UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended: March 31, 2004
or
For the transition period from: to
Commission File Number: 001-11954
VORNADO REALTY TRUST (Exact name of registrant as specified in its charter)
(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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
As of May 3, 2004 125,695,304 of the registrant's common shares of beneficial interest are outstanding.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
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VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
4
VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
Vornado Realty Trust ("Vornado") is a fully-integrated real estate investment trust. Vornado conducts its business through Vornado Realty L.P., a Delaware limited partnership (the "Operating Partnership"). Vornado is the sole general partner of, and owned approximately 86.4% of the common limited partnership interest in, the Operating Partnership at March 31, 2004. All references to the "Company" and "Vornado" refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
2. Basis of Presentation
The accompanying consolidated financial statements are unaudited. In the opinion of management, 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 have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Vornado's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2004, are not necessarily indicative of the operating results for the full year.
The accompanying consolidated financial statements include the accounts of Vornado and its majority-owned subsidiary, Vornado Realty L.P., as well as certain partially-owned entities in which the Company owns (i) more than 50%, unless a partner has shared board and management representation and authority and substantive participation rights on all significant business decisions or (ii) 50% or less when the Company is considered the primary beneficiary and the entity qualifies as a variable interest entity under FASB Interpretation No. 46 (Revised)—Consolidation of Variable Interest Entities, ("FIN 46R") which became effective on March 31, 2004. All significant intercompany amounts have been eliminated. Equity interests in partially-owned corporate entities are accounted for under the equity method of accounting when the Company's ownership interest is more than 20%, but less than 50%. When partially-owned investments are in partnership form, the 20% threshold for equity method accounting may be reduced. Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company's share of the net income or loss and cash contributions and distributions to or from these entities. For all other investments, the Company uses the cost method.
Management has made estimates and assumptions that affect the reported amounts of assets and liabilities and 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.
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3. Recently Issued Accounting Standards
Financial Accounting Standards Board ("FASB") Interpretation No. 46 (Revised)—Consolidation of Variable Interest Entities ("FIN 46R")
In January 2003, the FASB issued FIN 46, as amended in December 2003 by FIN 46R, which deferred the effective date until the first interim or annual reporting period ending after March 15, 2004. FIN 46R requires the consolidation of an entity by an enterprise known as a "primary beneficiary," (i) if that enterprise has a variable interest that will absorb a majority of the entity's expected losses, if they occur, receive a majority of the entity's expected residual returns, if they occur, or both and (ii) if the entity is a variable interest entity ("VIE"), as defined. An entity qualifies as a VIE if (i) the total equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the equity investors do not have the characteristics of a controlling financial interest in the entity. The initial determination of whether an entity is a VIE shall be made as of the date at which an enterprise becomes involved with the entity and re-evaluated as of the date of triggering events, as defined. The Company has evaluated each partially-owned entity to determine whether any qualify as a VIE, and if so, whether the Company is the primary beneficiary, as defined. The Company has determined that its investment in Newkirk MLP, in which it owns a 22.3% equity interest (see Note 5—Investments in Partially-Owned Entities), qualifies as a VIE. The Company has determined that it is not the primary beneficiary and, accordingly, consolidation is not required. The Company's maximum exposure to loss as a result of its involvement in Newkirk MLP is limited to its equity investment of approximately $145,088,000, as of March 31, 2004. In addition, the Company has variable interests in certain other entities which are primarily financing arrangements. The Company has evaluated these entities in accordance with FIN 46R and has determined that they are not VIEs. Based on the Company's evaluations, the adoption of FIN 46R on March 31, 2004 did not have a material effect on its consolidated financial statements.
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4. Acquisitions, Dispositions and Financings
Acquisitions
Forest Plaza Shopping Center
On February 3, 2004, the Company acquired the Forest Plaza Shopping Center for approximately $32,500,000, of which $14,000,000 was paid in cash, and $18,500,000 was debt assumed. The purchase was funded as part of Section 1031 tax-free "like-kind" exchange with the remaining portion of the proceeds from the sale of the Company's Two Park Avenue property. Forest Plaza is a 165,000 square foot shopping center located in Staten Island, New York, anchored by a Waldbaum's supermarket.
