UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
March 31, 2017
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)
001-34482 (Vornado Realty L.P.)
Vornado Realty Trust
Vornado Realty L.P.
(Exact name of registrants as specified in its charter)
Maryland
22-1657560
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Delaware
13-3925979
888 Seventh Avenue, New York, New York, 10019
(Address of principal executive offices) (Zip Code)
(212) 894-7000
(Registrants’ 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. Vornado Realty Trust: Yes þ No ☐ Vornado Realty L.P.: Yes þ No ☐
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). Vornado Realty Trust: Yes þ No ☐ Vornado Realty L.P.: Yes þ No ☐
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Vornado Realty Trust:
þLarge Accelerated Filer
o Accelerated Filer
oNon-Accelerated Filer (Do not check if smaller reporting company)
o Smaller Reporting Company
o Emerging Growth Company
Vornado Realty L.P.:
o Large Accelerated Filer
þNon-Accelerated Filer (Do not check if smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Vornado Realty Trust: Yes ☐ No þ Vornado Realty L.P.: Yes ☐ No þ
As of March 31, 2017, 189,343,482 of Vornado Realty Trust’s common shares of beneficial interest are outstanding.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2017 of Vornado Realty Trust and Vornado Realty L.P. Unless stated otherwise or the context otherwise requires, references to “Vornado” refer to Vornado Realty Trust, a Maryland real estate investment trust (“REIT”), and references to the “Operating Partnership” refer to Vornado Realty L.P., a Delaware limited partnership. References to the “Company,” “we,” “us” and “our” mean collectively Vornado, the Operating Partnership and those subsidiaries consolidated by Vornado.
The Operating Partnership is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. Vornado is the sole general partner and also a 93.6% limited partner of the Operating Partnership. As the sole general partner of the Operating Partnership, Vornado has exclusive control of the Operating Partnership’s day-to-day management.
Under the limited partnership agreement of the Operating Partnership, unitholders may present their Class A units for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time). Class A units may be tendered for redemption to the Operating Partnership for cash; Vornado, at its option, may assume that obligation and pay the holder either cash or Vornado common shares on a one-for-one basis. Because the number of Vornado common shares outstanding at all times equals the number of Class A units owned by Vornado, the redemption value of each Class A unit is equivalent to the market value of one Vornado common share, and the quarterly distribution to a Class A unitholder is equal to the quarterly dividend paid to a Vornado common shareholder. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. Vornado generally expects that it will elect to issue its common shares in connection with each such presentation for redemption rather than having the Operating Partnership pay cash. With each such exchange or redemption, Vornado’s percentage ownership in the Operating Partnership will increase. In addition, whenever Vornado issues common shares other than to acquire Class A units of the Operating Partnership, Vornado must contribute any net proceeds it receives to the Operating Partnership and the Operating Partnership must issue to Vornado an equivalent number of Class A units of the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.
The Company believes that combining the quarterly reports on Form 10-Q of Vornado and the Operating Partnership into this single report provides the following benefits:
•
enhances investors’ understanding of Vornado and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation because a substantial portion of the disclosure applies to both Vornado and the Operating Partnership; and
creates time and cost efficiencies in the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few differences between Vornado and the Operating Partnership in the context of how Vornado and the Operating Partnership operate as a consolidated company. The financial results of the Operating Partnership are consolidated into the financial statements of Vornado. Vornado does not have any other significant assets, liabilities or operations, other than its investment in the Operating Partnership. The Operating Partnership, not Vornado, generally executes all significant business relationships other than transactions involving the securities of Vornado. The Operating Partnership holds substantially all of the assets of Vornado. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by Vornado, which are contributed to the capital of the Operating Partnership in exchange for units of limited partnership in the Operating Partnership, as applicable, the Operating Partnership generates all remaining capital required by the Company’s business. These sources may include working capital, net cash provided by operating activities, borrowings under the revolving credit facility, the issuance of secured and unsecured debt and equity securities, and proceeds received from the disposition of certain properties.
2
To help investors better understand the key differences between Vornado and the Operating Partnership, certain information for Vornado and the Operating Partnership in this report has been separated, as set forth below:
Item 1. Financial Statements (unaudited), which includes the following specific disclosures for Vornado Realty Trust and Vornado Realty L.P.:
Note 10. Redeemable Noncontrolling Interests/Redeemable Partnership Units
Note 18. Income (Loss) Per Share/Income (Loss) Per Class A Unit
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes information specific to each entity, where applicable.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of Vornado and the Operating Partnership in order to establish that the requisite certifications have been made and that Vornado and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
3
Financial Information:
Page Number
Item 1.
Financial Statements of Vornado Realty Trust:
Consolidated Balance Sheets (Unaudited) as of March 31, 2017 and December 31, 2016
5
Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 2017 and 2016
6
Consolidated Statements of Comprehensive Income (Unaudited) for the
7
Consolidated Statements of Changes in Equity (Unaudited) for the
8
Consolidated Statements of Cash Flows (Unaudited) for the
10
Financial Statements of Vornado Realty L.P.:
12
13
14
15
17
Vornado Realty Trust and Vornado Realty L.P.:
Notes to Consolidated Financial Statements (Unaudited)
19
Reports of Independent Registered Public Accounting Firm
41
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
73
Item 4.
Controls and Procedures
74
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
78
4
Item 1. Financial Statements
VORNADO REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except unit, share, and per share amounts)
December 31, 2016
ASSETS
Real estate, at cost:
Land
$
4,056,666
4,065,142
Buildings and improvements
12,727,776
12,727,980
Development costs and construction in progress
1,564,647
1,430,276
Leasehold improvements and equipment
117,246
116,560
Total
18,466,335
18,339,958
Less accumulated depreciation and amortization
(3,604,348)
(3,513,574)
Real estate, net
14,861,987
14,826,384
Cash and cash equivalents
1,484,814
1,501,027
Restricted cash
98,191
98,295
Marketable securities
188,695
203,704
Tenant and other receivables, net of allowance for doubtful accounts of $10,711 and $10,920
86,753
94,467
Investments in partially owned entities
1,415,747
1,428,019
Real estate fund investments
454,946
462,132
Receivable arising from the straight-lining of rents, net of allowance of $1,744 and $2,227
1,048,940
1,032,736
Deferred leasing costs, net of accumulated amortization of $239,415 and $228,862
452,187
454,345
Identified intangible assets, net of accumulated amortization of $203,668 and $207,330
184,009
192,731
Assets related to discontinued operations
4,416
5,570
Other assets
450,763
515,437
20,731,448
20,814,847
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
9,281,280
9,278,263
Senior unsecured notes, net
845,932
845,577
Unsecured term loan, net
372,595
372,215
Unsecured revolving credit facilities
115,630
Accounts payable and accrued expenses
451,156
458,694
Deferred revenue
274,477
287,846
Deferred compensation plan
124,933
121,374
Liabilities related to discontinued operations
2,670
2,870
Other liabilities
433,374
435,436
Total liabilities
11,902,047
11,917,905
Commitments and contingencies
-
Redeemable noncontrolling interests:
Class A units - 12,567,493 and 12,197,162 units outstanding
1,260,646
1,273,018
Series D cumulative redeemable preferred units - 177,101 units outstanding
5,428
Total redeemable noncontrolling interests
1,266,074
1,278,446
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 42,824,829 shares
1,038,049
1,038,055
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 189,343,482 and 189,100,876 shares
7,551
7,542
Additional capital
7,183,324
7,153,332
Earnings less than distributions
(1,506,236)
(1,419,382)
Accumulated other comprehensive income
119,019
118,972
Total Vornado shareholders' equity
6,841,707
6,898,519
Noncontrolling interests in consolidated subsidiaries
721,620
719,977
Total equity
7,563,327
7,618,496
See notes to consolidated financial statements (unaudited).
