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Vornado Realty LP – ‘10-Q’ for 3/31/08

On:  Friday, 5/9/08, at 4:26pm ET   ·   For:  3/31/08   ·   Accession #:  1040765-8-8   ·   File #:  0-22685

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

 5/09/08  Vornado Realty LP                 10-Q        3/31/08    6:2.7M

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML   1.45M 
 2: EX-15.1     Letter re: Unaudited Interim Financial Information  HTML      8K 
 3: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
 4: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
 5: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 
 6: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 


10-Q   —   Quarterly Report


This is an HTML Document rendered as filed.  [ Alternative Formats ]



 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:   

March 31, 2008

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:

 

to

 

 

Commission File Number:

001-22635

 

 

VORNADO REALTY L.P.

(Exact name of registrant as specified in its charter)

 

Maryland

 

22-1657560

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

888 Seventh Avenue, New York, New York

 

10019

(Address of principal executive offices)

 

(Zip Code)

 

 

(212) 894-7000

(Registrant’s telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No o

 

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

 

x Large Accelerated Filer

 

o Accelerated Filer

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

 

o Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 


 


 

PART I.

 

Financial Information:

Page Number

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets (Unaudited) as of
March 31, 2008 and December 31, 2007

3

 

 

 

 

 

 

Consolidated Statements of Income (Unaudited) for the Three Months
Ended March 31, 2008 and March 31, 2007

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2008 and March 31, 2007

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

31

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

32

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

 

 

Item 4.

Controls and Procedures

57

 

 

 

 

 

 

 

 

 

 

 

 

PART II.

 

Other Information:

 

 

 

 

 

 

Item 1.

Legal Proceedings

58

 

 

 

 

 

Item 1A.

Risk Factors

59

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

59

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

59

 

 

 

 

 

Item 5.

Other Information

59

 

 

 

 

 

Item 6.

Exhibits

59

 

 

 

 

Signatures

 

 

60

 

 

 

 

Exhibit Index

 

 

61

 

 

2

 


VORNADO REALTY L.P.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

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

 

 

 

ASSETS

 

 

 

Real estate, at cost:

 

 

 

 

 

 

 

Land

 

$

4,551,850

 

$

4,597,574

 

Buildings and improvements

 

 

11,621,455

 

 

11,619,150

 

Development costs and construction in progress

 

 

903,355

 

 

822,514

 

Leasehold improvements and equipment

 

 

108,163

 

 

106,102

 

Total

 

 

17,184,823

 

 

17,145,340

 

Less accumulated depreciation and amortization

 

 

(1,910,438

)

 

(1,825,696

)

Real estate, net

 

 

15,274,385

 

 

15,319,644

 

Cash and cash equivalents

 

 

1,541,074

 

 

1,154,595

 

Escrow deposits and restricted cash

 

 

378,253

 

 

378,732

 

Marketable securities

 

 

304,903

 

 

322,992

 

Accounts receivable, net of allowance for doubtful accounts of $20,151 and $19,151

 

 

167,914

 

 

168,183

 

Investments in partially owned entities, including Alexander’s of $127,816 and $122,797

 

 

1,193,501

 

 

1,206,742

 

Investment in Toys “R” Us

 

 

377,264

 

 

298,089

 

Mezzanine loans receivable

 

 

491,868

 

 

492,339

 

Receivable arising from the straight-lining of rents, net of allowance of $3,129 and $3,076

 

 

536,920

 

 

516,777

 

Deferred leasing and financing costs, net of accumulated amortization of $132,083 and $123,624

 

 

288,177

 

 

275,887

 

Assets related to discontinued operations

 

 

108,461

 

 

1,533,240

 

Due from officers

 

 

13,186

 

 

13,228

 

Other assets

 

 

810,292

 

 

798,487

 

 

 

$

21,486,198

 

$

22,478,935

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and mortgages payable

 

$

8,613,600

 

$

7,938,457

 

Due to Vornado Realty Trust

 

 

2,362,825

 

 

2,360,412

 

Senior unsecured notes

 

 

698,810

 

 

698,656

 

Exchangeable senior debentures

 

 

493,268

 

 

492,857

 

Revolving credit facility debt

 

 

 

 

405,656

 

Accounts payable and accrued expenses

 

 

496,272

 

 

475,191

 

Deferred credit

 

 

824,648

 

 

848,855

 

Officers’ deferred compensation plan

 

 

71,258

 

 

67,714

 

Deferred tax liabilities

 

 

19,741

 

 

241,895

 

Other liabilities

 

 

122,381

 

 

118,983

 

Liabilities related to discontinued operations

 

 

1,650

 

 

1,332,627

 

Total liabilities

 

 

13,704,453

 

 

14,981,303

 

Minority interest

 

 

413,879

 

 

416,298

 

Commitments and contingencies

 

 

 

 

 

 

 

Partners’ Capital:

 

 

 

 

 

 

 

Equity

 

 

7,112,743

 

 

7,094,386

 

Earnings in excess of (less than) distributions

 

 

245,602

 

 

(42,824

)

Accumulated other comprehensive income

 

 

9,521

 

 

29,772

 

Total Partner’s Capital

 

 

7,367,866

 

 

7,081,334

 

 

 

$

21,486,198

 

$

22,478,935

 

 

See notes to consolidated financial statements.

 

3

 


VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

For The Three Months Ended
March 31,

 

 

 

 

2007

 

(Amounts in thousands, except per unit amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

Property rentals

 

$

536,336

 

$

434,723

 

Tenant expense reimbursements

 

 

87,477

 

 

72,466

 

Fee and other income

 

 

28,708

 

 

29,055

 

Total revenues

 

 

652,521

 

 

536,244

 

EXPENSES:

 

 

 

 

 

 

 

Operating

 

 

262,605

 

 

212,802

 

Depreciation and amortization

 

 

131,505

 

 

89,008

 

General and administrative

 

 

49,388

 

 

40,417

 

Costs of acquisitions not consummated

 

 

2,283

 

 

8,807

 

Total expenses

 

 

445,781

 

 

351,034

 

Operating income

 

 

206,740

 

 

185,210

 

Income applicable to Alexander’s

 

 

7,929

 

 

13,519

 

Income applicable to Toys “R” Us

 

 

80,362

 

 

58,661

 

(Loss) income from partially owned entities

 

 

(30,353

)

 

8,695

 

Interest and other investment income

 

 

14,104

 

 

53,504

 

Interest and debt expense (including amortization of deferred
financing costs of $4,243 and $2,164)

 

 

(148,179

)

 

(130,698

)

Net gain on disposition of wholly owned and partially owned assets
other than depreciable real estate

 

 

 

 

909

 

Minority interest of partially owned entities

 

 

406

 

 

350

 

Income before taxes

 

 

131,009

 

 

190,150

 

Income tax benefit (expense)

 

 

217,329

 

 

(89

)

Income from continuing operations

 

 

348,338

 

 

190,061

 

Income (loss) from discontinued operations (including $112,690 net gain on sale of Americold Realty Trust in 2008)

 

 

111,094

 

 

(1,138

)

Net income

 

 

459,432

 

 

188,923

 

Preferred unit distributions

 

 

(19,092

)

 

(18,806

)

NET INCOME applicable to CLASS A UNITS

 

$

440,340

 

$

170,117

 

 

 

 

 

 

 

 

 

INCOME PER CLASS A UNIT – BASIC:

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.96

 

$

1.03

 

Income (loss) from discontinued operations

 

 

0.66

 

 

(0.01

)

Net income per Class A unit

 

$

2.62

 

$

1.02

 

 

 

 

 

 

 

 

 

INCOME PER CLASS A UNIT – DILUTED:

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.87

 

$

0.98

 

Income (loss) from discontinued operations

 

 

0.62

 

 

(0.01

)

Net income per Class A unit

 

$

2.49

 

$

0.97

 

 

 

 

 

 

 

 

 

DIVIDENDS PER CLASS A UNIT

 

$

0.90

 

$

0.85

 

 

See notes to consolidated financial statements.

 

4

 


VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For The Three Months Ended
March 31,

 

(Amounts in thousands)

 

2008

 

2007

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

459,432

 

$

188,923

 

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

 

 

 

 

 

 

 

Write-off of deferred tax liability

 

 

(222,174

)

 

 

Depreciation and amortization (including amortization of debt issuance costs)

 

 

156,955

 

 

112,956

 

Equity in income of partially owned entities, including Alexander’s and Toys

 

 

(92,529

)

 

(81,285

)

Net gain on sale of Americold

 

 

(112,690

)

 

 

Write-off of pre-development costs

 

 

34,200

 

 

 

Amortization of below market leases, net

 

 

(23,264

)

 

(14,005

)

Straight-lining of rental income

 

 

(22,050

)

 

(20,475

)

Net losses (gains) from derivative positions

 

 

18,362

 

 

(9,380

)

Distributions of income from partially owned entities

 

 

9,978

 

 

6,902

 

Marketable Equity Security – impairment loss

 

 

9,073

 

 

 

Minority interest of partially owned entities

 

 

(3,981

)

 

(3,883

)

Other non-cash adjustments

 

 

(3,302

)

 

6,699

 

Costs of acquisitions not consummated

 

 

2,283

 

 

8,807

 

Net gains on sale of real estate

 

 

(580

)

 

 

Net gains on dispositions of wholly owned and partially owned assets
other than depreciable real estate

 

 

 

 

(909

)

Loss on early extinguishment of debt and write-off of unamortized financing costs

 

 

 

 

5,969

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

3,686

 

 

(2,506

)

Accounts payable and accrued expenses

 

 

46,443

 

 

(70,987

)

Other assets

 

 

(50,270

)

 

(46,600

)

Other liabilities

 

 

12,003

 

 

1,037

 

Net cash provided by operating activities

 

 

221,575

 

 

81,263

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Development costs and construction in progress

 

 

(106,688

)

 

(49,438

)

Proceeds from sales of real estate and real estate related investments

 

 

199,331

 

 

 

Investments in partially owned entities

 

 

(74,552

)

 

(91,037

)

Additions to real estate

 

 

(50,838

)

 

(38,204

)

Distributions of capital from partially owned entities

 

 

22,163

 

 

2,812

 

Proceeds received from repayment of notes and mortgage loans receivable

 

 

19,099

 

 

40,150

 

Acquisitions of real estate and other

 

 

(4,874

)

 

(878,654

)

Investments in notes and mortgage loans receivable

 

 

(4,632

)

 

(135,615

)

Deposits in connection with real estate acquisitions, including pre-acquisition costs

 

 

(1,623

)

 

(125,359

)

Proceeds from sales of, and return of investment in, marketable securities

 

 

174

 

 

2,217

 

Cash restricted, including mortgage escrows

 

 

866

 

 

9,117

 

Purchases of marketable securities

 

 

(830

)

 

(43,685

)

Proceeds received from Officer loan repayment

 

 

 

 

2,000

 

Net cash used in investing activities

 

 

(2,404

)

 

(1,305,696

)

 

See notes to consolidated financial statements.

 

5

 


VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

 

(Amounts in thousands)

 

For The Three Months
Ended March 31,

 

 

 

2007

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

956,499

 

 

2,286,725

 

Repayments of borrowings

 

 

(605,342

)

 

(156,759

)

Distributions paid to Class A unitholders

 

 

(151,914

)

 

(143,228

)

Dividends paid on preferred unitholders

 

 

(19,236

)

 

(19,362

)

Debt issuance costs

 

 

(13,526

)

 

(6,768

)

Proceeds from exercise of Vornado share options and other

 

 

10,307

 

 

1,835

 

Distributions to minority partners

 

 

(9,480

)

 

 

Purchase of marketable securities in connection with the legal defeasance of mortgage notes payable

 

 

 

 

(86,653

)

Net cash provided by financing activities

 

 

167,308

 

 

1,875,790

 

Net increase in cash and cash equivalents

 

 

386,479

 

 

651,357

 

Cash and cash equivalents at beginning of period

 

 

1,154,595

 

 

2,233,317

 

Cash and cash equivalents at end of period

 

$

1,541,074

 

$

2,884,674

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

Cash payments for interest (including capitalized interest of $16,219 and $10,368)

 

$

135,872

 

$

123,753

 

Cash payments for income taxes

 

$

1,800

 

$

907

 

 

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

 

Financing assumed in acquisitions

 

$

 

$

25,228

 

Marketable securities transferred in connection with the legal defeasance of mortgage notes payable

 

 

 

 

86,653

 

Mortgage notes payable legally defeased

 

 

 

 

83,542

 

Unrealized net (loss) gain on securities available for sale

 

 

(10,483

)

 

4,124

 

 

See notes to consolidated financial statements.

 

6

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Organization

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 90.1% of the common limited partnership interest in, the Operating Partnership at March 31, 2008. All references to “our,” “we,” “us,” the “Operating Partnership” and the Company refer to Vornado Realty L.P. and its consolidated subsidiaries.

 

Substantially all of Vornado Realty Trust’s assets are held through subsidiaries of the Operating Partnership. Accordingly, Vornado Realty Trust’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors.

 

2.

Basis of Presentation

The accompanying consolidated financial statements are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2008, are not necessarily indicative of the operating results for the full year.

 

The accompanying consolidated financial statements include the accounts of Vornado Realty L.P. and its majority-owned subsidiaries, as well as certain partially owned entities in which we own more than 50%, unless a partner has shared board and management representation and substantive participation rights on all significant business decisions, or 50% or less when (i) we are the primary beneficiary and the entity qualifies as a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities (“FIN 46R”), or (ii) when we are a general partner that meets the criteria under Emerging Issues Task Force (“EITF”) Issue No. 04-5. All significant inter-company amounts have been eliminated. Equity interests in partially owned entities are accounted for under the equity method of accounting when they do not meet the criteria for consolidation and our ownership interest is greater than 20%. When partially owned investments are in partnership form, the 20% threshold for equity method accounting is generally reduced to 3% to 5%, based on our ability to influence the operating and financial policies of the partnership. Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities. Investments in partially owned entities that do not meet the criteria for consolidation or for equity method accounting are accounted for on the cost method.

 

We have made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Certain prior year balances related to discontinued operations and income tax expense (benefit) have been reclassified in order to conform to current year presentation.

 

In connection with purchase accounting for H Street, in July 2005 and April 2007 we recorded an aggregate of $222,174,000 of deferred tax liabilities representing the differences between the tax basis and the book basis of the acquired assets and liabilities multiplied by the effective tax rate. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we have completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, the deferred tax liabilities were eliminated and we recognized $222,174,000 as an income tax benefit on our consolidated statement of income.

 

7

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

3.