25 W. 14th Street
On March 19, 2004, the Company acquired a 62,000 square foot free-standing retail building located at 25 W. 14th Street in Manhattan for $40,000,000. The building, which was recently renovated, was 87% occupied as of March 31, 2004. This purchase will ultimately be funded as part of a Section 1031 tax-free "like-kind" exchange with a portion of the proceeds from the sale of the Company's Palisades Residential Complex which is expected to be completed by the third quarter of 2004.
Dispositions
On January 9, 2003, the Company sold its Baltimore, Maryland shopping center for $4,752,000, which resulted in a net gain on sale after closing costs of $2,644,000.
On February 2, 2004, the Palisades Venture entered into an agreement to sell its only asset, a 538 unit high-rise residential apartment tower in Fort Lee, New Jersey, for $222,500,000. On February 27, 2004, the Company acquired the remaining 25% interest it did not previously own for approximately $17,000,000. The Company's gain on sale after closing costs will be approximately $70,000,000. The sale, which is subject to customary closing conditions, is expected to be completed by the third quarter of 2004.
In the three months ended March 31, 2004, and 2003, the Company sold certain partially-owned development property which resulted in a net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate of $776,000 and $188,000, respectively.
Financings
On January 6, 2004, the Company redeemed all of its 8.375% Series D-2 Cumulative Redeemable Preferred Units at a redemption price equal to $50.00 per unit for an aggregate of $27.5 million plus accrued distributions. The redemption amount exceeded the carrying amount by $700,000, representing the original issuance costs. Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to common shares, in accordance with the July 2003 EITF clarification of Topic D-42.
On March 17, 2004, the Company redeemed all of its Series B Preferred Shares at a redemption price equal to $25.00 per share for an aggregate of $85,000,000 plus accrued dividends. The redemption amount exceeded the carrying amount by $3,195,000, representing the original issuance costs. Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to common shares, in accordance with the July 2003 EITF clarification of Topic D-42.
For details of the Company's financing activities see Note 7—Notes and Mortgages Payable.
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5. Investments and Advances to Partially-Owned Entities
The Company's investments in partially-owned entities and income recognized from such investments are as follows:
Investments:
Equity in Income (loss):
9
Below is a summary of the debt of partially-owned entities as of March 31, 2004 and December 31, 2003, none of which is guaranteed by the Company.
Based on the Company's ownership interest in the partially-owned entities above, the Company's share of the debt of these partially-owned entities was $1,105,668,000 and $930,567,000 as of March 31, 2004 and December 31, 2003, respectively.
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Temperature Controlled Logistics
Based on the joint venture's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $6,465,000 and $3,376,000 of rent it was due for the three months ended March 31, 2004 and 2003, which together with previously deferred rent is $55,901,000.
On February 5, 2004, AmeriCold Realty Trust completed a $254,400,000 mortgage financing for 21 of its owned and 7 of its leased temperature-controlled warehouses. The loan bears interest at LIBOR plus 2.95% (with a LIBOR floor of 1.5% with respect to $54,400,000 of the loan) and requires principal payments of $5,000,000 annually. The loan matures in April 2009 and is pre-payable without penalty after April 9, 2006. The net proceeds were approximately $225,000,000 after providing for usual escrows, closing costs and the repayment of $12,900,000 of existing mortgages on two of the warehouses, of which $135,000,000 was distributed to the Company and the remainder was distributed to its partner.
On January 20, and March 29, 2004, a joint venture in which the Company has a 44% interest acquired an aggregate of $10,200,000 of trade receivables from AmeriCold Logistics for $10,000,000 in cash. These receivables have been subsequently collected in full.
Alexander's
The Company owns 33% of the outstanding common stock of Alexander's at March 31, 2004. Alexander's is managed by, and its properties are leased by, the Company pursuant to agreements with a one-year term expiring in March of each year, except for the Lexington Avenue agreements which provide for a term lasting until substantial completion of the development of the property, all of which are automatically renewable. As of March 31, 2004, the Company had a receivable from Alexander's of $39,062,000 under the management and development agreements. In addition, Alexander's paid $493,000 to Building Maintenance Services, a wholly-owned subsidiary of the Company, for cleaning and engineering services at Alexander's Lexington Avenue project.
