Alexander's, Inc. - 10-Q quarterly report FY

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

As of October 20, 2005, there were 5,173,450 shares of common stock, par value $1 per share, outstanding.

     Item 1. Financial Statements

See notes to consolidated financial statements.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

     Alexander’s, Inc. (the “Company” or “Alexander’s”) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. Alexander’s conducts its activities through its manager, Vornado Realty Trust (“Vornado”).

     The consolidated balance sheet as of September 30, 2005, the consolidated statements of operations for the three and nine months ended September 30, 2005 and 2004, and the consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004 are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and 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 in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the operating results for the full year.

     The accompanying condensed consolidated financial statements include the accounts of Alexander’s and all of its wholly owned subsidiaries. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

     The Company currently operates in one business segment.

     Vornado owned 33.0% of the outstanding common stock of Alexander’s as of September 30, 2005. Steven Roth is the Chief Executive Officer and a director of the Company, the Managing General Partner of Interstate Properties (“Interstate”), a New Jersey general partnership, and the Chairman of the Board and Chief Executive Officer of Vornado. At September 30, 2005, Mr. Roth, Interstate and its other two general partners, David Mandelbaum and Russell B. Wight, Jr. (who are also directors of the Company and trustees of Vornado) owned, in the aggregate, 27.7% of the outstanding common stock of Alexander’s, in addition to the common stock owned directly by Vornado, and 9.4% of the outstanding common shares of beneficial interest of Vornado.

     The Company is managed, and its properties are leased and developed by Vornado, pursuant to agreements with one-year terms, expiring in March of each year, which are automatically renewable except for the 731 Lexington Avenue property which provides for a term lasting until substantial completion of the development of the property.

     The annual fee payable to Vornado for management of the Company is equal to the sum of (i) $3,000,000, (ii) 3% of gross income from the Kings Plaza Regional Shopping Center, and (iii) 6% of development costs with minimum guaranteed fees of $750,000 per annum.

     Vornado also provides all leasing services for the Company for a fee of 3% of rent for the first ten years of a lease term, 2% of rent for the eleventh through the twentieth year of a lease term, and 1% of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by tenants. In the event of the sale of an asset, the fee is 3% of the gross proceeds, as defined. Such amounts are payable annually in an amount not to exceed $2,500,000, until the present value of such installments, calculated at a discount rate of 9% per annum, equals the amount that would have been paid had they been paid at the time the transactions which gave rise to the commissions occurred. Pursuant to the leasing agreement, in the event third party real estate brokers are used, the fees to Vornado increase by 1% and Vornado is responsible for the fees to the third party real estate brokers, except in connection with the Bloomberg L.P. lease, where the tenant paid the third party broker directly.

     As a result of repaying the construction loan encumbering the property on July 6, 2005, the Company paid Vornado the unpaid balance of the development fee for the construction of the property of $20,624,000 and $6,300,000 for the Completion Guarantee fee.

     On May 27, 2004, the Company entered into an agreement with Vornado under which it provides property management services at the 731 Lexington Avenue property for an annual fee of $0.50 per square foot of the tenant-occupied office and retail space. Further, the Company entered into an agreement with Building Maintenance Services (“BMS”), a wholly-owned subsidiary of Vornado, to supervise the cleaning, engineering and security at the 731 Lexington Avenue property for an annual fee of 6% of costs for such services. In addition, in October 2004, the Company entered into an agreement with BMS to provide the same services at the Kings Plaza Regional Shopping Center. These agreements were negotiated and approved on behalf of the Company by a committee of directors of the Company unaffiliated with Vornado.

     At September 30, 2005, the Company owed Vornado $32,434,000 for leasing fees and $1,778,000 for management fees and property management and cleaning fees.

     The following table shows the amounts incurred under the management, leasing and development agreements.

     In addition to the fees and costs described above, the Company incurred interest of $198,000 and $2,906,000 in the three months ended September 30, 2005 and 2004, respectively, and $6,009,000 and $9,745,000 in the nine months ended September 30, 2005 and 2004, respectively on the $124,000,000 loan from Vornado which was repaid on July 6, 2005. (See Note 6 — “Debt”).

     731 Lexington Avenue is a 1.3 million square foot multi-use building. The building contains approximately 885,000 net rentable square feet of office space, approximately 174,000 net rentable square feet of retail space and approximately 248,000 net saleable square feet of residential space consisting of 105 condominium units (through a taxable REIT subsidiary (“TRS”)).

