UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
June 30, 2017
Or
☐
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 ☑ No ☐ Vornado Realty L.P.: Yes ☑ 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 ☑ No ☐ Vornado Realty L.P.: Yes ☑ 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:
☑ Large Accelerated Filer
☐ Accelerated Filer
☐ Non-Accelerated Filer (Do not check if smaller reporting company)
☐ Smaller Reporting Company
☐ Emerging Growth Company
Vornado Realty L.P.:
☐ Large Accelerated Filer
☑ Non-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 ☑ Vornado Realty L.P.: Yes ☐ No ☑
As of June 30, 2017, 189,465,023 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 June 30, 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 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 Per Share/Income 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
PART I.
Financial Information:
Page Number
Item 1.
Financial Statements of Vornado Realty Trust:
Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016
5
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2017 and 2016
6
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three and Six Months Ended June 30, 2017 and 2016
7
Consolidated Statements of Changes in Equity (Unaudited) for the
Six Months Ended June 30, 2017 and 2016
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
50
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
52
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
100
Item 4.
Controls and Procedures
101
PART II.
Other Information:
Legal Proceedings
102
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
103
EXHIBIT INDEX
105
4
PART I. FINANCIAL INFORMATION
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
$
4,048,971
4,065,142
Buildings and improvements
12,750,314
12,727,980
Development costs and construction in progress
1,676,353
1,430,276
Leasehold improvements and equipment
119,852
116,560
Total
18,595,490
18,339,958
Less accumulated depreciation and amortization
(3,682,903)
(3,513,574)
Real estate, net
14,912,587
14,826,384
Cash and cash equivalents
1,471,303
1,501,027
Restricted cash
86,386
98,295
Marketable securities
187,489
203,704
Tenant and other receivables, net of allowance for doubtful accounts of $11,513 and $10,920
83,768
94,467
Investments in partially owned entities
1,354,089
1,428,019
Real estate fund investments
455,692
462,132
Receivable arising from the straight-lining of rents, net of allowance of $1,656 and $2,227
1,062,456
1,032,736
Deferred leasing costs, net of accumulated amortization of $242,373 and $228,862
449,714
454,345
Identified intangible assets, net of accumulated amortization of $211,285 and $207,330
176,506
192,731
Assets related to discontinued operations
4,378
5,570
Other assets
644,922
515,437
20,889,290
20,814,847
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net
9,502,694
9,278,263
Senior unsecured notes, net
846,286
845,577
Unsecured term loan, net
372,975
372,215
Unsecured revolving credit facilities
115,630
Accounts payable and accrued expenses
427,401
458,694
Deferred revenue
264,035
287,846
Deferred compensation plan
104,566
121,374
Liabilities related to discontinued operations
2,406
2,870
Other liabilities
431,983
435,436
Total liabilities
12,067,976
11,917,905
Commitments and contingencies
-
Redeemable noncontrolling interests:
Class A units - 12,477,710 and 12,197,162 units outstanding
1,171,656
1,273,018
Series D cumulative redeemable preferred units - 177,101 units outstanding
5,428
Total redeemable noncontrolling interests
1,177,084
1,278,446
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 42,823,428 and 42,824,829 shares
1,038,011
1,038,055
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 189,465,023 and 189,100,876 shares
7,556
7,542
Additional capital
7,279,834
7,153,332
Earnings less than distributions
(1,524,806)
(1,419,382)
Accumulated other comprehensive income
115,839
118,972
Total Vornado shareholders' equity
6,916,434
6,898,519
Noncontrolling interests in consolidated subsidiaries
727,796
719,977
Total equity
7,644,230
7,618,496
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
For the Three Months Ended
For the Six Months Ended
June 30,
2017
2016
REVENUES:
Property rentals
529,294
527,178
1,043,112
1,046,670
Tenant expense reimbursements
60,687
60,841
128,357
120,416
Fee and other income
36,058
33,689
75,418
67,659
Total revenues
626,039
621,708
1,246,887
1,234,745
EXPENSES:
Operating
256,687
245,138
517,594
501,487
Depreciation and amortization
137,015
141,313
275,826
284,270
General and administrative
42,470
45,564
99,128
94,268
Acquisition and transaction related costs
6,471
2,879
14,476
7,486
Skyline properties impairment loss
160,700
Total expenses
442,643
434,894
907,024
1,048,211
Operating income
183,396
186,814
339,863
186,534
Income (loss) from partially owned entities
46,276
642
47,721
(3,598)
Income from real estate fund investments
4,391
16,389
4,659
27,673
Interest and other investment income, net
9,307
10,236
18,535
13,754
Interest and debt expense
(96,797)
(105,576)
(191,082)
(206,065)
Net gains on disposition of wholly owned
and partially owned assets
159,511
501
160,225
Income before income taxes
146,573
268,016
220,197
178,523
Income tax benefit (expense)
248
(2,109)
(1,957)
(4,940)
Income from continuing operations
146,821
265,907
218,240
173,583
Income from discontinued operations
663
2,475
3,091
3,191
Net income
147,484
268,382
221,331
176,774
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(7,677)
(13,025)
(14,414)
(22,703)
Operating Partnership
(7,706)
(14,531)
(10,935)
(7,044)
Net income attributable to Vornado
132,101
240,826
195,982
147,027
Preferred share dividends
(16,129)
(20,363)
(32,258)
(40,727)
NET INCOME attributable to common shareholders
115,972
220,463
163,724
106,300
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.61
1.16
0.84
0.54
Income from discontinued operations, net
0.01
0.02
Net income per common share
1.17
0.86
0.56
Weighted average shares outstanding
189,395
188,772
189,304
188,715
INCOME PER COMMON SHARE - DILUTED:
1.15
190,444
189,885
190,674
190,000
DIVIDENDS PER COMMON SHARE
0.71
0.63
1.42
1.26
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive (loss) income:
(Reduction) increase in unrealized net gain on
available-for-sale securities
(1,206)
28,019
(16,215)
39,113
Pro rata share of amounts reclassified from accumulated
other comprehensive income of a
nonconsolidated subsidiary
9,268
Pro rata share of other comprehensive loss of
nonconsolidated subsidiaries
(980)
(628)
(1,031)
(622)
(Reduction) increase in value of interest rate swaps and other
(1,204)
(6,976)
4,638
(11,171)
Comprehensive income
144,094
288,797
217,991
204,094
Less comprehensive income attributable to noncontrolling interests
(15,173)
(28,814)
(25,142)
(31,432)
Comprehensive income attributable to Vornado Realty Trust
128,921
259,983
192,849
172,662
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Non-
Accumulated
controlling
Earnings
Other
Interests in
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
Consolidated
Shares
Amount
Capital
Distributions
Income
Subsidiaries
Equity
Balance, December 31, 2016
42,825
189,101
Net income attributable to
Vornado
noncontrolling interests in
consolidated subsidiaries
14,414
Dividends on common shares
(268,817)
Dividends on preferred shares
Common shares issued:
Upon redemption of Class A
units, at redemption value
249
25,552
25,562
Under employees' share
option plan
8,842
8,846
Under dividend reinvestment plan
780
Contributions
991
Distributions:
(6,200)
(1,339)
Conversion of Series A preferred
shares to common shares
(2)
(44)
44
Deferred compensation shares
and options
1,076
(285)
791
Reduction in unrealized net gain on
Pro rata share of amounts
reclassified related to a
Pro rata share of other
comprehensive loss of
Increase in value of interest
rate swaps
4,636
Adjustments to carry redeemable
Class A units at redemption value
90,208
Redeemable noncontrolling interests'
share of above adjustments
207
(46)
(47)
(91)
Balance, June 30, 2017
42,823
189,465
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
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
22,703
(237,832)
195
18,200
18,208
38
1
3,092
3,093
717
19,674
(56,533)
(10,970)
953
(186)
768
Increase in unrealized net gain
on available-for-sale securities
Reduction in value of interest
(11,170)
(20,369)
(1,685)
(1)
(7)
111
Balance, June 30, 2016
188,826
7,531
7,135,571
(1,898,505)
72,556
753,468
7,347,575
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of deferred financing costs)
289,898
299,541
Equity in net (income) loss of partially owned entities
(47,721)
3,598
Distributions of income from partially owned entities
44,778
42,012
Other non-cash adjustments
30,070
23,049
Straight-lining of rents
(28,581)
(83,883)
Amortization of below-market leases, net
(24,391)
(29,811)
Net realized and unrealized loss (gain) on real estate fund investments
6,201
(21,277)
Net gains on sale of real estate and other
(2,267)
(2,210)
Net gains on disposition of wholly owned and partially owned assets
(501)
(160,225)
Return of capital from real estate fund investments
71,888
Changes in operating assets and liabilities:
Tenant and other receivables, net
8,446
2,358
Prepaid assets
(148,446)
(131,927)
(8,402)
(29,303)
(1,324)
6,634
(22,874)
(9,113)
Net cash provided by operating activities
316,217
318,805
Cash Flows from Investing Activities:
(191,073)
(277,214)
Additions to real estate
(139,611)
(170,265)
Distributions of capital from partially owned entities
113,507
92,465
(27,720)
(90,659)
Acquisitions of real estate and other
(11,841)
(91,100)
Proceeds from sales of real estate and related investments
5,180
159,888
Proceeds from repayments of mortgage loans receivable
29
22
Net deconsolidation of 7 West 34th Street
(48,000)
Investments in loans receivable and other
(11,700)
Purchases of marketable securities
(4,379)
Net cash used in investing activities
(251,529)
(440,942)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Dividends paid on common shares
Proceeds from borrowings
226,929
1,325,246
Dividends paid on preferred shares
Distributions to noncontrolling interests
(25,617)
(83,266)
Repayments of borrowings
(13,971)
(1,032,115)
Proceeds received from exercise of employee share options
9,626
3,810
Debt issuance and other costs
(2,919)
(29,478)
Contributions from noncontrolling interests
11,874
Repurchase of shares related to stock compensation agreements and related
tax withholdings and other
Net cash used in financing activities
(106,321)
(82,674)
Net decrease in cash and cash equivalents and restricted cash
(41,633)
(204,811)
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
1,557,689
1,738,695
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
1,644,067
Restricted cash at end of period
94,628
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, excluding capitalized interest of $20,050 and $13,918
175,718
181,432
Cash payments for income taxes
3,151
5,003
Non-Cash Investing and Financing Activities:
Adjustments to carry redeemable Class A units at redemption value
Accrued capital expenditures included in accounts payable and accrued expenses
59,733
144,079
Write-off of fully depreciated assets
(35,727)
(220,654)
(Reduction) increase in unrealized net gain on available-for-sale securities
Decrease in assets and liabilities resulting from the deconsolidation of investments
that were previously consolidated:
(122,047)
Mortgage payable, net
(290,418)
11
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
8,325,401
8,198,929
Total Vornado Realty L.P. equity
(Amounts in thousands, except per unit amounts)
Less net income attributable to noncontrolling interests in
Net income attributable to Vornado Realty L.P.