Effective April 1, 2004, based on Alexander's improved liquidity, the Company modified its term loan and line of credit to Alexander's to reduce the spread it charges from 9.48% to 6%. Accordingly, the current interest rate has been reduced to 9% from 12.48%.
On February 13, 2004, Alexander's completed a $400,000,000 mortgage financing on the Office Space of its Lexington Avenue development project placed by German American Capital Corporation, an affiliate of Deutsche Bank. The loan bears interest at 5.33%, matures in February 2014 and beginning in the third year, provides for principal payments based on a 25-year amortization schedule such that over the remaining eight years of the loan, ten years of amortization will be paid. Of the loan proceeds, $253,529,000 was used to repay the entire amount outstanding under the construction loan with HVB Real Estate Capital (Hypo) (the "Construction Loan"). The Construction Loan was modified so that the remaining availability is $237,000,000, which was approximately the amount estimated to complete the Lexington Avenue development project. The interest rate on the Construction Loan is LIBOR plus 2.5% (currently 3.60%) and matures in January 2006, with two one-year extensions. The collateral for the Construction Loan is the same, except that the Office Space has been removed from the lien. Further, the Construction Loan permits the release of the retail space for $15,000,000 and requires all proceeds from the sale of the residential condominiums units to be applied to the Construction Loan balance until it is finally repaid. In connection with reducing the principal amount of the Construction Loan Alexander's wrote-off $3,050,000 of unamortized deferred financing costs in the first quarter of 2004, of which the Company's share was $1,010,000.
Equity in loss from Alexander's includes Alexander's stock appreciation rights compensation expense of which the Company's share was $9,913,000 for the three months ended March 31, 2004, based on a closing Alexander's stock price of $160.00 on March 31, 2004.
6. Notes and Mortgage Loans Receivable
On March 1, 2004, the Company's note receivable of $38,500,000 from Commonwealth Atlantic Properties was repaid.
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7. Notes and Mortgages Payable
Following is a summary of the Company's debt:
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8. Fee And Other Income
The following table sets forth the details of fee and other income:
Fee and other income above includes management fee income from Interstate Properties, a related party, of $213,000 and $176,000 in the three months ended March 31, 2004 and 2003. The above table excludes fee income from partially-owned entities which is included in income from partially-owned entities (see Note 5).
9. Discontinued Operations
Assets related to discontinued operations at March 31, 2004, consist primarily of real estate, net of accumulated depreciation and represent the Company's retail properties located in Vineland, New Jersey, and Baltimore (Dundalk), Maryland as well as the Palisades located in Fort Lee, New Jersey. Liabilities related to discontinued operations represent the Palisades mortgage payable of $120,000,000 at March 31, 2004 and December 31, 2003, respectively.
The combined results of operations of the assets related to discontinued operations as well as the Company's Two Park Avenue office property, sold on October 10, 2003, which resulted in a net gain of $156,433,000, and Baltimore and Hagerstown, Maryland retail properties, which were sold on January 9, 2003 and November 3, 2003 (resulting in net gains of $2,644,000 and $1,945,000) are shown as discontinued operations. The following is a summary of the combined results of operations of these properties:
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10. Income Per Share
The following table provides a reconciliation of both net income and the number of common shares used in the computation of basic income per common share, which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and diluted income per common share, which includes the weighted average common shares and dilutive share equivalents. Potential dilutive share equivalents include the Company's Series A Convertible Preferred Shares as well as Vornado Realty L.P.'s convertible preferred units.
11. Comprehensive Income
The following table sets forth the Company's comprehensive income:
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12. Commitments and Contingencies
At March 31, 2004, the Company's $600,000,000 revolving credit facility had a zero balance, and the Company utilized $12,805,000 of availability under the facility for letters of credit and guarantees.
Each of the Company's 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 the Company.