Recently Issued Accounting Literature

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for financial assets and liabilities on January 1, 2008.  The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain non-financial assets and liabilities until January 1, 2009. This standard is not expected to materially affect how we determine fair value, but may result in certain additional disclosures. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and Level 3 – unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Financial assets and liabilities measured at fair value in our consolidated financial statements consist of (i) marketable equity securities–available for sale, (ii) derivative positions in marketable equity securities and (iii) the assets of our officers’ deferred compensation plan (primarily marketable equity securities and equity investments in partially owned entities), for which there is a corresponding liability on our consolidated balance sheet. Financial assets and liabilities carried at fair value as of March 31, 2008 are presented in the table below based on the hierarchy used to measure fair value:

 

 

 

 

Fair Value Hierarchy

 

(Amounts in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Marketable equity securities

$

207,932

$

207,932

 

$

 

$

 

Officers’ deferred compensation plan assets

 

71,258

 

27,573

 

 

 

 

43,685

(2)

Interest rate caps

 

49

 

 

 

49

 

 

 

Total Assets, reported at fair value (1)

$

279,239

$

235,505

 

$

49

 

$

43,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative positions in marketable equity securities

$

1,528

$

 

$

1,528

 

$

 

Officers’ deferred compensation plan liabilities

 

71,258

 

27,573

 

 

 

 

43,685

 

Total Liabilities, reported at fair value (1)

$

72,786

$

27,573

 

$

1,528

 

$

43,685

 

 

___________________

(1)

We chose not to elect the fair value option prescribed by SFAS 159 for our financial assets and liabilities that had not been previously carried at fair value. These financial assets and liabilities include our outstanding debt, accounts receivable, accounts payable and investments in partially owned entities.

(2)

The fair value of these assets was $50,578 at December 31, 2007. The $6,893 decrease from the December 31, 2007 balance is due to a decline in fair value during the three months ended March 31, 2008.

 

In September 2006, the FASB issued Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of SFAS No. 87, 88, 106 and 132R (“SFAS 158”). SFAS 158 requires an employer to (i) recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status; (ii) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The adoption of the requirement to recognize the funded status of a benefit plan and the disclosure requirements as of December 31, 2006 did not have a material effect on our consolidated financial statements. The requirement to measure plan assets and benefit obligations to determine the funded status as of the end of the fiscal year and to recognize changes in the funded status in the year in which the changes occur is effective on January 1, 2009. The adoption of the measurement date provisions of this standard is not expected to have a material effect on our consolidated financial statements.

 

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value.  SFAS 159 was effective on January 1, 2008. We have not elected the fair value option for any of our existing financial instruments on the effective date and have not determined whether or not we will elect this option for any eligible financial instruments we acquire in the future.

 

 

8

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

3.

Recently Issued Accounting Literature - continued

In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R also broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and stipulates that acquisition related costs be expensed rather than included as part of the basis of the acquisition. SFAS 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for all transactions entered into on or after January 1, 2009. The adoption of this standard on January 1, 2009 could materially impact our future financial results to the extent that we acquire significant amounts of real estate, as related acquisition costs will be expensed as incurred compared to our current practice of capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.

 

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective on January 1, 2009. We are currently evaluating the impact SFAS 160 will have on our consolidated financial statements.

 

In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.

 

In March 2008, the FASB re-affirmed the scope of a previously proposed FASB Staff Position (the “FSP”) that, if adopted, would affect the accounting for our convertible and exchangeable senior debentures and Series D-13 convertible preferred units. The FSP would require the initial proceeds from the sale of our convertible and exchangeable senior debentures and Series D-13 convertible preferred units to be allocated between a liability component and an equity component. The resulting discount would be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP would be effective for our fiscal year beginning on January 1, 2009 and require retroactive application. The adoption of the FSP on January 1, 2009 would result in the recognition of an aggregate unamortized debt discount of $170,927,000 (as of March 31, 2008) on our consolidated balance sheet and additional interest expense on our consolidated statements of income. Our current estimate of the incremental interest expense for each reporting period is as follows:

 

(Amounts in thousands)

 

 

 

 

For the year ended December 31:

 

 

 

 

2005

 

$

3,783

 

2006

 

 

6,739

 

2007

 

 

31,370

 

2008

 

 

39,014

 

2009

 

 

42,062

 

2010

 

 

44,571

 

2011

 

 

45,680

 

2012

 

 

9,103

 

 

 

9

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

4.

1290 Avenue of the Americas and 555 California Street

On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas, a 2,000,000 square foot Manhattan office building located on the block-front between 51st and 52nd Street on Avenue of the Americas, and the three-building 555 California Street complex (“555 California Street”) containing 1,800,000 square feet, known as the Bank of America Center, located at California and Montgomery Streets in San Francisco’s financial district. The purchase price for our 70% interest in the real estate, excluding $225,394,000 of net working capital and closing costs, was approximately $1.8 billion, consisting of $1.0 billion of cash and $797,000,000 of existing debt. Our share of the debt is comprised of $308,000,000 secured by 1290 Avenue of the Americas and $489,000,000 secured by 555 California Street. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump. The operations of 1290 Avenue of the Americas are included in the New York Office segment and the operations of 555 California Street are included in the other segment. We consolidate the accounts of these properties into our consolidated financial statements from the date of acquisition.

 

In August 2005, Mr. Trump brought a lawsuit in the New York State Supreme Court against, among others, the general partners of the partnerships referred to above.   Mr. Trump’s claims arose out of a dispute over the sale price of, and use of proceeds from, the sale of properties located on the former Penn Central rail yards between West 59th and 72nd Streets in Manhattan which were formerly owned by the partnerships. In decisions dated September 14, 2005 and July 24, 2006, the Court denied various of Mr. Trump’s motions and ultimately dismissed all of Mr. Trump’s claims, except for his claim seeking access to books and records.  In a decision dated October 1, 2007, the Court determined that Mr. Trump had already received access to the books and records to which he was entitled, with the exception of certain documents which were subsequently delivered to Mr. Trump. Mr. Trump has sought re-argument and renewal on, and filed a notice of appeal in connection with, his dismissed claims.  

 

In connection with the acquisition, we agreed to indemnify the sellers for liabilities and expenses arising out of Mr. Trump’s claim that the general partners of the partnerships we acquired did not sell the rail yards at a fair price or could have sold the rail yards for a greater price and any other claims asserted in the legal action; provided however, that if Mr. Trump prevails on certain claims involving partnership matters, other than claims relating to sale price, the sellers will be required to reimburse us for certain costs related to those claims. We believe that the claims relating to the sale price are without merit. All other allegations are not asserted as a basis for damages and regardless of merit would not be material to our consolidated financial statements.

 

The following table presents our pro forma condensed consolidated statement of income for the quarter ended March 31, 2007, as if the above transaction occurred on January 1, 2007. The unaudited pro forma information is not necessarily indicative of what our actual results would have been had the transaction been consummated on January 1, 2007, nor does it represent the results of operations for any future periods. In our opinion all adjustments necessary to reflect this transaction have been made.

 

 

 

 

Condensed Consolidated
Statements of Income

 

For the Quarter Ended
March 31,

 

(Amounts in thousands, except per unit amounts)

 

Actual
2008

 

Pro Forma
2007

 

Revenues

 

$

652,521

 

$

601,824

 

Net income

 

$

459,432

 

 

177,992

 

Preferred unit distributions

 

 

(19,092

)

 

(18,806

)

Net income applicable to Class A units

 

$

440,340

 

$

159,186

 

Net income per Class A unit – basic

 

$

2.62

 

$

0.96

 

Net income per Class A unit - diluted

 

$

2.49

 

$

0.90

 

 

 

10

 


 

 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

5.

Investments in Partially Owned Entities

 

Toys “R” Us (“Toys”)

 

As of March 31, 2008, we own 32.7% of Toys. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income. Because Toys’ fiscal year ends on the Saturday nearest January 31, we record our 32.7% share of Toys’ net income of loss on a one quarter lag basis. Below is a summary of Toys’ latest available financial information.

 

(in millions)

 

Balance as of

 

Balance Sheet:

 

 

 

Total Assets

 

$

11,970

 

$

11,790

 

Total Liabilities

 

$

10,635

 

$

10,637

 

Total Equity

 

$

1,335

 

$

1,153

 

 

 

 

For the Quarterly Period Ended

 

Income Statement:

 

 

 

Total Revenues

 

$

5,827

 

$

5,679

 

Net Income

 

$

240

 

$

173

 

 

 

 

 

 

 

 

 

 

The Lexington Master Limited Partnership (“Lexington MLP”)

 

As of March 31, 2008, we own 8,149,593 limited partnership units of Lexington MLP which are exchangeable on a one-for-one basis into common shares of Lexington Realty Trust (“Lexington”) (NYSE: LXP) or a 7.5% limited partnership interest. We record our pro rata share of Lexington MLP’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.

 

Based on Lexington’s March 31, 2008 closing share price of $14.41 on the NYSE, the market value (“fair value” pursuant to SFAS 157) of our investment in Lexington MLP is $117,436,000, or $38,966,000 below the carrying amount on our consolidated balance sheet. We have concluded that as of March 31, 2008, the decline in the value of our investment is not “other-than-temporary.”

 

GMH Communities L.P. (“GMH”)

 

As of March 31, 2008, we own 7,337,857 GMH limited partnership units, which are exchangeable on a one-for-one basis into common shares of GMH Communities Trust (“GCT”) (NYSE: GCT), and 2,517,247 common shares of GCT, or 13.8% of the limited partnership interest of GMH. We account for our investment in GMH on the equity method and record our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT files its financial statements.

 

On February 12, 2008, GCT announced that it has entered into two definitive agreements in connection with the sale of its military and student housing divisions for an aggregate sales price of approximately $9.61 per share/unit. In addition, GCT anticipates selling its remaining assets prior to the closing of the merger. The merger, which has been unanimously approved by GCT’s Board of Trustees, is subject to GCT shareholder approval and customary closing conditions.

 

Based on GCT’s March 31, 2008 closing share price of $8.68 on the NYSE, the market value (“fair value” pursuant to SFAS 157) of our investment in GMH and GCT is $85,542,000, or $16,092,000 below the carrying amount of $10.31 per share/unit on our consolidated balance sheet. We have concluded as of March 31, 2008, the decline in value of our investments is not “other-than-temporary” based on the aggregate value anticipated to be received as a result of the transaction described above, including the additional consideration from the sale of GCT’s remaining assets. Beginning on January 1, 2008, we are reserving 100% of our share of GMH’s net income (which amounted to $687,000 for the three months ended March 31, 2008) until the sale transactions have been finalized.

 

11

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

5.

Investments in Partially Owned Entities - continued

 

Alexander’s (NYSE: ALX)

 

As of March 31, 2008, we own 32.8% of the outstanding common stock of Alexander’s. We manage, lease and develop Alexander’s properties pursuant to agreements, which expire in March of each year and are automatically renewable. As of March 31, 2008, Alexander’s owed us $41,192,000 for fees under these agreements.

 

Based on Alexander’s March 31, 2008 closing share price on the NYSE of $354.50, the market value (“fair value” pursuant to SFAS 157) of our investment in Alexander’s is $586,367,000, or $458,551,000 in excess of the carrying amount on our consolidated balance sheet.

 

India Real Estate Ventures

 

As of March 31, 2008, we are a partner in four joint ventures established to develop real estate in India’s leading cities. During the three months ended March 31, 2008, we funded $32,250,000 of cash to one of the four ventures, the India Property Fund L.P. (the “Fund”), and have a remaining capital commitment to the Fund of $82,750,000. As of March 31, 2008, and December 31, 2007, our ownership interest in the Fund was 36.5% and 50.6%, respectively. Based on the reduction of our ownership interest in 2008, we no longer consolidate the accounts of the Fund into our consolidated financial statements and beginning January 1, 2008 we account for our investment in the Fund on the equity method. Our aggregate investment in these four ventures is $79,405,000 as of March 31, 2008, and we are committed to fund an additional $96,750,000 to these four ventures.

 

12

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

5.

Investments in Partially Owned Entities - continued

The carrying amount of our investments in partially owned entities and income (loss) recognized from such investments are as follows:

Investments:
(Amounts in thousands)

 

Balance as of

 

 

 

 

 

Toys

 

$

377,264

 

$

298,089

 

Lexington MLP

 

$

156,402

 

$

160,868

 

Partially Owned Office Buildings

 

 

263,622

 

 

215,153

 

GMH

 

 

101,634

 

 

103,260

 

India Real Estate Ventures

 

 

79,405

 

 

123,997

 

Alexander’s

 

 

127,816

 

 

122,797

 

Beverly Connection Joint Venture (“Beverly Connection”)

 

 

94,632

 

 

91,302

 

Other Equity Method Investments

 

 

369,990

 

 

389,365

 

 

 

$

1,193,501

 

$

1,206,742

 

 

 

Our Share of Net Income (Loss):
(Amounts in thousands)

 

For the Three Months
Ended March 31,

 

Toys:

 

2008

 

2007

 

32.7% in 2008 and 32.9% in 2007 share of equity in net income

 

$

78,355

 

$

56,815

 

Interest and other income

 

 

2,007

 

 

1,846

 

 

 

$

80,362

 

$

58,661

 

Alexander’s:

 

 

 

 

 

 

 

32.8% share of:

 

 

 

 

 

 

 

Equity in net income before stock appreciation rights compensation (expense) income

 

$

5,127

 

$

6,116

 

Stock appreciation rights compensation (expense) income

 

 

(205

)

 

4,694

 

Equity in net income

 

 

4,922

 

 

10,810

 

Management and leasing fees

 

 

2,127

 

 

2,181

 

Development fees

 

 

880

 

 

528

 

 

 

$

7,929

 

$

13,519

 

Beverly Connection:

 

 

 

 

 

 

 

50% share of equity in net loss

 

$

(1,691

)

$

(1,327

)

Interest and fee income

 

 

3,415

 

 

2,277

 

 

 

 

1,724

 

 

950

 

Lexington MLP – 7.5% in 2008 and 7.4% in 2007 share of equity in net income (1)

 

 

1,827

 

 

 

H Street partially owned entities – 50% share of equity in net income

 

 

 

 

2,834

(2)

GMH – 13.8% in 2008 and 13.5% in 2007 share of equity in net loss

 

 

 

 

(312

)

India Real Estate Ventures – 4% to 36.5% share of equity in net loss

 

 

(414

)

 

 

Other (3) (4)

 

 

(33,490

)

 

5,223

 

 

 

$

(30,353

)

$

8,695

 

_________________________

See notes on following page.

13

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

5.

Investments in Partially Owned Entities - continued

Notes to preceding tabular information:

 

 

(1)

Effective as of the December 31, 2006 merger of Newkirk Master Limited Partnership with Lexington MLP, we recognize our share of Lexington MLP’s net earnings on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements. Accordingly, our “equity in net income or loss from partially owned entities” for the three months ended March 31, 2007 did not include our share of Lexington MLP’s net income or loss for its first quarter ended March 31, 2007.

 

 

(2)

Represents our 50% share of equity in net income from January 1, 2007 through March 31, 2007. On April 30, 2007, we acquired the remaining 50% interest of these entities and began to consolidate the accounts into our consolidated financial statements and no longer account for this investment under the equity method.