139,807
255,357
206,917
154,071
Preferred unit distributions
(16,177)
(20,412)
(32,355)
(40,824)
NET INCOME attributable to Class A unitholders
123,630
234,945
174,562
113,247
INCOME PER CLASS A UNIT - BASIC:
Net income per Class A unit
Weighted average units outstanding
201,127
200,369
200,987
200,220
INCOME PER CLASS A UNIT - DILUTED:
0.85
0.55
202,623
201,975
202,617
201,821
DISTRIBUTIONS PER CLASS A UNIT
in consolidated subsidiaries
Comprehensive income attributable to Vornado Realty L.P.
136,417
275,772
203,577
181,391
Class A Units
Preferred Units
Owned by Vornado
Units
7,160,874
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
above adjustments
7,287,390
7,140,500
Under Vornado's employees' share option plan
954
Reduction in value of interest rate swaps
7,143,102
16
Distributions to redeemable security holders and noncontrolling interests in
Proceeds received from exercise of Vornado stock options
Contributions from noncontrolling interests in consolidated subsidiaries
Repurchase of Class A units related to stock compensation agreements and related
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 as of June 30, 2017. All references to the “Company,” “we,” “us,” and “our” mean collectively Vornado, the Operating Partnership and those entities/subsidiaries consolidated by Vornado.
On July 17, 2017, we completed the spin-off of our Washington, DC segment comprised of (i) 37 office properties totaling over 11.1 million square feet, five multifamily properties with 3,133 units and five other assets totaling approximately 406,000 square feet and (ii) 18 future development assets totaling over 10.4 million square feet of estimated potential development density, and $275.0 million of cash to JBG SMITH Properties (“JBGS”). On July 18, 2017, JBGS was combined 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, is the Chairman of the Board of Trustees of JBGS. Mitchell Schear, former President of our Washington, DC business, is a member of the Board of Trustees of JBGS. We are providing transition services to JBGS initially including information technology, financial reporting and payroll services. The spin-off was effected through a tax-free distribution by Vornado to the holders of Vornado common shares of all of the common shares of JBGS at the rate of one JBGS common share for every two common shares of Vornado and the distribution by the Operating Partnership to the holders of its common units of all of the outstanding common units of JBG SMITH Properties LP (“JBGSLP”) at the rate of one JBGSLP common unit for every two common units of VRLP held of record. See JBGS’ Amendment No. 3 on Form 10 (File No. 001-37994) filed with the Securities and Exchange Commission on June 9, 2017 for additional information. Beginning in the third quarter of 2017, the historical financial results of our Washington, DC segment will be reflected in our consolidated financial statements as discontinued operations for all periods presented.
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 and six months ended June 30, 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 progressed with our project plan for adopting this standard, including 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 the update (“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, items such as reimbursable real estate taxes and insurance expenses, will be presented in “property rentals” and non-lease components, such as certain reimbursable operating expenses, will be presented in “tenant 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 (“ASC 718”). ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The adoption of this update as of January 1, 2017, did not have a material impact on our consolidated financial statements.
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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 $4,488,000 for the six months ended June 30, 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. We expect to utilize the modified retrospective method of adoption. The adoption of this standard is not expected to have an impact on our consolidated financial statements.
In May 2017, the FASB issued an update (“ASU 2017-09”) Scope of Modification Accountingto ASC 718. ASU 2017-09 provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. ASU 2017-09 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.
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4. Real Estate Fund Investments
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.
As of June 30, 2017, we had six real estate fund investments through the Fund and the Crowne Plaza Joint Venture with an aggregate fair value of $455,692,000, or $143,092,000 in excess of cost, and had remaining unfunded commitments of $117,902,000, of which our share was $34,519,000. Below is a summary of income from the Fund and the Crowne Plaza Joint Venture for the three and six months ended June 30, 2017 and 2016.
Net investment income
3,646
1,723
10,860
6,396
Net realized gain on exited investments
241
14,676
Previously recorded unrealized gain on exited investment
(14,254)
Net unrealized gain (loss) on held investments
745
14,666
(6,442)
20,855
Income from real estate fund investments(1)
Less income attributable to noncontrolling interests
(4,695)
(8,845)
(8,198)
(14,818)
(Loss) income from real estate fund investments attributable to
the Operating Partnership
(304)
7,544
(3,539)
12,855
Less loss (income) attributable to noncontrolling interests
in the Operating Partnership
(465)
221
(794)
7,079
(3,318)
12,061
Excludes $1,381 and $935 of management and leasing fees for the three months ended June 30, 2017 and 2016, respectively, and $2,381 and $1,695 for the six months ended June 30, 2017 and 2016, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
5. Marketable Securities
Below is a summary of our marketable securities portfolio as of June 30, 2017 and December 31, 2016.
As of June 30, 2017
As of December 31, 2016
GAAP
Unrealized
Fair Value
Cost
Gain
Equity securities:
Lexington Realty Trust
183,027
72,549
110,478
199,465
126,916
4,462
650
3,812
4,239
3,589
73,199
114,290
130,505
6. Investments in Partially Owned Entities
As of June 30, 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 June 30, 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 June 30, 2017 closing share price of $421.46, was $697,124,000, or $570,494,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 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 $39,468,000. 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.
On June 1, 2017, Alexander’s completed a $500,000,000 refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus 0.90% (2.06% at June 30, 2017) and matures in June 2020 with four one-year extension options. In connection therewith, Alexander’s purchased an interest rate cap with a notional amount of $500,000,000 that caps LIBOR at a rate of 6%. The property was previously encumbered by a $300,000,000 interest-only mortgage at LIBOR plus 0.95% which was scheduled to mature in March 2021.
Urban Edge Properties (“UE”) (NYSE: UE)
As of June 30, 2017, we own 5,717,184 UE operating partnership units, representing a 4.8% 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 June 30, 2017, the fair value of our investment in UE, based on UE’s June 30, 2017 closing share price of $23.73, was $135,669,000, or $93,777,000 in excess of the carrying amount on our consolidated balance sheet.
During the six months ended June 30, 2017, UE issued approximately 14,000,000 operating partnership units related to property acquisitions and a public offering of its common stock. As a result, our ownership interest in UE decreased to 4.8% from 5.4%. In accordance with ASC 323-10-40-1, we account for a unit issuance by an equity method investee as if we had sold a proportionate share of our investment. The average issuance price per unit of the newly issued UE capital is $26.07. Our average per unit carrying amount is $4.55. Accordingly, we recorded a $15,900,000 net gain in connection with this issuance which is included in “income (loss) from partially owned entities” on our consolidated statements of income.
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6. Investments in Partially Owned Entities – continued
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
As of June 30, 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 June 30, 2017, the fair value of our investment in PREIT, based on PREIT’s June 30, 2017 closing share price of $11.32, was $70,750,000, or $46,854,000 below the carrying amount on our consolidated balance sheet. As of June 30, 2017, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $84,087,000. 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.
Farley Post Office Joint Venture
In September 2016, our 50.1% joint venture with the Related Companies (“Related”) was designated by Empire State Development (“ESD”), an entity of 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 commercial space, comprised of approximately 730,000 square feet of office space and approximately 120,000 square feet of retail space. On June 15, 2017, the joint venture closed a 99-year, triple-net lease with ESD for the commercial space at the Farley Post Office building and made a $230,000,000 upfront contribution, of which our share is $115,230,000, towards the construction of the train hall. The lease calls for annual rent payments of $5,000,000 plus payments in lieu of real estate taxes. Simultaneously, the joint venture completed a $271,000,000 loan facility, with an initial advance of $202,299,000. The interest only loan is at LIBOR plus 3.25% (4.41% at June 30, 2017) and matures in June 2019 with two one-year extension options.
The joint venture has also entered into a development agreement with ESD and a design-build contract with Skanska Moynihan Train Hall Builders. Under the development agreement with ESD, the joint venture is obligated to build the Moynihan Train Hall, with Vornado and Related each guaranteeing the joint venture’s obligations. Under the design-build agreement, Skanska Moynihan Train Hall Builders is obligated to fulfill all of the joint venture’s obligations. The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bears a full guaranty from Skanska AB.
Mezzanine Loan – New York
On May 9, 2017, a $150,000,000 mezzanine loan owned by a joint venture in which we have a 33.3% ownership interest was repaid at its maturity and we received our $50,000,000 share. The mezzanine loan earned interest at LIBOR plus 9.42%.
Sterling Suffolk Racecourse, LLC (“Suffolk Downs JV”)
On May 26, 2017, Suffolk Downs JV, a joint venture in which we have a 21.2% equity interest, sold the property comprising the Suffolk Downs race track in East Boston, Massachusetts (“Suffolk Downs”) for $155,000,000, which resulted in net proceeds and a net gain to us of $15,314,000. In addition, we were repaid $29,318,000 of principal and $6,129,000 of accrued interest on our debt investments in Suffolk Downs JV, resulting in a net gain of $11,373,000.
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Below is a schedule summarizing our investments in partially owned entities.
Percentage
Ownership at
Balance as of
Investments:
Partially owned office buildings (1)
Various
804,492
825,421
Alexander’s
32.4%
126,630
129,324
PREIT
8.0%
117,604
122,883
UE
4.8%
41,892
24,523
India real estate ventures
4.1%-36.5%
26,491
30,290
Other investments (2)
236,980
295,578
7 West 34th Street (3)
53.0%
(45,789)
(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, 61 Ninth Avenue and others.
Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, Farley Post Office Joint Venture, Toys "R" Us, Inc. (which has a carrying amount of zero) and others.