(Amounts in thousands, except per share amounts)
For the Three Months Ended March 31,
2017
2016
REVENUES:
Property rentals
513,818
519,492
Tenant expense reimbursements
67,670
59,575
Fee and other income
39,360
33,970
Total revenues
620,848
613,037
EXPENSES:
Operating
260,907
256,349
Depreciation and amortization
138,811
142,957
General and administrative
56,658
48,704
Acquisition and transaction related costs
8,005
4,607
Skyline properties impairment loss
160,700
Total expenses
464,381
613,317
Operating income (loss)
156,467
(280)
Income (loss) from partially owned entities
1,445
(4,240)
Income from real estate fund investments
268
11,284
Interest and other investment income, net
9,228
3,518
Interest and debt expense
(94,285)
(100,489)
Net gains on disposition of wholly owned and partially owned assets
501
714
Income (loss) before income taxes
73,624
(89,493)
Income tax expense
(2,205)
(2,831)
Income (loss) from continuing operations
71,419
(92,324)
Income from discontinued operations
2,428
716
Net income (loss)
73,847
(91,608)
Less net (income) loss attributable to noncontrolling interests in:
Consolidated subsidiaries
(6,737)
(9,678)
Operating Partnership
(3,229)
7,487
Net income (loss) attributable to Vornado
63,881
(93,799)
Preferred share dividends
(16,129)
(20,364)
NET INCOME (LOSS) attributable to common shareholders
47,752
(114,163)
INCOME (LOSS) PER COMMON SHARE - BASIC:
Income (loss) from continuing operations, net
0.24
(0.61)
Income from discontinued operations, net
0.01
Net income (loss) per common share
0.25
Weighted average shares outstanding
189,210
188,658
INCOME (LOSS) PER COMMON SHARE - DILUTED:
190,372
DIVIDENDS PER COMMON SHARE
0.71
0.63
(Amounts in thousands)
Other comprehensive (loss) income:
(Reduction) increase in unrealized net gain on available-for-sale securities
(15,009)
11,094
Pro rata share of amounts reclassified from accumulated other comprehensive income
of a nonconsolidated subsidiary
9,268
Pro rata share of other comprehensive (loss) income of nonconsolidated subsidiaries
(51)
Increase (reduction) in value of interest rate swaps and other
5,842
(4,195)
Comprehensive income (loss)
73,897
(84,703)
Less comprehensive income attributable to noncontrolling interests
(9,969)
(2,618)
Comprehensive income (loss) attributable to Vornado
63,928
(87,321)
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, 2016
42,825
189,101
Net income attributable to
Vornado
noncontrolling interests in
consolidated subsidiaries
6,737
Dividends on common shares
(134,332)
Dividends on preferred shares
Common shares issued:
Upon redemption of Class A
units, at redemption value
140
14,733
14,739
Under employees' share
option plan
96
8,094
8,097
Under dividend reinvestment plan
387
Contributions
Distributions:
(4,528)
(590)
Conversion of Series A preferred
shares to common shares
(6)
Deferred compensation shares
and options
575
(264)
311
Reduction in unrealized net gain on
available-for-sale securities
Pro rata share of amounts
reclassified related to a
nonconsolidated subsidiary
Pro rata share of other
comprehensive loss of
nonconsolidated subsidiaries
Increase in value of interest
rate swaps
Adjustments to carry redeemable
Class A units at redemption value
6,197
Redeemable noncontrolling interests'
share of above adjustments
(3)
(10)
(61)
Balance, March 31, 2017
189,343
Balance, December 31, 2015
52,677
1,276,954
188,577
7,521
7,132,979
(1,766,780)
46,921
778,483
7,476,078
Net loss attributable to Vornado
9,678
(118,867)
157
14,476
14,482
26
1
2,165
2,166
357
(13,487)
(152)
535
(186)
350
Increase in unrealized net gain
on available-for-sale securities
comprehensive income of
Reduction in value of interest
36,524
(427)
110
112
Balance, March 31, 2016
188,771
7,529
7,187,036
(1,999,994)
53,399
774,632
7,299,556
9
Cash Flows from Operating Activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization (including amortization of deferred financing costs)
145,886
150,648
Distributions of income from partially owned entities
18,226
24,747
Other non-cash adjustments
17,535
15,248
Straight-lining of rents
(15,522)
(41,626)
Amortization of below-market leases, net
(11,459)
(17,507)
Net realized and unrealized loss (gain) on real estate fund investments
6,946
(6,611)
Net gains on sale of real estate and other
(2,267)
Equity in net (income) loss of partially owned entities
(1,445)
4,240
(501)
(714)
Return of capital from real estate fund investments
14,676
Changes in operating assets and liabilities:
Tenant and other receivables, net
6,947
800
Prepaid assets
68,445
64,851
(12,766)
(20,113)
8,315
12,774
(902)
1,027
Net cash provided by operating activities
301,285
271,532
Cash Flows from Investing Activities:
(98,227)
(127,283)
Additions to real estate
(67,363)
(77,243)
Distributions of capital from partially owned entities
11,592
30,637
(6,679)
(63,188)
Proceeds from sales of real estate and related investments
5,180
2,867
Acquisitions of real estate and other
(1,171)
(938)
Proceeds from repayments of mortgage loans receivable
11
Net cash used in investing activities
(156,654)
(235,137)
Cash Flows from Financing Activities:
Dividends paid on common shares
Dividends paid on preferred shares
Distributions to noncontrolling interests
(14,281)
(21,474)
Proceeds received from exercise of employee share options
8,484
2,523
Repayments of borrowings
(6,987)
(909,617)
Proceeds from borrowings
2,529
887,500
Repurchase of shares related to stock compensation agreements and related
tax withholdings and other
(185)
Contributions from noncontrolling interests
Debt issuance and other costs
(43)
(16,704)
Net cash used in financing activities
(160,948)
(197,188)
Net decrease in cash and cash equivalents and restricted cash
(16,317)
(160,793)
Cash and cash equivalents and restricted cash at beginning of period
1,599,322
1,943,506
Cash and cash equivalents and restricted cash at end of period
1,583,005
1,782,713
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
1,835,707
Restricted cash at beginning of period
107,799
Cash and cash equivalents at end of period
1,673,566
Restricted cash at end of period
109,147
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $9,364 and $7,497
88,078
91,719
Cash payments for income taxes
1,512
2,193
Non-Cash Investing and Financing Activities:
Accrued capital expenditures included in accounts payable and accrued expenses
57,993
113,755
Write-off of fully depreciated assets
(15,809)
(187,419)
Adjustments to carry redeemable Class A units at redemption value
VORNADO REALTY L.P.
(Amounts in thousands, except unit amounts)
LIABILITIES, REDEEMABLE PARTNERSHIP UNITS AND EQUITY
Redeemable partnership units:
Total redeemable partnership units
Equity:
Partners' capital
8,228,924
8,198,929
Total Vornado Realty L.P. equity
(Amounts in thousands, except per unit amounts)
Less net income attributable to noncontrolling interests in consolidated subsidiaries
Net income (loss) attributable to Vornado Realty L.P.
67,110
(101,286)
Preferred unit distributions
(16,178)
(20,412)
NET INCOME (LOSS) attributable to Class A unitholders
50,932
(121,698)
INCOME (LOSS) PER CLASS A UNIT - BASIC:
Net income (loss) per Class A unit
Weighted average units outstanding
200,845
200,072
INCOME (LOSS) PER CLASS A UNIT - DILUTED:
202,647
DISTRIBUTIONS PER CLASS A UNIT
Less comprehensive income attributable to noncontrolling interests in consolidated subsidiaries
Comprehensive income (loss) attributable to Vornado Realty L.P.
67,160
(94,381)
Class A Units
Preferred Units
Owned by Vornado
Units
7,160,874
Net income attributable to Vornado Realty L.P.
Net income attributable to redeemable
partnership units
Net income attributable to noncontrolling
interests in consolidated subsidiaries
Distributions to Vornado
Distributions to preferred unitholders
Class A Units issued to Vornado:
Upon redemption of redeemable Class A
Under Vornado's employees' share option
plan
Under Vornado's dividend reinvestment plan
Conversion of Series A preferred units
to Class A units
Deferred compensation units and options
Pro rata share of other comprehensive loss
of nonconsolidated subsidiaries
Increase in value of interest rate swaps
Adjustments to carry redeemable Class A
units at redemption value
Redeemable partnership units' share of the above
adjustments
7,190,875
7,140,500
Net loss attributable to Vornado Realty L.P.
Net loss attributable to redeemable
Under Vornado's employees' share option plan
536
Pro rata share of other comprehensive income
Reduction in value of interest rate swaps
Redeemable partnership units' share of
the above adjustments
7,194,565
16
Distributions to redeemable security holders and noncontrolling interests in
Proceeds received from exercise of Vornado stock options
Repurchase of Class A units related to stock compensation agreements and related
Contributions from noncontrolling interests in consolidated subsidiaries
18
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vornado Realty Trust (“Vornado”) is a fully integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Vornado is the sole general partner of, and owned approximately 93.6% of the common limited partnership interest in, the Operating Partnership at March 31, 2017. All references to the “Company,” “we,” “us,” and “our” mean collectively Vornado, the Operating Partnership and those entities/subsidiaries consolidated by Vornado.
On October 31, 2016, Vornado’s Board of Trustees approved the tax-free spin-off of our Washington, DC segment and we entered into a definitive agreement to combine it with the management business and certain Washington, DC assets of The JBG Companies (“JBG”), a Washington, DC real estate company. Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, will be Chairman of the Board of Trustees of the new company, which will be named JBG SMITH Properties. Mitchell Schear, President of our Washington, DC business, will be a member of the Board of Trustees of the new company. The pro rata distribution to Vornado common shareholders and Class A Operating Partnership unitholders is intended to be treated as a tax-free spin-off for U.S. federal income tax purposes. It is expected to be made on a pro rata 1:2 basis. We expect the spin-off and merger to be completed by the end of the second quarter of 2017, subject to certain conditions, including the SEC declaring the Form 10 registration statement effective, filing and approval of the new company’s listing application, receipt of regulatory approvals and third party consents by each of the Company and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. The distribution and combination are not subject to a vote by Vornado’s shareholders or Operating Partnership unitholders. Vornado’s Board of Trustees has approved the transaction. JBG has obtained all requisite approvals from its investment funds for this transaction. There can be no assurance that this transaction will be completed.
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and the Operating Partnership and their consolidated subsidiaries. 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, 2016, 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 months ended March 31, 2017 are not necessarily indicative of the operating results for the full year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, as amended by subsequent ASUs on the topic, 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. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of 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. When adopting this standard, we are permitted to use either the full retrospective method or the modified retrospective method. We will adopt this standard effective as of January 1, 2018 and currently expect to utilize the modified retrospective method of adoption. We have commenced the execution of our project plan for adopting this standard, which consists of gathering and evaluating the inventory of our revenue streams. We expect this standard will have an impact on the presentation of certain lease and non-lease components of revenue from leases upon the adoption of (“ASU 2016-02”) Leases with no impact on “total revenues.” We expect this standard will have an impact on the timing of gains on certain sales of real estate. We are continuing to evaluate the impact of this standard on our consolidated financial statements.
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. ASU 2016-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. While the adoption of this standard requires us to continue to measure “marketable securities” at fair value at each reporting date, the changes in fair value will be recognized in current period earnings as opposed to “other comprehensive income.”
In February 2016, the FASB issued an update ASU 2016-02 establishing ASC Topic 842, 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. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the overall impact of the adoption of ASU 2016-02 on our consolidated financial statements, including the timing of adopting this standard. ASU 2016-02 will more significantly impact the accounting for leases in which we are a lessee. We have a number of ground leases for which we will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments upon adoption of this standard. We also expect that this standard will have an impact on the presentation of certain lease and non-lease components of revenue from leases with no impact on “total revenues.” In particular, lease components, such as reimbursable real estate taxes and insurance expenses, will be presented in “property rentals” and non-lease components, such as reimbursable operating expenses, will be presented in “expense reimbursements” on our consolidated statements of income.
In March 2016, the FASB issued an update (“ASU 2016-09”) Improvements to Employee Share-Based Payment Accounting to ASC Topic 718, Compensation – Stock Compensation. 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, 2016. The adoption of this update as of January 1, 2017, did not have a material impact on our consolidated financial statements.
20
In August 2016, the FASB issued an update (“ASU 2016-15”) Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. We elected to early adopt ASU 2016-15 effective January 1, 2017, with retrospective application to our consolidated statements of cash flows. The adoption of ASU 2016-15 impacted our classification of distributions received from equity method investees. We selected the nature of earnings approach for classifying distributions. Under this approach, the distributions from equity method investees are classified on the basis of the nature of the activity of the investee that generated the distribution. The retrospective application of ASU 2016-15 resulted in the reclassification of certain distributions of income from partially owned entities to distributions of capital from partially owned entities, which reduced net cash provided by operating activities and net cash used in investing activities by $5,113,000 for the three months ended March 31, 2016.
In November 2016, the FASB issued an update (“ASU 2016-18”) Restricted Cash to ASC Topic 230, Statement of Cash Flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. ASU 2016-18 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. We elected to early adopt ASU 2016-18 effective January 1, 2017, with retrospective application to our consolidated statements of cash flows. Accordingly, the consolidated statements of cash flows present a reconciliation of the changes in cash and cash equivalents and restricted cash. Restricted cash primarily consists of security deposits, cash restricted for the purposes of facilitating a Section 1031 Like-Kind Exchange, cash restricted in connection with our deferred compensation plan and cash escrowed under loan agreements for debt service, real estate taxes, property insurance and capital improvements.
In February 2017, the FASB issued an update (“ASU 2017-05”) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets to ASC Subtopic 610-20, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets. ASU 2017-05 clarifies the scope of recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in ASC 606. ASU 2017-05 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have an impact on our consolidated financial statements.
21
We are the general partner and investment manager of Vornado Capital Partners Real Estate Fund (the “Fund”) and own a 25.0% interest in the Fund, which has an eight-year term and a three-year investment period that ended in July 2013. 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 the Crowne Plaza Times Square Hotel Joint Venture (the “Crowne Plaza Joint Venture”) and own a 57.1% interest in the joint venture which owns the 24.7% interest in the Crowne Plaza Times Square Hotel not owned by the Fund. The Crowne Plaza Joint Venture is also accounted for under ASC 946 and we consolidate the accounts of the joint venture into our consolidated financial statements, retaining the fair value basis of accounting.
At March 31, 2017, we had six real estate fund investments through the Fund and the Crowne Plaza Joint Venture with an aggregate fair value of $454,946,000, or $142,346,000 in excess of cost, and had remaining unfunded commitments of $117,907,000, of which our share was $34,422,000. Below is a summary of income from the Fund and the Crowne Plaza Joint Venture for the three months ended March 31, 2017 and 2016.
Net investment income
7,214
4,673
Net realized gains on exited investments
241
Previously recorded unrealized gain on exited investment
(14,254)
Net unrealized (loss) gain on held investments
(7,187)
6,189
Income from real estate fund investments (1)
Less income attributable to noncontrolling interests in consolidated subsidiaries
(3,503)
(5,973)
(Loss) income from real estate fund investments attributable to the Operating Partnership
(3,235)
5,311
Less loss (income) attributable to noncontrolling interests in the Operating Partnership
202
(329)
(Loss) income from real estate fund investments attributable to Vornado
(3,033)
4,982
(1)
Excludes $1,000 and $760 of management and leasing fees for the three months ended March 31, 2017 and 2016, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
22
Below is a summary of our marketable securities portfolio as of March 31, 2017 and December 31, 2016.
As of March 31, 2017
As of December 31, 2016
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
184,320
72,549
111,771
199,465
126,916
4,375
650
3,725
4,239
3,589
73,199
115,496
130,505
6. Investments in Partially Owned Entities
As of March 31, 2017, 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 March 31, 2017, 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 March 31, 2017 closing share price of $431.86, was $714,326,000, or $586,418,000 in excess of the carrying amount on our consolidated balance sheet. As of March 31, 2017, 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 $39,651,000. 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 March 31, 2017, 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. In 2017 and 2016, we provided UE with 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 March 31, 2017, the fair value of our investment in UE, based on UE’s March 31, 2017 closing share price of $26.30, was $150,362,000, or $126,004,000 in excess of the carrying amount on our consolidated balance sheet.
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
As of March 31, 2017, 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 March 31, 2017, the fair value of our investment in PREIT, based on PREIT’s March 31, 2017 closing share price of $15.14, was $94,625,000, or $25,018,000 below the carrying amount on our consolidated balance sheet. As of March 31, 2017, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $68,845,000. 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.
23
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
786,387
797,205
Alexander’s
32.4%
127,908
129,324
PREIT
8.0%
119,643
122,883
India real estate ventures
4.1%-36.5%
31,519
30,290
UE
5.4%
24,358
24,523
Other investments (2)
325,932
323,794
7 West 34th Street (3)
53.0%
(44,291)
(43,022)
Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue, 512 West 22nd Street, 85 Tenth Avenue and others.
(2)
Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, 50-70 West 93rd Street, Toys "R" Us, Inc. (which has a carrying amount of zero) and others.
Our negative basis results from a 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 23 for details):
Equity in net income
6,892
6,937
Management, leasing and development fees
1,509
1,725
8,401
8,662
UE (see page 23 for details):
1,091
876
Management fees
209
1,300
1,085
(10,054)
(14,249)
1,654
(686)
PREIT (see page 23 for details)
(2,830)
(4,288)
2,974
5,236
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, 85 Tenth Avenue and others.
Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, 50-70 West 93rd Street, Toys "R" Us, Inc. and others.
24
Discontinued Operations
The tables below set forth the assets and liabilities related to discontinued operations as of March 31, 2017 and December 31, 2016 and their combined results of operations and cash flows for the three months ended March 31, 2017 and 2016.
Assets related to discontinued operations:
1,927
2,642
2,489
2,928
Liabilities related to discontinued operations:
Income from discontinued operations:
324
1,182
163
466
161
Net gain on sale of real estate
2,267
Cash flows related to discontinued operations:
Cash flows from operating activities
(37)
Cash flows from investing activities
3,419
25
The following summarizes our identified intangible assets (primarily above-market leases) and liabilities (primarily acquired below-market leases) as of March 31, 2017 and December 31, 2016.
Identified intangible assets:
Gross amount
387,677
400,061
Accumulated amortization
(203,668)
(207,330)
Net
Identified intangible liabilities (included in deferred revenue):
586,969
(335,798)
(323,183)
251,171
263,786
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $11,459,000 and $17,507,000 for the three months ended March 31, 2017 and 2016, 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, 2018 is as follows:
2018
44,346
2019
32,168
2020
23,343
2021
18,159
2022
15,009
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $7,108,000 and $7,793,000 for the three months ended March 31, 2017 and 2016, 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, 2018 is as follows:
20,059
15,720
12,275
11,177
9,395
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 (a component of operating expense) of $458,000 and $458,000 for the three months ended March 31, 2017 and 2016. Estimated annual amortization of these below-market leases, net of above-market leases, for each of the five succeeding years commencing January 1, 2018 is as follows:
1,832
The following is a summary of our debt:
Interest Rate at
Mortgages Payable:
Fixed rate
3.84%
6,092,346
6,099,873
Variable rate
2.68%
3,277,493
3,274,424
3.43%
9,369,839
9,374,297
Deferred financing costs, net and other
(88,559)
(96,034)
Total, net
Unsecured Debt:
Senior unsecured notes
3.68%
850,000
(4,068)
(4,423)
Unsecured term loan
2.11%
375,000
(2,405)
(2,785)
1.88%
1,334,157
1,333,422
27
Redeemable noncontrolling interests on Vornado’s consolidated balance sheets and redeemable partnership units on the consolidated balance sheets of the Operating Partnership are primarily comprised 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 Vornado’s consolidated statements of changes in equity and to “partners’ capital” on the consolidated balance sheets of the Operating Partnership.
Balance at December 31, 2015
1,229,221
Net loss
(7,487)
Other comprehensive income
427
(7,835)
Redemption of Class A units for common shares/units, at redemption value
(14,482)
(36,524)
Other, net
14,364
Balance at March 31, 2016
1,177,684
Balance at December 31, 2016
Net income
3,229
(9,163)
(14,739)
(6,197)
14,495
Balance at March 31, 2017
As of March 31, 2017 and December 31, 2016, the aggregate redemption value of redeemable Class A units of the Operating Partnership, which are those units held by third parties, was $1,260,646,000 and $1,273,018,000, respectively.
Redeemable noncontrolling interests/redeemable partnership units 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 March 31, 2017 and December 31, 2016. Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income.
28
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 March 31, 2017
Balance as of December 31, 2016
(12,058)
8,066
(7,541)
OCI before reclassifications
(9,221)
Amounts reclassified from AOCI
Net current period OCI
47
9,217
Balance as of March 31, 2017
(2,841)
13,908
(7,544)
Reclassified upon receipt of proceeds related to the sale of an investment by a nonconsolidated subsidiary.
For the Three Months Ended March 31, 2016
Balance as of December 31, 2015
78,448
(9,319)
(19,368)
(2,840)
6,478
Balance as of March 31, 2016
89,542
(9,313)
(23,563)
(3,267)
Unconsolidated VIEs
As of March 31, 2017 and December 31, 2016, 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 6 – Investments in Partially Owned Entities). As of March 31, 2017 and December 31, 2016, the net carrying amount of our investments in these entities was $385,487,000 and $392,150,000, respectively, and our maximum exposure to loss in these entities is limited to our investments.
Consolidated VIEs
Our most significant consolidated VIEs are the Operating Partnership (for Vornado), real estate fund investments, and certain properties that have noncontrolling interests. These entities are VIEs because the noncontrolling interests do not have substantive kick-out or participating rights. We consolidate these entities because we control all of their significant business activities.
As of March 31, 2017, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $3,664,609,000 and $1,765,238,000, respectively. As of December 31, 2016, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $3,638,483,000 and $1,762,322,000, respectively.
29
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) interest rate swaps and (v) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units). The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy as of March 31, 2017 and December 31, 2016, respectively.
Level 1
Level 2
Level 3
Deferred compensation plan assets (included in other assets)
68,023
56,910
Interest rate swaps (included in other assets)
24,513
Total assets
793,087
256,718
511,856
Mandatorily redeemable instruments (included in other liabilities)
50,561
Interest rate swap (included in other liabilities)
7,221
57,782
63,930
57,444
21,816
809,026
267,634
519,576
10,122
60,683
30
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At March 31, 2017, we had six real estate fund investments with an aggregate fair value of $454,946,000, or $142,346,000 in excess of cost. These investments are classified as Level 3. We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period. The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 0.8 to 3.8 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, current and anticipated market conditions, industry publications and 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 March 31, 2017 and December 31, 2016.
Weighted Average
Range
(based on fair value of investments)
Unobservable Quantitative Input
Discount rates
10.0% to 14.9%
12.4%
12.6%
Terminal capitalization rates
4.3% to 5.8%
5.3%
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.
The table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3, for the three months ended March 31, 2017 and 2016.
Beginning balance
574,761
Net unrealized (loss) gain
Dispositions/distributions
(14,676)
Net realized gains
422
(240)
Ending balance
566,696
31
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 months ended March 31, 2017 and 2016.
59,186
Purchases
463
1,166
Sales
(2,737)
(1,372)
Realized and unrealized gain (loss)
1,075
(1,907)
665
111
57,184
Fair Value Measurements on a Nonrecurring Basis
There were no assets measured at fair value on a nonrecurring basis on our consolidated balance sheets as of March 31, 2017 and December 31, 2016.
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 values of cash equivalents and borrowings under our unsecured revolving credit facilities and unsecured term loan are classified as Level 1. The fair values of our secured and unsecured debt are classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of March 31, 2017 and December 31, 2016.
Carrying
Fair
Value
Cash equivalents
1,249,832
1,250,000
1,307,105
1,307,000
Debt:
Mortgages payable
9,383,000
9,356,000
884,000
899,000
116,000
10,710,469
10,758,000
10,714,927
10,746,000
Excludes $95,032 and $103,242 of deferred financing costs, net and other as of March 31, 2017 and December 31, 2016, respectively.
32
Vornado’s 2010 Omnibus Share Plan provides for grants of incentive and non-qualified Vornado stock options, restricted stock, 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 $14,277,000 and $14,571,000 for the three months ended March 31, 2017 and 2016, respectively.
15. Fee and Other Income
The following table sets forth the details of fee and other income:
BMS cleaning fees
21,996
18,146
Management and leasing fees
4,637
4,799
Lease termination fees
4,166
2,405
Other income
8,561
8,620
Management and leasing fees include management fees from Interstate Properties, a related party, of $128,000 and $134,000 for the three months ended March 31, 2017 and 2016, respectively. The above table excludes fee income from partially owned entities, which is included in “income (loss) from partially owned entities” (see Note 6 – Investments in Partially Owned Entities).
16. Interest and Other Investment Income, Net
The following table sets forth the details of interest and other investment income, net:
Dividends on marketable securities
3,445
3,215
Mark-to-market income (loss) of investments in our deferred compensation plan (1)
2,469
(1,938)
Interest on loans receivable
743
748
2,571
1,493
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.
17. Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
Interest expense
96,574
100,295
Amortization of deferred financing costs
8,981
9,265
Capitalized interest and debt expense
(11,270)
(9,071)
94,285
100,489
33
The following table provides a reconciliation of both net income (loss) and the number of common shares used in the computation of (i) basic income (loss) per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income (loss) 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 (loss) from continuing operations, net of income
attributable to noncontrolling interests
61,605
(94,471)
Income from discontinued operations, net of income attributable to noncontrolling interests
2,276
672
Net income (loss) attributable to common shareholders
Earnings allocated to unvested participating securities
(15)
(16)
Numerator for basic and diluted income (loss) per share
47,737
(114,179)
Denominator:
Denominator for basic income (loss) per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,162
Denominator for diluted income (loss) per share – weighted average
shares and assumed conversions
INCOME (LOSS) PER COMMON SHARE – BASIC:
INCOME (LOSS) PER COMMON SHARE – DILUTED:
The effect of dilutive securities for the three months ended March 31, 2017 and 2016 excludes an aggregate of 12,405 and 13,281 weighted average common share equivalents, respectively, as their effect was anti-dilutive.
34
The following table provides a reconciliation of both net income (loss) and the number of Class A units used in the computation of (i) basic income (loss) per Class A unit - which includes the weighted average number of Class A units outstanding without regard to dilutive potential Class A units, and (ii) diluted income (loss) per Class A unit - which includes the weighted average Class A units and dilutive unit equivalents. Dilutive unit equivalents may include our Series A convertible preferred units, Vornado stock options, restricted unit awards and Out-Performance Plan awards.
64,682
(102,002)
Net income (loss) attributable to Class A unitholders
(1,018)
(772)
Numerator for basic and diluted income (loss) per Class A unit
49,914
(122,470)
Denominator for basic income (loss) per Class A unit – weighted average units
Vornado stock options and restricted unit awards
1,802
Denominator for diluted income (loss) per Class A unit – weighted average
units and assumed conversions
INCOME (LOSS) PER CLASS A UNIT – BASIC:
INCOME (LOSS) PER CLASS A UNIT – DILUTED:
The effect of dilutive securities for the three months ended March 31, 2017 and 2016 excludes an aggregate of 130 and 1,867 weighted average Class A unit equivalents, respectively, as their effect was anti-dilutive.
