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, 2016
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. Yesx 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, 2016, 188,825,520 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, 2016 and December 31, 2015
3
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2016 and 2015
4
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three and Six Months Ended June 30, 2016 and 2015
5
Consolidated Statements of Changes in Equity (Unaudited) for the
Six Months Ended June 30, 2016 and 2015
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
32
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
33
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
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
December 31, 2015
ASSETS
Real estate, at cost:
Land
$
4,154,201
4,164,799
Buildings and improvements
12,541,161
12,582,671
Development costs and construction in progress
1,302,108
1,226,637
Leasehold improvements and equipment
112,096
116,030
Total
18,109,566
18,090,137
Less accumulated depreciation and amortization
(3,374,867)
(3,418,267)
Real estate, net
14,734,699
14,671,870
Cash and cash equivalents
1,644,067
1,835,707
Restricted cash
94,628
107,799
Marketable securities
194,489
150,997
Tenant and other receivables, net of allowance for doubtful accounts of $11,260 and $11,908
95,623
98,062
Investments in partially owned entities
1,499,792
1,550,422
Real estate fund investments
524,150
574,761
Receivable arising from the straight-lining of rents, net of allowance of $2,489 and $2,751
991,953
931,245
Deferred leasing costs, net of accumulated amortization of $227,015 and $218,239
462,649
480,421
Identified intangible assets, net of accumulated amortization of $194,463 and $187,360
210,010
227,901
Assets related to discontinued operations
8,678
37,020
Other assets
612,992
477,088
21,073,730
21,143,293
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
9,746,818
9,513,713
Senior unsecured notes, net
844,868
844,159
Unsecured revolving credit facilities
115,630
550,000
Unsecured term loan, net
371,455
183,138
Accounts payable and accrued expenses
480,094
443,955
Deferred revenue
314,367
346,119
Deferred compensation plan
119,292
117,475
Liabilities related to discontinued operations
8,104
12,470
Other liabilities
480,030
426,965
Total liabilities
12,480,658
12,437,994
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 12,385,829 and 12,242,820 units outstanding
1,240,069
1,223,793
Series D cumulative redeemable preferred units - 177,101 units outstanding
5,428
Total redeemable noncontrolling interests
1,245,497
1,229,221
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 52,676,629 shares
1,276,954
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 188,825,520 and 188,576,853 shares
7,531
7,521
Additional capital
7,135,571
7,132,979
Earnings less than distributions
(1,898,505)
(1,766,780)
Accumulated other comprehensive income
72,556
46,921
Total Vornado shareholders' equity
6,594,107
6,697,595
Noncontrolling interests in consolidated subsidiaries
753,468
778,483
Total equity
7,347,575
7,476,078
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,
2016
2015
REVENUES:
Property rentals
527,178
514,843
1,046,670
1,015,117
Tenant expense reimbursements
60,841
62,215
120,416
129,136
Fee and other income
33,689
39,230
67,659
78,837
Total revenues
621,708
616,288
1,234,745
1,223,090
EXPENSES:
Operating
245,138
242,690
501,487
497,183
Depreciation and amortization
141,313
136,957
284,270
261,079
General and administrative
45,564
39,189
94,268
97,681
Impairment loss and acquisition and transaction related costs
2,879
4,061
168,186
6,042
Total expenses
434,894
422,897
1,048,211
861,985
Operating income
186,814
193,391
186,534
361,105
Income (loss) from partially owned entities
642
(5,641)
(3,598)
(8,384)
Income from real estate fund investments
16,389
26,368
27,673
50,457
Interest and other investment income, net
10,236
5,666
13,754
16,458
Interest and debt expense
(105,576)
(92,092)
(206,065)
(183,766)
Net gain on disposition of wholly owned and partially owned assets
159,511
-
160,225
1,860
Income before income taxes
268,016
127,692
178,523
237,730
Income tax (expense) benefit
(2,109)
88,072
(4,940)
87,101
Income from continuing operations
265,907
215,764
173,583
324,831
Income (loss) from discontinued operations
2,475
(364)
3,191
15,815
Net income
268,382
215,400
176,774
340,646
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(13,025)
(19,186)
(22,703)
(35,068)
Operating Partnership
(14,531)
(10,198)
(7,044)
(15,485)
Net income attributable to Vornado
240,826
186,016
147,027
290,093
Preferred share dividends
(20,363)
(20,365)
(40,727)
(39,849)
NET INCOME attributable to common shareholders
220,463
165,651
106,300
250,244
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
1.16
0.88
0.54
1.25
Income from discontinued operations, net
0.01
0.02
0.08
Net income per common share
1.17
0.56
1.33
Weighted average shares outstanding
188,772
188,365
188,715
188,183
INCOME PER COMMON SHARE - DILUTED:
1.15
0.87
1.24
1.32
189,885
189,600
190,000
189,775
DIVIDENDS PER COMMON SHARE
0.63
1.26
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income (loss):
Increase (reduction) in unrealized net gain on
available-for-sale securities
28,019
(25,000)
39,113
(46,332)
Pro rata share of other comprehensive loss of
nonconsolidated subsidiaries
(628)
(1,191)
(622)
(1,034)
(Reduction) increase in value of interest rate swaps and other
(6,976)
2,848
(11,171)
2,077
Comprehensive income
288,797
192,057
204,094
295,357
Less comprehensive income attributable to noncontrolling interests
(28,814)
(28,037)
(31,432)
(47,918)
Comprehensive income attributable to Vornado
259,983
164,020
172,662
247,439
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
Subsidiaries
Equity
Balance, December 31, 2015
52,677
188,577
Net income attributable to
noncontrolling interests in
consolidated subsidiaries
22,703
Dividends on common shares
(237,832)
Dividends on preferred shares
Common shares issued:
Upon redemption of Class A
units, at redemption value
195
18,200
18,208
Under employees' share
option plan
38
1
3,092
3,093
Under dividend reinvestment plan
717
Contributions:
19,674
Distributions:
(56,533)
(10,970)
Deferred compensation shares
and options
7
953
(186)
768
Increase in unrealized net gain on
Pro rata share of other
comprehensive loss of
Reduction in value of interest
rate swaps
(11,170)
Adjustments to carry redeemable
Class A units at redemption value
(20,369)
Redeemable noncontrolling interests'
share of above adjustments
(1,685)
(1)
(7)
111
102
Balance, June 30, 2016
188,826
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
Balance, December 31, 2014
52,679
1,277,026
187,887
7,493
6,873,025
(1,505,385)
93,267
743,956
7,489,382
35,068
Distribution of Urban Edge
Properties
(464,262)
(341)
(464,603)
(237,160)
400
16
43,262
43,278
12,972
(2,579)
10,400
701
51,725
(62,495)
(255)
Conversion of Series A preferred
shares to common shares
(16)
1,653
(359)
1,295
Reduction in unrealized net gain
on available-for-sale securities
Increase in value of interest
rate swap
2,073
229,521
2,635
955
(92)
867
Balance, June 30, 2015
52,678
1,277,010
188,497
7,517
7,161,150
(1,958,546)
50,613
767,566
7,305,310
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)
299,541
272,942
Real estate impairment losses
160,700
256
(160,225)
(1,860)
Straight-lining of rental income
(83,883)
(64,121)
Return of capital from real estate fund investments
71,888
83,443
Distributions of income from partially owned entities
46,500
37,821
Amortization of below-market leases, net
(29,811)
(26,132)
Other non-cash adjustments
23,049
26,569
Net realized and unrealized gains on real estate fund investments
(21,277)
(41,857)
Loss from partially owned entities
3,598
7,636
Net gains on sale of real estate and other
(2,210)
(32,243)
Reversal of allowance for deferred tax assets
(90,030)
Changes in operating assets and liabilities:
(95,000)
Tenant and other receivables, net
2,358
(5,051)
Prepaid assets
(131,927)
(138,473)
(29,303)
(46,858)
6,634
(26,440)
(9,113)
(16,632)
Net cash provided by operating activities
323,293
184,616
Cash Flows from Investing Activities:
(277,214)
(200,970)
Additions to real estate
(170,265)
(137,528)
Proceeds from sales of real estate and related investments
130,249
334,725
(90,659)
(137,465)
Distributions of capital from partially owned entities
87,977
29,666
Acquisitions of real estate and other
(46,807)
(381,001)
Net deconsolidation of 7 West 34th Street
(42,000)
Investments in loans receivable and other
(11,700)
(23,919)
(7,483)
25,118
Purchases of marketable securities
(4,379)
Proceeds from sales and repayments of mortgage and mezzanine loans receivable and other
22
16,772
Net cash used in investing activities
(432,259)
(474,602)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Proceeds from borrowings
1,325,246
1,746,460
Repayments of borrowings
(1,032,115)
(1,607,574)
Dividends paid on common shares
Distributions to noncontrolling interests
(83,266)
(77,447)
Dividends paid on preferred shares
Debt issuance and other costs
(29,478)
(14,053)
Contributions from noncontrolling interests
11,874
Proceeds received from exercise of employee share options
3,810
13,683
Repurchase of shares related to stock compensation agreements and related
tax withholdings and other
(2,939)
Cash included in the spin-off of Urban Edge Properties
(225,000)
Net cash used in financing activities
(82,674)
(392,154)
Net decrease in cash and cash equivalents
(191,640)
(682,140)
Cash and cash equivalents at beginning of period
1,198,477
Cash and cash equivalents at end of period
516,337
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $13,918 and $17,550
181,432
178,461
Cash payments for income taxes
5,003
6,584
Non-Cash Investing and Financing Activities:
Write-off of fully depreciated assets
(220,654)
(81,027)
Accrued capital expenditures included in accounts payable and accrued expenses
144,079
70,672
Change in unrealized net gain (loss) on securities available-for-sale
Adjustments to carry redeemable Class A units at redemption value
Decrease in assets and liabilities resulting from the deconsolidation of investments
that were previously consolidated
(122,047)
(290,418)
Non-cash distribution of Urban Edge Properties:
Assets
1,722,263
Liabilities
(1,482,660)
(239,603)
Transfer of interest in real estate to Pennsylvania Real Estate Investment Trust
(145,313)
Financing assumed in acquisitions
62,000
Like-kind exchange of real estate:
Acquisitions
46,698
62,355
Dispositions
(29,639)
(38,822)
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Vornado is the sole general partner of, and owned approximately 93.6% of the common limited partnership interest in, the Operating Partnership at June 30, 2016. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and its consolidated subsidiaries, including the Operating Partnership. All inter-company 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 Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2015, 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, 2016 are not necessarily indicative of the operating results for the full year.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update ("ASU 2014-09") establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). 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. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC 606, Deferral of the Effective Date, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an update (“ASU 2016-10”) to ASC 606, Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued an update (“ASU 2016-12”) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are currently evaluating the impact of the adoption of these ASUs on our consolidated financial statements.