(3)
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 sheets.
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Below is a schedule net income (loss) from partially owned entities.
Our Share of Net Income (Loss):
UE (see page 23 for details):
Net gain resulting from UE operating
partnership unit issuances
15,900
Equity in net earnings
2,894
1,071
3,985
1,947
Management fees
209
418
19,003
1,280
20,303
2,365
Alexander's (see page 23 for details):
Equity in net income
6,690
6,812
13,582
13,749
Management, leasing and development fees
1,507
1,688
3,016
3,413
8,197
8,500
16,598
17,162
(7,897)
(12,398)
(17,840)
(26,647)
(1,644)
(1,934)
(2,620)
PREIT (see page 24 for details)
(902)
(527)
(3,732)
(4,815)
29,519
5,721
32,382
10,957
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, Rosslyn Plaza, 50-70 West 93rd Street, Toys "R" Us, Inc. and others. In the second quarter of 2017, we recognized $26,687 of net gains, comprised of $15,314 representing our share of a net gain on the sale of Suffolk Downs and $11,373 representing the net gain on repayment of our debt investments in Suffolk Downs JV. See page 24 for details.
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7. Dispositions
Discontinued Operations
The tables below set forth the assets and liabilities related to discontinued operations as of June 30, 2017 and December 31, 2016 and their combined results of operations and cash flows for the three and six months ended June 30, 2017 and 2016.
Assets related to discontinued operations:
1,927
2,642
2,451
2,928
Liabilities related to discontinued operations:
For the Three Months Ended June 30,
Income from discontinued operations:
848
947
1,172
2,129
185
682
348
1,148
265
824
981
Net gains on the sale of real estate
2,210
2,267
Pretax income from discontinued operations
Income tax expense
Cash flows related to discontinued operations:
Cash flows from operating activities
400
(4,685)
Cash flows from investing activities
3,419
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8. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily above-market leases) and liabilities (primarily acquired below-market leases) as of June 30, 2017 and December 31, 2016.
Identified intangible assets:
Gross amount
387,791
400,061
Accumulated amortization
(211,285)
(207,330)
Total, net
Identified intangible liabilities (included in deferred revenue):
581,471
586,969
(340,131)
(323,183)
241,340
263,786
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $12,932,000and $12,301,000 for the three months ended June 30, 2017 and 2016, respectively, and $24,391,000 and $29,808,000 for the six months ended June 30, 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
44,474
2019
32,297
2020
23,472
2021
18,646
2022
15,530
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $6,971,000 and $8,066,000 for the three months ended June 30, 2017 and 2016, respectively, and $14,079,000 and $15,859,000 for the six months ended June 30, 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:
20,073
15,737
12,291
11,288
9,532
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 $458,000and $458,000 for the three months ended June 30, 2017 and 2016, respectively, and $916,000 and $916,000 for the six months ended June 30, 2017 and 2016, respectively. 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
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9. Debt
The following is a summary of our debt:
Interest Rate at
Mortgages Payable:
Fixed rate
3.84%
6,084,795
6,099,873
Variable rate
2.93%
3,502,460
3,274,424
3.51%
9,587,255
9,374,297
Deferred financing costs, net and other
(84,561)
(96,034)
Unsecured Debt:
Senior unsecured notes
3.68%
850,000
(3,714)
(4,423)
Unsecured term loan
2.37%
375,000
(2,025)
(2,785)
2.14%
1,334,891
1,333,422
On June 20, 2017, we completed a $220,000,000 financing of The Bartlett, a 699-unit residential building with a 39,000 square foot Whole Foods Market at its base, located in Arlington, Virginia. The five-year interest-only loan is at LIBOR plus 1.70% (2.90% at June 30, 2017), and matures in June 2022. On July 17, 2017, the property, the loan and the $217,000,000 of net proceeds were transferred to JBGS in connection with the tax-free spin-off of our Washington, DC segment.
10. Redeemable Noncontrolling Interests/Redeemable Partnership Units
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 as of December 31, 2015
1,229,221
7,044
Other comprehensive income
1,685
(15,763)
Redemption of Class A units for common shares/units, at redemption value
(18,208)
20,369
Other, net
21,149
Balance as of June 30, 2016
1,245,497
Balance as of December 31, 2016
10,935
Other comprehensive loss
(207)
(18,078)
(25,562)
(90,208)
21,758
Balance as of June 30, 2017
As of June 30, 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 $1,171,656,000 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 June 30, 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.
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11. Accumulated Other Comprehensive Income (“AOCI”)
The following tables set forth the changes in accumulated other comprehensive income by component.
Securities
Pro rata share of
Interest
available-
nonconsolidated
rate
for-sale
subsidiaries' OCI
swaps
For the Three Months Ended June 30, 2017
Balance as of March 31, 2017
119,019
115,496
(2,841)
13,908
(7,544)
OCI before reclassifications
(3,180)
212
Amounts reclassified from AOCI
Net current period OCI
(3,821)
12,702
(7,332)
For the Three Months Ended June 30, 2016
Balance as of March 31, 2016
53,399
89,542
(9,313)
(23,563)
(3,267)
19,157
(6,975)
(1,259)
117,561
(9,941)
(30,538)
(4,526)
For the Six Months Ended June 30, 2017
(12,058)
8,066
(7,541)
(12,401)
(3,133)
8,237
For the Six Months Ended June 30, 2016
78,448
(9,319)
(19,368)
(2,840)
25,635
(1,686)
31
Unconsolidated VIEs
As of June 30, 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 June 30, 2017 and December 31, 2016, the net carrying amount of our investments in these entities was $393,418,000 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 June 30, 2017, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, were $3,648,565,000 and $1,756,632,000, 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.
32
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 June 30, 2017 and December 31, 2016, respectively.
Level 1
Level 2
Level 3
Deferred compensation plan assets ($2,691 included in restricted
cash and $101,875 in other assets)
54,717
49,849
Interest rate swaps (included in other assets)
20,998
Total assets
768,745
242,206
505,541
Mandatorily redeemable instruments (included in other liabilities)
50,561
Interest rate swap (included in other liabilities)
5,011
55,572
Deferred compensation plan assets ($4,187 included in restricted
cash and $117,187 in other assets)
63,930
57,444
21,816
809,026
267,634
519,576
10,122
60,683
33
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
As of June 30, 2017, we had six real estate fund investments with an aggregate fair value of $455,692,000, or $143,092,000 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 0.3 to 3.5 years. Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit. Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor. Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs.
The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, 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 June 30, 2017 and December 31, 2016.
Weighted Average
Range
(based on fair value of investments)
Unobservable Quantitative Input
Discount rates
3.0% to 16.0%
10.0% to 14.9%
11.1%
12.6%
Terminal capitalization rates
4.7% to 5.8%
4.3% to 5.8%
5.5%
5.3%
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.
The table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3, for the three and six months ended June 30, 2017 and 2016.
Beginning balance
454,946
566,696
574,761
Dispositions / distributions
(57,212)
(71,888)
Net unrealized gain (loss)
Net realized gain
422
(239)
Ending balance
524,150
34
Deferred Compensation Plan Assets
Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The third party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements.
The table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3, for the three and six months ended June 30, 2017 and 2016.
56,910
57,184
59,186
Purchases
1,350
1,106
1,813
2,272
Sales
(9,375)
(779)
(12,112)
(2,151)
Realized and unrealized gains
830
2,219
1,905
312
134
410
799
521
60,140
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 June 30, 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 June 30, 2017 and December 31, 2016.
Carrying
Fair
Value
Cash equivalents
1,103,553
1,307,105
Debt:
Mortgages payable
9,626,000
9,356,000
887,000
899,000
116,000
10,927,885
11,004,000
10,714,927
10,746,000
Excludes $90,300 and $103,242 of deferred financing costs, net and other as of June 30, 2017 and December 31, 2016, respectively.
35
14. Stock-based Compensation
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 $7,349,000 and $7,215,000 for the three months ended June 30, 2017 and 2016, respectively, and $21,626,000 and $21,786,000 for the six months ended June 30, 2017 and 2016, respectively.
15. Fee and Other Income
The following table sets forth the details of fee and other income:
BMS cleaning fees
21,294
18,794
43,290
36,940
Management and leasing fees
4,892
4,604
9,529
9,403
Lease termination fees
1,459
3,199
5,625
5,604
Other income
8,413
7,092
16,974
15,712
Management and leasing fees include management fees from Interstate Properties, a related party, of $124,000and $128,000 for the three months ended June 30, 2017 and 2016, respectively, and $252,000 and $262,000 for the six months ended June 30, 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).
36
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
3,539
3,230
6,984
6,445
Interest on loans receivable
2,102
748
2,845
1,496
Mark-to-market income of investments in our
deferred compensation plan (1)
789
4,359
3,258
2,421
2,877
1,899
5,448
3,392
This income is entirely offset by the expense resulting from the mark-to-market of the deferred compensation plan liability, which is included in "general and administrative" expense.
17. Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
Interest expense
100,486
104,435
197,060
204,730
Amortization of deferred financing costs
8,353
8,508
17,334
17,773
Capitalized interest and debt expense
(12,042)
(7,367)
(23,312)
(16,438)
96,797
105,576
191,082
206,065
37
18. Income Per Share/Income Per Class A Unit
The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options, restricted stock awards and Out-Performance Plan awards.
Numerator:
Income from continuing operations, net of income
attributable to noncontrolling interests
131,479
238,504
193,084
144,033
Income from discontinued operations, net of income
622
2,322
2,898
2,994
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(13)
(25)
(27)
(30)
Numerator for basic income per share
115,959
220,438
163,697
106,270
Impact of assumed conversions:
Convertible preferred share dividends
Earnings allocated to Out-Performance Plan units
233
Numerator for diluted income per share
115,979
220,459
163,930
106,294
Denominator:
Denominator for basic income per share – weighted average shares
Effect of dilutive securities(1):
Employee stock options and restricted share awards
1,011
1,070
1,089
1,020
Convertible preferred shares
43
Out-Performance Plan units
281
Denominator for diluted income per share – weighted average
shares and assumed conversions
INCOME PER COMMON SHARE – BASIC:
INCOME PER COMMON SHARE – DILUTED:
The effect of dilutive securities for the three months ended June 30, 2017 and 2016 excludes an aggregate of 12,268 and 12,278 weighted average common share equivalents, respectively, and 12,125 and 12,052 weighted average common share equivalents for the six months ended June 30, 2017 and 2016, respectively, as their effect was anti-dilutive.
18. Income Per Share/Income Per Class A Unit - continued
The following table provides a reconciliation of both net income and the number of Class A units used in the computation of (i) basic income per Class A unit - which includes the weighted average number of Class A units outstanding without regard to dilutive potential Class A units, and (ii) diluted income per Class A unit - which includes the weighted average Class A units and 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.
139,144
252,882
203,826
150,880
Net income attributable to Class A unitholders
(742)
(1,059)
(1,759)
(1,412)
Numerator for basic income per Class A unit
122,888
233,886
172,803
111,835
Convertible preferred unit distributions
Numerator for diluted income per Class A unit
122,908
233,908
Denominator for basic income per Class A unit – weighted
average units
Vornado stock options and restricted unit awards
1,458
1,564
1,630
1,601
Convertible preferred units
42
Denominator for diluted income per Class A unit – weighted
average units and assumed conversions
INCOME PER CLASS A UNIT – BASIC:
INCOME PER CLASS A UNIT – DILUTED:
The effect of dilutive securities for the three months ended June 30, 2017 and 2016 excludes an aggregate of 89 and 187 weighted average Class A unit equivalents, respectively, and 182 and 231 weighted average Class A unit equivalents for the six months ended June 30, 2017 and 2016, respectively, as their effect was anti-dilutive.
39
19. Commitments and Contingencies
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.
40
19. Commitments and Contingencies – continued
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 June 30, 2017, the aggregate dollar amount of these guarantees and master leases is approximately $774,000,000.
As of June 30, 2017, $20,777,000 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 June 30, 2017, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $52,000,000.
As of June 30, 2017, we have construction commitments aggregating approximately $543,000,000.
Upon completion of the spin-off of our Washington, DC segment, on July 17, 2017, we incurred approximately $47,000,000 of additional transaction costs, primarily for advisory fees which will be recognized as expense in the quarter ended September 30, 2017.
41
20. Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1)and NOI(1) by segment for the three months ended June 30, 2017and 2016.
New York
Washington, DC
436,862
118,336
70,841
279,835
82,317
80,491
Operating income (loss)
157,027
36,019
(9,650)
(272)
255
46,293
Interest and other investment income (loss), net
1,499
(23)
7,831
(60,335)
(12,008)
(24,454)
97,919
24,243
24,411
906
(362)
(296)
98,825
23,881
24,115
24,778
Less net income attributable to noncontrolling interests
(2,645)
(5,032)
Net income attributable to the Operating Partnership
96,180
19,746
Interest and debt expense(2)
118,585
78,202
13,567
26,816
Depreciation and amortization(2)
168,248
110,449
33,648
24,151
Income tax expense (benefit)(2)
289
(869)
353
805
EBITDA(1)
426,929
283,962
71,449
(4)
71,518
(5)
Non-cash adjustments for straight-line rents, amortization of
acquired below-market leases, net, and other (2)
(44,580)
(26,741)
(1,826)
(16,013)
NOI(1)
382,349
257,221
69,623
55,505
425,770
127,468
68,470
268,135
89,106
77,653
157,635
38,362
(9,183)
(1,001)
(2,370)
4,013
1,214
8,988
(56,395)
(19,817)
(29,364)
Net gain on disposition of wholly owned and partially
owned assets
Income (loss) before income taxes
260,964
16,209
(9,157)
(816)
(318)
(975)
Income (loss) from continuing operations
260,148
15,891
(10,132)
Net income (loss)
(7,657)
(3,397)
(9,628)
Net income (loss) attributable to the Operating Partnership
256,751
(17,285)
127,799
71,171
21,926
34,702
173,352
111,314
37,196
24,842
Income tax expense (2)
4,704
889
2,205
1,610
561,212
440,125
77,218
43,869
(74,383)
(50,045)
(6,067)
(18,271)
486,829
390,080
71,151
25,598
See notes on pages 45 through 48.
20. Segment Information - continued
Below is a summary of net income and a reconciliation of net income to EBITDA(1)and NOI(1) by segment for the six months ended June 30, 2017.
863,101
234,543
149,243
560,656
166,305
180,063
302,445
68,238
(30,820)
(2,365)
342
49,744
2,971
15,523
(118,322)
(23,569)
(49,191)
Net gains on disposition of wholly owned and partially
184,729
45,052
(9,584)
Income tax (expense) benefit
763
(716)
(2,004)
185,492
44,336
(11,588)
(8,497)
(5,489)
(8,925)
180,003
(17,422)
234,912
154,125
26,748
54,039
339,785
223,259
69,141
47,385
2,718
(642)
720
2,640
784,332
556,745
140,945
86,642
(61,708)
(52,159)
(5,892)
(3,657)
722,624
504,586
135,053
82,985
Below is a summary of net income and a reconciliation of net income to EBITDA(1)and NOI(1) by segment for the six months ended June 30, 2016.
836,595
255,480
142,670
537,730
345,671
164,810
298,865
(90,191)
(22,140)
(Loss) income from partially owned entities
(4,564)
(3,679)
4,645
2,329
92
11,333
(110,981)
(35,752)
(59,332)
714
345,160
(129,530)
(37,107)
(1,775)
(582)
(2,583)
343,385
(130,112)
(39,690)
(36,499)
(6,826)
(15,877)
336,559
(52,376)
253,919
142,369
40,637
70,913
348,163
219,717
77,795
50,651
Income tax expense(2)
7,965
1,979
2,470
3,516
764,118
700,624
(9,210)
72,704
(133,739)
(97,555)
(10,264)
(25,920)
630,379
603,069
(19,474)
46,784
20. Segment Information – continued
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." NOI represents "Net Operating Income" (the equivalent of EBITDA on a cash basis). We calculate EBITDA and NOI on an Operating Partnership basis which is before allocation to the noncontrolling interest of the Operating Partnership. We consider EBITDA the primary 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. We also consider NOI a key non-GAAP financial measure. As properties are bought and sold based on a multiple of NOI, we utilize this measure to make investment decisions as well as to compare the performance of our assets to those of our peers. EBITDA and NOI should not be considered substitutes for net income. EBITDA and NOI may not be comparable to similarly titled measures employed by other companies.
Our 7.5% interest in Fashion Centre Mall/Washington Tower and our interest in Rosslyn Plaza (ranging from 43.7% to 50.4%) will not be included in the spin-off of our Washington, DC segment and have 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 (benefit) in the reconciliation of net income (loss) to EBITDA and straight-line rents, amortization of acquired below-market leases, net and other non-cash adjustments in the reconciliation of EBITDA to NOI include our share of these items from partially owned entities.
45
Notes to preceding tabular information - continued:
The elements of "New York" EBITDA are summarized below.
Office
169,327
165,576
(a)
339,405
320,585
Retail
90,183
91,421
179,446
181,022
Residential
6,190
6,337
12,468
12,687
Alexander's
11,742
11,805
23,304
23,374
Hotel Pennsylvania
6,520
3,797
2,122
325
Total New York EBITDA, as adjusted
278,936
537,993
Certain items that impact EBITDA:
Net gain on sale of 47% ownership interest
in 7 West 34th Street
EBITDA from sold properties
1,678
3,120
Total of certain items that impact EBITDA
161,189
162,631
Total New York EBITDA
The elements of "New York" NOI are summarized below.
158,105
142,639
317,632
277,071
80,193
71,084
159,827
139,433
5,341
5,627
10,881
11,199
7,029
6,616
14,059
13,233
6,553
3,830
2,187
390
Total New York NOI, as adjusted
229,796
441,326
Certain items that impact NOI:
NOI from sold properties
773
2,232
Total of certain items that impact NOI
160,284
161,743
Total New York NOI
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 $3,931 and $7,845 of income from retail to office for the three and six months ended June 30, 2016, respectively.
46
The elements of "Washington, DC" EBITDA are summarized below.
57,418
61,357
113,710
119,376
14,031
10,118
27,235
20,426
Total Washington, DC EBITDA, as adjusted
71,475
139,802
5,743
11,688
(160,700)
(149,012)
Total Washington, DC EBITDA
The elements of "Washington, DC" NOI are summarized below.
55,592
57,501
107,818
112,937
Total Washington, DC NOI, as adjusted
67,619
133,363
3,532
7,863
(152,837)
Total Washington, DC NOI
47
The elements of "Other" EBITDA are summarized below.
theMART (including trade shows)
24,122
25,965
48,306
48,993
555 California Street
12,144
12,117
24,227
23,732
Other investments
12,383
17,407
23,998
33,091
48,649
55,489
96,531
105,816
Our share of real estate fund investments
Corporate general and administrative expenses(a)
(23,235)
(24,239)
(56,222)
(54,845)
Investment income and other, net(a)
9,629
5,471
18,169
12,446
Net gain resulting from UE operating partnership
unit issuances
Net gain on sale of property at Suffolk Downs
15,314
Net gain on repayment of our Suffolk Downs JV
debt investments
11,373
Acquisition and transaction related costs(b)
(6,471)
(2,879)
(14,476)
(7,486)
Residual retail properties discontinued operations
2,483
3,204
Total Other
The elements of "Other" NOI are summarized below.
22,904
24,233
45,808
45,955
11,258
8,033
22,633
13,922
6,630
6,002
15,909
13,528
40,792
38,268
84,350
73,405
1,995
1,522
4,931
3,865
(17,790)
(19,267)
(40,268)
(39,364)
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $789 and $4,359 of income for the three months ended June 30, 2017 and 2016, respectively, and $3,258 and $2,421 of income for the six months ended June 30, 2017 and 2016, respectively.
(b)
Includes transaction costs related to the spin-off of our Washington, DC business of $6,211 and $1,606 for the three months ended June 30, 2017 and 2016, respectively, and $13,464 and $1,858 for the six months ended June 30, 2017 and 2016, respectively.
48
21. Subsequent Event
330 Madison Avenue
On July 19, 2017, the joint venture, in which we have a 25% interest, completed a $500,000,000 refinancing of 330 Madison Avenue, an 845,000 square foot Manhattan office building. The seven-year interest only loan matures in August 2024 and has a fixed rate of 3.43%. Our share of net proceeds, after repayment of the existing LIBOR plus 1.30% $150,000,000 mortgage and closing costs, was approximately $85,000,000.