     At September 30, 2005, the Company has leased all of the office space, of which 697,000 square feet of office space was leased to Bloomberg L.P., and 176,000 square feet of office space was leased to Citibank N.A. In addition, the Company has leased 169,000 square feet of retail space to, among others, The Home Depot, Hennes & Mauritz, The Container Store, Wachovia Bank and Bank of America.

     The residential space is comprised of 105 condominium units. The total value of condominiums (i) sold, (ii) under contract for sale, and (iii) remaining to be sold is approximately $500,000,000, which would produce pre-tax profit of approximately $116,000,000. At September 30, 2005, 98 condominium units have been sold and closed and 1 unit was under sales contract, which in the aggregate would result in $107,000,000 of pre-tax profit. After income taxes, the Company will recognize approximately $57,878,000 of income in 2005 from the units sold and under contract. Of this income, $1,372,000 and $54,517,000 was recognized in the three and nine months ended September 30, 2005 using the percentage of completion method.

     On July 6, 2005, the Company completed a $320,000,000 mortgage financing on the retail space. The loan is interest only at a fixed rate of 4.93% and matures in July 2015. Of the net proceeds of approximately $312,000,000 (net of mortgage recording tax and closing costs), $90,000,000 was used to repay the construction loan and $124,000,000 was used to repay the loans from Vornado. In the event of a substantial casualty, up to $75,000,000 of this loan may become recourse.

     While the project is nearing completion, there can be no assurance that the remainder of the project will be completed on time or completed for the budgeted amount. Any failure to complete the 731 Lexington Avenue project on time or within budget may adversely affect the Company’s future cash flows, funds from operations and financial condition.

     The Company leases space to tenants in retail centers and an office building. Future base rental revenue under these non-cancelable operating leases is as follows:

     Bloomberg L.P. and Sears accounted for 37% and 10% of the Company’s consolidated revenues in the nine months ended September 30, 2005, and 39% and 11% in the nine months ended September 30, 2004. No other tenant accounted for more than 10% of the Company’s consolidated revenues.

     The following is a summary of the Company’s outstanding debt.

     Neither the Company nor any of its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceeding other than routine litigation incidental to their businesses. The Company believes that these routine legal actions will not be material to the Company’s financial condition or results of operations.

     The Company carries comprehensive liability and all-risk property insurance (fire, flood, extended coverage and rental loss insurance) with respect to its assets but is at risk for financial loss in excess of the policies’ limits. Such a loss could be material.

     On June 30, 2005, the Company renewed its annual all risk policy with limits of (i) $960,000,000 per occurrence including certified terrorist acts and $350,000,000 for non-certified terrorist acts for its 731 Lexington Avenue property, and (ii) $510,000,000 per occurrence including certified terrorist acts and $350,000,000 for non-certified terrorist acts for the remaining properties.

     The Company’s debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that a future exclusion from all-risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments, allowing the lenders to declare an event of default and accelerate repayment of debt. In addition, if lenders insist on coverage for these risks and the Company is unable to obtain coverage if the Terrorism Risk Insurance Act of 2002 is not extended, it may adversely affect the Company’s ability to finance and/or refinance its properties and businesses.

     In June 1997, the Kings Plaza Regional Shopping Center commissioned an Environmental Study and Contamination Assessment Site Investigation (the “Phase II Study”) to evaluate and delineate environmental conditions disclosed in a Phase I study. The results of the Phase II Study indicated the presence of petroleum and bis (2-ethylhexyl) phthalate contamination in the soil and groundwater. The Company has delineated the contamination and has developed a remediation approach, which is ongoing. The New York State Department of Environmental Conservation (“NYSDEC”) has approved a portion of the remediation approach. The Company accrued $2,675,000 in previous years, of which $2,612,000 has been paid as of September 30, 2005, for its estimated obligation with respect to the cleanup of the site, and which includes costs of (i) remedial investigation, (ii) feasibility studies, (iii) remedial design, (iv) remedial action and (v) professional fees. Costs of future expenditures for these environmental remediation obligations were not discounted to their present value. If NYSDEC insists on a more extensive remediation approach, the Company could incur additional obligations.

