UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

 

 

 

Or

 

 

 

 

 

ALEXANDER’S, INC.

(Exact name of registrant as specified in its charter)

 

 

(Registrant’s telephone number, including area code)

 

(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.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section  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).  o Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

 

As of September 30, 2010, there were 5,105,936 shares of common stock, par value $1 per share, outstanding.

ALEXANDER’S, INC.

 

INDEX

 

 

 

PART I. FINANCIAL INFORMATION

Item 1.          Financial Statements

ALEXANDER’S, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Amounts in thousands, except share and per share amounts)

See notes to consolidated financial statements (unaudited).

3

ALEXANDER’S, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(Amounts in thousands, except per share amounts)

 

 

 

 

 

See notes to consolidated financial statements (unaudited).

ALEXANDER’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(Amounts in thousands)

 

 

 

 

 

 

 

See notes to consolidated financial statements (unaudited).

ALEXANDER’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)

 

 

 

See notes to consolidated financial statements (unaudited).

ALEXANDER’S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.             Organization

 

Alexander’s, Inc. (NYSE: ALX) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to “we,” “us,” “our,” “Company” and “Alexander’s” refer to Alexander’s, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE: VNO).

 

 

2.             Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and include our accounts and those of our consolidated subsidiaries.  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.  We have 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.

 

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 for the year ended December 31, 2009, as filed with the SEC.  The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the operating results for the full year.

 

We currently operate in one business segment.

 

 

3.             Recently Issued Accounting Literature

On January 21, 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, adding new requirements for disclosures about transfers into and out of Levels 1 and 2 fair value measurements and additional disclosures about the activity within Level 3 fair value measurements.  The application of this guidance on January 1, 2010 did not have any effect on our consolidated financial statements.

 

On June 12, 2009, the FASB issued an update to ASC 810, Consolidation, which modifies the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity (“VIE”) by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE.  The adoption of this guidance on January 1, 2010 did not have any effect on our consolidated financial statements.

 

ALEXANDER’S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

4.             Relationship with Vornado

 

At September 30, 2010, Vornado owned 32.4% of our outstanding common stock.  We are managed by, and our properties are leased and developed by, Vornado, pursuant to the agreements described below which expire in March of each year and are automatically renewable.

 

Management and Development Agreements

We pay Vornado an annual management fee equal to the sum of (i) $3,000,000, (ii) 3% of gross income from the Kings Plaza Regional Shopping Center, (iii) $0.50 per square foot of the tenant-occupied office and retail space at 731 Lexington Avenue and (iv) $248,000, escalating at 3% per annum, for managing the common area of 731 Lexington Avenue. 

 

In addition, Vornado is entitled to a development fee of 6% of development costs, as defined, with minimum guaranteed fees of $750,000 per annum.  The development fee for the Rego Park II project (see Note 5) is estimated to be approximately $18,000,000, of which $3,934,000 has been paid as of September 30, 2010.  The remainder is due on substantial completion of the construction, as defined.

 

Leasing Agreements

Vornado also provides us with leasing services for a fee of 3% of rent for the first ten years of a lease term, 2% of rent for the eleventh through the twentieth year of a lease term, and 1% of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by tenants.  In the event third-party real estate brokers are used, the fees to Vornado increase by 1% and Vornado is responsible for the fees to the third-party real estate brokers.  Vornado is also entitled to a commission upon the sale of any of our assets equal to 3% of gross proceeds, as defined, for asset sales less than $50,000,000 and 1% of gross proceeds, as defined, for asset sales of $50,000,000 or more.  The total of these amounts is payable in annual installments in an amount not to exceed $4,000,000, with interest on the unpaid balance at one-year LIBOR plus 1.0% (1.99% at September 30, 2010).

 

Other Agreements

We have also entered into agreements with Building Maintenance Services, a wholly owned subsidiary of Vornado, to supervise cleaning, engineering and security services at our Lexington Avenue and Kings Plaza properties for an annual fee of the cost for such services plus 6%. 

 

The following is a summary of fees to Vornado under the agreements discussed above.

 

 

At September 30, 2010, we owed Vornado $42,661,000 for leasing fees, $13,948,000 for the earned portion of the Rego Park II development fee and $1,800,000 for management, property management and cleaning fees.