49
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 June 30, 2017, and the related consolidated statements of income and comprehensive income for the three month and six month periods ended June 30, 2017 and 2016 and changes in equity and cash flows for the six month periods ended June 30, 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
July 31, 2017
Partners
We have reviewed the accompanying consolidated balance sheet of Vornado Realty L.P. and consolidated subsidiaries (the “Partnership”) as of June 30, 2017, and the related consolidated statements of income and comprehensive income for the three month and six month periods ended June 30, 2017 and 2016 and changes in equity, and cash flows for the six month periods ended June 30, 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.
51
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Quarterly Report constitute forward‑looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q. We also note the following forward-looking statements: in the case of our development and redevelopment projects, the estimated completion date, estimated project cost and cost to complete; and estimates of future capital expenditures, dividends to common and preferred shareholders and operating partnership distributions. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 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 and six months ended June 30, 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 and six months ended June 30, 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.
Overview
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 June 30, 2017:
Total Return(1)
Office REIT
MSCI
Three-month
(5.7%)
1.0%
1.7%
Six-month
(8.8%)
2.6%
2.7%
One-year
(3.6%)
6.6%
(1.8%)
Three-year
5.2%
24.4%
26.6%
Five-year
44.6%
55.3%
56.5%
Ten-year
36.3%
44.3%
78.2%
Past performance is not necessarily indicative of future performance.
53
Overview – continued
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.
54
Quarter Ended June 30, 2017 Financial Results Summary
Net income attributable to common shareholders for the quarter ended June 30, 2017 was $115,972,000, or $0.61 per diluted share, compared to $220,463,000, or $1.16 per diluted share, for the prior year’s quarter. The quarters ended June 30, 2017 and 2016 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the quarters ended June 30, 2017 and 2016 by $34,021,000, or $0.18 per diluted share, and $153,920,000, or $0.81 per diluted share, respectively.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended June 30, 2017 was $257,673,000, or $1.35 per diluted share, compared to $229,432,000, or $1.21 per diluted share, for the prior year’s quarter. FFO for the quarters ended June 30, 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, increased FFO for the quarters ended June 30, 2017 and 2016 by $19,788,000, or $0.10 per diluted share, and $4,418,000, or $0.02 per diluted share, respectively.
Net income attributable to common shareholders for the six months ended June 30, 2017 was $163,724,000, or $0.86 per diluted share, compared to $106,300,000, or $0.56 per diluted share, for the six months ended June 30, 2016. The six months ended June 30, 2017 and 2016 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the six months ended June 30, 2017 by $25,095,000, or $0.13 per diluted share, and decreased net income attributable to common shareholders for the six months ended June 30, 2016 by $949,000, or $0.00 per diluted share.
FFO for the six months ended June 30, 2017 was $463,422,000, or $2.43 per diluted share, compared to $433,104,000, or $2.28 per diluted share, for the six months ended June 30, 2016. FFO for the six months ended June 30, 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, increased FFO for the six months ended June 30, 2017 and 2016 by $9,863,000, or $0.05 per diluted share, and $9,102,000, or $0.05 per diluted share, respectively.
55
Vornado Realty Trust - continued
Certain items that impact net income attributable to
common shareholders:
Net gain on repayment of our Suffolk Downs JV debt investments
Net income (loss) from discontinued operations and
sold properties
104
(1,325)
(Loss) income from real estate fund investments, net
Net gains on sale of real estate
161,721
Default interest on Skyline properties mortgage loan
(2,711)
Our share of partially owned entities:
Net gain resulting from Urban Edge Properties ("UE")
operating partnership unit issuances
15,339
319
17,192
Real estate impairment losses
(167)
(49)
(3,218)
(4,402)
(67)
36,266
164,024
26,757
(1,040)
Noncontrolling interests' share of above adjustments
(2,245)
(10,104)
(1,662)
91
Total of certain items that impact net income attributable to
common shareholders, net
34,021
153,920
25,095
(949)
Certain items that impact FFO:
FFO from discontinued operations and sold properties
2,889
6,349
21,094
4,818
10,516
9,696
(1,306)
(400)
(653)
(594)
Total of certain items that impact FFO, net
19,788
4,418
9,863
9,102
56
Net income attributable to Class A unitholders for the quarter ended June 30, 2017 was $123,630,000, or $0.61 per diluted Class A unit, compared to $234,945,000, or $1.16 per diluted Class A unit, for the prior year’s quarter. The quarters ended June 30, 2017 and 2016 include certain items that impact net income attributable to Class A unitholders, which are listed in the table below. The aggregate of these items increased net income attributable to Class A unitholders for the quarters ended June 30, 2017 and 2016 by $36,266,000, or $0.18, and $164,024,000, or $0.81 per diluted Class A unit, respectively.
Net income attributable to Class A unitholders for the six months ended June 30, 2017 was $174,562,000, or $0.85 per diluted Class A unit, compared to $113,247,000, or $0.55 per diluted Class A unit, for the six months ended June 30, 2016. The six months ended June 30, 2017 and 2016 include certain items that impact net income attributable to Class A unitholders, which are listed in the table below. The aggregate of these items increased net income attributable to Class A unitholders for the six months ended June 30, 2017 by $26,757,000, or $0.13 per diluted Class A unit, and decreased net income attributable to Class A unitholders for the six months ended June 30, 2016 by $1,040,000, or $0.01 per diluted Class A unit.
Class A unitholders:
Class A unitholders, net
57
Vornado Realty Trust and Vornado Realty L.P.
Same Store EBITDA and NOI
The percentage (decrease) increase in same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and same store Net Operating Income (“NOI”) of our operating segments and theMART and 555 California Street, which are included in Other, are summarized below.
555
Washington,
California
DC
theMART
Street
Same store EBITDA % (decrease) increase :
Three months ended June 30, 2017 compared to June 30, 2016
(0.5
%)
(1)(2)
(2.7
(4.5
(2.9
Six months ended June 30, 2017 compared to June 30, 2016
1.5
%
(1.2
(0.2
(1.0
Three months ended June 30, 2017 compared to March 31, 2017
3.6
1.7
0.5
Same store NOI % increase (decrease):
10.6
(2.8
33.7
12.9
0.1
0.9
54.3
4.5
2.5
2.3
EBITDA
NOI
Excluding Hotel Pennsylvania - same store % (decrease) increase:
(1.5
9.6
1.2
12.5
(0.4
Excluding $2,557,000 of one-time prior period tenant adjustments in the
three months ended June 30, 2017 - same store % increase:
0.4
11.7
2.0
13.5
5.5
The three months ended June 30, 2016 includes a $2,300,000 reversal of an expense accrued in the prior quarters. Excluding this amount, same store EBITDA increased by 4.0% and same store NOI increased by 6.5%.
The six months ended June 30, 2016 includes a $2,000,000 reversal of an expense accrued in 2015. Excluding this amount, same store EBITDA increased by 3.8% and same store NOI increased by 5.2%.
Calculations of same store EBITDA, same store NOI, 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.
58
Financings
On June 1, 2017, Alexander’s, Inc. (NYSE: ALX), in which we have a 32.4% ownership interest, completed a $500,000,000 refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus 0.90% (2.06% at June 30, 2017) and matures in June 2020 with four one-year extension options. In connection therewith, Alexander’s purchased an interest rate cap with a notional amount of $500,000,000 that caps LIBOR at a rate of 6%. The property was previously encumbered by a $300,000,000 interest-only mortgage at LIBOR plus 0.95% which was scheduled to mature in March 2021.
Other Activities
Washington, DC Segment
We completed the spin-off of our Washington, DC segment on July 17, 2017. Our Washington, DC segment EBITDA as adjusted was $140,945,000 for the six months ended June 30, 2017, which is $1,143,000 ahead of the prior year’s first half as a result of an increase in EBITDA from the core business of $6,665,000, offset by a decline in EBITDA of $5,522,000 from 1700 M Street, 1800 South Bell and 1750 Crystal Drive being taken out-of-service for redevelopment. These results are slightly ahead of the guidance we published for the first half of 2017.
59
Recently Issued Accounting Literature
60
Recently Issued Accounting Literature – continued
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 $4,488,000 for the six months ended June 30, 2016.
In November 2016, the FASB issued an update (“ASU 2016-18”) Restricted Cashto 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 May 2017, the FASB issued an update (“ASU 2017-09”) Scope of Modification Accounting to ASC 718. ASU 2017-09 provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. ASU 2017-09 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.
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.
61
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
Three Months Ended June 30, 2017
Total square feet leased
543
196
Our share of square feet leased:
402
186
Initial rent(1)
79.50
160.08
46.91
89.00
42.43
Weighted average lease term (years)
7.8
6.2
7.2
5.2
Second generation relet space:
Square feet
288
89
141
GAAP basis:
Straight-line rent(2)
66.53
154.39
45.98
44.63
Prior straight-line rent
56.47
114.45
41.49
43.70
Percentage increase
17.8%
34.9%
10.8%
- %
2.1%
Cash basis:
67.31
145.80
46.45
44.67
Prior escalated rent
59.19
116.83
44.97
45.90
Percentage increase (decrease)
13.7%
24.8%
3.3%
(2.7%)
Tenant improvements and leasing commissions:
Per square foot
57.66
70.12
31.10
134.00
37.58
Per square foot per annum
7.39
8.99
5.02
18.61
7.23
Percentage of initial rent
9.3%
5.6%
10.7%
20.9%
17.0%
Six Months Ended June 30, 2017
1,096
191
71
740
782
710
77.41
190.57
47.28
87.03
42.88
7.6
5.8
10.8
7.9
492
623
68.94
229.02
46.86
95.09
44.11
60.51
169.89
36.44
80.30
42.06
13.9%
34.8%
28.6%
18.4%
4.9%
70.21
215.42
46.77
86.49
43.12
63.67
177.62
38.69
78.67
45.73
10.3%
21.3%
9.9%
69.35
59.96
44.48
59.36
9.13
10.34
6.18
8.80
7.51
11.8%
5.4%
13.1%
10.1%
17.5%
Represents the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.
Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases, and includes the effect of free rent and periodic step-ups in rent.
62
Overview - continued
Square footage (in service) and Occupancy as of June 30, 2017
Square Feet (in service)
Number of
Our
Properties
Portfolio
Share
Occupancy %
New York:
20,231
16,959
96.7%
2,677
2,472
95.3%
Residential - 1,699 units
831
94.8%
Alexander's, including 312 residential units
2,437
790
99.4%
1,400
28,309
22,452
96.6%
Washington, DC:
10,364
9,618
87.9%
Residential - 3,104 units
3,111
98.4%
330
100.0%
13,805
13,059
90.4%
Other:
3,682
3,673
98.9%
1,738
1,217
90.7%
Rosslyn Plaza Office and Residential - 196 units
705
67.3%
1,837
877
99.7%
7,962
6,086
Total square feet as of June 30, 2017
50,076
41,597
63
Square footage (in service) and Occupancy as of December 31, 2016
properties
20,227
16,962
96.3%
70
2,672
2,464
97.1%
Residential - 1,692 units
1,559
826
95.7%
99.8%
28,295
22,442
96.5%
10,648
9,890
88.8%
Residential - 2,862 units
2,992
97.9%
13,970
13,212
90.9%
3,671
3,662
92.4%
746
339
64.0%
1,811
850
7,966
6,068
Total square feet as of December 31, 2016
50,231
41,722
64
Net Income, EBITDA and NOI by Segment for the Three Months Ended June 30, 2017 and 2016
Below is a summary of net income and a reconciliation of net income to EBITDA(1) and NOI(1)by segment for the three months ended June 30, 2017 and 2016.
See notes on the following pages.
65
Net Income, EBITDA and NOI by Segment for the Three Months Ended June 30, 2017 and 2016 - continued
66
Net gain on sale of 47% ownership interest in 7 West 34th Street
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 $3,931 of income from retail to office for the three months ended June 30, 2016.
67
68
Investment income and other, net (a)
Net gain resulting from UE operating partnership unit issuances
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $789 and $4,359 of income for the three months ended June 30, 2017 and 2016, respectively.
The three months ended June 30, 2017 and 2016 include $6,211 and $1,606, respectively, of transaction costs related to the spin-off of our Washington, DC business.
69
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%
Washington, DC / Northern Virginia area
19%
18%
Chicago, IL
6%
7%
San Francisco, CA
3%
100%
Our revenues, which consist of property rentals, tenant expense reimbursements, and fee and other income, were $626,039,000 for the three months ended June 30, 2017, compared to $621,708,000 for the prior year’s quarter, an increase of $4,331,000. Below are the details of the increase (decrease) by segment:
(Decrease) increase due to:
Property rentals:
Acquisitions, dispositions and other
(3,264)
6,115
(9,379)
Development and redevelopment
(221)
201
2,921
Trade shows
Same store operations
2,255
76
1,329
2,116
9,915
(9,524)
1,725
Tenant expense reimbursements:
(1,344)
(1,158)
1,307
988
(117)
(198)
85
(154)
(1,356)
129
1,073
Fee and other income:
2,500
3,210
(710)
625
(429)
(1,740)
(1,913)
217
1,321
611
475
235
2,369
2,533
263
(427)
Total increase (decrease) in revenues
4,331
11,092
(9,132)
2,371
Our expenses, which consist of operating, depreciation and amortization, general and administrative expenses, and acquisition and transaction related costs, were $442,643,000 for the three months ended June 30, 2017, compared to $434,894,000 for the prior year’s quarter, an increase of $7,749,000. Below are the details of the increase (decrease) by segment:
Operating:
(5,498)
(952)
(4,546)
203
133
Non-reimbursable expenses, including
bad debt reserves
1,296
1,048
200
197
(500)
BMS expenses
3,017
3,726
(709)
12,834
8,344
885
3,605
11,549
11,370
(2,480)
2,659
Depreciation and amortization:
(2,127)
(20)
(2,107)
(4,357)
(4,239)
(118)
2,186
(1,751)
3,056
881
(4,298)
(1,771)
(3,290)
General and administrative:
Mark-to-market of deferred
compensation plan liability
(3,570)
476
2,101
(1,019)
(606)
(3,094)
(4,176)
3,592
Total increase (decrease) in expenses
7,749
11,700
(6,789)
2,838
This decrease 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. Upon completion of the spin-off on July 17, 2017, we incurred approximately $47,000 of additional transaction costs, primarily for advisory fees which will be recognized as expense in the quarter ended September 30, 2017.
72
Summarized below are the components of income (loss) from partially owned entities for the three months ended June 30, 2017 and 2016.
UE (1)
Partially owned office buildings (2)
Other investments (3)
2017 includes a $15,900 net gain resulting from UE operating partnership unit issuances.
Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, Toys "R" Us, Inc. and others. In the second quarter of 2017, we recognized $26,687 of net gains, comprised of $15,314 representing our share of a net gain on the sale of Suffolk Downs and $11,373 representing the net gain on repayment of our debt investments in Suffolk Downs JV. See page 59 for details.
Below are the components of the (loss) income from our real estate fund investments for the three months ended June 30, 2017 and 2016.
Net unrealized gain on held investments
Income from real estate fund investments (1)
Less income attributable to noncontrolling interests in consolidated subsidiaries
(Loss) income from real estate fund investments attributable to the Operating Partnership
Less loss (income) attributable to noncontrolling interests in the Operating Partnership
(Loss) income from real estate fund investments attributable to Vornado
Excludes $1,381 and $935 of management and leasing fees for the three months ended June 30, 2017 and 2016, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
73
Results of Operations – Three Months Ended June 30, 2017 Compared to June 30, 2016 - continued
Interest and other investment income, net, was $9,307,000 for the three months ended June 30, 2017, compared to $10,236,000 in the prior year’s quarter, a decrease of $929,000. This decrease resulted primarily from a reduction in the value of investments in our deferred compensation plan (offset by a corresponding increase in the liability for plan assets in general and administrative expenses).
Interest and debt expense was $96,797,000 for the three months ended June 30, 2017, compared to $105,576,000 in the prior year’s quarter, a decrease of $8,779,000. This decrease was primarily due to (i) $10,344,000 of interest savings from the disposition of the Skyline properties and the refinancing of theMART and (ii) $4,675,000 higher capitalized interest and debt expense, partially offset by (iii) $2,011,000 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) $2,054,000 of higher interest expense from the 1535 Broadway capital lease obligation.
For the three months ended June 30, 2016, we recognized a $159,511,000 net gain from the sale of a 47% ownership interest in 7 West 34th Street.
For the three months ended June 30, 2017, income tax benefit was $248,000, compared to an expense of $2,109,000 for the prior year’s quarter, a decrease of $2,357,000. This decrease was primarily due to our right this year to offset certain tax losses against certain taxable income of our taxable REIT subsidiaries.
The table below sets forth the combined results of operations of assets related to discontinued operations for the three months ended June 30, 2017 and 2016.
74
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $7,677,000 for the three months ended June 30, 2017, compared to $13,025,000 for the prior year’s quarter, a decrease of $5,348,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $7,706,000 for the three months ended June 30, 2017, compared to $14,531,000 for the prior year’s quarter, a decrease of $6,825,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred share dividends were $16,129,000 for the three months ended June 30, 2017, compared to $20,363,000 for the prior year’s quarter, a decrease of $4,234,000. The decrease is primarily due to the redemption of the 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
Preferred unit distributions were $16,177,000 for the three months ended June 30, 2017, compared to $20,412,000 for the prior year’s quarter, a decrease of $4,235,000. The decrease is primarily due to the redemption of the 6.875% Series J cumulative redeemable preferred units on September 1, 2016.
75
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 NOI 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 and theMART and 555 California Street, which are included in Other, for the three months ended June 30, 2017 compared to June 30, 2016.
EBITDA for the three months ended June 30, 2017
Add-back:
Non-property level overhead expenses included above
9,908
6,276
2,063
Less EBITDA from:
Acquisitions
(4,963)
169
Dispositions
(235)
(382)
Development properties placed into and out of service
(6,081)
(3,454)
Other non-operating income, net
(899)
(396)
Same store EBITDA for the three months ended June 30, 2017
281,692
73,493
26,354
EBITDA for the three months ended June 30, 2016
7,807
7,295
1,626
125
(153)
Dispositions, including net gains on sale
(161,429)
(5,713)
(7,508)
(3,097)
262
Other non-operating loss (income), net
4,368
(137)
Same store EBITDA for the three months ended June 30, 2016
283,210
75,566
27,591
12,504
Decrease in same store EBITDA for the three months ended
June 30, 2017 compared to June 30, 2016
(1,518)
(2,073)
(1,237)
(360)
% decrease in same store EBITDA
(0.5%)
(4.5%)
(2.9%)
Excluding Hotel Pennsylvania, same store EBITDA decreased by 1.5%.
The three months ended June 30, 2017 includes $2,557 of one-time prior period tenant adjustments. Excluding this item, same store EBITDA increased by 0.4%.
The three months ended June 30, 2016 includes a $2,300 reversal of an expense accrued in the prior quarters. Excluding this amount, same store EBITDA increased by 4.0%.
Reconciliation of NOI to Same Store NOI
NOI for the three months ended June 30, 2017
8,771
5,672
1,997
Less NOI from:
(4,569)
(1,562)
(3,661)
(2,252)
Same store NOI for the three months ended June 30, 2017
257,374
70,856
25,070
NOI for the three months ended June 30, 2016
6,752
6,182
1,567
124
(105)
(160,524)
(3,502)
(1,218)
(3,210)
(2,262)
(135)
Same store NOI for the three months ended June 30, 2016
232,723
70,486
25,800
8,419
Increase (decrease) in same store NOI for the three months ended
24,651
370
(730)
2,839
% increase (decrease) in same store NOI
10.6%
0.5%
(2.8%)
33.7%
Excluding Hotel Pennsylvania, same store NOI increased by 9.6%.
The three months ended June 30, 2017 includes $2,557 of one-time prior period tenant adjustments. Excluding this item, same store NOI increased by 11.7%.
The three months ended June 30, 2016 includes a $2,300 reversal of an expense accrued in the prior quarters. Excluding this amount, same store NOI increased by 6.5%.
77
Net Income, EBITDA and NOI by Segment for the Six Months Ended June 30, 2017 and 2016
Below is a summary of net income and a reconciliation of net income to EBITDA(1) and NOI(1) by segment for the six months ended June 30, 2017 and 2016.
78
Net Income, EBITDA and NOI by Segment for the Six Months Ended June 30, 2017 and 2016 - continued
79
Certain items that impact EBITDA
Total of New York EBITDA
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 $7,845 of income from retail to office for the six months ended June 30, 2016.
80
81
The amounts in these captions (for this table only) exclude the results of the mark-to-market of our deferred compensation plan of $3,258 and $2,421 of income for the six months ended June 30, 2017 and 2016, respectively.
The six months ended June 30, 2017 and 2016 include $13,464 and $1,858, respectively, of transaction costs related to the spin-off of our Washington, DC business.
82
83
Our revenues, which consist of property rentals, tenant expense reimbursements, and fee and other income, were $1,246,887,000 for the six months ended June 30, 2017, compared to $1,234,745,000 for the prior year’s six months, an increase of $12,142,000. Below are the details of the increase (decrease) by segment:
(13,603)
5,173
(18,776)
(573)
(1,173)
571
3,003
1,188
6,427
2,725
606
3,096
(3,558)
10,930
(19,343)
4,855
(2,339)
(1,993)
(346)
1,449
87
1,362
8,831
9,179
(616)
268
7,941
7,186
(875)
6,891
6,674
541
(324)
127
1,099
(1,103)
131
(377)
369
994
(526)
252
7,759
8,390
(719)
88
12,142
26,506
(20,937)
6,573
Primarily from the disposition of the Skyline properties by the receiver on December 21, 2016.
84
Our expenses, which consist of operating, depreciation and amortization, general and administrative expenses, acquisition and transaction related costs and Skyline properties impairment loss, were $907,024,000 for the six months ended June 30, 2017, compared to $1,048,211,000 for the prior year’s six months, a decrease of $141,187,000. Below are the details of the (decrease) increase by segment:
(12,449)
(2,998)
(9,451)
(807)
(895)
Non-reimbursable expenses, including bad debt
reserves
(2,239)
(2,268)
1,267
6,292
23,952
16,556
2,139
5,257
16,107
19,170
(8,446)
5,383
(6,427)
(292)
(6,135)
(10,553)
(10,364)
(189)
8,536
(329)
8,310
(8,444)
(621)
(8,189)
366
Mark-to-market of deferred compensation plan
liability
837
4,023
4,377
(2,031)
1,677
4,860
2,514
6,990
Total (decrease) increase in expenses
(141,187)
22,926
(179,366)
15,253
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 was 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 six months ended June 30, 2017 and 2016.
Partially owned office buildings(2)
2017 includes a $15,900 net gain resulting from the issuance of UE operating partnership units.
Income from Real Estate Fund Investments
Below are the components of the income from our real estate fund investments for the six months ended June 30, 2017 and 2016.
Net unrealized (loss) gain on held investments
Less loss (income) attributable to noncontrolling interests in Operating Partnership
Excludes $2,381 and $1,695 of management and leasing fees for the six months ended June 30, 2017 and 2016, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and other investment income, net, was $18,535,000 for the six months ended June 30, 2017, compared to $13,754,000 for the prior year’s six months, an increase of $4,781,000. 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).
86
Interest and debt expense was $191,082,000 for the six months ended June 30, 2017, compared to $206,065,000 for the prior year’s six months, a decrease of $14,983,000. This decrease was primarily due to (i) $17,856,000 of interest savings from the disposition of the Skyline properties and the refinancing of theMART and (ii) $6,874,000 higher capitalized interest and debt expense, partially offset by (iii) $3,963,000 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) $3,137,000 of higher interest expense from the 1535 Broadway capital lease obligation.
For the six months ended June 30, 2017, income tax expense was $1,957,000, compared to $4,940,000 for the prior year’s six months, a decrease of $2,983,000.
The table below sets forth the combined results of operations of assets related to discontinued operations for the six months ended June 30, 2017 and 2016.
Net income attributable to noncontrolling interests in consolidated subsidiaries was $14,414,000 for the six months ended June 30, 2017, compared to $22,703,000 for the prior year’s six months, a decrease of $8,289,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net income attributable to noncontrolling interests in the Operating Partnership was $10,935,000 for the six months ended June 30, 2017, compared to $7,044,000 for the prior year’s six months, an increase of $3,891,000. This increase resulted primarily from higher net income subject to allocation to unitholders.
Preferred share dividends were $32,258,000 for the six months ended June 30, 2017, compared to $40,727,000 for the prior year’s six months, a decrease of $8,469,000. 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 $32,355,000 for the six months ended June 30, 2017, compared to $40,824,000 for the prior year’s six months, a decrease of $8,469,000. This decrease resulted primarily from the redemption of the 6.875% Series J cumulative redeemable preferred units on September 1, 2016.
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 cash basis same store NOI 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 and theMART and 555 California Street, which are included in Other, for the six months ended June 30, 2017 compared to June 30, 2016.
EBITDA for the six months ended June 30, 2017
22,151
13,228
3,773
(10,160)
(533)
(384)
(12,336)
(5,711)
(2,887)
(713)
Same store EBITDA for the six months ended June 30, 2017
552,980
147,365
52,228
EBITDA for the six months ended June 30, 2016
17,774
15,259
3,344
189
(152)
(162,461)
(11,615)
(16,078)
(5,702)
556
Other non-operating loss, net
5,139
160,400
Same store EBITDA for the six months ended June 30, 2016
544,846
149,132
52,337
24,477
Increase (decrease) in same store EBITDA for the six months ended
8,134
(1,767)
(109)
(250)
% increase (decrease) in same store EBITDA
1.5%
(1.2%)
(0.2%)
(1.0%)
Excluding Hotel Pennsylvania, same store EBITDA increased by 1.2%.
The six months ended June 30, 2017 includes $2,557 one-time prior period tenant adjustments. Excluding this item, same store EBITDA increased by 2.0%.
The six months ended June 30, 2016 includes a $2,000 reversal of an expense accrued in 2015. Excluding this amount, same store EBITDA increased by 3.8%.
NOI for the six months ended June 30, 2017
18,205
11,933
3,629
(9,951)
(5,934)
(6,971)
(31)
Same store NOI for the six months ended June 30, 2017
502,495
139,957
49,575
NOI for the six months ended June 30, 2016
13,995
12,815
3,201
(161,573)
(7,791)
(3,905)
(6,074)
Other non-operating (income) loss, net
(6,483)
Same store NOI for the six months ended June 30, 2016
444,998
139,876
49,156
14,667
Increase in same store NOI for the six months ended
57,497
419
% increase in same store NOI
12.9%
0.1%
0.9%
54.3%
Excluding Hotel Pennsylvania, same store NOI increased by 12.5%.
The six months ended June 30, 2017 includes $2,557 of one-time prior period tenant adjustments. Excluding this amount, same store NOI increased by 13.5%.
The six months ended June 30, 2016 includes a $2,000 reversal of an expense accrued in 2015. Excluding this amount, same store NOI increased by 5.2%.
SUPPLEMENTAL INFORMATION
Reconciliation of Net Income to EBITDA for the Three Months Ended March 31, 2017
Net income attributable to Vornado for the three months ended March 31, 2017
83,823
20,455
75,923
13,181
112,810
35,493
227
367
EBITDA for the three months ended March 31, 2017
272,783
69,496
(164)
(383)
286,562
73,492
24,184
12,083
12,243
6,952
1,710
(228)
(6,255)
(2,260)
(1,892)
(316)
Same store EBITDA for the three months ended March 31, 2017
276,651
73,872
25,905
Increase (decrease) in same store EBITDA for the three months
ended June 30, 2017 compared to March 31, 2017
9,911
(380)
449
3.6%
Excluding Hotel Pennsylvania, same store EBITDA decreased by 0.4%.
The three months ended June 30, 2017 includes $2,557 of one-time prior period tenant adjustments. Excluding this item, same store EBITDA increased by 4.5%.
90
Reconciliation of NOI to Same Store NOI – Three Months Ended June 30, 2017 Compared to March 31, 2017
(63)
261,951
NOI for the three months ended March 31, 2017
247,365
65,430
11,375
9,434
6,261
1,632
(1,279)
(2,275)
(4,623)
Same store NOI for the three months ended March 31, 2017
250,669
69,100
24,505
June 30, 2017 compared to March 31, 2017
11,282
1,756
565
4.5%
2.5%
2.3%
Excluding Hotel Pennsylvania, same store NOI increased by 0.1%.
The three months ended June 30, 2017 includes $2,557 of one-time prior period tenant adjustments. Excluding this item, same store NOI increased by 5.5%.
Liquidity and Capital Resources
Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties. Our cash requirements include property operating expenses, capital improvements, tenant improvements, 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.
Liquidity and Capital Resources – continued
Cash Flows for the Six Months Ended June 30, 2017
Our cash and cash equivalents and restricted cash were $1,557,689,000 as of June 30, 2017, a $41,633,000 decrease from the balance at December 31, 2016. Our consolidated outstanding debt, net was $10,837,585,000 as of June 30, 2017, a $225,900,000 increase from the balance at December 31, 2016. As of June 30, 2017 and December 31, 2016, $115,630,000 was outstanding under our revolving credit facilities. During the remainder of 2017 and 2018, $117,919,000 and $207,930,000, 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 $316,217,000 was comprised of (i) net income of $221,331,000, (ii) $222,708,000 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 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 (iii) distributions of income from partially owned entities of $44,778,000, partially offset by (iv) the net change in operating assets and liabilities of $172,600,000.
Net Cash Used in Investing Activities
Net cash used in investing activities of $251,529,000 was primarily comprised of (i) $191,073,000 of development costs and construction in progress, (ii) $139,611,000 of additions to real estate, (iii) $27,720,000 of investments in partially owned entities and (iv) $11,841,000 of acquisitions of real estate, partially offset by (v) $113,507,000 of capital distributions from partially owned entities and (vi) $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 $106,321,000 was primarily comprised of (i) $268,817,000 of dividends paid on common shares, (ii) $32,258,000 of dividends paid on preferred shares, (iii) $25,617,000 of distributions to noncontrolling interests and (iv) $13,971,000 for the repayments of borrowings, partially offset by (v) $226,929,000 of proceeds from borrowings and (vi) $9,626,000 of proceeds received from exercise of employee share options.