35
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 the 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 $1,976,000 and 17% of the balance of a covered loss and the Federal government is responsible for the remaining portion 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 cost 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 cost 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 currently 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 cost 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 March 31, 2017, the aggregate dollar amount of these guarantees and master leases is approximately $723,000,000.
As of March 31, 2017, $19,895,000 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 rate 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 March 31, 2017, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $170,000,000, which includes our share for the commitments of the Farley Post Office redevelopment joint venture.
As of March 31, 2017, we have construction commitments aggregating approximately $584,000,000.
36
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2017.
New York
Washington, DC
426,239
116,207
78,402
280,821
83,988
99,572
145,418
32,219
(21,170)
(2,093)
3,506
1,472
64
7,692
(57,987)
(11,561)
(24,737)
Net gains on disposition of wholly owned and partially
owned assets
86,810
20,754
(33,940)
(143)
(354)
(1,708)
86,667
20,400
(35,648)
(33,220)
Less net income attributable to noncontrolling interests
in consolidated subsidiaries
(2,844)
(3,893)
Net income (loss) attributable to the Operating Partnership
83,823
(37,113)
Interest and debt expense(2)
116,327
75,923
13,499
26,905
Depreciation and amortization(2)
171,537
112,810
36,383
22,344
Income tax expense (2)
2,429
227
367
1,835
EBITDA(1)
357,403
272,783
70,649
(4)
13,971
(5)
See notes on pages 39 and 40.
37
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2016.
410,825
128,012
74,200
269,595
256,565
87,157
Operating (loss) income
141,230
(128,553)
(12,957)
(Loss) income from partially owned entities
(3,563)
(2,265)
1,588
1,115
58
2,345
(54,586)
(15,935)
(29,968)
(Loss) income before income taxes
84,196
(146,695)
(26,994)
(959)
(1,608)
(Loss) income from continuing operations
83,237
(146,959)
(28,602)
Net (loss) income
(27,886)
(3,429)
(6,249)
Net (loss) income attributable to the Operating Partnership
79,808
(34,135)
126,120
71,198
18,996
35,926
174,811
108,403
42,230
24,178
Income tax expense(2)
3,261
1,090
265
1,906
202,906
260,499
(85,468)
27,875
See notes on the following pages.
38
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We calculate EBITDA on an Operating Partnership basis which is before allocation to the noncontrolling interest of the Operating Partnership. 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.
Our 7.5% interest in Fashion Centre Mall/Washington Tower will not be included in the spin-off of our Washington, DC segment and has been reclassified to Other. The prior year's presentation has been conformed to the current year. In addition, on January 1, 2017, we reclassified our investment in 85 Tenth Avenue from Other to the New York segment as a result of the December 1, 2016 repayment of our loans receivable and the receipt of a 49.9% ownership interest in the property.
Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
The elements of "New York" EBITDA are summarized below.
Office
170,077
156,643
(a)
Retail
89,264
89,409
Residential
6,278
6,350
Alexander's
11,562
11,569
Hotel Pennsylvania
(4,398)
(3,472)
Total New York EBITDA
EBITDA from sold properties
(1,442)
Total New York EBITDA, as adjusted
259,057
Beginning in January 2017 for office buildings with retail at the base, we have adjusted the allocation of real estate taxes between the retail and office elements above. This has no effect on our consolidated financial statements, but resulted in a reallocation of $3,914 of income from retail to office for the three months ended March 31, 2016.
The elements of "Washington, DC" EBITDA are summarized below.
Office, excluding the Skyline properties
57,032
59,208
Skyline properties
(155,083)
Total Office
(95,875)
13,617
10,407
Total Washington, DC EBITDA
Certain items that impact EBITDA:
(5,945)
Total of certain items that impact EBITDA
154,755
Total Washington, DC EBITDA, as adjusted
69,287
39
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 and losses
2,875
2,231
Net realized/unrealized (losses) gains on investments
(1,737)
1,561
Carried interest
(4,373)
1,519
theMART (including trade shows)
24,184
23,028
555 California Street
12,083
11,615
Other investments
10,462
14,724
43,494
54,678
Corporate general and administrative expenses(a)
(32,987)
(30,606)
Investment income and other, net(a)
8,540
6,975
Acquisition and transaction related costs(b)
(8,005)
(4,607)
Residual retail properties discontinued operations
721
Net gains on sale of residential condominiums
Total Other
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $2,469 of income for the three months ended March 31, 2017 and $1,938 of loss for the three months ended March 31, 2016.
(b)
The three months ended March 31, 2017 includes $7,253 of transaction costs related to the spin-off of our Washington, DC business.
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
New York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of March 31, 2017, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the three month periods ended March 31, 2017 and 2016. 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, 2016, 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 13, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2016 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
May 1, 2017
Partners
We have reviewed the accompanying consolidated balance sheet of Vornado Realty L.P. and consolidated subsidiaries (the “Partnership”) as of March 31, 2017, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the three month periods ended March 31, 2017 and 2016. These interim financial statements are the responsibility of the Partnership’s management.
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 L.P. as of December 31, 2016, 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 13, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
42
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, 2016. 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 months ended March 31, 2017. 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 months ended March 31, 2017 are not necessarily indicative of the operating results for the full year. Certain prior year balances have been reclassified in order to conform to the current year presentation.
Business Objective and Operating Strategy
Our business objective is to maximize Vornado shareholder value, which we measure by the total return provided to Vornado’s shareholders. Below is a table comparing Vornado’s performance to the FTSE NAREIT Office Index (“Office REIT”) and the MSCI US REIT Index (“MSCI”) for the following periods ended March 31, 2017:
Total Return(1)
Office REIT
MSCI
Three-month
(3.3%)
1.6%
1.0%
One-year
9.1%
14.5%
3.2%
Three-year
21.6%
30.5%
33.3%
Five-year
54.2%
58.0%
59.8%
Ten-year
33.9%
32.0%
58.5%
Past performance is not necessarily indicative of future performance.
44
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, 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, 2016, for additional information regarding these factors.
Net income attributable to common shareholders for the quarter ended March 31, 2017 was $47,752,000, or $0.25 per diluted share, compared to a net loss attributable to common shareholders of $114,163,000, or $0.61 per diluted share, for the quarter ended March 31, 2016. The quarters ended March 31, 2017 and 2016 include certain items that impact net income attributable to common shareholders and net loss attributable to common shareholders, respectively, 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 quarter ended March 31, 2017 by $8,916,000, or $0.05 per diluted share, and increased net loss attributable to common shareholders for the quarter ended March 31, 2016 by $154,724,000, or $0.82 per diluted share.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended March 31, 2017 was $205,729,000, or $1.08 per diluted share, compared to $203,137,000, or $1.07 per diluted share, for the quarter ended March 31, 2016. FFO for the quarters ended March 31, 2017 and 2016 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 March 31, 2017 by $9,918,000, or $0.05 per diluted share, and increased FFO by $4,576,000, or $0.02 per diluted share, for the quarter ended March 31, 2016.
45
Vornado Realty Trust - continued
Certain items that impact net income (loss) attributable to common shareholders:
(Loss) income from real estate fund investments, net
Net income (loss) from discontinued operations and sold properties
(1,429)
(160,700)
Our share of partially owned entities:
Real estate impairment losses
(3,051)
(4,353)
1,853
(9,509)
(165,064)
Noncontrolling interests' share of above adjustments
593
10,340
Total of certain items that impact net income (loss) attributable to common shareholders, net
(8,916)
(154,724)
Certain items that impact FFO:
FFO from discontinued operations and sold properties
3,460
(10,578)
4,878
660
(302)
Total of certain items that impact FFO, net
(9,918)
4,576
46
Net income attributable to Class A unitholders for the quarter ended March 31, 2017 was $50,932,000, or $0.25 per diluted Class A unit, compared to net loss attributable to Class A unitholders of $121,698,000, or $0.61 per diluted Class A unit, for the quarter ended March 31, 2016. The quarters ended March 31, 2017 and 2016 include certain items that impact net income attributable to Class A unitholders and net loss attributable to Class A unitholders, respectively, which are listed in the table below. The aggregate of these items decreased net income attributable to Class A unitholders for the quarter ended March 31, 2017 by $9,509,000, or $0.05 per diluted Class A unit, and increased net loss attributable to Class A unitholders for the quarter ended March 31, 2016 by $165,064,000, or $0.83 per diluted Class A unit.
Certain items that impact net income (loss) attributable to Class A unitholders:
Total of certain items that impact net income (loss) attributable to Class A unitholders
Vornado Realty Trust and Vornado Realty L.P.