     The Company has concluded that the large majority of the contamination at the site is historic and the result of past activities of third parties. Although the Company is pursuing claims against potentially responsible third parties, and negotiations are ongoing with a former owner of the property, there can be no assurance as to the extent that the Company will be successful in obtaining recovery from such parties of the remediation costs incurred. In addition, the costs associated with further pursuit of responsible parties may be prohibitive. The Company has not recorded an asset as of September 30, 2005 for possible recoveries of environmental remediation costs from potentially responsible third parties. On January 31, 2005, the Company received a settlement of $337,500 from one of the responsible parties.

     In the fourth quarter of 2003, the Company recognized $1,289,000 of income representing a non-refundable deposit of $1,875,000 from a party that had agreed to purchase the Company’s Flushing property, net of $586,000 of transaction costs, as the party had not met its obligations under a May 30, 2002 purchase contract. On September 10, 2002, November 7, 2002, and July 8, 2004, the Company received letters from the party demanding return of the deposit. The Company, after consulting with its legal counsel, does not believe the party is entitled to a return of the deposit. There can be no assurance that the party will not institute legal action and, if it does, that it will not be successful in requiring the Company to return all or a portion of the deposit.

     The Company plans to construct a freestanding building adjacent to the mall containing approximately 120,000 square feet, which has been leased to Lowe’s Home Improvement Warehouse (“Lowe’s”). This lease is expected to commence in 2006. The cost of this project will be approximately $11.5 million which is net of a tenant reimbursement of $16.5 million. These costs include construction of structural elements which will support a second and third level. There can be no assurance that this project will be completed, completed on time or completed for the budgeted amount.

     The Company owns two land parcels containing approximately 10 acres adjacent to its Rego Park I property in Queens, New York. One parcel comprises the entire square block bounded by the Horace Harding Service Road, 97^th Street, 62^nd Drive and Junction Boulevard. The other is a parcel of approximately one-quarter square block at the intersection of Junction Boulevard and the Horace Harding Service Road.

     The Company’s plan for the entire square block parcel is a mixed-use, development containing approximately 600,000 square feet of retail space on four levels, 450 apartment units in two towers, and about a 1,400 space parking deck. On September 20, 2005, the Company received governmental approvals for this project. The Company has entered into a long-term lease with Century 21 for 134,000 square feet of retail space at this project.

     While the current plans for the one-quarter square block parcel are very preliminary, we anticipate it may include up to 80,000 square feet of retail space.

     There can be no assurance that these projects will commence, be completed, completed on time or completed for the budgeted amount.

     In 2001 the Company leased 30.3 acres of land located in Paramus, New Jersey to IKEA Property, Inc. The lease has a 40-year term with a purchase option at the end of the twentieth year for $75,000,000. The Company has a $68,000,000 interest only, non-recourse mortgage loan on the property from a third party lender. The fixed interest rate on the debt is 5.92% with interest payable monthly until maturity in October 2011. The triple-net rent each year is the sum of $700,000 plus the amount of debt service on the mortgage loan. If the purchase option is exercised, the Company will receive net cash proceeds of approximately $7,000,000 and recognize a gain on the sale of the land of approximately $62,000,000. If the purchase option is not exercised, the triple-net rent for the last 20 years will be the debt service sufficient to fully amortize $68,000,000 over the remaining 20-year lease term.

     Approximately $4,130,000 in standby letters of credit were issued at September 30, 2005.

     The following table sets forth the computation of basic and diluted earnings per share. Basic earnings per share is determined using the weighted average shares of common stock outstanding during the period. Diluted earnings per share is determined using the weighted average shares of common stock outstanding assuming all potentially dilutive securities were converted into common shares at the earliest date possible.

     Options to purchase 81,850 and 93,000 shares of the Company’s common stock were not included in the computation of net loss per common share for the three months ended September 30, 2005 and for the three and nine months ended September 30, 2004, respectively, as they were anti-dilutive.