Net cash used in financing activities of the Operating Partnership of $106,321,000 was primarily comprised of (i) $268,817,000 of distributions to Vornado, (ii) $32,258,000 of distributions to preferred unitholders, (iii) $25,617,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries and (iv) $13,971,000 for the repayments of borrowings, partially offset by (v) $226,929,000 of proceeds from borrowings and (vi) $9,626,000 of proceeds received from exercise of Vornado stock options.
93
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 for the six months ended June 30, 2017.
Expenditures to maintain assets
54,674
39,972
4,361
3,148
7,193
Tenant improvements
56,737
14,828
7,309
3,454
31,146
Leasing commissions
15,264
7,768
1,083
5,645
Non-recurring capital expenditures
37,725
32,905
110
526
4,184
Total capital expenditures and leasing
commissions (accrual basis)
164,400
95,473
12,863
7,896
48,168
Adjustments to reconcile to cash basis:
Expenditures in the current year
applicable to prior periods
65,985
26,238
5,987
8,439
25,321
Expenditures to be made in future
periods for the current period
(68,784)
(25,576)
(7,704)
4,263
(39,767)
commissions (cash basis)
161,601
96,135
11,146
20,598
33,722
8.37
9.16
13.2%
11.2%
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 $744,967,000 has been expended as of June 30, 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 June 30, 2017, $50,847,000 has been expended, of which our share is $27,966,000.
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 $152,000,000, of which our share is $69,000,000. As of June 30, 2017, $74,055,000 has been expended, of which our share is $33,399,000.
94
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 June 30, 2017, $28,430,000 has been expended, of which our share is $14,215,000.
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 $18,577,000 has been expended as of June 30, 2017.
A joint venture in which we have a 50.1% ownership interest is redeveloping the historic Farley Post Office building which will include a new Moynihan Train Hall and approximately 850,000 rentable square feet of commercial space, comprised of approximately 730,000 square feet of office space and approximately 120,000 square feet of retail space. As of June 30, 2017, $255,467,000 has been expended, of which our share is $127,989,000. The joint venture has also entered into a development agreement with Empire State Development (“ESD”) and a design-build contract with Skanska Moynihan Train Hall Builders. Under the development agreement with ESD, the joint venture is obligated to build the Moynihan Train Hall, with Vornado and Related each guaranteeing the joint venture’s obligations. Under the design-build agreement, Skanska Moynihan Train Hall Builders is obligated to fulfill all of the joint venture’s obligations. The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bears a full guaranty from Skanska AB.
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 for the six months ended June 30, 2017. These expenditures include interest of $23,312,000, payroll of $4,581,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $15,089,000, which were capitalized in connection with the development and redevelopment of these projects.
220 Central Park South
126,384
606 Broadway
9,467
1700 M Street
7,442
The Bartlett
315/345 Montgomery Street
6,632
90 Park Avenue
Penn Plaza
3,724
304 Canal Street
2,534
22,198
5,138
3,957
12,207
896
191,073
26,865
26,339
127,280
95
Our cash and cash equivalents and restricted cash were $1,738,695,000 at June 30, 2016, a $204,811,000 decrease from the balance at December 31, 2015. The decrease is 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 $318,805,000 was comprised of (i) net income of $176,774,000, (ii) $189,482,000 of non-cash adjustments, which include depreciation and amortization expense, real estate impairment losses, net gain on the disposition of wholly owned and partially owned assets, the effect of straight-lining of rents, net realized and unrealized gain on real estate fund investments and equity in net loss of partially owned entities, (iii) return of capital from real estate fund investments of $71,888,000, (iv) distributions of income from partially owned entities of $42,012,000, partially offset by (v) the net change in operating assets and liabilities of $161,351,000.
Net cash used in investing activities of $440,942,000 was primarily comprised of (i) $277,214,000 of development costs and construction in progress, (ii) $170,265,000 of additions to real estate, (iii) $91,100,000 of acquisitions of real estate and other, (iv) $90,659,000 of investments in partially owned entities, (v) $48,000,000 due to the net deconsolidation of 7 West 34th Street, (vi) $11,700,000 of investments in loans receivable and other and (vii) $4,379,000 in purchases of marketable securities, partially offset by (viii) $159,888,000 of proceeds from sales of real estate and related investments and (ix) $92,465,000 of capital distributions from partially owned entities.
Net cash used in financing activities of Vornado Realty Trust of $82,674,000 was comprised of (i) $1,032,115,000 for the repayments of borrowings, (ii) $237,832,000 of dividends paid on common shares, (iii) $83,266,000 of distributions to noncontrolling interests, (iv) $40,727,000 of dividends paid on preferred shares, (v) $29,478,000 of debt issuance and other costs, and (vi) $186,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (vii) $1,325,246,000 of proceeds from borrowings, (viii) $11,874,000 of contributions from noncontrolling interests and (ix) $3,810,000 of proceeds received from exercise of employee share options.
Net cash used in financing activities of the Operating Partnership of $82,674,000 was comprised of (i) $1,032,115,000 for the repayments of borrowings, (ii) $237,832,000 of distributions to Vornado, (iii) $83,266,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries, (iv) $40,727,000 of distributions to preferred unitholders, (v) $29,478,000 of debt issuance and other costs, and (vi) $186,000 for the repurchase of Class A units related to stock compensation agreements and related tax withholdings and other, partially offset by (vii) $1,325,246,000 of proceeds from borrowings, (viii) $11,874,000 of contributions from noncontrolling interests in consolidated subsidiaries and (ix) $3,810,000 of proceeds received from exercise of Vornado stock options.
96
Capital Expenditures for the Six Months Ended June 30, 2016
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended for the six months ended June 30, 2016.
37,688
22,201
6,653
2,400
6,434
46,270
38,490
1,383
6,397
24,939
22,499
146
2,294
22,971
17,104
132
874
4,861
131,868
100,294
8,314
3,274
19,986
118,340
60,696
14,903
5,056
37,685
(44,768)
(38,368)
2,550
2,757
(11,707)
205,440
122,622
25,767
11,087
45,964
6.20
6.88
3.46
9.20
4.00
8.6%
6.8%
10.9%
10.0%
Below is a summary of development and redevelopment expenditures incurred for the six months ended June 30, 2016. These expenditures include interest of $16,438,000, payroll of $6,401,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $30,224,000, which were capitalized in connection with the development and redevelopment of these projects.
130,696
48,700
640 Fifth Avenue
17,368
16,243
2221 South Clark Street (residential conversion)
12,589
Wayne Towne Center
7,055
6,766
330 West 34th Street
2,812
34,985
5,391
11,031
836
17,713
277,214
48,580
79,002
137,765
97
98
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 Per Share/Income Per Class A Unit, in our consolidated financial statements on page 38 of this Quarterly Report on Form 10-Q.
FFO for the Three and Six Months Ended June 30, 2017 and 2016
FFO attributable to common shareholders plus assumed conversions was $257,673,000, or $1.35 per diluted share for the three months ended June 30, 2017, compared to $229,432,000, or $1.21 per diluted share, for the prior year’s three months. FFO attributable to common shareholders plus assumed conversions was $463,422,000, or $2.43 per diluted share for the six months ended June 30, 2017, compared to $433,104,000, or $2.28 per diluted share, for the prior year’s six months. Details of certain adjustments to FFO are discussed in the financial results summary of our “Overview”.
Reconciliation of our net income to FFO:
Per diluted share
FFO adjustments:
Depreciation and amortization of real property
128,527
133,218
258,996
267,339
(161,721)
Proportionate share of adjustments to equity in net income (loss) of
partially owned entities to arrive at FFO:
37,682
38,308
76,756
77,354
(15,339)
(319)
(17,192)
167
3,218
4,402
151,037
9,535
319,511
347,755
(9,356)
(588)
(19,873)
(21,469)
FFO adjustments, net
141,681
8,947
299,638
326,286
FFO attributable to common shareholders (non-GAAP)
257,653
229,410
463,362
432,586
FFO attributable to common shareholders plus assumed
conversions (non-GAAP)
257,673
229,432
463,422
433,104
Per diluted share (non-GAAP)
1.35
1.21
2.43
2.28
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
Denominator for FFO per diluted share
190,450
190,043
99
We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:
Weighted
Effect of 1%
Average
Change In
December 31,
Balance
Interest Rate
Base Rates
Consolidated debt:
3,993,090
2.86%
39,931
3,765,054
2.40%
6,934,795
3.82%
6,949,873
3.47%
3.32%
Pro rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys "R" Us, Inc.
1,272,836
2.96%
12,728
1,109,376
2.49%
Variable rate – Toys "R" Us, Inc.
1,255,604
6.43%
12,556
1,162,072
6.05%
Fixed rate - excluding Toys "R" Us, Inc.
2,102,611
5.04%
2,120,068
Fixed rate - Toys "R" Us, Inc.
466,577
10.06%
671,181
9.42%
5,097,628
5.32%
25,284
5,062,697
5.30%
Noncontrolling interests' share of consolidated
subsidiaries
(1,427)
Total change in annual net income attributable to
63,788
Noncontrolling interests’ share of the Operating
Partnership
(3,948)
59,840
the Operating Partnership per diluted
Class A unit
0.31
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 June 30, 2017, we have an interest rate swap on a $410,000,000 mortgage loan on Two Penn Plaza that swapped the rate from LIBOR plus 1.65% (2.70% as of June 30, 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% (2.65% as of June 30, 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% (2.83% as of June 30, 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 June 30, 2017, the estimated fair value of our consolidated debt was $11,004,000,000.
Item 4. Controls and Procedures
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 June 30, 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 June 30, 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 June 30, 2017, we issued 30,204 Class A units in connection with equity awards issued pursuant to Vornado’s omnibus share plan, including with respect to grants of restricted Vornado common shares and restricted units of the Operating Partnership and upon conversion, surrender or exchange of the Operating Partnership’s units or Vornado stock options, and consideration received included $774,032 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: July 31, 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)
Exhibit No.
10.32
**
Form of 2017 Amendment to Vornado Realty Trust 2015, 2016, and 2017 Outperformance Plan
Award Agreements.
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