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). 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 began after December 15, 2015. The adoption of this update as of January 1, 2016, did not have any impact on our consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysisto 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. The adoption of this update on January 1, 2016 resulted in the identification of additional VIEs, but did not have an impact on our consolidated financial statements other than additional disclosures(see Note 13 - Variable Interest Entities).
In January 2016, the FASB issued an update (“ASU 2016-01”) Recognition and Measurement of Financial Assets and Financial Liabilities to ASC Topic 825, Financial Instruments. ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In February 2016, the FASB issued (“ASU 2016-02”) Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued an update (“ASU 2016-09”) Improvements to Employee Share-Based Payment Accounting to ASC 718. ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.
4. Acquisitions
On May 20, 2016, we contributed $19,650,000 for a 50.0% equity interest in a joint venture that will develop a 33,000 square foot office and retail building, located on Houston Street in Manhattan. The development cost of this project is estimated to be approximately $104,000,000. At closing, the joint venture obtained a $65,000,000 construction loan, of which approximately $22,100,000 was outstanding at June 30, 2016. The loan, which bears interest at LIBOR plus 3.00% (3.47% at June 30, 2016), matures in May 2019 with two one-year extension options. Because this joint venture is a VIE and we determined we are the primary beneficiary, we consolidate the accounts of this joint venture from the date of our investment.
11
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.
We are also the general partner and investment manager of Crowne Plaza Times Square Hotel Co-Investment (the “Co-Investment”), which owns a 24.7% interest in the Crowne Plaza Times Square Hotel. The Fund owns the remaining 75.3% interest. The Co-Investment is also accounted for under ASC 946. We consolidate the accounts of the Co-Investment into our consolidated financial statements, retaining the fair value basis of accounting.
At June 30, 2016, we had six real estate fund investments with an aggregate fair value of $524,150,000, or $215,215,000 in excess of cost, and had remaining unfunded commitments of $117,907,000, of which our share was $34,522,000. Below is a summary of income from the Fund and the Co-Investment for the three and six months ended June 30, 2016 and 2015.
Net investment income
1,723
2,150
6,396
8,600
Net realized gains on exited investments
886
14,676
25,591
Previously recorded unrealized gain on exited investment
(14,254)
(23,279)
Net unrealized gains on held investments
14,666
23,332
20,855
39,545
Less income attributable to noncontrolling interests
(8,845)
(15,872)
(14,818)
(29,411)
Income from real estate fund investments attributable to Vornado (1)
7,544
10,496
12,855
21,046
Excludes management, leasing and development fees of $935 and $633 for the three months ended June 30, 2016 and 2015, respectively, and $1,695 and $1,337 for the six months ended June 30, 2016 and 2015, respectively, which are included as a component of "fee and other income" in our consolidated statements of income.
6. Marketable Securities
Below is a summary of our marketable securities portfolio as of June 30, 2016 and December 31, 2015.
As of June 30, 2016
As of December 31, 2015
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
186,721
72,549
114,172
147,752
75,203
7,768
4,379
3,389
3,245
76,928
117,561
78,448
12
As of June 30, 2016, we own 1,654,068 Alexander’s common shares, representing a 32.4% interest in Alexander’s. We account for our investment in Alexander’s under the equity method. 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, 2016, the market value (“fair value” pursuant to ASC Topic 820, Fair Value Measurements (“ASC 820”)) of our investment in Alexander’s, based on Alexander’s June 30, 2016 closing share price of $409.23, was $676,894,000, or $547,099,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 2016, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander’s by approximately $39,786,000. 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.
Urban Edge Properties (“UE”) (NYSE: UE)
As of June 30, 2016, we own 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 record our share of UE’s net income or loss on a one-quarter lag basis. During 2015, we provided transition services to UE, primarily for information technology, human resources, tax and financial planning. In 2016, we continue to provide UE information technology support. UE is providing us with leasing and property management services for (i) certain small retail properties that we plan to sell, and (ii) our affiliate, Alexander’s, Rego Park retail assets. As of June 30, 2016, the fair value of our investment in UE, based on UE’s June 30, 2016 closing share price of $29.86, was $170,715,000, or $146,847,000 in excess of the carrying amount on our consolidated balance sheet.
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
As of June 30, 2016, we own 6,250,000 PREIT operating partnership units, representing an 8.0% interest in PREIT. We account for our investment in PREIT under the equity method and record our share of PREIT’s net income or loss on a one-quarter lag basis. As of June 30, 2016, the fair value of our investment in PREIT, based on PREIT’s June 30, 2016 closing share price of $21.45, was $134,063,000, or $8,241,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 2016, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $64,712,000. The majority of this basis difference resulted from the excess of the fair value of the PREIT operating units received over our share of the book value of PREIT’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of PREIT’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 PREIT’s net loss. The basis difference related to the land will be recognized upon disposition of our investment.
One Park Avenue
On March 7, 2016, the joint venture in which we have a 55% ownership interest, completed a $300,000,000 refinancing of One Park Avenue, a 947,000 square foot Manhattan office building. The loan matures in March 2021 and is interest only at LIBOR plus 1.75% (2.21% at June 30, 2016). The property was previously encumbered by a 4.995%, $250,000,000 mortgage which matured in March 2016.
Mezzanine Loan – New York
On March 17, 2016, we entered into a joint venture, in which we own a 33.3% interest, which owns a $142,050,000 mezzanine loan. The interest rate is LIBOR plus 8.875% (9.32% at June 30, 2016) and the debt matures in November 2016, with two three-month extension options. At June 30, 2016, the joint venture has a $7,950,000 remaining commitment, of which our share is $2,650,000. The joint venture’s investment is subordinate to $350,000,000 of third party debt. We account for our investment in the joint venture under the equity method.
13
The Warner Building
On May 6, 2016, the joint venture in which we have a 55% ownership interest, completed a $273,000,000 refinancing of The Warner Building, a 621,000 square foot Washington, DC office building. The loan matures in June 2023, has a fixed rate of 3.65%, is interest only for the first two years and amortizes based on a 30-year schedule beginning in year three. The property was previously encumbered by a 6.26%, $293,000,000 mortgage which matured in May 2016.
280 Park Avenue
On May 11, 2016, the joint venture in which we have a 50% ownership interest, completed a $900,000,000 refinancing of 280 Park Avenue, a 1,250,000 square foot Manhattan office building. The three-year loan with four one-year extensions is interest only at LIBOR plus 2.00%, (2.45% at June 30, 2016). The property was previously encumbered by a 6.35%, $721,000,000 mortgage which was scheduled to mature in June 2016.
7 West 34th Street
On May 16, 2016, we completed a $300,000,000 recourse financing of 7 West 34th Street, a 477,000 square foot Manhattan office building leased to Amazon. The ten-year loan is interest only at a fixed rate of 3.65% and matures in June 2026. Subsequently, on May 27, 2016, we sold a 47% ownership interest in this property and retained the remaining 53% interest. This transaction was based on a property value of approximately $561,000,000 or $1,176 per square foot. We received net proceeds of $127,382,000 from the sale and realized a net gain of $203,324,000, of which $159,511,000 is recognized this quarter and is included in “net gain on disposition of wholly owned and partially owned assets” in our consolidated statements of income. The remaining net gain of $43,813,000 has been deferred until our guarantee of payment of loan principal and interest has been removed or the loan has been repaid. We realized a net tax gain of $90,017,000. We continue to manage and lease the property. We share control over major decisions with our joint venture partner. Accordingly, this property is accounted for under the equity method from the date of sale.
