UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
June 30, 2012
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from:
to
Commission File Number:
001-11954
VORNADO REALTY TRUST
(Exact name of registrant as specified in its charter)
Maryland
22-1657560
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
888 Seventh Avenue, New York, New York
10019
(Address of principal executive offices)
(Zip Code)
(212) 894-7000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x Large Accelerated Filer
o Accelerated Filer
o Non-Accelerated Filer (Do not check if smaller reporting company)
o Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2012, 185,814,787 of the registrant’s common shares of beneficial interest are outstanding.
PART I.
Financial Information:
Page Number
Item 1.
Financial Statements:
Consolidated Balance Sheets (Unaudited) as of
June 30, 2012 and December 31, 2011
3
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2012 and 2011
4
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
for the Three and Six Months Ended June 30, 2012 and 2011
5
Consolidated Statements of Changes in Equity (Unaudited) for the
Six Months Ended June 30, 2012 and 2011
6
Consolidated Statements of Cash Flows (Unaudited) for the
8
Notes to Consolidated Financial Statements (Unaudited)
10
Report of Independent Registered Public Accounting Firm
38
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
39
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
78
Item 4.
Controls and Procedures
79
PART II.
Other Information:
Legal Proceedings
80
Item 1A.
Risk Factors
81
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
82
EXHIBIT INDEX
83
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share and per share amounts)
June 30,
December 31,
ASSETS
2012
2011
Real estate, at cost:
Land
$
4,598,453
4,578,962
Buildings and improvements
12,298,264
12,328,234
Development costs and construction in progress
140,394
121,555
Leasehold improvements and equipment
125,339
126,841
Total
17,162,450
17,155,592
Less accumulated depreciation and amortization
(3,070,968)
(2,979,897)
Real estate, net
14,091,482
14,175,695
Cash and cash equivalents
471,363
606,553
Restricted cash
112,726
98,068
Marketable securities
466,599
741,321
Accounts receivable, net of allowance for doubtful accounts of $42,166 and $43,241
180,769
171,798
Investments in partially owned entities
1,285,147
1,233,650
Investment in Toys "R" Us
573,292
506,809
Real Estate Fund investments
460,496
346,650
Mezzanine loans receivable
132,369
133,948
Receivable arising from the straight-lining of rents, net of allowance of $2,909 and $3,290
755,926
712,231
Deferred leasing and financing costs, net of accumulated amortization of $222,123 and $241,073
382,210
368,873
Identified intangible assets, net of accumulated amortization of $349,060 and $347,105
266,386
295,460
Assets related to discontinued operations
301,946
661,724
Due from officers
-
13,127
Other assets
523,054
380,580
20,003,765
20,446,487
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Notes and mortgages payable
8,360,192
8,483,621
Senior unsecured notes
1,357,835
1,357,661
Revolving credit facility debt
500,000
138,000
Exchangeable senior debentures
497,898
Convertible senior debentures
10,168
Accounts payable and accrued expenses
431,346
423,512
Deferred revenue
481,302
511,959
Deferred compensation plan
101,163
95,457
Deferred tax liabilities
15,577
13,315
Liabilities related to discontinued operations
70,844
93,603
Other liabilities
175,056
152,169
Total liabilities
11,493,315
11,777,363
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 12,036,494 and 12,160,771 units outstanding
1,010,825
934,677
Series D cumulative redeemable preferred units - 9,000,001 units outstanding
226,000
Total redeemable noncontrolling interests
1,236,825
1,160,677
Vornado shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
shares; issued and outstanding 42,184,609 and 42,186,709 shares
1,021,555
1,021,660
Common shares of beneficial interest: $.04 par value per share; authorized
250,000,000 shares; issued and outstanding 185,814,787 and 185,080,020 shares
7,402
7,373
Additional capital
7,059,872
7,127,258
Earnings less than distributions
(1,420,304)
(1,401,704)
Accumulated other comprehensive (loss) income
(162,785)
73,729
Total Vornado shareholders' equity
6,505,740
6,828,316
Noncontrolling interests in consolidated subsidiaries
767,885
680,131
Total equity
7,273,625
7,508,447
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
For the Three
For the Six
Months Ended June 30,
(Amounts in thousands, except per share amounts)
REVENUES:
Property rentals
532,399
544,905
1,067,374
1,084,814
Tenant expense reimbursements
78,833
77,902
157,934
164,507
Cleveland Medical Mart development project
56,304
32,369
111,363
73,068
Fee and other income
33,055
40,862
66,344
75,048
Total revenues
700,591
696,038
1,403,015
1,397,437
EXPENSES:
Operating
251,970
257,228
515,339
528,642
Depreciation and amortization
132,529
125,802
267,983
251,598
General and administrative
46,834
49,795
102,405
108,243
53,935
29,940
106,696
68,218
Acquisition related costs and tenant buy-outs
2,559
1,897
3,244
20,167
Total expenses
487,827
464,662
995,667
976,868
Operating income
212,764
231,376
407,348
420,569
(Loss) income applicable to Toys "R" Us
(19,190)
(22,846)
97,281
90,098
Income from partially owned entities
12,563
26,016
32,223
41,895
Income from Real Estate Fund (of which $12,306 and $12,102 in
each three-month period, respectively, and $20,239 and $12,028
in each six-month period, respectively, are attributable to
noncontrolling interests)
20,301
19,058
32,063
20,138
Interest and other investment (loss) income, net
(49,172)
7,998
(33,507)
125,097
Interest and debt expense (including amortization of deferred
financing costs of $5,855 and $5,191, in each three-month period,
respectively, and $11,720 and $9,792 in each six-month
period, respectively)
(128,427)
(135,361)
(262,655)
(268,296)
Net gain on disposition of wholly owned and partially owned assets
4,856
6,677
Income before income taxes
53,695
126,241
277,609
436,178
Income tax expense
(7,479)
(5,641)
(14,304)
(11,589)
Income from continuing operations
46,216
120,600
263,305
424,589
Income from discontinued operations
12,012
10,369
75,187
152,201
Net income
58,228
130,969
338,492
576,790
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(14,721)
(13,657)
(24,318)
(15,007)
Operating Partnership, including unit distributions
(5,210)
(8,731)
(24,355)
(40,539)
Net income attributable to Vornado
38,297
108,581
289,819
521,244
Preferred share dividends
(17,787)
(16,668)
(35,574)
(30,116)
NET INCOME attributable to common shareholders
20,510
91,913
254,245
491,128
INCOME PER COMMON SHARE - BASIC:
Income from continuing operations, net
0.05
0.44
0.99
1.89
Income from discontinued operations, net
0.06
0.38
0.78
Net income per common share
0.11
0.50
1.37
2.67
Weighted average shares outstanding
185,673
184,268
185,521
184,129
INCOME PER COMMON SHARE - DILUTED:
0.98
1.88
0.75
0.49
1.36
2.63
186,342
186,144
186,271
191,736
DIVIDENDS PER COMMON SHARE
0.69
1.38
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Amounts in thousands)
Other comprehensive (loss) income:
Change in unrealized net (loss) gain on securities
available-for-sale
(233,218)
(27,195)
(220,525)
40,844
Pro rata share of other comprehensive (loss) income of
nonconsolidated subsidiaries
(4,310)
30,156
(26,254)
26,365
Change in value of interest rate swap
(8,388)
(10,887)
(6,002)
(18,034)
Other
496
(5,105)
373
(5,045)
Comprehensive (loss) income
(187,192)
117,938
86,084
620,920
Less comprehensive income attributable to noncontrolling interests
(4,470)
(21,875)
(32,779)
(58,650)
Comprehensive (loss) income attributable to Vornado
(191,662)
96,063
53,305
562,270
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Earnings
Non-
Preferred Shares
Common Shares
Additional
Less Than
Comprehensive
controlling
Shares
Amount
Capital
Distributions
Income (Loss)
Interests
Equity
Balance, December 31, 2010
32,340
783,088
183,662
7,317
6,932,728
(1,480,876)
73,453
514,695
6,830,405
15,007
536,251
Dividends on common shares
(254,099)
Dividends on preferred shares
Issuance of Series J preferred shares
8,850
214,538
Common shares issued:
Upon redemption of Class A
units, at redemption value
401
16
35,192
35,208
Under employees' share
option plan
343
14
20,434
(397)
20,051
Under dividend reinvestment plan
883
Contributions:
Real Estate Fund
109,241
364
Distributions:
(20,796)
(15,604)
Conversion of Series A preferred
shares to common shares
(1)
(75)
75
Deferred compensation shares
and options
5,122
Change in unrealized net gain
on securities available-for-sale
Pro rata share of other
comprehensive income of
Adjustments to carry redeemable
Class A units at redemption value
(104,693)
Redeemable noncontrolling interests'
share of above adjustments
(3,104)
(105)
(4,518)
(10)
4,376
(5,302)
Balance, June 30, 2011
41,189
997,446
184,428
7,347
6,885,223
(1,244,254)
114,479
607,283
7,367,524
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - CONTINUED
Balance, December 31, 2011
42,187
185,080
24,318
314,137
(256,119)
303
12
24,964
24,976
412
8,800
(16,389)
(7,573)
1
842
843
108,319
30
(44,910)
(2)
105
7
8,484
(339)
8,145
Change in unrealized net loss
comprehensive loss of
(110,581)
15,894
(3)
372
Balance, June 30, 2012
42,185
185,815
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
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)
285,617
273,980
Equity in net income of partially owned entities, including Toys “R” Us
(129,504)
(131,993)
Net gains on sale of real estate
(72,713)
(51,623)
Loss (income) from the mark-to-market of J.C. Penney derivative position
57,687
(10,401)
Straight-lining of rental income
(43,124)
(22,291)
Distributions of income from partially owned entities
34,613
43,741
Unrealized gain on Real Estate Fund assets
(27,979)
(13,570)
Amortization of below-market leases, net
(26,457)
(33,704)
Other non-cash adjustments
20,993
14,381
Impairment losses
13,511
(4,856)
(6,677)
Net gain on extinguishment of debt
(83,907)
Mezzanine loans loss reversal and net gain on disposition
(82,744)
Changes in operating assets and liabilities:
(85,867)
(97,802)
Accounts receivable, net
(8,971)
(11,478)
Prepaid assets
(100,012)
(117,503)
(18,582)
(10,424)
25,940
13,250
5,076
12,015
Net cash provided by operating activities
263,864
260,040
Cash Flows from Investing Activities:
Proceeds from sales of real estate and related investments
370,037
130,789
Additions to real estate
(83,368)
(86,944)
Funding of J.C. Penney derivative collateral
(70,000)
Proceeds from sales of marketable securities
58,460
19,301
(58,069)
(32,489)
(57,237)
(426,376)
Acquisitions of real estate and other
(32,156)
Return of J.C. Penney derivative collateral
24,950
Distributions of capital from partially owned entities
17,963
271,375
(14,658)
91,127
Proceeds from the repayment of loan to officer
13,123
Proceeds from sales and repayments of mezzanine loans
1,994
99,990
Investments in mezzanine loans receivable and other
(145)
(43,516)
Net cash provided by investing activities
170,894
23,257
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Repayments of borrowings
(1,507,220)
(1,636,817)
Proceeds from borrowings
1,225,000
1,284,167
Dividends paid on common shares
Contributions from noncontrolling interests
108,349
109,605
Distributions to noncontrolling interests
(69,367)
(62,111)
Dividends paid on preferred shares
(35,576)
(27,117)
Repurchase of shares related to stock compensation agreements and/or related
tax withholdings
(30,034)
(748)
Debt issuance and other costs
(14,648)
(23,319)
Proceeds received from exercise of employee share options
9,667
21,330
Proceeds from the issuance of Series J preferred shares
Purchases of outstanding preferred units and shares
(8,000)
Net cash used in financing activities
(569,948)
(382,571)
Net decrease in cash and cash equivalents
(135,190)
(99,274)
Cash and cash equivalents at beginning of period
690,789
Cash and cash equivalents at end of period
591,515
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest, net of capitalized interest of $361 and $0
163,928
256,776
Cash payments for income taxes
6,494
5,416
Non-Cash Investing and Financing Activities:
Change in unrealized net (loss) gain on securities available-for-sale
Adjustments to carry redeemable Class A units at redemption value
L.A. Mart seller financing
35,000
Common shares issued upon redemption of Class A units, at redemption value
Contribution of mezzanine loan receivable to a joint venture
73,750
Like-kind exchange of real estate
(45,625)
Decrease in assets and liabilities resulting from deconsolidation
of discontinued operations:
(145,333)
(232,502)
Write-off of fully depreciated assets
(131,770)
(32,794)
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Accordingly, Vornado’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors. Vornado is the sole general partner of, and owned approximately 93.6% of the common limited partnership interest in the Operating Partnership at June 30, 2012. All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
The accompanying consolidated financial statements are unaudited and include the accounts of Vornado, and the Operating Partnership and its consolidated partially owned entities. All intercompany amounts have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011, 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, 2012 are not necessarily indicative of the operating results for the full year. Certain prior year balances have been reclassified in order to conform to current year presentation.
3. Recently Issued Accounting Literature
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”). ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures (see Note 14 – Fair Value Measurements).
4. Acquisitions
On July 5, 2012, we entered into an agreement to acquire a retail condominium located at 666 Fifth Avenue at 53rd Street for $707,000,000. The property has 126 feet of frontage on Fifth Avenue and contains 114,000 square feet, 39,000 square feet in fee and 75,000 square feet by long-term lease from the 666 Fifth Avenue office condominium, which is 49.5% owned by Vornado. The acquisition will be funded by property level debt and proceeds from asset sales, and is expected to close in the fourth quarter, subject to customary closing conditions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Acquisitions- continued
On July 30, 2012, we entered into a lease with Host Hotels & Resorts, Inc. (NYSE:HST), under which we will redevelop the retail and signage components of the Marriott Marquis Times Square Hotel. The lease contains options based on cash flow which, if exercised, would lead to our ownership. The Marriott Marquis with over 1,900 rooms is one of the largest hotels in Manhattan. It is located in the heart of the bow-tie of Times Square and spans the entire block front from 45th Street to 46th Street on Broadway. The Marriott Marquis is directly across from our 1540 Broadway iconic retail property leased to Forever 21 and Disney flagship stores. We plan to spend as much as $140 million to redevelop and substantially expand the existing retail space, including converting the below grade parking garage into retail, and creating six-story, 300 feet wide block front dynamic LED signs.