 

ALEXANDER’S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

5.             Rego Park II Project

 

The Rego Park II property, a newly developed 600,000 square foot shopping center, is located adjacent to our Rego Park I property in Queens, New York.  As of September 30, 2010, 89% of the center is in service and such portion is 100% leased, primarily to three anchor tenants: a 137,000 square foot Costco, a 134,000 square foot Century 21 and a 132,000 square foot Kohl’s.  On April 5, 2010, 47,000 square feet was leased to Toys “R” Us/Babies “R” Us, a one-third owned affiliate of Vornado.  The shopping center contains a parking deck (1,400 spaces) that provides paid parking.

 

As of September 30, 2010, $379,000,000 was expended under the total construction budget of $410,000,000.  $296,665,000 was drawn on the construction loan, which has an interest rate of LIBOR plus 1.20% (1.67% at September 30, 2010) and matures in December 2010 with a one-year extension option.

 

6.             Notes and Mortgages Payable

 

The following is a summary of our outstanding notes and mortgages payable.

 

_____________________________

(1)     This loan bears interest at LIBOR plus 1.20% and has a one-year extension option.

(2)     On March 5, 2010, we acquired $27,500 of this debt for $28,738 in cash, resulting in a $1,238 net loss on early extinguishment of debt.

(3)     In the event of a substantial casualty, as defined, up to $75,000 of this loan may become recourse to us.

 

The fair value of our consolidated debt is calculated by discounting the future contractual cash flows of our existing debt using the current rates available to borrowers with similar credit ratings for the remaining terms of such debt.  As of September 30, 2010 and December 31, 2009, the estimated fair value of our consolidated debt was $1,287,356,000 and $1,215,501,000, respectively.  Our fair value estimates, which are made at the end of the reporting period, may be different from the amounts that may ultimately be realized upon disposition of our financial instruments.

 

ALEXANDER’S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

7.             Liability for Income Taxes

 

In accordance with the provisions of ASC 740, Income Taxes (“ASC 740”), we have an income tax liability of $2,902,000 and $7,450,000 as of September 30, 2010 and December 31, 2009, respectively.  This ASC 740 liability, which includes $2,427,000 and $4,041,000 of accrued interest as of September 30, 2010 and December 31, 2009, respectively, is included as a component of “liability for income taxes and other,” on our consolidated balance sheets.  If this liability were reversed, it would result in non-cash income and reduce our effective tax rate.  Of this liability, $2,419,000 is expected to reverse in the third quarter of 2011 as a result of the expiration of the applicable statute of limitations. Interest expense related to the ASC 740 liability is included as a component of “interest and debt expense” on our consolidated statements of income.  We recognized interest of $114,000 and $392,000 in the three months ended September 30, 2010 and 2009, respectively, and $337,000 and $1,700,000 in the nine months ended September 30, 2010 and 2009, respectively.

 

In the third quarter of 2010 and 2009, we reversed $5,113,000 and $42,472,000, respectively, of liabilities related to income taxes as a result of the expiration of the applicable statute of limitations.  Accordingly, we recognized income in the third quarter of 2010 and 2009, of which $3,162,000 and $37,307,000, respectively, were included as a component of “income tax benefit” (portion previously recognized as income tax expense) and $1,951,000 and $5,165,000, respectively, were included as a reduction of “interest and debt expense” (portion previously recognized as interest expense) on our consolidated statements of income. 

 

        As of September 30, 2010, Taxable REIT Subsidiary (“TRS”) tax returns for the years 2004 through 2009 and REIT tax returns for the years 2007 through 2009 remain open to examination by the major taxing jurisdictions to which we are subject.

 

8.             Significant Tenants

 

Bloomberg L.P. (“Bloomberg”) accounted for $62,476,000, or 35%, and $57,886,000, or 35%, of our consolidated revenues in the nine months ended September 30, 2010 and 2009, respectively.  No other tenant accounted for more than 10% of our consolidated revenues.  If we were to lose Bloomberg as a tenant, or if Bloomberg were to fail or become unable to perform its obligations under its lease, it would adversely affect our results of operations and financial condition.  We receive semi-annually, certain confidential financial information and metrics from Bloomberg.  In addition, we access financial information regarding Bloomberg from private sources, as well as other publicly available data. 