14
Below are schedules summarizing our investments in, and income (loss) from, partially owned entities.
Percentage
Ownership at
Balance as of
Investments:
Partially owned office buildings (1)
Various
811,984
909,782
Alexander’s
32.4%
129,795
133,568
PREIT
8.0%
125,822
133,375
India real estate ventures
4.1%-36.5%
45,139
48,310
UE
5.4%
23,868
25,351
Other investments (2)
363,184
300,036
7 West 34th Street (3)
53.0%
(43,160)
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue, 512 West 22nd Street and others.
(2)
Includes interests in Independence Plaza, 85 Tenth Avenue, Fashion Center Mall, 50-70 West 93rd Street, Toys "R" Us, Inc. (which has a carrying amount of zero) and others.
(3)
Our negative basis results from a $43,813 deferred gain from the sale of a 47.0% ownership interest in the property and is included in "other liabilities" on our consolidated balance sheet.
Our Share of Net Income (Loss):
Alexander's (see page 13 for details):
Equity in net income
6,812
5,447
13,749
11,041
Management, leasing and development fees
1,688
1,876
3,413
3,973
8,500
7,323
17,162
15,014
UE (see page 13 for details):
Equity in net earnings
1,071
404
1,947
Management fees
209
500
418
1,084
1,280
904
2,365
1,488
(12,462)
(3,238)
(26,711)
(12,534)
(1,934)
(16,567)
(2,620)
(16,676)
PREIT (see page 13 for details)
(527)
(4,815)
5,785
6,301
11,021
4,688
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 7 West 34th Street, 330 Madison Avenue, 512 West 22nd Street and others. In 2015, we recognized our $5,387 share of a write-off of a below market lease liability related to a tenant vacating at 650 Madison.
Includes interests in Independence Plaza, 85 Tenth Avenue, Fashion Center Mall, 50-70 West 93rd Street, Toys "R" Us, Inc. and others.
15
Discontinued Operations
The tables below set forth the assets and liabilities related to discontinued operations at June 30, 2016 and December 31, 2015 and their combined results of operations and cash flows for the three and six months ended June 30, 2016 and 2015.
Assets related to discontinued operations:
3,111
29,561
5,567
7,459
Liabilities related to discontinued operations:
For the Three Months Ended June 30,
Income (loss) from discontinued operations:
947
1,983
2,129
22,279
682
2,020
1,148
15,393
265
(37)
981
6,886
Net gains on sale of real estate
2,210
10,867
UE spin-off transaction related costs
(327)
(22,972)
Net gain on sale of lease position in Geary Street, CA
21,376
Impairment losses
(256)
Pretax income from discontinued operations
15,901
Income tax expense
(86)
Cash flows related to discontinued operations:
Cash flows from operating activities
(4,685)
(35,738)
Cash flows from investing activities
310,069
The following summarizes our identified intangible assets (primarily above-market leases) and liabilities (primarily acquired below-market leases) as of June 30, 2016 and December 31, 2015.
Identified intangible assets:
Gross amount
404,473
415,261
Accumulated amortization
(194,463)
(187,360)
Net
Identified intangible liabilities (included in deferred revenue):
600,722
643,488
(311,197)
(325,340)
289,525
318,148
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $12,301,000 and $13,378,000 for the three months ended June 30, 2016 and 2015, respectively, and $29,808,000 and $25,828,000 for the six months ended June 30, 2016 and 2015, 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, 2017 is as follows:
2017
45,361
2018
44,101
2019
31,937
2020
23,365
2021
18,287
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $8,066,000 and $5,309,000 for the three months ended June 30, 2016 and 2015, respectively, and $15,859,000 and $11,494,000 for the six months ended June 30, 2016 and 2015, 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, 2017 is as follows:
24,795
20,541
16,202
12,404
11,032
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 $458,000 and $458,000 for the three months ended June 30, 2016 and 2015, respectively, and $916,000 and $916,000 for the six months ended June 30, 2016 and 2015. Estimated annual amortization of these below-market leases, net of above-market leases, for each of the five succeeding years commencing January 1, 2017 is as follows:
1,832
17
On February 8, 2016, we completed a $700,000,000 refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.75%, (2.21% at June 30, 2016) which was swapped for four and a half years to a fixed rate of 2.56%. The Company realized net proceeds of approximately $330,000,000. The property was previously encumbered by a 5.65%, $353,000,000 mortgage which matured in March 2016.
On March 15, 2016, we notified the servicer of the $678,000,000 mortgage loan on the Skyline properties in Virginia that cash flow will be insufficient to service the debt and pay other property related costs and expenses and that we were not willing to fund additional cash shortfalls. Accordingly, at our request, the loan has been transferred to the special servicer. Consequently, based on our shortened estimated holding period for the underlying assets, we concluded that the excess of carrying amount over our estimate of fair value was not recoverable and recognized a $160,700,000 non-cash impairment loss in the first quarter of 2016. The Company’s estimate of fair value was derived from a discounted cash flow model based upon market conditions and expectations of growth and utilized unobservable quantitative inputs including a capitalization rate of 8.0% and a discount rate of 8.2%. In the second quarter of 2016, cash flow became insufficient to service the debt and we ceased making debt service payments. Pursuant to the loan agreement, the loan is in default, causing the loan to be immediately due and payable, and is subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remains unpaid. For the three and six months ended June 30, 2016, we accrued $2,711,000 of default interest expense. We continue to negotiate with the special servicer. There can be no assurance as to the timing or ultimate resolution of this matter.
The following is a summary of our debt:
Interest Rate at
Balance at
Mortgages Payable:
Fixed rate
4.17%
6,571,398
6,356,634
Variable rate
2.28%
3,281,935
3,258,204
3.54%
9,853,333
9,614,838
Deferred financing costs, net and other
(106,515)
(101,125)
Total, net
Unsecured Debt:
Senior unsecured notes
3.68%
850,000
(5,132)
(5,841)
Unsecured term loan
1.61%
375,000
187,500
(3,545)
(4,362)
1.51%
1,331,953
1,577,297
18
Redeemable noncontrolling interests on our consolidated balance sheets are comprised primarily of Class A Operating Partnership units held by third parties and are recorded at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity. Below is a table summarizing the activity of redeemable noncontrolling interests.
Balance at December 31, 2014
1,337,780
15,485
Other comprehensive loss
(2,635)
(14,734)
Redemption of Class A units for common shares, at redemption value
(43,278)
(229,521)
Issuance of Series D-17 Preferred Units
4,427
Other, net
25,370
Balance at June 30, 2015
1,092,894
Balance at December 31, 2015
7,044
Other comprehensive income
1,685
(15,763)
(18,208)
20,369
21,149
Balance at June 30, 2016
As of June 30, 2016 and December 31, 2015, the aggregate redemption value of redeemable Class A units was $1,240,069,000 and $1,223,793,000, 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 $50,561,000 as of June 30, 2016 and December 31, 2015. Changes in the value from period to period, if any, are charged to “interest and debt expense” in our consolidated statements of income.
19
The following tables set forth the changes in accumulated other comprehensive income by component.
Securities
Pro rata share of
Interest
available-
nonconsolidated
rate
for-sale
subsidiaries' OCI
swaps
For the Three Months Ended June 30, 2016
Balance as of March 31, 2016
53,399
89,542
(9,313)
(23,563)
(3,267)
OCI before reclassifications
19,157
(6,975)
(1,259)
Amounts reclassified from AOCI
Net current period OCI
Balance as of June 30, 2016
(9,941)
(30,538)
(4,526)
For the Three Months Ended June 30, 2015
Balance as of March 31, 2015
72,609
112,442
(8,835)
(26,579)
(4,419)
(21,996)
2,849
1,346
Balance as of June 30, 2015
87,442
(10,026)
(23,730)
(3,073)
For the Six Months Ended June 30, 2016
Balance as of December 31, 2015
(9,319)
(19,368)
(2,840)
25,635
(1,686)
For the Six Months Ended June 30, 2015
Balance as of December 31, 2014
133,774
(8,992)
(25,803)
(5,712)
(42,654)
2,639
At June 30, 2016 and December 31, 2015, we have several unconsolidated VIEs. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance. We account for our investment in these entities under the equity method (see Note 7 – Investments in Partially Owned Entities). As of June 30, 2016 and December 31, 2015, the net carrying amounts of our investment in these entities were $394,866,000 and $379,939,000, respectively, and our maximum exposure to loss in these entities, is limited to our investments.
We adopted ASU 2015-02 on January 1, 2016 which resulted in the identification of several VIEs at June 30, 2016. Prior to the adoption of ASU 2015-02, these entities were consolidated under the voting interest model. Our most significant consolidated VIEs are our Operating Partnership, real estate fund investments, and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. We consolidate these entities because we control all significant business activities.
We conduct our business through, and all of our assets and liabilities are held by, our Operating Partnership which is a VIE.
20
ASC 820 defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) marketable securities, (ii) real estate fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units), and (v) interest rate swaps. The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy as of June 30, 2016 and December 31, 2015, respectively.
