASSACHUSETTS Chicopee -- 510 2,031 358 510 2,389 2,899 Springfield (4) 3,142 * 505 1,657 795 2,586 371 2,957 ---------- ---------- ----------- -------- --------- ----------- -------- Total Massachusetts 3,142 1,015 3,688 1,153 3,096 2,760 5,856 ---------- ---------- ----------- -------- --------- ----------- -------- PUERTO RICO (SAN JUAN) Caguas 67,692 15,359 74,089 (147) 15,359 73,942 89,301 Montehiedra 59,638 9,182 66,701 1,033 9,182 67,734 76,916 ---------- ---------- ----------- -------- --------- ----------- -------- Total Puerto Rico 127,330 24,541 140,790 886 24,541 141,676 166,217 ---------- ---------- ----------- -------- --------- ----------- -------- Total Retail Properties 772,230 239,801 427,587 170,921 274,826 563,483 838,309 ---------- ---------- ----------- -------- --------- ----------- -------- Merchandise Mart Properties ILLINOIS Merchandise Mart, Chicago -- 64,528 319,146 36,487 64,535 355,626 420,161 350 North Orleans, Chicago -- 14,238 67,008 24,632 14,246 91,632 105,878 33 North Dearborn, Chicago 18,926 6,624 30,680 2,826 6,624 33,506 40,130 WASHINGTON D.C. Washington Office Center 44,924 10,719 69,658 3,580 10,719 73,238 83,957 Washington Design Center 48,542 12,274 40,662 8,829 12,274 49,491 61,765 Other -- 9,175 6,273 37 9,175 6,310 15,485 NORTH CAROLINA Market Square Complex, High Point 102,100 11,969 85,478 69,285 14,010 152,722 166,732 National Furniture Mart, High Point 13,106 1,069 16,761 596 1,069 17,357 18,426 CALIFORNIA Gift and Furniture Mart, Los Angeles -- 10,141 43,422 14,889 10,141 58,311 68,452 ---------- ---------- ----------- -------- --------- ----------- -------- Total Merchandise Mart 227,598 140,737 679,088 161,161 142,793 838,193 980,986 ---------- ---------- ----------- -------- --------- ----------- -------- COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I ----------------------------------------------------------------------------------------- LIFE ON WHICH DEPRECIATION ACCUMULATED IN LATEST DEPRECIATION INCOME AND DATE OF DATE STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED -------------------------------- ------------- -------------- ---------- --------------- CONNECTICUT Newington (4) 258 1965 1965 9 - 40 Years Waterbury 2,098 1969 1969 21 - 40 Years --------- Total Connecticut 2,356 --------- MASSACHUSETTS Chicopee 2,004 1969 1969 13 - 40 Years Springfield (4) 125 1993 1966 28 - 30 Years --------- Total Massachusetts 2,129 --------- PUERTO RICO (SAN JUAN) Caguas 6,172 1996 2002 15 - 39 Years Montehiedra 9,735 1996 1997 40 Years --------- Total Puerto Rico 15,907 --------- Total Retail Properties 184,975 --------- Merchandise Mart Properties ILLINOIS Merchandise Mart, Chicago 43,299 1930 1998 40 Years 350 North Orleans, Chicago 14,203 1977 1998 40 Years 33 North Dearborn, Chicago 1,864 2000 40 Years WASHINGTON D.C. Washington Office Center 8,824 1990 1998 40 Years Washington Design Center 6,718 1919 1998 40 Years Other 749 NORTH CAROLINA Market Square Complex, High Point 12,839 1902 - 1989 1998 40 Years National Furniture Mart, High Point 1,869 1964 1998 40 Years CALIFORNIA Gift and Furniture Mart, Los Angeles 3,083 2000 40 Years --------- Total Merchandise Mart 93,448 --------- -151-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) [Enlarge/Download Table] COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------------------------------------------------------------------------------------------------------------------------- GROSS AMOUNT AT WHICH COSTS CARRIED AT CLOSE OF PERIOD INITIAL COST TO COMPANY(1) CAPITALIZED --------------------------------------- --------------------------- SUBSEQUENT BUILDINGS BUILDINGS AND TO AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL(2) -------------------------------- -------------- -------------------------- ----------- ----------- ------------ ---------- Warehouse/Industrial NEW JERSEY East Brunswick 6,575 -- 4,772 3,146 -- 7,918 7,918 East Hanover 27,232 576 7,752 7,479 691 15,116 15,807 Edison 4,343 705 2,839 1,753 704 4,593 5,297 Garfield 11,273 96 8,068 5,088 96 13,156 13,252 ----------- ----------- ----------- --------- ----------- ----------- ----------- Total Warehouse/Industrial 49,423 1,377 23,431 17,466 1,491 40,783 42,274 ----------- ----------- ----------- --------- ----------- ----------- ----------- Other Properties NEW JERSEY Palisades, Fort Lee 100,000 12,017 129,786 -- 12,017 129,786 141,803 Montclair -- 66 470 330 66 800 866 ----------- ----------- ----------- --------- ----------- ----------- ----------- Total New Jersey 100,000 12,083 130,256 330 12,083 130,586 142,669 ----------- ----------- ----------- --------- ----------- ----------- ----------- NEW YORK Hotel Pennsylvania -- 29,904 121,922 21,922 29,904 143,634 173,538 ----------- ----------- ----------- --------- ----------- ----------- ----------- Total New York -- 29,904 121,922 21,922 29,904 143,634 173,538 ----------- ----------- ----------- --------- ----------- ----------- ----------- FLORIDA Student Housing Joint Venture 19,019 3,722 21,095 565 3,763 21,619 25,382 ----------- ----------- ----------- --------- ----------- ----------- ----------- Total Florida 19,019 3,722 21,095 565 3,763 21,619 25,382 ----------- ----------- ----------- --------- ----------- ----------- ----------- Total Other Properties 119,019 45,709 273,063 22,817 45,750 295,839 341,589 ----------- ----------- ----------- --------- ----------- ----------- ----------- Leasehold