 

 

(3)

Includes our equity in net earnings of partially owned entities including, partially owned office buildings in New York and Washington, DC, the Monmouth Mall, Dune Capital LP, Verde Group LLC, and others.

 

 

(4)

The three months ended March 31, 2008 includes a $34,200 write-off for our share of two joint ventures’ pre-development costs, of which $23,000 represents our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project.

 

 

14

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

5.

Investments in Partially Owned Entities - continued

Below is a summary of the debt of partially owned entities as of March 31, 2008 and December 31, 2007, none of which is guaranteed by us.

 

 

100% of
Partially Owned Entities Debt


(Amounts in thousands)

 

 

Toys (32.7% interest) (as of February 3, 2008 and November 3, 2007, respectively):

 

 

 

 

 

 

$1.3 billion senior credit facility, due 2010, LIBOR plus 3.00%
(6.12% at March 31, 2008)

 

$

1,300,000

 

$

1,300,000

$2.0 billion credit facility, due 2010, LIBOR plus 1.00%-3.75%

 

 

 

 

489,000

Mortgage loan, due 2010, LIBOR plus 1.30% (4.12% at March 31, 2008)

 

 

800,000

 

 

800,000

$804 million secured term loan facility, due 2012, LIBOR plus 4.25%
(9.10% at March 31, 2008)

 

 

797,000

 

 

797,000

Senior U.K. real estate facility, due 2013, with interest at 5.02%

 

 

696,000

 

 

741,000

7.625% bonds, due 2011 (Face value – $500,000)

 

 

482,000

 

 

481,000

7.875% senior notes, due 2013 (Face value – $400,000)

 

 

374,000

 

 

373,000

7.375% senior notes, due 2018 (Face value – $400,000)

 

 

332,000

 

 

331,000

4.51% Spanish real estate facility, due 2013

 

 

196,000

 

 

193,000

$181 million unsecured term loan facility, due 2013, LIBOR plus 5.00%

(8.00% at March 31, 2008)

 

 

180,000

 

 

180,000

Japan bank loans, due 2011-2014, 1.20%-2.80%

 

 

154,000

 

 

161,000

Japan short-term borrowings, due 2011
(weighted average rate of 1.05% at March 31, 2008)

 

 

137,000

 

 

243,000

6.84% Junior U.K. real estate facility, due 2013

 

 

124,000

 

 

132,000

4.51% French real estate facility, due 2013

 

 

95,000

 

 

93,000

8.750% debentures, due 2021 (Face value – $22,000)

 

 

21,000

 

 

21,000

Note at an effective cost of 2.23% due in semi-annual installments through 2008

 

 

21,000

 

 

19,000

Multi-currency revolving credit facility, due 2010, LIBOR plus 1.50%-2.00%

 

 

 

 

28,000

Other

 

 

37,000

 

 

41,000

 

 

 

5,746,000

 

 

6,423,000

Alexander’s (32.8% interest):

 

 

 

 

 

 

731 Lexington Avenue mortgage note payable collateralized by the office space,
due in February 2014, with interest at 5.33% (prepayable with yield maintenance)

 

 

381,184

 

 

383,670

731 Lexington Avenue mortgage note payable, collateralized by the retail space,
due in July 2015, with interest at 4.93% (prepayable with yield maintenance)

 

 

320,000

 

 

320,000

Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011,
with interest at 7.46% (prepayable with yield maintenance)

 

 

202,483

 

 

203,456

Rego Park mortgage note payable, due in June 2009, with interest at 7.25%
(prepayable without penalty after March 2009)

 

 

79,058

 

 

79,285

Rego Park construction loan payable, due in December 2010, LIBOR plus 1.20%
(4.32% at March 31, 2008)

 

 

81,662

 

 

55,786

Paramus mortgage note payable, due in October 2011, with interest at 5.92%
(prepayable without penalty)

 

 

68,000

 

 

68,000

 

 

 

1,132,387

 

 

1,110,197

Lexington MLP (7.5% interest) (as of December 31, 2007 and September 30, 2007, respectively):
Portion of first mortgages collateralized by the partnership’s real estate,
due from 2008 to 2024, with a weighted average interest rate of 5.89%
at March 31, 2008 (various prepayment terms)

 

 

3,047,550

 

 

3,320,261

 

 

 

 

 

 

 

GMH (13.8% interest) (as of December 31, 2007 and September 30, 2007, respectively):
Mortgage notes payable, due from 2008 to 2024, with a weighted average interest rate of 5.45% (various prepayment terms)

 

 

1,015,136

 

 

995,818

 

 

 

 

 

 

 

 

 

15

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

5.

Investments in Partially Owned Entities - continued

 

(Amounts in thousands)

 

100% of
Partially Owned Entities Debt

 
 

March 31,
2008

 

December 31,
2007

 


Partially owned office buildings:

 

 

Kaempfer Properties (2.5% and 5.0% interests in two partnerships) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2011 to 2031, with a weighted average interest rate of 6.70% at March 31, 2008 (various prepayment terms)

$

143,980

 

$

144,340

 

Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%

 

63,740

 

 

64,035

 

330 Madison Avenue (25% interest) mortgage note payable, due in May 2008,
with interest at 6.52% (prepayable with yield maintenance)

 

60,000

 

 

60,000

 

Rosslyn Plaza (46% interest) mortgage note payable, due in December 2009, LIBOR plus 1.0% (4.12% at March 31, 2008)

 

56,680

 

 

56,680

 

825 Seventh Avenue (50% interest) mortgage note payable, due in October 2014,
with interest at 8.07% (prepayable with yield maintenance)

 

21,746

 

 

21,808

 

West 57th Street (50% interest) mortgage note payable, due in October 2009, with interest
at 4.94% (prepayable without penalty after July 2009)

 

29,000

 

 

29,000

 

India Real Estate Ventures:

 

 

 

 

 

 

TCG Urban Infrastructure Holdings (25% interest) mortgage notes payable, collateralized by the entity’s real estate, due from 2008 to 2022, with a weighted average interest rate of 12.87% at March 31, 2008 (various prepayment terms)

 

137,609

 

 

136,431

 

India Property Fund L.P. (36.5% interest) $82.5 million secured revolving credit facility, due in June 2008, LIBOR plus .80% (3.51% at March 31, 2008) (see note (8) on page 21)

 

77,888

 

 

 

Verde Realty Master Limited Partnership (8.5% interest) mortgage notes payable,
collateralized by the partnerships’ real estate, due from 2008 to 2037, with a weighted average interest rate of 6.16% at March 31, 2008 (various prepayment terms)

 

509,748

 

 

487,122

 

Green Courte Real Estate Partners, LLC (8.3% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2008 to 2015, with a weighted average interest rate of 5.73% at March 31, 2008 (various prepayment terms)

 

255,704

 

 

225,704

 

Beverly Connection (50% interest) mortgage and mezzanine loans payable, with a weighted average interest rate of 8.55%, $70,000 of which is due to Vornado

 

170,000

 

 

170,000

 

Monmouth Mall (50% interest) mortgage note payable, due in September 2015, with interest
at 5.44% (prepayable with yield maintenance)

 

165,000

 

 

165,000

 

San Jose, California Ground-up Development (45% interest) construction loan, due in March 2009, with a one-year extension option LIBOR plus 1.75% (4.88% at March 31, 2008)

 

107,914

 

 

101,045

 

Wells/Kinzie Garage (50% interest) mortgage note payable, due in June 2009, with interest at 7.03%

 

14,334

 

 

14,422

 

Orleans Hubbard Garage (50% interest) mortgage note payable, due in April 2009,
with interest at 7.03%

 

8,990

 

 

9,045

 

Other

 

280,407

 

 

282,320

 

 

 

 

Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $3,093,044,000 and $3,289,873,000 as of March 31, 2008 and December 31, 2007, respectively.

 

16

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

6.

Mezzanine Loans Receivable

 

The following is a summary of our investments in mezzanine loans as of March 31, 2008 and December 31, 2007.

 

(Amounts in thousands)

 

 

 

Interest Rate
as of

 

Carrying Amount as of

 

Mezzanine Loans Receivable:

 

Maturity

 

 

 

 

Tharaldson Lodging Companies

 

04/09

 

6.94%

 

$

76,292

 

$

76,219

 

Riley HoldCo Corp.

 

02/15

 

10.0%

 

 

74,296

 

 

74,268

 

280 Park Avenue

 

06/16

 

10.25%

 

 

73,750

 

 

73,750

 

Equinox

 

02/13

 

14.0%

 

 

75,798

 

 

73,162

 

MPH, net of a valuation allowance of $46,700 and $57,000, respectively (1)

 

 

 

 

19,300

 

 

9,000

 

Other

 

11/08-08/15

 

4.75%-15.0%

 

 

172,432

 

 

185,940

 

 

 

 

 

 

 

$

491,868

 

$

492,339

 

_____________________

 

 

(1)

On June 5, 2007, we acquired a 42% interest in two MPH mezzanine loans totaling $158,700, for $66,000 in cash. The loans, which were due on February 8, 2008 and have not been repaid, are subordinate to $2.9 billion of mortgage and other debt and secured by the equity interests in four New York City properties: Worldwide Plaza, 1540 Broadway office condominium, 527 Madison Avenue and Tower 56. As of December 31, 2007, we reduced the net carrying amount of the loans to $9,000, by recognizing a $57,000 non-cash charge which was included as a reduction of “interest and other investment income” on our consolidated statement of income. On April 2, 2008, we sold a sub-participation interest in the loans for $19,300. The sub-participation did not meet the criteria for sale accounting under Statement of Financial Accounting Standard No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) because the sub-participant is not free to pledge or exchange the asset. As of March 31, 2008, we have reduced our valuation allowance from $57,000 to $46,700, resulting in the recognition of $10,300 of “interest and other investment income” in the quarter ended March 31, 2008.

 

17

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

7.

Identified Intangible Assets, Intangible Liabilities and Goodwill

The following summarizes our identified intangible assets, intangible liabilities (deferred credit) and goodwill as of March 31, 2008 and December 31, 2007.

 

 

 

Balance as of

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Identified intangible assets (included in other assets):

 

 

 

 

 

 

 

Gross amount

 

$

772,730

 

$

727,205

 

Accumulated amortization

 

 

(196,298

)

 

(163,688

)

Net

 

$

576,432

 

$

563,517

 

Goodwill (included in other assets):

 

 

 

 

 

 

 

Gross amount

 

$

4,345

 

$

4,345

 

Identified intangible liabilities (included in deferred credit):

 

 

 

 

 

 

 

Gross amount

 

$

980,329

 

$

977,574

 

Accumulated amortization

 

 

(192,760

)

 

(163,473

)

Net

 

$

787,569

 

$

814,101

 

 

Amortization of acquired below market leases, net of acquired above market leases (a component of rental income) was $23,264,000 and $14,005,000 for the three months ended March 31, 2008 and 2007, respectively. Estimated annual amortization of acquired below market leases, net of acquired above market leases for each of the five succeeding years is as follows:

 

(Amounts in thousands)

 

 

 

 

2009

 

$

66,576

 

2010

 

 

59,305

 

2011

 

 

56,037

 

2012

 

 

52,351

 

2013

 

 

44,558

 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $24,581,000 and $6,933,000 for the three months ended March 31, 2008 and 2007, respectively. Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years is as follows:

 

(Amounts in thousands)

 

 

 

 

2009

 

$

58,891

 

2010

 

 

56,247

 

2011

 

 

53,878

 

2012

 

 

49,242

 

2013

 

 

41,140

 

 

We are a tenant under ground leases for certain properties acquired during 2007 and 2006. Amortization of these acquired below market leases resulted in an increase to rent expense of $533,000 and $384,000 for the three months ended March 31, 2008 and 2007, respectively. Estimated annual amortization of these below market leases for each of the five succeeding years is as follows:

 

(Amounts in thousands)

 

 

 

 

2009

 

$

2,133

 

2010

 

 

2,133

 

2011

 

 

2,133

 

2012

 

 

2,133

 

2013

 

 

2,133

 

 

18

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

8.

Debt

The following is a summary of our notes and mortgages payable:

 

(Amounts in thousands)

 

 

 

Interest Rate

 

Balance as of

 

Fixed Interest:

 

Maturity

 

 

 

December 31,2007

 

New York Office:

 

 

 

 

 

 

 

 

 

 

 

1290 Avenue of the Americas

 

01/13

 

5.97%

 

$

451,796

 

$

454,166

 

350 Park Avenue

 

01/12

 

5.48%

 

 

430,000

 

 

430,000

 

770 Broadway

 

03/16

 

5.65%

 

 

353,000

 

 

353,000

 

888 Seventh Avenue

 

01/16

 

5.71%

 

 

318,554

 

 

318,554

 

Two Penn Plaza

 

02/11

 

4.97%

 

 

290,848

 

 

292,000

 

909 Third Avenue

 

04/15

 

5.64%

 

 

216,469

 

 

217,266

 

Eleven Penn Plaza

 

12/14

 

5.20%

 

 

209,475

 

 

210,338

 

 

 

 

 

 

 

 

 

 

 

 

 

Washington DC Office:

 

 

 

 

 

 

 

 

 

 

 

Skyline Place

 

02/17

 

5.74%

 

 

678,000

 

 

678,000

 

Warner Building

 

05/16

 

6.26%

 

 

292,700

 

 

292,700

 

1215, 1225, 1235 Clark Street, 200 12th Street and 251 18th Street

 

10/10-08/13

 

6.75%-7.09%

 

 

202,951

 

 

203,679

 

River House Apartment Complex (1)

 

04/15

 

5.43%

 

 

195,546

 

 

46,339

 

2011, 2032, 2345 Crystal Dive

 

09/08-08/13

 

6.66%-7.08%

 

 

149,352

 

 

150,084

 

1550, 1750 Crystal Drive and 241 18th Street

 

10/10-11/14

 

6.82%-7.08%

 

 

132,922

 

 

133,471

 

Bowen Building

 

06/16

 

6.14%

 

 

115,022

 

 

115,022

 

Reston Executive I, II and III

 

01/13

 

5.57%

 

 

93,000

 

 

93,000

 

1101 17th , 1140 Connecticut, 1730 M and 1150 17th Street

 

08/10

 

6.74%

 

 

89,156

 

 

89,514

 

Universal Buildings

 

06/14

 

5.09%

 

 

61,966

 

 

62,613

 

1750 Pennsylvania Avenue

 

06/12

 

7.26%

 

 

47,045

 

 

47,204

 

1800, 1851, 1901 South Bell Street

 

12/11

 

6.91%

 

 

33,681

 

 

35,558

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

Cross collateralized mortgages payable on
42 shopping centers

 

03/10

 

7.93%

 

 

454,013

 

 

455,907

 

Springfield Mall (including present value of
purchase option)

 

04/13

 

5.45%

 

 

255,794

 

 

256,796

 

Green Acres Mall (2)

 

02/08

 

6.75%

 

 

 

 

137,331

 

Montehiedra Town Center

 

06/16

 

6.04%

 

 

120,000

 

 

120,000

 

Broadway Mall

 

06/13

 

6.42%

 

 

96,506

 

 

97,050

 

828-850 Madison Avenue Condominium

 

06/18

 

5.29%

 

 

80,000

 

 

80,000

 

Las Catalinas Mall

 

11/13

 

6.97%

 

 

61,798

 

 

62,130

 

Other

 

05/09-11/34

 

4.00%-7.57%

 

 

165,351

 

 

165,299

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise Mart:

 

 

 

 

 

 

 

 

 

 

 

Merchandise Mart

 

12/16

 

5.57%

 

 

550,000

 

 

550,000

 

High Point Complex

 

08/16

 

6.34%

 

 

221,222

 

 

221,258

 

Boston Design Center

 

09/15

 

5.02%

 

 

71,498

 

 

71,750

 

Washington Design Center

 

11/11

 

6.95%

 

 

45,508

 

 

45,679

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

555 California Street

 

05/10-09/11

 

5.97%

 

 

719,846

 

 

719,568

 

Industrial Warehouses

 

10/11

 

6.95%

 

 

25,559

 

 

25,656

 

Total Fixed Interest Notes and Mortgages Payable

 

 

 

5.97%

 

$

7,228,578

 

$

7,230,932

 

_____________________

See notes on page 21.