Level 1
Level 2
Level 3
Deferred compensation plan assets (included in other assets)
59,152
60,140
Total assets
837,931
253,641
584,290
Mandatorily redeemable instruments (included in other liabilities)
50,561
Interest rate swaps (included in other liabilities)
31,900
82,461
58,289
59,186
843,233
209,286
633,947
19,600
70,161
21
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At June 30, 2016, we had six real estate fund investments with an aggregate fair value of $524,150,000, or $215,215,000 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 1.0 to 4.5 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, 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, 2016 and December 31, 2015.
Weighted Average
Range
(based on fair value of investments)
Unobservable Quantitative Input
Discount rates
12.0% to 14.9%
13.7%
13.6%
Terminal capitalization rates
4.8% to 6.1%
5.5%
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, 2016 and 2015.
Beginning balance
566,696
554,426
513,973
Purchases
95,000
Dispositions / distributions
(57,212)
(11,235)
(71,888)
(83,421)
Net unrealized gains
Net realized gains
422
2,312
(1,433)
Ending balance
565,976
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, 2016 and 2015.
57,184
64,836
63,315
1,106
5,607
2,272
6,231
Sales
(779)
(4,655)
(2,151)
(5,093)
Realized and unrealized gain
2,219
1,387
312
2,722
410
493
521
67,668
23
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), and our secured and unsecured debt. Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument. The fair value of cash equivalents and borrowings under our unsecured revolving credit facilities and unsecured term loan are classified as Level 1. The fair value of our secured and unsecured debt is classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of June 30, 2016 and December 31, 2015.
Carrying
Fair
Value
Cash equivalents
1,134,521
1,135,000
1,295,980
1,296,000
Debt:
Mortgages payable
9,277,000
9,306,000
894,000
868,000
188,000
116,000
11,193,963
10,662,000
11,202,338
10,912,000
Excludes $115,192 and $111,328 of deferred financing costs, net and other as of June 30, 2016 and December 31, 2015, respectively.
15. Incentive Compensation
Our 2010 Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted shares, restricted Operating Partnership units and Out-Performance Plan awards to certain of our employees and officers. We account for all equity-based compensation in accordance with ASC 718. Equity-based compensation expense was $7,215,000 and $6,685,000 for the three months ended June 30, 2016 and 2015, respectively, and $21,786,000 and $26,827,000 for the six months ended June 30, 2016 and 2015, respectively.
24
The following table sets forth the details of fee and other income:
BMS cleaning fees
18,794
21,741
36,940
44,374
Management and leasing fees
4,604
4,274
9,403
8,466
Lease termination fees
3,199
2,893
5,604
6,640
Other income
7,092
10,322
15,712
19,357
Management and leasing fees include management fees from Interstate Properties, a related party, of $128,000 and $132,000 for the three months ended June 30, 2016 and 2015, and $262,000 and $271,000 for the six months ended June 30, 2016 and 2015, respectively. The above table excludes fee income from partially owned entities, which is included in “income (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, net:
Dividends on marketable securities
3,230
3,202
6,445
6,405
Mark-to-market income (loss) of investments in
our deferred compensation plan (1)
4,359
(609)
2,421
2,250
Interest on loans receivable
748
1,135
1,496
3,959
1,899
1,938
3,392
3,844
This income (loss) is entirely offset by the income (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
104,435
96,297
204,730
191,625
Amortization of deferred financing costs
8,508
7,497
17,773
14,953
Capitalized interest and debt expense
(7,367)
(11,702)
(16,438)
(22,812)
105,576
92,092
206,065
183,766
25
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 stock awards and Out-Performance Plan awards.
Numerator:
Income from continuing operations, net of income
attributable to noncontrolling interests
238,504
186,359
144,033
275,207
Income (loss) from discontinued operations, net of income
2,322
(343)
2,994
14,886
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(25)
(18)
(30)
(34)
Numerator for basic income per share
220,438
165,633
106,270
250,210
Impact of assumed conversions:
Convertible preferred share dividends
46
Earnings allocated to Out-Performance Plan units
367
Numerator for diluted income per share
220,459
165,656
106,294
250,623
Denominator:
Denominator for basic income per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,070
1,190
1,020
1,260
Convertible preferred shares
43
45
Out-Performance Plan units
286
Denominator for diluted income per share – weighted average
shares and assumed conversions
INCOME PER COMMON SHARE – BASIC:
INCOME PER COMMON SHARE – DILUTED:
The effect of dilutive securities for the three months ended June 30, 2016 and 2015 excludes an aggregate of 12,278 and 11,381 weighted average common share equivalents, respectively, and 12,052 and 11,209 weighted average common share equivalents for the six months ended June 30, 2016 and 2015, respectively, as their effect was anti-dilutive.
26
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as flood and earthquake. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence and in the annual aggregate, subject to a deductible in the amount of 5% of the value of the affected property. 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 of 2015, which expires in December 2020.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism including NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $2,400,000 per occurrence and 16% of the balance of a covered loss and the Federal government is responsible for the remaining 84% of a covered loss. 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.
Generally, 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, 2016, the aggregate dollar amount of these guarantees and master leases is approximately $857,000,000.
At June 30, 2016, $38,576,000 of letters of credit were outstanding under one of our unsecured revolving credit facilities. Our unsecured 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 unsecured 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, 2016, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $70,000,000.
As of June 30, 2016, we have construction commitments aggregating approximately $721,173,000.
27
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, 2016 and 2015.
New York
Washington, DC
425,770
127,468
68,470
268,135
89,106
77,653
Operating income (loss)
157,635
38,362
(9,183)
(1,001)
(2,958)
4,601
1,214
34
8,988
(56,395)
(19,817)
(29,364)
Net gain on disposition of wholly owned and partially
owned assets
Income (loss) before income taxes
260,964
15,621
(8,569)
(816)
(318)
(975)
Income (loss) from continuing operations
260,148
15,303
(9,544)
Income from discontinued operations
Net income (loss)
(7,069)
Less net income attributable to noncontrolling interests
(27,556)
(3,397)
(24,159)
Net income (loss) attributable to Vornado
256,751
(31,228)
Interest and debt expense(2)
127,799
71,171
22,641
33,987
Depreciation and amortization(2)
173,352
111,314
39,305
22,733
Income tax expense(2)
4,704
889
2,205
1,610
EBITDA(1)
546,681
440,125
79,454
(4)
27,102
(5)
414,262
134,856
67,170
250,298
98,661
73,938
163,964
36,195
(6,768)
(Loss) income from partially owned entities
3,176
(1,805)
(7,012)
1,892
3,761
(47,173)
(17,483)
(27,436)
121,859
16,920
(11,087)
Income tax benefit (expense)
(1,095)
(466)
89,633
120,764
16,454
78,546
Loss from discontinued operations
78,182
(29,384)
(2,552)
(26,832)
118,212
51,350
115,073
61,057
20,891
33,125
163,245
95,567
47,803
19,875
Income tax (benefit) expense (2)
(87,653)
1,152
486
(89,291)
376,681
275,988
85,634
15,059
See notes on pages 30 and 31.
28
836,595
255,480
142,670
537,730
345,671
164,810
298,865
(90,191)
(22,140)
(4,564)
(5,001)
5,967
2,329
92
11,333
(110,981)
(35,752)
(59,332)
714
345,160
(130,852)
(35,785)
(1,775)
(582)
(2,583)
343,385
(131,434)
(38,368)
(35,177)
(29,747)
(6,826)
(22,921)
336,559
(58,098)
253,919
142,369
42,047
69,503
348,163
219,717
81,986
46,460
Income tax expense (2)
7,965
1,979
2,470
3,516
757,074
700,624
(4,931)
61,381
813,775
268,824
140,491
503,058
191,658
167,269
310,717
77,166
(26,778)
(2,487)
(1,674)
(4,223)
3,754
12,678
(92,524)
(35,643)
(55,599)
219,460
39,875
(21,605)
(2,038)
208
88,931
217,422
40,083
67,326
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
Income tax (benefit) expense(2)
(88,392)
2,154
(2,150)
(88,396)
751,144
524,933
168,891
57,320
See notes on the following pages.
29
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a 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(a)
163,060
165,031
315,789
319,340
Retail
95,615
86,151
188,938
167,456
Residential
6,337
5,709
12,687
10,759
Alexander's
11,805
10,241
23,374
20,648
Hotel Pennsylvania
3,797
8,856
325
6,730
280,614
541,113
Gain on sale of 47% ownership interest
in 7 West 34th Street
Total New York
(a)
The three and six months ended June 30, 2015 include $3,304 and $6,844, respectively, of EBITDA from 20 Broad Street which was sold in December 2015. Excluding these items, EBITDA was $161,727 and $312,496, respectively.
The elements of "Washington, DC" EBITDA are summarized below.
Office, excluding the Skyline properties (a)
63,757
68,509
124,573
135,878
Skyline properties
4,863
6,984
9,955
13,039
Skyline properties impairment loss
(160,700)
Total Office
68,620
75,493
(26,172)
148,917
10,834
10,141
21,241
19,974
Total Washington, DC
The three and six months ended June 30, 2015 include $2,067 and $3,990, respectively, of EBITDA from 1750 Pennsylvania Avenue which was sold in September 2015. Excluding these items, EBITDA was $66,442 and $131,888, respectively.