Improvements Equipment and Other 75,155 8,000 67,155 75,155 --------- ----------- ----------- ----------- TOTAL DECEMBER 31, 2002 $ 3,537,719 $ 1,447,479 $ 5,203,822 $ 908,393 $ 1,491,808 $ 6,067,886 $ 7,559,694 =========== =========== =========== ========= =========== =========== =========== COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I ----------------------------------------------------------------------------------------- LIFE ON WHICH DEPRECIATION ACCUMULATED IN LATEST DEPRECIATION INCOME AND DATE OF DATE STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED -------------------------------- ------------- -------------- ---------- --------------- Warehouse/Industrial NEW JERSEY East Brunswick 5,040 1972 1972 18 - 40 Years East Hanover 12,008 1963 - 1967 1963 7 - 40 Years Edison 2,898 1954 1982 12 - 25 Years Garfield 10,780 1942 1959 11 - 33 Years --------- Total Warehouse/Industrial 30,726 --------- Other Properties NEW JERSEY Palisades, Fort Lee 2,704 2002 2002 40 Years Montclair 574 1972 1972 4 - 15 Years --------- Total New Jersey 3,278 --------- NEW YORK Hotel Pennsylvania 21,080 1919 1997 39 Years --------- Total New York 21,080 --------- FLORIDA Student Housing Joint Venture 1,625 1996-1997 2000 40 Years --------- Total Florida 1,625 --------- Total Other Properties 25,983 --------- Leasehold Improvements Equipment and Other 27,103 3 - 20 Years --------- TOTAL DECEMBER 31, 2002 $ 737,426 ========= * These encumbrances are cross collateralized under a blanket mortgage in the amount of $487,246 at December 31, 2002. Notes: (1) Initial cost is cost as of January 30, 1982 (the date on which Vornado commenced real estate operations) unless acquired subsequent to that date -- see Column H. (2) The net basis of the company's assets and liabilities for tax purposes is approximately $2,822,000 lower than the amount reported for financial statement purposes. (3) Date of original construction -- many properties have had substantial renovation or additional construction -- see Column D. (4) Buildings on these properties were demolished. As a result, the cost of the buildings and improvements, net of accumulated depreciation, were transferred to land. In addition, the cost of the land in Kearny property is net of a $1,615 insurance recovery. -152-
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VORNADO REALTY L.P. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (AMOUNTS IN THOUSANDS) The following is a reconciliation of real estate assets and accumulated depreciation: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, --------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ REAL ESTATE Balance at beginning of period.................... $ 4,690,211 $ 4,354,392 $ 3,921,507 Additions during the period: Land............................................ 595,977 25,808 57,669 Buildings & improvements........................ 2,276,371 332,766 416,917 ------------ ------------ ------------ 7,562,559 4,712,966 4,396,093 Less: Asset sold and written-off.................. 2,865 22,755 41,701 ------------ ------------ ------------ Balance at end of period.......................... $ 7,559,694 $ 4,690,211 $ 4,354,392 ============ ============ ============ ACCUMULATED DEPRECIATION Balance at beginning of period.................... $ 506,225 $ 393,787 $ 308,542 Additions charged to operating expenses........... 170,888 114,121 91,236 Additions due to acquisitions..................... 63,178 -- -- ------------ ------------ ------------ 740,291 507,908 399,778 Less: Accumulated depreciation on assets sold and written-off............................ 2,865 1,683 5,991 ------------ ------------ ------------ Balance at end of period.......................... $ 737,426 $ 506,225 $ 393,787 ============ ============ ============ -153-
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EXHIBIT INDEX [Enlarge/Download Table] EXHIBIT NO. ------- 3.1 -- Amended and Restated Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 16, 1993 - Incorporated by reference to Exhibit 3(a) of Vornado's Registration Statement on Form S-4 (File No. 33-60286), filed on April 15, 1993 ........................................... * 3.2 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on May 23, 1996 - Incorporated by reference to Exhibit 3.2 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 11, 2002 ............ * 3.3 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 3, 1997 - Incorporated by reference to Exhibit 3.3 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-11954), filed on March 11, 2002 .............. * 3.4 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on October 14, 1997 - Incorporated by reference to Exhibit 3.2 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000 .............................................. * 3.5 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 22, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated April 22, 1998 (File No. 001-11954), filed on April 28, 1998 ........................... * 3.6 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on November 24, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000 .............................................. * 3.7 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 20, 2000 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000 .............................................. * 3.8 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on September 14, 2000 - Incorporated by reference to Exhibit 4.6 of Vornado's Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001 .......................................... * 3.9 -- Articles of Amendment of Declaration of Trust of Vornado dated May 31, 2002, as filed with the Department of Assessments and Taxation of the State of Maryland on June 13, 2002 - incorporated by reference to Exhibit 3.9 to Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954) ........................................................ * 3.10 -- Articles of Amendment of Declaration of Trust of Vornado dated June 6, 2002, as filed with the Department of Assessments and Taxation of the State of Maryland on June 13, 2002 - incorporated by reference to Exhibit 3.10 to Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954) ........................................................ * ---------- * Incorporated by reference. -154-
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[Enlarge/Download Table] EXHIBIT NO. ------- 3.11 -- Articles Supplementary Classifying Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 4.1 of Vornado's Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997 ................................ * 3.12 -- Articles Supplementary Classifying Vornado's $3.25 Series A Convertible Preferred Shares of Beneficial Interest, as filed with the State Department of Assessments and Taxation of Maryland on December 15, 1997 - Incorporated by reference to Exhibit 3.10 to Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 31, 2002 ............ * 3.13 -- Articles Supplementary Classifying Vornado's Series D-1 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, no par value (the "Series D-1 Preferred Shares") - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998 .............................................................. * 3.14 -- Articles Supplementary Classifying Additional Series D-1 8.5% Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999 . * 3.15 -- Articles Supplementary Classifying 8.5% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999 . * 3.16 -- Articles Supplementary Classifying Vornado's Series C 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.7 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed on May 19, 1999 . * 3.17 -- Articles Supplementary Classifying Vornado Realty Trust's Series D-2 8.375% Cumulative Redeemable Preferred Shares, dated as of May 27, 1999, as filed with the State Department of Assessments and Taxation of Maryland on May 27, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999 .................. * 3.18 -- Articles Supplementary Classifying Vornado's Series D-3 8.25% Cumulative Redeemable Preferred Shares, dated September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999 . * 3.19 -- Articles Supplementary Classifying Vornado's Series D-4 8.25% Cumulative Redeemable Preferred Shares, dated September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999 . * ---------- * Incorporated by reference. -155-
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[Enlarge/Download Table] EXHIBIT NO. ------- 3.20 -- Articles Supplementary Classifying Vornado's Series D-5 8.25% Cumulative Redeemable Preferred Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999 * 3.21 -- Articles Supplementary Classifying Vornado's Series D-6 8.25% Cumulative Redeemable Preferred Shares, dated May 1, 2000, as filed with the State Department of Assessments and Taxation of Maryland on May 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed May 19, 2000 .................................... * 3.22 -- Articles Supplementary Classifying Vornado's Series D-7 8.25% Cumulative Redeemable Preferred Shares, dated May 25, 2000, as filed with the State Department of Assessments and Taxation of Maryland on June 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000 ............................ * 3.23 -- Articles Supplementary Classifying Vornado's Series D-8 8.25% Cumulative Redeemable Preferred Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000 . * 3.24 -- Articles Supplementary Classifying Vornado's Series D-9 8.75% Preferred Shares, dated September 21, 2001, as filed with the State Department of Assessments and Taxation of Maryland on September 25, 2001 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001 .......................................................... * 3.25 -- Amended and Restated Bylaws of Vornado, as amended on March 2, 2000 - Incorporated by reference to Exhibit 3.12 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000 ................................ * 3.26 -- Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of October 20, 1997 (the "Partnership Agreement") - Incorporated by reference to Exhibit 3.4 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 filed on March 31, 1998 .................................. * 3.27 -- Amendment to the Partnership Agreement, dated as of December 16, 1997-Incorporated by reference to Exhibit 3.5 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-11954) filed on March 31, 1998 ................................ * 3.28 -- Second Amendment to the Partnership Agreement, dated as of April 1, 1998 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998 .................................................... * 3.29 -- Third Amendment to the Partnership Agreement, dated as of November 12, 1998 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998 ............................ * 3.30 -- Fourth Amendment to the Partnership Agreement, dated as of November 30, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 1, 1998 (File No. 001-11954), filed on February 9, 1999 ............................. * 3.31 -- Exhibit A to the Partnership Agreement, dated as of December 22, 1998 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999 ............................. * ---------- * Incorporated by reference. -156-