19

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

8.

Debt - continued

 

(Amounts in thousands)

 

 

 

 

Interest Rate
as of

 

Balance as of

 

Notes and Mortgages Payable:

Maturity

 

Spread over
LIBOR

 

 

 

 

Variable Interest:

 

 

 

 

 

 

 

 

 

 

 

 

New York Office:

 

 

 

 

 

 

 

 

 

 

 

 

Manhattan Mall

02/12

 

L+55

 

3.37%

 

$

232,000

 

$

232,000

 

866 UN Plaza

05/11

 

L+40

 

2.96%

 

 

44,978

 

 

44,978

 

Washington, DC Office:

 

 

 

 

 

 

 

 

 

 

 

 

2101 L Street (3)

02/13

 

L+120

 

3.81%

 

 

150,000

 

 

 

Courthouse Plaza One and Two

01/15

 

L+75

 

3.86%

 

 

73,697

 

 

74,200

 

River House Apartments (1)

04/18

 

(1)

 

3.66%

 

 

64,000

 

 

 

Commerce Executive III, IV and V

07/09

 

L+55

 

3.67%

 

 

50,223

 

 

50,223

 

1999 K Street (4)

12/10

 

L+130

 

3.95%

 

 

30,997

 

 

 

220 20th Street (5)

01/11

 

L+115

 

3.75%

 

 

7,120

 

 

 

West End 25 (6)

02/11

 

L+130

 

3.86%

 

 

6,506

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

Green Acres Mall (2)

02/13

 

L+140

 

4.52%

 

 

335,000

 

 

 

Bergen Town Center (7)

03/13

 

L+150

 

4.06%

 

 

157,755

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

220 Central Park South

11/10

 

L+235 – L+245

 

5.50%

 

 

128,998

 

 

128,998

 

India Property Fund L.P. $82.5 million
secured revolving credit facility (8)

 

L+80

 

 

 

 

 

82,500

 

Other

07/08-02/10

 

Various

 

5.41%

 

 

103,748

 

 

94,626

 

Total Variable Interest Notes and Mortgages Payable

 

 

 

 

4.18%

 

 

1,385,022

 

 

707,525

 

Total Notes and Mortgages Payable

 

 

 

 

5.68%

 

$

8,613,600

 

$

7,938,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due to Vornado Realty Trust:

 

 

 

 

 

 

 

 

 

 

 

 

Due 2027

04/12 (9)

 

 

 

2.85%

 

$

1,377,678

 

$

1,376,278

 

Due 2026

11/11 (9)

 

 

 

3.63%

 

 

985,147

 

 

984,134

 

Total Due to Vornado Realty Trust

 

 

 

 

3.17%

 

$

2,362,825

 

$

2,360,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Unsecured Notes:

 

 

 

 

 

 

 

 

 

 

 

 

Senior unsecured notes due 2009

08/09

 

 

 

4.50%

 

$

249,460

 

$

249,365

 

Senior unsecured notes due 2010

12/10

 

 

 

4.75%

 

 

199,483

 

 

199,436

 

Senior unsecured notes due 2011

02/11

 

 

 

5.60%

 

 

249,867

 

 

249,855

 

Total Senior Unsecured Notes

 

 

 

 

4.96%

 

$

698,810

 

$

698,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchangeable Senior Debentures due 2025

04/12 (9)

 

 

 

3.88%

 

$

493,268

 

$

492,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured Revolving Credit Facilities:

 

 

 

 

 

 

 

 

 

 

 

 

$1.595 billion unsecured revolving credit facility

09/12

 

L+55

 

 

$

 

$

300,000

 

$1.000 billion unsecured revolving credit facility
($51,472 reserved for outstanding letters of credit)

06/11

 

L+55

 

 

 

 

 

105,656

 

Total Unsecured Revolving Credit Facilities

 

 

 

 

 

$

 

$

405,656

 

 

_______________________

See notes on following page.

 

20

 


 

 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

8.

Debt - continued

Notes to preceding tabular information ($ in thousands):

 

 

(1)

On March 12, 2008 we completed a $260,000 refinancing of the River House Apartment Complex. The financing is comprised of a $196,000 interest-only seven year 5.43% fixed rate mortgage and a $64,000 interest-only ten year floating rate mortgage at the Freddie Mac Reference Note Rate plus 1.53% (3.66% at March 31, 2008). We retained net proceeds of $205,000 after repaying the existing loan.

 

 

(2)

On February 11, 2008, we completed a $335,000 refinancing of the Green Acres regional mall. This interest-only loan has a rate of LIBOR plus 1.40% (4.52% at March 31, 2008) and matures in February 2011, with two one-year extension options. We retained net proceeds of $193,000 after repaying the existing loan.

 

 

(3)

On February 26, 2008, we completed a $150,000 financing of 2101 L Street. The loan bears interest at LIBOR plus 1.20% (3.81% at March 31, 2008) and matures in February 2011 with two one-year extension options. We retained net proceeds of $148,000.

 

 

(4)

On March 27, 2008, we closed a construction loan providing up to $124,000 to finance the redevelopment of 1999 K Street. The interest-only loan has a rate of LIBOR plus 1.30% (3.95% at March 31, 2008) and matures in December 2010 with two 6-month extension options.

 

 

(5)

On January 18, 2008, we closed a construction loan providing up to $87,000 to finance the residential redevelopment project at 220 20th Street (formally Crystal Plaza Two). The construction loan bears interest at LIBOR plus 1.15% (3.75% at March 31, 2008) and matures in January 2011 with two six-month extension options.

 

 

(6)

On February 20, 2008, we closed a construction loan providing up to $104,000 to finance the residential redevelopment project at 1229-1231 25th Street NW (“West End 25”). The construction loan bears interest at LIBOR plus 1.30% (3.86% at March 31, 2008) and matures in February 2011 with two six-month extension options.

 

 

(7)

On March 24, 2008, we closed a construction loan providing up to $290,000 to finance the redevelopment of a portion of the Bergen Town Center. The interest-only loan has a rate of LIBOR plus 1.50% (4.06% at March 31, 2008) and matures in March 2011 with two one-year extension options.

 

 

(8)

Beginning in the first quarter of 2008, we account for our investment in the India Property Fund on the equity method and no longer consolidate its accounts into our consolidated financial statements, based on the reduction in our ownership interest from 50.6% as of December 31, 2007 to 36.5% as of March 31, 2008.

 

 

(9)

Represents the earliest date the holders can require us to repurchase the debentures.

 

21

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

9.

Fee and Other Income

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

 


(Amounts in thousands)

 

For the Three Months
Ended March 31,

 

 

 

 

2007

 

Tenant cleaning revenue

 

$

13,422

 

$

9,843

 

Management and leasing fees

 

 

3,968

 

 

7,199

 

Lease termination fees

 

 

2,453

 

 

3,441

 

Other income

 

 

8,865

 

 

8,572

 

 

 

$

28,708

 

$

29,055

 

 

Fee and other income above include management fee income from Interstate Properties, a related party, of $211,000 and $206,000 for the three months ended March 31, 2008 and 2007, respectively. The above table excludes fee income from partially owned entities, which is included in income from partially owned entities (see Note 5 – Investments in Partially Owned Entities).

 

10.

Discontinued Operations (including $112,690,000 net gain on sale of Americold Realty Trust in 2008)

On March 31, 2008, we sold our 47.6% interest in Americold Realty Trust (“Americold”), our Temperature Controlled Logistics segment, for $220,000,000, which resulted in a net gain of $112,690,000. Accordingly, during the first quarter of 2008, we classified our Temperature Controlled Logistics segment as a discontinued operation in accordance with the provisions of SFAS No. 144 and reported revenues and expenses related to this segment as “income from discontinued operations” and the related assets and liabilities of this segment as “assets held for sale” and “liabilities held for sale” for all periods presented in the accompanying consolidated financial statements.

 

The following table sets forth the assets and liabilities related to discontinued operations at March 31, 2008 and December 31, 2007, which consist primarily of the net book value of real estate and the assets and liabilities of Americold.

 

(Amounts in thousands)

 

Assets related to
Discontinued Operations as of

 

Liabilities related to
Discontinued Operations as of

 

 

 

   

   

   

 

H Street – land under sales contract

 

$

108,461

 

$

108,470

 

$

 

$

 

Americold

 

 

 

 

1,424,770

 

 

1,650

 

 

1,332,627

 

 

 

$

108,461

 

$

1,533,240

 

$

1,650

 

$

1,332,627

 

 

 

The following table sets forth the combined results of operations related to discontinued operations for the three months ended March 31, 2008 and 2007.

 

(Amounts in thousands)

 

For the Three Months
Ended March 31,

 

 

 

 

2007

 

Revenues

 

$

216,182

 

$

202,217

 

Expenses

 

 

218,358

 

 

203,355

 

Net loss

 

 

(2,176

)

 

(1,138

)

Net gain on sale of Americold

 

 

112,690

 

 

 

Net gain on sale of other real estate

 

 

580

 

 

 

Income (loss) from discontinued operations

 

$

111,094

 

$

(1,138

)

 

 

22

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

11.

Income Per Class A Unit

The following table provides a reconciliation of both net income and the number of Class A units used in the computation of (i) basic income per Class A unit - which utilizes the weighted average number of Class A units outstanding without regard to dilutive potential Class A units, and (ii) diluted income per Class A unit - which includes the weighted average Class A units and potentially dilutive unit equivalents. Potentially dilutive unit equivalents include our convertible preferred units, Vornado employee stock options and restricted unit awards, and exchangeable senior debentures due 2025.

 

(Amounts in thousands, except per unit amounts)

For The Three Months
Ended March 31,

 

 

 

2007

 

Numerator:

 

 

 

 

 

 

Income from continuing operations

$

348,338

 

$

190,061

 

Income (loss) from discontinued operations

 

111,094

 

 

(1,138

)

Net income

 

459,432

 

 

188,923

 

Preferred unit distributions

 

(19,092

)

 

(18,806

)

Numerator for basic income per Class A unit – net income applicable to Class A Units

 

440,340

 

 

170,117

 

Impact of assumed conversions:

 

 

 

 

 

 

Interest on 3.875% exchangeable senior debentures

 

5,255

 

 

5,309

 

Convertible preferred unit distributions

 

1,447

 

 

539

 

Numerator for diluted income per Class A unit – net income applicable to Class A Units

$

447,012

 

$

175,965

 

Denominator:

 

 

 

 

 

 

Denominator for basic income per Class A unit – weighted average units

 

167,801

 

 

166,464

 

Effect of dilutive securities (1):

 

 

 

 

 

 

Vornado Employee stock options and restricted unit awards

 

5,011

 

 

7,430

 

3.875% exchangeable senior debentures

 

5,559

 

 

5,560

 

Convertible preferred units

 

1,489

 

 

1,186

 

Denominator for diluted income per Class A unit – adjusted weighted average Class A Units and assumed conversions

 

179,860

 

 

180,640

 

INCOME PER CLASS A UNIT– BASIC:

 

 

 

 

 

 

Income from continuing operations

$

1.96

 

$

1.03

 

Income (loss) from discontinued operations

 

0.66

 

 

(0.01

)

Net income per Class A unit

$

2.62

 

$

1.02

 

INCOME PER CLASS A UNIT– DILUTED:

 

 

 

 

 

 

Income from continuing operations

$

1.87

 

$

0.98

 

Income (loss) from discontinued operations

 

0.62

 

 

(0.01

)

Net income per Class A unit

$

2.49

 

$

0.97

 

__________________

(1)

The effect of dilutive securities in the three months ended March 31, 2008 and 2007 excludes an aggregate of 1,676,677 and 81,862 weighted average unit equivalents, respectfully, as their effect was anti-dilutive.

 

12.

Comprehensive Income

(Amounts in thousands)

 

For The Three Months
Ended March 31,

 

 

 

 

2007

 

Net income

 

$

459,432

 

$

188,923

 

Other comprehensive (loss) income

 

 

(20,251

)

 

6,761

 

Comprehensive income

 

$

439,181

 

$

195,684

 

 

Substantially all of other comprehensive (loss) income for the three months ended March 31, 2008 and 2007 relates to income from the mark-to-market of marketable equity securities classified as available-for-sale.

 

23

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

13.

Stock-based Compensation

Vornado’s Share Option Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, stock appreciation rights, performance shares and limited partnership units to certain of our employees and officers. We account for stock-based compensation in accordance with SFAS No. 123: Accounting for Stock-Based Compensation, as amended by SFAS No. 148: Accounting for Stock-Based Compensation - Transition and Disclosure and as revised by SFAS No. 123R: Share-Based Payment (“SFAS No. 123R”). We adopted SFAS No. 123R, using the modified prospective application, on January 1, 2006. Stock based compensation expense for the three months ended March 31, 2008 and 2007 consists of Vornado’s stock option awards, restricted unit awards, and Vornado’s Out-Performance Plan awards. During the three months ended March 31, 2008 and 2007, we recognized $8,075,000 and $5,647,000 of stock-based compensation expense, respectively, of which $3,128,000 in 2008 relates to Vornado’s 2006 and 2008 Out-Performance Plans.

 

2008 Stock Options

 

On March 31, 2008, the Compensation Committee approved a grant of Vornado stock options to senior executives and employees. The options were granted with an exercise price 17.5% in excess of the average of the high and low price of Vornado’s shares on the New York Stock Exchange on that date. The options are expensed pro rata over the 5-year vesting term in accordance with SFAS No. 123R.