The Company carries comprehensive liability and all risk property insurance ((i) fire, (ii) flood, (iii) extended coverage, (iv) "acts of terrorism" as defined in the Terrorism Risk Insurance Act of 2002 which expires in 2005 and (v) rental loss insurance) with respect to its assets. In April 2004, the Company renewed its all risk policies and increased its coverage for Acts of Terrorism for each of its New York Office, CESCR Office and Merchandise Mart divisions. Below is a summary of the current all risk property insurance and terrorism risk insurance for each of the Company's business segments:
In addition to the coverage above, the Company carries lesser amounts of coverage for terrorist acts not covered by the Terrorism Risk Insurance Act of 2002.
The Company's debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its senior unsecured notes due 2007 and 2010 and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. Although the Company believes that it has adequate insurance coverage under these agreements, the Company 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 the Company is able to obtain, it could adversely affect the Company's ability to finance and/or refinance its properties and expand its portfolio.
From time to time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness that cannot be quantified by the Company.
There are various legal actions against the Company in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition, results of operations or cash flow.
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13. Stock-Based Compensation
Prior to 2003, the Company accounted for stock-based compensation using the intrinsic value method (i.e. the difference between the price per share at the grant date and the option exercise price). Accordingly, no stock-based compensation was recognized in the Company's consolidated financial statements for plan awards granted prior to 2003. If compensation cost for plan awards granted prior to 2003 had been determined based on fair value at the grant dates, net income and income per share would have been reduced to the pro-forma amounts below:
14. Retirement Plans
The following table sets forth the components of net periodic benefit costs:
Employer Contributions
During the quarter ended March 31, 2004, the Company made contributions of $510,000 to the plans. The Company anticipates additional contributions of $480,000 to the plans during the remainder of 2004.
15. Related Party Transactions
On March 10, 2004, the Company loaned $2,000,000 to Melvyn Blum, an executive officer of the Company, pursuant to the revolving credit facility contained in his January 2000 employment agreement. The loan bears interest at 1.57% per annum (the Federal rate) and is due on March 10, 2007.
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16. Segment Information
The Company has four business segments: Office, Retail, Merchandise Mart Properties and Temperature Controlled Logistics.
See footnotes on page 19.
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Notes to segment information:
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INDEPENDENT ACCOUNTANTS' REPORT
Shareholders and Board of TrusteesVornado Realty TrustNew York, New York
We have reviewed the accompanying condensed consolidated balance sheet of Vornado Realty Trust as of March 31, 2004, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2004 and 2003. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States of America, 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 condensed 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet of Vornado Realty Trust as of December 31, 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 2, 2004, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the Company's adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained herein 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 involve risks, uncertainties and assumptions. 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 "believes," "expects," "anticipates," "intends," "plans," "will," "would," "may" or similar expressions in this quarterly report on Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to, those set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 under "Forward Looking Statements" and "Item 1. Business—Certain Factors That May Adversely Affect the Company's Business and Operations." For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Management's Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of the Company's consolidated financial statements for the three months ended March 31, 2004. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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.
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Overview
The Company owns and operates office, retail and showroom properties with large concentrations of office and retail properties in the New York City metropolitan area and in the Washington, D.C. and Northern Virginia area. In addition, the Company has a 60% interest in a partnership that owns cold storage warehouses nationwide.
The Company's business objective is to maximize shareholder value. The Company measures its success in meeting this objective by the total return to its shareholders. Below is a table comparing the Company's performance to the Morgan Stanley REIT Index ("RMS") for the following periods ending March 31, 2004:
The Company intends to continue to achieve its business objective by pursuing its investment philosophy and executing its operating strategies through:
The Company competes with a large number of real estate property owners and developers. Principal factors of competition are rent charged, attractiveness of location and quality and breadth of services provided. The Company's success depends upon, among other factors, trends of the national and local economies, 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. The current economic recovery is fostered, in part, by low interest rates, Federal tax cuts, and increases in government spending. To the extent this recovery stalls, the Company may experience lower occupancy rates which may lead to lower initial rental rates, higher leasing costs and a corresponding decrease in net income, funds from operations and cash flow. Alternatively, if the recovery continues, the Company may experience higher occupancy rates leading to higher initial rents and higher interest rates causing an increase in the Company's weighted average cost of capital and a corresponding effect on net income, funds from operations and cash flow.