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[Enlarge/Download Table] EXHIBIT NO. ------- 3.32 -- Fifth Amendment to the Partnership Agreement, dated as of March 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999 ............................... * 3.33 -- Exhibit A to the Partnership Agreement, dated as of March 11, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999 ................................................. * 3.34 -- Sixth Amendment to the Partnership Agreement, dated as of March 17, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999 ................................. * 3.35 -- Seventh Amendment to the Partnership Agreement, dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999 ................................. * 3.36 -- Eighth Amendment to the Partnership Agreement, dated as of May 27, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999 ................................. * 3.37 -- Ninth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 25, 1999 .......................................................... * 3.38 -- Tenth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999 ............................. * 3.39 -- Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999 ........................ * 3.40 -- Twelfth Amendment to the Partnership Agreement, dated as of May 1, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed on May 19, 2000 ............................................. * 3.41 -- Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000 ................................ * 3.42 -- Fourteenth Amendment to the Partnership Agreement, dated as of December 8, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000 ........................ * 3.43 -- Fifteenth Amendment to the Partnership Agreement, dated as of December 15, 2000 - Incorporated by reference to Exhibit 4.35 of Vornado Realty Trust's Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001 .............................. * ---------- * Incorporated by reference. -157-
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[Enlarge/Download Table] EXHIBIT NO. ------- 3.44 -- Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001 - Incorporated by reference to Exhibit 3.3 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001 ......................................... * 3.45 -- Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001 - Incorporated by reference to Exhibit 3.4 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001 ............................. * 3.46 -- Eighteenth Amendment to the Partnership Agreement, dated as of January 1, 2002 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002 .................................................... * 3.47 -- Nineteenth Amendment to the Partnership Agreement, dated as of July 1, 2002 - Incorporated by reference to Exhibit 3.47 to Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954) ................................ * 4.1 -- Instruments defining the rights of security holders (see Exhibits 3.1 through 3.24 of this Annual Report on Form 10-K) .............. * 4.2 -- Indenture dated as of November 24, 1993 between Vornado Finance Corp. and Bankers Trust Company, as Trustee - Incorporated by reference to Vornado's Current Report on Form 8-K dated November 24, 1993 (File No. 001-11954), filed December 1, 1993 ............. * 4.3 -- Specimen certificate representing Vornado's Common Shares of Beneficial Interest, par value $0.04 per share - Incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Vornado's Registration Statement on Form S-3 (File No. 33-62395), filed on October 26, 1995 .................................................. * 4.4 -- Specimen certificate representing Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share, no par value - Incorporated by reference to Exhibit 4.2 of Vornado's Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997 ................. * 4.5 -- Specimen certificate evidencing Vornado's Series B 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 4.2 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed on March 15, 1999 ............ * 4.6 -- Specimen certificate evidencing Vornado's 8.5% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preferences $25.00 per share, no par value - Incorporated by reference to Exhibit 4.2 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed May 19, 1999 ................. * 4.7 -- Indenture and Servicing Agreement, dated as of March 1, 2000, among Vornado, LaSalle Bank National Association, ABN Amro Bank N.V. and Midland Loan Services, Inc. - Incorporated by reference to Exhibit 10.48 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 1-11954), filed on March 9, 2000 ...... * 4.8 -- Indenture, dated as of June 24, 2002, between Vornado Realty L.P. and The Bank of New York, as Trustee - Incorporated by reference to Exhibit 4.1 to Vornado Realty L.P.'s Current Report on Form 8-K dated June 19, 2002 (File No. 000-22685), filed on June 24, 2002 .. * ---------- * Incorporated by reference. -158-
