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:
June 30, 2015
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from:
to
Commission File Number:
001-11954
VORNADO REALTY TRUST
(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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 the definitions 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
As of June 30, 2015, 188,496,525 of the registrant’s common shares of beneficial interest are outstanding.
PART I.
Financial Information:
Page Number
Item 1.
Financial Statements:
Consolidated Balance Sheets (Unaudited) as of
June 30, 2015 and December 31, 2014
3
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2015 and 2014
4
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three and Six Months Ended June 30, 2015 and 2014
5
Consolidated Statements of Changes in Equity (Unaudited) for the
Six Months Ended June 30, 2015 and 2014
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
34
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
74
Item 4.
Controls and Procedures
PART II.
Other Information:
Legal Proceedings
75
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
76
EXHIBIT INDEX
77
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
December 31, 2014
ASSETS
Real estate, at cost:
Land
$
4,036,944
3,861,913
Buildings and improvements
12,188,912
11,705,749
Development costs and construction in progress
1,273,897
1,128,037
Leasehold improvements and equipment
129,930
126,659
Total
17,629,683
16,822,358
Less accumulated depreciation and amortization
(3,303,014)
(3,161,633)
Real estate, net
14,326,669
13,660,725
Cash and cash equivalents
516,337
1,198,477
Restricted cash
127,857
176,204
Marketable securities
159,991
206,323
Tenant and other receivables, net of allowance for doubtful accounts of $10,944 and $12,210
115,049
109,998
Investments in partially owned entities
1,477,090
1,246,496
Real estate fund investments
565,976
513,973
Receivable arising from the straight-lining of rents, net of allowance of $3,229 and $3,190
851,894
787,271
Deferred leasing and financing costs, net of accumulated amortization of $280,286 and $281,109
528,179
475,158
Identified intangible assets, net of accumulated amortization of $207,744 and $199,821
245,846
225,155
Assets related to discontinued operations
34,891
2,238,474
Other assets
636,128
410,066
19,585,907
21,248,320
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable
8,562,314
8,263,165
Senior unsecured notes
847,463
1,347,159
Revolving credit facility debt
400,000
-
Accounts payable and accrued expenses
437,813
447,745
Deferred revenue
390,636
358,613
Deferred compensation plan
118,931
117,284
Liabilities related to discontinued operations
12,611
1,511,362
Other liabilities
417,935
375,830
Total liabilities
11,187,703
12,421,158
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 11,455,453 and 11,356,550 units outstanding
1,087,466
1,336,780
Series D cumulative redeemable preferred units - 177,101 and 1 units outstanding
5,428
1,000
Total redeemable noncontrolling interests
1,092,894
1,337,780
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 52,678,429 and 52,678,939 shares
1,277,010
1,277,026
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 188,496,525 and 187,887,498 shares
7,517
7,493
Additional capital
7,161,150
6,873,025
Earnings less than distributions
(1,958,546)
(1,505,385)
Accumulated other comprehensive income
50,613
93,267
Total Vornado shareholders' equity
6,537,744
6,745,426
Noncontrolling interests in consolidated subsidiaries
767,566
743,956
Total equity
7,305,310
7,489,382
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
For the Three Months Ended
For the Six Months Ended
June 30,
2015
2014
REVENUES:
Property rentals
514,843
478,490
1,015,117
945,630
Tenant expense reimbursements
62,215
55,110
129,136
114,411
Fee and other income
39,230
40,811
78,837
76,751
Total revenues
616,288
574,411
1,223,090
1,136,792
EXPENSES:
Operating
242,690
230,398
497,183
466,959
Depreciation and amortization
136,957
113,200
261,079
244,992
General and administrative
39,189
40,478
97,681
87,980
Acquisition and transaction related costs
4,061
1,067
6,042
2,352
Total expenses
422,897
385,143
861,985
802,283
Operating income
193,391
189,268
361,105
334,509
Loss from partially owned entities
(5,231)
(53,742)
(7,636)
(51,763)
Income from real estate fund investments
26,368
100,110
50,457
118,258
Interest and other investment income, net
5,666
9,396
16,458
21,246
Interest and debt expense
(92,092)
(103,913)
(183,766)
(200,225)
Net gain on disposition of wholly owned and partially owned assets
905
1,860
10,540
Income before income taxes
128,102
142,024
238,478
232,565
Income tax benefit (expense)
88,072
(3,280)
87,101
(4,131)
Income from continuing operations
216,174
138,744
325,579
228,434
(Loss) income from discontinued operations
(774)
26,943
15,067
35,409
Net income
215,400
165,687
340,646
263,843
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(19,186)
(63,975)
(35,068)
(75,554)
Operating Partnership
(10,198)
(4,704)
(15,485)
(8,564)
Net income attributable to Vornado
186,016
97,008
290,093
179,725
Preferred share dividends
(20,365)
(20,366)
(39,849)
(40,734)
NET INCOME attributable to common shareholders
165,651
76,642
250,244
138,991
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.88
0.27
1.25
0.56
Income from discontinued operations, net
0.14
0.08
0.18
Net income per common share
0.41
1.33
0.74
Weighted average shares outstanding
188,365
187,527
188,183
187,418
INCOME (LOSS) PER COMMON SHARE - DILUTED:
(Loss) income from discontinued operations, net
(0.01)
0.07
0.87
1.32
189,600
188,617
189,775
188,431
DIVIDENDS PER COMMON SHARE
0.63
0.73
1.26
1.46
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Change in unrealized net (loss) gain on available-for-sale securities
(25,000)
1,878
(46,332)
15,003
Pro rata share of other comprehensive (loss) income of
nonconsolidated subsidiaries
(1,191)
14,163
(1,034)
5,877
Change in value of interest rate swap and other
2,848
(547)
2,077
1,064
Comprehensive income
192,057
181,181
295,357
285,787
Less comprehensive income attributable to noncontrolling interests
(28,037)
(69,578)
(47,918)
(85,378)
Comprehensive income attributable to Vornado
164,020
111,603
247,439
200,409
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Non-
Accumulated
controlling
Earnings
Other
Interests in
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
Consolidated
Shares
Amount
Capital
Distributions
Income (Loss)
Subsidiaries
Equity
Balance, December 31, 2014
52,679
187,887
Net income attributable to
noncontrolling interests in
consolidated subsidiaries
35,068
Distribution of Urban Edge
Properties
(464,262)
(341)
(464,603)
Dividends on common shares
(237,160)
Dividends on preferred shares
Common shares issued:
Upon redemption of Class A
units, at redemption value
400
16
43,262
43,278
Under employees' share
option plan
195
7
12,972
(2,579)
10,400
Under dividend reinvestment plan
701
Contributions:
51,725
Distributions:
(62,495)
(255)
Conversion of Series A preferred
shares to common shares
(1)
(16)
1
Deferred compensation shares
and options
1,653
(359)
1,295
Change in unrealized net loss on
available-for-sale securities
Pro rata share of other
comprehensive loss of
Change in value of interest rate swap
2,073
Adjustments to carry redeemable
Class A units at redemption value
229,521
Redeemable noncontrolling interests'
share of above adjustments
2,635
955
(92)
867
Balance, June 30, 2015
52,678
188,497
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
Balance, December 31, 2013
52,683
1,277,225
187,285
7,469
7,143,840
(1,734,839)
71,537
829,512
7,594,744
75,554
(273,694)
199
19,763
19,771
159
9,200
9,206
9
919
5,297
(132,819)
(301)
Transfer of noncontrolling interest
in real estate fund investments
(33,028)
(4)
(193)
193
3,383
(340)
3,044
Change in unrealized net gain
on available-for-sale securities
comprehensive income of
1,065
(227,338)
(1,260)
(6)
(297)
(2,368)
(5)
(2,677)
Balance, June 30, 2014
187,665
7,484
6,949,663
(1,872,250)
92,221
744,210
7,198,354
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of deferred financing costs)
272,942
288,187
Reversal of allowance for deferred tax assets
(90,030)
Return of capital from real estate fund investments
83,443
140,920
Straight-lining of rental income
(64,121)
(33,413)
Net realized and unrealized gains on real estate fund investments
(41,857)
(111,227)
Distributions of income from partially owned entities
37,821
25,784
Net gains on sale of real estate and other
(32,243)
Amortization of below-market leases, net
(26,132)
(22,624)
Other non-cash adjustments
26,569
20,546
7,636
51,763
(1,860)
(10,540)
Impairment losses
256
20,842
Defeasance cost in connection with the refinancing of mortgage notes payable
5,589
Changes in operating assets and liabilities:
(95,000)
(2,666)
Tenant and other receivables, net
(5,051)
(2,355)
Prepaid assets
(138,473)
(138,884)
(46,858)
(43,842)
(26,440)
2,157
(16,632)
(6,437)
Net cash provided by operating activities
184,616
447,643
Cash Flows from Investing Activities:
Acquisitions of real estate and other
(381,001)
(8,963)
Proceeds from sales of real estate and related investments
334,725
125,037
(200,970)
(214,615)
Additions to real estate
(137,528)
(105,116)
(137,465)
(62,894)
Distributions of capital from partially owned entities
29,666
1,791
25,118
102,087
Investments in loans receivable
(23,919)
Proceeds from repayments of mortgage and mezzanine loans receivable and other
16,772
96,159
Net cash used in investing activities
(474,602)
(66,514)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Proceeds from borrowings
1,746,460
1,398,285
Repayments of borrowings
(1,607,574)
(313,444)
Dividends paid on common shares
Cash included in the spin-off of Urban Edge Properties
(225,000)
Distributions to noncontrolling interests
(77,447)
(149,944)
Contributions from noncontrolling interests
Dividends paid on preferred shares
(40,737)
Debt issuance costs
(14,053)
(29,560)
Proceeds received from exercise of employee share options
13,683
10,125
Repurchase of shares related to stock compensation agreements and/or related
tax withholdings
(2,939)
(637)
Purchase of marketable securities in connection with the defeasance of mortgage
notes payable
(198,884)
Net cash (used in) provided by financing activities
(392,154)
406,807
Net (decrease) increase in cash and cash equivalents
(682,140)
787,936
Cash and cash equivalents at beginning of period
583,290
Cash and cash equivalents at end of period
1,371,226
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $17,550 and $30,182
178,461
214,239
Cash payments for income taxes
6,584
6,726
Non-Cash Investing and Financing Activities:
Non-cash distribution of Urban Edge Properties:
Assets
1,722,263
Liabilities
(1,482,660)
(239,603)
Adjustments to carry redeemable Class A units at redemption value
Transfer of interest in real estate to Pennsylvania Real Estate Investment Trust
(145,313)
Write-off of fully depreciated assets
(81,027)
(85,037)
Accrued capital expenditures included in accounts payable and accrued expenses
70,672
111,742
Like-kind exchange of real estate:
Acquisitions
62,355
Dispositions
(38,822)
Financing assumed in acquisitions
62,000
Marketable securities transferred in connection with the defeasance of mortgage
198,884
Defeasance of mortgage notes payable
(193,406)
Elimination of a mortgage and mezzanine loan asset and liability
59,375
Transfer of interest in real estate fund investments to an unconsolidated joint venture
(58,564)
Transfer of noncontrolling interest in real estate fund investments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Vornado is the sole general partner of, and owned approximately 94.0% of the common limited partnership interest in, the Operating Partnership at June 30, 2015. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to Urban Edge Properties (“UE”) (NYSE: UE). As part of this transaction, we retained 5,717,184 UE operating partnership units (5.4% ownership interest). We are providing transition services to UE for an initial period of up to two years, including information technology, human resources, tax and financial reporting. UE is providing us with leasing and property management services for (i) the Monmouth Mall, (ii) certain small retail properties that we plan to sell, and (iii) our affiliate, Alexander’s, Inc. (NYSE: ALX), Rego Park retail assets. Steven Roth, our Chairman and Chief Executive Officer is a member of the Board of Trustees of UE. The spin-off distribution was effected by Vornado distributing one UE common share for every two Vornado common shares. Beginning in the first quarter of 2015, the historical financial results of UE are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Basis of Presentation
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and its consolidated subsidiaries, including the Operating Partnership. All intercompany amounts have been eliminated. 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 (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the SEC and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014, as filed with the SEC.