Board of Directors and Stockholders of Alexander’s, Inc.
Paramus, New Jersey

     We have reviewed the accompanying condensed consolidated balance sheet of Alexander’s, Inc. and subsidiaries (the “Company”) as of September 30, 2005, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2005 and 2004, and cash flows for the nine month periods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

     We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with 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 condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

     We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Alexander’s, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Parsippany, New Jersey
October 27, 2005

     Certain statements contained herein and throughout this Quarterly Report on Form 10-Q 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. The Company’s future results, financial condition, results of operations 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,” “will” or other similar expressions in this Quarterly Report on Form 10-Q. These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. Factors that might cause such a material difference include, but are not limited to: (a) national, regional and local economic conditions; (b) the consequences of any armed conflict involving, or terrorist attack against, the United States; (c) our ability to secure adequate insurance; (d) local conditions, such as an oversupply of space or a reduction in demand for real estate in the area; (e) competition from other available space; (f) whether tenants consider a property attractive; (g) the financial condition of our tenants, including the extent of tenant bankruptcies or defaults; (h) whether we are able to pass some or all of any increased operating costs we incur through to our tenants; (i) how well we manage our properties; (j) any increase in interest rates; (k) any decreases in market rental rates; (l) the timing and costs associated with property development, improvements and rentals; (m) changes in taxation or zoning laws; (n) government regulations; (o) our failure to continue to qualify as a real estate investment trust; (p) the availability of financing on acceptable terms or at all; (q) potential liabilities under environmental or other laws or regulations; (r) general competitive factors; (s) dependence upon Vornado Realty Trust (“Vornado”); and (t) possible conflicts of interest with Vornado.

     For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution on relying on forward-looking statements, which is based on results and trends at the time they are made, to anticipate future results or trends.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of the Company’s consolidated financial statements for the three and nine months ended September 30, 2005 and 2004. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

     The Company is a real estate investment trust (“REIT”) engaged in leasing, managing, developing and redeveloping properties. Alexander’s activities are conducted through its manager, Vornado Realty Trust (“Vornado”). Alexander’s has six properties in the greater New York City metropolitan area including the 731 Lexington Avenue property, a 1,300,000 square foot multi-use building in Manhattan, and the Kings Plaza Regional Shopping Center located in Brooklyn.

     The Company competes with a large number of real estate property owners and developers. The Company success depends upon, among other factors, trends of national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation, population trends, zoning laws, and the ability of the Company to lease, sublease or sell its properties, at profitable levels.

     The residential space at 731 Lexington Avenue contains approximately 248,000 net saleable square feet, consisting of 105 condominium units. The total value of condominiums (i) sold, (ii) under contract for sale, and (iii) remaining to be sold is approximately $500,000,000, which would produce pre-tax profit of approximately $116,000,000. At September 30, 2005, 98 condominium units have been sold and closed and 1 unit was under sales contract, which in the aggregate would result in $107,000,000 of pre-tax profit. After income taxes, the Company will recognize approximately $57,878,000 of income in 2005 from the units sold and under contract. Of this income, $1,372,000 and $54,517,000 was recognized in the three and nine months ended September 30, 2005 using the percentage of completion method.

     Compensation expense for each stock appreciation right (“SARs”) is measured by the excess of the stock price at the current balance sheet date over the stock price at the previous balance sheet date. If the stock price is lower at the current balance sheet date, previously recognized expense is reversed but not below zero. Based on Alexander’s closing stock price of $270.00 on September 30, 2005 (compared to $248.75 on June 30, 2005 and $215.00 on December 31, 2004), the Company recorded SARs compensation expense of $18,062,000 and $46,750,000, for the three and nine months ended September 30, 2005, respectively. The Company recorded SARs compensation expense of $26,656,000 and $63,274,000, for the three and nine months ended September 30, 2004, respectively.

     As construction of the Lexington Avenue development project progresses and as components of the building are placed into service, the Company will cease capitalizing property operating expenses and interest expense and begin to expense these items, as well as depreciation, for those components. In the nine months ended September 30, 2005, the Company transferred approximately $116,320,000 from “Construction in Progress” to “Buildings, leaseholds and leasehold improvements,” representing the space delivered. In addition, during the nine months ended September 30, 2005, the Company transferred approximately $323,533,000 from “Construction in Progress” as its cost portion relating to the sales of its condominium units.

     A summary of the Company’s critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 2 — Summary of Significant Accounting Policies” to the consolidated financial statements included therein. There have been no significant changes to those policies during the third quarter of 2005.

     The Company had a net loss of $6,754,000, or $1.34 per diluted share for the quarter ended September 30, 2005, compared to a net loss of $11,693,000, or $2.33 per diluted share in the prior year’s quarter. Net loss for the quarter ended September 30, 2005 includes (i) an accrual of $18,062,000 for SARs compensation expense, (ii) an after-tax gain of $1,372,000 from the sale of condominium units at the 731 Lexington Avenue property, and (iii) a $736,000 write-off of unamortized deferred debt expense in connection with the repayment of the remaining principal amount of the construction loan. Net loss for the quarter ended September 30, 2004 includes (i) an accrual of $26,656,000 for SARs compensation expense, and (ii) a net gain of $3,862,000 from the sale of other non-depreciable real estate.

     The Company had net income of $41,928,000, or $8.25 per diluted share for the nine months ended September 30, 2005, compared to a net loss of $32,162,000, or $6.42 per diluted share in the prior year period. Net income for the nine months ended September 30, 2005 includes (i) an after-tax gain of $54,517,000 from the sale of condominium units at the 731 Lexington Avenue property, (ii) an accrual of $46,750,000 for SARs compensation expense, and (iii) a $736,000 write-off of unamortized deferred debt expense in connection with the repayment of the remaining principal amount of the construction loan. Net loss for the nine months ended September 30, 2004 includes (i) an accrual of $63,274,000 for SARs compensation, (ii) a $3,050,000 write-off for the proportionate share of unamortized deferred debt expense in connection with the reduction of the principal amount of the construction loan for the Company’s 731 Lexington Avenue project, and (iii) a net gain of $3,862,000 from the sale of other non-depreciable real estate.

     Property rentals were $33,337,000 in the quarter ended September 30, 2005, compared to $29,009,000 in the prior year’s quarter, an increase of $4,328,000, and $98,580,000 in the nine months ended September 30, 2005, compared to $80,712,000 in the prior year period, and increase of $17,868,000. These increases were primarily attributable to tenants located in the 731 Lexington Avenue property whose space was placed in service subsequent to the second quarter of 2004. These tenants include the Home Depot, Hennes & Mauritz, Container Store, Metrovest, Wachovia Bank, Bank of America and Citibank.

     Tenant expense reimbursements were $14,051,000 in the quarter ended September 30, 2005, compared to $9,826,000 in the prior year’s quarter, an increase of $4,225,000, and $38,219,000 in the nine months ended September 30, 2005, compared to $26,687,000 in the prior year period, an increase of $11,532,000. These increases were largely due to reimbursements received from the tenants whose space was placed in service subsequent to the second quarter of 2004 at the 731 Lexington Avenue property.

     Operating expenses were $17,567,000 in the quarter ended September 30, 2005, compared to $12,732,000 in the prior year’s quarter, an increase of $4,835,000, and $45,982,000 in the nine months ended September 30, 2005, compared to $33,969,000 in the prior year period, an increase of $12,013,000. These increases resulted primarily from lower amounts being capitalized in the current year periods as well as additional operating costs being incurred at the 731 Lexington Avenue property as a result of the property becoming fully operational in 2005.

     General and administrative expenses were $19,225,000 in the quarter ended September 30, 2005, compared to $27,627,000 in the prior year’s quarter, a decrease of $8,402,000, and $50,306,000 in the nine months ended September 30, 2005, compared to $66,488,000 in the prior year period, a decrease of $16,182,000. These decreases were attributable to lower accruals for SARs compensation expense.

     Depreciation and amortization was $4,996,000 in the quarter ended September 30, 2005, compared to $3,785,000 in the prior year’s quarter, an increase of $1,211,000, and $14,619,000 in the nine months ended September 30, 2005, compared to $11,193,000 in the prior year period, an increase of $3,426,000. These increases were largely due to depreciation on the 731 Lexington Avenue building improvements, which became fully operational in 2005.

     Interest and other income was $4,530,000 in the quarter ended September 30, 2005, compared to $353,000 in the prior year’s quarter, an increase of $4,177,000, and $7,487,000 in the nine months ended September 30, 2005, compared to $1,090,000 in the prior year period, an increase of $6,397,000. These increases resulted primarily from (i) an increase in average cash balances of $406,000,000 and $202,000,000 in the three and nine months ended September 30, 2005, respectively and (ii) an increase in the average yields on investment of approximately 2% in the current year periods.

     Interest and debt expense was $17,520,000 in the quarter ended September 30, 2005, compared to $10,599,000 in the prior year’s quarter, an increase of $6,921,000, and $45,232,000 in the nine months ended September 30, 2005, compared to $29,813,000 in the prior year period, an increase of $15,419,000. These increases resulted primarily from (i) lower amounts of capitalized interest in the current year periods as a result of the 731 Lexington Avenue property becoming fully operational in 2005 (interest of $0 and $6,935,000 was capitalized in the three and nine months ended September 30, 2005, as compared to $6,061,000 and $18,628,000 in the comparable prior year periods), (ii) increases in the average debt outstanding of $159,310,000 and $128,605,000 in the three and nine months ended September 30, 2005, respectively, primarily due to the 731 Lexington Avenue retail financing of $320,000,000, partially offset by (iii) a decrease in average interest rates of 0.68% and 0.43% in the three and nine months ended September 30, 2005, respectively.

     The Company anticipates that cash from operations over the next twelve months together with existing cash balances will be adequate to fund its business operations, recurring capital expenditures, development capital expenditures, and debt amortization.

     731 Lexington Avenue

     The residential space at 731 Lexington Avenue is comprised of 105 condominium units. At September 30, 2005, 98 condominium units have been sold and closed and 1 unit was under sales contract. After income taxes, the Company will recognize approximately $57,878,000 of income in fiscal 2005 from these sales for the units sold or under contract. Of this amount $54,517,000 of income was recognized through the nine months ended September 30, 2005, of which $1,372,000 was recognized in the current quarter, using the percentage of completion method of accounting.

     Kings Plaza

     The Company plans to construct a freestanding building adjacent to the mall containing approximately 120,000 square feet, which has been leased to Lowe’s. This lease is expected to commence in 2006. The cost of this project, net of tenant reimbursement, will be approximately $5 million. In addition, the Company may construct a second level on this project. There can be no assurance that this project will be completed, completed on time or completed for the budgeted amount.

     Rego Park

     The Company owns two land parcels containing approximately 10 acres adjacent to its Rego Park I property in Queens, New York. One parcel comprises the entire square block bounded by the Horace Harding Service Road, 97^th Street, 62^nd Drive and Junction Boulevard. The other is a parcel of approximately one-quarter square block at the intersection of Junction Boulevard and the Horace Harding Service Road.

     The Company’s plan for the entire square block parcel is a mixed-use, development containing approximately 600,000 square feet of retail space on four levels, 450 apartment units in two towers, and about a 1,400 space parking deck. On September 20, 2005, the Company received governmental approvals to commence this project. The Company has entered into a long-term lease with Century 21 for 122,000 square feet of retail space at this project.

     While the current plans for the one-quarter square block parcel are very preliminary, we anticipate it may include up to 80,000 square feet of retail space.

     There can be no assurance that these projects will commence, be completed, completed on time or completed for the budgeted amount.

     As of September 30, 2005, 850,000 SARs were outstanding and exercisable at a weighted-average exercise price of $71.82. The agreements for these SARs require that they be settled in cash. Had the holders of these SARs chosen to exercise their rights as of September 30, 2005, the Company would have had to pay $168,456,000 in cash. Any change in the Company’s stock price from the closing stock price of $270.00 at September 30, 2005 will increase or decrease the amount the Company would have to pay upon exercise.

     The Company carries comprehensive liability and all-risk property insurance (fire, flood, extended coverage and rental loss insurance) with respect to its assets but is at risk for financial loss in excess of the policies’ limits. Such a loss could be material.

     On June 30, 2005, the Company renewed its annual all risk policy with limits of (i) $960,000,000 per occurrence including certified terrorist acts and $350,000,000 for non-certified terrorist acts for its 731 Lexington Avenue property, and (ii) $510,000,000 per occurrence including certified terrorist acts and $350,000,000 for non-certified terrorist acts for the remaining properties.

     The Company’s debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that a future exclusion from all-risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments, allowing the lenders to declare an event of default and accelerate repayment of debt. In addition, if lenders insist on coverage for these risks and the Company is unable to obtain coverage if the Terrorism Risk Insurance Act of 2002 is not extended, it may adversely affect the Company’s ability to finance and/or refinance its properties and businesses.

     Net cash provided by operating activities of $26,836,000 was comprised of (i) net income of $41,928,000, and (ii) the net change in operating assets and liabilities of $53,947,000, partially offset by non-cash items of $69,039,000. The adjustments for non-cash items are primarily comprised of (a) $64,687,000 resulting from the after-tax gain on the sales of condominiums (b) the effect of straight-lining of rental income of $21,919,000, and partially offset by (c) $16,831,000 of depreciation and amortization.

     Net cash provided by investing activities of $340,909,000 was primarily comprised of proceeds from the sales of condominiums of $437,436,000, partially offset by capital expenditures of $92,230,000. The capital expenditures primarily related to the 731 Lexington Avenue property.

     Net cash provided by financing activities of $119,221,000 was primarily comprised of borrowings collateralized by the 731 Lexington Avenue property of $344,832,000, partially offset by debt repayments of $216,879,000.

     Net cash provided by operating activities of $17,906,000 was comprised of the net change in operating assets and liabilities of $75,882,000, partially offset by (i) a net loss of $32,162,000 and (ii) non-cash items of $25,814,000. The adjustments for non-cash items were comprised of (a) the effect of straight-lining of rental income of $38,691,000, (b) a gain on sale of other real estate of $3,862,000, partially offset by (c) $13,689,000 of depreciation and amortization and (c) $3,050,000 resulting from the write off of unamortized deferred debt expense.

     Net cash used in investing activities of $112,369,000 was comprised of capital expenditures of $115,577,000 and net cash restricted for operating liabilities of $1,086,000, partially offset by (iii) net proceeds from the sale of real estate of $4,294,000. The capital expenditures primarily related to the 731 Lexington Avenue project.

     Net cash provided by financing activities of $199,877,000 resulted primarily from borrowings collateralized by 731 Lexington Avenue of $458,306,000, partially offset by debt repayments of $255,812,000 and debt issuance costs of $3,461,000.

     FFO for the three and nine months ended September 30, 2005 and 2004

     FFO was a negative $1,779,000 or $0.35 per diluted share for the quarter ended September 30, 2005, compared to a negative $7,908,000 or $1.58 per diluted share in the prior year’s quarter, an increase of 6,129,000 or $1.23 per diluted share, and a positive $56,486,000 or $11.12 per diluted share for the nine months ended September 30, 2005, compared to a negative $20,969,000 or $4.19 per diluted share in the prior year’s period, an increase of $77,455,000 or $15.31 per diluted share. FFO for the three and nine months ended September 30, 2005 include (i) an after-tax gain of $1,372,000 and $54,517,000, respectively from the sale of condominium units at the 731 Lexington Avenue property, (ii) accruals for SARs compensation expense of $18,062,000 and $46,750,000, respectively and (iii) a $736,000 write-off of unamortized deferred debt expense in connection with the repayment of the remaining principal amount of the construction loan. FFO for the three and nine months ended September 30, 2004 include (i) accruals for SARs compensation expense of $26,656,000 and $63,274,000, respectively and (ii) a net gain of $3,862,000 from the sale of other non-depreciable real estate. FFO for the nine months ended 2004 also includes a $3,050,000 write-off for the proportionate share of unamortized deferred debt expense in connection with the reduction of the principal amount of the construction loan for the 731 Lexington Avenue project. The following table reconciles net (loss) income to FFO.

     FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income or loss determined in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

     Management, investors and industry analysts use FFO as a supplemental measure of operating performance of equity REITs. FFO should be evaluated along with GAAP net earnings and net earnings per diluted share (the most directly comparable GAAP measures), as well as cash flow from operating activities, investing activities and financing activities, in evaluating the operating performance of equity REITs. Management believes that FFO is helpful to investors as a supplemental performance measure because this measure excludes the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs, which implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, these non-GAAP measures can facilitate comparisons of operating performance between periods and among other equity REITs.

     FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as disclosed in the Company’s Statements of Cash Flows. FFO should not be considered as an alternative to net loss as an indicator of the Company’s operating performance or as an alternative to cash flows as a measure of liquidity.

     At September 30, 2005, the Company had $1,080,481,000 of fixed rate debt at a weighted average interest rate of 5.81%, as such the Company has no exposure to changes in interest rates.

     The fair value of the Company’s debt, estimated by discounting future cash flows using the current rates available to borrowers with similar credit ratings for the remaining terms of such debt, is less than the aggregate carrying amount by approximately $45,850,000 at September 30, 2005. Such fair value estimates are not necessarily indicative of the amounts that would be paid upon liquidation of the Company’s debt.

     (a) Disclosure Controls and Procedures — The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

     (b) Internal Control Over Financial Reporting — There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Neither the Company nor any of its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceeding other than routine litigation incidental to their businesses. The Company believes that these routine legal actions will not be material to the Company’s financial condition or results of operations.

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.