 

9.             Fair Value

 

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.  Financial assets recorded at fair value in our consolidated financial statements at September 30, 2010 and December 31, 2009 consist solely of short-term investments (CDARS classified as available-for-sale) and are presented in the table below based on their level in the fair value hierarchy.  There were no financial liabilities recorded at fair value at September 30, 2010 and December 31, 2009. 

 

 

 

 

ALEXANDER’S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

10.          Commitments and Contingencies

Insurance

We maintain general liability with limits of $300,000,000 per occurrence and all-risk property and rental value insurance coverage with limits of $1.7 billion per occurrence, including coverage for terrorist acts, with sub-limits for certain perils such as floods and earthquakes on each of our properties.  There can be no assurance that we will be able to maintain similar levels of insurance coverage in the future in amounts and on terms that are commercially reasonable.  We are responsible for deductibles and losses in excess of our insurance coverage, which could be material.

 

Our mortgage loans are non-recourse to us, except for $75,000,000 of the $320,000,000 mortgage on our 731 Lexington Avenue property, in the event of a substantial casualty, as defined.  Our mortgage loans contain customary covenants requiring us to maintain insurance.  If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance and/or refinance our properties.

 

Environmental Remediation

In July 2006, we discovered an oil spill at our Kings Plaza Regional Shopping Center.  We have notified the New York State Department of Environmental Conservation (“NYSDEC”) about the spill and have developed a remediation plan. The NYSDEC has approved a portion of the remediation plan and clean up is ongoing.  The estimated costs associated with the clean up will aggregate approximately $2,500,000.  We have paid $500,000 of such amount and the remainder is covered under our insurance policy.

 

Flushing Property

In the fourth quarter of 2003, we recognized $1,289,000 of income representing a non-refundable deposit of $1,875,000, net of $586,000 of costs associated with the transaction, from a party that had agreed to purchase this property, as such party had not met its obligations under a May 30, 2002 purchase contract.  On September 10, 2002, November 7, 2002, and July 8, 2004, we received letters from the party demanding return of the deposit.  On December 28, 2005, the party filed a complaint against us in the New York State Court alleging that we failed to honor the terms and conditions of the agreement.  The complaint sought specific performance and, if specific performance was denied, it sought a return of the deposit plus interest and $50,000 in costs.  In August 2010, the New York State Court entered judgment denying specific performance and ordering us to return the deposit together with accrued interest and fees.  We have filed a notice of appeal and this judgment is stayed pending the appeal.  As a result of the judgment, included as a component of "general and administrative expenses" is a $3,135,000 litigation loss accrual in the three months ended September 30, 2010, representing the amount of the deposit, accrued interest and fees.

 

Paramus

In 2001 we leased 30.3 acres of land located in Paramus, New Jersey to IKEA Property, Inc. The lease has a 40-year term with a purchase option in 2021 for $75,000,000. We have a $68,000,000 interest only, non-recourse mortgage loan on the property from a third party lender. The fixed interest rate on the debt is 5.92% with interest payable monthly until maturity in October 2011. The annual triple-net rent is the sum of $700,000 plus the amount of debt service on the mortgage loan. If the purchase option is exercised, we will receive net cash proceeds of approximately $7,000,000 and recognize a gain on sale of land of approximately $62,000,000. If the purchase option is not exercised, the triple-net rent for the last 20 years must include the debt service sufficient to fully amortize $68,000,000 over the remaining 20-year lease term.

 

Letters of Credit

Approximately $7,998,000 of standby letters of credit were issued and outstanding as of September 30, 2010. 

 

Other

There are various other legal actions against us in the ordinary course of business.  In our opinion, the outcome of such matters in the aggregate will not have a material effect on our financial condition, results of operations or cash flows. 

 

 

ALEXANDER’S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

 

11.          Stock Appreciation Rights (“SARs”)

On March 2, 2009, Steven Roth, the Chairman of our Board of Directors and our Chief Executive Officer, and Michael Fascitelli, our President, each exercised 150,000 SARs, which were scheduled to expire on March 4, 2009.  As a result of the March 2, 2009 exercises, $34,275,000 of previously accrued SARs compensation expense was reversed into income.  As of September 30, 2010, there are no SARs outstanding.