We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the operating results for the full year.
Certain prior year balances have been reclassified in order to conform to the current period presentation. Beginning in the three months ended March 31, 2015, the Company classifies signage revenue within “property rentals”. For the three and six months ended June 30, 2014, $8,873,000 and $18,191,000, respectively, related to signage revenue has been reclassified from “fee and other income” to “property rentals” to conform to the current period presentation.
Significant Accounting Policies
Condominium Units Held For Sale: Pursuant to ASC 605-35-25-88, Revenue Recognition: Completed Contract Method, revenue from condominium unit sales is recognized upon closing of the sale, as all conditions for full profit recognition have not been met until that time. We use the relative sales value method to allocate costs to individual condominium units.
We are constructing a residential condominium tower containing 392,000 salable square feet on our 220 Central Park South (“220 CPS”) development site. As of June 30, 2015, we had entered into agreements to sell approximately 40% of the project for aggregate sales proceeds of $1.4 billion. In connection therewith, $209,902,000 of deposits are held with a third party escrow agent.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. Basis of Presentation and Significant Accounting Policies - continued
Significant Accounting Policies - continued
Income Taxes: We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856‑860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We distribute to our shareholders 100% of our taxable income and therefore, no provision for Federal income taxes is required.
We have elected to treat certain consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries pursuant to an amendment to the Internal Revenue Code that became effective January 1, 2001. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to Federal and State income tax at regular corporate tax rates.
At June 30, 2015 and December 31, 2014, our taxable REIT subsidiaries had deferred tax assets of $95,419,000 and $94,100,000, respectively, which are included in “other assets” on our consolidated balance sheets. Prior to the quarter ended June 30, 2015, there was a full valuation allowance against our deferred tax assets because we had not determined that it is more-likely-than-not that we would use the net operating loss carryforwards to offset future taxable income. During the second quarter of 2015, we began to enter into agreements to sell residential condominium units at 220 CPS and as of June 30, 2015, we had entered into agreements to sell approximately 40% of the project for aggregate sales proceeds of $1.4 billion. Based on these agreements, among other factors, we have concluded that it is more-likely-than-not that we will generate sufficient taxable income to realize the deferred tax assets. Accordingly, during the second quarter of 2015, we reversed $90,030,000 of the allowance for deferred tax assets and recognized an income tax benefit in our consolidated statements of income in the three and six months ended June 30, 2015.
3. Recently Issued Accounting Literature
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment. Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that began after December 15, 2014. Upon adoption of this standard on January 1, 2015, individual properties sold in the ordinary course of business are not expected to qualify as discontinued operations. The financial results of UE and certain other retail assets are reflected in our consolidated financial statements as discontinued operations for all periods presented (see Note 8 – Discontinued Operations for further details).
In May 2014, the FASB issued an update ("ASU 2014-09") establishing ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
11
3. Recently Issued Accounting Literature - continued
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation. ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. We are currently evaluating the impact of the adoption of ASU 2014-12 on our consolidated financial statements.
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. We are currently evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
In April 2015, the FASB issued an update (“ASU 2015-03”) Simplifying the Presentation of Debt Issuance Costs to ASC Topic 835, Interest. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets. ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update on January 1, 2016 will not have a material impact on our consolidated financial statements.
4. Acquisitions
On January 20, 2015, we and one of our real estate fund’s limited partners co-invested with the Fund to buy out the Fund’s joint venture partner’s 57% interest in the Crowne Plaza Times Square Hotel (see Note 5 – Real Estate Fund Investments).
On March 18, 2015, we acquired the Center Building, a 437,000 square foot office building, located at 33-00 Northern Boulevard in Long Island City, New York, for $142,000,000, including the assumption of an existing $62,000,000, 4.43% mortgage maturing in October 2018.
On June 2, 2015, we completed the acquisition of 150 West 34th Street, a 78,000 square foot retail property leased to Old Navy through May 2019, and 226,000 square feet of additional zoning air rights, for approximately $355,000,000. At closing we completed a $205,000,000 financing of the property (see Note 10 – Debt).
12
5. Real Estate Fund Investments
We are the general partner and investment manager of Vornado Capital Partners Real Estate Fund (the “Fund”), which has an eight-year term and a three-year investment period that ended in July 2013. During the investment period, the Fund was our exclusive investment vehicle for all investments that fit within its investment parameters, as defined. The Fund is accounted for under ASC 946, Financial Services – Investment Companies (“ASC 946”) and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings. We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting.
On January 20, 2015, we and one of the Fund’s limited partners co-invested with the Fund to buy out the Fund’s joint venture partner’s 57% interest in the Crowne Plaza Times Square Hotel (the “Co-Investment”). The purchase price for the 57% interest was approximately $95,000,000 (our share $39,000,000) which valued the property at approximately $480,000,000. The property is encumbered by a $310,000,000 mortgage loan bearing interest at LIBOR plus 2.80% which matures in December 2018 with a one-year extension option. Our aggregate ownership interest in the property increased to 33% from 11%. The Co-Investment is also accounted for under ASC 946 and is included as a component of “real estate fund investments” on our consolidated balance sheet.
On March 25, 2015, the Fund completed the sale of 520 Broadway in Santa Monica, CA for $91,650,000. The Fund realized a $24,705,000 net gain over the holding period.
At June 30, 2015, we had six real estate fund investments with an aggregate fair value of $565,976,000, or $193,164,000 in excess of cost, and had remaining unfunded commitments of $102,324,000, of which our share was $25,581,000. Below is a summary of income from the Fund and the Co-Investment for the three and six months ended June 30, 2015 and 2014.
Net investment income
2,150
3,052
8,600
7,031
Net realized gains on exited investments
886
75,069
25,591
Previously recorded unrealized gains on exited investments
(35,365)
(23,279)
(22,388)
Net unrealized gains on held investments
23,332
57,354
39,545
58,546
Less income attributable to noncontrolling interests
(15,872)
(61,780)
(29,411)
(72,629)
Income from real estate fund investments attributable to Vornado (1)
10,496
38,330
21,046
45,629
Excludes property management, leasing and development fees of $633 and $638 for the three months ended June 30, 2015 and 2014, respectively, and $1,337 and $1,256 for the six months ended June 30, 2015 and 2014, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
6. Marketable Securities
Below is a summary of our marketable securities portfolio as of June 30, 2015 and December 31, 2014.
As of June 30, 2015
As of December 31, 2014
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
156,617
72,549
84,068
202,789
130,240
3,374
3,534
87,442
133,774
13
7. Investments in Partially Owned Entities
Toys “R” Us (“Toys”)
As of June 30, 2015, we own 32.5% of Toys. We have not guaranteed any of Toys’ obligations and are not committed to provide any support to Toys. Pursuant to ASC 323-10-35-20, we discontinued applying the equity method for our Toys’ investment when the carrying amount was reduced to zero in the third quarter of 2014. We will resume application of the equity method if, during the period the equity method has been suspended, our share of unrecognized net income exceeds our share of unrecognized net losses.
In the first quarter of 2014, we recognized our share of Toys’ fourth quarter net income of $75,196,000 and a corresponding non-cash impairment loss of the same amount.
Below is a summary of Toys’ latest available financial information on a purchase accounting basis:
Balance as of
May 2, 2015
November 1, 2014
Balance Sheet:
9,772,000
11,267,000
8,965,000
10,377,000
Noncontrolling interests
85,000
82,000
Toys “R” Us, Inc. equity (1)
722,000
808,000
May 3, 2014
Income Statement:
2,325,000
2,479,000
7,308,000
7,746,000
Net (loss) income attributable to Toys
(129,700)
(194,000)
64,000
(111,000)
At June 30, 2015, the carrying amount of our investment in Toys is less than our share of Toys' equity by approximately $234,553. This basis difference results primarily from non-cash impairment losses aggregating $355,953 that we have recognized through June 30, 2015. We have allocated the basis difference primarily to Toys' real estate.
As of June 30, 2015, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity. We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.
As of June 30, 2015, the market value (“fair value” pursuant to ASC 820, Fair Value Measurements and Disclosures) of our investment in Alexander’s, based on Alexander’s June 30, 2015 closing share price of $410.00, was $678,168,000, or $547,529,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 2015, the carrying amount of our investment in Alexander’s exceeds our share of the equity in the net assets of Alexander’s by approximately $40,690,000. The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to real estate (land and buildings). We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This depreciation is not material to our share of equity in Alexander’s net income. The basis difference related to the land will be recognized upon disposition of our investment.
14
7. Investments in Partially Owned Entities - continued
Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX) - continued
Below is a summary of Alexander’s latest available financial information:
1,418,000
1,423,000
1,074,000
1,075,000
Stockholders' equity
344,000
348,000
For the Three Months Ended June 30,
51,000
50,000
103,000
99,000
Net income attributable to Alexander’s
17,000
35,000
32,000
Urban Edge Properties (“UE”) (NYSE: UE)
As part of our spin-off of substantially all of our retail segment to UE on January 15, 2015 (see Note 1 – Organization), we retained 5,717,184 UE operating partnership units, representing a 5.4% ownership interest in UE. We account for our investment in UE under the equity method and will recognize our share of UE’s earnings on a one-quarter lag basis. We are providing transition services to UE for an initial period of up to two years, including information technology, human resources, tax and financial reporting. UE is providing us with leasing and property management services for (i) the Monmouth Mall, (ii) certain small retail properties that we plan to sell, and (iii) our affiliate, Alexander’s, Rego Park retail assets.
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT Associates, L.P., which is the operating partnership of PREIT, in exchange for $485,313,000; comprised of $340,000,000 of cash and 6,250,000 PREIT operating partnership units (valued at $145,313,000 or $23.25 per PREIT unit) (See Note 8 – Discontinued Operations). $19,000,000 of tenant improvements and allowances was credited to PREIT as a closing adjustment. As a result of this transaction, we own an 8.1% interest in PREIT. We account for our investment in PREIT under the equity method and will recognize our share of PREIT’s earnings on a one-quarter lag basis.