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Overview (continued)—Leasing Activity
The following table sets forth certain information for the properties the Company owns directly or indirectly, including leasing activity. Tenant improvements and leasing commissions are presented below based on square feet leased during the period and on a per annum basis based on the weighted average term of the leases.
In addition to the above, 22,000 square feet of retail space included in the NYC office properties was leased for the quarter ended March 31, 2004, at an initial rent of $149 per square foot.
Critical Accounting Policies
A summary of the Company's critical accounting policies is included in the Company's annual report on Form 10-K for the year ended December 31, 2003 in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the footnotes to the consolidated financial statements, Note 2—Summary of Significant Accounting Policies also included in the Company's annual report on Form 10-K. There have been no significant changes to those policies during 2004.
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Reconciliation of Net Income and EBITDA
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2004 and 2003.
See footnotes on page 26.
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See following page for footnotes.
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Notes:
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Results of Operations
Revenues
The Company's revenues, which consist of property rentals, expense reimbursements, hotel revenues, trade show revenues, amortization of acquired below market leases net of above market leases pursuant to SFAS No. 141, and fee and other income, were $393,050,000 for the quarter ended March 31, 2004, compared to $364,977,000 in the prior year's quarter, an increase of $28,073,000. Below are the details of the increase by segment:
See Overview—Leasing Activity on page 23 for further details of leasing activity and corresponding changes in occupancy.
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Expenses
The Company's expenses were $241,831,000 for the quarter ended March 31, 2004, compared to $224,249,000 in the prior year's quarter, an increase of $17,582,000. Below are the details of the increase by segment:
Income Applicable to Alexander's
Equity in net loss applicable to Alexander's (loan interest income, management, leasing, development and commitment fees, and equity in income) was $2,528,000 in the quarter ended March 31, 2004, compared to income of $7,254,000 in the prior year's quarter, a decrease of $9,782,000. This decrease resulted from the Company's $9,913,000 share of Alexander's stock appreciation rights compensation expense and the Company's $1,010,000 share of Alexander's loss on early extinguishment of debt in the three months ended March 31, 2004, partially offset by income from the commencement of the lease with Bloomberg on November 15, 2003 at Alexander's 731 Lexington Avenue property.
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Income from Partially-Owned Entities
Below is the detail of income from partially-owned entities by investment as well as the increase (decrease) in income from partially-owned entities for the quarters ended March 31, 2004 and 2003:
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Interest and Other Investment Income
Interest and other investment income (interest income on mortgage loans receivable, other interest income and dividend income) was $9,245,000 for the quarter ended March 31, 2004, compared to $9,796,000 in the prior year's quarter, a decrease of $551,000. This decrease resulted primarily from $6,284,000 of interest received in the first quarter of 2003 in connection with the Dearborn Center loan receivable repayment (of which $5,655,000 was contingent interest income), offset by interest income recognized in the first quarter of 2004, on the $225,000,000 GM Building mezzanine loans.
Interest and Debt Expense
Interest and debt expense was $58,705,000 for the three months ended March 31, 2004, compared to $56,900,000 in the prior year's quarter, an increase of $1,805,000. This increase resulted primarily from higher average outstanding debt during the quarter ended March 31, 2004.
Net Gains on Disposition of Wholly-owned and Partially-owned Assets other than Real Estate
Net gains on disposition of "wholly-owned and partially-owned assets other than depreciable real estate" reflects the Company's $776,000 share of gains on disposition of certain partially-owned development assets in the current quarter and a $188,000 gain on sale of Kinzie Park Condominium units in the prior year's quarter.
Minority Interest
Minority interest expense was $31,508,000 for the three months ended March 31, 2004, compared to $38,657,000 for the prior year's quarter, a decrease of $7,149,000. This decrease resulted primarily from lower distributions to preferred unit holders as a result of the Company's redemption of the Series D-2 preferred units in January 2004, the Series D-1 preferred units in November 2003, and the Series C-1 preferred units during the fourth quarter of 2003.