 

2008 Out-Performance Plan

 

On March 31, 2008, the Compensation Committee approved the Vornado Realty Trust $75,000,000 out-performance plan (the “2008 OPP”) that requires the achievement of performance objectives against both absolute and relative thresholds. The 2008 OPP establishes a potential performance pool in which 71 members of senior management have the opportunity to share in, if the total return to our shareholders (the “Total Return”), resulting from both share appreciation and dividends, for the four-year period from March 31, 2008 to March 31, 2012 exceeds both an absolute and a relative hurdle. The initial value from which to determine the Total Return is $86.20 per share, a 0.93% premium to the trailing 10-day average closing price for Vornado’s shares on the date the plan was adopted.

 

The size of the out-performance pool for the 2008 OPP is 6% of the aggregate “out-performance return” subject to a maximum total award of $75,000,000 (the “Maximum Award”). The “out-performance return” is comprised of (i) 3% of the total dollar value of the Total Return in excess of 10% per annum (the “Absolute Component”), plus (ii) 3% of the total dollar value of the Total Return in excess of the Relative Threshold (the “Relative Component”), based on the SNL Equity REIT Index (the “Index”) over the four-year performance period. In the event that the Relative Component creates a negative award as a result of underperforming the Index, the value of any out-performance award potentially earned under the Absolute Component will be reduced dollar for dollar. In addition, awards potentially earned under the Relative Component will be reduced on a ratable sliding scale to the extent the Total Return is less than 10% per annum and to zero to the extent the Total Return is less than 7% per annum. The size of this out-performance pool, if any, will be determined based on the highest 30-trading day trailing average price of Vornado’s shares during the final 150 days of the four-year period. During the four-year performance period, participants are entitled to receive 10% of the common dividends paid on Vornado’s common shares for each OPP unit awarded, regardless of whether the OPP units are ultimately earned.

 

The 2008 OPP also provides participants an opportunity to earn partial awards during two interim measurement periods (the “Interim Periods”): (a) one for a period consisting of the first two years of the plan and (b) one for a period consisting of the final two years of the plan. For each Interim Period, participants may be entitled to share in 40% ($30,000,000) of the maximum $75,000,000 performance pool if the performance thresholds have been met for the applicable Interim Periods on a pro rated basis. The starting Vornado share price for the first Interim Period is $86.20 per share. The starting Vornado share price for the second Interim Period is equal to the greater of Vornado’s share price on March 31, 2010, or the initial starting Vornado share price of $86.20 per share less dividends paid during the first two years of the plan. If the maximum award is earned during the first Interim Period, participants lose the potential to earn the second Interim Period award, but not the potential to earn the remainder of the maximum award over the four-year period. The size of any out-performance pool for an Interim Period will be determined based on the highest 30-day trailing average price of Vornado shares during the final 120 days of the applicable Interim Period.

 

Awards earned under the program (including any awards earned for the Interim Periods), will vest 50% on March 31, 2012 and 50% on March 31, 2013. The 2008 OPP is accounted for in accordance with FASB No. 123R. The fair value of the OPP awards on the day of grant, as adjusted for estimated forfeitures, was approximately $21,500,000, which will be amortized into expense over a five-year period beginning on the date of grant through the final vesting period, using a graded vesting attribution model.

 

24

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

14.

Commitments and Contingencies

At March 31, 2008, $51,472,000 was reserved for outstanding letters of credit under our $1 billion revolving credit facility. Our credit facilities contain financial covenants, which require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provides for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our credit facilities also contain customary conditions precedent to borrowing, including representations and warranties and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

In connection with our investments in partially owned entities, we are committed to fund additional capital aggregating $128,988,000. Of this amount, $82,750,000 relates to our equity commitment to the India Property Fund, L.P., and $19,701,000 relates to capital expenditures committed to the Springfield Mall, in which we have a 97.5% interest.

 

On November 10, 2005, we committed to fund the junior portion of up to $30,530,000 of a $173,000,000 construction loan to an entity developing a mixed-use building complex in Boston, Massachusetts, at the north end of the Boston Harbor. We will earn current-pay interest at 30-day LIBOR plus 11%. The loan will mature in November 2008, with a one-year extension option. As of March 31, 2008, we have funded $23,545,000 of this commitment.

 

In June 2007 we formed Penn Plaza Insurance Company, LLC (“PPIC”), a wholly owned consolidated subsidiary, to act as a re-insurer with respect to a portion of our earthquake insurance coverage and as a direct insurer for coverage for “certified” acts of terrorism and for nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). Coverage for “certified” acts of terrorism is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. Prior to the formation of PPIC, we were uninsured for losses under NBCR coverage. Subsequently, we have $1.5 billion of NBCR coverage under TRIPRA, for which PPIC is responsible for 15% of each NBCR loss and the insurance company deductible of $1,000,000. We are ultimately responsible for any loss borne by PPIC.

 

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

 

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

 

We enter 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 our name by various money center banks. We have 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. We had $285,810,000 and $82,240,000 of cash invested in these agreements at March 31, 2008 and December 31, 2007, respectively.

 

On January 16, 2008, our Board of Trustees approved the termination of the Vornado Realty Trust Retirement Plan and the Merchandise Mart Properties Pension Plan. The plans were frozen in 1998 and 1999, respectively. The termination is expected to be completed in the third quarter of 2008. Our current estimate of the cost we will incur during the third quarter of 2008 to buy annuities from an insurance company or to make lump-sum payments to plan participants to terminate both plans is approximately $4,000,000.

 

From time to time, we have disposed of substantial amounts of real estate to third parties for which, as to certain properties, we remain contingently liable for rent payments or mortgage indebtedness that cannot be quantified.

 

 

25

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

14.

Commitments and Contingencies - continued

 

Litigation

 

On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) claiming we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty. Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, froze our right to re-allocate which effectively terminated our right to collect the additional rent from Stop & Shop. On March 3, 2003, after we moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint. On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint. We removed the action to the United States District Court for the Southern District of New York. In January 2005 that court remanded the action to the New York Supreme Court. On February 14, 2005, we served an answer in which we asserted a counterclaim seeking a judgment for all the unpaid additional rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the additional rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. On May 17, 2005, we filed a motion for summary judgment. On July 15, 2005, Stop & Shop opposed our motion and filed a cross-motion for summary judgment. On December 13, 2005, the Court issued its decision denying the motions for summary judgment. Both parties appealed the Court’s decision and on December 14, 2006, the Appellate Court division issued a decision affirming the Court’s decision. On January 16, 2007 we filed a motion for the reconsideration of one aspect of the Appellate Court’s decision which was denied on March 13, 2007. We are currently engaged in discovery and anticipate that a trial date will be set for some time in 2008. We intend to vigorously pursue our claims against Stop & Shop. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.

 

On May 24, 2007, we acquired a 70% controlling interest in 1290 Avenue of the Americas and the 555 California Street complex. Our 70% interest was acquired through the purchase of all of the shares of a group of foreign companies that own, through U.S. entities, the 1% sole general partnership interest and a 69% limited partnership interest in the partnerships that own the two properties. The remaining 30% limited partnership interest is owned by Donald J. Trump. In August 2005, Mr. Trump brought a lawsuit in the New York State Supreme Court against, among others, the general partners of the partnerships referred to above.   Mr. Trump’s claims arose out of a dispute over the sale price of, and use of proceeds from, the sale of properties located on the former Penn Central rail yards between West 59th and 72nd Streets in Manhattan which were formerly owned by the partnerships. In decisions dated September 14, 2005 and July 24, 2006, the Court denied various of Mr. Trump’s motions and ultimately dismissed all of Mr. Trump’s claims, except for his claim seeking access to books and records. In a decision dated October 1, 2007, the Court determined that Mr. Trump already received access to the books and records to which he was entitled, with the exception of certain documents which were subsequently delivered to Mr. Trump. Mr. Trump has sought re-argument and renewal on, and filed a notice of appeal in connection with, his dismissed claims.  In connection with the acquisition, we agreed to indemnify the sellers for liabilities and expenses arising out of Mr. Trump’s claim that the general partners of the partnerships we acquired did not sell the rail yards at a fair price or could have sold the rail yards for a greater price and any other claims asserted in the legal action; provided however, that if Mr. Trump prevails on certain claims involving partnership matters, other than claims relating to sale price, the sellers will be required to reimburse us for certain costs related to those claims. We believe that the claims relating to the sale price are without merit. All other allegations are not asserted as a basis for damages and regardless of merit would not be material to our consolidated financial statements.

 

There are various other legal actions against us in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material effect on our financial condition, results of operations or cash flows.

 

26

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

15.

Retirement Plans

On January 16, 2008, our Board of Trustees approved the termination of the Vornado Realty Trust Retirement Plan (“Vornado Plan”) and the Merchandise Mart Properties Pension Plan (“Mart Plan”). The termination is expected to be completed in the third quarter of 2008. Our current estimate of the cost we will incur during the third quarter of 2008 to buy annuities from an insurance company or to make lump-sum payments to plan participants to terminate both plans is approximately $4,000,000.

 

The following table sets forth the components of net periodic benefit costs:

 

(Amounts in thousands)

 

For The Three Months
Ended March 31,

 

 

 

 

2007

 

Interest cost

 

$

292

 

$

293

 

Expected return on plan assets

 

 

(309

)

 

(299

)

Amortization of net loss

 

 

65

 

 

61

 

Net periodic benefit cost

 

$

48

 

$

55

 

 

Employer Contributions

 

During the quarter ended March 31, 2008, we made no contributions to the plans. We made contributions of $366,000 to the plans during the three months ended March 31, 2007. We anticipate making contributions of $2,205,000 to the plans during the remainder of 2008.

 

16.

Costs of Acquisitions Not Consummated

In the first quarter of 2008, we wrote-off $2,283,000 of costs associated with the Hudson Rail Yards acquisition not consummated. In the first quarter of 2007, we wrote-off $8,807,000 of costs associated with The Equity Office Properties Trust acquisition not consummated.

 

17.

Marketable Equity Securities

In the first quarter of 2008, we determined that an investment in a marketable equity security was “other-than-temporarily” impaired and recorded a non-cash charge of $9,073,000, based on the March 31, 2008 closing share price of this security, which is included in “interest and other investment income” on our consolidated statement of income.

 

27

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

18.

Segment Information

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2008 and 2007.

 

(Amounts in thousands)

 

For the Three Months Ended March 31, 2008

 

 

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Toys

 

Other (2)

 

Property rentals

 

$

491,022

 

$

176,503

 

$

126,232

 

$

86,721

 

$

57,543

 

$

 

$

44,023

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

 

17,951

 

 

7,283

 

 

3,349

 

 

5,799

 

 

1,377

 

 

 

 

143

 

Amortization of free rent

 

 

4,099

 

 

871

 

 

1,505

 

 

(1,221

)

 

2,353

 

 

 

 

591

 

Amortization of acquired below-
market leases, net

 

 

23,264

 

 

15,329

 

 

1,105

 

 

4,954

 

 

33

 

 

 

 

1,843

 

Total rentals

 

 

536,336

 

 

199,986

 

 

132,191

 

 

96,253

 

 

61,306

 

 

 

 

46,600

 

Tenant expense reimbursements

 

 

87,477

 

 

31,523

 

 

15,532

 

 

33,690

 

 

4,589

 

 

 

 

2,143

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning revenue

 

 

13,422

 

 

17,154

 

 

 

 

 

 

 

 

 

 

(3,732

)

Management and leasing fees

 

 

3,968

 

 

1,402

 

 

3,156

 

 

365

 

 

140

 

 

 

 

(1,095

)

Lease termination fees

 

 

2,453

 

 

1,924

 

 

 

 

375

 

 

154

 

 

 

 

 

Other

 

 

8,865

 

 

3,935

 

 

4,220

 

 

(379

)

 

1,440

 

 

 

 

(351

)

Total revenues

 

 

652,521

 

 

255,924

 

 

155,099

 

 

130,304

 

 

67,629

 

 

 

 

43,565

 

Operating expenses

 

 

262,605

 

 

106,646

 

 

52,941

 

 

48,054

 

 

35,368

 

 

 

 

19,596

 

Depreciation and amortization

 

 

131,505

 

 

45,775

 

 

37,761

 

 

21,136

 

 

11,787

 

 

 

 

15,046

 

General and administrative

 

 

49,388

 

 

4,786

 

 

7,072

 

 

7,762

 

 

7,471

 

 

 

 

22,297

 

Costs of acquisition not consummated

 

 

2,283

 

 

 

 

 

 

 

 

 

 

 

 

2,283

 

Total expenses

 

 

445,781

 

 

157,207

 

 

97,774

 

 

76,952

 

 

54,626

 

 

 

 

59,222

 

Operating income (loss)

 

 

206,740

 

 

98,717

 

 

57,325

 

 

53,352

 

 

13,003

 

 

 

 

(15,657

)

Income applicable to Alexander’s

 

 

7,929

 

 

189

 

 

 

 

148

 

 

 

 

 

 

7,592

 

Income applicable to Toys “R” Us

 

 

80,362

 

 

 

 

 

 

 

 

 

 

80,362

 

 

 

(Loss) income from partially owned
entities

 

 

(30,353

)

 

2,577

 

 

1,279

 

 

2,907

 

 

518

 

 

 

 

(37,634

)

Interest and other investment income

 

 

14,104

 

 

708

 

 

679

 

 

242

 

 

93

 

 

 

 

12,382

 

Interest and debt expense

 

 

(148,179

)

 

(35,631

)

 

(29,622

)

 

(20,246

)

 

(13,021

)

 

 

 

(49,659

)

Minority interest of partially owned
entities

 

 

406

 

 

(945

)

 

 

 

14

 

 

 

 

 

 

1,337

 

Income (loss) before income taxes

 

 

131,009

 

 

65,615

 

 

29,661

 

 

36,417

 

 

593

 

 

80,362

 

 

(81,639

)

Income tax benefit (expense)

 

 

217,329

 

 

 

 

221,677

 

 

(2

)

 

(210

)

 

 

 

(4,136

)

Income (loss) from continuing
operations

 

 

348,338

 

 

65,615

 

 

251,338

 

 

36,415

 

 

383

 

 

80,362

 

 

(85,775

)

Income (loss) from discontinued
operations

 

 

111,094

 

 

 

 

 

 

(520

)

 

 

 

 

 

111,614

 

Net Income

 

 

459,432

 

 

65,615

 

 

251,338

 

 

35,895

 

 

383

 

 

80,362

 

 

25,839

 

Interest and debt expense (1)

 

 

207,961

 

 

34,004

 

 

30,628

 

 

23,827

 

 

13,233

 

 

41,495

 

 

64,774

 

Depreciation and amortization(1)

 

 

181,185

 

 

43,620

 

 

39,242

 

 

22,202

 

 

11,907

 

 

34,102

 

 

30,112

 

Income tax (benefit) expense (1)

 

 

(122,780

)

 

 

 

(221,672

)

 

2

 

 

210

 

 

93,919

 

 

4,761

 

EBITDA

 

$

725,798

 

$

143,239

 

$

99,536

 

$

81,926

 

$

25,733

 

$

249,878

 

$

125,486

 

 

The Washington, DC Office segment includes a $222,174 reduction in income tax expense resulting from a reversal of deferred tax liabilities in connection with the acquisition of H Street. Other segment EBITDA includes, a $112,690 net gain on sale of our 47.6% interest in Americold, a $34,200 write-off of pre-development costs, an $18,362 net loss on the mark-to-market of derivative instruments, $10,300 for the reversal of a mezzanine loan loss accrual, a $9,073 impairment loss on a marketable equity security and $2,283 of expense for costs of acquisitions not consummated.