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 March 31, 2017 compared to March 31, 2016
3.7
%
0.7
Three months ended March 31, 2017 compared to December 31, 2016
(6.9
%)
(1.2
Cash basis same store EBITDA % increase (decrease):
15.5
0.3
(4.0
(2.1
Excluding Hotel Pennsylvania, same store EBITDA increased by 4.0% and by 15.7% on a cash basis.
Excluding Hotel Pennsylvania, same store EBITDA decreased by 3.5% and by 0.1% 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.
Recently Issued Accounting Literature
48
Recently Issued Accounting Literature – continued
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2016 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to our policies during 2017.
49
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)
555 California
theMART
Street
Three Months Ended March 31, 2017
Total square feet leased
553
100
66
545
Our share of square feet leased:
380
525
Initial rent(1)
75.20
241.38
47.62
86.88
43.04
Weighted average lease term (years)
7.3
2.3
8.1
11.1
8.8
Second generation relet space:
Square feet
204
482
GAAP basis:
Straight-line rent(2)
72.34
568.95
47.67
95.09
43.96
Prior straight-line rent
66.23
422.44
31.75
80.31
41.58
Percentage increase
9.2%
34.7%
50.1%
18.4%
5.7%
Cash basis:
74.32
532.53
47.06
86.49
42.67
Prior escalated rent
70.01
454.54
32.86
78.67
45.68
Percentage increase (decrease)
6.2%
17.2%
43.2%
9.9%
(6.6%)
Tenant improvements and leasing commissions:
Per square foot
81.72
56.65
92.17
67.07
Per square foot per annum
11.19
18.71
6.99
8.30
7.62
Percentage of initial rent
14.9%
7.8%
14.7%
9.6%
17.7%
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.
50
Square footage (in service) and Occupancy as of March 31, 2017
Square Feet (in service)
Number of
Our
Properties
Portfolio
Share
Occupancy %
New York:
20,236
16,965
96.7%
70
2,668
2,463
95.3%
Residential - 1,692 units
1,559
826
95.4%
Alexander's, including 312 residential units
2,437
790
99.6%
1,400
28,300
22,444
96.6%
Washington, DC:
10,837
9,846
87.8%
Residential - 3,234 units
3,310
3,168
97.9%
330
100.0%
14,477
13,344
90.2%
Other:
3,682
3,673
98.9%
1,737
1,216
93.1%
871
99.8%
7,251
5,760
Total square feet as of March 31, 2017
50,028
41,548
51
Square footage (in service) and Occupancy as of December 31, 2016
properties
20,227
16,962
96.3%
2,672
2,464
97.1%
95.7%
28,295
22,442
96.5%
11,141
10,123
88.3%
Residential - 3,156 units
3,245
3,103
97.8%
14,716
13,556
90.5%
3,671
3,662
1,738
1,217
92.4%
1,811
850
7,220
5,729
Total square feet as of December 31, 2016
50,231
41,727
Washington, DC Segment
Our Washington, DC segment EBITDA as adjusted was $70,649,000 for the three months ended March 31, 2017, which is $1,362,000 ahead of the prior year’s first quarter as a result of an increase in EBITDA from the core business of $4,385,000, offset by a decline in EBITDA from properties taken out-of-service of $3,023,000.
We expect to complete the spin-off of our Washington, DC segment by the end of second quarter of 2017. Our expectation of Washington, DC’s EBITDA as adjusted for the first half of 2017 has improved, and is expected to be approximately even to the first half of 2016, comprised of:
(i) an increase in core business of approximately $6,000,000 to $8,000,000, offset by,
(ii) a reduction in EBITDA of approximately $6,000,000 to $8,000,000 from 1700 M Street, 1800 South Bell and 1750 Crystal Drive being taken out-of-service for redevelopment.
52
See notes on pages 55 and 56.
53
54
We calculate EBITDA on an Operating Partnership basis which is before allocation to the noncontrolling interest of the Operating Partnership. 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.
Beginning in January 2017, for office buildings with retail at the base, we have adjusted the allocation of real estate taxes between the retail and office elements above. This has no effect on our consolidated financial statements, but resulted in a reallocation of $3,914 of income from retail to office for the three months ended March 31, 2016.
55
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
72%
71%
Washington, DC / Northern Virginia area
19%
Chicago, IL
6%
7%
San Francisco, CA
3%
100%
56
Our revenues, which consist of property rentals, tenant expense reimbursements, and fee and other income, were $620,848,000 for the three months ended March 31, 2017, compared to $613,037,000 for the prior year’s three months, an increase of $7,811,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions, dispositions and other
(10,339)
(943)
(9,396)
Development and redevelopment
(583)
(952)
369
82
Trade shows
993
Same store operations
4,173
1,876
529
1,768
(5,674)
1,015
(9,819)
3,130
Tenant expense reimbursements:
(961)
(834)
(127)
145
(228)
373
8,911
9,376
(649)
184
8,095
8,542
(1,004)
557
Fee and other income:
3,850
3,464
386
(162)
474
(674)
1,761
1,537
151
(59)
382
(459)
5,390
5,857
(982)
515
Total increase (decrease) in revenues
7,811
15,414
(11,805)
4,202
Primarily from the disposition of the Skyline properties by the receiver on December 21, 2016.
57
Our expenses, which consist of operating, depreciation and amortization, general and administrative expenses, acquisition and transaction related costs and Skyline properties impairment loss, were $464,381,000 for the three months ended March 31, 2017, compared to $613,317,000 for the prior year’s three months, a decrease of $148,936,000. Below are the details of the (decrease) increase by segment:
(Decrease) increase due to:
Operating:
(6,917)
(2,046)
(4,871)
(1,013)
(1,027)
Non-reimbursable expenses, including bad debt
reserves
(3,499)
(2,280)
(1,286)
67
1,070
591
BMS expenses
3,276
2,890
11,050
8,176
1,218
1,656
4,558
7,800
(5,966)
2,724
Depreciation and amortization:
(4,298)
(270)
(4,028)
(6,125)
(72)
6,349
1,420
5,254
(325)
(4,146)
1,150
(4,899)
(397)
General and administrative:
Mark-to-market of deferred compensation plan
liability
4,407
3,547
(1,012)
2,283
7,954
6,690
3,398
Total (decrease) increase in expenses
(148,936)
11,226
(172,577)
12,415
Primarily due to the demolition of two adjacent office properties, 1726 M Street and 1150 17th Street.
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.
Primarily from the transaction costs related to the spin-off of our Washington, DC business.
On March 15, 2016, we notified the servicer of the $678,000 mortgage loan on the Skyline properties in Virginia that cash flow would 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%. 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 was in default and was subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remained unpaid. On August 24, 2016, the Skyline properties were placed into receivership. On December 21, 2016, the disposition of Skyline properties was completed by the servicer. In connection therewith, the Skyline properties' assets (approximately $236,535) and liabilities (approximately $724,412), were removed from our consolidated balance sheet which resulted in a net gain of $487,877. There was no taxable income related to this transaction.
Income (Loss) from Partially Owned Entities
Summarized below are the components of income (loss) from partially owned entities for the three months ended March 31, 2017 and 2016.
Our Share of Net (Loss) Income:
Other investments(2)
Income from Real Estate Fund Investments
Below are the components of the income from our real estate fund investments for the three months ended March 31, 2017 and 2016.
Interest and other investment income, net was $9,228,000 for the three months ended March 31, 2017, compared to $3,518,000 for the prior year’s three months, an increase of $5,710,000. 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).
59
Interest and debt expense was $94,285,000 for the three months ended March 31, 2017, compared to $100,489,000 for the prior year’s three months, a decrease of $6,204,000. This decrease was primarily due to (i) $7,512,000 of interest savings from the disposition of the Skyline properties and the refinancing of theMART and (ii) $2,199,000 higher capitalized interest partially offset by (iii) $1,952,000 of higher interest expense from the refinancing of 350 Park Avenue and the $375,000,000 drawn on our $750,000,000 delayed draw term loan and (iv) $1,083,000 of higher interest expense from the 1535 Broadway capital lease obligation.
For the three months ended March 31, 2017, income tax expense was $2,205,000, compared to $2,831,000 for the prior year’s three months, a decrease of $626,000.
The table below sets forth the combined results of operations of assets related to discontinued operations for the three months ended March 31, 2017 and 2016.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $6,737,000 for the three months ended March 31, 2017, compared to $9,678,000 for the prior year’s three months, a decrease of $2,941,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net (Income) Loss Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $3,229,000 for the three months ended March 31, 2017, compared to net loss attributable to noncontrolling interests in the Operating Partnership of $7,487,000 for the prior year’s three months, an increase in income of $10,716,000. This increase resulted from higher net income subject to allocation to unitholders primarily due to a $160,700,000 non-cash impairment loss on the Skyline properties recognized in the prior year’s quarter.