510 West 22nd Street
On June 24, 2015, we entered into a joint venture, in which we own a 55% interest, to develop a 173,000 square foot Class-A office building, located along the western edge of the High Line at 510 West 22nd Street. The development cost of this project is approximately $225,000,000. The development is expected to commence during the third quarter of 2015 and be completed in 2017.
15
7. Investments in Partially Owned Entities – continued
Below are schedules summarizing our investments in, and (loss) income from, partially owned entities.
Percentage
Ownership at
Investments:
Partially owned office buildings (1)
Various
859,544
760,749
PREIT Associates
8.1%
143,031
Alexander’s
32.4%
130,639
131,616
India real estate ventures
4.1%-36.5%
50,542
76,752
UE
5.4%
25,610
Toys
32.5%
Other investments (2)
267,724
277,379
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue, 510 West 22nd Street and others.
(2)
Includes interests in Independence Plaza, Monmouth Mall, 85 Tenth Avenue, Fashion Center Mall, 50-70 West 93rd Street and others.
Our Share of Net (Loss) Income:
Alexander's:
Equity in net income
5,447
5,272
11,041
10,031
Management, leasing and development fees
1,876
1,622
3,973
3,248
7,323
6,894
15,014
13,279
(3,238)
990
(12,534)
(1,405)
UE:
404
500
1,084
904
1,488
Toys:
Equity in net (loss) income
(59,530)
15,666
Non-cash impairment losses
(75,196)
Management fees
1,939
1,954
3,786
(57,591)
(55,744)
India real estate ventures (2)
(16,567)
(2,041)
(16,676)
(2,178)
Other investments (3)
5,847
(1,994)
3,118
(5,715)
2015 includes $14,806 for our share of non-cash impairment loss.
(3)
8. Discontinued Operations
On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to UE (NYSE: UE) (see Note 1 – Organization).
On March 13, 2015, we sold our Geary Street, CA lease for $34,189,000, which resulted in a net gain of $21,376,000.
On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT (see Note 7 – Investments in Partially Owned Entities). The financial statement gain was $7,823,000, of which $7,192,000 was recognized in the first quarter of 2015 and the remaining $631,000 was deferred based on our ownership interest in PREIT. On March 31, 2018, we will be entitled to additional consideration of 50% of the increase in the value of Springfield Town Center, if any, over $465,000,000, calculated utilizing a 5.5% capitalization rate. In the first quarter of 2014, we recorded a non-cash impairment loss of $20,000,000 on Springfield Town Center which is included in “(loss) income from discontinued operations” on our consolidated statements of income.
During the first quarter of 2015, we sold five residual retail properties, in separate transactions, for an aggregate of $10,731,000, which resulted in net gains of $3,675,000.
We have reclassified the revenues and expenses of the properties discussed above to “(loss) income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying consolidated financial statements. The net gains resulting from the sale of these properties are included in “(loss) income from discontinued operations” on our consolidated statements of income. The tables below set forth the assets and liabilities related to discontinued operations at June 30, 2015 and December 31, 2014 and their combined results of operations and cash flows for the six months ended June 30, 2015 and 2014.
Assets related to discontinued operations:
27,205
2,028,677
7,686
209,797
Liabilities related to discontinued operations:
1,288,535
Other liabilities (primarily deferred revenue in 2014)
222,827
(Loss) income from discontinued operations:
1,573
96,157
21,531
202,720
2,020
65,879
15,393
141,904
(447)
30,278
6,138
60,816
Transaction related costs
(327)
(3,016)
(22,972)
(3,515)
Net gain on sale of Geary Street, CA lease
21,376
Net gains on sale of real estate
10,867
(256)
(20,842)
Pretax (loss) income from discontinued operations
27,262
15,153
36,459
Income tax expense
(319)
(86)
(1,050)
Cash flows related to discontinued operations:
Cash flows from operating activities
(35,738)
55,065
Cash flows from investing activities
310,069
(59,141)
17
9. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily acquired in-place and above-market leases) and liabilities (primarily acquired below-market leases) as of June 30, 2015 and December 31, 2014.
Identified intangible assets:
Gross amount
453,590
424,976
Accumulated amortization
(207,744)
(199,821)
Net
Identified intangible liabilities (included in deferred revenue):
668,314
657,976
(306,956)
(329,775)
361,358
328,201
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $13,378,000 and $8,522,000 for the three months ended June 30, 2015 and 2014, respectively, and $25,828,000 and $18,234,000 for the six months ended June 30, 2015 and 2014, respectively. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2016 is as follows:
2016
51,912
2017
49,937
2018
48,654
2019
29,912
2020
21,681
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $5,309,000 and $6,940,000 for the three months ended June 30, 2015 and 2014, respectively, and $11,494,000 and $15,831,000 for the six months ended June 30, 2015 and 2014, 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 commencing January 1, 2016 is as follows:
29,217
24,385
20,067
14,246
10,703
We are a tenant under ground leases for certain properties. Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $457,000 for the three months ended June 30, 2015 and 2014 and $916,000 for the six months ended June 30, 2015 and 2014. Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2016 is as follows:
1,832
18
10. Debt
On January 1, 2015, we redeemed all of the $500,000,000 principal amount of our outstanding 4.25% senior unsecured notes, which were scheduled to mature on April 1, 2015, at a redemption price of 100% of the principal amount plus accrued interest through December 31, 2014.
On April 1, 2015, we completed a $308,000,000 refinancing of RiverHouse Apartments, a three building, 1,670 unit rental complex located in Arlington, VA. The loan is interest-only at LIBOR plus 1.28% and matures in 2025. We realized net proceeds of approximately $43,000,000. The property was previously encumbered by a 5.43%, $195,000,000 mortgage maturing in April 2015 and a $64,000,000 mortgage at LIBOR plus 1.53% maturing in 2018.
On June 2, 2015, we completed a $205,000,000 financing in connection with the acquisition of 150 West 34th Street (see Note 4 – Acquisitions). The loan bears interest at LIBOR plus 2.25% and matures in 2018 with two one-year extension options.
The following is a summary of our debt:
Interest Rate at
Balance at
Mortgages Payable:
Fixed rate
4.43%
6,349,878
6,499,396
Variable rate
2.16%
2,212,436
1,763,769
3.85%
Unsecured Debt:
3.68%
1.24%
2.90%
1,247,463
19
11. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests on our consolidated balance sheets are comprised primarily of Class A Operating Partnership units that are held by third parties and are recorded at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity. Below is a table summarizing the activity of redeemable noncontrolling interests.
Balance at December 31, 2013
1,003,620
8,564
Other comprehensive income
1,260
(16,824)
Redemption of Class A units for common shares, at redemption value
(19,771)
227,338
Other, net
16,771
Balance at June 30, 2014
1,220,958
Balance at December 31, 2014
15,485
Other comprehensive loss
(2,635)
(14,734)
(43,278)
(229,521)
Issuance of Series D-17 Preferred Units
4,427
25,370
Balance at June 30, 2015
As of June 30, 2015 and December 31, 2014, the aggregate redemption value of redeemable Class A units was $1,087,466,000 and $1,336,780,000, respectively.
Redeemable noncontrolling interests exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares. Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $55,097,000 as of June 30, 2015 and December 31, 2014. Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income.
20
12. Accumulated Other Comprehensive Income (“AOCI”)
The following tables set forth the changes in accumulated other comprehensive income (loss) by component.
Securities
Pro rata share of
Interest
available-
nonconsolidated
rate
for-sale
subsidiaries' OCI
swap
For the Three Months Ended June 30, 2015
Balance as of March 31, 2015
72,609
112,442
(8,835)
(26,579)
(4,419)
OCI before reclassifications
(21,996)
2,849
1,346
Amounts reclassified from AOCI
Net current period OCI
Balance as of June 30, 2015
(10,026)
(23,730)
(3,073)
For the Three Months Ended June 30, 2014
Balance as of March 31, 2014
77,626
132,434
(19,787)
(30,272)
(4,749)
14,595
(545)
(901)
Balance as of June 30, 2014
134,312
(5,624)
(30,817)
(5,650)
For the Six Months Ended June 30, 2015
Balance as of December 31, 2014
(8,992)
(25,803)
(5,712)
(42,654)
2,639
For the Six Months Ended June 30, 2014
Balance as of December 31, 2013
119,309
(11,501)
(31,882)
(4,389)
20,684
(1,261)
21
13. Variable Interest Entities (“VIEs”)
At June 30, 2015 and December 31, 2014, we have unconsolidated VIEs comprised of our investments in the entities that own One Park Avenue, Independence Plaza, the Warner Building and Suffolk Downs. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance. We account for our investment in these entities under the equity method. As of June 30, 2015 and December 31, 2014, the net carrying amounts of our investment in these entities were $305,865,000 and $286,783,000, respectively, and our maximum exposure to loss in these entities is limited to our investment. We did not have any consolidated VIEs as of June 30, 2015 and December 31, 2014.
14. Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) marketable securities, (ii) real estate fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units), and (v) an interest rate swap. The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at June 30, 2015 and December 31, 2014, respectively.
Level 1
Level 2
Level 3
Real estate fund investments (75% of which is attributable to
noncontrolling interests)
Deferred compensation plan assets (included in other assets)
118,932
51,264
67,668
Total assets
844,899
211,255
633,644
Mandatorily redeemable instruments (included in other liabilities)
55,097
Interest rate swap (included in other liabilities)
23,747
78,844
53,969
63,315
837,580
260,292
577,288
25,797
80,894
22
14. Fair Value Measurements – continued
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At June 30, 2015, we had six real estate fund investments with an aggregate fair value of $565,976,000, or $193,164,000 in excess of cost. These investments are classified as Level 3. We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period. The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 0.2 to 5.5 years. Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit. Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor. Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs.
The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these real estate fund investments at June 30, 2015 and December 31, 2014.
Weighted Average
Range
(based on fair value of investments)
Unobservable Quantitative Input
Discount rates
12.0% to 14.5%
12.0% to 17.5%
13.4%
13.7%
Terminal capitalization rates
4.8% to 6.5%
4.7% to 6.5%
5.5%
5.3%
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate, may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.
The table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3, for the three and six months ended June 30, 2015 and 2014.
Beginning balance
554,426
682,002
667,710
Purchases
2,544
95,000
2,667
Dispositions / Distributions
(11,235)
(232,513)
(83,421)
Net unrealized gains
Net realized gains
39,704
2,312
52,681
(1,433)
Ending balance
549,091
23
Deferred Compensation Plan Assets
Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The third-party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements.
The table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3, for the three and six months ended June 30, 2015 and 2014.
64,836
67,627
68,782
5,607
7,915
6,231
9,559
Sales
(4,655)
(11,255)
(5,093)
(16,379)
Realized and unrealized gain (loss)
1,387
(198)
2,722
1,974
493
520
673
64,609
Fair Value Measurements on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consist primarily of real estate assets required to be measured for impairment at December 31, 2014. There are no assets remaining at fair value on a nonrecurring basis at June 30, 2015. The fair values of real estate assets required to be measured for impairment were determined using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity.