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[Enlarge/Download Table] EXHIBIT NO. ------- 4.9 -- Officer's Certificate pursuant to Sections 102 and 301 of the Indenture, dated June 24, 2002 - Incorporated by reference to Exhibit 4.2 to Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 001-11954), filed on August 7, 2002 .................................................... * 10.1 -- Vornado Realty Trust's 1993 Omnibus Share Plan, as amended - Incorporated by reference to Exhibit 4.1 of Vornado Realty Trust's registration statement on Form S-8 (File No. 331-09159), filed on July 30, 1996 ..................................................... * 10.2 -- Second Amendment, dated as of June 12, 1997, to Vornado's 1993 Omnibus Share Plan, as amended - Incorporated by reference to Vornado's Registration Statement on Form S-8 (File No. 333-29011) filed on June 12, 1997 ............................................ * 10.3 -- Master Agreement and Guaranty, between Vornado, Inc. and Bradlees New Jersey, Inc. dated as of May 1, 1992 - Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for quarter ended March 31, 1992 (File No. 001-11954), filed May 8, 1992 ...... * 10.4** -- Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated as of November 24, 1993 made by each of the entities listed therein, as mortgagors to Vornado Finance Corp., as mortgagee - Incorporated by reference to Vornado's Current Report on Form 8-K dated November 24, 1993 (File No. 001-11954), filed December 1, 1993 .................................................. * 10.5** -- Employment Agreement between Vornado Realty Trust and Joseph Macnow dated January 1, 1998 - Incorporated by reference to Exhibit 10.7 of Vornado's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 001-11954), filed November 12, 1998 .. * 10.6** -- Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 001-11954), filed March 13, 1997 ............... * 10.7 -- Registration Rights Agreement between Vornado, Inc. and Steven Roth, dated December 29, 1992 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993 ............ * 10.8 -- Stock Pledge Agreement between Vornado, Inc. and Steven Roth dated December 29, 1992 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993 ............................... * 10.9 -- Management Agreement between Interstate Properties and Vornado, Inc. dated July 13, 1992 -Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993 ..................... * 10.10 -- Real Estate Retention Agreement between Vornado, Inc., Keen Realty Consultants, Inc. and Alexander's, Inc., dated as of July 20, 1992 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993 ................................................. * 10.11 -- Amendment to Real Estate Retention Agreement dated February 6, 1995 - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001-11954), filed March 23, 1995 .................................................... * ---------- * Incorporated by reference. ** Management contract or compensatory plan. -159-
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[Enlarge/Download Table] EXHIBIT NO. ------- 10.12 -- Stipulation between Keen Realty Consultants Inc. and Vornado Realty Trust re: Alexander's Retention Agreement - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-11954), filed March 24, 1994 * 10.13 -- Stock Purchase Agreement, dated February 6, 1995, among Vornado Realty Trust and Citibank, N.A. Incorporated by reference to Vornado's Current Report on Form 8-K dated February 6, 1995 (File No. 001-11954), filed February 21, 1995 ........................... * 10.14 -- Management and Development Agreement, dated as of February 6, 1995 - Incorporated by reference to Vornado's Current Report on Form 8-K dated February 6, 1995 (File No. 001-11954), filed February 21, 1995 .............................................................. * 10.15 -- Standstill and Corporate Governance Agreement, dated as of February 6, 1995 - Incorporated by reference to Vornado's Current Report on Form 8-K dated February 6, 1995 (File No. 001-11954), filed February 21, 1995 ................................................. * 10.16 -- Credit Agreement, dated as of March 15, 1995, among Alexander's Inc., as borrower, and Vornado Lending Corp., as lender - Incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001 - 11954), filed March 23, 1995 .......................................................... * 10.17 -- Subordination and Intercreditor Agreement, dated as of March 15, 1995 among Vornado Lending Corp., Vornado Realty Trust and First Fidelity Bank, National Association - Incorporated by reference to Vornado's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 001-11954), filed March 23, 1995 ............... * 10.18 -- Form of Intercompany Agreement between Vornado Realty L.P. and Vornado Operating, Inc. -Incorporated by reference to Exhibit 10.1 of Amendment No. 1 to Vornado Operating, Inc.'s Registration Statement on Form S-11 (File No. 333-40701), filed on January 23, 1998 .............................................................. * 10.19 -- Form of Revolving Credit Agreement between Vornado Realty L.P. and Vornado Operating, Inc., together with related form of Note - Incorporated by reference to Exhibit 10.2 of Amendment No. 1 to Vornado Operating, Inc.'s