 

 

12.          Income Per Share

The following table sets forth the computation of basic and diluted income per share, including a reconciliation of net income and the number of shares used in computing basic and diluted income per share. Basic income per share is determined using the weighted average shares of common stock outstanding during the period. Diluted income per share is determined using the weighted average shares of common stock outstanding during the period and assumes all potentially dilutive securities were converted into common shares at the earliest date possible.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Alexander’s, Inc.

Paramus, New Jersey

 

We have reviewed the accompanying consolidated balance sheet of Alexander’s, Inc. and subsidiaries (the “Company”) as of September 30, 2010, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2010 and 2009, and consolidated statements of changes in equity and cash flows for the nine-month periods ended September 30, 2010 and 2009.  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 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 Alexander’s, Inc. and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 22, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009 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
November 1, 2010

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 future performance.  They involve risks, uncertainties and assumptions.  Our future results, financial condition, results of operations and business may differ materially from those expressed in these forward-looking statements.  You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q.  We also note the following forward-looking statements:  in the case of our development project, the estimated completion date, estimated project costs and costs to complete.  These forward-looking statements represent our intentions, plans, expectations and beliefs and 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.  For a 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 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 the 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 after the date of this Quarterly Report on Form 10-Q.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our consolidated financial statements for the three and nine months ended September 30, 2010 and 2009. 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.

 

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, 2009 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 2 – Summary of Significant Accounting Policies” to the consolidated financial statements included therein.  There have been no significant changes to these policies during 2010.

 

 

Alexander’s, Inc. (NYSE: ALX) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties.  All references to “we,” “us,” “our,” “Company,” and “Alexander’s”, refer to Alexander’s, Inc. and its consolidated subsidiaries.  We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE: VNO).  We have seven properties in the greater New York City metropolitan area.

 

We compete with a large number of property owners and developers.  Our success depends upon, among other factors, trends of national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation, population trends, zoning laws, and our ability to lease, sublease or sell our properties, at profitable levels.  Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.

 

The economic recession and illiquidity and volatility in the financial and capital markets during 2008 and 2009 have negatively affected substantially all businesses, including ours.  Although signs of a recovery in 2010 have emerged, it is not possible for us to quantify the timing and impact of such a recovery, or lack thereof, on our future financial results.

 

 

Financial Results Summary

 

Net income attributable to common stockholders for the quarter ended September 30, 2010 was $17,875,000, or $3.50 per diluted share, compared to $58,029,000, or $11.37 per diluted share, for the quarter ended September 30, 2009.  FFO attributable to common stockholders (“FFO”) for the quarter ended September 30, 2010 was $25,624,000, or $5.02 per diluted share, compared to $65,228,000, or $12.77 per diluted share, for the quarter ended September 30, 2009. Net income attributable to common stockholders and FFO for the quarters ended September 30, 2010 and 2009 include income of $5,113,000 and $42,472,000, respectively, or $1.00 and $8.32 per diluted share, respectively, from the reversal of a portion of the liability for income taxes due to the expiration of the applicable statute of limitations.  Net income and FFO for the quarter ended September 30, 2010 include a litigation loss accrual related to our Flushing property of $3,135,000, or $0.61 per diluted share.

 

Net income attributable to common stockholders for the nine months ended September 30, 2010 was $48,538,000, or $9.51 per diluted share, compared to $117,088,000, or $22.94 per diluted share for the nine months ended September 30, 2009.  FFO for the nine months ended September 30, 2010 was $71,289,000, or $13.96 per diluted share, compared to $136,588,000, or $26.76 per diluted share, for the nine months ended September 30, 2009.  Net income attributable to common stockholders and FFO for the nine months ended September 30, 2010 and 2009 include income of $5,113,000 and $42,472,000, respectively, or $1.00 and $8.32 per diluted share, respectively, from the reversal of a portion of the liability for income taxes due to the expiration of the applicable statute of limitations.  Net income and FFO for the nine months ended September 30, 2010 include a litigation loss accrual related to our Flushing property of $3,135,000, or $0.61 per diluted share, and net income and FFO for the nine months ended September 20, 2009 include $34,275,000, of $6.71 per diluted share, for the reversal of stock appreciation rights (“SARs”) compensation expense.

 

Significant Tenants

 

Bloomberg L.P. (“Bloomberg”) accounted for $62,476,000, or 35%, and $57,886,000, or 35%, of our consolidated revenues in the nine months ended September 30, 2010 and 2009, respectively.  No other tenant accounted for more than 10% of our consolidated revenues.  If we were to lose Bloomberg as a tenant, or if Bloomberg were to fail or become unable to perform its obligations under its lease, it would adversely affect our results of operations and financial condition.  We receive semi-annually, certain confidential financial information and metrics from Bloomberg.  In addition, we access financial information regarding Bloomberg from private sources, as well as other publicly available data. 

 

Recently Issued Accounting Literature

 

On January 21, 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, adding new requirements for disclosures about transfers into and out of Levels 1 and 2 fair value measurements and additional disclosures about the activity within Level 3 fair value measurements.  The application of this guidance on January 1, 2010 did not have any effect on our consolidated financial statements.

 

On June 12, 2009, the FASB issued an update to ASC 810, Consolidation, which modifies the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity (“VIE”) by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE.  The adoption of this guidance on January 1, 2010 did not have any effect on our consolidated financial statements.

Results of Operations for the Three Months Ended September 30, 2010 and 2009

 

 

Property Rentals

Property rentals were $42,306,000 in the quarter ended September 30, 2010, compared to $40,762,000 in the prior year’s quarter, an increase of $1,544,000.  This increase was primarily attributable to tenants at the Rego Park II property, whose space was placed into service subsequent to the third quarter of 2009.   

 

 

Expense Reimbursements

Tenant expense reimbursements were $19,084,000 in the quarter ended September 30, 2010, compared to $17,648,000 in the prior year’s quarter, an increase of $1,436,000. This increase was due to higher reimbursable operating expenses and real estate taxes, partially offset by a true-up in billings for operating expense reimbursements.

 

 

Operating Expenses

Operating expenses were $20,799,000 in the quarter ended September 30, 2010, compared to $18,402,000 in the prior year’s quarter, an increase of $2,397,000.  This increase was primarily attributable to an increase in reimbursable operating expenses and real estate taxes of $2,146,000.

 

 

Depreciation and Amortization

Depreciation and amortization was $7,869,000 in the quarter ended September 30, 2010, compared to $7,328,000 in the prior year’s quarter, an increase of $541,000.  This increase resulted primarily from depreciation on the portion of Rego Park II placed into service subsequent to the third quarter of 2009.

 

 

General and Administrative Expenses

Excluding $3,135,000 for a litigation loss accrual related to our Flushing property, general and administrative expenses decreased by $60,000 from the prior year’s quarter.

 

 

Interest and Other Income, net

Interest and other income, net was $162,000 in the quarter ended September 30, 2010, compared to $758,000 in the prior year’s quarter, a decrease of $596,000.  This decrease was primarily due to lower average yields on investments (0.14% in the current quarter as compared to 0.55% in the prior year’s quarter).

 

 

Interest and Debt Expense

Interest and debt expense was $13,413,000 in the quarter ended September 30, 2010, compared to $10,924,000 in the prior year’s quarter, an increase of $2,489,000.  This increase was primarily due to (i) $2,936,000 of interest related to our income tax liability, resulting primarily from the reversal of a lower amount of previously recognized interest expense in the current quarter as compared to the prior year’s quarter and (ii) interest savings of $735,000 resulting from the partial repayment of Kings Plaza debt in March 2010.

 

 

Income Tax Benefit

Income tax benefit was $3,001,000 in the quarter ended September 30, 2010, compared to $37,065,000 in the prior year’s quarter, a decrease of $34,064,000.  This decrease resulted from the reversal of a lower amount of our income tax liability in the current quarter as compared to the prior year’s quarter.  These liabilities were reversed as a result of the expiration of the applicable statute of limitations.  

 

 

Net Income Attributable to the Noncontrolling Interest

Net income attributable to the noncontrolling interest was $432,000 in the quarter ended September 30, 2010, compared to $460,000 in the prior year’s quarter, and represents our venture partner’s 75% pro rata share of net income from our consolidated partially owned entity, the Kings Plaza energy plant joint venture.

Results of Operations for the Nine Months Ended September 30, 2010 and 2009

 

 

Property Rentals

Property rentals were $123,311,000 in the nine months ended September 30, 2010, compared to $114,837,000 in the prior year’s nine months, an increase of $8,474,000.  This increase was primarily attributable to tenants at the Rego Park II property, whose space was placed into service during, and subsequent to, the second quarter of 2009.

 

 

Expense Reimbursements

Tenant expense reimbursements were $55,789,000 in the nine months ended September 30, 2010, compared to $51,538,000 in the prior year’s nine months, an increase of $4,251,000. This increase was primarily due to higher reimbursable operating expenses and real estate taxes, additional billings for Kings Plaza energy plant costs related to 2009 and services provided to tenants, partially offset by a true-up in billings for operating expense reimbursements.

 

 

Operating Expenses

Operating expenses were $58,672,000 in the nine months ended September 30, 2010, compared to $55,689,000 in the prior year’s nine months, an increase of $2,983,000.  This increase was comprised of an increase in reimbursable operating expenses and real estate taxes of $3,660,000, partially offset by a decrease in non-reimbursable operating expenses of $677,000.

 

 

Depreciation and Amortization

Depreciation and amortization was $23,117,000 in the nine months ended September 30, 2010, compared to $19,886,000 in the nine months ended September 30, 2009, an increase of $3,231,000.  This increase resulted primarily from depreciation on the portion of Rego Park II placed into service during, and subsequent to, the second quarter of 2009.

 

 

General and Administrative Expenses

Excluding $3,135,000 for a litigation loss accrual related to our Flushing property in 2010, and $34,275,000 for the reversal of SARs compensation expense and $1,407,000 for the write-off of previously capitalized costs at our Flushing property in 2009, general and administrative expenses increased by $7,000 from the prior year’s nine months.

 

 

Interest and Other Income, net

Interest and other income, net was $649,000 in the nine months ended September 30, 2010, compared to $2,390,000 in the prior year’s nine months, a decrease of $1,741,000.  This decrease was primarily comprised of $1,455,000 from lower average yields on investments (0.16% in the nine months ended September 30, 2010 as compared to 0.58% in the prior year’s nine months).

 

 

Interest and Debt Expense

Interest and debt expense was $43,290,000 in the nine months ended September 30, 2010, compared to $41,770,000 in the prior year’s nine months, an increase of $1,520,000. This increase was primarily due to (i) $1,955,000 of lower capitalized interest as a result of placing a portion of our Rego Park II property in service and (ii) $1,851,000 of interest related to our income tax liability, resulting primarily from the reversal of a lower amount of previously recognized interest expense in the current period as compared to the prior period, partially offset by (iii) $1,685,000 resulting from the partial repayment of Kings Plaza debt in March 2010 and (iv) $976,000 from the refinancing of the Rego Park I mortgage loan in March 2009. 

 

 

Net Loss on Early Extinguishment of Debt

Net loss on early extinguishment of debt was $1,238,000 in the nine months ended September 30, 2010 and resulted from the open market purchase of $27,500,000 of our Kings Plaza debt for $28,738,000 in cash.

 

 

 

Results of Operations for the Nine Months Ended September 30, 2010 and 2009 — continued

 

 

Income Tax Benefit

Income tax benefit was $2,742,000 in the nine months ended September 30, 2010, compared to $36,947,000 in the prior year’s nine months, a decrease of $34,205,000.  This decrease resulted from the reversal of a lower amount of our income tax liability in the nine months ended September 30, 2010 as compared to the prior year’s nine months.  These liabilities were reversed as a result of the expiration of the applicable statute of limitations.  

 

 

Net Income Attributable to the Noncontrolling Interest

Net income attributable to the noncontrolling interest was $1,034,000 in the nine months ended September 30, 2010, compared to $687,000 in the prior year’s nine months, and represents our venture partner’s 75% pro rata share of net income from our consolidated partially owned entity, the Kings Plaza energy plant joint venture.

Liquidity and Capital Resources

 

We anticipate that cash flow from continuing operations over the next twelve months, together with existing cash balances, will be adequate to fund our business operations, cash dividends to stockholders, debt amortization and recurring capital expenditures.