30
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
1,526
2,671
3,757
4,285
Net realized/unrealized gains on investments
3,890
4,916
5,451
10,464
Carried interest
2,128
2,909
3,647
6,297
theMART (including trade shows)
25,965
22,144
48,993
43,185
555 California Street
12,117
12,831
23,732
25,232
430
375
1,749
2,216
Other investments
14,741
9,424
27,063
16,183
60,797
55,270
114,392
107,862
Corporate general and administrative expenses(a) (b)
(24,239)
(23,760)
(54,845)
(59,702)
Investment income and other, net(a)
5,471
6,561
12,446
15,323
Acquisition and transaction related costs
(2,879)
(4,061)
(7,486)
(6,042)
UE and residual retail properties discontinued operations(c)
2,483
1,540
3,204
23,797
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
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 the results of the mark-to-market of our deferred compensation plan of $4,359 of income and $609 of loss for the three months ended June 30, 2016 and 2015, respectively, and $2,421 and $2,250 of income for the six months ended June 30, 2016 and 2015, respectively.
(b)
The six months ended June 30, 2015 includes a cumulative catch up of $4,542 from the acceleration of recognition of compensation expense related to the modification of the 2012-2014 Out-Performance Plans.
(c)
The three and six months ended June 30, 2015 include $327 and $22,972, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls.
31
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, 2016, and the related consolidated statements of income and comprehensive income for the three month and six month periods ended June 30, 2016 and 2015 and changes in equity and cash flows for the six month periods ended June 30, 2016 and 2015. 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, 2015, 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 16, 2016, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2015 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 1, 2016
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, 2015. 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, 2016. 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, 2016 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.
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 Index (“Office REIT”) and the MSCI US REIT Index (“MSCI”) for the following periods ended June 30, 2016:
Total Return(1)
Vornado
Office REIT
MSCI
Three-month
6.7%
8.5%
6.8%
Six-month
1.5%
9.0%
One-year
8.3%
15.3%
24.1%
Three-year
45.1%
36.1%
46.2%
Five-year
40.0%
80.5%
Ten-year
64.6%
52.9%
103.3%
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, 2015, for additional information regarding these factors.
Net income attributable to common shareholders for the quarter ended June 30, 2016 was $220,463,000, or $1.16 per diluted share, compared to net income attributable to common shareholders of $165,651,000, or $0.87 per diluted share, for the prior year’s quarter. The quarters ended June 30, 2016 and 2015 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the quarters ended June 30, 2016 and 2015 by $148,000,000 and $76,523,000, or $0.78 and $0.40 per diluted share, respectively.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended June 30, 2016 was $229,432,000, or $1.21 per diluted share, compared to $323,381,000, or $1.71 per diluted share, for the prior year’s quarter. FFO for the quarters ended June 30, 2016 and 2015 include certain items that impact FFO, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the quarter ended June 30, 2016 by $3,583,000, or $0.02 per diluted share, and increased FFO for the quarter ended June 30, 2015 by $84,831,000, or $0.45 per diluted share.
Net income attributable to common shareholders for the six months ended June 30, 2016 was $106,300,000, or $0.56 per diluted share, compared to $250,244,000, or $1.32 per diluted share, for the six months ended June 30, 2015. In addition, the six months ended June 30, 2016 and 2015 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the six months ended June 30, 2016 by $8,884,000, or $0.05 per diluted share, and increased net income attributable to common shareholders for the six months ended June 30, 2015 by $100,207,000, or $0.53 per diluted share.
FFO for the six months ended June 30, 2016 was $433,104,000, or $2.28 per diluted share, compared to $544,305,000, or $2.87 per diluted share, for the six months ended June 30, 2015. FFO for the six months ended June 30, 2016 and 2015 include certain items that impact FFO, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the six months ended June 30, 2016 by $5,212,000, or $0.03 per diluted share, and increased FFO for the six months ended June 30, 2015 by $103,006,000, or $0.54 per diluted share.
35
Items that impact net income attributable to common shareholders:
Net gains on sale of real estate and residential condominiums
159,830
160,544
17,240
Net income from discontinued operations and sold properties
3,671
5,168
5,316
17,006
(2,904)
(7,511)
Default interest on Skyline properties mortgage loan
(2,711)
(49)
(165,102)
(15,062)
Reversal of allowance for deferred tax assets (re: taxable
REIT subsidiary's ability to utilize NOLs)
90,030
433
3,154
157,837
81,277
(9,464)
106,326
Noncontrolling interests' share of above adjustments
(9,837)
(4,754)
580
(6,119)
Items that impact net income attributable to common shareholders, net
148,000
76,523
(8,884)
100,207
Items that impact FFO:
FFO from discontinued operations and sold properties
1,794
8,201
3,957
24,796
Our share of impairment loss on India real estate venture's
non-depreciable real estate
(4,502)
(3,821)
90,101
(5,551)
109,296
238
(5,270)
339
(6,290)
Items that impact FFO, net
(3,583)
84,831
(5,212)
103,006
Same Store EBITDA
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 are summarized below.
Same store EBITDA % increase (decrease):
Three months ended June 30, 2016 vs. June 30, 2015
6.9
%
(1.3
%)
Six months ended June 30, 2016 vs. June 30, 2015
6.2
(1.4
Three months ended June 30, 2016 vs. March 31, 2016
8.1
2.5
Cash basis same store EBITDA % increase (decrease):
5.9
(2.5
3.6
(2.0
9.2
0.9
Excluding Hotel Pennsylvania, same store EBITDA increased by 9.2% and by 8.5% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA increased by 7.5% and by 5.1% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA increased by 5.3% and by 5.7% 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.
36
2016 Investments
2016 Dispositions
On May 27, 2016, we sold a 47% ownership interest in 7 West 34th Street, a 477,000 square foot Manhattan office building leased to Amazon, and retained the remaining 53% interest. This transaction was based on a property value of approximately $561,000,000 or $1,176 per square foot. We received net proceeds of $127,382,000 from the sale and realized a net gain of $203,324,000, of which $159,511,000 is recognized this quarter and is included in “net gain on disposition of wholly owned and partially owned assets” in our consolidated statements of income. The remaining net gain of $43,813,000 has been deferred until our guarantee of payment of loan principal and interest has been removed or the loan has been repaid. We realized a net tax gain of $90,017,000. We continue to manage and lease the property. We share control over major decisions with our joint venture partner. Accordingly, this property is accounted for under the equity method from the date of sale.
2016 Financings
On May 16, 2016, we completed a $300,000,000 recourse financing of 7 West 34th Street. The ten-year loan is interest only at a fixed rate of 3.65% and matures in June 2026.
37
Recently Issued Accounting Literature
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. The adoption of this update on January 1, 2016 resulted in the identification of additional VIEs, but did not have an impact on our consolidated financial statements other than additional disclosures.
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, 2015 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2016.
39
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)
New York Office
Long Island City
Manhattan
(Center Building)
Office
Three Months Ended June 30, 2016
Total square feet leased
259
285
55
352
Our share of square feet leased:
249
338
Initial rent(1)
81.67
40.10
140.26
42.63
Weighted average lease term (years)
9.3
5.8
8.8
5.0
Second generation relet space:
Square feet
221
258
GAAP basis:
Straight-line rent(2)
78.81
38.68
164.95
38.78
Prior straight-line rent
66.66
28.69
136.00
40.80
Percentage increase (decrease)
18.2%
34.8%
21.3%
(5.0%)
Cash basis:
80.54
158.84
43.55
Prior escalated rent
72.49
30.53
142.41
46.70
11.1%
31.4%
11.5%
(6.7%)
Tenant improvements and leasing commissions:
Per square foot
78.47
18.47
94.53
25.06
Per square foot per annum
8.44
3.18
10.74
5.01
Percentage of initial rent
10.3%
7.9%
7.7%
11.8%
See notes on following page.
40
Leasing Activity – continued
Six Months Ended June 30, 2016
996
93
921
801
73
901
83.50
193.45
39.96
11.2
10.0
3.9
745
709
83.51
192.96
37.17
65.11
162.57
38.85
28.3%
18.7%
(4.3%)
83.08
185.28
40.41
67.66
170.92
42.17
22.8%
8.4%
(4.2%)
81.31
105.65
15.60
7.26
10.57
4.00
8.7%
10.0%
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.