5. Vornado Capital Partners Real Estate Fund (the “Fund”)
In February 2011, the Fund’s subscription period closed with an aggregate of $800,000,000 of capital commitments, of which we committed $200,000,000. We are the general partner and investment manager of the Fund, which has an eight-year term and a three-year investment period. During the investment period, which concludes in July 2013, the Fund is our exclusive investment vehicle for all investments that fit within its investment parameters, as defined. The Fund is accounted for under the AICPA Investment Company Guide and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings. We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting.
On April 26, 2012, the Fund acquired 520 Broadway, a 112,000 square foot office building located in Santa Monica, California for $59,650,000 and subsequently placed a $30,000,000 mortgage loan on the property. The three-year loan bears interest at LIBOR plus 2.25% and has two one-year extension options.
On June 28, 2012, the Fund made an investment in an unconsolidated subsidiary that, on July 2, 2012, acquired 1100 Lincoln Road, a 167,000 square foot retail property, the western anchor of the Lincoln Road Shopping District in Miami Beach, Florida, for $132,000,000. The purchase price consisted of $66,000,000 in cash and a $66,000,000 mortgage loan. The three-year loan bears interest at LIBOR plus 2.75% and has two one-year extension options.
At June 30, 2012, the Fund had seven investments with an aggregate fair value of approximately $460,496,000, or $40,260,000 in excess of cost, and had remaining unfunded commitments of $330,753,000, of which our share was $82,688,250. Below is a summary of income from the Fund for the three and six months ended June 30, 2012 and 2011.
For the Three Months
For the Six Months
Ended June 30,
Operating (loss) income
(834)
3,101
4,084
3,483
Net realized gain
3,085
Net unrealized gains
21,135
12,872
27,979
13,570
Income from Real Estate Fund
Less (income) attributable to noncontrolling interests
(12,306)
(12,102)
(20,239)
(12,028)
Income from Real Estate Fund attributable to Vornado (1)
7,995
6,956
11,824
8,110
___________________________________
Excludes management, leasing and development fees of $600 and $865 for the three months ended June 30, 2012 and 2011, respectively, and $1,303 and $1,165 for the six months ended June 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
6. Mezzanine Loans Receivable
As of June 30, 2012 and December 31, 2011, the carrying amount of mezzanine loans receivable was $132,369,000 and $133,948,000, respectively. These loans have a weighted average interest rate of 9.53% and maturities ranging from August 2014 to May 2016.
11
7. Marketable Securities and Derivative InstrumentsMarketable Securities
Our portfolio of marketable securities is comprised of debt and equity securities that are classified as available for sale. Available for sale securities are presented on our consolidated balance sheets at fair value. Gains and losses resulting from the mark-to-market of these securities are included in “other comprehensive (loss) income.” Gains and losses are recognized in earnings only upon the sale of the securities and are recorded based on the weighted average cost of such securities.
In the six months ended June 30, 2012 and 2011, we sold certain marketable securities for aggregate proceeds of $58,460,000 and $19,301,000, resulting in net gains of $3,582,000 and $2,139,000, respectively, of which $3,582,000 and $48,000 were recognized in the three months ended June 30, 2012 and 2011.
Below is a summary of our marketable securities portfolio as of June 30, 2012 and December 31, 2011.
As of June 30, 2012
As of December 31, 2011
GAAP
Unrealized
Maturity
Fair Value
Cost
(Loss) Gain
Gain
Equity securities:
J.C. Penney
n/a
433,193
591,214
(158,021)
653,228
591,069
62,159
33,406
14,183
19,223
30,568
14,585
15,983
Debt securities
04/13 - 10/18
57,525
53,941
3,584
605,397
(138,798)
659,595
81,726
Investment in J.C. Penney Company, Inc. (“J.C. Penney”) (NYSE: JCP)
We own 23,400,000 J.C. Penney common shares, or 11.0% of its outstanding common shares. Below are the details of our investment.
We own 18,584,010 common shares at an average economic cost of $25.76 per share, or $478,677,000 in the aggregate. As of June 30, 2012, these shares have an aggregate fair value of $433,193,000, based on J.C. Penney’s closing share price of $23.31 per share. Unrealized gains and losses from the mark-to-market of these shares are included in “other comprehensive (loss) income.” The three and six months ended June 30, 2012 include $225,383,000 and $220,180,000, respectively, of unrealized losses. The three and six months ended June 30, 2011 include $25,611,000 of unrealized losses and $41,292,000 of unrealized gains, respectively.
We also own an economic interest in 4,815,990 common shares through a forward contract executed on October 7, 2010, at a weighted average strike price of $28.93 per share, or $139,348,000 in the aggregate. The contract may be settled, at our election, in cash or common shares, in whole or in part, at any time prior to October 9, 2012. The strike price per share increases at an annual rate of LIBOR plus 80 basis points. The contract is a derivative instrument that does not qualify for hedge accounting treatment. Gains and losses from the mark-to-market of the underlying common shares are recognized in “interest and other investment (loss) income, net” on our consolidated statements of income. In the three and six months ended June 30, 2012, we recognized losses of $58,732,000 and $57,687,000, respectively, from the mark-to-market of the underlying common shares, and as of June 30, 2012, have funded $45,050,000 in connection with this derivative position. In the three and six months ended June 30, 2011, we recognized a loss of $6,762,000 and income of $10,401,000, respectively, from the mark-to-market of the underlying common shares.
At June 30, 2012, the aggregate economic net loss on our investment in J.C. Penney, after dividends, was $43,224,000, based on our economic cost of $26.41 per share.
8. Investments in Partially Owned Entities
Toys “R” Us (“Toys”)
As of June 30, 2012, we own 32.5% of Toys. The business of Toys is highly seasonal. Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income. We account for our investment in Toys under the equity method and record our 32.5% share of Toys net income or loss on a one-quarter lag basis because Toys’ fiscal year ends on the Saturday nearest January 31, and our fiscal year ends on December 31. As of June 30, 2012, the carrying amount of our investment in Toys does not differ materially from our share of the equity in the net assets of Toys on a purchase accounting basis.
8. Investments in Partially Owned Entities – continued
Below is a summary of Toys’ latest available financial information on a purchase accounting basis:
Balance as of
Balance Sheet:
April 28, 2012
October 29, 2011
Assets
11,889,000
13,221,000
Liabilities
9,969,000
11,530,000
Noncontrolling interests
34,000
Toys “R” Us, Inc. equity
1,886,000
1,691,000
For the Three Months Ended
Income Statement:
April 30, 2011
2,612,000
2,636,000
8,537,000
8,608,000
Net (loss) income attributable to Toys
(66,000)
(77,000)
283,000
262,000
As of June 30, 2012, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity. We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable. As of June 30, 2012, Alexander’s owed us $40,480,000 in fees under these agreements.
As of June 30, 2012, the market value of our investment in Alexander’s, based on Alexander’s June 30, 2012 closing share price of $431.11, was $713,085,000, or $524,376,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 2012, 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 $58,552,000. 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 amortization 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.
Below is a summary of Alexander’s latest available financial information:
December 31, 2011
1,761,000
1,771,000
1,397,000
1,408,000
5,000
4,000
Stockholders' equity
359,000
June 30, 2011
64,000
62,000
127,000
125,000
Net income attributable to Alexander’s
19,000
20,000
38,000
Lexington Realty Trust (“Lexington”) (NYSE: LXP)
As of June 30, 2012, we own 18,468,969 Lexington common shares, or approximately 11.9% of Lexington’s common equity. We account for our investment in Lexington under the equity method because we believe we have the ability to exercise significant influence over Lexington’s operating and financial policies, based on, among other factors, our representation on Lexington’s Board of Trustees and the level of our ownership in Lexington as compared to other shareholders. We record our pro rata share of Lexington’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its consolidated financial statements.
13
Based on Lexington’s June 30, 2012 closing share price of $8.47, the market value of our investment in Lexington was $156,432,000, or $102,877,000 in excess of the June 30, 2012 carrying amount on our consolidated balance sheet. As of June 30, 2012, the carrying amount of our investment in Lexington was less than our share of the equity in the net assets of Lexington by approximately $45,263,000. This basis difference resulted primarily from $107,882,000 of non-cash impairment charges recognized in 2008, partially offset by purchase accounting for our acquisition of an additional 8,000,000 common shares of Lexington in October 2008, of which the majority relates to our estimate of the fair values of Lexington’s real estate (land and buildings) as compared to the carrying amounts in Lexington’s consolidated financial statements. We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This amortization is not material to our share of equity in Lexington’s net income or loss. The basis difference related to the land will be recognized upon disposition of our investment.
Below is a summary of Lexington’s latest available financial information:
March 31, 2012
September 30, 2011
3,047,000
3,164,000
1,844,000
1,888,000
60,000
59,000
Shareholders’ equity
1,143,000
1,217,000
March 31, 2011
83,000
80,000
166,000
160,000
Net income (loss) attributable to Lexington
(17,000)
17,000
(5,000)
LNR Property LLC (“LNR”)
As of June 30, 2012, we own a 26.2% equity interest in LNR. We account for our investment in LNR under the equity method and record our 26.2% share of LNR’s net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to receiving LNR’s consolidated financial statements.
LNR consolidates certain Commercial Mortgage-Backed Securities (“CMBS”) and Collateralized Debt Obligation (“CDO”) trusts for which it is the primary beneficiary. The assets of these trusts (primarily commercial mortgage loans), which aggregate approximately $85 billion as of March 31, 2012, are the sole source of repayment of the related liabilities, which are non-recourse to LNR and its equity holders, including us. Changes in the fair value of these assets each period are offset by changes in the fair value of the related liabilities through LNR’s consolidated income statement. As of June 30, 2012, the carrying amount of our investment in LNR does not materially differ from our share of LNR’s equity.
Below is a summary of LNR’s latest available financial information:
86,155,000
128,536,000
85,383,000
127,809,000
14,000
55,000
LNR Property Corporation equity
758,000
672,000
47,000
104,000
Net income attributable to LNR
36,000
42,000
87,000
100,000
Below is a schedule of our investments in partially owned entities as of June 30, 2012 and December 31, 2011.
Percentage
Ownership at
Investments:
Toys
32.5 %(1)
Alexander’s
32.4 %
188,709
189,775
Lexington
11.9 %(2)
53,555
57,402
LNR
26.2 %
192,788
174,408
India real estate ventures
4.0%-36.5%
96,518
80,499
Partially owned office buildings:
280 Park Avenue
49.5 %
186,102
184,516
Rosslyn Plaza
43.7%-50.4%
62,552
53,333
West 57th Street properties
50.0 %
57,754
58,529
One Park Avenue
30.3 %
48,202
47,568
666 Fifth Avenue Office Condominium
33,107
23,655
330 Madison Avenue
25.0 %
23,229
20,353
1101 17th Street
55.0 %
21,688
20,407
Fairfax Square
20.0 %
6,144
6,343
Warner Building
5,009
2,715
Other partially owned office buildings
Various
10,569
11,547
Other equity method investments:
Verde Realty Operating Partnership
8.3 %
58,595
59,801
Independence Plaza Partnership (3)
51.0 %
51,718
48,511
Downtown Crossing, Boston
47,365
46,691
Monmouth Mall
7,573
7,536
Other equity method investments (4)
133,970
140,061
32.7% at December 31, 2011.
12.0% at December 31, 2011.
Represents an investment in mezzanine loans to the property owner entity.
(4)
Includes interests in 85 10th Avenue, Farley Project, Suffolk Downs, Dune Capital L.P., Fashion Centre Mall and others.
15
8. Investments in Partially Owned Entities - continued
Below is a schedule of income recognized from investments in partially owned entities for the three and six months ended June 30, 2012 and 2011.
Ownership
Our Share of Net Income (Loss):
Toys:
Equity in net (loss) income before income taxes
(35,664)
(49,017)
121,723
130,822
Income tax benefit (expense)
14,103
23,969
(29,100)
(45,049)
Equity in net (loss) income
(21,561)
(25,048)
92,623
85,773
Management fees
2,371
2,202
4,658
4,325
Alexander’s:
Equity in net income
5,941
6,351
12,073
12,070
Fee income
1,907
1,900
3,796
3,787
7,848
8,251
15,869
15,857
Lexington:
(236)
346
694
1,066
Net gain resulting from Lexington's stock issuance
8,308
9,760
8,654
10,826
LNR:
9,469
4,983
22,719
11,260
Net gains from asset sales and tax settlement gains
6,020
14,997
11,003
26,257
(3,815)
205
(4,608)
Warner Building:
Equity in net loss
(1,589)
(3,225)
(4,599)
(3,525)
Straight-line reserves and write-off of tenant
improvements
(9,022)
(12,547)
280 Park Avenue (acquired in May 2011)
(1,955)
(2,184)
(7,550)
666 Fifth Avenue Office Condominium (acquired
in December 2011)
1,785
3,500
646
700
1,329
1,423
18
506
812
1,125
One Park Avenue (acquired in March 2011)
(243)
634
(1,471)
252
238
565
336
145
(195)
2,220
(40)
42
(52)
29
555
1,997
1,082
4,086
120
(2,364)
(3,976)
(6,983)
Independence Plaza Partnership (acquired in June 2011) (3)
1,733
3,415
(500)
(242)
298
826
660
957
(289)
585
(612)
(1,209)
(2,065)
(902)
(1,104)
(3,060)
(823)
267
1,525
(4,060)
32.7% at June 30, 2011.
11.7% at June 30, 2011.
Below is a summary of the debt of our partially owned entities as of June 30, 2012 and December 31, 2011, none of which is recourse to us.
Interest
100% of
Rate at
Partially Owned Entities’ Debt at
Notes, loans and mortgages payable
2012-2021
7.40 %
5,439,646
6,047,521
Alexander's:
Mortgage notes payable
2013-2018
3.51 %
1,323,532
1,330,932
2012-2037
5.58 %
1,652,094
1,712,750
2013-2031
4.34 %
373,286
353,504
Liabilities of consolidated CMBS and CDO trusts
5.32 %
84,922,346
127,348,336
85,295,632
127,701,840
666 Fifth Avenue Office Condominium mortgage
note payable
02/19
6.76 %
1,070,288
1,035,884
280 Park Avenue mortgage notes payable
06/16
6.65 %
738,001
737,678
Warner Building mortgage note payable
05/16
6.26 %
292,700
One Park Avenue mortgage note payable
03/16
5.00 %
250,000
330 Madison Avenue mortgage note payable
06/15
1.74 %
150,000
Fairfax Square mortgage note payable
12/14
7.00 %
70,558
70,974
Rosslyn Plaza mortgage note payable
43.7% to 50.4%
56,680
West 57th Street properties mortgage note payable
02/14
4.94 %
21,026
21,864
6.38 %
69,972
70,230
2,662,545
2,686,010
India Real Estate Ventures:
TCG Urban Infrastructure Holdings mortgage notes
payable
2012-2022
12.97 %
227,820
226,534
Other:
Verde Realty Operating Partnership mortgage notes
2013-2025
5.51 %
522,022
340,378
Monmouth Mall mortgage note payable
09/15
5.44 %
161,016
162,153
Other(3)
4.88 %
973,289
992,872
1,656,327
1,495,403
Includes interests in Suffolk Downs, Fashion Centre Mall and others.
Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $26,214,635,000 and $37,531,298,000 at June 30, 2012 and December 31, 2011, respectively. Excluding our pro rata share of LNR’s liabilities related to consolidated CMBS and CDO trusts, which are non-recourse to LNR and its equity holders, including us, our pro rata share of partially owned entities debt was $3,987,060,000 and $4,199,145,000 at June 30, 2012 and December 31, 2011, respectively.
17
9. Discontinued Operations
During 2012, we sold or have entered into agreements to sell (i) five Mart properties, (ii) one Washington, DC property, and (iii) 11 Retail properties, for an aggregate of $792,000,000. Below are the details of these transactions.
Merchandise Mart Properties
On January 6, 2012, we completed the sale of 350 West Mart Center, a 1.2 million square foot office building in Chicago, Illinois, for $228,000,000 in cash, which resulted in a net gain of $54,911,000.
On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.
On July 5, 2012, we entered into agreements to sell the Washington Design Center, the Boston Design Center and the Canadian Trade Shows, for an aggregate of $175,000,000 in cash, which will result in a net gain aggregating approximately $24,500,000. The sales of the Canadian Trade Shows and the Washington Design Center were completed in July 2012 and the sale of the Boston Design Center is expected to be completed in the third quarter, subject to customary closing conditions.
Washington, DC Property
On July 26, 2012, we completed the sale of 409 Third Street S.W., a 409,000 square foot office building in Washington, DC, for $200,000,000 in cash, which resulted in a net gain of approximately $124,700,000, that will be recognized in the third quarter. This building is contiguous to the Washington Design Center and was sold to the same purchaser.
Retail Properties
During 2012, we sold 11 retail properties in separate transactions, for an aggregate of $136,000,000 in cash, which resulted in a net gain aggregating $17,802,000.
We have reclassified the revenues and expenses of all of the properties discussed above, as well as 10 other retail properties that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying financial statements. The tables below set forth the assets and liabilities related to discontinued operations at June 30, 2012 and December 31, 2011 and their combined results of operations for the three and six months ended June 30, 2012 and 2011.
Assets Related to
Liabilities Related to
Discontinued Operations as of
134,698
376,571
67,071
74,236
102,620
220,249
3,773
19,367
409 Third Street S.W.
64,628
64,904
22,678
34,509
49,429
76,622
14,051
24,598
33,444
59,951
8,627
9,911
15,985
16,671
16,896
458
72,713
51,623
(13,511)
Net gain on extinguishment of High Point debt
83,907
10. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily acquired above-market leases) and liabilities (primarily acquired below-market leases) as of June 30, 2012 and December 31, 2011.
Identified intangible assets:
Gross amount
615,446
642,565
Accumulated amortization
(349,060)
(347,105)
Net
Identified intangible liabilities (included in deferred revenue):
819,397
830,411
(386,293)
(367,525)
433,104
462,886
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $12,411,000 and $16,427,000 for the three months ended June 30, 2012 and 2011, respectively, and $25,986,000 and $32,772,000 for the six months ended June 30, 2012 and 2011, 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, 2013 is as follows:
2013
43,597
2014
37,331
2015
34,260
2016
31,212
2017
25,704
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $14,492,000 and $13,060,000 for the three months ended June 30, 2012 and 2011, respectively, and $26,424,000 and $26,715,000 for the six months ended June 30, 2012 and 2011, 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, 2013 is as follows:
40,047
21,670
16,700
14,173
11,571
We are a tenant under ground leases for certain properties. Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $408,000 and $344,000 for the three months ended June 30, 2012 and 2011, respectively, and $774,000 and $688,000 for the six months ended June 30, 2012 and 2011, respectively. Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2013 is as follows:
1,472
1,457
19
11. Debt
The following is a summary of our debt:
Balance at
Notes and mortgages payable:
Maturity (1)
Fixed rate:
New York:
Two Penn Plaza
03/18
5.13 %
425,000
1290 Avenue of the Americas
01/13
5.97 %
410,841
413,111
770 Broadway
5.65 %
353,000
888 Seventh Avenue
01/16
5.71 %
318,554
350 Park Avenue(2)
01/17
3.75 %
300,000
430,000
909 Third Avenue
04/15
5.64 %
201,237
203,217
828-850 Madison Avenue Condominium - retail
06/18
5.29 %
510 5th Avenue - retail
5.60 %
31,495
31,732
Washington, DC:
Skyline Properties(3)
02/17
5.74 %
684,598
678,000
River House Apartments
5.43 %
195,546
2121 Crystal Drive
03/23
Bowen Building
6.14 %
115,022
1215 Clark Street, 200 12th Street and 251 18th Street
01/25
7.09 %
107,097
108,423
West End 25
06/21
101,671
Universal Buildings
04/14
6.47 %
95,755
98,239
Reston Executive I, II, and III
5.57 %
93,000
2011 Crystal Drive
08/17
7.30 %
80,023
80,486
1550 and 1750 Crystal Drive
11/14
7.08 %
75,254
76,624
220 20th Street
02/18
4.61 %
74,437
75,037
1235 Clark Street(4)
07/12
6.75 %
50,786
51,309
2231 Crystal Drive
08/13
42,581
43,819
1225 Clark Street
25,470
26,211
1750 Pennsylvania Avenue
44,330
Retail:
Cross-collateralized mortgages on 40 strip shopping centers
09/20
4.22 %
579,350
585,398
Montehiedra Town Center
07/16
6.04 %
120,000
Broadway Mall
07/13
5.30 %
86,479
87,750
North Bergen (Tonnelle Avenue)
01/18
4.59 %
75,000
Las Catalinas Mall
11/13
6.97 %
55,022
55,912
06/14-05/36
5.12%-7.30%
87,452
88,237
Merchandise Mart:
Merchandise Mart
12/16
550,000
555 California Street
09/21
5.10 %
600,000
Borgata Land
02/21
5.14 %
Total fixed rate notes and mortgages payable
6,224,670
6,414,628
___________________
See notes on page 22.
20
11. Debt - continued
Spread over
LIBOR
Variable rate:
Eleven Penn Plaza
01/19
L+235
2.59 %
330,000
100 West 33rd Street - office & retail(5)
03/17
L+250
2.74 %
325,000
232,000
4 Union Square South - retail
L+325
3.49 %
435 Seventh Avenue - retail(6)
08/14
L+300 (6)
51,093
51,353
866 UN Plaza
L+125
1.49 %
44,978
2101 L Street
02/13
L+120
1.42 %
148,125
04/18
n/a (7)
1.62 %
2200/2300 Clarendon Boulevard
01/15
L+75
0.99 %
50,359
53,344
1730 M and 1150 17th Street
06/14
L+140
1.65 %
43,581
Green Acres Mall
1.64 %
308,825
325,045
Bergen Town Center
03/13
L+150
282,312
283,590
San Jose Strip Center
L+400
4.25 %
109,072
112,476
Beverly Connection (8)
09/14
L+425 (8)
4.75 %
Cross-collateralized mortgages on 40 strip
shopping centers (9)
L+136 (9)
2.36 %
11/12
L+375
3.99 %
19,427
19,876
220 Central Park South
10/13
L+275
2.99 %
123,750
Total variable rate notes and mortgages payable
2.48 %
2,135,522
2,068,993
Total notes and mortgages payable
4.68 %
Senior unsecured notes:
Senior unsecured notes due 2015
499,545
499,462
Senior unsecured notes due 2039 (10)
10/39
7.88 %
460,000
Senior unsecured notes due 2022
01/22
398,290
398,199
Total senior unsecured notes
5.70 %
Unsecured revolving credit facilities:
$1.25 billion unsecured revolving credit facility
11/16
1.47 %
($22,195 reserved for outstanding letters of credit)
L+135
Total unsecured revolving credit facilities
3.88% exchangeable senior debentures(11)
2.85% convertible senior debentures(11)
See notes on the following page.
21
Notes to preceding tabular information (amounts in thousands):
Represents the extended maturity for certain loans in which we have the unilateral right, ability and intent to extend.
On January 9, 2012, we completed a $300,000 refinancing of this property. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000 of existing cash were used to repay the existing loan and closing costs.
In the first quarter of 2012, we notified the lender that due to scheduled lease expirations resulting primarily from the effects of the Base Realignment and Closure statute, the Skyline properties had a 26% vacancy rate, which is expected to increase and, accordingly, cash flows are expected to decrease. As a result, our subsidiary that owns these properties does not have and is not expected to have for some time sufficient funds to pay all of its current obligations, including interest payments to the lender. Based on the projected vacancy and the significant amount of capital required to re-tenant these properties, at our request, the mortgage loan was transferred to the special servicer. In the second quarter of 2012, we entered into a forbearance agreement with the special servicer to apply cash flows of the property, before interest on the loan, towards the repayment of $4,000 of tenant improvements and leasing commissions we recently funded in connection with a new lease at these properties. The forbearance agreement provides that until the earlier of (i) the full repayment to us of that capital or (ii) December 1, 2012, any interest shortfall will be deferred and not give rise to a loan default. The deferred interest will be added to the principal balance of the loan and, as of June 30, 2012, amounted to $6,598. We continue to negotiate with the special servicer to restructure the terms of the loan.
On July 11, 2012, upon maturity, we repaid this loan.
(5)
On March 5, 2012, we completed a $325,000 refinancing of this property. The three-year loan bears interest at LIBOR plus 2.50% and has two one-year extension options. We retained net proceeds of approximately $87,000, after repaying the existing loan and closing costs.
(6)
LIBOR floor of 2.00%.
(7)
Interest at the Freddie Mac Reference Note Rate plus 1.53%.
(8)
LIBOR floor of 0.50%.
(9)
LIBOR floor of 1.00%.
May be redeemed at our option in whole or in part beginning on October 1, 2014, at a price equal to the principal amount plus accrued interest.
(11)
In April 2012, we redeemed all of the outstanding exchangeable and convertible senior debentures at par, for an aggregate of $510,215 in cash.
22
12. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests on our consolidated balance sheets represent Operating Partnership units held by third parties and are comprised of Class A units and Series D-10, D-14, D-15 and D-16 (collectively, “Series D”) cumulative redeemable preferred units. Redeemable noncontrolling interests on our consolidated balance sheets are recorded at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity. Below is a table summarizing the activity of redeemable noncontrolling interests.
Balance at December 31, 2010
1,327,974
40,539
(25,711)
Conversion of Class A units into common shares, at redemption value
(35,208)
104,693
Redemption of Series D-11 redeemable units
Other, net
17,180
Balance at June 30, 2011
1,421,467
Balance at December 31, 2011
24,355
(24,457)
(24,976)
110,581
(9,355)
Balance at June 30, 2012
As of June 30, 2012 and December 31, 2011, the aggregate redemption value of redeemable Class A units was $1,010,825,000 and $934,677,000, respectively.
Redeemable noncontrolling interests exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares. Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $55,097,000 and $54,865,000 as of June 30, 2012 and December 31, 2011, respectively.
On July 19, 2012, we redeemed all of the outstanding 7.0% Series D-10 and 6.75% Series D-14 cumulative redeemable preferred units with an aggregate face amount of $180,000,000 for $168,300,000 in cash, plus accrued and unpaid distributions through the date of redemption.
13. Shareholders’ Equity
On July 11, 2012, we sold 12,000,000 5.70% Series K Cumulative Redeemable Preferred Shares at a price of $25.00 per share in an underwritten public offering pursuant to an effective registration statement. We retained aggregate net proceeds of $291,923,000, after underwriters’ discounts and issuance costs. Dividends on the Series K Preferred Shares are cumulative and payable quarterly in arrears. The Series K Preferred Shares are not convertible into, or exchangeable for, any of our properties or securities. On or after five years from the date of issuance (or sooner under limited circumstances), we may redeem the Series K Preferred Shares at a redemption price of $25.00 per share, plus accrued and unpaid dividends through the date of redemption. The Series K Preferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by us.
On July 17, 2012, we issued a notice of redemption to the holders of our 7.0% Series E Cumulative Redeemable Preferred Shares. The preferred shares will be redeemed at par on August 16, 2012, for an aggregate of $75,000,000 in cash, plus accrued and unpaid dividends through the date of redemption.
23
14. Fair Value Measurements
ASC 820, Fair Value Measurement and Disclosures defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.
Financial Assets and Liabilities Measured at Fair Value
Financial assets and liabilities that are measured at fair value in our consolidated financial statements 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) derivative positions in marketable equity securities, (v) interest rate swaps and (vi) 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 at June 30, 2012 and December 31, 2011, respectively.
Level 1
Level 2
Level 3
Real Estate Fund investments (75% of which is attributable to
72,041
388,455
Deferred compensation plan assets (included in other assets)
42,850
58,313
J.C. Penney derivative position (included in other assets)(1)
Total assets
1,046,221
581,490
446,768
Mandatorily redeemable instruments (included in other liabilities)
55,097
Interest rate swap (included in other liabilities)
50,120
105,217
(1) Represents the cash deposited with the counterparty in excess of the mark-to-market loss on the derivative position.
39,236
56,221
30,600
1,214,028
780,557
402,871
54,865
44,114
98,979
(1) Represents the mark-to-market gain on the derivative position.
24
14. Fair Value Measurements – continued
Financial Assets and Liabilities Measured at Fair Value - continued
Real Estate Fund Investments
At June 30, 2012, our Real Estate Fund had seven investments with an aggregate fair value of approximately $460,496,000, or $40,260,000 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 2.1 to 6.6 years. Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit. Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor. Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs.
The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these Fund investments at June 30, 2012.
Weighted Average
(based on fair
Unobservable Quantitative Input
Range
value of investments)
Discount rates
12.5% to 23.3%
14.6 %
Terminal capitalization rates
5.5% to 7.0%
6.1 %
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 Fund investments that are classified as Level 3, for the three and six months ended June 30, 2012 and 2011.
Beginning balance
324,514
230,657
144,423
Purchases
44,592
22,808
123,047
Sales
(12,831)
(31,052)
Realized gains
Unrealized gains
(1,786)
(796)
286
(15,499)
Ending balance
255,795
25
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 for the three and six months ended June 30, 2012 and 2011.
58,881
51,612
47,850
155
17,818
3,766
19,104
(616)
(16,347)
(4,011)
(17,494)
Realized and unrealized (loss) gain
(123)
594
2,269
4,217
47
68
53,724
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value in our consolidated financial statements include mezzanine loans receivable and our secured and unsecured debt. Estimates of the fair values of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument. The fair value of our mezzanine loans receivable is classified as Level 3 and the fair value of our secured and unsecured debt is classified as Level 2. The table below summarizes the carrying amounts and fair values of these financial instruments as of June 30, 2012 and December 31, 2011.
Carrying
Fair
Value
128,000
129,000
Debt:
8,430,000
8,686,000
1,465,000
1,426,000
510,000
10,000
10,218,027
10,395,000
10,487,348
10,770,000
26
15. Incentive Compensation
Our Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, restricted Operating Partnership units and out-performance plan rewards to certain of our employees and officers. We account for all stock-based compensation in accordance ASC 718, Compensation – Stock Compensation.
On March 30, 2012, our Compensation Committee (the “Committee”) approved the 2012 formulaic annual incentive program for our senior executive management team. Under the program, our senior executive management team, including our Chairman and our President and Chief Executive Officer, will have the ability to earn annual incentive payments (cash or equity) if and only if we achieve comparable funds from operations (“Comparable FFO”) of at least 80% or more of the prior year Comparable FFO. Moreover, even if we achieve the stipulated Comparable FFO performance requirement, the Committee retains the right, consistent with best practices, to elect to make no payments under the program. Comparable FFO excludes the impact of certain non-recurring items such as income or loss from discontinued operations, the sale or mark-to-market of marketable securities or derivatives and early extinguishment of debt, restructuring costs and non-cash impairment losses, among others, and thus the Committee believes provides a better metric than total FFO for assessing management’s performance for the year. Aggregate incentive awards earned under the program are subject to a cap of 1.25% of Comparable FFO for the year, with individual award allocations determined by the Committee based on an assessment of individual and overall performance.
On March 30, 2012, the Committee also approved the 2012 Out-Performance Plan, a multi-year, performance-based equity compensation plan (the “2012 OPP”). The aggregate notional amount of the 2012 OPP is $40,000,000. Under the 2012 OPP, participants, including our Chairman and our President and Chief Executive Officer, have the opportunity to earn compensation payable in the form of equity awards if and only if we outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to a relative TSR in any year during a three-year performance period. Specifically, awards under our 2012 OPP may be earned if we (i) achieve a TSR above that of the SNL US REIT Index (the “Index”) over a one-year, two-year or three-year performance period (the “Relative Component”), and/or (ii) achieve a TSR level greater than 7% per annum, or 21% over the three-year performance period (the “Absolute Component”). To the extent awards would be earned under the Absolute Component of the 2012 OPP but we underperform the Index, such awards would be reduced (and potentially fully negated) based on the degree to which we underperform the Index. In certain circumstances, in the event we outperform the Index but awards would not otherwise be earned under the Absolute Component, awards may still be earned under the Relative Component. To the extent awards would otherwise be earned under the Relative Component but we fail to achieve at least a 6% per annum absolute TSR level, such awards would be reduced based on our absolute TSR performance, with no awards being earned in the event our TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which we may outperform the Index. If the designated performance objectives are achieved, OPP Units are also subject to time-based vesting requirements. Dividends on awards issued accrue during the performance period and are paid to participants if and only if awards are ultimately earned based on the achievement of the designated performance objectives. Awards earned under the 2012 OPP vest 33% in year three, 33% in year four and 34% in year five. The fair value of the 2012 OPP on the date of grant, as adjusted for estimated forfeitures, was $12,250,000, and is being amortized into expense over a five-year period from the date of grant, using a graded vesting attribution model.
Stock-based compensation expense consists of stock option awards, restricted stock awards, Operating Partnership unit awards and out-performance plan awards. Stock-based compensation expense was $8,438,000 and $6,919,000 in the three months ended June 30, 2012 and 2011, respectively, and $15,047,000 and $14,065,000 in the six months ended June 30, 2012 and 2011, respectively.
27
16. Fee and Other Income
The following table sets forth the details of our fee and other income:
BMS cleaning fees
16,982
15,409
32,492
30,832
Management and leasing fees
4,546
7,376
9,300
11,887
Lease termination fees
479
6,499
890
7,675
Other income
11,048
11,578
23,662
24,654
Fee and other income above includes management fee income from Interstate Properties, a related party, of $192,000 and $194,000 for the three months ended June 30, 2012 and 2011, respectively, and $391,000 and $391,000 for the six months ended June 30, 2012 and 2011, respectively. The above table excludes fee income from partially owned entities, which is typically included in “income from partially owned entities” (see Note 8 – Investments in Partially Owned Entities).
17. Interest and Other Investment (Loss) Income, Net
The following table sets forth the details of our interest and other investment (loss) income:
(Loss) income from the mark-to-market of J.C. Penney derivative position
(58,732)
(6,762)
(57,687)
10,401
Dividends and interest on marketable securities
4,846
7,669
11,093
15,336
Interest on mezzanine loans
3,165
3,083
6,015
5,727
Mark-to-market of investments in our deferred compensation plan (1)
1,793
4,151
6,745
82,744
2,215
2,921
4,144
__________________________
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.
28
18. Income Per Share
The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options, restricted stock and exchangeable senior debentures.
Numerator:
Income from continuing operations, net of income
attributable to noncontrolling interests
27,020
98,241
218,845
377,671
Income from discontinued operations, net of income
11,277
10,340
143,573
Net income attributable to common shareholders
Earnings allocated to unvested participating securities
(48)
(79)
(184)
Numerator for basic income per share
20,470
91,865
254,166
490,944
Impact of assumed conversions:
Interest on 3.88% exchangeable senior debentures
13,090
Convertible preferred share dividends
57
64
Numerator for diluted income per share
254,223
504,098
Denominator:
Denominator for basic income per share –
weighted average shares
Effect of dilutive securities(1):
3.88% exchangeable senior debentures
5,736
Employee stock options and restricted share awards
669
1,876
1,815
Convertible preferred shares
50
56
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 above excludes anti-dilutive weighted average common share equivalent of 14,002 and 18,349 in the three months ended June 30, 2012 and 2011, respectively, and 16,292 and 12,922 in the six months ended June 30, 2012 and 2011, respectively.
19. Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, including coverage for terrorist acts, with sub-limits for certain perils such as floods. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate.
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 nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act. 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. Coverage for NBCR losses is up to $2.0 billion per occurrence, for which PPIC is responsible for a deductible of $3,200,000 and 15% of the balance of a covered loss and the Federal government is responsible for the remaining 85% of a covered loss. We are ultimately responsible for any loss borne by PPIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.
Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.
Other Commitments and Contingencies
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, 2012, the aggregate dollar amount of these guarantees and master leases is approximately $266,074,000.
At June 30, 2012, $22,195,000 of letters of credit were outstanding under one of our revolving credit facilities. Our credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our 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.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
Two of our wholly owned subsidiaries that are contracted to develop and operate the Cleveland Medical Mart and Convention Center, in Cleveland, Ohio, are required to fund $11,500,000, primarily for tenant improvements, and they are responsible for operating expenses and are entitled to the net operating income, if any, upon the completion of development and the commencement of operations.
As of June 30, 2012, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $259,607,000.
19. Commitments and Contingencies – continued
Litigation
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, including the matter referred to below, is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
In 2003, Stop & Shop filed an action against us in the New York Supreme Court, claiming that we had no right to reallocate and therefore continue to collect $5,000,000 of annual rent from Stop & Shop pursuant to a Master Agreement and Guaranty, because of the expiration of the leases to which the annual rent was previously allocated. Stop & Shop asserted that an order of the Bankruptcy Court for the Southern District of New York, as modified on appeal by the District Court, froze our right to reallocate and effectively terminated our right to collect the annual rent from Stop & Shop. We asserted a counterclaim seeking a judgment for all the unpaid annual rent accruing through the date of the judgment and a declaration that Stop & Shop will continue to be liable for the annual rent as long as any of the leases subject to the Master Agreement and Guaranty remain in effect. After summary judgment motions by both sides were denied, the parties conducted discovery. A trial was held in November 2010. On November 7, 2011, the Court determined that we have a continuing right to allocate the annual rent to unexpired leases covered by the Master Agreement and Guaranty, and directed entry of a judgment in our favor ordering Stop & Shop to pay us the unpaid annual rent accrued through February 28, 2011 in the amount of $37,422,000, a portion of the annual rent due from March 1, 2011 through the date of judgment, interest, and attorneys’ fees. On December 16, 2011, a money judgment based on the Court’s decision was entered in our favor in the amount of $56,597,000 (including interest and costs). The amount for attorneys’ fees is being addressed in a proceeding before a special referee. Stop & Shop has appealed the Court’s decision and the judgment, and has posted a bond to secure payment of the judgment. On January 12, 2012, we commenced a new action against Stop & Shop seeking recovery of $2,500,000 of annual rent not included in the money judgment, plus additional annual rent as it accrues. A motion by Stop & Shop to dismiss the new action was denied on July 19, 2012.
As of June 30, 2012, we have a $44,900,000 receivable from Stop & Shop, excluding amounts due to us for interest and costs resulting from the Court’s judgment. As a result of Stop & Shop appealing the Court’s decision, we believe, after consultation with counsel, that the maximum reasonably possible loss is up to the total amount of the receivable of $44,900,000.
20. Related Party Transactions
On March 8, 2012, Steven Roth, the Chairman of our Board of Trustees, repaid his $13,122,500 outstanding loan from the Company.
31
21. Segment Information
Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment). Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation. See note (3) on page 36 for the elements of the New York segment’s EBITDA. Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and six months ended June 30, 2012 and 2011.
For the Three Months Ended June 30, 2012
Retail
Merchandise
New York
Washington, DC
Properties
Mart
498,644
245,948
120,532
75,718
34,015
22,431
Straight-line rent adjustments
21,344
17,065
1,261
2,970
(34)
Amortization of acquired below-
market leases, net
12,411
7,623
508
2,791
1,489
Total rentals
270,636
122,301
81,479
34,097
23,886
36,985
10,958
28,314
1,267
1,309
Cleveland Medical Mart development
project
Fee and other income:
23,911
(6,929)
1,113
2,384
1,068
(20)
233
128
117
5,455
4,971
388
312
(78)
338,333
140,742
111,250
92,098
18,168
Operating expenses
143,190
48,500
41,527
16,258
2,495
56,665
35,994
21,415
7,869
10,586
6,654
6,233
6,367
4,848
22,732
Acquisition related costs and
tenant buy-outs
206,509
90,727
69,309
82,910
38,372
Operating income (loss)
131,824
50,015
41,941
9,188
(20,204)
(Loss) applicable to Toys
Income (loss) from partially owned
entities
6,851
(519)
294
185
5,752
Interest and other investment
(loss) income, net
1,057
(50,264)
Interest and debt expense
(36,407)
(29,313)
(18,963)
(7,781)
(35,963)
Net gain on disposition of wholly
owned and partially owned assets
Income (loss) before income taxes
103,325
20,212
23,278
1,592
(75,522)
(1,064)
(852)
(892)
(4,671)
Income (loss) from continuing
operations
102,261
19,360
(80,193)
Income (loss) from discontinued
(32)
3,713
10,744
(9,588)
7,175
Net income (loss)
102,229
23,073
34,022
(8,888)
(73,018)
Less net (income) loss attributable to
noncontrolling interests in:
(2,998)
97
(11,820)
Operating Partnership, including
unit distributions
Net income (loss) attributable to
Vornado
99,231
34,119
(90,048)
Interest and debt expense(2)
190,942
46,413
32,549
20,102
8,786
37,293
45,799
Depreciation and amortization(2)
184,028
63,664
39,656
22,131
9,826
32,505
16,246
Income tax (benefit) expense(2)
(5,214)
1,034
1,215
(14,103)
5,527
EBITDA(1)
408,053
210,421
96,312
76,352
10,939
36,505
(22,476)
See notes on page 36.
32
21. Segment Information – continued
For the Three Months Ended June 30, 2011
521,431
246,218
137,430
76,137
39,295
22,351
7,047
6,093
(698)
1,486
(553)
719
16,427
11,671
512
3,135
1,109
263,982
137,244
80,758
38,742
24,179
37,891
8,724
28,391
1,543
1,353
22,300
(6,891)
1,574
4,074
1,548
200
5,571
900
6,345
5,128
450
(481)
136
337,663
156,070
111,175
72,373
18,757
139,264
48,163
44,275
21,767
3,759
54,534
33,472
19,905
6,991
10,900
6,423
6,462
6,746
6,406
23,758
200,221
88,097
70,926
65,104
40,314
137,442
67,973
40,249
7,269
(21,557)
5,408
(767)
635
178
20,562
income (loss), net
1,050
48
6,908
(38,709)
(30,729)
(19,487)
(38,655)
105,191
36,525
21,389
(334)
(13,684)
(440)
(504)
(695)
(4,002)
104,751
36,021
(1,029)
(17,686)
110
2,490
4,593
3,294
(118)
104,861
38,511
25,982
2,265
(17,804)
Less net income attributable to
(2,325)
(69)
(11,263)
102,536
25,913
(37,798)
202,956
45,268
34,093
20,796
9,595
43,393
49,811
182,496
59,363
38,306
21,802
11,227
32,896
18,902
(17,343)
443
607
911
(23,969)
4,665
476,690
207,610
111,517
68,511
23,998
29,474
35,580
33
For the Six Months Ended June 30, 2012
997,745
479,884
245,772
151,347
76,062
44,680
43,643
34,194
3,127
5,245
751
326
25,986
15,318
1,031
6,780
2,857
529,396
249,930
163,372
76,813
47,863
73,697
21,122
57,738
2,501
2,876
46,558
(14,066)
2,221
5,167
1,904
46
(38)
256
505
11,802
10,562
739
740
(181)
663,930
286,909
223,754
191,968
36,454
288,862
95,662
85,033
40,799
110,424
79,517
42,025
14,885
21,132
15,241
13,186
12,700
10,757
50,521
414,527
188,365
139,758
173,137
79,880
249,403
98,544
83,996
18,831
(43,426)
Income applicable to Toys
11,036
(2,389)
698
341
22,537
2,109
73
(35,709)
(72,548)
(59,724)
(38,171)
(15,561)
(76,651)
190,000
36,504
46,543
3,611
(96,330)
(1,665)
(1,302)
(1,823)
(9,514)
188,335
35,202
1,788
(105,844)
Income (loss) from discontinued operations
(640)
5,943
15,395
47,499
6,990
187,695
41,145
61,938
49,287
(98,854)
(5,174)
211
(19,355)
182,521
62,149
(142,564)
384,024
93,471
66,206
40,540
17,576
68,862
97,369
375,201
125,575
87,916
44,406
19,304
67,211
30,789
Income tax expense(2)
46,226
1,806
1,557
2,377
29,100
11,386
1,095,270
403,373
196,824
147,095
88,544
262,454
(3,020)
34
For the Six Months Ended June 30, 2011
1,032,339
480,092
272,075
151,863
82,954
45,355
19,703
16,191
(696)
3,219
(760)
1,749
32,772
23,340
978
6,206
2,248
519,623
272,357
161,288
82,194
49,352
76,796
17,685
61,103
3,307
5,616
44,342
(13,510)
2,538
6,959
2,313
(226)
5,636
2,011
12,003
10,281
950
1,248
172
660,938
309,293
225,682
160,120
41,404
282,639
95,384
91,714
49,921
8,984
109,346
66,562
40,243
13,952
21,495
13,957
12,999
13,958
13,453
53,876
15,000
3,040
2,127
420,942
174,945
145,915
148,584
86,482
239,996
134,348
79,767
11,536
(45,078)
12,117
(4,682)
254
33,560
income, net
2,122
122,895
(75,293)
(59,655)
(38,875)
(15,476)
(78,997)
178,942
70,091
41,538
(3,686)
59,195
(959)
(1,174)
(739)
(8,712)
177,983
68,917
41,533
(4,425)
50,483
51,439
12,890
87,882
178,216
120,356
54,423
83,457
50,240
(4,596)
86
(10,497)
173,620
54,509
401,804
85,557
66,314
41,466
22,502
83,528
102,437
368,344
116,072
80,205
44,177
22,402
67,569
37,919
49,485
910
1,455
1,321
45,049
745
1,340,877
376,159
268,330
140,157
129,682
286,244
140,305
35
21. Segment Information - continued
Notes to preceding tabular information:
EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental measure for making decisions and assessing the unlevered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.
Interest and debt expense, depreciation and amortization and income tax (benefit) expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.
The elements of "New York" EBITDA are summarized below.
Office
142,573
137,630
278,520
262,321
Retail(a)
45,081
47,382
89,234
78,027
Alexander's
13,026
13,921
26,397
27,202
Hotel Pennsylvania
9,741
8,677
9,222
8,609
Total New York
(a)
The EBITDA for the six months ended June 30, 2011 is after a $15,000 expense for the buy-out of a below market lease.
The elements of "Retail Properties" EBITDA are summarized below.
Strip Shopping Centers(a)
52,268
45,622
99,176
95,782
Regional Malls
24,084
22,889
47,919
44,375
Total Retail Properties
EBITDA from continuing operations was $41,438 and $39,564 for the three months ended June 30, 2012 and 2011, respectively, and $82,604 and $79,605 for the six months ended June 30, 2012 and 2011, respectively.
36
Notes to preceding tabular information - continued:
The elements of "other" EBITDA are summarized below.
Our share of Real Estate Fund:
Income before net realized/unrealized gains
170
827
2,288
1,807
5,284
3,218
6,995
3,392
Net realized gains
771
Carried interest
2,541
2,140
13,410
27,233
22,800
10,377
10,423
20,692
21,388
7,703
9,005
16,921
19,546
Other investments
11,523
11,735
20,823
19,936
49,269
51,529
97,493
91,780
Corporate general and administrative expenses(a)
(21,812)
(20,024)
(44,129)
(41,379)
Investment income and other, net(a)
13,387
11,660
23,832
24,743
Fee income from Alexander's
(Loss) income from the mark-to-market of J.C. Penney derivative
position
Acquisition costs
(2,559)
(1,897)
(3,244)
(2,127)
Net gain on sale of condominiums
1,274
4,586
Real Estate Fund placement fees
(403)
(3,451)
Net income attributable to noncontrolling interests in the Operating
Partnership, including unit distributions
The amounts in these captions (for this table only) exclude the mark-to-market of our deferred compensation plan assets and offsetting liability.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of June 30, 2012, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011, and of changes in equity and cash flows for the six-month periods ended June 30, 2012 and 2011. 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, 2011, 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 27, 2012, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the change in method of presenting comprehensive income due to the adoption of FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 6, 2012
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. 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 for the year ended December 31, 2011. 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, 2012. 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.
Overview
Business Objective and Operating Strategy
Our business objective is to maximize shareholder value, which we measure by the total return provided to our shareholders. Below is a table comparing our performance to the Morgan Stanley REIT Index (“RMS”) and the SNL REIT Index (“SNL”) for the following periods ended June 30, 2012.
Total Return(1)
RMS
SNL
One-year
(6.7%)
13.2%
13.0%
Three-year
105.2%
135.6%
136.1%
Five-year
(9.3%)
13.8%
18.0%
Ten-year
178.6%
166.3%
178.9%
(1) Past performance is not necessarily indicative of future performance.
We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:
· Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;
· Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is a high likelihood of capital appreciation;
· Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;
· Investing in retail properties in select under-stored locations such as the New York City metropolitan area;
· Developing and redeveloping existing properties to increase returns and maximize value; and
· 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, 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 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 and population trends. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for additional information regarding these factors.
40
Overview – continued
Quarter Ended June 30, 2012 Financial Results Summary
Net income attributable to common shareholders for the quarter ended June 30, 2012 was $20,510,000, or $0.11 per diluted share, compared to $91,913,000, or $0.49 per diluted share, for the quarter ended June 30, 2011. Net income for the quarters ended June 30, 2012 and 2011 include $17,130,000 and $3,069,000, respectively, of net gains on sale of real estate, and $14,879,000 of real estate impairment losses in the quarter ended June 30, 2012. In addition, the quarters ended June 30, 2012 and 2011 include certain other items that affect comparability, which are listed in the table below. The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the quarter ended June 30, 2012 by $44,022,000, or $0.24 per diluted share and increased net income attributable to common shareholders for the quarter ended June 30, 2011 by $20,349,000, or $0.11 per diluted share.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended June 30, 2012 was $166,672,000, or $0.89 per diluted share, compared to $243,418,000, or $1.27 per diluted share, for the prior year’s quarter. FFO for the quarters ended June 30, 2012 and 2011 include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the quarter ended June 30, 2012 by $44,926,000, or $0.24 per diluted share and increased FFO for the quarter ended June 30, 2011 by $23,158,000, or $0.12 per diluted share.
For the Three Months Ended June 30,
Items that affect comparability income (expense):
Loss from the mark-to-market of J.C. Penney derivative position
FFO attributable to discontinued operations
9,926
15,929
Net gain resulting from Lexington's stock issuances
Our share of LNR's net gain from asset sales
(392)
(47,924)
24,710
Noncontrolling interests' share of above adjustments
2,998
(1,552)
Items that affect comparability, net
(44,926)
23,158
The percentage increase (decrease) in GAAP basis and Cash basis same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the quarter ended June 30, 2012 over the quarter ended June 30, 2011 and the trailing quarter ended March 31, 2012 are summarized below.
Same Store EBITDA:
June 30, 2012 vs. June 30, 2011
GAAP basis
2.9%
(8.1%)
0.7%
10.5%
Cash Basis
1.5%
(9.9%)
(1.3%)
7.2%
June 30, 2012 vs. March 31, 2012
8.0%
(1.7%)
1.2%
(2.2%)
9.7%
(1.8%)
0.5%
0.4%
Excluding the seasonality impact of the Hotel Pennsylvania, same store increased by 2.9% and 3.5% on a GAAP and Cash basis, respectively.
41
Six Months Ended June 30, 2012 Financial Results Summary
Net income attributable to common shareholders for the six months ended June 30, 2012 was $254,245,000, or $1.36 per diluted share, compared to $491,128,000, or $2.63 per diluted share, for the six months ended June 30, 2011. Net income for the six months ended June 30, 2012 and 2011 include $73,608,000 and $55,883,000, respectively, of net gains on sale of real estate and $23,754,000 of real estate impairment losses in the six months ended June 30, 2012. In addition, the six months ended June 30, 2012 and 2011 include certain items that affect comparability, which are listed in the table below. The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders by $8,252,000, or $0.04 per diluted share for the six months ended June 30, 2012 and $246,409,000, or $1.29 per diluted share for the six months ended June 30, 2011.
FFO for the six months ended June 30, 2012 was $516,328,000, or $2.72 per diluted share, compared to $749,349,000, or $3.91 per diluted share, for the six months ended June 30, 2011. FFO for the six months ended June 30, 2012 and 2011 includes certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO for the six months ended June 30, 2012 by $33,617,000, or $0.18 per diluted share and increased FFO for the six months ended June 30, 2011 by $205,625,000, or $1.07 per diluted share.
For the Six Months Ended June 30,
21,200
29,028
Our share of LNR's asset sales and tax settlement gains
Buy-out of a below-market lease
(15,000)
(620)
(978)
(35,833)
219,445
2,216
(13,820)
(33,617)
205,625
The percentage increase (decrease) in GAAP basis and Cash basis same store EBITDA of our operating segments for the six months ended June 30, 2012 over the six months ended June 30, 2011 is summarized below.
3.2%
(7.6%)
4.6%
1.9%
(9.1%)
(0.3%)
1.0%
Calculations of same store EBITDA, reconciliations of our net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.
Overview - continued
2012 Acquisitions
On April 26, 2012, our 25% owned Real Estate Fund acquired 520 Broadway, a 112,000 square foot office building in Santa Monica, California for $59,650,000 and subsequently placed a $30,000,000 mortgage loan on the property. The three-year loan bears interest at LIBOR plus 2.25% and has two one-year extension options.
On June 28, 2012, our 25% owned Real Estate Fund made an investment in an unconsolidated subsidiary that, on July 2, 2012, acquired 1100 Lincoln Road, a 167,000 square foot retail property, the western anchor of the Lincoln Road Shopping District in Miami Beach, Florida, for $132,000,000. The purchase price consisted of $66,000,000 in cash and a $66,000,000 mortgage loan. The three-year loan bears interest at LIBOR plus 2.75% and has two one-year extension options.
2012 Dispositions
We sold or have entered into agreements to sell (i) five Mart properties, (ii) one Washington, DC property, and (iii) 11 Retail properties, for an aggregate of $792,000,000. Below are the details of these transactions.
On June 22, 2012, we completed the sale of L.A. Mart, a 784,000 square foot showroom building in Los Angeles, California, for $53,000,000, of which $18,000,000 was cash and $35,000,000 was nine-month seller financing at 6.0%.
On July 5, 2012, we entered into agreements to sell the Washington Design Center, the Boston Design Center and the Canadian Trade Shows, for an aggregate of $175,000,000 in cash, which will result in a net gain aggregating approximately $24,500,000, including non-comparable FFO of $19,200,000 from the sale of the Canadian Trade Shows. The sales of the Canadian Trade Shows and the Washington Design Center were completed in July 2012 and the sale of the Boston Design Center is expected to be completed in the third quarter, subject to customary closing conditions.
We sold 11 retail properties in separate transactions, for an aggregate of $136,000,000 in cash, which resulted in a net gain aggregating $17,802,000.
We have engaged the services of a real estate broker to sell the 1.8 million square foot Green Acres Mall, located in Valley Stream, New York. In addition, Alexander’s, our 32.4% owned affiliate, has engaged the services of the same broker to sell its 1.2 million square foot Kings Plaza Regional Shopping Center, located in Brooklyn, New York. There can be no assurance that these efforts will result in the sales of these properties.
43
2012 Financing Activities
Secured Debt
On January 9, 2012, we completed a $300,000,000 refinancing of 350 Park Avenue, a 559,000 square foot Manhattan office building. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000,000 of existing cash were used to repay the existing loan and closing costs.
On March 5, 2012, we completed a $325,000,000 refinancing of 100 West 33rdStreet, a 1.1 million square foot property located on the entire Sixth Avenue block front between 32nd and 33rd Streets in Manhattan. The building contains the 257,000 square foot Manhattan Mall and 848,000 square feet of office space. The three-year loan bears interest at LIBOR plus 2.50% (2.74% at June 30, 2012) and has two one-year extension options. We retained net proceeds of approximately $87,000,000, after repaying the existing loan and closing costs.
Senior Unsecured Debt
In April 2012, we redeemed all of the outstanding exchangeable and convertible senior debentures at par, for an aggregate of $510,215,000 in cash.
Preferred Equity
Redeemable Noncontrolling Interests
44
Recently Issued Accounting Literature
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS(“ASU No. 2011-04”). ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures.
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2011 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2012.
45
Leasing Activity:
The leasing activity in the table below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Tenant improvements and leasing commissions are based on our share of square feet leased during the period. Second generation relet space represents square footage that has not been vacant for more than nine months. The leasing activity for the New York segment excludes Alexander’s and the Hotel Pennsylvania.
(Square feet in thousands)
Strips
Malls(3)
Showroom
Quarter Ended June 30, 2012:
Total square feet leased
474
140
526
352
Our share of square feet leased:
328
Initial rent(1)
64.50
69.08
36.66
15.54
56.28
31.00
35.38
Weighted average lease term (years)
8.1
14.5
7.2
9.3
5.6
6.0
4.3
Second generation relet space:
Square feet
191
137
503
271
Cash basis:
70.39
68.83
36.59
15.07
76.28
Prior escalated rent
67.36
66.72
38.19
12.24
75.04
35.65
Percentage increase (decrease)
4.5%
(4.2%)
23.1%
1.7%
-%
(0.8%)
GAAP basis:
Straight-line rent (2)
70.81
72.00
36.37
15.36
80.42
30.01
35.68
Prior straight-line rent
65.93
69.46
36.13
11.89
66.41
33.71
Percentage increase
7.4%
3.7%
29.2%
21.1%
5.8%
Tenant improvements and leasing
commissions:
Per square foot
49.97
22.97
32.79
3.66
1.73
45.50
8.80
Per square foot per annum:
6.17
1.58
4.55
0.39
0.31
7.58
2.05
Percentage of initial rent
9.6%
2.3%
12.4%
2.5%
0.6%
24.5%
Six Months Ended June 30, 2012:
987
174
1,238
874
193
837
1,140
62
57.90
102.29
38.73
17.46
45.61
37.17
8.7
12.2
6.5
8.6
5.3
673
147
1,093
657
58.60
102.10
38.67
15.04
87.79
56.90
83.15
39.20
13.45
84.57
38.07
3.0%
22.8%
(1.4%)
11.8%
3.8%
(2.4%)
57.96
107.41
38.26
15.70
90.94
37.38
55.48
84.47
37.55
12.32
78.33
34.67
27.2%
27.4%
16.1%
7.8%
45.46
28.13
32.14
9.15
4.17
12.73
5.22
2.31
4.91
1.06
0.79
2.12
9.0%
12.7%
6.1%
5.7%
Represents the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.
Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases, and includes the effect of free rent and periodic step-ups in rent.
Mall sales per square foot, including partially owned malls, for the trailing twelve months ended June 30, 2012 and 2011 were $480 and $474, respectively.
Square footage (in service) and Occupancy as of June 30, 2012:
Square Feet (in service)
Number of
Our
Portfolio
Share
Occupancy %
19,426
16,483
95.3%
2,080
1,916
94.5%
3,389
1,098
98.0%
1,400
26,295
20,897
95.4%
76
19,594
16,986
85.9%(1)
Retail Properties:
112
15,402
14,820
93.8%
7,179
5,539
92.6%
22,581
20,359
93.5%
1,258
1,249
89.3%
2,747
79.7%
4,005
3,996
82.6%
1,795
1,257
Primarily Warehouses
1,235
50.1%
3,030
2,492
Total square feet at June 30, 2012
75,505
64,730
The occupancy rate for office properties excluding residential and other properties is 83.5%.
Square footage (in service) and Occupancy as of December 31, 2011:
properties
19,571
16,598
96.2%
2,239
1,982
95.6%
97.8%
26,599
21,078
20,120
17,516
90.0%(1)
15,417
14,834
93.3%
7,278
5,631
92.0%
22,695
20,465
92.9%
1,220
1,211
90.3%
89.8%
3,935
3,926
89.9%
93.1%
45.3%
Total square feet at December 31, 2011
76,379
65,477
The occupancy rate for office properties excluding residential and other properties is 88.6%.
Square footage (in service) and Occupancy as of June 30, 2011:
18,607
16,283
95.2%
2,079
1,903
97.4%
3,402
1,102
96.8%
25,488
20,688
95.5%
20,147
17,418
93.2%(1)
111
15,554
15,226
92.2%
7,216
5,577
22,770
20,803
1,145
1,136
90.9%
2,789
3,934
3,925
94.2%
Total square feet at June 30, 2011
75,369
65,326
The occupancy rate for office properties excluding residential and other properties is 92.3%.
Washington, DC Properties Segment
In our Form 10-K for the year ended December 31, 2011, as a result of the BRAC statute, we estimated that occupancy will decrease from 90% at year end, to between 82% to 84% in 2012 and that 2012 EBITDA from continuing operations will be lower than 2011 by approximately $55,000,000 to $65,000,000 based on 2,902,000 square feet expiring in 2012, partially offset by leasing over 1,000,000 square feet.
At June 30, 2012, occupancy is at 85.9% and EBITDA from continuing operations for the three and six months ended June 30, 2012 is lower by approximately $14,500,000 and $22,100,000, respectively, than it was for the three and six months ended June 30, 2011. Based on leasing activity as of June 30, 2012, we currently estimate that 2012 EBITDA from continuing operations will be lower than 2011 by approximately $50,000,000 to $60,000,000.
Of the 2,395,000 square feet subject to BRAC, 348,000 square feet has been taken out of service for redevelopment and 470,000 square feet has been leased or is pending. The table below summarizes the status of the BRAC space as of June 30, 2012.
Rent Per
Square Feet
Square Foot
Crystal City
Skyline
Rosslyn
Resolved:
Relet as of June 30, 2012
38.66
354,000
266,000
88,000
Leases pending
39.65
116,000
Taken out of service for redevelopment
348,000
818,000
730,000
To Be Resolved:
Already vacated
32.71
664,000
310,000
Expiring in:
41.91
361,000
119,000
37.08
179,000
43,000
136,000
31.39
280,000
79,000
201,000
42.37
1,577,000
709,000
722,000
146,000
Total square feet subject to BRAC
2,395,000
1,439,000
810,000
In the first quarter of 2012, we notified the lender that due to scheduled lease expirations resulting primarily from the effects of the BRAC statute, the Skyline properties had a 26% vacancy rate, which is expected to increase and, accordingly, cash flows are expected to decrease. As a result, our subsidiary that owns these properties does not have and is not expected to have for some time sufficient funds to pay all of its current obligations, including interest payments to the lender. Based on the projected vacancy and the significant amount of capital required to re-tenant these properties, at our request, the mortgage loan was transferred to the special servicer. In the second quarter of 2012, we entered into a forbearance agreement with the special servicer to apply cash flows of the property, before interest on the loan, towards the repayment of $4,000,000 of tenant improvements and leasing commissions we recently funded in connection with a new lease at these properties. The forbearance agreement provides that until the earlier of (i) the full repayment to us of that capital or (ii) December 1, 2012, any interest shortfall will be deferred and not give rise to a loan default. The deferred interest will be added to the principal balance of the loan and, as of June 30, 2012, amounted to $6,598,000. We continue to negotiate with the special servicer to restructure the terms of the loan.
49
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2012 and 2011
Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment). Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation. See note (3) on page 52 for the elements of the New York segment’s EBITDA.
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended June 30, 2012 and 2011.
____________________
See notes on page 52.
Net Income and EBITDA by Segment for the Three Months Ended June 30, 2012 and 2011 - continued
51
EBITDA from continuing operations was $41,438 and $39,564 for the three months ended June 30, 2012 and 2011, respectively.
(Loss) from the mark-to-market of J.C. Penney derivative position
52
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations and other gains and losses that affect comparability), from our New York, Washington, DC, Retail Properties and Merchandise Mart segments.
Region:
New York City metropolitan area
66%
64%
Washington, DC / Northern Virginia metropolitan area
25%
28%
Chicago
4%
California
2%
Puerto Rico
1%
Other geographies
100%
53
Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011
Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below-market leases, net of above-market leases and fee income, were $700,591,000 in the three months ended June 30, 2012, compared to $696,038,000 in the prior year’s quarter, an increase of $4,553,000. Below are the details of the increase (decrease) by segment:
Increase (decrease) due to:
Property rentals:
Acquisitions, sale of partial interests
and other
1,413
Development
(8,106)
(1,417)
(6,690)
1,644
Trade Shows
(4,219)
Amortization of acquired below-market
leases, net
(4,016)
(4,048)
(344)
380
Leasing activity (see page 46)
778
10,475
(9,662)
1,064
(426)
(673)
(12,506)
(14,943)
721
(4,645)
(293)
Tenant expense reimbursements:
Acquisitions/development, sale of partial
interests and other
449
(657)
798
308
Operations
482
(249)
1,436
(385)
(276)
(44)
931
(906)
2,234
(77)
23,935
1,573
1,611
(2,830)
(461)
(1,690)
(480)
(199)
Lease cancellation fee income
(6,020)
(5,338)
(772)
(27)
(530)
(890)
(157)
(62)
793
(214)
(7,807)
(5,078)
(2,619)
(569)
711
(252)
Total increase (decrease) in revenues
4,553
670
(15,328)
19,725
(589)
This increase in income is offset by an increase in development costs expensed in the quarter. See note (4) on page 55.
54
Results of Operations – Three Months Ended June 30, 2012 Compared to June 30, 2011 - continued
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $487,827,000 in the three months ended June 30, 2012, compared to $464,662,000 in the prior year’s quarter, an increase of $23,165,000. Below are the details of the increase (decrease) by segment:
Operating:
929
71
858
Development/redevelopment
(733)
(1,394)
631
Non-reimbursable expenses, including
bad debt reserves
(6,965)
(667)
(109)
(3,569)
(2,620)
507
(4,233)
BMS expenses
1,443
1,481
3,794
2,504
982
190
1,344
(1,226)
(5,258)
337
(2,748)
(5,509)
(1,264)
Depreciation and amortization:
4,354
3,910
549
2,373
2,236
(1,388)
961
878
(314)
6,727
2,131
2,522
1,510
General and administrative:
Mark-to-market of deferred compensation
plan liability (1)
(1,769)
(789)
231
(229)
(379)
(1,558)
1,146
(2,961)
(1,026)
23,995
662
Total increase (decrease) in expenses
23,165
6,288
2,630
(1,617)
17,806
(1,942)
This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment (loss) income, net” on our consolidated statements of income.
Primarily from lower payroll costs due to a reduction in workforce.
Primarily from higher payroll costs and stock based compensation expense.
This increase in expense is offset by the increase in development revenue in the quarter. See note (1) on page 54.
55
Loss Applicable to Toys
In the three months ended June 30, 2012, we recognized a net loss of $19,190,000 from our investment in Toys, comprised of $21,561,000 for our 32.5% share of Toys’ net loss ($35,664,000 before our share of Toys’ income tax benefit) and $2,371,000 of management fees. In the three months ended June 30, 2011, we recognized a net loss of $22,846,000 from our investment in Toys, comprised of $25,048,000 for our 32.7% share of Toys’ net loss ($49,017,000 before our share of Toys’ income tax benefit) and $2,202,000 of management fees.
Income from Partially Owned Entities
Summarized below are the components of income (loss) from partially owned entities for the three months ended June 30, 2012 and 2011.
Equity in Net Income (Loss):
32.4%
Lexington(1)
11.9% (2)
LNR (3)
26.2%
49.5%
666 Fifth Avenue Office Condominium (acquired in
December 2011)
55.0%
30.3%
West 57th Street Properties
50.0%
20.0%
25.0%
Independence Plaza Partnership (mezzanine position)
(acquired in June 2011)
51.0%
8.3%
Other equity method investments
2011 includes an $8,308 net gain resulting from Lexington's stock issuance.
2011 includes $6,020 of net gains from asset sales.
Below are the components of the income from our Real Estate Fund for the three months ended June 30, 2012 and 2011.
Excludes management, leasing and development fees of $600 and $865 for the three months ended June 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and Other Investment (Loss) Income, net
Interest and other investment (loss) income, net (comprised of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable, other interest income and dividend income) was a loss of $49,172,000 in the three months ended June 30, 2012, compared to income of $7,998,000 in the prior year’s quarter, a decrease of $57,170,000. This decrease resulted from:
J.C. Penney derivative position ($58,732 mark-to-market loss in the current year's quarter, compared to
$6,762 in the prior year's quarter)
(51,970)
Decrease 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)
Other, net (primarily lower average investments in marketable securities)
(3,431)
(57,170)
Interest and Debt Expense
Interest and debt expense was $128,427,000 in the three months ended June 30, 2012, compared to $135,361,000 in the prior year’s quarter, a decrease of $6,934,000. This decrease was primarily due to (i) $7,842,000 from the redemption of our exchangeable and convertible senior debentures in April 2012 and November 2011, respectively, and (ii) $3,146,000 from the refinancing of 350 Park Avenue in January 2012 (of which $1,880,000 was due to a lower rate and $1,266,000 was due to a lower outstanding loan balance), partially offset by (iii) $5,046,000 from the issuance of $400,000,000 of senior unsecured notes in November 2011.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets
Net gain on disposition of wholly owned and partially owned assets was $4,856,000 in the three months ended June 30, 2012 and resulted primarily from the sale of marketable securities and residential condominiums.
Income Tax Expense
Income tax expense was $7,479,000 in the three months ended June 30, 2012, compared to $5,641,000 in the prior year’s quarter, an increase of $1,838,000. This increase resulted primarily from higher taxable income of our taxable REIT subsidiaries.
Income from Discontinued Operations
In the second quarter of 2012, we sold four retail properties in separate transactions, for an aggregate of $43,500,000 in cash, which resulted in a net gain aggregating $16,896,000.
We have reclassified the revenues and expenses of the properties that were sold and that are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements. The table below sets forth the combined results of assets related to discontinued operations for the three months ended June 30, 2012 and 2011.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $14,721,000 in the three months ended June 30, 2012, compared to $13,657,000 in the prior year’s quarter, an increase of $1,064,000. This increase resulted primarily from higher income at 1290 Avenue of the Americas and 555 California Street.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership, including Unit Distributions
Net income attributable to noncontrolling interests in the Operating Partnership, including unit distributions for the three months ended June 30, 2012 and 2011 is primarily comprised of allocations of income to redeemable noncontrolling interests of $1,337,000 and $6,283,000, respectively, and preferred unit distributions of the Operating Partnership of $3,873,000 and $4,448,000, respectively. The decrease of $4,946,000 in allocations of income to redeemable noncontrolling interests resulted primarily from lower net income subject to allocation to unitholders.
Preferred Share Dividends
Preferred share dividends were $17,787,000 in the three months ended June 30, 2012, compared to $16,668,000 in the prior year’s quarter, an increase of $1,119,000. This increase resulted from the issuance of Series J preferred shares during 2011.
58
Same Store EBITDA
Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods. Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items. We present same store EBITDA on both a GAAP basis and a cash basis, which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments. We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers. Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies.
Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the three months ended June 30, 2012, compared to the three months ended June 30, 2011.
EBITDA for the three months ended June 30, 2012
Add-back: non-property level overhead
expenses included above
Less: EBITDA from acquisitions, dispositions
and other non-operating income or expenses
(9,384)
(4,745)
(13,446)
6,448
GAAP basis same store EBITDA for the three months
ended June 30, 2012
207,691
97,800
69,273
22,235
Less: Adjustments for straight-line rents,
amortization of below-market leases, net, and other
non-cash adjustments
(29,307)
(1,883)
(4,365)
(83)
Cash basis same store EBITDA for the three months
178,384
95,917
64,908
22,152
EBITDA for the three months ended June 30, 2011
(12,124)
(11,582)
(6,491)
(10,289)
ended June 30, 2011
201,909
106,397
68,766
20,115
(26,246)
(2,972)
553
175,663
106,447
65,794
20,668
Increase (decrease) in GAAP basis same store EBITDA for
the three months ended June 30, 2012 over the
three months ended June 30, 2011
5,782
(8,597)
2,120
Increase (decrease) in Cash basis same store EBITDA for
2,721
(10,530)
(886)
1,484
% increase (decrease) in GAAP basis same store EBITDA
% increase (decrease) in Cash basis same store EBITDA
59
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2012 and 2011
Effective January 1, 2012, as a result of certain organizational and operational changes, we redefined the New York business segment to encompass all of our Manhattan assets by including the 1.0 million square feet in 21 freestanding Manhattan street retail assets (formerly in our Retail segment), and the Hotel Pennsylvania and our interest in Alexander’s, Inc. (formerly in our Other segment). Accordingly, we have reclassified the prior period segment financial results to conform to the current year presentation. See note (3) on page 62 for the elements of the New York segment’s EBITDA.
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the six months ended June 30, 2012 and 2011.
See notes on page 62.
60
Net Income and EBITDA by Segment for the Six Months Ended June 30, 2012 and 2011 - continued
___________________________
61
EBITDA from continuing operations was $82,604 and $79,605 for the six months ended June 30, 2012 and 2011, respectively.
26%
63
Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011
Revenues
Our revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues, amortization of acquired below-market leases, net of above-market leases and fee income, were $1,403,015,000 for the six months ended June 30, 2012, compared to $1,397,437,000 in the prior year’s six months, an increase of $5,578,000. Below are the details of the increase (decrease) by segment:
3,037
(13,203)
(3,160)
(10,130)
87
2,229
(3,550)
(6,786)
(8,022)
574
609
833
18,726
(15,387)
(1,831)
(2,098)
(17,440)
9,773
(22,427)
2,084
(5,381)
(1,489)
(2,446)
(997)
1,963
(725)
(2,687)
(4,127)
(2,102)
1,474
(2,640)
(806)
(53)
(6,573)
(3,099)
3,437
(3,365)
(2,740)
38,295
1,660
(556)
(2,587)
(317)
(1,792)
(409)
(257)
188
(6,785)
(5,380)
(992)
(201)
281
(211)
(508)
(353)
(8,704)
(3,682)
(3,394)
(647)
(260)
(721)
5,578
2,992
(22,384)
(1,928)
31,848
(4,950)
This increase in income is offset by an increase in development costs expensed in the period. See note (4) on page 65.
Results of Operations – Six Months Ended June 30, 2012 Compared to June 30, 2011 - continued
Our expenses, which consist primarily of operating, depreciation and amortization and general and administrative expenses, were $995,667,000 for the six months ended June 30, 2012, compared to $976,868,000 in the prior year’s six months, an increase of $18,799,000. Below are the details of the increase (decrease) by segment:
(762)
160
1,765
(2,109)
100
(2,044)
(165)
(11,577)
(1,869)
(533)
(4,247)
(4,928)
1,428
(3,905)
1,123
1,679
2,499
4,725
1,090
(2,269)
(758)
(13,303)
6,223
278
(6,681)
(9,122)
(4,001)
15,957
(708)
15,849
816
428
1,786
(2,894)
966
933
(363)
16,385
1,078
12,955
1,782
plan liability(1)
(2,594)
207
1,284
187
(1,258)
(2,696)
2,690
(5,838)
(3,355)
38,478
(16,923)
(3,040)
1,117
18,799
(6,415)
13,420
(6,157)
24,553
(6,602)
Primarily from higher payroll costs and stock based compensation.
This increase in expense is offset by the increase in development revenue in the period. See note (1) on page 64.
Represents the buy-out of a below-market lease in the prior year.
65
Income Applicable to Toys
In the six months ended June 30, 2012, we recognized net income of $97,281,000 from our investment in Toys, comprised of $92,623,000 for our 32.5% share of Toys’ net income ($121,723,000 before our share of Toys’ income tax expense) and $4,658,000 of management fees. In the six months ended June 30, 2011, we recognized net income of $90,098,000 from our investment in Toys, comprised of $85,773,000 for our 32.7% share of Toys’ net income ($130,822,000 before our share of Toys’ income tax expense) and $4,325,000 of management fees.
Summarized below are the components of income (loss) from partially owned entities for the six months ended June 30, 2012 and 2011.
Warner Building(4)
2011 includes a $9,760 net gain resulting from Lexington's stock issuance.
2011 includes $8,977 for our share of a tax settlement gain and $6,020 of net gains from asset sales.
2011 includes $9,022 for our share of expense, primarily for straight-line reserves and the write-off of tenant improvements in connection with a tenant's bankruptcy at the Warner Building.
66
Below are the components of the income from our Real Estate Fund for the six months ended June 30, 2012 and 2011.
Less income attributable to noncontrolling interests
Excludes management, leasing and development fees of $1,303 and $1,165 for the six months ended June 30, 2012 and 2011, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.
Interest and other investment (loss) income, net (comprised of the mark-to-market of derivative positions in marketable equity securities, interest income on mezzanine loans receivable, other interest income and dividend income) was a loss of $33,507,000 in the six months ended June 30, 2012, compared to income of $125,097,000 in the prior year’s six months, a decrease of $158,604,000. This decrease resulted from:
Mezzanine loan loss reversal and net gain on disposition in 2011
J.C. Penney derivative position ($57,687 mark-to-market loss in 2012, compared to a $10,401
mark-to-market gain in 2011)
(68,088)
(5,178)
(158,604)
Interest and debt expense was $262,655,000 in the six months ended June 30, 2012, compared to $268,296,000 in the prior year’s six months, a decrease of $5,641,000. This decrease was primarily due to (i) $10,093,000 from the redemption of our exchangeable and convertible senior debentures in April 2012 and November 2011, respectively, and (ii) $5,659,000 from the refinancing of 350 Park Avenue in January 2012 (of which $3,554,000 was due to a lower rate and $2,105,000 was due to a lower outstanding loan balance), partially offset by (iii) $10,091,000 from the issuance of $400,000,000 of senior unsecured notes in November 2011.
Net gain on disposition of wholly owned and partially owned assets was $4,856,000 in the six months ended June 30, 2012 compared to $6,677,000, in the prior year’s six months and resulted primarily from the sale of marketable securities and residential condominiums.
67
Income tax expense was $14,304,000 in the six months ended June 30, 2012, compared to $11,589,000 in the prior year’s six months, an increase of $2,715,000. This increase resulted primarily from higher taxable income of our taxable REIT subsidiaries.
In addition, during 2012, we sold 11 retail properties in separate transactions, for an aggregate of $136,000,000 in cash, which resulted in a net gain aggregating $17,802,000.
We have reclassified the revenues and expenses of the properties that were sold and that are currently being held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements. The table below sets forth the combined results of assets related to discontinued operations for the six months ended June 30, 2012 and 2011.
Net gains on sales of real estate
Net income attributable to noncontrolling interests in consolidated subsidiaries was $24,318,000 in the six months ended June 30, 2012, compared to $15,007,000 in the prior year’s six months, an increase of $9,311,000. This increase resulted primarily from an $8,211,000 increase in income allocated to the noncontrolling interests of our Real Estate Fund.
Net income attributable to noncontrolling interests in the Operating Partnership, including unit distributions for the six months ended June 30, 2012 and 2011 is primarily comprised of allocations of income to redeemable noncontrolling interests of $16,608,000 and $33,588,000, respectively, and preferred unit distributions of the Operating Partnership of $7,747,000 and $8,951,000, respectively. The decrease of $16,980,000 in allocations of income to redeemable noncontrolling interests resulted primarily from lower net income subject to allocation to unitholders.
Preferred share dividends were $35,574,000 in the six months ended June 30, 2012, compared to $30,116,000 in the prior year’s six months, an increase of $5,458,000. This increase resulted from the issuance of Series J preferred shares in 2011.
Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the six months ended June 30, 2012, compared to the six months ended June 30, 2011.
EBITDA for the six months ended June 30, 2012
(19,900)
(12,792)
(21,891)
(54,577)
GAAP basis same store EBITDA for the six months
398,714
197,218
137,904
44,724
(58,756)
(3,583)
(7,780)
(751)
Cash basis same store EBITDA for the six months
339,958
193,635
130,124
43,973
EBITDA for the six months ended June 30, 2011
(3,810)
(67,816)
(16,830)
(100,359)
386,306
213,513
137,285
42,776
(52,670)
(587)
(6,727)
760
333,636
212,926
130,558
43,536
the six months ended June 30, 2012 over the
six months ended June 30, 2011
12,408
(16,295)
619
1,948
6,322
(19,291)
(434)
437
69
SUPPLEMENTAL INFORMATION
Reconciliation of EBITDA to Same Store EBITDA - Three Months Ended June 30, 2012 vs. March 31, 2012
Below are the same store EBITDA results on a GAAP and cash basis for each of our segments for the three months ended June 30, 2012, compared to the three months ended March 31, 2012.
Add-back: non-property level overhead expenses
included above
(4,961)
(10,467)
6,331
212,114
72,252
22,118
Less: Adjustments for straight-line rents, amortization of
below-market leases, net, and other non-cash adjustments
(33,461)
(4,832)
178,653
67,420
22,035
EBITDA for the three months ended March 31, 2012(1)
192,952
100,512
70,743
77,605
8,587
6,953
6,333
5,909
(5,185)
(7,926)
(5,692)
(60,908)
ended March 31, 2012
196,354
99,539
71,384
22,606
(33,567)
(1,822)
(4,285)
(668)
162,787
97,717
67,099
21,938
three months ended March 31, 2012
15,760
(1,739)
868
(488)
15,866
(1,800)
321
Below is the reconciliation of net income to EBITDA for the three months ended March 31, 2012.
Net income attributable to Vornado for the three months
83,290
18,072
28,030
58,175
47,058
33,657
20,438
8,790
61,911
48,260
22,275
9,478
693
523
1,162
EBITDA for the three months ended March 31, 2012
70
Related Party Transactions
Liquidity and Capital Resources
Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties. Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, dividends to shareholders, distributions to unitholders of the Operating Partnership, as well as acquisition and development costs. Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, and our revolving credit facilities; proceeds from the issuance of common and preferred equity; and asset sales.
We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures. Capital requirements for development expenditures and acquisitions (excluding Fund acquisitions) may require funding from borrowings and/or equity offerings. Our Real Estate Fund has aggregate unfunded equity commitments of $330,753,000 for acquisitions, including $82,688,250 from us.
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.
See “Overview” on page 43 for significant transactions that have occurred subsequent to quarter end that may have an impact on our liquidity and capital resources.
Cash Flows for the Six Months Ended June 30, 2012
Our cash and cash equivalents were $471,363,000 at June 30, 2012, a $135,190,000 decrease over the balance at December 31, 2011. Our consolidated outstanding debt was $10,218,027,000 at June 30, 2012, a $269,321,000 decrease over the balance at December 31, 2011. As of June 30, 2012 and December 31, 2011, $500,000,000 and $138,000,000, respectively, was outstanding under our revolving credit facilities. During the remainder of 2012 and 2013, $70,213,000 and $1,685,477,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it using a portion of our $2,471,363,000 of available capacity (comprised of $471,363,000 of cash and cash equivalents and $2,000,000,000 of availability under our revolving credit facilities).
Cash flows provided by operating activities of $263,864,000 was comprised of (i) net income of $338,492,000, (ii) distributions of income from partially owned entities of $34,613,000 and (iii) $73,175,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities and net gains on sale of real estate, partially offset by (iv) the net change in operating assets and liabilities of $182,416,000, including $85,867,000 related to Real Estate Fund investments.
Net cash provided by investing activities of $170,894,000 was comprised of (i) $370,037,000 of proceeds from sales of real estate and related investments, (ii) $58,460,000 of proceeds from the sale of marketable securities, (iii) $24,950,000 from the return of the J.C. Penney derivative collateral, (iv) $17,963,000 of capital distributions from partially owned entities, (v) $13,123,000 of proceeds from the repayment of loan to officer and (vi) $1,994,000 of proceeds from repayments of mezzanine loans, partially offset by (vii) $83,368,000 of additions to real estate, (viii) $70,000,000 for the funding of the J.C. Penney derivative collateral, (ix) $58,069,000 of development costs and construction in progress, (x) $57,237,000 of investments in partially owned entities, (xi) $32,156,000 of acquisitions of real estate and other, (xii) $14,658,000 of changes in restricted cash, and (xiii) $145,000 of investments in mezzanine loans receivable and other.
Net cash used in financing activities of $569,948,000 was comprised of (i) $1,507,220,000 for the repayments of borrowings, (ii) $256,119,000 of dividends paid on common shares, (iii) $69,367,000 of distributions to noncontrolling interests, (iv) $35,576,000 of dividends paid on preferred shares, (v) $30,034,000 for the repurchase of shares related to stock compensation agreements and related tax holdings and (vi) $14,648,000 of debt issuance and other costs, partially offset by (vii) $1,225,000,000 of proceeds from borrowings, (viii) $108,349,000 of contributions from noncontrolling interests in consolidated subsidiaries and (ix) $9,667,000 of proceeds from exercise of employee share options.
Liquidity and Capital Resources – continued
Capital Expenditures in the six months ended June 30, 2012
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 expenditures 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. Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the six months ended June 30, 2012.
Expenditures to maintain assets
22,625
10,033
5,244
2,665
1,891
2,792
Tenant improvements
60,511
25,820
25,332
6,503
2,856
Leasing commissions
23,438
14,219
7,342
1,755
122
Non-recurring capital expenditures
4,877
4,095
782
Total capital expenditures and leasing
commissions (accrual basis)
111,451
54,167
37,918
10,923
4,869
3,574
Adjustments to reconcile to cash basis:
Expenditures in the current year
applicable to prior periods
58,095
20,667
16,603
4,917
10,672
5,236
Expenditures to be made in future
periods for the current period
(69,209)
(33,249)
(27,479)
(6,951)
(1,530)
commissions (cash basis)
100,337
41,585
27,042
8,889
14,011
8,810
Tenant improvements and leasing commissions:
Per square foot per annum
3.51
4.57
1.05
2.44
8.5%
7.0%
5.4%
6.6%
Development and Redevelopment Expenditures in the six months ended June 30, 2012
Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions, capitalized interest and operating costs until the property is substantially completed and ready for its intended use. Below is a summary of development and redevelopment expenditures incurred in the six months ended June 30, 2012.
510 Fifth Avenue
8,369
8,114
Crystal Square 5
6,976
Beverly Connection
5,842
3,108
2,947
Poughkeepsie, New York
1,411
Crystal City Hotel
1,316
Crystal Plaza 5
1,191
18,795
5,933
5,327
7,260
247
58,069
17,249
14,810
22,627
3,355
As of June 30, 2012, the estimated costs to complete the above projects are approximately $26,000,000. In addition, during 2012, we plan to redevelop 1851 South Bell Street, a 348,000 square foot office building in Crystal City, into a new 700,000 square foot office building (readdressed as 1900 Crystal Drive). The estimated cost of this project is approximately $300,000,000, or $425 per square foot. There can be no assurance that these projects will commence, or, if commenced, be completed on schedule or within budget.
72
Cash Flows for the Six Months Ended June 30, 2011
Our cash and cash equivalents were $591,515,000 at June 30, 2011, a $99,274,000 decrease over the balance at December 31, 2010. This decrease was primarily due to cash flows from financing activities, partially offset by cash flows from operating activities, as discussed below.
Cash flows provided by operating activities of $260,040,000 was comprised of (i) net income of $576,790,000 and (ii) distributions of income from partially owned entities of $43,741,000, partially offset by (iii) $148,549,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income and equity in net income of partially owned entities, and (iv) the net change in operating assets and liabilities of $211,942,000, including $97,802,000 related to Real Estate Fund investments.
Net cash provided by investing activities of $23,257,000 was comprised of (i) $271,375,000 of capital distributions from partially owned entities, (ii) $130,789,000 of proceeds from sales of real estate and related investments, (iii) $99,990,000 of proceeds from sales and repayments of mezzanine loans, (iv) changes in restricted cash of $91,127,000 and (v) $19,301,000 of proceeds from sales of, and return of investments in, marketable securities, partially offset by (vi) $426,376,000 of investments in partially owned entities, (vii) $86,944,000 of additions to real estate, (viii) $43,516,000 of investments in mezzanine loans receivable and other and (ix) $32,489,000 of development costs and construction in progress.
Net cash used in financing activities of $382,571,000 was comprised of (i) $1,636,817,000 for the repayments of borrowings, (ii) $254,099,000 of dividends paid on common shares, (iii) $62,111,000 of distributions to noncontrolling interests, (iv) $27,117,000 of dividends paid on preferred shares, (v) $23,319,000 of debt issuance and other costs, (vi) $8,000,000 for the purchase of outstanding preferred units and (vii) $748,000 for the repurchase of shares related to stock compensation agreements and related tax holdings, partially offset by (viii) $1,284,167,000 of proceeds from borrowings, (ix) $214,538,000 of proceeds from the issuance of Series J preferred shares, (x) $109,605,000 of contributions from noncontrolling interests and (xi) $21,330,000 of proceeds received from exercise of employee share options.
Capital Expenditures in the six months ended June 30, 2011
20,864
8,400
4,124
2,387
4,326
1,627
38,972
22,293
12,608
1,610
2,139
322
10,142
7,467
2,177
123
14,945
13,085
500
1,360
84,923
51,245
18,909
4,800
6,537
3,432
62,082
25,604
9,028
7,412
19,210
828
(49,923)
(31,924)
(13,547)
(2,405)
(2,047)
97,082
44,925
14,390
9,807
23,700
4,260
3.31
5.10
3.96
0.60
1.47
7.6%
10.1%
3.1%
4.3%
Development and Redevelopment Expenditures in the six months ended June 30, 2011
10,105
3,539
1,841
North Bergen, New Jersey
1,494
1,492
1,207
Crystal Square
1,046
Crystal Plaza
1,013
796
9,956
2,664
3,559
1,528
310
1,895
32,489
4,156
8,666
17,462
74
Funds From Operations (“FFO”)
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gain from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets, extraordinary items and other specified non-cash items, including the pro-rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flows as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. The calculations of both the numerator and denominator used in the computation of income per share are disclosed in footnote 18 – Income per Share, in the notes to our consolidated financial statements on page 29 of this Quarterly Report on Form 10-Q.
FFO for the Three and Six Months Ended June 30, 2012 and 2011
FFO attributable to common shareholders plus assumed conversions was $166,672,000, or $0.89 per diluted share for the three months ended June 30, 2012, compared to $243,418,000, or $1.27 per diluted share, for the prior year’s quarter. FFO attributable to common shareholders plus assumed conversions was $516,328,000, or $2.72 per diluted share for the six months ended June 30, 2012, compared to $749,349,000, or $3.91 per diluted share, for the prior year’s six months. Details of certain items that affect comparability are discussed in the financial results summary of our “Overview.”
For The Three Months
For The Six Months
Reconciliation of our net income to FFO:
Depreciation and amortization of real property
126,063
124,326
258,621
248,647
(16,896)
(458)
Real estate impairment losses
Proportionate share of adjustments to equity in net income
of Toys, to arrive at FFO:
16,513
17,168
33,801
34,897
(491)
1,368
8,394
Income tax effect of above adjustments
(6,351)
(5,835)
(14,848)
(12,040)
Proportionate share of adjustments to equity in net income of
partially owned entities, excluding Toys, to arrive at FFO:
21,684
22,233
43,060
46,202
(234)
(2,120)
(895)
(3,769)
1,849
(9,524)
(9,906)
(16,584)
(16,756)
FFO
184,431
253,498
544,015
766,311
FFO attributable to common shareholders
166,644
236,830
508,441
736,195
6,556
7,830
FFO attributable to common shareholders plus assumed conversions
166,672
243,418
516,328
749,349
Reconciliation of Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities:
3,430
Denominator for FFO per diluted share
186,391
191,935
189,701
0.89
1.27
2.72
3.91
77
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:
Weighted
Effect of 1%
Average
Change In
Consolidated debt:
Balance
Interest Rate
Base Rates
Variable rate
2,635,522
2.29%
26,355
2,206,993
2.25%
Fixed rate
7,582,505
5.49%
8,280,355
5.55%
4.66%
4.86%
Pro-rata share of debt of non-consolidated
entities (non-recourse):
Variable rate – excluding Toys
344,482
2.70%
3,445
284,372
2.85%
Variable rate – Toys
633,411
6.00%
6,334
706,301
4.83%
Fixed rate (including $1,134,474 and
$1,270,029 of Toys debt in 2012 and 2011)
3,009,167
6.99%
3,208,472
6.96%
3,987,060
6.46%
9,779
4,199,145
6.32%
Noncontrolling interests’ share of above
(2,276)
Total change in annual net income
33,858
Per share-diluted
0.18
Excludes $22.2 billion for our 26.2% pro rata share of LNR's liabilities related to consolidated CMBS and CDO trusts which are non-recourse to LNR and its equity holders, including us.
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, 2012, variable rate debt with an aggregate principal amount of $211,093,000 and a weighted average interest rate of 4.13% was subject to LIBOR caps. These caps are based on a notional amount of $211,093,000 and cap LIBOR at a weighted average rate of 4.03%. In addition, we have one interest rate swap on a $425,000,000 loan that swapped the rate from LIBOR plus 2.00% (2.25% at June 30, 2012) to a fixed rate of 5.13% for the remaining seven-year term of the loan.
As of June 30, 2012, we have investments in mezzanine loans with an aggregate carrying amount of $54,770,000 that are based on variable interest rates which partially mitigate our exposure to a change in interest rates on our variable rate debt.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt. As of June 30, 2012, the estimated fair value of our consolidated debt was $10,395,000,000.
Derivative Instruments
We have, and may in the future enter into, derivative positions that do not qualify for hedge accounting treatment, including our economic interest in J.C. Penney common shares. Because these derivatives do not qualify for hedge accounting treatment, the gains or losses resulting from their mark-to-market at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income, net” on our consolidated statements of income. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative positions and a specified spread over LIBOR. Because the market value of these instruments can vary significantly between periods, we may experience significant fluctuations in the amount of our investment income or expense in any given period. In the three and six months ended June 30, 2012, we recognized losses of $58,732,000 and $57,687,000, respectively, from derivative instruments, compared to a loss of $6,762,000 and income of $10,401,000, respectively, for the three and six months ended June 30, 2011.
Item 4. Controls and Procedures
Disclosure Controls and Procedures: The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2012, such disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
Item 1A. Risk Factors
There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2012, we issued 16,257 common shares upon the redemption of Class A units of the Operating Partnership held by persons who received units, in private placements in earlier periods, in exchange for their interests in limited partnerships that owned real estate. The common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4 (2) of that Act.
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under Part III, Item 12 of the Annual Report on Form 10-K for the year ended December 31, 2011, and such information is incorporated by reference herein.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: August 6, 2012
By:
/s/ Joseph Macnow
Joseph Macnow, Executive Vice President -Finance and Administration andChief Financial Officer (duly authorized officer and principal financial and accounting officer)
Exhibit No.
3.3
Articles Supplementary, 5.70% Series K Cumulative Redeemable Preferred Shares of
*
Beneficial Interest, liquidation preference $25.00 per share, no par value – Incorporated by
reference to Exhibit 3.5 to Vornado Realty Trust’s Registration Statement on Form 8-A
(File No. 001-11954), filed on July 18, 2012
3.48
Forty-Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership,
dated as of July 18, 2012 – Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s
Current Report on Form 8-K (File No. 001-34482), filed on July 18, 2012
15.1
Letter regarding Unaudited Interim Financial
31.1
Rule 13a-14 (a) Certification of the Chief Executive Officer
31.2
Rule 13a-14 (a) Certification of the Chief Financial Officer
32.1
Section 1350 Certification of the Chief Executive Officer
32.2
Section 1350 Certification of the Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
______________________________
Incorporated by reference