Registration Statement on Form S-11 (File No. 333-40701) .................................................... * 10.20 -- Registration Rights Agreement, dated as of April 15, 1997, between Vornado Realty Trust and the holders of Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997 .............................................................. * 10.21 -- Noncompetition Agreement, dated as of April 15, 1997, by and among Vornado Realty Trust, the Mendik Company, L.P., and Bernard H. Mendik - Incorporated by reference to Exhibit 10.3 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997 .............................................................. * 10.22 -- Employment Agreement, dated as of April 15, 1997, by and among Vornado Realty Trust, The Mendik Company, L.P. and David R. Greenbaum - Incorporated by reference to Exhibit 10.4 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on April 30, 1997 .............................................................. * 10.23 -- Agreement, dated September 28, 1997, between Atlanta Parent Incorporated, Portland Parent Incorporated and Crescent Real Estate Equities, Limited Partnership - Incorporated by reference to Exhibit 99.6 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 8, 1997 .............................. * ---------- * Incorporated by reference. -160-
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[Enlarge/Download Table] EXHIBIT NO. ------- 10.24 -- Contribution Agreement between Vornado Realty Trust, Vornado Realty L.P. and The Contributors Signatory - thereto - Merchandise Mart Properties, Inc. (DE) and Merchandise Mart Enterprises, Inc. - Incorporated by reference to Exhibit 10.34 of Vornado's Annual Report on Form 10-K/A for the year ended December 31, 1997 (File No. 001-11954), filed on April 8, 1998 ............................ * 10.25 -- Sale Agreement executed November 18, 1997, and effective December 19, 1997, between MidCity Associates, a New York partnership, as Seller, and One Penn Plaza LLC, a New York Limited liability company, as purchaser - Incorporated by reference to Exhibit 10.35 of Vornado's Annual Report on Form 10-K/A for the year ended December 31, 1997 (File No. 001-11954), filed on April 8, 1998 .... * 10.26 -- Credit Agreement dated as of June 22, 1998 among One Penn Plaza, LLC, as Borrower, The Lenders Party hereto, The Chase Manhattan Bank, as Administrative Agent - Incorporated by reference to Exhibit 10 of Vornado's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 001-11954), filed August 13, 1998 .............................................................. * 10.27 -- Registration Rights Agreement, dated as of April 1, 1998, between Vornado and the Unit Holders named herein - Incorporated by reference to Exhibit 10.2 of Amendment No. 1 to Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on May 6, 1998 ....................................................... * 10.28 -- Registration Rights Agreement, dated as of August 5, 1998, between Vornado and the Unit Holders named therein - Incorporated by reference to Exhibit 10.1 of Vornado's Registration Statement on Form S-3 (File No. 333-89667), filed on October 25, 1999 .......... * 10.29 -- Registration Rights Agreement, dated as of July 23, 1998, between Vornado and the Unit Holders named therein - Incorporated by reference to Exhibit 10.2 of Vornado's Registration Statement on Form S-3 (File No. 333-89667), filed on October 25, 1999 .......... * 10.30 -- Consolidated and Restated Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated as of March 1, 2000, between Entities named therein (as Mortgagors) and Vornado (as Mortgagee) - Incorporated by reference to Exhibit 10.47 of Vornado's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000 ............. * 10.31** -- Employment Agreement, dated January 22, 2000, between Vornado Realty Trust and Melvyn Blum - Incorporated by reference to Exhibit 10.49 of Vornado's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000 .... * 10.32** -- Deferred Stock Agreement, dated December 29, 2000, between Vornado Realty Trust and Melvyn Blum - Incorporated by reference to Exhibit 10.32 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2002 .... * 10.33 -- First Amended and Restated Promissory Note of Steven Roth, dated November 16, 1999 - Incorporated by reference to Exhibit 10.50 of Vornado's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000 ............. * 10.34 -- Letter agreement, dated November 16, 1999, between Steven Roth and Vornado Realty Trust - Incorporated by reference to Exhibit 10.51 of Vornado's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000 .... * ---------- * Incorporated by reference. ** Management contract or compensatory plan. -161-