41
Square footage (in service) and Occupancy as of June 30, 2016:
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
New York:
20,212
16,951
96.0%
70
2,696
2,476
94.9%
Residential - 1,711 units
1,559
826
93.3%
Alexander's, including 312 residential units
2,437
790
99.0%
1,400
28,304
22,443
Washington, DC:
Office, excluding the Skyline properties
49
12,926
10,522
89.2%
2,648
46.9%
57
15,574
13,170
80.7%
Residential - 2,889 units
3,023
2,881
98.2%
330
100.0%
18,927
16,381
84.0%
Other:
theMART
3,663
3,654
97.8%
1,737
1,216
92.1%
779
6,179
5,649
Total square feet as of June 30, 2016
53,410
44,473
42
Square footage (in service) and Occupancy as of December 31, 2015:
properties
21,288
17,412
96.3%
63
2,641
2,408
96.2%
1,561
827
94.1%
Alexander's, including 296 residential units
2,419
784
99.7%
29,309
22,831
96.4%
13,136
10,781
90.0%
Skyline Properties
50.1%
15,784
13,429
82.1%
Residential - 2,630 units
2,808
2,666
386
18,978
16,481
84.8%
3,658
3,649
98.5%
1,736
1,215
763
6,157
5,627
Total square feet as of December 31, 2015
54,444
44,939
Washington, DC Segment
EBITDA, as adjusted for the six months ended June 30, 2016, was $9,132,000 behind the prior year's six months, and consistent with our expected results for the first half of the year. We expect that Washington’s 2016 EBITDA, as adjusted, will be approximately $7,000,000 to $11,000,000 lower than 2015, comprised of:
(i) core business being flat to $4,000,000 higher, offset by,
(ii) occupancy of Skyline properties declining further, decreasing EBITDA by approximately $6,500,000, and
(iii) 1726 M Street and 1150 17th Street being taken out of service (to prepare for the development in the future of a new Class A office building) decreasing EBITDA by approximately $4,500,000.
Of the 2,395,000 square feet subject to the effects of the Base Realignment and Closure (“BRAC”) statute, 348,000 square feet has been taken out of service for redevelopment, and 1,462,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of June 30, 2016.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of June 30, 2016
37.37
1,452,000
979,000
389,000
84,000
Leases pending
39.39
10,000
Taken out of service for redevelopment
348,000
1,810,000
1,327,000
399,000
To be resolved:
Vacated as of June 30, 2016
34.70
585,000
109,000
412,000
64,000
Total square feet subject to BRAC
2,395,000
1,436,000
811,000
44
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, 2016 and 2015.
Gain on sale of 47% ownership interest in 7 West 34th Street
2015 includes $3,304 of EBITDA from 20 Broad Street which was sold in December 2015. Excluding this item, EBITDA was $161,727.
2015 includes $2,067 of EBITDA from 1750 Pennsylvania Avenue which was sold in September 2015. Excluding this item, EBITDA was $66,442.
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2016 and 2015 - continued
Corporate general and administrative expenses(a)
UE and residual retail properties discontinued operations(b)
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $4,359 of income and $609 of loss for the three months ended June 30, 2016 and 2015, respectively.
The three months ended June 30, 2015 includes $327 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 gains on sale of real estate, non-cash impairment losses and operations of sold properties.
Region:
New York City metropolitan area
70%
69%
Washington, DC / Northern Virginia area
20%
22%
Chicago, IL
7%
6%
San Francisco, CA
3%
100%
47
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $621,708,000 for the three months ended June 30, 2016, compared to $616,288,000 for the prior year’s quarter, an increase of $5,420,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions, dispositions and other
(8,822)
(5,906)
(2,916)
Development and redevelopment
(19)
(60)
(843)
884
(4,211)
Trade shows
(123)
Same store operations
25,510
23,597
166
1,747
12,335
13,420
(3,593)
2,508
Tenant expense reimbursements:
(814)
(736)
(78)
(128)
(230)
105
(432)
2,263
(1,378)
(1,317)
(1,374)
1,524
(1,212)
Fee and other income:
(2,945)
(2,957)
328
148
(38)
218
307
699
(402)
(3,231)
(1,326)
(2,081)
176
(5,541)
(3,436)
Total increase (decrease) in revenues
5,420
11,508
(7,388)
1,300
48
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative expenses, and acquisition and transaction related costs were $434,894,000 for the three months ended June 30, 2016, compared to $422,897,000 for the prior year’s quarter, an increase of $11,997,000. Below are the details of the increase (decrease) by segment:
Operating:
1,942
3,144
(1,202)
(453)
(93)
(732)
372
Non-reimbursable expenses, including
bad debt reserves
1,342
860
343
139
864
639
BMS expenses
(2,705)
(2,790)
85
819
3,188
(198)
(2,171)
2,448
5,173
(1,789)
(936)
Depreciation and amortization:
2,080
(591)
(7,847)
(54)
(7,759)
10,123
10,129
(200)
194
4,356
12,746
(8,550)
160
General and administrative:
Mark-to-market of deferred
compensation plan liability
4,968
1,407
(82)
705
6,375
5,673
(1,182)
Total increase (decrease) in expenses
11,997
17,837
(9,555)
3,715
This increase in expense is entirely offset by a corresponding increase 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.
Summarized below are the components of income (loss) from partially owned entities for the three months ended June 30, 2016 and 2015.
Urban Edge Properties ("UE")
Pennsylvania Real Estate Investment Trust ("PREIT")
Below are the components of the income from our real estate fund investments for the three months ended June 30, 2016 and 2015.
Excludes management, leasing and development fees of $935 and $633 for the three months ended June 30, 2016 and 2015, respectively, which are included as a component of "fee and other income" in our consolidated statements of income.
50
Interest and other investment income, net was $10,236,000 for the three months ended June 30, 2016, compared to $5,666,000 in the prior year’s quarter, an increase of $4,570,000. This increase resulted primarily from an increase in the value of investments in our deferred compensation plan (offset by a corresponding decrease in the liability for plan assets in general and administrative expenses).
Interest and debt expense was $105,576,000 for the three months ended June 30, 2016, compared to $92,092,000 in the prior year’s quarter, an increase of $13,484,000. This increase was primarily due to (i) $6,937,000 of higher interest expense from the financings of the St. Regis Retail, 150 West 34th Street, 100 West 33rd Street, and our $750,000,000 delayed draw term loan, (ii) $4,335,000 of lower capitalized interest, and (iii) $2,711,000 of accrued default interest on our Skyline properties mortgage loan which has been transferred to the special servicer at our request.
For the three months ended June 30, 2016, we recognized a $159,511,000 net gain from the sale of a 47% ownership interest in 7 West 34th Street.
In the three months ended June 30, 2016, income tax expense was $2,109,000, compared to an income tax benefit of $88,072,000 for the prior year’s quarter, an increase in expense of $90,181,000. This increase in expense resulted primarily from the prior year reversal of the valuation allowances against certain of 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.
We have reclassified the revenues and expenses of the UE portfolio and other retail properties that were sold or are currently held for sale to “income (loss) 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, 2016 and 2015.
51
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $13,025,000 for the three months ended June 30, 2016, compared to $19,186,000 for the prior year’s quarter, a decrease of $6,161,000. 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 $14,531,000 for the three months ended June 30, 2016, compared to $10,198,000 for the prior year’s quarter, an increase of $4,333,000. This increase resulted primarily from higher net income subject to allocation to unitholders.
Preferred share dividends were $20,363,000 for the three months ended June 30, 2016, compared to $20,365,000 for the prior year’s quarter, a decrease of $2,000.
52
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, 2016, compared to the three months ended June 30, 2015.
EBITDA for the three months ended June 30, 2016
Add-back:
Non-property level overhead expenses included above
7,807
7,295
Less EBITDA from:
(7,619)
Dispositions, including net gains on sale
(159,751)
Properties taken out of service for redevelopment
(6,886)
(214)
Other non-operating income
4,484
(136)
Same store EBITDA for the three months ended June 30, 2016
278,160
86,406
EBITDA for the three months ended June 30, 2015
7,889
6,511
(1,463)
(3,786)
(2,067)
(5,587)
(808)
(12,923)
(1,753)
Same store EBITDA for the three months ended June 30, 2015
260,118
87,517
Increase (decrease) in same store EBITDA -
18,042
(1,111)
% increase (decrease) in same store EBITDA
6.9%
(1.3%)
See notes on following page
53
(1) The $18,042,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $11,798,000 and $10,560,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $5,059,000. The Office and Retail EBITDA increases resulted primarily from higher rents, partially offset by higher operating expenses, net of reimbursements.
(2) Excluding Hotel Pennsylvania, same store EBITDA increased by 9.2%.
(3) The $1,111,000 decrease in Washington, DC same store EBITDA resulted primarily from higher net operating expenses of $1,524,000 partially offset by higher rental revenue of $610,000.
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
(46,433)
(7,459)
Cash basis same store EBITDA for the three months ended
231,727
78,947
(41,298)
(6,524)
June 30, 2015
218,820
80,993
Increase (decrease) in Cash basis same store EBITDA -
12,907
(2,046)
% increase (decrease) in Cash basis same store EBITDA
5.9%
(2.5%)
Excluding Hotel Pennsylvania, same store EBITDA increased by 8.5% on a cash basis.
54
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2016 and 2015
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, 2016 and 2015.
2015 includes $6,844 of EBITDA from 20 Broad Street which was sold in December 2015. Excluding this item, EBITDA was $312,496.
2015 includes $3,990 of EBITDA from 1750 Pennsylvania Avenue which was sold in September 2015. Excluding this item, EBITDA was $131,888.
56
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2016 and 2015 - continued
The amounts in these captions (for this table only) excludes income from the mark-to-market of our deferred compensation plan of $2,421 and $2,250 of income for the six months ended June 30, 2016 and 2015, respectively.
The six months ended June 30, 2015 includes $22,972 of transaction costs related to the spin-off of our strip shopping centers and malls.