Real estate assets
4,848
24
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), mortgage and mezzanine loans receivable and our secured and unsecured debt. Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument. The fair value of cash equivalents and borrowings under our revolving credit facility is classified as Level 1, and the fair value of our mortgage and mezzanine loans receivable as of December 31, 2014 is classified as Level 3. There are no mortgage and mezzanine loans receivable outstanding as of June 30, 2015. The fair value of our secured and unsecured debt are classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of June 30, 2015 and December 31, 2014.
Carrying
Fair
Value
Cash equivalents
311,017
311,000
749,418
749,000
Mortgage and mezzanine loans receivable
16,748
766,166
766,000
Debt:
8,541,000
8,224,000
882,000
1,385,000
9,809,777
9,823,000
9,610,324
9,609,000
15. Incentive Compensation
Our 2010 Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, restricted Operating Partnership units and Out-Performance Plan awards to certain of our employees and officers. We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Stock-based compensation expense was $6,685,000 and $9,051,000 for the three months ended June 30, 2015 and 2014, respectively and $26,827,000 and $20,075,000 for the six months ended June 30, 2015 and 2014, respectively.
25
16. Fee and Other Income
The following table sets forth the details of fee and other income:
BMS cleaning fees
21,741
22,195
44,374
41,151
Management and leasing fees
4,274
5,765
8,466
11,593
Lease termination fees
2,893
4,545
6,640
8,122
Other income
10,322
8,306
19,357
15,885
Management and leasing fees include management fees from Interstate Properties, a related party, of $132,000 and $131,000 for the three months ended June 30, 2015 and 2014, and $271,000 and $265,000 for the six months ended June 30, 2015 and 2014, respectively. The above table excludes fee income from partially owned entities, which is included in “loss from partially owned entities” (see Note 7 – Investments in Partially Owned Entities).
17. Interest and Other Investment Income, Net
The following table sets forth the details of interest and other investment income:
Dividends on marketable securities
3,202
3,198
6,405
6,304
Interest on loans receivable
1,135
1,034
3,959
3,714
Mark-to-market of investments in our deferred compensation plan (1)
(609)
2,380
2,250
6,780
1,938
2,784
3,844
4,448
This income is entirely offset by the expense resulting from the mark-to-market of the deferred compensation plan liability, which is included in "general and administrative" expense.
18. Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
Interest expense
96,297
112,736
191,625
218,248
Amortization of deferred financing costs
7,497
7,737
14,953
12,159
Capitalized interest and debt expense
(11,702)
(16,560)
(22,812)
(30,182)
92,092
103,913
183,766
200,225
26
19. Income Per Share
The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options, restricted share and Out-Performance Plan awards.
Numerator:
Income from continuing operations, net of income attributable
to noncontrolling interests
186,745
71,619
275,911
146,362
(Loss) income from discontinued operations, net of income
attributable to noncontrolling interests
(729)
25,389
14,182
33,363
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(18)
(21)
(34)
(51)
Numerator for basic income per share
165,633
76,621
250,210
138,940
Impact of assumed conversions:
Convertible preferred share dividends
46
Earnings allocated to Out-Performance Plan units
367
Numerator for diluted income per share
165,656
250,623
Denominator:
Denominator for basic income per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,190
1,090
1,013
Convertible preferred shares
45
Out-Performance Plan units
286
Denominator for diluted income per share – weighted average
shares and assumed conversions
INCOME PER COMMON SHARE – BASIC:
INCOME (LOSS) PER COMMON SHARE – DILUTED:
The effect of dilutive securities for the three months ended June 30, 2015 and 2014 excludes an aggregate of 11,381 and 11,289 weighted average common share equivalents, respectively, and 11,209 and 11,304 weighted average common share equivalents for the six months ended June 30, 2015 and 2014, respectively, as their effect was anti-dilutive.
27
20. Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as floods. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, and $2.0 billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $2,480,000 and 15% of the balance of a covered loss (16% effective January 1, 2016) and the Federal government is responsible for the remaining 85% of a covered loss (84% effective January 1, 2016). We are ultimately responsible for any loss incurred by PPIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future.
Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.
Other Commitments and Contingencies
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
Our mortgage loans are non-recourse to us. However, in certain cases we have provided guarantees or master leased tenant space. These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans. As of June 30, 2015, the aggregate dollar amount of these guarantees and master leases is approximately $369,000,000.
At June 30, 2015, $39,382,000 of letters of credit were outstanding under one of our revolving credit facilities. Our revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.
As of June 30, 2015, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $81,000,000.
28
21. Segment Information
As a result of the spin-off of substantially all of our Retail Properties segment (see Note 8 – Discontinued Operations), the remaining retail properties no longer meet the criteria to be a separate reportable segment. In addition, as a result of our investment in Toys being reduced to zero, we suspended equity method accounting for our investment in Toys (see Note 7 - Investments in Partially Owned Entities) and the Toys segment no longer meets the criteria to be a separate reportable segment. Accordingly, effective January 1, 2015, the Retail Properties segment and Toys have been reclassified to the Other segment. We have also reclassified the prior period segment financial results to conform to the current period presentation. Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and six months ended June 30, 2015 and 2014.
New York
Washington, DC
414,262
134,856
67,170
250,298
98,661
73,938
Operating income (loss)
163,964
36,195
(6,768)
(Loss) income from partially owned entities
3,176
(1,805)
(6,602)
1,892
3,761
(47,173)
(17,483)
(27,436)
Income (loss) before income taxes
121,859
16,920
(10,677)
(1,095)
(466)
89,633
120,764
16,454
78,956
Loss from discontinued operations
78,182
Less net income attributable to noncontrolling interests
(29,384)
(2,552)
(26,832)
118,212
51,350
Interest and debt expense(2)
115,073
61,057
20,891
33,125
Depreciation and amortization(2)
163,245
95,567
47,803
19,875
Income tax (benefit) expense(2)
(87,653)
1,152
486
(89,291)
EBITDA(1)
376,681
275,988
85,634
15,059
375,674
134,826
63,911
226,840
87,352
70,951
148,834
47,474
(7,040)
8,996
(2,248)
(60,490)
1,614
42
7,740
(49,070)
(18,660)
(36,183)
Net gain on disposition of wholly owned and partially
owned assets
110,374
26,608
5,042
(1,226)
(115)
(1,939)
109,148
26,493
3,103
Income from discontinued operations
5,919
21,024
115,067
24,127
(68,679)
(3,108)
(65,571)
Net income (loss) attributable to Vornado
111,959
(41,444)
179,520
64,072
22,463
92,985
173,443
74,007
35,806
63,630
Income tax (benefit) expense (2)
(574)
1,291
132
(1,997)
449,397
251,329
84,894
113,174
See notes on page 31.
29
21. Segment Information – continued
813,775
268,824
140,491
503,058
191,658
167,269
310,717
77,166
(26,778)
(2,487)
(1,674)
(3,475)
3,754
12,678
(92,524)
(35,643)
(55,599)
219,460
39,875
(20,857)
(2,038)
208
88,931
217,422
40,083
68,074
83,141
(50,553)
(4,058)
(46,495)
213,364
36,646
229,748
119,724
42,403
67,621
319,695
189,691
88,555
41,449
(88,392)
2,154
(2,150)
(88,396)
751,144
524,933
168,891
57,320
736,858
270,104
129,830
464,574
176,924
160,785
272,284
93,180
(30,955)
10,562
(3,514)
(58,811)
3,055
78
18,113
(91,909)
(38,007)
(70,309)
193,992
51,737
(13,164)
Income tax (expense) benefit
(2,195)
84
(2,020)
Income (loss) from continuing operations
191,797
51,821
(15,184)
11,786
23,623
203,583
8,439
(84,118)
(4,513)
(79,605)
199,070
(71,166)
350,472
122,140
45,261
183,071
369,782
161,594
71,956
136,232
Income tax expense (benefit)(2)
19,257
2,323
(57)
16,991
919,236
485,127
168,981
265,128
See notes on the following page.
30
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental non-GAAP financial measure for making decisions and assessing the unlevered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on 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.
Interest and debt expense, depreciation and amortization and income tax expense (benefit) in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
The elements of "New York" EBITDA are summarized below.
Office
170,740
162,833
330,099
320,712
Retail
86,151
67,947
167,456
134,142
Alexander's
10,241
10,271
20,648
20,701
Hotel Pennsylvania
8,856
10,278
6,730
9,572
Total New York
The elements of "Washington, DC" EBITDA are summarized below.
Office, excluding the Skyline Properties
68,514
67,057
135,898
134,314
Skyline properties
6,984
7,073
13,039
13,572
Total Office
75,498
74,130
148,937
147,886
Residential
10,136
10,764
19,954
21,095
Total Washington, DC
31
Notes to preceding tabular information - continued:
The elements of "Other" EBITDA are summarized below.
Our share of real estate fund investments:
Income before net realized/unrealized gains
1,533
2,191
4,285
4,617
Net realized/unrealized gains on investments
6,054
24,265
10,464
27,807
Carried interest
2,909
11,874
6,297
13,205
The Mart and trade shows
22,144
22,454
43,185
41,541
555 California Street
12,831
11,506
25,232
23,572
Our share of Toys(a)
5,189
90,586
375
99
2,216
1,923
Other investments
11,222
18,966
14,380
57,568
84,358
112,599
217,631
Corporate general and administrative expenses(b) (c)
(23,760)
(23,022)
(59,702)
(49,004)
Investment income and other, net(b)
6,561
8,032
15,323
16,105
Our share of impairment loss on India real estate ventures
(14,806)
Our share of gains on sale of real estate of partially owned entities
4,513
(4,061)
(1,067)
(6,042)
(2,352)
UE and residual retail properties discontinued operations(d)
(758)
48,672
19,060
80,772
Net gain on sale of residential condominiums and a land parcel
Net income attributable to noncontrolling interests in
the Operating Partnership
(a)
As a result of our investment being reduced to zero, we suspended equity method accounting in the third quarter of 2014 (see Note 7 - Investments in Partially Owned Entities). The six months ended June 30, 2014 includes an impairment loss of $75,196.
(b)
The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $609 and $2,380 for the three months ended June 30, 2015 and 2014, respectively, and $2,250 and $6,780 for the six months ended June 30, 2015 and 2014, respectively.
(c)
The six months ended June 30, 2015 includes $8,817 from the acceleration of the recognition of compensation expense related to 2013-2015 Out-Performance Plans due to the modification of the vesting criteria of awards such that they will fully vest at age 65. The accelerated expense will result in lower general and administrative expense for the remainder of 2015 of $1,734 and $6,217 thereafter.
(d)
The three months ended June 30, 2015 and 2014, include $327 and $3,016, respectively, and the six months ended June 30, 2015 and 2014, include $22,972 and $3,515, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls (see Note 1 - Organization).