Discontinued Operations
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Three Months Ended March 31, 2004 and March 31, 2003
Below are the details of the changes by segment in EBITDA.
31
Liquidity And Capital Resources
Three Months Ended March 31, 2004
Cash flows provided by operating activities of $153,321,000 was primarily comprised of (i) income of $82,439,000, (ii) adjustments for non-cash items of $68,481,000 and (iii) the net change in operating assets and liabilities of $2,401,000. The adjustments for non-cash items are primarily comprised of (i) depreciation and amortization of $58,465,000, (ii) minority interest of $31,508,000 and (iii) write-off of preferred share and unit issuance costs of $3,895,000, partially offset by, (iv) the effect of straight-lining of rental income of $10,376,000, (v) equity in net income of partially-owned entities and Alexander's of $10,585,000 and (vi) amortization of acquired below market leases net of above market leases of $3,650,000.
Net cash provided by investing activities of $68,614,000 was primarily comprised of (i) distributions from partially-owned entities of $147,394,000, (ii) repayments on notes and mortgages receivable of $38,500,000, partially offset by, (iii) capital expenditures of $29,744,000, (iv) development and redevelopment expenditures of $24,068,000, (v) investments in partially-owned entities of $5,102,000, and (vi) acquisitions of real estate of $54,422,000.
Net cash used in financing activities of $251,459,000 was primarily comprised of (i) dividends paid on common shares of $103,692,000 (ii) repayments of borrowings of $160,183,000, (iii) redemption of preferred shares and units of $112,467,000, (iv) dividends paid on preferred shares of $6,614,000, and (v) distributions to minority partners of $38,937,000, partially offset by, (vi) proceeds from borrowings of $150,427,000 and (vii) proceeds of $20,007,000 from the exercise by employees of share options.
Capital expenditures are categorized as follows:
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Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the three months ended March 31, 2004. See page 23 for per square foot data.
33
Three Months Ended March 31, 2003
Cash flow provided by operating activities of $120,255,000 was primarily comprised of (i) income of $91,742,000, (ii) adjustments for non-cash items of $47,863,000, partially offset by (iii) the net change in operating assets and liabilities of $16,706,000. The adjustments for non-cash items were primarily comprised of (i) depreciation and amortization of $52,314,000, (ii) minority interest of $38,657,000, partially offset by (iii) the effect of straight-lining of rental income of $10,987,000, (iv) equity in net income of partially-owned entities and income applicable to Alexander's of $30,488,000, and (v) amortization of acquired below market leases net of above market leases of $1,445,000.
Net cash used in investing activities of $21,221,000 was primarily comprised of (i) distributions from partially-owned entities of $8,284,000, (ii) repayments on notes receivable of $23,392,000, (iii) proceeds from the sale of real estate of $4,752,000, (iv) decrease in restricted cash of $2,562,000 partially offset by, (v) recurring capital expenditures of $16,872,000, (vi) non-recurring capital expenditures of $732,000, (vii) development and redevelopment expenditures of $12,942,000, (viii) investments in partially-owned entities of $15,592,000, and (ix) acquisitions of real estate of $13,000,000.
Net cash used in financing activities of $130,343,000 was primarily comprised of (i) dividends paid on common shares of $74,225,000, (ii) dividends paid on preferred shares of $5,425,000, (iii) distributions to minority partners of $39,041,000, (iv) repayments of borrowings of $59,442,000, partially offset by (v) proceeds from borrowing of $47,000,000.
Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures and a reconciliation of total expenditures on an accrual basis to the cash expended in the three months ended March 31, 2003.
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SUPPLEMENTAL INFORMATION
Three Months Ended March 31, 2004 vs. Three Months Ended December 31, 2003
Below are the details of the changes by segment in EBITDA for the three months ended March 31, 2004 from the three months ended December 31, 2003.
Below is a reconciliation of net income and EBITDA for the three months ended December 31, 2003.