21%
Our revenues, which consist primarily of property rentals, tenant expense reimbursements, and fee and other income, were $1,234,745,000 for the six months ended June 30, 2016, compared to $1,223,090,000 for the prior year’s six months, an increase of $11,655,000. Below are the details of the increase (decrease) by segment:
(8,067)
(2,569)
(5,498)
(620)
(150)
(1,981)
1,511
(6,694)
(776)
47,710
44,762
(393)
3,341
31,553
35,349
(7,872)
4,076
(979)
(833)
(146)
385
(298)
681
(8,126)
(2,149)
(3,070)
(2,907)
(8,720)
(2,980)
(3,514)
(2,226)
(7,433)
(7,602)
169
936
80
598
(1,035)
(633)
(448)
(3,646)
(1,572)
(2,084)
(11,178)
(9,549)
(1,958)
329
11,655
22,820
(13,344)
2,179
Primarily from the termination of a third party cleaning contract in 2015.
58
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative expenses, and impairment loss and acquisition and transaction related costs were $1,048,211,000 for the six months ended June 30, 2016, compared to $861,985,000 for the prior year’s six months, an increase of $186,226,000. Below are the details of the increase (decrease) by segment:
5,952
8,321
(2,369)
(246)
(124)
(721)
599
Non-reimbursable expenses, including bad debt
reserves
1,971
1,228
(161)
409
(6,399)
(6,676)
277
2,915
7,692
(1,411)
(3,366)
4,304
9,819
(3,273)
(2,242)
6,343
7,510
(1,167)
(5,845)
(296)
(5,491)
(58)
22,693
19,798
200
2,695
23,191
27,012
(6,458)
2,637
Mark-to-market of deferred compensation plan
liability
171
(3,584)
(2,159)
3,044
(4,469)
(3,413)
(4,298)
Impairment loss and acquisition and transaction
related costs
162,144
(6)
1,444
186,226
34,672
154,013
(2,459)
Results primarily from (i) the six months ended June 30, 2015 including a cumulative catch up of $986 from the acceleration of recognition of compensation expense related to the modification of the 2012-2014 Out-Performance Plans and (ii) higher capitalized leasing payroll in 2016.
Results primarily from lower capitalized payroll in 2016.
On March 15, 2016, we notified the servicer of the $678,000 mortgage loan on the Skyline properties in Virginia that cash flow will be insufficient to service the debt and pay other property related costs and expenses and that we were not willing to fund additional cash shortfalls. Accordingly, at our request, the loan has been transferred to the special servicer. Consequently, based on our shortened estimated holding period for the underlying assets, we concluded that the excess of carrying amount over our estimate of fair value was not recoverable and recognized a $160,700 non-cash impairment loss in the first quarter of 2016. The Company’s estimate of fair value was derived from a discounted cash flow model based upon market conditions and expectations of growth and utilized unobservable quantitative inputs including a capitalization rate of 8.0% and a discount rate of 8.2%.
59
Summarized below are the components of loss from partially owned entities for the six months ended June 30, 2016 and 2015.
Our Share of Net (Loss) Income:
Below are the components of the income from our real estate fund investments for the six months ended June 30, 2016 and 2015.
Excludes management, leasing and development fees of $1,695 and $1,337 for the six months ended June 30, 2016 and 2015, respectively, which are included as a component of "fee and other income" in our consolidated statements of income.
60
Interest and other investment income, net was $13,754,000 for the six months ended June 30, 2016, compared to $16,458,000 for the prior year’s six months, a decrease of $2,704,000. This decrease resulted primarily from a $2,463,000 decrease in interest on loans receivable as a result of lower outstanding loan balances.
Interest and debt expense was $206,065,000 for the six months ended June 30, 2016, compared to $183,766,000 for the prior year’s six months, an increase of $22,299,000. This increase was primarily due to (i) $13,634,000 of higher interest expense from the financings of the St. Regis Retail, 150 West 34th Street, 100 West 33rd Street, and our $750,000,000 delayed draw term loan, (ii) $6,374,000 of lower capitalized interest, and (iii) $2,711,000 of accrued default interest on our Skyline properties mortgage loan which has been transferred to the special servicer at our request.
For the six months ended June 30, 2016, we recognized a $160,225,000 net gain on disposition of wholly owned and partially owned assets, primarily from the sale of a 47% ownership interest in 7 West 34th Street and net gains from the sale of residential condominiums, compared to $1,860,000 for the prior year’s six months, primarily from the sale of residential condominiums.
In the six months ended June 30, 2016, income tax expense was $4,940,000, compared to an income tax benefit of $87,101,000 for the prior year’s six months, an increase in expense of $92,041,000. This increase in expense resulted primarily from the prior year reversal of the valuation allowances against certain of 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.
61
We have reclassified the revenues and expenses of the UE portfolio and other retail properties that were sold or are currently held for sale to “income (loss) 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 six months ended June 30, 2016 and 2015.
Net income attributable to noncontrolling interests in consolidated subsidiaries was $22,703,000 for the six months ended June 30, 2016, compared to $35,068,000 for the prior year’s six months, a decrease of $12,365,000. 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 $7,044,000 for the six months ended June 30, 2016, compared to $15,485,000 for the prior year’s six months, a decrease of $8,441,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred share dividends were $40,727,000 for the six months ended June 30, 2016, compared to $39,849,000 for the prior year’s six months, an increase of $878,000.
62
Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the six months ended June 30, 2016, compared to six months ended June 30, 2015.
EBITDA for the six months ended June 30, 2016
17,774
15,259
(18,797)
(159,341)
(27)
(13,254)
(8)
Other non-operating income, net
6,030
160,400
Same store EBITDA for the six months ended June 30, 2016
533,036
170,693
EBITDA for the six months ended June 30, 2015
19,933
12,215
(1,888)
(7,132)
(4,049)
(10,612)
(2,008)
(23,096)
(1,882)
Same store EBITDA for the six months ended June 30, 2015
502,138
173,167
30,898
(2,474)
6.2%
(1.4%)
(1) The $30,898,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $21,538,000 and $13,770,000, respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $6,405,000. The Office and Retail EBITDA increases resulted primarily from higher rents, partially offset by higher operating expenses, net of reimbursements.
(2) Excluding Hotel Pennsylvania, same store EBITDA increased by 7.5%.
(3) The $2,474,000 decrease in Washington, DC same store EBITDA resulted primarily from higher net operating expenses of $2,887,000 partially offset by higher rental revenue of $520,000.
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA
(90,886)
(13,529)
Cash basis same store EBITDA for the six months ended
442,150
157,164
(75,211)
(12,730)
426,927
160,437
Increase (decrease) in cash basis same store EBITDA -
15,223
% increase (decrease) in cash basis same store EBITDA
3.6%
(2.0%)
Excluding Hotel Pennsylvania, same store EBITDA increased by 5.1% on a cash basis.
64
Reconciliation of Net Income to EBITDA for the Three Months Ended March 31, 2016
Net income attributable to Vornado for the three months ended March 31, 2016
79,808
(146,737)
71,198
19,406
108,403
42,681
1,090
EBITDA for the three months ended March 31, 2016
260,499
(84,385)
(264)
(159,750)
(7,574)
284,828
9,967
7,964
(2,095)
(151)
(6,372)
1,563
160,535
Same store EBITDA for the three months ended March 31, 2016
263,411
84,289
Increase in same store EBITDA -
21,417
2,117
% increase in same store EBITDA
8.1%
2.5%
Excluding Hotel Pennsylvania, same store EBITDA increased by 5.3%.
65
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA – Three Months Ended June 30, 2016 Compared to March 31, 2016
(50,970)
233,858
(49,175)
(6,059)
March 31, 2016
214,236
78,230
Increase in cash basis same store EBITDA -
19,622
% increase in cash basis same store EBITDA
9.2%
0.9%
Excluding Hotel Pennsylvania, same store EBITDA increased by 5.7% on a cash basis.
66
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.
In the first quarter of 2016, we notified the servicer of the $678,000,000 mortgage loan on the Skyline properties in Virginia that cash flow will be insufficient to service the debt and pay other property related costs and expenses and that we were not willing to fund additional cash shortfalls. Accordingly, at our request, the loan has been transferred to the special servicer. In the second quarter of 2016, cash flow became insufficient to service the debt and we ceased making debt service payments. Pursuant to the loan agreement, the loan is in default, causing the loan to be immediately due and payable, and is subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remains unpaid. This loan is recourse only to the Skyline properties. Accordingly, this default has not had, nor is expected to have, any material impact on our current or future business operations, our ability to raise capital or our credit ratings. For the three and six months ended June 30, 2016, we accrued $2,711,000 of default interest expense. We continue to negotiate with the special servicer. There can be no assurance as to the timing or ultimate resolution of this matter.