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[Enlarge/Download Table] EXHIBIT NO. ------- 10.35 -- Revolving Credit Agreement dated as of March 21, 2000 among Vornado Realty L.P., as borrower, Vornado Realty Trust, as general partner, and UBS AG, as Bank - Incorporated by reference to Vornado's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No. 001-11954) filed on May 5, 2000 ......................... * 10.36 -- Agreement and Plan of Merger, dated as of October 18, 2001, by and among Vornado Realty Trust, Vornado Merger Sub L.P., Charles E. Smith Commercial Realty L.P., Charles E. Smith Commercial Realty L.L.C., Robert H. Smith, individually, Robert P. Kogod, individually, and Charles E. Smith Management, Inc. - Incorporated by reference to Exhibit 2.1 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed on January 16, 2002 * 10.37 -- Registration Rights Agreement, dated January 1, 2002, between Vornado Realty Trust and the holders of the Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.1 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002 .................................................... * 10.38 -- Registration Rights Agreement, dated January 1, 2002, between Vornado Realty Trust and the holders of the Units listed on Schedule A thereto - Incorporated by reference to Exhibit 10.2 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002 .................................................... * 10.39 -- Tax Reporting and Protection Agreement, dated December 31, 2001, by and among Vornado, Vornado Realty L.P., Charles E. Smith Commercial Realty L.P. and Charles E. Smith Commercial Realty L.L.C. - Incorporated by reference to Exhibit 10.3 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002 .... * 10.40** -- Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit 10.7 to Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 001-11954), filed on May 1, 2002 .............................................. * 10.41** -- First Amendment, dated October 31, 2002, to the Employment Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit 99.6 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 * 10.42** -- First Amendment, dated June 7, 2002, to the Convertible Units Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Exhibit 99.3 to Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 * 10.43** -- Second Amendment, dated October 31, 2002, to the Convertible Units Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Exhibit 99.4 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 .............................................................. * 10.44** -- 2002 Units Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit 99.7 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 .................................................. * 10.45** -- First Amendment, dated October 31, 2002, to the 2002 Units Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - Incorporated by reference to Exhibit 99.8 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 * ---------- * Incorporated by reference. ** Management contract or compensatory plan. -162-
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[Enlarge/Download Table] EXHIBIT NO. ------- 10.46** -- First Amendment, dated October 31, 2002, to the Registration Agreement between Vornado Realty Trust and Michael D. Fascitelli, dated December 2, 1996 - Incorporated by reference to Exhibit 99.9 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 .............................................................. * 10.47** -- Trust Agreement between Vornado Realty Trust and Chase Manhattan Bank, dated December 2, 1996 - Incorporated by reference to Exhibit 99.10 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 .................................................. * 10.48** -- First Amendment, dated September 17, 2002, to the Trust Agreement between Vornado Realty Trust and Chase Manhattan Bank, dated December 2, 1996 - Incorporated by reference to Exhibit 99.11 to the Schedule 13D filed by Michael D. Fascitelli on November 8, 2002 * 10.49 -- Amended and Restated Credit Agreement, dated July 3, 2002, between Alexander's Inc. and Vornado Lending L.L.C. (evidencing a $50,000,000 line of credit facility) - Incorporated by reference to Exhibit 10(i)(B)(3) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 .............................................................. * 10.50 -- Credit Agreement, dated July 3, 2002, between Alexander's and Vornado Lending L.L.C. (evidencing a $35,000,000 loan) - Incorporated by reference to Exhibit 10(i)(B)(4) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 ........................... * 10.51 -- Guaranty of Completion, dated as of July 3, 2002, executed by Vornado Realty L.P. for the benefit of Bayerische Hypo- and Vereinsbank AG, New York Branch, as Agent for the Lenders - Incorporated by reference to Exhibit 10(i)(C)(5) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 ........................... * 10.52 -- Reimbursement Agreement, dated as of July 3, 2002, by and between Alexander's, Inc., 731 Commercial LLC, 731 Residential LLC and Vornado Realty L.P. - Incorporated by reference to Exhibit 10(i)(C)(8) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 . * 10.53 -- Amendment to Real Estate Retention Agreement, dated as of July 3, 2002, by and between Alexander's, Inc. and Vornado Realty L.P. - Incorporated by reference to Exhibit 10(i)(E)(3) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 ........................... * 10.54 -- 59th Street Real Estate Retention Agreement, dated as of July 3, 2002, by and between Vornado Realty L.P., 731 Residential LLC and 731 Commercial LLC - Incorporated by reference to Exhibit 10(i)(E)(4) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 . * 10.55 -- Amended and Restated Management and Development Agreement, dated as of July 3, 2002, by and between Alexander's, Inc., the subsidiaries party thereto and Vornado Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(1) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 ........................................... * ---------- * Incorporated by reference. ** Management contract or compensatory plan. -163-