32
22. Subsequent Events
100 West 33rd Street
On July 28, 2015, we completed a $580,000,000 refinancing of 100 West 33rd Street, a 1.1 million square foot property comprised of 851,000 square feet of office space and the 256,000 square foot Manhattan Mall. The loan is interest only at LIBOR plus 1.65%, and matures in July 2020. We realized net proceeds of approximately $242,000,000.
260 Eleventh Avenue
On July 31, 2015, we acquired 260 Eleventh Avenue, a 235,000 square foot office property leased to the City of New York through 2021 with two five-year renewal options, a 10,000 square foot parking lot and additional air rights. The 44,000 square foot site is located on Eleventh Avenue from 26th to 27th Streets directly across from the Starrett Lehigh building. The transaction is structured as a 99-year ground lease with an option to purchase the land for $110,000,000. The $3,900,000 annual ground rent and the purchase option price escalate annually at the lesser of 1.5% or CPI. The buildings were purchased for 813,900 newly issued Vornado Operating Partnership units valued at approximately $80,000,000. We intend to redevelop and expand the property to serve the supply constrained West Chelsea office market.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of June 30, 2015, and the related consolidated statements of income and comprehensive income for the three month and six month periods ended June 30, 2015 and 2014 and changes in equity and cash flows for the six month periods ended June 30, 2015 and 2014. 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 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 17, 2015, 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, 2014 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
August 3, 2015
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Quarterly Report constitute forward‑looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q. We also note the following forward-looking statements: in the case of our development and redevelopment projects, the estimated completion date, estimated project cost and cost to complete; and estimates of future capital expenditures, dividends to common and preferred shareholders and operating partnership distributions. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three and six months ended June 30, 2015. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the operating results for the full year. Certain prior year balances have been reclassified in order to conform to current year presentation.
Overview
Business Objective and Operating Strategy
Our business objective is to maximize shareholder value, which we measure by the total return provided to our shareholders. Below is a table comparing our performance to the FTSE NAREIT Office REIT Index (“Office REIT”) and the Morgan Stanley REIT Index (“RMS”) for the following periods ended June 30, 2015.
Total Return(1)
Vornado
Office REIT
RMS
Three-month
(14.7%)
(11.2%)
(10.4%)
Six-month
(9.9%)
(5.3%)
(6.2%)
One-year
0.7%
1.3%
3.9%
Three-year
38.5%
26.4%
28.5%
Five-year
70.1%
67.6%
95.0%
Ten-year
93.0%
65.6%
96.0%
Past performance is not necessarily indicative of future performance.
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
· Developing and redeveloping existing properties to increase returns and maximize value
· Investing in operating companies that have a significant real estate component
We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from asset sales and by accessing the public and private capital markets. We may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire these securities in the future.
We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, sales prices, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the global, national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, population and employment trends. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014, for additional information regarding these factors.
36
Overview – continued
Quarter Ended June 30, 2015 Financial Results Summary
Net income attributable to common shareholders for the quarter ended June 30, 2015 was $165,651,000, or $0.87 per diluted share, compared to $76,642,000, or $0.41 per diluted share, for the quarter ended June 30, 2014. Net income for the quarter ended June 30, 2015 includes $14,806,000 of real estate impairment losses, of which $10,304,000 relates to depreciable real estate and is therefore excluded from Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”). Net income for the quarter ended June 30, 2015 also includes $4,513,000 of net gains on sale of real estate. In addition, the quarters ended June 30, 2015 and 2014 include certain other items that affect comparability, which are listed in the table below. The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the quarter ended June 30, 2015 by $71,800,000, or $0.38 per diluted share, and decreased net income attributable to common shareholders by $34,894,000, or $0.18 per diluted share, for the quarter ended June 30, 2014.
FFO for the quarter ended June 30, 2015 was $323,381,000, or $1.71 per diluted share, compared to $216,547,000, or $1.15 per diluted share, for the prior year’s quarter. FFO for the quarters ended June 30, 2015 and 2014 include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO by $76,859,000, or $0.41 per diluted share, for the quarter ended June 30, 2015, and decreased FFO by $15,012,000, or $0.08 per diluted share, for the quarter ended June 30, 2014.
Items that affect comparability income (expense):
Reversal of allowance for deferred tax assets (re: taxable REIT subsidiary's
ability to utilize NOLs)
90,030
Our share of impairment loss on India real estate venture's non-depreciable real estate
(4,502)
FFO from discontinued operations (including UE spin-off related
costs of $327 and $3,016, respectively)
(767)
41,673
Toys FFO (negative FFO)
(51,862)
Defeasance cost in connection with the refinancing of 909 Third Avenue
(5,589)
433
81,633
(15,940)
Noncontrolling interests' share of above adjustments
(4,774)
928
Items that affect comparability, net
76,859
(15,012)
The percentage increase (decrease) in same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and cash basis same store EBITDA of our operating segments for the quarter ended June 30, 2015 over the quarter ended June 30, 2014 and the trailing quarter ended March 31, 2015 are summarized below.
Same Store EBITDA:
June 30, 2015 vs. June 30, 2014
Same store EBITDA
1.5
%
0.8
Cash basis same store EBITDA
2.4
(3.3
%)
June 30, 2015 vs. March 31, 2015
4.6
1.9
3.1
1.8
Excluding Hotel Pennsylvania, same store EBITDA increased by 2.2% and by 3.2% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA increased by 0.1% and decreased by 2.0% on a cash basis.
37
Six Months Ended June 30, 2015 Financial Results Summary
Net income attributable to common shareholders for the six months ended June 30, 2015 was $250,244,000, or $1.32 per diluted share, compared to $138,991,000, or $0.74 per diluted share, for the six months ended June 30, 2014. Net income for the six months ended June 30, 2015 includes $15,380,000 of net gains on sale of real estate and $14,806,000 of real estate impairment losses, of which $10,304,000 relates to depreciable real estate and is therefore excluded from FFO. Net income for the six months ended June 30, 2015 also includes $256,000 of real estate impairment losses of other properties. Net income for the six months ended June 30, 2014 includes $20,842,000 of real estate impairment losses. In addition, the six months ended June 30, 2015 and 2014 include certain items that affect comparability, which are listed in the table below. The aggregate of real estate impairment losses, net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the six months ended June 30, 2015 by $90,220,000, or $0.48 per diluted share, and decreased net income attributable to common shareholders for the six months ended June 30, 2014 by $18,884,000, or $0.10 per diluted share.
FFO for the six months ended June 30, 2015 was $544,305,000, or $2.87 per diluted share, compared to $463,626,000, or $2.46 per diluted share, for the six months ended June 30, 2014. FFO for the six months ended June 30, 2015 and 2014 include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO by $87,725,000, or $0.46 per diluted share, for the six months ended June 30, 2015 and increased FFO by $44,328,000, or $0.24 per diluted share, for the six months ended June 30, 2014.
costs of $22,972 and $3,515, respectively)
6,628
87,071
Toys FFO (negative FFO) (including impairment losses of $75,196 in 2014)
(42,595)
Net gain on sale of residential condominiums and a land parcel in 2014
3,154
93,082
47,075
(5,357)
(2,747)
87,725
44,328
The percentage increase (decrease) in same store EBITDA and cash basis same store EBITDA of our operating segments for the six months ended June 30, 2015 over the six months ended June 30, 2014 is summarized below.
2.3
0.4
3.9
(4.3
Excluding Hotel Pennsylvania, same store EBITDA increased by 3.0% and by 4.7% on a cash basis.
Calculations of same store EBITDA, reconciliations of our net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.
38
2015 Acquisitions
On January 20, 2015, we and one of our real estate fund’s limited partners co-invested with the Fund to buy out the Fund’s joint venture partner’s 57% interest in the Crowne Plaza Times Square Hotel. The purchase price for the 57% interest was approximately $95,000,000 (our share $39,000,000) which valued the property at approximately $480,000,000. The property is encumbered by a $310,000,000 mortgage loan bearing interest at LIBOR plus 2.80% which matures in December 2018 with a one-year extension option. Our aggregate ownership interest in the property increased to 33% from 11%.
On June 2, 2015, we completed the acquisition of 150 West 34th Street, a 78,000 square foot retail property leased to Old Navy through May 2019, and 226,000 square feet of additional zoning air rights, for approximately $355,000,000. At closing we completed a $205,000,000 financing of the property.
2015 Dispositions
On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to Urban Edge Properties (“UE”) (NYSE: UE). As part of this transaction, we retained 5,717,184 UE operating partnership units (5.4% ownership interest). We are providing transition services to UE for an initial period of up to two years, including information technology, human resources, tax and financial reporting. UE is providing us with leasing and property management services for (i) the Monmouth Mall, (ii) certain small retail properties that we plan to sell, and (iii) our affiliate, Alexander’s, Inc. (NYSE: ALX), Rego Park retail assets. Steven Roth, our Chairman and Chief Executive Officer is a member of the Board of Trustees of UE. The spin-off distribution was effected by Vornado distributing one UE common share for every two Vornado common shares.
On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT Associates, L.P., which is the operating partnership of Pennsylvania Real Estate Investment Trust (NYSE: PEI) (collectively, “PREIT”). The financial statement gain was $7,823,000, of which $7,192,000 was recognized in the first quarter of 2015 and the remaining $631,000 was deferred based on our ownership interest in PREIT. In the first quarter of 2014, we recorded a non-cash impairment loss of $20,000,000 on Springfield Town Center which is included in “(loss) income from discontinued operations” on our consolidated statements of income.
39
2015 Financings
On June 2, 2015, we completed a $205,000,000 financing in connection with the acquisition of 150 West 34thStreet. The loan bears interest at LIBOR plus 2.25% and matures in 2018 with two one-year extension options.
Recently Issued Accounting Literature
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment. Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that began after December 15, 2014. Upon adoption of this standard on January 1, 2015, individual properties sold in the ordinary course of business are not expected to qualify as discontinued operations. The financial results of UE and certain other retail assets are reflected in our consolidated financial statements as discontinued operations for all periods presented.
40
Recently Issued Accounting Literature - continued
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014 in Management’s Discussion and Analysis of Financial Condition. Although there have been no significant changes during 2015, the following updates have been made to our policies.
41
Overview - continued
Leasing Activity:
The leasing activity and related statistics in the table below are based on leases signed during the period and are not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Second generation relet space represents square footage that has not been vacant for more than nine months and tenant improvements and leasing commissions are based on our share of square feet leased during the period.
(Square feet in thousands)
Quarter Ended June 30, 2015
Total square feet leased
605
411
Our share of square feet leased:
494
391
Initial rent (1)
82.21
1,381.81
40.50
Weighted average lease term (years)
11.0
12.9
8.3
Second generation relet space:
Square feet
257
202
Cash basis:
89.39
1,297.54
40.79
Prior escalated rent
80.63
376.12
43.64
Percentage increase (decrease)
10.9%
245.0%
(6.5%)
GAAP basis:
Straight-line rent (2)
87.28
1,642.75
38.98
Prior straight-line rent
72.87
993.62
40.71
19.8%
65.3%
(4.2%)
Tenant improvements and leasing commissions:
Per square foot
84.56
714.48
41.66
Per square foot per annum
7.69
55.39
5.02
Percentage of initial rent
9.4%
4.0%
12.4%
Six Months Ended June 30, 2015
1,158
43
1,165
911
1,087
80.21
1,169.82
37.01
10.0
12.7
10.1
707
81.94
1,173.47
35.44
72.10
361.48
41.32
13.6%
224.6%
(14.2%)
79.11
1,479.21
33.37
66.44
899.84
38.43
19.1%
64.4%
(13.2%)
80.06
627.55
69.01
8.01
49.41
6.83
10.0%
4.2%
18.5%
Represents the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.
Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases, and includes the effect of free rent and periodic step-ups in rent.
Excluding 371 square feet of leasing activity with the U.S. Marshals Service (of which 293 square feet are second generation relet space), the initial rent and prior escalated rent on a cash basis was $37.88 and $39.35 per square foot, respectively (3.7% decrease), and the initial rent and prior escalated rent on a GAAP basis was $34.33 and $35.77 per square foot, respectively (3.7% decrease).
Square footage (in service) and Occupancy as of June 30, 2015:
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
New York:
20,928
17,555
96.4%
60
2,538
2,347
96.6%
2,178
706
99.7%
1,400
Residential - 1,654 units
1,521
761
96.1%
28,565
22,769
96.5%
Washington, DC:
51
13,431
11,059
89.7%
Skyline Properties
2,646
53.5%
59
16,077
13,705
82.7%
Residential - 2,414 units
2,597
2,455
95.4%
384
100.0%
19,058
16,544
85.0%
Other:
The Mart
3,578
3,569
93.9%
1,802
1,261
97.5%
85 Tenth Avenue(1)
612
305
Other Properties
2,171
1,210
95.8%
8,163
6,345
Total square feet at June 30, 2015
55,786
45,658
As of June 30, 2015, we own junior and senior mezzanine loans of 85 Tenth Avenue with an accreted balance of $155.6 million. The junior and senior mezzanine loans bear paid-in-kind interest of 12% and 9%, respectively, and mature in May 2017. We account for our investment in 85 Tenth Avenue using the equity method of accounting because we will receive a 49.9% interest in the property after repayment of the junior mezzanine loan. As a result of recording our share of the GAAP losses of the property, the net carrying amount of these loans is $25.6 million on our consolidated balance sheets.
Square footage (in service) and Occupancy as of December 31, 2014:
properties
20,052
16,808
96.9%
57
2,450
2,259
1,524
763
95.7%
27,604
21,936
13,461
11,083
87.5%
2,648
16,109
13,731
80.9%
97.4%
19,090
16,570
83.8%
3,587
94.7%
1,801
97.6%
613
306
2,135
1,174
96.8%
8,136
6,319
Total square feet at December 31,2014
54,830
44,825
As of December 31, 2014, we own junior and senior mezzanine loans of 85 Tenth Avenue with an accreted balance of $147.6 million. The junior and senior mezzanine loans bear paid-in-kind interest of 12% and 9%, respectively, and mature in May 2017. We account for our investment in 85 Tenth Avenue using the equity method of accounting because we will receive a 49.9% interest in the property after repayment of the junior mezzanine loan. As a result of recording our share of the GAAP losses of the property, the net carrying amount of these loans is $28.2 million on our consolidated balance sheets.
44
Washington, DC Segment
We expect that 2015 EBITDA from continuing operations will be flat to 2014 EBITDA. Of the 2,395,000 square feet subject to the effects of the Base Realignment and Closure (“BRAC”) statute, 393,000 square feet has been taken out of service for redevelopment and 1,262,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of June 30, 2015.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of June 30, 2015
37.44
1,255,000
790,000
381,000
84,000
Leases pending
38.77
7,000
Taken out of service for redevelopment
393,000
1,655,000
1,190,000
To Be Resolved:
Vacated as of June 30, 2015
35.41
691,000
202,000
425,000
Expiring in 2015
42.96
49,000
44,000
5,000
740,000
246,000
430,000
Total square feet subject to BRAC
2,395,000
1,436,000
811,000
148,000
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2015 and 2014
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended June 30, 2015 and 2014.
_____________________________
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2015 and 2014 - continued
47
Our share of Toys
Corporate general and administrative expenses(a)
Investment income and other, net(a)
UE and residual retail properties discontinued operations(b)
Net gain on sale of residential condominiums
Net income attributable to noncontrolling interests in the Operating Partnership
The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $609 and $2,380 for the three months ended June 30, 2015 and 2014, respectively.
The three months ended June 30, 2015 and 2014, include $327 and $3,016, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls.
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region, excluding discontinued operations and other items that affect comparability.
Region:
New York City metropolitan area
69%
67%
Washington, DC / Northern Virginia area
22%
24%
Chicago, IL
6%
San Francisco, CA
3%
100%
48
Results of Operations – Three Months Ended June 30, 2015 Compared to June 30, 2014
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $616,288,000 for the three months ended June 30, 2015, compared to $574,411,000 for the prior year’s quarter, an increase of $41,877,000. Below are the details of the increase by segment:
Increase due to:
Property rentals:
Acquisitions and other
11,404
11,345
Development and redevelopment
14,565
13,689
832
(1,485)
Trade Shows
(1,344)
Same store operations
13,213
10,215
(133)
3,131
36,353
33,764
(30)
2,619
Tenant expense reimbursements:
1,020
645
584
61
5,440
3,867
533
1,040
7,105
5,471
594
Fee and other income:
(455)
(559)
104
(1,491)
(1,124)
(229)
(138)
(1,653)
(325)
(204)
Other income (loss)
2,018
1,361
819
(162)
(1,581)
(647)
(534)
(400)
Total increase in revenues
41,877
38,588
3,259
49
Results of Operations – Three Months Ended June 30, 2015 Compared to June 30, 2014 - continued
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $422,897,000 for the three months ended June 30, 2015, compared to $385,143,000 for the prior year’s quarter, an increase of $37,754,000. Below are the details of the increase by segment:
Operating:
2,397
2,396
5,487
4,074
448
965
Non-reimbursable expenses, including
bad debt reserves
(261)
(152)
(922)
BMS expenses
(933)
(1,098)
165
6,678
5,867
(1,063)
1,874
12,294
11,087
(614)
1,821
Depreciation and amortization:
7,239
11,770
487
10,580
703
4,747
3,402
1,405
(60)
23,756
11,128
11,985
643
General and administrative:
Mark-to-market of deferred
compensation plan liability (1)
(2,989)
1,699
1,243
(61)
517
(1,290)
(2,472)
2,994
Total increase in expenses
37,754
23,458
11,310
2,986
This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment income, net” on our consolidated statements of income.
50
Loss from Partially Owned Entities
Summarized below are the components of loss from partially owned entities for the three months ended June 30, 2015 and 2014.
Equity in Net (Loss) Income:
India real estate ventures (1)
Partially owned office buildings (2)
Toys (3)
Other investments (4)
For the three months ended June 30, 2015, we recognized net income of $500,000 from our investment in Toys, representing management fees earned and received, compared to a net loss of $57,591,000 for the three months ended June 30, 2014, comprised of $59,530,000 for our share of Toys' net loss, partially offset by $1,939,000 of management fees earned and received.
Income from Real Estate Fund Investments
Below are the components of the income from our real estate fund investments for the three months ended June 30, 2015 and 2014.
Excludes property management, leasing and development fees of $633 and $638 for the three months ended June 30, 2015 and 2014, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and Other Investment Income, net
Interest and other investment income, net was $5,666,000 for the three months ended June 30, 2015, compared to $9,396,000 in the prior year’s quarter, a decrease of $3,730,000. This decrease resulted primarily from a lower increase in the value of investments in our deferred compensation plan (offset by a corresponding lower increase in the liability for plan assets in general and administrative expenses).
Interest and Debt Expense
Interest and debt expense was $92,092,000 for the three months ended June 30, 2015, compared to $103,913,000 in the prior year’s quarter, a decrease of $11,821,000. This decrease was primarily due to (i) $8,761,000 of interest savings from the redemption of the $445,000,000 principal amount of the outstanding 7.875% senior unsecured notes during the fourth quarter of 2014, (ii) $5,589,000 of defeasance costs in April 2014 in connection with the refinancing of 909 Third Avenue, (iii) $5,354,000 of interest savings from the redemption of the $500,000,000 principal amount of the outstanding 4.25% senior unsecured notes on January 1, 2015, partially offset by (iv) $4,858,000 of lower capitalized interest in the current year, and (v) $2,399,000 of interest expense from the issuance of $450,000,000 of senior unsecured notes in June 2014.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets
In the three months ended June 30, 2014, we recognized a net gain of $905,000 from the sale of residential condominiums.
Income Tax Benefit (Expense)
Income tax benefit related to our taxable REIT subsidiaries was $88,072,000 for the three months ended June 30, 2015, compared to an expense of $3,280,000 in the prior year’s quarter. The decrease in expense of $91,352,000 was primarily attributable to the $90,030,000 reversal of the valuation allowance against our deferred tax assets, as we have concluded that it is more-likely-than-not that we will generate sufficient taxable income from the sale of 220 Central Park South residential condominium units to realize the deferred tax assets.
(Loss) Income from Discontinued Operations
We have reclassified the revenues and expenses of the properties that were sold or are currently held for sale to “(loss) income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements. The table below sets forth the combined results of assets related to discontinued operations for the three months ended June 30, 2015 and 2014.
52
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $19,186,000 for the three months ended June 30, 2015, compared to $63,975,000 for the prior year’s quarter, a decrease of $44,789,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership
Net income attributable to noncontrolling interests in the Operating Partnership was $10,198,000 for the three months ended June 30, 2015, compared to $4,704,000 for the prior year’s quarter, an increase of $5,494,000. This increase resulted primarily from higher net income subject to allocation to unitholders.
Preferred Share Dividends
Preferred share dividends were $20,365,000 for the three months ended June 30, 2015, compared to $20,366,000 for the prior year’s quarter, a decrease of $1,000.
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Same Store EBITDA
Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods. Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items. We also present same store EBITDA on a cash basis which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments. We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers. Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies.
Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the three months ended June 30, 2015, compared to the three months ended June 30, 2014.
EBITDA for the three months ended June 30, 2015
Add-back:
Non-property level overhead expenses included above
7,889
6,512
Less EBITDA from:
(11,059)
Dispositions, including net gains on sale
156
Properties taken out-of-service for redevelopment
(17,341)
Other non-operating income
(8,330)
(1,753)
Same store EBITDA for the three months ended June 30, 2015
247,303
90,342
EBITDA for the three months ended June 30, 2014
6,646
6,572
(6,285)
(6,292)
(143)
(1,800)
(1,659)
Same store EBITDA for the three months ended June 30, 2014
243,598
89,662
Increase in same store EBITDA -
Three months ended June 30, 2015 vs. June 30, 2014(1)
3,705
680
% increase in same store EBITDA
1.5%
0.8%
See notes on following page
54
Notes to preceding tabular information
The $3,705,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $2,949,000 and $2,092,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $1,422,000. The Office and Retail EBITDA increases resulted primarily from higher rents, including signage, partially offset by lower cleaning, management and leasing fees and higher operating expenses, net of reimbursements.