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FUNDS FROM OPERATIONS (FFO) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
FFO was $128,975,000, or $1.01 per diluted share for three months ended March 31, 2004, compared to $130,105,000, or $1.15 per diluted share for prior year's quarter, a decrease of $1,130,000 or $.14 per share. Included in FFO are certain items that affect comparability as detailed below. Before these items, first quarter 2004 FFO is 2.6% lower than first quarter 2003 on a per share basis.
The following table reconciles FFO and net income:
FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a relevant supplemental measure of operating performance because it provides a basis for comparison among REITs. FFO is computed in accordance with NAREIT's definition, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with NAREIT's definition.
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On February 3, 2004, the Company acquired the Forest Plaza Shopping Center for approximately $32,500,000, of which $14,000,000 was paid in cash, and $18,500,000 was debt assumed. The purchase was funded as part of Section 1031 tax-free "like kind" exchange with the remaining portion of the proceeds from the sale of the Company's Two Park Avenue property. Forest Plaza is a 165,000 square foot shopping center located in Staten Island, New York, anchored by a Waldbaum's supermarket.
On March 17, 2004, the Company redeemed all of its Series B preferred Shares at a redemption price equal to $25.00 per share for an aggregate of $85,000,000 plus accrued dividends. The redemption amount exceeded the carrying amount by $3,195,000, representing the original issuance costs. Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to common shares, in accordance with the July 2003 EITF clarification of Topic D-42.
The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an on-going basis for more than the next twelve months; however, capital outlays for significant acquisitions would require funding from borrowings or equity offerings.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company has exposure to fluctuations in market interest rates. Market interest rates are highly sensitive to many factors that are beyond the control of the Company. Various financial instruments exist which would allow management to mitigate the impact of interest rate fluctuations on the Company's cash flows and earnings.
As of March 31, 2004, the Company has an interest rate swap as described in footnote 1 to the table below. In addition, during 2003 the Company purchased two interest rate caps with notional amounts aggregating $295,000,000, and simultaneously sold two interest rate caps with the same aggregate notional amount on substantially the same terms as the caps purchased. As the significant terms of these arrangements are the same, the effects of a revaluation of these instruments are expected to substantially offset one another. Management may engage in additional hedging strategies in the future, depending on management's analysis of the interest rate environment and the costs and risks of such strategies.
The Company's exposure to a change in interest rates on its wholly-owned and partially-owned debt (all of which arises out of non-trading activity) is as follows:
The fair value of the Company's debt, based on discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt, exceeds the aggregate carrying amount by approximately $113,199,000 at March 31, 2004.
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 the end of such period, the Company's disclosure controls and procedures are effective.
Internal Control Over Financial Reporting: There have not been any changes in the Company's internal control over financial reporting (as 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters, including in respect of the matters referred to below, is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows.
The following supplements and amends the discussion set forth under Item 3 "Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Stop & Shop
As previously disclosed, on January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey ("USDC-NJ") claiming the Company has no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty, because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated. Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, terminated the Company's right to reallocate. On March 3, 2003, after the Company moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint.
On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint. On April 9, 2003, the Company moved the New York Supreme Court action to the United States District Court for the Southern District of New York. On June 30, 2003, the District Court ordered that the case be placed in suspension and ordered the parties to proceed in a related case that the Company commenced in the United States Bankruptcy Court for the Southern District of New York. On July 24, 2003, the Bankruptcy Court referred the related case to mediation. The mediation has not been concluded. If this matter is not resolved through mediation, the hearing will reconvene in the Bankruptcy Court. The Company believes that the additional rent provision of the guaranty expires at the earliest in 2012 and will vigorously oppose Stop & Shop's complaint.
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities
During the three months ended March 31, 2004, the Company issued 6,922,017 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. All of the common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) of that Act.
Item 6. Exhibits and Reports on Form 8-K
During the three months ended March 31, 2004, the Company did not file any reports on Form 8-K.
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SIGNATURES
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.
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EXHIBIT INDEX
41
42
43
44
45
46
47
48
49
50
51
52
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