_______________________

See notes on page 30.

28

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

18.

Segment Information – continued

(Amounts in thousands)

 

For the Three Months Ended March 31, 2007

 

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Toys

 

Other (2)

 

Property rentals

 

$

400,243

 

$

137,648

 

$

105,617

 

$

77,721

 

$

61,026

 

$

 

$

18,231

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

 

14,586

 

 

10,414

 

 

479

 

 

2,897

 

 

654

 

 

 

 

142

 

Amortization of free rent

 

 

5,889

 

 

398

 

 

4,840

 

 

272

 

 

379

 

 

 

 

 

Amortization of acquired below-
market leases, net

 

 

14,005

 

 

7,292

 

 

973

 

 

5,239

 

 

30

 

 

 

 

471

 

Total rentals

 

 

434,723

 

 

155,752

 

 

111,909

 

 

86,129

 

 

62,089

 

 

 

 

18,844

 

Tenant expense reimbursements

 

 

72,466

 

 

28,708

 

 

9,356

 

 

28,697

 

 

4,793

 

 

 

 

912

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning revenue

 

 

9,843

 

 

12,086

 

 

 

 

 

 

 

 

 

 

(2,243

)

Management and leasing fees

 

 

7,199

 

 

855

 

 

6,561

 

 

344

 

 

22

 

 

 

 

(583

)

Lease termination fees

 

 

3,441

 

 

1,798

 

 

95

 

 

1,505

 

 

43

 

 

 

 

 

Other

 

 

8,572

 

 

3,781

 

 

3,099

 

 

354

 

 

1,282

 

 

 

 

56

 

Total revenues

 

 

536,244

 

 

202,980

 

 

131,020

 

 

117,029

 

 

68,229

 

 

 

 

16,986

 

Operating expenses

 

 

212,802

 

 

88,252

 

 

39,610

 

 

40,517

 

 

31,581

 

 

 

 

12,842

 

Depreciation and amortization

 

 

89,008

 

 

29,805

 

 

25,558

 

 

17,283

 

 

11,091

 

 

 

 

5,271

 

General and administrative

 

 

40,417

 

 

3,946

 

 

8,385

 

 

7,002

 

 

7,438

 

 

 

 

13,646

 

Costs of acquisition not consummated

 

 

8,807

 

 

 

 

 

 

 

 

 

 

 

 

8,807

 

Total expenses

 

 

351,034

 

 

122,003

 

 

73,553

 

 

64,802

 

 

50,110

 

 

 

 

40,566

 

Operating income (loss)

 

 

185,210

 

 

80,977

 

 

57,467

 

 

52,227

 

 

18,119

 

 

 

 

(23,580

)

Income applicable to Alexander’s

 

 

13,519

 

 

188

 

 

 

 

209

 

 

 

 

 

 

13,122

 

Income applicable to Toys “R” Us

 

 

58,661

 

 

 

 

 

 

 

 

 

 

58,661

 

 

 

Income from partially owned entities

 

 

8,695

 

 

1,287

 

 

3,692

 

 

1,295

 

 

339

 

 

 

 

2,082

 

Interest and other investment income

 

 

53,504

 

 

673

 

 

313

 

 

75

 

 

95

 

 

 

 

52,348

 

Interest and debt expense

 

 

(130,698

)

 

(29,468

)

 

(34,522

)

 

(20,008

)

 

(12,847

)

 

 

 

(33,853

)

Net gain on disposition of wholly
owned and partially owned
assets other than depreciable
real estate

 

 

909

 

 

 

 

 

 

 

 

 

 

 

 

909

 

Minority interest of partially owned
entities

 

 

350

 

 

 

 

 

 

47

 

 

 

 

 

 

303

 

Income before income taxes

 

 

190,150

 

 

53,657

 

 

26,950

 

 

33,845

 

 

5,706

 

 

58,661

 

 

11,331

 

Income tax (expense) benefit

 

 

(89

)

 

 

 

224

 

 

 

 

(313

)

 

 

 

 

Income from continuing operations

 

 

190,061

 

 

53,657

 

 

27,174

 

 

33,845

 

 

5,393

 

 

58,661

 

 

11,331

 

Loss from discontinued operations

 

 

(1,138

)

 

 

 

(66

)

 

(34

)

 

 

 

 

 

(1,038

)

Net Income

 

 

188,923

 

 

53,657

 

 

27,108

 

 

33,811

 

 

5,393

 

 

58,661

 

 

10,293

 

Interest and debt expense (1)

 

 

198,771

 

 

30,138

 

 

35,908

 

 

22,797

 

 

13,064

 

 

46,634

 

 

50,230

 

Depreciation and amortization(1)

 

 

163,151

 

 

30,742

 

 

28,844

 

 

18,286

 

 

11,237

 

 

55,396

 

 

18,646

 

Income tax expense (1)

 

 

55,584

 

 

 

 

1,632

 

 

 

 

313

 

 

53,397

 

 

242

 

EBITDA

 

$

606,429

 

$

114,537

 

$

93,492

 

$

74,894

 

$

30,007

 

$

214,088

 

$

79,411

 

 

The Washington, DC Office segment includes $1,891 of expense for H Street litigation costs. Other segment EBITDA includes a $9,380 net gain on mark-to-market of derivative instruments, $8,807 for costs of acquisition not consummated and a $909 net gain on sale of marketable equity securities.

 

________________________

See notes on the following page.

 

29

 


VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

18.

Segment Information – continued

 

Notes to preceding tabular information

 

(1)

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

 

 

(2)

Other EBITDA is comprised of:

 

(Amounts in thousands)

 

For the Three Months
Ended March 31,

 

 

 

 

2007

 

Alexander’s

 

$

14,887

 

$

20,333

 

555 California Street

 

 

11,645

 

 

 

Lexington MLP

 

 

11,077

 

 

 

Hotel Pennsylvania

 

 

5,413

 

 

3,604

 

Industrial warehouses

 

 

1,438

 

 

1,373

 

GMH (see page 11)

 

 

 

 

4,168

 

Other investments

 

 

(2,834

)

 

3,911

 

 

 

 

41,626

 

 

33,389

 

Corporate general and administrative expenses

 

 

(20,242

)

 

(12,374

)

Write-off of pre-development costs (see note (4) on page 14)

 

 

(34,200

)

 

 

Costs of acquisitions not consummated

 

 

(2,283

)

 

(8,807

)

Investment income and other

 

 

11,318

 

 

51,062

 

Income from discontinued operations (including $112,690 net gain on sale of Americold in 2008)

 

 

129,267

 

 

16,141

 

 

 

$

125,486

 

$

79,411

 

 

 

On March 31, 2008, we sold our 47.6% interest in Americold Realty Trust (“Americold”), our Temperature Controlled Logistics segment, for $220,000,000, which resulted in a net gain of $112,690,000. Accordingly, during the first quarter of 2008, we classified our Temperature Controlled Logistics segment as a discontinued operation in accordance with the provisions of SFAS No. 144 and reported revenues and expenses related to this segment as “income from discontinued operations” and the related assets and liabilities of this segment as “assets held for sale” and “liabilities held for sale” for all periods presented in the accompanying consolidated financial statements. Accordingly, our reportable segments no longer include a Temperature Controlled Logistics segment.

 

30

 


 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Partners

Vornado Realty L.P.

New York, New York

 

We have reviewed the accompanying consolidated balance sheet of Vornado Realty L.P. as of March 31, 2008, and the related consolidated statements of income and cash flows for the three-month periods ended March 31, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

 

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

 

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

 

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty L.P. as of December 31, 2007, and the related consolidated statements of income, partners’ capital, and cash flows for the year then ended (not presented herein); and in our report dated February 29, 2008, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 10 that were applied to reclassify the December 31, 2007 consolidated balance sheet of Vornado Realty L.P. (not presented herein) for discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted consolidated balance sheet as of December 31, 2007.

 

/s/ DELOITTE & TOUCHE LLP

 

Parsippany, New Jersey

May 9, 2008

 

31

 


 

 

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

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our consolidated financial statements for the three months ended March 31, 2008. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

 

Critical Accounting Policies

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2007 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2008.

 

32

 


Overview

Business Objective and Operating Strategy

 

Our business objective is to maximize Vornado’s shareholder value. We measure our success in meeting this objective by our total return to Vornado shareholders. Below is a table comparing our performance to the Morgan Stanley REIT Index (“RMS”) and the SNL REIT Index (“SNL”) for the following periods ending March 31, 2008:

 

 

 

Total Return (1)

 

 

 

Vornado

 

RMS

 

SNL

 

One-year

 

(25.4%)

 

(17.9%)

 

(17.3%)

 

Three-years

 

39.5%

 

39.9%

 

39.6%

 

Five-years

 

202.3%

 

130.4%

 

132.9%

 

Ten-years

 

236.4%

 

175.8%

 

175.0%

 

_________________________

 

(1)

Past performance is not necessarily indicative of how we will perform in the future.

 

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

 

 

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

 

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

 

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

 

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

 

Investing in fully-integrated operating companies that have a significant real estate component;

 

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

 

Providing specialty financing to real estate related companies.

 

We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets.

 

We have a large concentration of properties in the New York City metropolitan area and in the Washington, DC and Northern Virginia areas. We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rent charged, attractiveness of location, the quality of the property and breadth and quality of services provided. Our success depends upon, among other factors, trends of the national, regional 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.

 

Beginning in the second half of 2007, the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining residential home values and increasing inventory nationwide. This “credit” crisis spread to the broader commercial credit markets and has generally reduced the availability of financing and widened spreads. These factors, coupled with a slowing economy, may negatively impact the volume of real estate transactions and cap rates, which would negatively impact stock price performance of public real estate companies, including ours. If these conditions continue to persist in 2008 and beyond, our real estate portfolio may experience lower occupancy and effective rents which would result in a corresponding decrease in net income, funds from operations and cash flows. In addition, the value of our investments in joint ventures, marketable securities and mezzanine loans may also decline as a result of the above factors. Such declines may result in impairment charges and/or valuation allowances which would result in a corresponding decrease in net income.

 

33

 


Overview – continued

Quarter Ended March 31, 2008 Financial Results Summary  

 

Net income applicable to Class A units for the quarter ended March 31, 2008 was $440,340,000, or $2.49 per diluted Class A unit, versus $170,117,000, or $0.97 per diluted Class A unit, for the quarter ended March 31, 2007. Net income for the quarter ended March 31, 2008 includes $6,002,000 for our share of net gains on sale of real estate. Net income for the quarters ended March 31, 2008 and 2007 also includes certain items that affect comparability which are listed in the table below. The aggregate of these items increased net income applicable to Class A units for the quarter ended March 31, 2008 by $284,304,000, or $1.58 per diluted Class A unit and decreased net income applicable to Class A units for the quarter ended March 31, 2007 by $3,433,000, or 0.02 per diluted Class A unit.

 

 

(Amounts in thousands)

 

For the Three Months Ended
March 31,

 

 

 

 

2007

 

Items that affect comparability (income)/expense:

 

 

 

 

 

 

 

Reversal of deferred income taxes initially recorded in connection with H Street acquisition

 

$

(222,174

)

$

 

Net gain on sale of our 47.6% interest in Americold

 

 

(112,690

)

 

 

Write-off of pre-development costs (see below)

 

 

34,200

 

 

 

Derivative positions in marketable equity securities

 

 

18,362

 

 

(9,380

)

Reversal of MPH mezzanine loan loss accrual

 

 

(10,300

)

 

 

Marketable equity security - impairment loss

 

 

9,073

 

 

 

Costs of acquisitions not consummated

 

 

2,283

 

 

8,807

 

Alexander’s stock appreciation rights

 

 

205

 

 

(4,694

)

Prepayment penalties and write-off of unamortized
financing costs

 

 

 

 

5,861

 

H Street litigation costs

 

 

 

 

1,891

 

Other, net

 

 

1,663

 

 

 

 

 

 

(279,378

)

 

2,485

 

47.6% share of Americold’s Net losses – sold on March 31, 2008

 

 

1,076

 

 

948

 

 

 

$

(278,302

)

$

3,433

 

 

 

The three months ended March 31, 2008 includes a $34,200,000 write-off for our share of two joint ventures’ pre-development costs, of which $23,000,000 represents our 50% share of costs in connection with the abandonment of the “arena move”/Moynihan East portions of the Farley project.

 

 

 

34

 


Overview – continued

 

We did not recognize income on certain assets with an aggregate carrying amount of approximately $1.3 billion during the quarter ended March 31, 2008, because they were out of service for redevelopment. Assets under development include all or portions of the Bergen Town Center, 2101 L Street, 220 20th Street, 1229-1231 25th Street (“West End 25”), 1999 K Street, 220 Central Park South, 40 East 66th Street, and certain investments in joint ventures including Beverly Connection, Wasserman and 800 17th Street/PNC Place investments.

 

The percentage increase (decrease) in the same-store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended March 31, 2008 over the quarter ended March 31, 2007 and the trailing quarter ended December 31, 2007 are summarized below.

 

Quarter Ended:

 

 

 

 

 

 

 

 

New York
Office

 

Washington, DC Office

 

Retail

 

Merchandise
Mart

 

March 31, 2008 vs. March 31, 2007

 

6.5%

 

7.2%

 

5.2%

 

(2.7)%

 

March 31, 2008 vs. December 31, 2007

 

(0.8)%

 

2.0%

 

1.3%

 

(12.5)%

 

 

 

 

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

 

35

 


Overview - continued

2008 Dispositions:

 

On March 31, 2008, we sold our 47.6% interest in Americold Realty Trust, our Temperature Controlled Logistics segment, for $220,000,000 which resulted in a net gain of $112,690,000. Accordingly, during the first quarter of 2008, we classified our Temperature Controlled Logistics segment as a discontinued operation in accordance with the provisions of SFAS No. 144 and reported revenues and expenses related to this segment as “income from discontinued operations” and the related assets and liabilities of this segment as “assets held for sale” and “liabilities held for sale” for all periods presented in the accompanying consolidated financial statements.

 

2008 Financings:

 

On January 18, 2008, we closed a construction loan providing up to $87,000,000 to finance the residential redevelopment project at 220 20th Street (formally Crystal Plaza Two). The construction loan bears interest at LIBOR plus 1.15% (3.75% at March 31, 2008) and matures in January 2011 with two six-month extension options. As of March 31, 2008, $7,000,000 was drawn under this loan.

 

On February 11, 2008, we completed a $335,000,000 refinancing of the Green Acres regional mall. This interest-only loan has a rate of LIBOR plus 1.40% (4.52% at March 31, 2008) and matures in February 2011, with two one-year extension options. We retained net proceeds of $193,000,000 after repaying the existing loan.

 

On February 20, 2008, we closed a construction loan providing up to $104,000,000 to finance the residential redevelopment project at 1229-1231 25th Street NW (“West End 25”). The construction loan bears interest at LIBOR plus 1.30% (3.86% at March 31, 2008) and matures in February 2011 with two six-month extension options. As of March 31, 2008, $6,500,000 was drawn under this loan.

 

On February 26, 2008, we completed a $150,000,000 financing of our 2101 L Street property located in Washington, DC. The loan bears interest at LIBOR plus 1.20% (3.81% at March 31, 2008) and matures in February 2011 with two one-year extension options. We retained net proceeds of $148,000,000.

 

On March 12, 2008 we completed a $260,000,000 refinancing of the River House Apartment Complex. The financing is comprised of a $196,000,000 interest-only seven year 5.43% fixed rate mortgage and a $64,000,000 interest-only ten year floating rate mortgage at the Freddie Mac Reference Note Rate plus 1.53% (3.66% at March 31, 2008). We retained net proceeds of $205,000,000 after repaying the existing loan.

 

On March 24, 2008, we closed a construction loan providing up to $290,000,000 to finance the redevelopment of a portion of the Bergen Town Center. The interest-only loan has a rate of LIBOR plus 1.50% (4.06% at March 31, 2008) and matures in March 2011 with two one-year extension options. As of March 31, 2008, $158,000,000 was drawn under this loan.

 

On March 27, 2008, we closed a construction loan providing up to $124,000,000 to finance the redevelopment of 1999 K Street. The interest-only loan has a rate of LIBOR plus 1.30% (3.95% at March 31, 2008) and matures in December 2010 with two 6-month extension options. As of March 31, 2008, $31,000,000 was drawn under this loan.

 

 

36

 


Overview - continued

The following table sets forth certain information for the properties we own directly or indirectly, including leasing activity. The leasing activity presented below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue recognition on a GAAP basis. Tenant improvements and leasing commissions are presented below based on square feet leased during the period, on a per square foot and per square foot per annum basis based on weighted average lease terms and as a percentage of initial rent per square foot.

 

(Square feet and cubic feet in thousands)

 

 

 

 

 

Merchandise Mart

 

 

As of March 31, 2008:

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Office

 

Showroom

 

 

Square feet/ cubic feet

 

 

16,025

 

 

17,874

 

 

21,820

 

 

2,390

 

 

6,169

 

Number of properties

 

 

28

 

 

88

 

 

176

 

 

8

 

 

8

 

Occupancy rate

 

 

97.6

%

 

93.4

%

 

94.2

%

 

92.6

%

 

93.5

%

Leasing Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

345

 

 

879

 

 

294

 

 

 

 

203

 

Initial rent (1)

 

$

76.16

 

$

37.13

 

$

29.98

 

$

 

$

26.23

 

Weighted average lease terms (years)

 

 

8.4

 

 

7.8

 

 

7.1

 

 

 

 

4.9

 

Rent per square foot on relet space:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

325

 

 

698

 

 

219

 

 

 

 

199

 

Initial Rent (1)

 

$

77.24

 

$

34.58

 

$

29.41

 

$

 

$

25.82

 

Prior escalated rent

 

$

52.87

 

$

27.68

 

$

25.75

 

$

 

$

25.47

 

Percentage increase:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash basis

 

 

46.1

%

 

24.9

%

 

14.2

%

 

 

 

1.4

%

GAAP basis

 

 

57.2

%

 

23.0

%

 

24.2

%

 

 

 

10.1

%

Rent per square foot on space
previously vacant:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

20

 

 

181

 

 

75

 

 

 

 

4

 

Initial rent (1)

 

$

58.58

 

$

47.00

 

$

31.65

 

$

 

$

46.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant improvements and leasing
commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per square foot

 

$

45.80

 

$

20.45

 

$

6.73

 

$

 

$

3.83

 

Per square foot per annum

 

$

5.46

 

$

2.62

 

$

0.95

 

$

 

$

0.78

 

Percentage of initial rent

 

 

7.2

%

 

7.1

%

 

3.2

%

 

 

 

3.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet/ cubic feet

 

 

15,994

 

 

17,931

 

 

21,934

 

 

2,390

 

 

6,139

 

Number of properties

 

 

28

 

 

84

 

 

177

 

 

8

 

 

8

 

Occupancy rate

 

 

97.6

%

 

93.3

%

 

94.3

%

 

96.8

%

 

93.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet/ cubic feet

 

 

14,553

 

 

17,582

 

 

20,158

 

 

2,365

 

 

6,366

 

Number of properties

 

 

27

 

 

87

 

 

163

 

 

8

 

 

8

 

Occupancy rate

 

 

97.9

%

 

91.6

%

 

93.5

%

 

96.1

%

 

92.4

%

 

_______________________________

(1)

Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

 

37

 


Overview - continued

 

Recently Issued Accounting Literature

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for financial assets and liabilities on January 1, 2008.  The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain non-financial assets and liabilities until January 1, 2009. This standard is not expected to materially affect how we determine fair value, but may result in certain additional disclosures. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and Level 3 – unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Financial assets and liabilities measured at fair value in our consolidated financial statements consist of (i) marketable equity securities–available for sale, (ii) derivative positions in marketable equity securities and (iii) the assets of our officers’ deferred compensation plan (primarily marketable equity securities and equity investments in partially owned entities), for which there is a corresponding liability on our consolidated balance sheet. Financial assets and liabilities carried at fair value as of March 31, 2008 are presented in the table below based on the hierarchy used to measure fair value:

 

 

 

 

Fair Value Hierarchy

 

(Amounts in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Marketable equity securities

$

207,932

$

207,932

 

$

 

$

 

Officers’ deferred compensation plan assets

 

71,258

 

27,573

 

 

 

 

43,685

(2)

Interest rate caps

 

49

 

 

 

49

 

 

 

Total Assets, reported at fair value (1)

$

279,239

$

235,505

 

$

49

 

$

43,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative positions in marketable equity securities

$

1,528

$

 

$

1,528

 

$

 

Officers’ deferred compensation plan liabilities

 

71,258

 

27,573

 

 

 

 

43,685

 

Total Liabilities, reported at fair value (1)

$

72,786

$

27,573

 

$

1,528

 

$

43,685

 

 

___________________

 

(1)

We chose not to elect the fair value option prescribed by SFAS 159 for our financial assets and liabilities that had not been previously carried at fair value. These financial assets and liabilities include our outstanding debt, accounts receivable, accounts payable and investments in partially owned entities.

 

(2)

The fair value of these assets was $50,578 at December 31, 2007. The $6,893 decrease from the December 31, 2007 balance is due to a decline in fair value during the three months ended March 31, 2008.

 

In September 2006, the FASB issued Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of SFAS No. 87, 88, 106 and 132R (“SFAS 158”). SFAS 158 requires an employer to (i) recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status; (ii) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The adoption of the requirement to recognize the funded status of a benefit plan and the disclosure requirements as of December 31, 2006 did not have a material effect on our consolidated financial statements. The requirement to measure plan assets and benefit obligations to determine the funded status as of the end of the fiscal year and to recognize changes in the funded status in the year in which the changes occur is effective on January 1, 2009. The adoption of the measurement date provisions of this standard is not expected to have a material effect on our consolidated financial statements.

 

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value.  SFAS 159 was effective on January 1, 2008. We have not elected the fair value option for any of our existing financial instruments on the effective date and have not determined whether or not we will elect this option for any eligible financial instruments we acquire in the future.

 

38 


 

Overview - continued

 

Recently Issued Accounting Literature - continued

 

In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R also broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and stipulates that acquisition related costs be expensed rather than included as part of the basis of the acquisition. SFAS 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for all transactions entered into on or after January 1, 2009. The adoption of this standard on January 1, 2009 could materially impact our future financial results to the extent that we acquire significant amounts of real estate, as related acquisition costs will be expensed as incurred compared to our current practice of capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.

 

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective on January 1, 2009. We are currently evaluating the impact SFAS 160 will have on our consolidated financial statements.

 

In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009 will not have a material effect on our consolidated financial statements.

 

In March 2008, the FASB re-affirmed the scope of a previously proposed FASB Staff Position (the “FSP”) that, if adopted, would affect the accounting for our convertible and exchangeable senior debentures and Series D-13 convertible preferred units. The FSP would require the initial proceeds from the sale of our convertible and exchangeable senior debentures and Series D-13 convertible preferred units to be allocated between a liability component and an equity component. The resulting discount would be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP would be effective for our fiscal year beginning on January 1, 2009 and require retroactive application. The adoption of the FSP on January 1, 2009 would result in the recognition of an aggregate unamortized debt discount of $170,927,000 (as of March 31, 2008) on our consolidated balance sheet and additional interest expense on our consolidated statements of income. Our current estimate of the incremental interest expense for each reporting period is as follows:

 

 

(Amounts in thousands)

 

 

 

 

For the year ended December 31:

 

 

 

 

2005

 

$

3,783

 

2006

 

 

6,739

 

2007

 

 

31,370

 

2008

 

 

39,014

 

2009

 

 

42,062

 

2010

 

 

44,571

 

2011

 

 

45,680

 

2012

 

 

9,103

 

 

 

39

 


Net Income and EBITDA by Segment for the Three Months Ended March 31, 2008 and 2007

 

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2008 and 2007.

 

(Amounts in thousands)

 

For the Three Months Ended March 31, 2008

 

 

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Toys

 

Other (2)

 

Property rentals

 

$

491,022

 

$

176,503

 

$

126,232

 

$

86,721

 

$

57,543

 

$

 

$

44,023

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

 

17,951

 

 

7,283

 

 

3,349

 

 

5,799

 

 

1,377

 

 

 

 

143

 

Amortization of free rent

 

 

4,099

 

 

871

 

 

1,505

 

 

(1,221

)

 

2,353

 

 

 

 

591

 

Amortization of acquired below-
market leases, net

 

 

23,264

 

 

15,329

 

 

1,105

 

 

4,954

 

 

33

 

 

 

 

1,843

 

Total rentals

 

 

536,336

 

 

199,986

 

 

132,191

 

 

96,253

 

 

61,306

 

 

 

 

46,600

 

Tenant expense reimbursements

 

 

87,477

 

 

31,523

 

 

15,532

 

 

33,690

 

 

4,589

 

 

 

 

2,143

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning revenue

 

 

13,422

 

 

17,154

 

 

 

 

 

 

 

 

 

 

(3,732

)

Management and leasing fees

 

 

3,968

 

 

1,402

 

 

3,156

 

 

365

 

 

140

 

 

 

 

(1,095

)

Lease termination fees

 

 

2,453

 

 

1,924

 

 

 

 

375

 

 

154

 

 

 

 

 

Other

 

 

8,865

 

 

3,935

 

 

4,220

 

 

(379

)

 

1,440

 

 

 

 

(351

)

Total revenues

 

 

652,521

 

 

255,924

 

 

155,099

 

 

130,304

 

 

67,629

 

 

 

 

43,565

 

Operating expenses

 

 

262,605

 

 

106,646

 

 

52,941

 

 

48,054

 

 

35,368

 

 

 

 

19,596

 

Depreciation and amortization

 

 

131,505

 

 

45,775

 

 

37,761

 

 

21,136

 

 

11,787

 

 

 

 

15,046

 

General and administrative

 

 

49,388

 

 

4,786

 

 

7,072

 

 

7,762

 

 

7,471

 

 

 

 

22,297

 

Costs of acquisition not consummated

 

 

2,283

 

 

 

 

 

 

 

 

 

 

 

 

2,283

 

Total expenses

 

 

445,781

 

 

157,207

 

 

97,774

 

 

76,952

 

 

54,626

 

 

 

 

59,222

 

Operating income (loss)

 

 

206,740

 

 

98,717

 

 

57,325

 

 

53,352

 

 

13,003

 

 

 

 

(15,657

)

Income applicable to Alexander’s

 

 

7,929

 

 

189

 

 

 

 

148

 

 

 

 

 

 

7,592

 

Income applicable to Toys “R” Us

 

 

80,362

 

 

 

 

 

 

 

 

 

 

80,362

 

 

 

(Loss) income from partially owned
entities

 

 

(30,353

)

 

2,577

 

 

1,279

 

 

2,907

 

 

518

 

 

 

 

(37,634

)

Interest and other investment income

 

 

14,104

 

 

708

 

 

679

 

 

242

 

 

93

 

 

 

 

12,382

 

Interest and debt expense

 

 

(148,179

)

 

(35,631

)

 

(29,622

)

 

(20,246

)

 

(13,021

)

 

 

 

(49,659

)

Minority interest of partially owned
entities

 

 

406

 

 

(945

)

 

 

 

14

 

 

 

 

 

 

1,337

 

Income (loss) before income taxes

 

 

131,009

 

 

65,615

 

 

29,661

 

 

36,417

 

 

593

 

 

80,362

 

 

(81,639

)

Income tax benefit (expense)

 

 

217,329

 

 

 

 

221,677

 

 

(2

)

 

(210

)

 

 

 

(4,136

)

Income (loss) from continuing
operations

 

 

348,338

 

 

65,615

 

 

251,338

 

 

36,415

 

 

383

 

 

80,362

 

 

(85,775

)

Income (loss) from discontinued
operations

 

 

111,094

 

 

 

 

 

 

(520

)

 

 

 

 

 

111,614

 

Net Income

 

 

459,432

 

 

65,615

 

 

251,338

 

 

35,895

 

 

383

 

 

80,362

 

 

25,839

 

Interest and debt expense (1)

 

 

207,961

 

 

34,004

 

 

30,628

 

 

23,827

 

 

13,233

 

 

41,495

 

 

64,774

 

Depreciation and amortization(1)

 

 

181,185

 

 

43,620

 

 

39,242

 

 

22,202

 

 

11,907

 

 

34,102

 

 

30,112

 

Income tax (benefit) expense (1)

 

 

(122,780

)

 

 

 

(221,672

)

 

2

 

 

210

 

 

93,919

 

 

4,761

 

EBITDA

 

$

725,798

 

$

143,239

 

$

99,536

 

$

81,926

 

$

25,733

 

$

249,878

 

$

125,486

 

 

The Washington, DC Office segment includes a $222,174 reduction in income tax expense resulting from a reversal of deferred tax liabilities in connection with the acquisition of H Street. Other segment EBITDA includes, a $112,690 net gain on sale of our 47.6% interest in Americold, a $34,200 write-off of pre-development costs, an $18,362 net loss on the mark-to-market of derivative instruments, $10,300 for the reversal of a mezzanine loan loss accrual, a $9,073 impairment loss on a marketable equity security and $2,283 of expense for costs of acquisitions not consummated.

 

___________________

See notes on page 42.

 

40

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended March 31, 2008 and 2007 - continued

 

 

 

For the Three Months Ended March 31, 2007

 

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Toys

 

Other (2)

 

Property rentals

 

$

400,243

 

$

137,648

 

$

105,617

 

$

77,721

 

$

61,026

 

$

 

$

18,231

 

Straight-line rents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual rent increases

 

 

14,586

 

 

10,414

 

 

479

 

 

2,897

 

 

654

 

 

 

 

142

 

Amortization of free rent

 

 

5,889

 

 

398

 

 

4,840

 

 

272

 

 

379

 

 

 

 

 

Amortization of acquired below-
market leases, net

 

 

14,005

 

 

7,292

 

 

973

 

 

5,239

 

 

30

 

 

 

 

471

 

Total rentals

 

 

434,723

 

 

155,752

 

 

111,909

 

 

86,129

 

 

62,089

 

 

 

 

18,844

 

Tenant expense reimbursements

 

 

72,466

 

 

28,708

 

 

9,356

 

 

28,697

 

 

4,793

 

 

 

 

912

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant cleaning revenue

 

 

9,843

 

 

12,086

 

 

 

 

 

 

 

 

 

 

(2,243

)

Management and leasing fees

 

 

7,199

 

 

855

 

 

6,561

 

 

344

 

 

22

 

 

 

 

(583

)

Lease termination fees

 

 

3,441

 

 

1,798

 

 

95

 

 

1,505

 

 

43

 

 

 

 

 

Other

 

 

8,572

 

 

3,781

 

 

3,099

 

 

354

 

 

1,282

 

 

 

 

56

 

Total revenues

 

 

536,244

 

 

202,980

 

 

131,020

 

 

117,029

 

 

68,229

 

 

 

 

16,986

 

Operating expenses

 

 

212,802

 

 

88,252

 

 

39,610

 

 

40,517

 

 

31,581

 

 

 

 

12,842

 

Depreciation and amortization

 

 

89,008

 

 

29,805

 

 

25,558

 

 

17,283

 

 

11,091

 

 

 

 

5,271

 

General and administrative

 

 

40,417

 

 

3,946

 

 

8,385

 

 

7,002

 

 

7,438

 

 

 

 

13,646

 

Costs of acquisition not consummated

 

 

8,807

 

 

 

 

 

 

 

 

 

 

 

 

8,807

 

Total expenses

 

 

351,034

 

 

122,003

 

 

73,553

 

 

64,802

 

 

50,110

 

 

 

 

40,566

 

Operating income (loss)

 

 

185,210

 

 

80,977

 

 

57,467

 

 

52,227

 

 

18,119

 

 

 

 

(23,580

)

Income applicable to Alexander’s

 

 

13,519

 

 

188

 

 

 

 

209

 

 

 

 

 

 

13,122

 

Income applicable to Toys “R” Us

 

 

58,661

 

 

 

 

 

 

 

 

 

 

58,661

 

 

 

Income from partially owned entities

 

 

8,695

 

 

1,287

 

 

3,692

 

 

1,295

 

 

339

 

 

 

 

2,082

 

Interest and other investment income

 

 

53,504

 

 

673

 

 

313

 

 

75

 

 

95

 

 

 

 

52,348

 

Interest and debt expense

 

 

(130,698

)

 

(29,468

)

 

(34,522

)

 

(20,008

)

 

(12,847

)

 

 

 

(33,853

)

Net gain on disposition of wholly
owned and partially owned
assets other than depreciable
real estate

 

 

909

 

 

 

 

 

 

 

 

 

 

 

 

909

 

Minority interest of partially owned
entities

 

 

350

 

 

 

 

 

 

47

 

 

 

 

 

 

303

 

Income before income taxes

 

 

190,150

 

 

53,657

 

 

26,950

 

 

33,845

 

 

5,706

 

 

58,661

 

 

11,331

 

Income tax (expense) benefit

 

 

(89

)

 

 

 

224

 

 

 

 

(313

)

 

 

 

 

Income from continuing operations

 

 

190,061

 

 

53,657

 

 

27,174

 

 

33,845

 

 

5,393

 

 

58,661

 

 

11,331

 

Loss from discontinued
operations

 

 

(1,138

)

 

 

 

(66

)

 

(34

)

 

 

 

 

 

(1,038

)

Net Income

 

 

188,923

 

 

53,657

 

 

27,108

 

 

33,811

 

 

5,393

 

 

58,661

 

 

10,293

 

Interest and debt expense (1)

 

 

198,771

 

 

30,138

 

 

35,908

 

 

22,797

 

 

13,064

 

 

46,634

 

 

50,230

 

Depreciation and amortization(1)

 

 

163,151

 

 

30,742

 

 

28,844

 

 

18,286

 

 

11,237

 

 

55,396

 

 

18,646

 

Income tax expense (1)

 

 

55,584

 

 

 

 

1,632

 

 

 

 

313

 

 

53,397

 

 

242

 

EBITDA

 

$

606,429

 

$

114,537

 

$

93,492

 

$

74,894

 

$

30,007

 

$

214,088

 

$

79,411

 

 

 

The Washington, DC Office segment includes $1,891 of expense for H Street litigation costs. Other segment EBITDA includes a $9,380 net gain on mark-to-market of derivative instruments, $8,807 for costs of acquisition not consummated and a $909 net gain on sale of marketable equity securities.

 

______________________________

See notes on following page.

 

41

 


 

Net Income and EBITDA by Segment for the Three Months Ended March 31, 2008 and 2007 - continued

 

Notes to preceding tabular information:

(1)

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

 

(2)

Other EBITDA is comprised of:

 

 

(Amounts in thousands)

 

For the Three Months
Ended March 31,

 

 

 

 

2007

 

Alexander’s

 

$

14,887

 

$

20,333

 

555 California Street

 

 

11,645

 

 

 

Lexington MLP

 

 

11,077

 

 

 

Hotel Pennsylvania

 

 

5,413

 

 

3,604

 

Industrial warehouses

 

 

1,438

 

 

1,373

 

GMH

 

 

 

 

4,168

 

Other investments

 

 

(2,834

)

 

3,911

 

 

 

 

41,626

 

 

33,389

 

Corporate general and administrative expenses

 

 

(20,242

)

 

(12,374

)

Write-off of pre-development costs

 

 

(34,200

)

 

 

Costs of acquisitions not consummated

 

 

(2,283

)

 

(8,807

)

Investment income and other

 

 

11,318

 

 

51,062

 

Income from discontinued operations (including $112,690 net gain on sale of Americold in 2008)

 

 

129,267

 

 

16,141

 

 

 

$

125,486

 

$

79,411

 

 

 

On March 31, 2008, we sold our 47.6% interest in Americold Realty Trust (“Americold”), our Temperature Controlled Logistics segment, for $220,000,000, which resulted in a net gain of $112,690,000. Accordingly, during the first quarter of 2008, we classified our Temperature Controlled Logistics segment as a discontinued operation in accordance with the provisions of SFAS No. 144 and reported revenues and expenses related to this segment as “income from discontinued operations” and the related assets and liabilities of this segment as “assets held for sale” and “liabilities held for sale” for all periods presented in the accompanying consolidated financial statements. Accordingly, our reportable segments no longer include a Temperature Controlled Logistics segment.

 

42

 


Results of Operations – Three Months Ended March 31, 2008 Compared to March 31, 2007

 

Revenues

Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below market leases, net of above market leases pursuant to SFAS No. 141 and 142, and fee income, were $652,521,000 for the quarter ended March 31, 2008, compared to $536,244,000 in the prior year’s first quarter, an increase of $116,277,000. Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Property rentals:

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Other

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1290 Avenue of the Americas

 

$

28,451

 

$

28,451

 

$

 

$

 

$

 

$

 

555 California Street

 

 

23,742

 

 

 

 

 

 

 

 

 

 

23,742

 

H Street (effect of consolidating from
May 1, 2007 vs. equity method prior)

 

 

14,515

 

 

 

 

14,515

 

 

 

 

 

 

 

Other

 

 

12,139

 

 

 

 

866

 

 

6,646

 

 

4,627

 

 

 

Development/Redevelopment

 

 

(2,124

)

 

 

 

(1,549

)

 

(575

)

 

 

 

 

Amortization of acquired below market leases, net

 

 

9,259

 

 

8,037

 

 

132

 

 

(285

)

 

3

 

 

1,372

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Pennsylvania

 

 

2,776

 

 

 

 

 

 

 

 

 

 

2,776

(1)

Trade shows

 

 

(5,200

)

 

 

 

 

 

 

 

(5,200

)(2)

 

 

 

Leasing activity (see page 37)

 

 

18,055

 

 

7,746

 

 

6,318

 

 

4,338

 

 

(213

)

 

(134

)

Total increase (decrease) in property rentals

 

 

101,613

 

 

44,234

 

 

20,282

 

 

10,124

 

 

(783

)

 

27,756

 

Tenant expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/development

 

 

9,575

 

 

4,289

 

 

1,625

 

 

1,494

 

 

 

 

2,167

 

Operations

 

 

5,436

 

 

(1,474

)(3)

 

4,551

 

 

3,500

 

 

(204

)

 

(937

)

Total increase (decrease) in tenant expense
reimbursements

 

 

15,011

 

 

2,815

 

 

6,176

 

 

4,994

 

 

(204

)

 

1,230

 

Fee and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease cancellation fee income

 

 

(988

)

 

126

 

 

(95

)

 

(1,130

)

 

111

 

 

 

Management and leasing fees

 

 

(3,231

)

 

547

 

 

(3,405

)(4)

 

21

 

 

118

 

 

(512

)

BMS Cleaning revenue

 

 

3,579

 

 

5,068

 

 

 

 

 

 

 

 

(1,489

)(5)

Other

 

 

293

 

 

154

 

 

1,121

 

 

(733

)

 

158

 

 

(407

)

Total increase (decrease) in fee and
other income

 

 

(347

)

 

5,895

 

 

(2,379

)

 

(1,842

)

 

387

 

 

(2,408

)

Total increase (decrease) in revenues

 

$

116,277

 

$

52,944

 

$

24,079

 

$

13,276

 

$

(600

)

$

26,578

 

 

______________________________

(1)

Revenue per available room (“REVPAR”) was $109.53 for the three months ended March 31, 2008 compared to $89.14 for the prior year’s quarter.

 

(2)

Primarily from the timing of a trade show held in March 2007 versus April 2008.

 

(3)

Primarily from a decrease in real estate taxes and new tenant base years.

 

(4)

Primarily from leasing fees in 2007 in connection with our management of a development project.

 

(5)

Represents the elimination of inter-company cleaning revenue from our other operating segments upon consolidation. See page 44 for the elimination of inter-company cleaning charges.

 

43

 


Results of Operations – Three Months Ended March 31, 2008 Compared to March 31, 2007

 

Expenses

Our expenses, which consist of operating, depreciation and amortization and general and administrative expenses, were $445,781,000 for the quarter ended March 31, 2008, compared to $351,034,000 in the prior year’s quarter, an increase of $94,747,000. Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating:

 

Total

 

New York
Office

 

Washington, DC
Office

 

Retail

 

Merchandise
Mart

 

Other

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1290 Avenue of the Americas

 

$

11,753

 

$

11,753

 

$

 

$

 

$

 

$

 

555 California Street

 

 

11,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,209

 

H Street (effective of consolidating from
May 1, 2007 vs. equity method prior)

 

 

7,227

 

 

 

 

7,227

 

 

 

 

 

 

 

Other

 

 

7,405

 

 

 

 

800

 

 

2,577

 

 

4,028

 

 

 

Development/Redevelopment

 

 

132

 

 

 

 

(559

)

 

691

 

 

 

 

 

Hotel activity

 

 

935

 

 

 

 

 

 

 

 

 

 

935

 

Trade shows activity

 

 

(1,223

)

 

 

 

 

 

 

 

(1,223

)(1)

 

 

Operations

 

 

12,365

 

 

6,641

(2)

 

5,863

 

 

4,270

 

 

982

 

 

(5,391

)(3)

Total increase in operating expenses

 

 

49,803

 

 

18,394

 

 

13,331

 

 

7,538

 

 

3,787

 

 

6,753

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/Development

 

 

35,824

 

 

13,862

 

 

9,567

 

 

3,145

 

 

 

 

9,250

 

Operations (due to additions to buildings and improvements)

 

 

6,673

 

 

2,108

 

 

2,636

 

 

708

 

 

696

 

 

525

 

Total increase in depreciation and amortization

 

 

42,497

 

 

15,970

 

 

12,203

 

 

3,853

 

 

696

 

 

9,775

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/Development and Other

 

 

4,205

 

 

152

 

 

(273

)

 

390

 

 

 

 

3,936

 

Operations

 

 

4,766

 

 

688

 

 

(1,040

)

 

370

 

 

33

 

 

4,715

(4)

Total increase (decrease) in general and administrative

 

 

8,971

 

 

840

 

 

(1,313

)

 

760

 

 

33

 

 

8,651

 

Costs of acquisitions not consummated

 

 

(6,524

)

 

 

 

 

 

 

 

 

 

(6,524

)

Total increase in expenses

 

$

94,747

 

$

35,204

 

$

24,221

 

$

12,151

 

$

4,516

 

$

18,655

 

 

______________________________

(1)

Primarily from the timing of a trade show held in March 2007 versus April 2008.

 

(2)

Primarily from a $4,512 increase in BMS operating expenses and a $1,611 write-off of receivables arising from the straight-lining of rent resulting from a lease termination.

 

(3)

Primarily from an increase in the elimination of inter-company fees of our operating segments upon consolidation.

 

(4)

Primarily from an increase in compensation expense and professional fees.

 

 

44

 


Results of Operations – Three Months Ended March 31, 2008 Compared to March 31, 2007

 

Income Applicable to Alexander’s

 

Our 32.8% share of Alexander’s net income (comprised of equity in net income, management, leasing, and development fees) was $7,929,000 for the three months ended March 31, 2008, compared to $13,519,000 for the prior year’s first quarter, a decrease of $5,590,000. This decrease was primarily due to $205,000 of expense for our share of accrued stock appreciation rights compensation expense in the current quarter as compared to $4,694,000 for our share of income from the reversal of accrued stock appreciation rights compensation expense in the prior year’s quarter.

 

Income Applicable to Toys

 

Our 32.7% share of Toys’ net income (comprised of equity in net income, interest income on loans receivable, and management fees) was $80,362,000 for the three months ended March 31, 2008, or $174,281,000 before our share of Toys’ income tax expense, compared to $58,661,000, or $112,058,000 before our share of Toys’ income tax expense for the prior year’s quarter. The increase in our income applicable to Toys’ before income tax expense of $62,223,000 results primarily from (i) an increase in Toys’ net sales due to improvements in comparable store sales across all divisions and benefits arising from foreign currency translation, (ii) decreased interest expense primarily due to reduced borrowings and reduced amortization of deferred financing costs, partially offset by, (iii) an increase in selling, general and administrative expenses, which as a percentage of net sales were 20.9% and 20.6% for the thirteen week period ended February 2, 2008 and the fourteen week period ended