Preferred share dividends were $16,129,000 for the three months ended March 31, 2017, compared to $20,364,000 for the prior year’s three months, a decrease of $4,235,000. This decrease resulted primarily from the redemption of the 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
Preferred unit distributions were $16,178,000 for the three months ended March 31, 2017, compared to $20,412,000 for the prior year’s three months, a decrease of $4,234,000. This decrease resulted primarily from the redemption of the 6.875% Series J cumulative redeemable preferred units on September 1, 2016.
60
Results of Operations – Three Months Ended March 31, 2017 Compared to March 31, 2016 - continued
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 March 31, 2017 compared to March 31, 2016.
EBITDA for the three months ended March 31, 2017
Add-back:
Non-property level overhead expenses included above
12,243
6,952
Less EBITDA from:
Acquisitions
(5,195)
Dispositions, including net gains on sale
(299)
Development properties placed into service
(2,191)
Other non-operating income, net
(8,243)
(317)
Same store EBITDA for the three months ended March 31, 2017
271,289
75,093
EBITDA for the three months ended March 31, 2016
9,967
7,964
(1,032)
(5,901)
(2,572)
Other non-operating (income) expenses, net
(7,782)
160,535
Same store EBITDA for the three months ended March 31, 2016
261,652
74,558
Increase in same store EBITDA for the three months ended
March 31, 2017 compared to March 31, 2016
9,637
% increase in same store EBITDA
3.7%
0.7%
Primarily 85 Tenth Avenue. On January 1, 2017, we reclassified our investment in 85 Tenth Avenue from Other to the New York segment as a result of the December 1, 2016 repayment of our loans receivable and the receipt of a 49.9% ownership interest in the property.
Primarily 666 Fifth Avenue Office Condominium.
Primarily The Bartlett.
The $9,637 increase in New York same store EBITDA resulted primarily from increases in Office and Retail EBITDA of $8,147 and $2,445 respectively, partially offset by a decrease in Hotel Pennsylvania EBITDA of $926. The Office EBITDA increase resulted primarily from higher tenant reimbursements, net of operating expenses. The Retail EBITDA increase resulted primarily from higher rents partially offset by higher operating expenses, net of reimbursements.
Excluding Hotel Pennsylvania, same store EBITDA increased by 4.0%.
61
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
(26,118)
(4,830)
Cash basis same store EBITDA for the three months ended
245,171
70,263
(49,358)
(4,485)
March 31, 2016
212,294
70,073
Increase in cash basis same store EBITDA for the three months ended
32,877
190
% increase in cash basis same store EBITDA
15.5%
0.3%
Excluding Hotel Pennsylvania, same store EBITDA increased by 15.7% on a cash basis.
62
Reconciliation of Net Income to EBITDA for the Three Months Ended December 31, 2016
Net income attributable to Vornado for the three months ended December 31, 2016
113,299
519,457
71,880
19,934
104,513
41,007
1,487
199
EBITDA for the three months ended December 31, 2016
291,179
580,597
(4,582)
271,973
8,307
7,612
(35)
(508,492)
(3,719)
(7,218)
Same store EBITDA for the three months ended December 31, 2016
292,233
76,021
Decrease in same store EBITDA for the three months ended
March 31, 2017 compared to December 31, 2016
(20,260)
(928)
% decrease in same store EBITDA
(6.9%)
(1.2%)
Excluding Hotel Pennsylvania, same store EBITDA decreased by 3.5%.
63
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA – Three Months Ended March 31, 2017 Compared to December 31, 2016
(26,538)
245,435
(36,488)
(4,252)
255,745
71,769
Decrease in cash basis same store EBITDA for the three months ended
(10,310)
(1,506)
% decrease in cash basis same store EBITDA
(4.0%)
(2.1%)
Excluding Hotel Pennsylvania, same store EBITDA decreased by 0.1% on a cash basis.
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, debt service, 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.
65
Cash Flows for the Three Months Ended March 31, 2017
Our cash and cash equivalents and restricted cash were $1,583,005,000 at March 31, 2017, a $16,317,000 decrease from the balance at December 31, 2016. Our consolidated outstanding debt, net was $10,615,437,000 at March 31, 2017, a $3,752,000 increase from the balance at December 31, 2016. As of March 31, 2017 and December 31, 2016, $115,630,000 was outstanding under our revolving credit facilities. During the remainder of 2017 and 2018, $118,255,000 and $208,560,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.
Net Cash Provided by Operating Activities
Net cash provided by operating activities of $301,285,000 was comprised of (i) net income of $73,847,000, (ii) distributions of income from partially owned entities of $18,226,000, (iii) $139,173,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rents, amortization of below-market leases, net, net realized and unrealized loss and gain on real estate fund investments, net gains on sale of real estate and other, equity in net income from partially owned entities and net gains on disposition of wholly owned and partially owned assets, and (iv) the net change in operating assets and liabilities of $70,039,000.
Net Cash Used in Investing Activities
Net cash used in investing activities of $156,654,000 was primarily comprised of (i) $98,227,000 of development costs and construction in progress, (ii) $67,363,000 of additions to real estate and (iii) $6,679,000 of investments in partially owned entities, partially offset by (iv) $11,592,000 of capital distributions from partially owned entities and (v) $5,180,000 of proceeds from sales of real estate and related investments.
Net Cash Used in Financing Activities
Net cash used in financing activities of Vornado Realty Trust of $160,948,000 was primarily comprised of (i) $134,332,000 of dividends paid on common shares, (ii) $16,129,000 of dividends paid on preferred shares, (iii) $14,281,000 of distributions to noncontrolling interests and (iv) $6,987,000 for the repayments of borrowings, partially offset by (v) $8,484,000 of proceeds received from exercise of employee share options and (vi) $2,529,000 of proceeds from borrowings.
Net cash used in financing activities of the Operating Partnership of $160,948,000 was primarily comprised of (i) $134,332,000 of distributions to Vornado, (ii) $16,129,000 of distributions to preferred unitholders, (iii) $14,281,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries and (iv) $6,987,000 for the repayments of borrowings, partially offset by (v) $8,484,000 of proceeds received from exercise of Vornado stock options and (vi) $2,529,000 of proceeds from borrowings.
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 three months ended March 31, 2017.
Expenditures to maintain assets
23,867
17,830
4,485
1,552
Tenant improvements
45,801
9,041
28,544
8,216
Leasing commissions
10,267
3,889
4,776
1,602
Non-recurring capital expenditures
22,327
20,916
1,265
146
Total capital expenditures and leasing commissions (accrual basis)
102,262
51,676
39,070
11,516
Adjustments to reconcile to cash basis:
Expenditures in the current year applicable to prior periods
33,810
13,940
10,649
9,221
Expenditures to be made in future periods for the current period
(58,120)
(27,379)
(30,002)
(739)
Total capital expenditures and leasing commissions (cash basis)
77,952
38,237
19,717
19,998
9.00
11.26
n/a
15.3%
14.1%
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 $680,737,000 has been expended as of March 31, 2017.
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 March 31, 2017, $40,821,000 has been expended, of which our share is $22,452,000.
We are developing a 170,000 square foot office and retail building at 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 incremental development cost of this project is estimated to be approximately $150,000,000, of which our share is $68,000,000. As of March 31, 2017, $48,824,000 has been expended, of which our share is $22,020,000.
We are developing a 34,000 square foot office and retail building at 606 Broadway, located on the northeast corner of Broadway and Houston Street in Manhattan (50.0% owned). The venture’s incremental development cost of this project is estimated to be approximately $60,000,000, of which our share is $30,000,000. As of March 31, 2017, $23,954,000 has been expended, of which our share is $11,977,000.
During the first quarter of 2017, we completed the demolition of two adjacent Washington, DC office properties, 1726 M Street and 1150 17th Street, and will 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, of which $13,991,000 has been expended as of March 31, 2017.
In September 2016, a joint venture between the Related Companies and Vornado was designated by New York State to redevelop the historic Farley Post Office building. The building will include a new Moynihan Train Hall and approximately 850,000 rentable square feet of office space and ancillary train hall retail. The joint venture will enter into a 99-year, triple-net lease and make a $230,000,000 contribution towards the construction of the train hall. Total costs for the redevelopment of the office and retail space are yet to be determined.
We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including the Penn Plaza District.
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 three months ended March 31, 2017. These expenditures include interest of $11,270,000, payroll of $2,105,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $7,380,000, which were capitalized in connection with the development and redevelopment of these projects.
220 Central Park South
66,284
The Bartlett
6,315
90 Park Avenue
3,447
315/345 Montgomery Street (555 California Street)
3,294
606 Broadway
2,765
1700 M Street
2,503
304 Canal Street
2,128
Penn Plaza
1,274
Marriott Marquis Times Square - retail and signage
1,266
640 Fifth Avenue
1,034
6,827
847
5,260
720
98,227
12,817
14,078
71,332
68
Our cash and cash equivalents and restricted cash were $1,782,713,000 at March 31, 2016, a $160,793,000 decrease from the balance at December 31, 2015. The decrease is primarily due to cash flows from investing and financing activities, partially offset by cash flows from operating activities, as discussed below.
Net cash provided by operating activities of $271,532,000 was comprised of (i) a net loss of $91,608,000, (ii) $264,378,000 of non-cash adjustments, which include Skyline properties impairment loss, depreciation and amortization expense, the effect of straight-lining of rents, amortization of below-market leases, net, net realized and unrealized gain on real estate fund investments and equity in net loss from partially owned entities, (iii) distributions of income from partially owned entities of $24,747,000, (iv) return of capital from real estate fund investments of $14,676,000, and (v) the net change in operating assets and liabilities of $59,339,000.
Net cash used in investing activities of $235,137,000 was comprised of (i) $127,283,000 of development costs and construction in progress, (ii) $77,243,000 of additions to real estate, (iii) $63,188,000 of investments in partially owned entities and (iv) $938,000 of acquisitions of real estate and other, partially offset by (v) $30,637,000 of capital distributions from partially owned entities, (vi) $2,867,000 of proceeds from sales of real estate and related investments, and (vii) $11,000 of proceeds from repayments of mortgage loans receivable.
Net cash used in financing activities of Vornado Realty Trust of $197,188,000 was comprised of (i) $909,617,000 for the repayments of borrowings, (ii) $118,867,000 of dividends paid on common shares, (iii) $21,474,000 of distributions to noncontrolling interests, (iv) $20,364,000 of dividends paid on preferred shares, (v) $16,704,000 of debt issuance and other costs, and (vi) $185,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (vii) $887,500,000 of proceeds from borrowings, and (viii) $2,523,000 of proceeds received from exercise of employee share options.
Net cash used in financing activities of the Operating Partnership of $197,188,000 was comprised of (i) $909,617,000 for the repayments of borrowings, (ii) $118,867,000 of distributions to Vornado, (iii) $21,474,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries, (iv) $20,364,000 of distributions to preferred unitholders, (v) $16,704,000 of debt issuance and other costs, and (vi) $185,000 for the repurchase of Class A units related to stock compensation agreements and related tax withholdings and other, partially offset by (vii) $887,500,000 of proceeds from borrowings, and (viii) $2,523,000 of proceeds received from exercise of Vornado stock options.
69
Capital Expenditures for the Three Months Ended March 31, 2016
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 three months ended March 31, 2016.
14,046
9,443
2,255
2,348
29,792
27,216
2,219
15,023
13,962
1,061
8,004
5,498
2,241
66,865
56,119
7,776
2,970
50,564
39,550
9,533
1,481
(23,182)
(24,146)
(5,323)
6,287
94,247
71,523
11,986
10,738
6.16
3.01
9.3%
7.5%
Below is a summary of development and redevelopment expenditures incurred in the three months ended March 31, 2016. These expenditures include interest of $9,071,000, payroll of $3,166,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $27,514,000, which were capitalized in connection with the development and redevelopment of these projects.
55,291
25,911
9,755
2221 South Clark Street (residential conversion)
9,310
6,635
Wayne Towne Center
3,777
2,744
330 West 34th Street
1,790
12,070
2,406
4,829
4,835
127,283
23,330
40,050
63,903
71
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 cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. The calculations of both the numerator and denominator used in the computation of income per share are disclosed in Note 18 – Income (Loss) Per Share/Income (Loss) Per Class A Unit, in our consolidated financial statements on page 34 of this Quarterly Report on Form 10-Q.
FFO for the Three Months Ended March 31, 2017 and 2016
FFO attributable to common shareholders plus assumed conversions was $205,729,000, or $1.08 per diluted share for the three months ended March 31, 2017, compared to $203,137,000, or $1.07 per diluted share, for the prior year’s three months. Details of certain adjustments to FFO are discussed in the financial results summary of our “Overview”.
Reconciliation of our net income (loss) to FFO:
Per diluted share
FFO adjustments:
Depreciation and amortization of real property
130,469
134,121
Real estate impairment loss
Proportionate share of adjustments to equity in net income (loss) of
partially owned entities to arrive at FFO:
39,074
39,046
(1,853)
3,051
4,353
168,474
338,220
(10,517)
(20,942)
FFO adjustments, net
157,957
317,278
FFO attributable to common shareholders
205,709
203,115
Convertible preferred share dividends
FFO attributable to common shareholders plus assumed conversions
205,729
203,137
1.08
1.07
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
964
Convertible preferred shares
Denominator for FFO per diluted share
190,412
189,664
72
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%
March 31,
Average
Change In
December 31,
Balance
Interest Rate
Base Rates
Consolidated debt:
3,768,123
2.60%
37,681
3,765,054
2.40%
6,942,346
3.82%
6,949,873
3.39%
3.32%
Pro rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys "R" Us, Inc.
1,113,023
2.69%
11,130
1,109,376
2.49%
Variable rate – Toys "R" Us, Inc.
1,111,001
6.69%
11,110
1,162,072
6.05%
Fixed rate (including $465,194 and $671,181
of Toys "R" Us, Inc. debt in 2017 and 2016)
2,584,813
5.95%
2,791,249
6.09%
4,808,837
5.36%
22,240
5,062,697
5.30%
Noncontrolling interests' share of consolidated
subsidiaries
(1,405)
Total change in annual net income attributable to
the Operating Partnership
58,516
Noncontrolling interests’ share of the Operating
Partnership
(3,651)
54,865
the Operating Partnership per diluted
Class A unit
0.29
Vornado per diluted share
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 March 31, 2017, we have an interest rate swap on a $411,000,000 mortgage loan on Two Penn Plaza that swapped the rate from LIBOR plus 1.65% (2.43% at March 31, 2017) to a fixed rate of 4.78% through March 2018, an interest rate swap on a $375,000,000 mortgage loan on 888 Seventh Avenue that swapped the rate from LIBOR plus 1.60% (2.38% at March 31, 2017) to a fixed rate of 3.15% through December 2020 and an interest rate swap on a $700,000,000 mortgage loan on 770 Broadway that swapped the rate from LIBOR plus 1.75% (2.58% at March 31, 2017) 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 March 31, 2017, the estimated fair value of our consolidated debt was $10,758,000,000.
Evaluation of Disclosure Controls and Procedures (Vornado Realty Trust)
Disclosure Controls and Procedures: Our management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our 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, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2017, such disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There have not been any changes in our 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, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures (Vornado Realty L.P.)
Disclosure Controls and Procedures: Vornado Realty L.P.’s management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our 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, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2017, such disclosure controls and procedures were effective.
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, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
During the quarter ended March 31, 2017, we issued 618,342 Class A units in connection with equity awards issued pursuant to Vornado’s omnibus share plan, including with respect to grants of restricted Vornado commons shares and restricted units of the Company and upon conversion, surrender or exchange of the Company’s units or Vornado stock options, and consideration received included $8,964,908 in cash proceeds. Such units were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
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: May 1, 2017
By:
/s/ Matthew Iocco
Matthew Iocco, Chief Accounting Officer (dulyauthorized officer and principal accounting officer)
Matthew Iocco, Chief Accounting Officer of VornadoRealty Trust, sole General Partner of Vornado RealtyL.P. (duly authorized officer and principal accountingofficer)
77
Exhibit No.
10.30
**
Amendment to Employment Agreement, dated March 10, 2017, between Vornado Realty Trust and Mitchell Schear.
10.31
Consulting Agreement, dated March 10, 2017, between JBG SMITH Properties and Mitchell Schear.
15.1
Letter regarding Unaudited Interim Financial Information of Vornado Realty Trust
15.2
Letter regarding Unaudited Interim Financial Information of Vornado Realty L.P.
31.1
Rule 13a-14 (a) Certification of the Chief Executive Officer of Vornado Realty Trust
31.2
Rule 13a-14 (a) Certification of the Chief Financial Officer of Vornado Realty Trust
31.3
Rule 13a-14 (a) Certification of the Chief Executive Officer of Vornado Realty L.P.
31.4
Rule 13a-14 (a) Certification of the Chief Financial Officer of Vornado Realty L.P.
32.1
Section 1350 Certification of the Chief Executive Officer of Vornado Realty Trust
32.2
Section 1350 Certification of the Chief Financial Officer of Vornado Realty Trust
32.3
Section 1350 Certification of the Chief Executive Officer of Vornado Realty L.P.
32.4
Section 1350 Certification of the Chief Financial Officer of Vornado Realty L.P.
101.INS
XBRL Instance Document of Vornado Realty Trust and Vornado Realty L.P.
101.SCH
XBRL Taxonomy Extension Schema of Vornado Realty Trust and Vornado Realty L.P.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.DEF
XBRL Taxonomy Extension Definition Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.LAB
XBRL Taxonomy Extension Label Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
Management contract or compensatory agreement.