Cash Flows for the Six Months Ended June 30, 2016
Our cash and cash equivalents were $1,644,067,000 at June 30, 2016, a $191,640,000 decrease from the balance at December 31, 2015. Our consolidated outstanding debt was $11,078,771,000 at June 30, 2016, a $12,239,000 decrease from the balance at December 31, 2015. As of June 30, 2016 and December 31, 2015, $115,630,000 and $550,000,000, respectively, was outstanding under our revolving credit facilities. During the remainder of 2016 and 2017, $1,288,394,000 and $362,058,000, 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 $323,293,000 was comprised of (i) net income of $176,774,000, (ii) $189,482,000 of non-cash adjustments, which include depreciation and amortization expense, real estate impairment losses, net gain on the disposition of wholly owned and partially owned assets, the effect of straight-lining of rental income, and loss from partially owned entities, (iii) return of capital from real estate fund investments of $71,888,000, (iv) distributions of income from partially owned entities of $46,500,000, partially offset by (v) the net change in operating assets and liabilities of $161,351,000.
Net cash used in investing activities of $432,259,000 was comprised of (i) $277,214,000 of development costs and construction in progress, (ii) $170,265,000 of additions to real estate, (iii) $90,659,000 of investments in partially owned entities, (iv) $46,807,000 of acquisitions of real estate and other, (v) $42,000,000 due to the net deconsolidation of 7 West 34th Street, (vi) $11,700,000 of investments in loans receivable, (vii) $7,483,000 of changes in restricted cash and (viii) $4,379,000 in purchases of marketable securities, partially offset by (ix) $130,249,000 of proceeds from sales of real estate and related investments and (x) $87,977,000 of capital distributions from partially owned entities.
Net cash used in financing activities of $82,674,000 was comprised of (i) $1,032,115,000 for the repayments of borrowings, (ii) $237,832,000 of dividends paid on common shares, (iii) $83,266,000 of distributions to noncontrolling interests, (iv) $40,727,000 of dividends paid on preferred shares, (v) $29,478,000 of debt issuance and other costs, and (vi) $186,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (vii) $1,325,246,000 of proceeds from borrowings, (viii) $11,874,000 of contributions from noncontrolling interests and (ix) $3,810,000 of proceeds received from the exercise of employee share options.
67
Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions. Recurring capital expenditures include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases. Non-recurring capital improvements include expenditures to lease space that has been vacant for more than nine months and expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition, as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property.
Below is a summary of 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, 2016.
Expenditures to maintain assets
37,688
22,201
6,434
9,053
Tenant improvements
46,270
38,490
6,397
1,383
Leasing commissions
24,939
22,499
2,294
146
Non-recurring capital expenditures
22,971
17,104
4,861
1,006
Total capital expenditures and leasing commissions (accrual basis)
131,868
100,294
19,986
11,588
Adjustments to reconcile to cash basis:
Expenditures in the current year applicable to prior periods
118,340
60,696
37,685
19,959
Expenditures to be made in future periods for the current period
(44,768)
(11,707)
5,307
Total capital expenditures and leasing commissions (cash basis)
205,440
122,622
45,964
36,854
6.20
6.88
n/a
9.9%
8.6%
Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including capitalized interest, debt and operating costs until the property is substantially completed and ready for its intended use. Our development project budgets below include initial leasing costs, which are reflected as non-recurring capital expenditures in the table above.
We are constructing a residential condominium tower containing 397,000 salable square feet on our 220 Central Park South development site. The incremental development cost of this project is estimated to be approximately $1.3 billion, of which $446,000,000 has been expended as of June 30, 2016.
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 40,000 square foot Whole Foods Market at the base of the building. The incremental development cost of this project is estimated to be approximately $250,000,000, of which $210,000,000 has been expended as of June 30, 2016.
We are developing a 173,000 square foot Class-A office building, located along the western edge of the High Line at 512 West 22nd Street in the West Chelsea submarket of Manhattan (55.0% owned). The incremental development cost of this project is estimated to be approximately $130,000,000, of which our share is $72,000,000. As of June 30, 2016, $20,000,000 has been expended, of which our share is $11,000,000.
We are developing 61 Ninth Avenue, located on the Southwest corner of Ninth Avenue and 15th Street in the West Chelsea submarket of Manhattan. In February 2016, the venture purchased an adjacent five story loft building and air rights in exchange for a 10% common and preferred equity interest in the venture valued at $19,400,000, which reduced our ownership interest to 45.1% from 50.1%. The venture’s current plans are to construct an office building, with retail at the base, of approximately 167,000 square feet. The incremental development cost of this project is estimated to be approximately $150,000,000, of which our share is $68,000,000. As of June 30, 2016, $18,000,000 has been expended, of which our share is $8,000,000.
68
We are developing a 33,000 square foot office and retail building, located on Houston Street in Manhattan (50.0% owned). The incremental development cost of this project is estimated to be approximately $60,000,000, of which our share is $30,000,000. As of June 30, 2016, $16,000,000 has been expended, of which our share is $8,000,000.
We plan to demolish two adjacent Washington, DC office properties, 1726 M Street and 1150 17th Street in 2016 and replace them in the future with a new 335,000 square foot Class A office building, to be addressed 1700 M Street. The incremental development cost of the project is estimated to be approximately $170,000,000.
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.
Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2016. These expenditures include interest of $16,438,000, payroll of $6,401,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $30,224,000, that were capitalized in connection with the development and redevelopment of these projects.
220 Central Park South
130,696
The Bartlett
48,700
640 Fifth Avenue
17,368
90 Park Avenue
16,243
2221 South Clark Street (residential conversion)
12,589
11,031
Wayne Towne Center
7,055
Penn Plaza
6,766
330 West 34th Street
2,812
23,954
5,391
17,713
850
277,214
48,580
79,002
149,632
69
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. The decrease is primarily due to cash flows from investing and financing activities, partially offset by cash flows from operating activities, as discussed below.
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 and other, 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 for the Six Months Ended June 30, 2015
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.
46,080
25,985
6,009
14,086
62,363
36,913
5,652
15,610
10,144
4,677
789
90,592
63,633
26,638
321
214,645
119,560
74,237
20,848
77,839
41,085
20,826
15,928
(122,715)
(60,309)
(58,408)
(3,998)
169,769
100,336
36,655
32,778
8.25
9.88
6.83
11.0%
18.5%
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.
57,554
41,889
18,324
Marriott Marquis Times Square - retail and signage
15,294
Springfield Town Center
14,478
12,868
10,959
6,939
251 18th Street
3,891
2,011
608 Fifth Avenue
1,811
1,533
13,419
2,504
10,628
287
200,970
54,345
63,347
83,278
71
72
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets 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 net income and should not be considered an alternative to net income as a performance 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 26 of this Quarterly Report on Form 10-Q.
FFO for the Three and Six Months Ended June 30, 2016 and 2015
FFO attributable to common shareholders plus assumed conversions was $229,432,000, or $1.21 per diluted share for the three months ended June 30, 2016, compared to $323,381,000, or $1.71 per diluted share, for the prior year’s three months. FFO attributable to common shareholders plus assumed conversions was $433,104,000, or $2.28 per diluted share for the six months ended June 30, 2016, compared to $544,305,000, or $2.87 per diluted share, for the prior year’s six months. Details of certain adjustments to FFO are discussed in the financial results summary of our “Overview”.
Reconciliation of our net income to FFO:
Per diluted share
FFO adjustments:
Depreciation and amortization of real property
133,218
129,296
267,339
247,552
(161,721)
(10,867)
Proportionate share of adjustments to equity in net income (loss) of
partially owned entities to arrive at FFO:
38,308
32,282
77,354
68,554
(319)
(4,513)
10,304
4,402
9,535
167,369
347,755
311,286
(588)
(9,662)
(21,469)
(18,109)
FFO adjustments, net
8,947
157,707
326,286
293,177
FFO attributable to common shareholders
229,410
323,358
432,586
543,421
475
838
FFO attributable to common shareholders plus assumed conversions
229,432
323,381
433,104
544,305
1.21
1.71
2.28
2.87
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
Denominator for FFO per diluted share
190,043
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:
3,772,565
2.19%
37,726
3,995,704
2.00%
7,421,398
4.11%
7,206,634
4.21%
3.46%
3.42%
Pro rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys "R" Us, Inc.
1,114,317
11,143
485,160
1.97%
Variable rate – Toys "R" Us, Inc.
1,026,139
6.46%
10,261
1,164,893
6.61%
Fixed rate (including $714,421 and $661,513
of Toys "R" Us, Inc. debt in 2016 and 2015)
2,509,040
6.14%
2,782,025
6.37%
4,649,496
5.29%
21,404
4,432,078
5.95%
Noncontrolling interests’ share of above
(3,625)
Total change in annual net income
55,505
Per share-diluted
0.29
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, 2016, we have an interest rate swap on a $415,000,000 mortgage loan on Two Penn Plaza that swapped the rate from LIBOR plus 1.65% (2.11% at June 30, 2016) to a fixed rate of 4.78% through March 2018 and an interest swap on a $375,000,000 mortgage loan on 888 Seventh Avenue that swapped the rate from LIBOR plus 1.60% (2.06% at June 30, 2016) to a fixed rate of 3.15% through December 2020.
In connection with the $700,000,000 refinancing of 770 Broadway, we entered into an interest rate swap from LIBOR plus 1.75% (2.21% at June 30, 2016) to a fixed rate of 2.56% through September 2020.
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of June 30, 2016, the estimated fair value of our consolidated debt was $10,662,000,000.
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, 2016, 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, 2015.
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 1, 2016
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