The $680,000 increase in Washington, DC same store EBITDA resulted primarily from lower non-reimbursable operating expenses of $931,000, partially offset by lower management and leasing fees.
Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA
Less: Adjustments for straight line rents, amortization of acquired
below-market leases, net, and other non-cash adjustments
(29,606)
(6,074)
Cash basis same store EBITDA for the three months ended
217,697
84,268
(30,929)
(2,481)
June 30, 2014
212,669
87,181
Increase (decrease) in Cash basis same store EBITDA -
Three months ended June 30, 2015 vs. June 30, 2014
5,028
(2,913)
% increase (decrease) in Cash basis same store EBITDA
2.4%
(3.3%)
55
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2015 and 2014
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the six months ended June 30, 2015 and 2014.
56
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2015 and 2014 - continued
As a result of our investment being reduced to zero, we suspended equity method accounting in the third quarter of 2014. The six months ended June 30, 2014 includes an impairment loss of $75,196.
The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $2,250 and $6,780 for the six months ended June 30, 2015 and 2014, respectively.
The six months ended June 30, 2015 and 2014, include $22,972 and $3,515, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls.
58
Results of Operations – Six Months Ended June 30, 2015 Compared to June 30, 2014
Revenues
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $1,223,090,000 for the six months ended June 30, 2015, compared to $1,136,792,000 for the prior year’s six months, an increase of $86,298,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
19,212
18,490
722
24,921
24,232
(720)
1,409
(2,611)
1,601
26,364
20,325
5,049
69,487
60,436
992
8,059
1,226
1,455
1,379
12,044
8,474
452
14,725
11,079
528
3,222
2,786
436
(3,127)
(2,741)
(169)
(217)
(1,483)
2,379
(3,491)
(371)
3,474
2,978
860
(364)
2,086
5,402
(2,800)
(516)
Total increase (decrease) in revenues
86,298
76,917
(1,280)
10,661
Results of Operations – Six Months Ended June 30, 2015 Compared to June 30, 2014 - continued
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $861,985,000 for the six months ended June 30, 2015, compared to $802,283,000 for the prior year’s six months, an increase of $59,702,000. Below are the details of the increase by segment:
3,094
9,942
7,504
361
Non-reimbursable expenses, including bad debt
reserves
294
223
280
2,541
1,993
548
13,850
11,348
(438)
2,940
30,224
24,162
(77)
6,139
12,441
(2,318)
(10,826)
15,363
(6,855)
5,964
7,212
1,252
(2,500)
16,087
8,827
16,615
(9,355)
Mark-to-market of deferred compensation plan
liability (1)
(4,530)
14,231
5,495
(1,804)
9,701
6,010
3,690
59,702
38,484
14,734
6,484
Results primarily from the acceleration of the recognition of compensation expense of $11,065 related to 2013-2015 Out-Performance Plans due to the modification of the vesting criteria of awards such that they fully vest at age 65. The accelerated expense will result in lower general and administrative expense during the remainder of 2015 of $2,154 and $7,834 thereafter.
Summarized below are the components of loss from partially owned entities for the six months ended June 30, 2015 and 2014.
For the six months ended June 30, 2015, we recognized net income of $1,954,000 from our investment in Toys, representing management fees earned and received, compared to a net loss of $55,744,000 for the six months ended June 30, 2014, comprised of (i) $15,666,000 for our share of Toys’ equity in earnings, (ii) $3,786,000 of management fees earned and received, offset by (iii) a $75,196,000 non-cash impairment loss.
Below are the components of the income from our real estate fund investments for the six months ended June 30, 2015 and 2014.
Income from real estate fund investments attributable to Vornado(1)
Excludes property management, leasing and development fees of $1,337 and $1,256 for the six months ended June 30, 2015 and 2014, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and other investment income, net was $16,458,000 for the six months ended June 30, 2015, compared to $21,246,000 for the prior year’s six months, a decrease of $4,788,000. This decrease resulted primarily from a lower increase in the value of investments in our deferred compensation plan (offset by a corresponding lower increase in the liability for plan assets in general and administrative expenses).
Interest and debt expense was $183,766,000 for the six months ended June 30, 2015, compared to $200,225,000 for the prior year’s six months, a decrease of $16,459,000. This decrease was primarily due to (i) $17,891,000 of interest savings from the redemption of the $445,000,000 principal amount of the outstanding 7.875% senior unsecured notes during the fourth quarter of 2014, (ii) $10,667,000 of interest savings from the redemption of the $500,000,000 principal amount of the outstanding 4.25% senior unsecured notes on January 1, 2015, (iii) $5,589,000 of defeasance costs in April 2014 in connection with the refinancing of 909 Third Avenue, partially offset by (iv) $7,370,000 of lower capitalized interest in the current year, (v) $5,297,000 of interest expense from the issuance of $450,000,000 of senior unsecured notes in June 2014, and (vi) $3,949,000 of interest expense and deferred financing costs from the financing of our 220 Central Park South development site in January 2014.
For the six months ended June 30, 2015, we recognized a $1,860,000 net gain on disposition of wholly owned and partially owned assets, primarily from the sale of residential condominiums, compared to $10,540,000 for the prior year’s six months, primarily from the sale of residential condominiums and a land parcel.
Income tax benefit related to our taxable REIT subsidiaries was $87,101,000 for the six months ended June 30, 2015, compared to an expense of $4,131,000 for the prior year’s six months. The decrease in expense of $91,232,000 was primarily attributable to the $90,030,000 reversal of the valuation allowance against our deferred tax assets, as we have concluded that it is more-likely-than-not that we will generate sufficient taxable income from the sale of 220 Central Park South residential condominium units to realize the deferred tax assets.
62
Income from Discontinued Operations
The table below sets forth the combined results of assets related to discontinued operations for the six months ended June 30, 2015 and 2014.
Transaction related costs (primarily UE spin off)
Pretax income from discontinued operations
Net income attributable to noncontrolling interests in consolidated subsidiaries was $35,068,000 for the six months ended June 30, 2015, compared to $75,554,000 for the prior year’s six months, a decrease of $40,486,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net income attributable to noncontrolling interests in the Operating Partnership was $15,485,000 for the six months ended June 30, 2015, compared to $8,564,000 for the prior year’s six months, an increase of $6,921,000. This increase resulted primarily from higher net income subject to allocation to unitholders.
Preferred share dividends were $39,849,000 for the six months ended June 30, 2015, compared to $40,734,000 for the prior year’s six months, a decrease of $885,000.
63
Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the six months ended June 30, 2015, compared to six months ended June 30, 2014.
EBITDA for the six months ended June 30, 2015
19,933
12,215
(18,998)
190
(59)
(30,715)
(144)
(12,337)
(1,881)
Same store EBITDA for the six months ended June 30, 2015
483,006
179,022
EBITDA for the six months ended June 30, 2014
14,438
14,019
(12,389)
(11,850)
(3,332)
(3,687)
Same store EBITDA for the six months ended June 30, 2014
471,994
178,279
Six months ended June 30, 2015 vs. June 30, 2014(1)
11,012
743
2.3%
0.4%
See notes on following page.
64
The $11,012,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $5,210,000 and $8,559,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $2,842,000. The Office and Retail EBITDA increases resulted primarily from higher rents, including signage, partially offset by higher operating expenses, net of reimbursements and lower revenue at the Hotel Pennsylvania.
The $743,000 increase in Washington, DC same store EBITDA resulted primarily from lower non-reimbursable operating expenses, partially offset by lower management and leasing fee income.
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA
(54,516)
(11,959)
Cash basis same store EBITDA for the six months ended
428,490
167,063
(59,587)
(3,677)
412,407
174,602
Increase (decrease) in cash basis same store EBITDA -
Six months ended June 30, 2015 vs. June 30, 2014
16,083
(7,539)
% increase (decrease) in cash basis same store EBITDA
(4.3%)
65
SUPPLEMENTAL INFORMATION
Reconciliation of Net Income to EBITDA for the Three Months Ended March 31, 2015
Net income attributable to Vornado for the three months ended March 31,2015
95,152
23,629
58,667
21,512
94,124
40,752
Income tax expense (benefit)
1,002
(2,636)
EBITDA for the three months ended March 31,2015
248,945
83,257
Reconciliation of EBITDA to Same Store EBITDA – Three Months Ended June 30, 2015 Compared to March 31, 2015
6,511
(3,732)
(1,752)
254,630
EBITDA for the three months ended March 31, 2015
5,704
(338)
(13,308)
(4,008)
(129)
Same store EBITDA for the three months ended March 31, 2015
243,370
88,681
Three months ended June 30, 2015 vs. March 31, 2015
11,260
1,661
4.6%
1.9%
66
SUPPLEMENTAL INFORMATION – CONTINUED
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA – Three Months Ended June 30, 2015 Compared to March 31, 2015
(33,477)
221,153
(28,800)
(5,885)
March 31, 2015
214,570
82,796
Increase in cash basis same store EBITDA -
6,583
1,472
% increase in cash basis same store EBITDA
3.1%
1.8%
67
Liquidity and Capital Resources
Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties. Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, dividends to shareholders, distributions to unitholders of the Operating Partnership, as well as acquisition and development costs. Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, and our revolving credit facilities; proceeds from the issuance of common and preferred equity; and asset sales.
We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures. Capital requirements for development expenditures and acquisitions may require funding from borrowings and/or equity offerings.
We may from time to time purchase or retire outstanding debt securities or redeem our equity securities. Such purchases, if any, will depend on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Cash Flows for the Six Months Ended June 30, 2015
Our cash and cash equivalents were $516,337,000 at June 30, 2015, a $682,140,000 decrease over the balance at December 31, 2014. Our consolidated outstanding debt was $9,809,777,000 at June 30, 2015, a $199,453,000 increase over the balance at December 31, 2014. As of June 30, 2015 and December 31, 2014, $400,000,000 and $0, respectively, was outstanding under our revolving credit facilities. During the remainder of 2015 and 2016, $0 and $1,410,070,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.
Cash flows provided by operating activities of $184,616,000 was comprised of (i) net income of $340,646,000, (ii) return of capital from real estate fund investments of $83,443,000, (iii) $51,160,000 of non-cash adjustments, which include depreciation and amortization expense, the reversal of allowance for deferred tax assets, the effect of straight-lining of rental income, loss from partially owned entities and impairment losses on real estate, and (iv) distributions of income from partially owned entities of $37,821,000, partially offset by (v) the net change in operating assets and liabilities of $328,454,000 (including the acquisition of real estate fund investments of $95,000,000).