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[Enlarge/Download Table] EXHIBIT NO. ------- 10.56 -- 59th Street Management and Development Agreement, dated as of July 3, 2002, by and between 731 Commercial LLC and Vornado Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(2) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 ................ * 10.57 -- Amendment dated May 29, 2002, to the Stock Pledge Agreement between Vornado Realty Trust and Steven Roth dated December 29, 1992 - Incorporated by reference to Exhibit 5 of Interstate Properties' Schedule 13D dated May 29, 2002 (File No. 005-44144), filed on May 30, 2002 .......................................................... * 10.58 -- Vornado Realty Trust's 2002 Omnibus Share Plan - Incorporated by reference to Exhibit 4.2 to Vornado Registration Statement on Form S-3 (File No. 333-102216) filed December 26, 2002 ................. * 10.59** -- First Amended and Restated Promissory Note from Michael D Fascitelli to Vornado Realty Trust, Management dated December 17, 2001 - Incorporated by reference to Exhibit 10.59 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2002 plan........................ * 10.60** -- Promissory Note from Joseph Macnow to Vornado Realty Trust, dated July 23, 2002 - Incorporated by reference to Exhibit 10.60 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2002.............. * 10.61** -- Amendment to Employment Agreement by and between Vornado Realty Trust and Melvyn H. Blum, dated February 13, 2003 - Incorporated by reference to Exhibit 10.61 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2002...................................................... * 10.62** -- Amendment No. 1 to Deferred Stock Agreement by and between Vornado Realty Trust and Melvyn H. Blum, dated February 13, 2003 - Incorporated by reference to Exhibit 10.62 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11954), filed on March 7, 2002................................. * 21 -- Subsidiaries of the Registrant 23 -- Consent of independent auditors ---------- * Incorporated by reference. ** Management contract or compensatory plan. -164-

Dates Referenced Herein   and   Documents Incorporated by Reference

Referenced-On Page
This ‘10-K’ Filing    Date First  Last      Other Filings
11/30/1838
10/16/11122
10/1/11122
11/30/0838
11/30/0738
6/15/0711122
12/31/068013210-K,  3,  4
2/1/06122
1/3/0612118
1/1/0680132
3/4/05142
1/31/0546115
12/31/04913410-K,  10-K/A
11/30/0438132
9/30/041010-Q
1/21/0410120
12/31/0382010-K
6/30/03149010-Q,  3,  3/A
6/15/0393109
5/28/031
3/31/0311710-Q
Filed on:3/25/03144146
3/15/03116
3/6/0396
3/1/0338
2/14/0352
2/13/03142164
2/3/034115
2/1/0393109
1/31/0393109
1/17/0352
1/9/0336
1/8/0333129
1/1/0314133
For Period End:12/31/021164
12/30/0238
12/26/02164
12/21/0247
12/19/0252
12/15/0211122
11/26/021490
11/25/0238
11/18/02116
11/8/0216216310-Q
10/31/02162163
10/10/026115
10/1/02117
9/30/021011710-Q,  10-Q/A
9/23/026122
9/20/0265
9/17/02163
8/30/0245119
8/11/021627
8/7/0292164
7/31/0252
7/23/0280164
7/15/02122
7/3/0245164
7/1/025158
6/30/0215416410-Q
6/28/021113
6/27/0211122
6/24/02111598-K
6/21/02122424B5
6/19/021588-K
6/13/02154
6/10/0252
6/7/02162
6/6/02154
5/31/02154
5/30/02164
5/29/0252164
5/15/0292108
5/9/0252
5/3/0252
5/1/02162
4/30/0210117
4/1/02122
3/31/0215516210-Q
3/28/0252
3/18/021581628-K/A
3/11/02154
3/8/0280162
3/7/02161164
3/4/02142
3/1/0210
2/25/021190
2/12/0247
2/6/0246115
1/16/021628-K
1/2/02115
1/1/0251628-K,  8-K/A
12/31/01516210-K405
12/17/01164
12/14/0180132
11/30/0180132
11/21/0179111
11/19/0167113
10/31/0167113
10/25/0167113
10/19/015110
10/18/01162
10/16/01122
10/12/011561588-K
10/5/01119
9/25/01156
9/21/01541588-K
9/20/01122
9/11/0114131
8/27/01154157
8/6/0173114
7/25/01158
7/11/01122
7/1/0154107
6/30/017311410-Q
6/27/0173114
6/7/0180132
5/17/0173134
5/1/01119
2/9/0169
1/12/0170119
1/11/01122
1/1/0112137
12/31/00814710-K405
12/29/00142161
12/28/001561578-K
12/15/00157
12/8/001561578-K
9/28/0067113
9/19/0072
9/14/00154
8/1/0012118
6/16/001561578-K
6/1/00156
5/25/001561578-K
5/19/001561578-K
5/5/00162
5/2/00154
5/1/001561578-K
4/20/00154
3/31/0016210-Q
3/21/00162
3/9/00156161
3/2/0069156
3/1/00158161
1/22/00161
1/1/0059137
12/31/9915616110-K405
12/23/991561578-K
11/24/991541578-K
11/16/99161
10/25/991551618-K
9/3/991551578-K
7/7/991551578-K
5/27/99155157
5/20/99157
5/19/99155158
3/17/991551578-K
3/15/99158
3/11/998157
3/4/99120
3/3/991551578-K
2/9/991551568-K,  8-K/A
12/22/98156
12/1/981568-K
11/30/981551568-K
11/12/9815515910-Q,  8-K,  8-K/A
9/30/9815910-Q
8/13/9816110-Q,  8-K
8/5/98161
7/23/98161
6/30/9816110-Q
6/22/98161
5/6/98161
4/28/98154
4/22/98154
4/14/9815610-K405/A
4/8/9816110-K405/A
4/1/981561618-K
3/31/9815610-K405,  10-Q
1/23/98160
1/1/98159
12/31/9712716110-K405,  10-K405/A
12/19/97161
12/16/971568-K
12/15/97155
11/18/971618-K,  8-K/A
10/20/97156
10/14/97154
10/8/971608-K
9/28/97160
6/12/9715910-12G,  S-3
4/30/97160
4/15/97160
4/8/97155158
4/3/97154158
3/13/97159
12/31/9616159
12/2/96159163
7/30/96159
5/23/96154
10/26/95158
3/23/95159160
3/15/95160
2/21/95160
2/6/95159160
12/31/94159160
3/24/94160
12/31/93160
12/1/93158159
11/24/93158159
4/16/93154
4/15/93154
2/16/93159
12/31/92159
12/29/92159164
7/20/92159
7/13/92159
5/8/92159
5/1/9233159
3/31/92159
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