 

 

Cash Flows

 

Property rental income is our primary source of cash flow and is dependent on a number of factors, including the occupancy level and rental rates of our properties, as well as our tenants’ ability to pay their rents.  Our properties provide us with a relatively consistent stream of cash flow that enables us to pay our operating expenses, non-development capital improvements and interest expense.  Other sources of liquidity to fund cash requirements include existing cash, proceeds from debt financings, including mortgage or construction loans secured by our properties and proceeds from asset sales.

 

Nine Months Ended September 30, 2010

 

Cash and cash equivalents were $419,735,000 at September 30, 2010, compared to $412,734,000 at December 31, 2009, an increase of $7,001,000.  This increase resulted from $42,746,000 of net cash provided by operating activities, partially offset by $34,545,000 of net cash used in financing activities and $1,200,000 of net cash used in investing activities. 

 

Net cash provided by operating activities of $42,746,000 was comprised of net income of $49,572,000 and adjustments for non-cash items of $9,046,000, partially offset by the net change in operating assets and liabilities of $15,872,000.  The adjustments for non-cash items were comprised of (i) depreciation and amortization of $25,745,000, partially offset by (ii) straight-lining of rental income of $11,586,000 and (iii) a $5,113,000 reversal of a portion of the liability for income taxes as a result of the expiration of the applicable statute of limitations.

 

Net cash used in investing activities of $1,200,000 was primarily comprised of purchases of short-term investments of $23,000,000 and capital expenditures of $20,608,000, primarily related to the development of our Rego Park II project, partially offset by proceeds from maturing short-term investments of $40,000,000.

 

Net cash used in financing activities of $34,545,000 was comprised of a $27,500,000 purchase of our Kings Plaza debt, dividends paid on common stock of $25,530,000 and debt amortization of $11,769,000, partially offset by $30,254,000 of borrowings under our Rego Park II construction loan. 

 

 

Nine Months Ended September 30, 2009

 

Cash and cash equivalents were $436,830,000 at September 30, 2009, compared to $515,940,000 at December 31, 2008, a decrease of $79,110,000.  This decrease resulted from $141,980,000 of net cash used in investing activities, partially offset $45,843,000 of net cash provided by financing activities and $17,027,000 of net cash provided by operating activities.

 

Net cash provided by operating activities of $17,027,000 was comprised of net income of $117,775,000, partially offset by adjustments for non-cash items of $69,438,000 and the net change in operating assets and liabilities of $31,310,000.  The adjustments for non-cash items were comprised of (i) a $42,472,000 reversal of a portion of the liability for income taxes as a result of the expiration of the applicable statute of limitations, (ii) a reversal of the liability for SARs compensation expense of $34,275,000 and (iii) straight-lining of rental income of $16,773,000, partially offset by (iv) depreciation and amortization of $22,198,000 and (v) other non-cash adjustments of $1,884,000, primarily due to a $1,407,000 write-off of previously capitalized costs at our Flushing property.  The net change in operating assets and liabilities of $31,310,000 included a $22,838,000 payment for SARs compensation expense.

 

Net cash used in investing activities of $141,980,000 was primarily comprised of restricted cash of $83,553,000, primarily related to the fully cash-collateralized mortgage at Rego Park I, and capital expenditures of $58,427,000, primarily related to the development of our Rego Park II project.

 

Net cash provided by financing activities of $45,843,000 was primarily comprised of borrowings under the construction loan to fund expenditures at our Rego Park II project.  Financing activities also include the $78,246,000 refinancing of the Rego Park I mortgage loan.

 

Liquidity and Capital Resources — continued

 

 

Rego Park II Development Project

 

The Rego Park II property, a newly developed 600,000 square foot shopping center, is located adjacent to our Rego Park I property in Queens, New York.  As of September 30, 2010, 89% of the center is in service and $379,000,000 was expended under the total construction budget of $410,000,000.  $296,665,000 was drawn on the construction loan, which has an interest rate of LIBOR plus 1.20% (1.67% at September 30, 2010) and matures in December 2010 with a one-year extension option.  The estimated costs to complete this project are expected to be funded by the existing construction loan.

 

 

Insurance

 

We maintain general liability with limits of $300,000,000 per occurrence and all-risk property and rental value insurance coverage with limits of $1.7 billion per occurrence, including coverage for terrorist acts, with sub-limits for certain perils such as floods and earthquakes on each of our properties.  There can be no assurance that we will be able to maintain similar levels of insurance coverage in the future in amounts and on terms that are commercially reasonable.  We are responsible for deductibles and losses in excess of our insurance coverage, which could be material.

 

Our mortgage loans are non-recourse to us, except for $75,000,000 of the $320,000,000 mortgage on our 731 Lexington Avenue property, in the event of a substantial casualty, as defined.  Our mortgage loans contain customary covenants requiring us to maintain insurance.  If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance and/or refinance our properties.

 

 

Dividends

 

In order to maintain our qualification as a REIT under the Internal Revenue Code, we must distribute at least 90% of our taxable income to shareholders.  Because the balance of our NOL has exceeded taxable income in the past, there was no distribution requirement.  On May 24, 2010 and August 20, 2010, we paid quarterly dividends of $2.50 per share (estimated quarterly taxable income), or $25,530,000 in the aggregate, an indicated annual rate of $10.00 per share.  Dividends contemplated for the fourth quarter of 2010 would require us to pay out approximately $12,800,000.

 

Significant Tenants

 

Bloomberg L.P. (“Bloomberg”) accounted for $62,476,000, or 35%, and $57,886,000, or 35%, of our consolidated revenues in the nine months ended September 30, 2010 and 2009, respectively.  No other tenant accounted for more than 10% of our consolidated revenues.  If we were to lose Bloomberg as a tenant, or if Bloomberg were to fail or become unable to perform its obligations under its lease, it would adversely affect our results of operations and financial condition.  We receive semi-annually, certain confidential financial information and metrics from Bloomberg.  In addition, we access financial information regarding Bloomberg from private sources, as well as other publicly available data. 

 

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 gains from sales of depreciated real estate assets, 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 flow as a liquidity measure.  FFO may not be comparable to similarly titled measures employed by other companies.  A reconciliation of our net income to FFO is provided below.

 

 

FFO Attributable to Common Stockholders for the Three and Nine Months Ended September 30, 2010 and 2009

 

FFO attributable to common stockholders for the quarter ended September 30, 2010 was $25,624,000, or $5.02 per diluted share, compared to $65,228,000, or $12.77 per diluted share, for the quarter ended September 30, 2009.  FFO attributable to common stockholders for the quarters ended September 30, 2010 and 2009 include income of $5,113,000 and $42,472,000, respectively, or $1.00 and $8.32 per diluted share, respectively, from the reversal of a portion of the liability for income taxes due to the expiration of the applicable statute of limitations.  FFO for the quarter ended September 30, 2010 includes a litigation loss accrual related to our Flushing property of $3,135,000, or $0.61 per diluted share.

 

FFO attributable to common stockholders for the nine months ended September 30, 2010 was $71,289,000, or $13.96 per diluted share, compared to $136,588,000, or $26.76 per diluted share, for the nine months ended September 30, 2009.  FFO attributable to common stockholders for the nine months ended September 30, 2010 and 2009 include income of $5,113,000 and $42,472,000, respectively, or $1.00 and $8.32 per diluted share, respectively, from the reversal of a portion of the liability for income taxes due to the expiration of the applicable statute of limitations.  The nine months ended September 30, 2010 includes a litigation loss accrual related to our Flushing property of $3,135,000, or $0.61 per diluted share, and net income and FFO for the nine months ended September 30, 2009 includes $34,275,000, of $6.71 per diluted share, for the reversal of SARs compensation expense. 

 

The following table reconciles our net income to FFO:

 

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

We have exposure to fluctuations in interest rates, which are sensitive to many factors that are beyond our control.  Our exposure to a change in interest rates is summarized in the table below.

 

 

The fair value of our consolidated debt is calculated by discounting the future contractual cash flows of our existing debt using the current rates available to borrowers with similar credit ratings for the remaining terms of such debt.  As of September 30, 2010, the estimated fair value of our consolidated debt was $1,287,356,000.  Our fair value estimates, which are made at the end of the reporting period, may be different from the amounts that may ultimately be realized upon disposition of our financial instruments.

 

 

Item 4.   Controls and Procedures

 

(a) Disclosure Controls and Procedures:  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

 

(b) Internal Control Over Financial Reporting:  There have not been any changes in our internal control over financial reporting during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.