Net cash used in investing activities of $474,602,000 was comprised of (i) $381,001,000 of acquisitions of real estate and other, (ii) $200,970,000 of development costs and construction in progress, (iii) $137,528,000 of additions to real estate, (iv) $137,465,000 of investments in partially owned entities, and (v) $23,919,000 of investments in loans receivable, partially offset by (vi) $334,725,000 of proceeds from sales of real estate and related investments, (vii) $29,666,000 of capital distributions from partially owned entities, (viii) $25,118,000 of changes in restricted cash, and (ix) $16,772,000 of proceeds from repayments of mortgage and mezzanine loans receivable and other.
Net cash used in financing activities of $392,154,000 was comprised of (i) $1,607,574,000 for the repayments of borrowings, (ii) $237,160,000 of dividends paid on common shares, (iii) $225,000,000 of distributions in connection with the spin-off of UE, (iv) $77,447,000 of distributions to noncontrolling interests, (v) $39,849,000 of dividends paid on preferred shares, (vi) $14,053,000 of debt issuance costs, and (vii) $2,939,000 for the repurchase of shares related to stock compensation agreements resulting from exercises of long-term equity awards by executives of the company and/or related tax withholdings, partially offset by (viii) $1,746,460,000 of proceeds from borrowings, (ix) $51,725,000 of contributions from noncontrolling interests, and (x) $13,683,000 of proceeds received from the exercise of employee share options.
Capital Expenditures
Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions. Recurring capital expenditures include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases. Non-recurring capital improvements include expenditures to lease space that has been vacant for more than nine months and expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition, as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property.
68
Liquidity and Capital Resources – continued
Capital Expenditures - continued
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2015.
Expenditures to maintain assets
46,080
25,985
6,009
14,086
Tenant improvements
62,363
19,798
36,913
5,652
Leasing commissions
15,610
10,144
4,677
789
Non-recurring capital expenditures
90,592
63,633
26,638
321
Total capital expenditures and leasing commissions (accrual basis)
214,645
119,560
74,237
20,848
Adjustments to reconcile to cash basis:
Expenditures in the current year applicable to prior periods
77,839
41,085
20,826
15,928
Expenditures to be made in future periods for the current period
(122,715)
(60,309)
(58,408)
(3,998)
Total capital expenditures and leasing commissions (cash basis)
169,769
100,336
36,655
32,778
8.25
9.88
n/a
11.0%
8.3%
Development and Redevelopment Expenditures
Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including capitalized interest, debt and operating costs until the property is substantially completed and ready for its intended use.
We are in the process of redeveloping the retail space at the Marriott Marquis Times Square Hotel, including converting the below grade parking garage into retail, which is expected to be completed by the end of 2015. The retail space includes 20,000 square feet on grade and 24,000 square feet below grade. As part of the redevelopment, we have completed the construction of a six-story, 300 foot wide block front, dynamic LED sign, which was lit for the first time in November 2014. The incremental development cost of this project is approximately $220,000,000, of which $192,000,000 has been expended as of June 30, 2015.
We are constructing a residential condominium tower containing 392,000 salable square feet on our 220 Central Park South development site. The incremental development cost of this project is approximately $1.0 billion, of which $176,000,000 has been expended as of June 30, 2015. In January 2014, we completed a $600,000,000 loan secured by this site. On August 26, 2014, we obtained a standby commitment for up to $500,000,000 of five-year mezzanine loan financing to fund a portion of the development expenditures at 220 Central Park South.
We are developing The Bartlett, a 699-unit residential project in Pentagon City, which is expected to be completed in 2016. The project will include a 37,000 square foot Whole Foods Market at the base of the building. The incremental development cost of this project is approximately $250,000,000, of which $104,000,000 has been expended as of June 30, 2015.
We are redeveloping an existing 165,000 square foot office building in Crystal City (2221 S. Clark Street), which we have leased to WeWork, into 216 rental residential units and 2 floors of co-working space. The incremental development cost of this project is approximately $40,000,000. The redevelopment is expected to be completed in phases beginning in the fourth quarter of 2015.
We have substantially completed the repositioning of 280 Park Avenue (50% owned). Our share of the incremental development costs of this project is approximately $63,000,000, of which $61,000,000 was expended as of June 30, 2015.
We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including the Penn Plaza District, and in Washington, including Crystal City, Rosslyn and Pentagon City.
There can be no assurance that any of our development or redevelopment projects will commence, or if commenced, be completed, or completed on schedule or within budget.
69
Development and Redevelopment Expenditures - continued
Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2015. These expenditures include interest of $22,812,000, payroll of $2,115,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $39,811,000, that were capitalized in connection with the development and redevelopment of these projects.
220 Central Park South
57,554
The Bartlett
41,889
330 West 34th Street
18,324
Marriott Marquis Times Square - retail and signage
15,294
Springfield Town Center
14,478
90 Park Avenue
12,868
Wayne Towne Center
10,959
2221 South Clark Street
6,939
251 18th Street
3,891
Penn Plaza
2,011
608 Fifth Avenue
1,811
7 West 34th Street
13,419
2,504
10,628
287
200,970
54,345
63,347
83,278
Cash Flows for the Six Months Ended June 30, 2014
Our cash and cash equivalents were $1,371,226,000 at June 30, 2014, a $787,936,000 increase over the balance at December 31, 2013. The increase is primarily due to cash flows from operating and financing activities, partially offset by cash flows from investing activities, as discussed below.
Cash flows provided by operating activities of $447,643,000 was comprised of (i) net income of $263,843,000, (ii) $209,123,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net loss of partially owned entities and impairment losses on real estate, (iii) return of capital from real estate fund investment of $140,920,000, and (iv) distributions of income from partially owned entities of $25,784,000, partially offset by (v) the net change in operating assets and liabilities of $192,027,000, including $2,666,000 related to real estate fund investments.
Net cash used in investing activities of $66,514,000 was comprised of (i) $214,615,000 of development costs and construction in progress, (ii) $105,116,000 of additions to real estate, (iii) $62,894,000 of investments in partially owned entities, and (iv) $8,963,000 of acquisition of real estate and other, partially offset by (v) $125,037,000 of proceeds from sales of real estate and related investments, (vi) $102,087,000 of changes in restricted cash, (vii) $96,159,000 of proceeds from repayments of mortgages and mezzanine loans receivable and other, and (viii) $1,791,000 of capital distributions from partially owned entities.
Net cash provided by financing activities of $406,807,000 was comprised of (i) $1,398,285,000 of proceeds from borrowings, (ii) $10,125,000 of proceeds received from the exercise of employee share options, and (iii) $5,297,000 of contributions from noncontrolling interests, partially offset by (iv) $313,444,000 for the repayments of borrowings, (v) $273,694,000 of dividends paid on common shares, (vi) purchase of marketable securities in connection with defeasance of mortgage notes payable of $198,884,000, (vii) $149,944,000 of distributions to noncontrolling interests, (viii) $40,737,000 of dividends paid on preferred shares, (ix) $29,560,000 of debt issuance costs, and (x) $637,000 for the repurchase of shares related to stock compensation agreements and/or related tax withholdings.
70
Capital Expenditures in the six months ended June 30, 2014
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2014.
34,110
20,896
4,761
8,453
114,133
89,525
11,180
13,428
50,624
44,171
2,806
3,647
17,761
2,904
12,435
2,422
216,628
157,496
31,182
27,950
67,908
26,568
30,957
10,383
(143,636)
(108,232)
(22,927)
(12,477)
140,900
75,832
39,212
25,856
6.25
6.50
5.23
9.9%
9.1%
13.0%
Development and Redevelopment Expenditures in the six months ended June 30, 2014
Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2014. These expenditures include interest of $30,182,000, payroll of $4,175,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $27,907,000, that were capitalized in connection with the development and redevelopment of these projects.
54,743
38,659
27,372
21,816
15,809
10,873
7,243
5,228
32,872
13,866
13,438
5,568
214,615
97,393
24,311
92,911
71
72
Funds From Operations (“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 GAAP net income or loss adjusted to exclude net gain from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets, extraordinary items and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are non-GAAP financial measures used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flows as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. The calculations of both the numerator and denominator used in the computation of income per share are disclosed in Note 19 – Income per Share, in our consolidated financial statements on page 27 of this Quarterly Report on Form 10-Q.
FFO for the Three and Six Months Ended June 30, 2015 and 2014
FFO attributable to common shareholders plus assumed conversions was $323,381,000, or $1.71 per diluted share for the three months ended June 30, 2015, compared to $216,547,000, or $1.15 per diluted share, for the prior year’s three months. FFO attributable to common shareholders plus assumed conversions was $544,305,000, or $2.87 per diluted share for the six months ended June 30, 2015, compared to $463,626,000, or $2.46 per diluted share, for the prior year’s six months. Details of certain items that affect comparability are discussed in the financial results summary of our “Overview”.
For The Three Months Ended
Reconciliation of our net income to FFO:
Depreciation and amortization of real property
129,296
121,402
247,552
263,971
(10,867)
Real estate impairment losses
Proportionate share of adjustments to equity in net loss of
partially owned entities to arrive at FFO:
32,282
30,126
68,554
66,812
10,304
Income tax effect of above adjustments
(3,085)
(7,080)
(9,662)
(8,561)
(18,109)
(19,960)
FFO attributable to Vornado
343,723
236,890
583,270
504,310
FFO attributable to common shareholders
323,358
216,524
543,421
463,576
838
FFO attributable to common shareholders plus assumed conversions
323,381
216,547
544,305
463,626
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
Denominator for FFO per diluted share
188,659
188,475
per diluted share
1.71
1.15
2.87
2.46
73
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:
Weighted
Effect of 1%
Average
Change In
December 31,
Balance
Interest Rate
Base Rates
Consolidated debt:
2,612,436
2.02%
26,124
2.20%
7,197,341
4.34%
7,846,555
4.36%
3.73%
3.97%
Pro rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys
364,355
1.96%
3,644
319,387
1.72%
Variable rate – Toys
1,028,680
7.18%
10,287
1,199,835
6.47%
Fixed rate (including $657,785 and
$674,443 of Toys debt in 2015 and 2014)
2,949,343
6.33%
2,754,410
6.45%
4,342,378
6.16%
13,931
4,273,632
6.10%
Noncontrolling interests’ share of above
(2,323)
Total change in annual net income
37,732
Per share-diluted
0.20
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of June 30, 2015, we have one interest rate swap on a $420,000,000 mortgage loan that swapped the rate from LIBOR plus 1.65% (1.83% at June 30, 2015) to a fixed rate of 4.78% through March 2018.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt. As of June 30, 2015, the estimated fair value of our consolidated debt was $9,823,000,000.
Item 4. Controls and Procedures
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 Rule 13a‑15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2015, such disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
Item 1A. Risk Factors
There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index.
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.
(Registrant)
Date: August 3, 2015
By:
/s/ Stephen W. Theriot
Stephen W. Theriot, Chief Financial Officer (duly authorized officer and principal financial and accounting officer)
Exhibit No.
15.1
Letter regarding Unaudited Interim Financial Information
31.1
Rule 13a-14 (a) Certification of the Chief Executive Officer
31.2
Rule 13a-14 (a) Certification of the Chief Financial Officer
32.1
Section 1350 Certification of the Chief Executive Officer
32.2
Section 1350 Certification of the Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase