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VORNADO REALTY TRUST - Quarter Report: 2014 September (Form 10-Q)

vno3q201410q.htm - Generated by SEC Publisher for SEC Filing  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended:   

September 30, 2014

 

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:

 

to

 

 

Commission File Number:

001-11954

 

 

VORNADO REALTY TRUST

(Exact name of registrant as specified in its charter)

 

Maryland

 

22-1657560

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

888 Seventh Avenue, New York, New York

 

10019

(Address of principal executive offices)

 

(Zip Code)

 

 

(212) 894-7000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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

 

x Large Accelerated Filer

 

o Accelerated Filer

o Non-Accelerated Filer (Do not check if smaller reporting company)

 

o Smaller Reporting Company

 

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

 

As of September 30, 2014, 187,735,229 of the registrant’s common shares of beneficial interest are outstanding.

 

 

 


 

 

PART I.

Financial Information:

Page Number

Item 1.

Financial Statements:

Consolidated Balance Sheets (Unaudited) as of

September 30, 2014 and December 31, 2013

3

Consolidated Statements of Income (Unaudited) for the

Three and Nine Months Ended September 30, 2014 and 2013

4

Consolidated Statements of Comprehensive Income (Unaudited)

for the Three and Nine Months Ended September 30, 2014 and 2013

5

Consolidated Statements of Changes in Equity (Unaudited) for the

Nine Months Ended September 30, 2014 and 2013

6

Consolidated Statements of Cash Flows (Unaudited) for the

Nine Months Ended September 30, 2014 and 2013

8

Notes to Consolidated Financial Statements (Unaudited)

10

Report of Independent Registered Public Accounting Firm

34

Item 2.

Management's Discussion and Analysis of Financial Condition

and Results of Operations

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

75

Item 4.

Controls and Procedures

76

PART II.

Other Information:

Item 1.

Legal Proceedings

77

Item 1A.

Risk Factors

77

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

77

Item 3.

Defaults Upon Senior Securities

77

Item 4.

Mine Safety Disclosures

77

Item 5.

Other Information

77

Item 6.

Exhibits

77

SIGNATURES

78

EXHIBIT INDEX

79

2

 


 

 

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

 

VORNADO REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

September 30,

December 31,

ASSETS

2014 

2013 

Real estate, at cost:

Land

$

4,137,278 

$

4,066,837 

Buildings and improvements

12,609,463 

12,466,244 

Development costs and construction in progress

1,680,202 

1,353,103 

Leasehold improvements and equipment

128,982 

132,483 

Total

18,555,925 

18,018,667 

Less accumulated depreciation and amortization

(3,613,098)

(3,372,207)

Real estate, net

14,942,827 

14,646,460 

Cash and cash equivalents

1,683,142 

583,290 

Restricted cash

160,848 

262,440 

Marketable securities

184,154 

191,917 

Tenant and other receivables, net of allowance for doubtful accounts of $18,307 and $21,869

118,636 

115,862 

Investments in partially owned entities

1,268,066 

1,166,443 

Investment in Toys "R" Us

-   

83,224 

Real Estate Fund investments

495,392 

667,710 

Mortgage and mezzanine loans receivable, net of allowance of $5,811 and $5,845

17,085 

170,972 

Receivable arising from the straight-lining of rents, net of allowance of $3,396 and $4,355

873,901 

817,314 

Deferred leasing and financing costs, net of accumulated amortization of $299,542 and $264,421

483,902 

411,922 

Identified intangible assets, net of accumulated amortization of $223,786 and $277,998

280,207 

311,963 

Assets related to discontinued operations

-   

316,219 

Other assets

492,355 

351,488 

$

21,000,515 

$

20,097,224 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

Mortgages payable

$

9,273,212 

$

8,331,993 

Senior unsecured notes

1,791,987 

1,350,855 

Revolving credit facility debt

88,138 

295,870 

Accounts payable and accrued expenses

498,565 

422,276 

Deferred revenue

489,250 

529,048 

Deferred compensation plan

113,549 

116,515 

Liabilities related to discontinued operations

-   

13,950 

Other liabilities

380,843 

438,353 

Total liabilities

12,635,544 

11,498,860 

Commitments and contingencies

Redeemable noncontrolling interests:

Class A units - 11,395,068 and 11,292,038 units outstanding

1,139,052 

1,002,620 

Series D cumulative redeemable preferred unit - 1 unit outstanding

1,000 

1,000 

Total redeemable noncontrolling interests

1,140,052 

1,003,620 

Vornado shareholders' equity:

Preferred shares of beneficial interest: no par value per share; authorized 110,000,000

shares; issued and outstanding 52,678,939 and 52,682,807 shares

1,277,026 

1,277,225 

Common shares of beneficial interest: $.04 par value per share; authorized

250,000,000 shares; issued and outstanding 187,735,229 and 187,284,688 shares

7,487 

7,469 

Additional capital

7,040,538 

7,143,840 

Earnings less than distributions

(1,878,125)

(1,734,839)

Accumulated other comprehensive income

69,580 

71,537 

Total Vornado shareholders' equity

6,516,506 

6,765,232 

Noncontrolling interests in consolidated subsidiaries

708,413 

829,512 

Total equity

7,224,919 

7,594,744 

$

21,000,515 

$

20,097,224 

See notes to consolidated financial statements (unaudited).

3

 


 
 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

For the Three

For the Nine

Months Ended September 30,

Months Ended September 30,

(Amounts in thousands, except per share amounts)

2014 

2013 

2014 

2013 

REVENUES:

Property rentals

$

538,168 

$

521,433 

$

1,606,120 

$

1,589,038 

Tenant expense reimbursements

86,330 

81,814 

248,964 

229,938 

Cleveland Medical Mart development project

4,893 

34,026 

Fee and other income

46,411 

60,849 

142,618 

205,523 

Total revenues

670,909 

668,989 

1,997,702 

2,058,525 

EXPENSES:

Operating

268,450 

261,776 

802,505 

785,992 

Depreciation and amortization

130,208 

122,119 

406,868 

394,579 

General and administrative

44,547 

44,186 

141,273 

145,871 

Cleveland Medical Mart development project

3,239 

29,764 

Impairment losses, acquisition and transaction related costs

7,105 

2,818 

32,972 

6,769 

Total expenses

450,310 

434,138 

1,383,618 

1,362,975 

Operating income

220,599 

234,851 

614,084 

695,550 

(Loss) applicable to Toys "R" Us

(18,418)

(34,209)

(74,162)

(69,311)

(Loss) income from partially owned entities

(7,245)

1,453 

(3,264)

23,691 

Income from Real Estate Fund

24,160 

22,913 

142,418 

73,947 

Interest and other investment income (loss), net

7,602 

(10,275)

28,930 

(32,935)

Interest and debt expense

(115,120)

(119,676)

(341,613)

(360,679)

Net gain (loss) on disposition of wholly owned and partially

owned assets

2,665 

15,138 

13,205 

(20,581)

Income before income taxes

114,243 

110,195 

379,598 

309,682 

Income tax expense

(3,177)

(2,222)

(8,358)

(6,172)

Income from continuing operations

111,066 

107,973 

371,240 

303,510 

Income from discontinued operations

58,131 

24,278 

61,800 

299,989 

Net income

169,197 

132,251 

433,040 

603,499 

Less net income attributable to noncontrolling interests in:

Consolidated subsidiaries

(9,685)

(23,833)

(85,239)

(50,049)

Operating Partnership

(7,975)

(5,032)

(16,514)

(27,814)

Preferred unit distributions of the Operating Partnership

(13)

(12)

(38)

(1,146)

Net income attributable to Vornado

151,524 

103,374 

331,249 

524,490 

Preferred share dividends

(20,365)

(20,369)

(61,099)

(62,439)

Preferred unit and share redemptions

(1,130)

NET INCOME attributable to common shareholders

$

131,159 

$

83,005 

$

270,150 

$

460,921 

INCOME PER COMMON SHARE - BASIC:

Income from continuing operations, net

$

0.41 

$

0.33 

$

1.13 

$

0.97 

Income from discontinued operations, net

0.29 

0.11 

0.31 

1.50 

Net income per common share

$

0.70 

$

0.44 

$

1.44 

$

2.47 

Weighted average shares outstanding

187,671 

186,969 

187,503 

186,885 

INCOME PER COMMON SHARE - DILUTED:

Income from continuing operations, net

$

0.40 

$

0.33 

$

1.12 

$

0.96 

Income from discontinued operations, net

0.29 

0.11 

0.31 

1.50 

Net income per common share

$

0.69 

$

0.44 

$

1.43 

$

2.46 

Weighted average shares outstanding

188,812 

187,724 

188,592 

187,679 

DIVIDENDS PER COMMON SHARE

$

0.73 

$

0.73 

$

2.19 

$

2.19 

See notes to consolidated financial statements (unaudited).

4

 


 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

For the Three

For the Nine

Months Ended September 30,

Months Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Net income

$

169,197 

$

132,251 

$

433,040 

$

603,499 

Other comprehensive income (loss):

Change in unrealized net (loss) gain on available-for-sale securities

(22,764)

(8,252)

(7,761)

160,886 

Amounts reclassified from accumulated other comprehensive

income related to sale of available-for-sale securities

-   

(42,404)

-   

(42,404)

Pro rata share of other comprehensive loss of

nonconsolidated subsidiaries

(6,028)

(1,669)

(151)

(25,023)

Change in value of interest rate swap

4,781 

(295)

5,846 

14,265 

Other

-   

531 

Comprehensive income

145,187 

79,632 

430,974 

711,754 

Less comprehensive income attributable to noncontrolling interests

(16,304)

(25,825)

(101,682)

(84,991)

Comprehensive income attributable to Vornado

$

128,883 

$

53,807 

$

329,292 

$

626,763 

See notes to consolidated financial statements (unaudited).

5

 


 
 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

Non-

Accumulated

controlling

(Amounts in thousands)

Earnings

Other

Interests in

Preferred Shares

Common Shares

Additional

Less Than

Comprehensive

Consolidated

Total

Shares

Amount

Shares

Amount

Capital

Distributions

Income (Loss)

Subsidiaries

Equity

Balance, December 31, 2013

52,683 

$

1,277,225 

187,285 

$

7,469 

$

7,143,840 

$

(1,734,839)

$

71,537 

$

829,512 

$

7,594,744 

Net income attributable to Vornado

-   

-   

-   

-   

-   

331,249 

-   

-   

331,249 

Net income attributable to

noncontrolling interests in

consolidated subsidiaries

-   

-   

-   

-   

-   

-   

-   

85,239 

85,239 

Dividends on common shares

-   

-   

-   

-   

-   

(410,724)

-   

-   

(410,724)

Dividends on preferred shares

-   

-   

-   

-   

-   

(61,099)

-   

-   

(61,099)

Common shares issued:

Upon redemption of Class A

units, at redemption value

-   

-   

227 

22,659 

-   

-   

-   

22,668 

Under employees' share

option plan

-   

-   

199 

12,342 

-   

-   

-   

12,350 

Under dividend reinvestment plan

-   

-   

13 

-   

1,387 

-   

-   

-   

1,387 

Contributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

5,297 

5,297 

Other

-   

-   

-   

-   

-   

-   

-   

5,000 

5,000 

Distributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

(182,964)

(182,964)

Other

-   

-   

-   

-   

-   

-   

-   

(643)

(643)

Transfer of noncontrolling interest

in Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

(33,028)

(33,028)

Conversion of Series A preferred

shares to common shares

(4)

(193)

-   

193 

-   

-   

-   

-   

Deferred compensation shares

and options

-   

-   

4,645 

(340)

-   

-   

4,306 

Change in unrealized net loss on

available-for-sale securities

-   

-   

-   

-   

-   

-   

(7,761)

-   

(7,761)

Pro rata share of other

comprehensive loss of

nonconsolidated subsidiaries

-   

-   

-   

-   

-   

-   

(151)

-   

(151)

Change in value of interest rate swap

-   

-   

-   

-   

-   

-   

5,846 

-   

5,846 

Adjustments to carry redeemable

Class A units at redemption value

-   

-   

-   

-   

(144,231)

-   

-   

-   

(144,231)

Redeemable noncontrolling interests'

share of above adjustments

-   

-   

-   

-   

-   

-   

109 

-   

109 

Other

-   

(6)

-   

-   

(297)

(2,372)

-   

-   

(2,675)

Balance, September 30, 2014

52,679 

$

1,277,026 

187,735 

$

7,487 

$

7,040,538 

$

(1,878,125)

$

69,580 

$

708,413 

$

7,224,919 

See notes to consolidated financial statements (unaudited).

 

6

 


 
 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED

(UNAUDITED)

Non-

Accumulated

controlling

(Amounts in thousands)

Earnings

Other

Interests in

Preferred Shares

Common Shares

Additional

Less Than

Comprehensive

Consolidated

Total

Shares

Amount

Shares

Amount

Capital

Distributions

Income (Loss)

Subsidiaries

Equity

Balance, December 31, 2012

51,185 

$

1,240,278 

186,735 

$

7,440 

$

7,195,438 

$

(1,573,275)

$

(18,946)

$

1,053,209 

$

7,904,144 

Net income attributable to Vornado

-   

-   

-   

-   

-   

524,490 

-   

-   

524,490 

Net income attributable to

noncontrolling interests in

consolidated subsidiaries

-   

-   

-   

-   

-   

-   

-   

50,049 

50,049 

Dividends on common shares

-   

-   

-   

-   

-   

(409,332)

-   

-   

(409,332)

Dividends on preferred shares

-   

-   

-   

-   

-   

(62,439)

-   

-   

(62,439)

Issuance of Series L preferred shares

12,000 

290,536 

-   

-   

-   

-   

-   

-   

290,536 

Redemption of Series F and Series H

preferred shares

(10,500)

(253,269)

-   

-   

-   

-   

-   

-   

(253,269)

Common shares issued:

Upon redemption of Class A

units, at redemption value

-   

-   

234 

19,618 

-   

-   

-   

19,627 

Under employees' share

option plan

-   

-   

66 

3,678 

-   

-   

-   

3,681 

Under dividend reinvestment plan

-   

-   

16 

-   

1,376 

-   

-   

-   

1,376 

Contributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

24,328 

24,328 

Other

-   

-   

-   

-   

-   

-   

-   

15,687 

15,687 

Distributions:

Real Estate Fund

-   

-   

-   

-   

-   

-   

-   

(47,268)

(47,268)

Other

-   

-   

-   

-   

-   

-   

-   

(126,799)

(126,799)

Conversion of Series A preferred

shares to common shares

(2)

(90)

-   

90 

-   

-   

-   

-   

Deferred compensation shares

and options

-   

-   

(6)

(12)

7,194 

(305)

-   

-   

6,877 

Change in unrealized net gain

on available-for-sale securities

-   

-   

-   

-   

-   

-   

160,886 

-   

160,886 

Amounts reclassified related to sale

of available-for-sale securities

-   

-   

-   

-   

-   

-   

(42,404)

-   

(42,404)

Pro rata share of other

comprehensive loss of

nonconsolidated subsidiaries

-   

-   

-   

-   

-   

-   

(25,023)

-   

(25,023)

Change in value of interest rate swap

-   

-   

-   

-   

-   

-   

14,265 

-   

14,265 

Adjustments to carry redeemable

Class A units at redemption value

-   

-   

-   

-   

(43,709)

-   

-   

-   

(43,709)

Redeemable noncontrolling interests'

share of above adjustments

-   

-   

-   

-   

-   

-   

(5,982)

-   

(5,982)

Preferred unit and share redemptions

-   

-   

-   

-   

-   

(1,130)

-   

-   

(1,130)

Deconsolidation of partially

owned entity

-   

-   

-   

-   

-   

-   

-   

(165,427)

(165,427)

Other

-   

-   

-   

-   

(25)

(5,672)

531 

(164)

(5,330)

Balance, September 30, 2013

52,683 

$

1,277,455 

187,048 

$

7,440 

$

7,183,660 

$

(1,527,663)

$

83,327 

$

803,615 

$

7,827,834 

See notes to consolidated financial statements (unaudited).

7

 


 
 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the Nine Months Ended

September 30,

2014 

2013 

(Amounts in thousands)

Cash Flows from Operating Activities:

Net income

$

433,040 

$

603,499 

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization (including amortization of deferred financing costs)

423,959 

419,249 

Proceeds from Real Estate Fund investments

215,676 

56,664 

Net realized and unrealized gains on Real Estate Fund investments

(131,558)

(59,476)

Equity in net loss of partially owned entities, including Toys “R” Us

77,426 

45,620 

Net gains on sale of real estate

(57,796)

(286,990)

Straight-lining of rental income

(56,983)

(48,561)

Distributions of income from partially owned entities

42,164 

34,350 

Amortization of below-market leases, net

(32,663)

(40,341)

Other non-cash adjustments

28,691 

60,957 

Impairment losses

20,842 

4,727 

Net (gain) loss on disposition of wholly owned and partially owned assets

(13,205)

20,581 

Defeasance cost in connection with the refinancing of mortgage notes payable

5,589 

-   

Non-cash impairment loss on J.C. Penney common shares

-   

39,487 

Loss from the mark-to-market of J.C. Penney derivative position

-   

33,487 

Changes in operating assets and liabilities:

Real Estate Fund investments

(3,392)

(32,392)

Accounts receivable, net

(2,775)

63,280 

Prepaid assets

(85,372)

(60,388)

Other assets

(68,833)

(25,854)

Accounts payable and accrued expenses

36,949 

(38,904)

Other liabilities

(3,190)

597 

Net cash provided by operating activities

828,569 

789,592 

Cash Flows from Investing Activities:

Development costs and construction in progress

(368,571)

(149,010)

Proceeds from sales of real estate and related investments

335,489 

734,427 

Additions to real estate

(171,660)

(170,424)

Restricted cash

101,592 

21,883 

Acquisitions of real estate and other

(95,546)

(75,079)

Proceeds from repayments of mortgage and mezzanine loans receivable and other

96,504 

49,452 

Investments in partially owned entities

(91,697)

(212,624)

Investment in mortgage and mezzanine loans receivable and other

(11,380)

(390)

Distributions of capital from partially owned entities

8,130 

287,944 

Proceeds from sales of marketable securities

-   

378,676 

Proceeds from the sale of LNR

-   

240,474 

Funding of J.C. Penney derivative collateral and settlement of derivative

-   

(186,079)

Return of J.C. Penney derivative collateral

-   

101,150 

Net cash (used in) provided by investing activities

(197,139)

1,020,400 

See notes to consolidated financial statements (unaudited).

 

8

 


 
 

 

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

For the Nine Months Ended

September 30,

2014 

2013 

(Amounts in thousands)

Cash Flows from Financing Activities:

Proceeds from borrowings

$

1,713,285 

$

1,600,357 

Dividends paid on common shares

(410,724)

(409,332)

Repayments of borrowings

(343,354)

(2,851,420)

Distributions to noncontrolling interests

(208,773)

(200,667)

Purchase of marketable securities in connection with the defeasance of mortgage

notes payable

(198,884)

-   

Dividends paid on preferred shares

(61,102)

(62,820)

Debt issuance costs

(40,424)

(9,982)

Proceeds received from exercise of employee share options

13,738 

5,057 

Contributions from noncontrolling interests

5,297 

40,015 

Repurchase of shares related to stock compensation agreements and/or related

tax withholdings

(637)

(332)

Purchases of outstanding preferred units and shares

-   

(299,400)

Proceeds from the issuance of preferred shares

-   

290,536 

Net cash provided by (used in) financing activities

468,422 

(1,897,988)

Net increase (decrease) in cash and cash equivalents

1,099,852 

(87,996)

Cash and cash equivalents at beginning of period

583,290 

960,319 

Cash and cash equivalents at end of period

$

1,683,142 

$

872,323 

Supplemental Disclosure of Cash Flow Information:

Cash payments for interest, excluding capitalized interest of $46,517 and $28,024

$

317,162 

$

350,899 

Cash payments for income taxes

$

9,407 

$

7,529 

Non-Cash Investing and Financing Activities:

Marketable securities transferred in connection with the defeasance of mortgage

notes payable

$

198,884 

$

-   

Defeasance of mortgage notes payable

(193,406)

-   

Adjustments to carry redeemable Class A units at redemption value

(144,231)

(43,709)

Write-off of fully depreciated assets

(103,184)

(54,377)

Elimination of a mortgage and mezzanine loan asset and liability

59,375 

-   

Transfer of interest in Real Estate Fund to an unconsolidated joint venture

(58,564)

-   

Like-kind exchange of real estate:

Acquisitions

50,159 

7,663 

Dispositions

(50,159)

(163,468)

Transfer of noncontrolling interest in Real Estate Fund

(33,028)

-   

Beverly Connection seller financing

13,620 

-   

Decrease in assets and liabilities resulting from the deconsolidation of Independence Plaza:

Real estate, net

-   

(852,166)

Notes and mortgages payable

-   

(322,903)

See notes to consolidated financial statements (unaudited).

9

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.     Organization

 

Vornado Realty Trust (“Vornado”) is a fully‑integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”).  Vornado is the sole general partner of, and owned approximately 94.0% of the common limited partnership interest in the Operating Partnership at September 30, 2014.  All references to “we,” “us,” “our,” the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.

 

On April 11, 2014, we announced a plan to spin off our shopping center business, consisting of 80 strip centers, four malls and a warehouse park adjacent to our East Hanover strip center, into a new publicly traded REIT, Urban Edge Properties (“UE”), formerly Vornado Spinco.  The spin-off is expected to be effectuated through a pro rata distribution of UE’s common shares to Vornado common shareholders and Vornado Realty L.P. common unitholders, and is intended to be treated as tax-free for U.S. federal income tax purposes.  We expect the spin-off to be completed by the end of 2014, subject to certain conditions, including the Securities and Exchange Commission (“SEC”) declaring UE’s Form 10 registration statement effective, filing and approval of UE’s listing application with the NYSE, receipt of third party consents, and formal approval and declaration of the distribution by Vornado’s Board of Trustees.  Vornado may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms.  Vornado will retain, for disposition in the near term, 20 small retail assets which do not fit UE’s strategy, and the Springfield Town Center, which is under contract for disposition (see Note 9 – Dispositions). 

 

 

2.    Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and include the accounts of Vornado and its consolidated subsidiaries, including the Operating Partnership.  All intercompany amounts have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the SEC and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2013, as filed with the SEC.

 

We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the operating results for the full year.  Certain prior year balances have been reclassified in order to conform to current year presentation. 

 

 

3.    Recently Issued Accounting Literature

 

In June 2013, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2013-08”) to Accounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies (“Topic 946”).  ASU 2013-08 amends the guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures.  ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.  The adoption of this update as of January 1, 2014, did not have any impact on our real estate fund or our consolidated financial statements.

 

In April 2014, the FASB issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment.  Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations.  In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations.  ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2014.  We are currently evaluating the impact of ASU 2014-08 on our consolidated financial statements. 

 

10

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

3.    Recently Issued Accounting Literature – continued

 

In May 2014, the FASB issued an update ("ASU 2014-09") establishing ASC Topic 606, Revenue from Contracts with Customers.  ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.  ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016.  We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

 

In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation.  ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects vesting.  ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.  We are currently evaluating the impact of the adoption of ASU 2014-12 on our consolidated financial statements.

 

 

4.    Acquisitions

 

On August 1, 2014, we acquired the land under our 715 Lexington Avenue retail property located on the Southeast corner of 58th Street and Lexington Avenue in Manhattan, for $63,000,000.

 

On October 28, 2014, we completed the purchase of the St. Regis Fifth Avenue retail for $700,000,000.  We own approximately 75% of the joint venture which owns the property.  The acquisition will be used in a like-kind exchange for income tax purposes for the sale of 1740 Broadway (see Note 22 – Subsequent Events).  We consolidate the accounts of the venture into our consolidated financial statements from the date of acquisition.  As of September 30, 2014, the venture’s $50,000,000 non-refundable deposit was included in “other assets” on our consolidated balance sheet.   

 

 

11

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

5.     Vornado Capital Partners Real Estate Fund (the “Fund”)

 

We are the general partner and investment manager of the Fund.  The Fund is accounted for under the AICPA Investment Company Guide and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings.  We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting.

 

On June 26, 2014, the Fund sold its 64.7% interest in One Park Avenue to a newly formed joint venture that we and an institutional investor own 55% and 45%, respectively (see Note 8 - Investments in Partially Owned Entities - One Park Avenue).  This transaction was based on a property value of $560,000,000.  From the inception of this investment through its disposition, the Fund realized a $75,529,000 net gain.

 

On August 21, 2014, the Fund and its 50% joint venture partner completed the sale of The Shops at Georgetown Park, a 305,000 square foot retail property, for $272,500,000. From the inception of this investment through its disposition, the Fund realized a $51,124,000 net gain.

 

At September 30, 2014, the Fund had seven investments with an aggregate fair value of $495,392,000, or $158,317,000 in excess of cost, and had remaining unfunded commitments of $144,123,000, of which our share was $36,031,000.  Below is a summary of income from the Fund for the three and nine months ended September 30, 2014 and 2013.

 

For the Three Months

For the Nine Months

 

(Amounts in thousands)

Ended September 30,

 

Ended September 30,

 

2014 

2013 

 

2014 

2013 

 

Net investment income

$

3,829 

$

2,362 

$

10,860 

$

6,287 

 

Net realized gains on exited investments

51,584 

8,184 

126,653 

8,184 

 

Previously recorded unrealized gains on exited investments

(49,586)

(50,316)

 

Net unrealized gains on held investments

18,333 

12,367 

55,221 

59,476 

 

Income from Real Estate Fund

24,160 

22,913 

142,418 

73,947 

 

Less income attributable to noncontrolling interests

(8,588)

(15,422)

(81,217)

(39,321)

 

Income from Real Estate Fund attributable to Vornado (1)

$

15,572 

$

7,491 

$

61,201 

$

34,626 

 

___________________________________

 

 
 

(1)         

Excludes management, leasing and development fees of $759 and $770 for the three months ended September 30, 2014 and 2013, respectively, and $2,208 and $2,446 for the nine months ended September 30, 2014 and 2013, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

 

 

6.    Marketable Securities

 

Below is a summary of our marketable securities portfolio as of September 30, 2014 and December 31, 2013.

 

(Amounts in thousands)

As of September 30, 2014

As of December 31, 2013

GAAP

Unrealized

GAAP

Unrealized

Fair Value

Cost

Gain

Fair Value

Cost

Gain

Equity securities:

Lexington Realty Trust

$

180,811 

$

72,549 

$

108,262 

$

188,567 

$

72,549 

$

116,018 

Other

3,343 

57 

3,286 

3,350 

59 

3,291 

$

184,154 

$

72,606 

$

111,548 

$

191,917 

$

72,608 

$

119,309 

 

In the first quarter of 2013, we wrote down 8,584,010 J.C. Penney common shares we owned to fair value, based on J.C. Penney’s March 31, 2013 closing share price of $15.11 per share, and recorded a $39,487,000 impairment loss.  In the third quarter of 2013, we settled a forward contract and received 4,815,990 J.C. Penney common shares.  In connection therewith, we recognized a $20,012,000 loss from the mark-to-market of the derivative position through its settlement date.  These losses are included in “interest and other investment income (loss), net” on our consolidated statements of income.

 

12

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

6.    Marketable Securities – continued

In March 2013 and September 2013, we sold an aggregate of 23,400,000 J.C. Penney common shares at a price of $14.29 per share, or $334,500,000, resulting in a net loss of $54,914,000, of which $36,800,000 and $18,114,000 was recognized during the first and third quarter of 2013, respectively.  In addition, in the third quarter of 2013, we sold another marketable security for $44,176,000, resulting in a net gain of $31,741,000.  The net gains and losses resulting from these sales are included in “net gain (loss) on disposition of wholly owned and partially owned assets” on our consolidated statements of income.

 

7.    Mortgage and Mezzanine Loans Receivable

 

In October 2012, we acquired a 25.0% participation in a mortgage and mezzanine loan on 701 Seventh Avenue.  In March 2013, we transferred at par, the 25.0% participation in the mortgage loan to a third party, for $59,375,000 in cash.  The transfer did not qualify for sale accounting given our continuing interest in the mezzanine loan.  Accordingly, we continued to include the 25.0% participation in the mortgage loan in “mortgage and mezzanine loans receivable” and recorded a $59,375,000 liability in “other liabilities” on our consolidated balance sheet.  In January 2014, the mortgage and mezzanine loans were repaid; accordingly, the $59,375,000 asset and liability were eliminated.  

 

In March 2014, a $30,000,000 mezzanine loan that was scheduled to mature in January 2015 was repaid. In May 2014, a $25,000,000 mezzanine loan that was scheduled to mature in November 2014 was repaid.

 

As of September 30, 2014 and December 31, 2013, the carrying amount of mortgage and mezzanine loans receivable was $17,085,000 and $170,972,000, respectively.  These loans have a weighted average interest rate of 9.1% and 11.0% at September 30, 2014 and December 31, 2013, respectively, and have maturities ranging from April 2015 to May 2016. 

 

8.    Investments in Partially Owned Entities

 

Toys “R” Us (“Toys”)

 

As of September 30, 2014, we own 32.7% of Toys.  We account for our investment in Toys under the equity method and record our share of Toys’ net income or loss on a one-quarter lag basis because Toys’ fiscal year ends on the Saturday nearest January 31, and our fiscal year ends on December 31.  The business of Toys is highly seasonal and substantially all of Toys’ net income is generated in its fourth quarter.

 

We have not guaranteed any of Toys’ obligations and are not committed to provide any support to Toys.  Pursuant to ASC 323-10-35-20, we discontinued applying the equity method of accounting for our Toys’ investment when the carrying amount was reduced to zero.  We will resume application of the equity method if our share of unrecognized net income exceeds our share of unrecognized net losses during the period the equity method was suspended.

 

Below is a summary of Toys’ latest available financial information on a purchase accounting basis:

 

(Amounts in thousands)

Balance as of

Balance Sheet:

August 2, 2014

November 2, 2013

Assets

$

10,213,000 

$

11,756,000 

Liabilities

9,139,000 

10,437,000 

Noncontrolling interests

83,000 

75,000 

Toys “R” Us, Inc. equity (1)

991,000 

1,244,000 

For the Three Months Ended

For the Nine Months Ended

Income Statement:

August 2, 2014

August 3, 2013

August 2, 2014

August 3, 2013

Total revenues

$

2,440,000 

$

2,377,000 

$

10,186,000 

$

10,555,000 

Net (loss) income attributable to Toys

(133,000)

(111,000)

(244,000)

11,000 

(1)

At September 30, 2014, the carrying amount of our investment in Toys is less than our share of Toys' equity by approximately $323,497. This basis difference results primarily from non-cash impairment losses aggregating $355,953 that we have recognized through September 30, 2014. We have allocated the basis difference primarily to Toys' real estate, which is being amortized over its remaining estimated useful life.

 

 

13

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

8.    Investments in Partially Owned Entities – continued

 

Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX)

 

As of September 30, 2014, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity.  We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.  As of September 30, 2014, we have a $44,179,000 receivable from Alexander’s for fees under these agreements.

 

As of September 30, 2014, the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s September 30, 2014 closing share price of $373.91, was $618,473,000, or $451,750,000 in excess of the carrying amount on our consolidated balance sheet.  As of September 30, 2014, the carrying amount of our investment in Alexander’s, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander’s by approximately $41,394,000.  The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets.  Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to real estate (land and buildings).  We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives.  This depreciation is not material to our share of equity in Alexander’s net income.  The basis difference related to the land will be recognized upon disposition of our investment.

 

Below is a summary of Alexander’s latest available financial information:

 

(Amounts in thousands)

Balance as of

Balance Sheet:

September 30, 2014

December 31, 2013

Assets

$

1,465,400 

$

1,457,700 

Liabilities

1,129,000 

1,124,100 

Stockholders' equity

336,400 

333,600 

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Income Statement:

2014 

2013 

2014 

2013 

Total revenues

$

50,100 

$

49,900 

$

149,500 

$

146,000 

Net income attributable to Alexander’s

17,700 

13,800 

49,800 

41,100 

                             

 

LNR Property LLC (“LNR”)

 

In January 2013, we and the other equity holders of LNR entered into a definitive agreement to sell LNR for $1.053 billion, of which our share of the net proceeds was $240,474,000.  The definitive agreement provided that LNR would not (i) make any cash distributions to the equity holders, including us, through the completion of the sale, which occurred on April 19, 2013, and (ii) take any of the following actions (among others) without the purchaser’s approval, the lending or advancing of any money, the acquisition of assets in excess of specified amounts, or the issuance of equity interests.  Notwithstanding the terms of the definitive agreement, in accordance with GAAP, we recorded our pro rata share of LNR’s earnings on a one-quarter lag basis through the date of sale, which increased the carrying amount of our investment in LNR above our share of the net sales proceeds and resulted in us recognizing a $27,231,000 “other-than-temporary” impairment loss on our investment in the three months ended March 31, 2013.

 

One Park Avenue

 

On June 26, 2014, we invested an additional $22,700,000 to increase our ownership in One Park Avenue to 55.0% from 46.5% through a joint venture with an institutional investor, who increased his ownership interest to 45.0% (see Note 5 – Vornado Capital Partners Real Estate Fund).  The transaction was based on a property value of $560,000,000.  The property is encumbered by a $250,000,000 interest-only mortgage loan that bears interest at 4.995% and matures in March 2016.  We account for our investment in the joint venture under the equity method because we share control over major decisions with our joint venture partner.

 

61 Ninth Avenue

 

On July 23, 2014, a joint venture in which we are a 50.1% partner entered into a 99-year ground lease for 61 Ninth Avenue located on the Southwest corner of Ninth Avenue and 15th Street in Manhattan.  The venture’s current plans are to construct an office building, with retail at the base, of approximately 130,000 square feet.  Total development costs are currently estimated to be approximately $125,000,000.  We account for our investment in the joint venture under the equity method because we share control over major decisions with our joint venture partner. 

 

14

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

8.    Investments in Partially Owned Entities – continued

Below are schedules summarizing our investments in, and (loss) income from, partially owned entities.

 

Percentage

(Amounts in thousands)

Ownership at

Balance as of

Investments:

September 30, 2014

September 30, 2014

December 31, 2013

Toys

32.7%

$

-   

$

83,224 

Alexander’s

32.4%

$

166,723 

$

167,785 

India real estate ventures

4.1%-36.5%

82,588 

88,467 

Partially owned office buildings (1)

Various

733,904 

621,294 

Other investments (2)

Various

284,851 

288,897 

$

1,268,066 

$

1,166,443 

(1)

Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.

(2)

Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others.

 

Percentage

For the Three Months

For the Nine Months

(Amounts in thousands)

Ownership at

Ended September 30,

Ended September 30,

Our Share of Net (Loss) Income:

September 30, 2014

2014 

2013 

2014 

2013 

Toys:

32.7%

Equity in net (loss) earnings

$

(20,357)

$

(36,056)

$

(4,691)

$

3,778 

Non-cash impairment losses

-   

-   

(75,196)

(78,542)

Management fees

1,939 

1,847 

5,725 

5,453 

$

(18,418)

$

(34,209)

$

(74,162)

$

(69,311)

Alexander's:

32.4%

Equity in net income

$

5,552 

$

4,299 

$

15,583 

$

12,785 

Management, leasing and development fees

1,640 

1,676 

4,888 

5,017 

7,192 

5,975 

20,471 

17,802 

India real estate ventures

4.1%-36.5%

(262)

(1,449)

(2,440)

(2,630)

Partially owned office buildings (1)

Various

18 

38 

(1,387)

(1,586)

Other investments (2)

Various

(14,193)

(3,111)

(19,908)

(8,626)

LNR (see page 14 for details):

n/a

Equity in net income

-   

-   

-   

45,962 

Impairment loss

-   

-   

-   

(27,231)

-   

-   

-   

18,731 

$

(7,245)

$

1,453 

$

(3,264)

$

23,691 

(1)

Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.

(2)

Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others. In the third quarter of 2014, we recognized a $10,263 non-cash charge, comprised of a $5,959 impairment loss and a $4,304 loan loss reserve, on our equity and debt investments in Suffolk Downs.

 

15

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

8.    Investments in Partially Owned Entities – continued

Below is a summary of the debt of our partially owned entities as of September 30, 2014 and December 31, 2013, none of which is recourse to us.

Percentage

Interest

100% of

Ownership at

Rate at

Partially Owned Entities’ Debt at

(Amounts in thousands)

September 30,

September 30,

September 30,

December 31,

2014 

Maturity

2014 

2014 

2013 

Toys:

Notes, loans and mortgages payable

32.7%

2014-2021

6.72%

$

5,385,461 

$

5,702,247 

Alexander's:

Mortgages payable

32.4%

2015-2021

2.58%

$

1,033,541 

$

1,049,959 

India real estate ventures:

TCG Urban Infrastructure Holdings mortgages

payable

25.0%

2014-2026

13.24%

$

190,453 

$

199,021 

Partially owned office buildings(1)

Various

2014-2023

5.71%

$

3,657,837 

$

3,622,759 

Other(2)

Various

2014-2025

4.56%

$

1,696,974 

$

1,709,509 

(1)

Includes 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.

(2)

Includes Independence Plaza, Monmouth Mall, Fashion Center Mall, 50-70 West 93rd Street and others.

 

 

Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities was $4,156,658,000 and $4,189,403,000 at September 30, 2014 and December 31, 2013, respectively.

16

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

9.    Dispositions

 

Discontinued Operations

 

On February 24, 2014, we completed the sale of Broadway Mall in Hicksville, Long Island, New York, for $94,000,000.  The sale resulted in net proceeds of $92,174,000 after closing costs.

 

On July 8, 2014, we completed the sale of Beverly Connection, a 335,000 square foot power shopping center in Los Angeles, California, for $260,000,000, of which $239,000,000 was cash and $21,000,000 was 10-year mezzanine seller financing.  The sale resulted in a net gain of $44,155,000, which was recognized in the third quarter of 2014. 

 

During the third quarter of 2014, we sold two of the 20 strip shopping centers which do not fit UE's strategy (see Note 1 – Organization), in separate transactions, for an aggregate of $15,000,000 in cash, which resulted in a net gain aggregating $13,641,000.            

 

We have reclassified the revenues and expenses of the properties discussed above to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying consolidated financial statements.  The net gains resulting from the sale of these properties are included in “income from discontinued operations” on our consolidated statements of income.  The tables below set forth the assets and liabilities related to discontinued operations at September 30, 2014 and December 31, 2013 and their combined results of operations for the three and nine months ended September 30, 2014 and 2013.

  

Assets Related to

Liabilities Related to

(Amounts in thousands)

Discontinued Operations as of

Discontinued Operations as of

September 30,

December 31,

September 30,

December 31,

2014 

2013 

2014 

2013 

Beverly Connection

$

$

208,458 

$

$

Broadway Mall

106,164 

13,950 

Other

1,597 

Total

$

$

316,219 

$

$

13,950 

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2014 

2013 

2014 

2013 

Total revenues

$

836 

$

17,354 

$

13,473 

$

63,048 

Total expenses

501 

11,352 

8,627 

45,322 

335 

6,002 

4,846 

17,726 

Net gain on sale of Beverly Connection

44,155 

44,155 

Net gain on sale of Green Acres Mall

202,275 

Net gains on sales of other real estate

13,641 

18,996 

13,641 

84,715 

Impairment losses

(720)

(842)

(4,727)

Income from discontinued operations

$

58,131 

$

24,278 

$

61,800 

$

299,989 

 

 

Other

 

On March 2, 2014, we entered into an agreement to transfer upon completion, the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to Pennsylvania Real Estate Investment Trust (NYSE: PEI) (“PREIT”) in exchange for $465,000,000 comprised of $340,000,000 of cash and $125,000,000 of PREIT operating partnership units.  In connection therewith, we recorded a non-cash impairment loss of $20,000,000 in the first quarter of 2014, which is included in “impairment losses, acquisition and transaction related costs” on our consolidated statements of income. The redevelopment was completed in October 2014 and the closing will be no later than March 31, 2015.

 

17

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

10.    Identified Intangible Assets and Liabilities

 

 

The following summarizes our identified intangible assets (primarily acquired in-place and above-market leases) and liabilities (primarily acquired below-market leases) as of September 30, 2014 and December 31, 2013.

 

Balance as of

September 30,

December 31,

(Amounts in thousands)

2014 

2013 

Identified intangible assets:

Gross amount

$

503,993 

$

589,961 

Accumulated amortization

(223,786)

(277,998)

Net

$

280,207 

$

311,963 

Identified intangible liabilities (included in deferred revenue):

Gross amount

$

843,941 

$

856,933 

Accumulated amortization

(385,824)

(360,398)

Net

$

458,117 

$

496,535 

 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $10,039,000 and $11,145,000 for the three months ended September 30, 2014 and 2013, respectively, and $32,201,000 and $38,322,000 for the nine months ended September 30, 2014 and 2013, respectively.  Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2015 is as follows:

 

(Amounts in thousands)

2015 

$

40,071 

2016 

38,455 

2017 

34,890 

2018 

33,381 

2019 

30,105 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $6,296,000 and $10,686,000 for the three months ended September 30, 2014 and 2013, respectively, and $22,996,000 and $52,997,000 for the nine months ended September 30, 2014 and 2013, respectively.  Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years commencing January 1, 2015 is as follows:

 

(Amounts in thousands)

2015 

$

23,160 

2016 

20,195 

2017 

16,813 

2018 

12,446 

2019 

11,539 

 

We are a tenant under ground leases for certain properties.  Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $858,000 and $981,000 for the three months ended September 30, 2014 and 2013, respectively, and $2,572,000 and $3,704,000 for the nine months ended September 30, 2014 and 2013, respectively.  Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2015 is as follows:

 

(Amounts in thousands)

2015 

$

3,430 

2016 

3,430 

2017 

3,430 

2018 

3,430 

2019 

3,430 

18

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

11.    Debt

 

On January 31, 2014, we completed a $600,000,000 loan secured by our 220 Central Park South development site.  The loan bears interest at LIBOR plus 2.75% (2.90% at September 30, 2014) and matures in January 2016, with three one-year extension options.

 

On April 16, 2014, we completed a $350,000,000 refinancing of 909 Third Avenue, a 1.3 million square foot Manhattan office building.  The seven-year interest only loan bears interest at 3.91% and matures in May 2021. We realized net proceeds of approximately $145,000,000 after defeasing the existing 5.64%, $193,000,000 mortgage, defeasance cost and other closing costs.

 

On June 16, 2014, we completed a green bond public offering of $450,000,000 2.50% senior unsecured notes due June 30, 2019. The notes were sold at 99.619% of their face amount to yield 2.581%.

 

On July 16, 2014, we completed a $130,000,000 financing of Las Catalinas, a 494,000 square foot mall located in the San Juan area of Puerto Rico. The 10-year fixed rate loan bears interest at 4.43% and matures in August 2024.  The loan amortizes based on a 30-year schedule beginning in year six.

 

On August 12, 2014, we completed a $185,000,000 financing of the Universal buildings, a 690,000 square foot, two-building office complex located in Washington, DC. The loan bears interest at LIBOR plus 1.90% (2.06% at September 30, 2014) and matures in August 2019 with two one-year extension options. The loan amortizes based on a 30-year schedule beginning in the fourth year.

 

On August 26, 2014, we obtained a standby commitment for up to $500,000,000 of five-year mezzanine loan financing to fund a portion of the development expenditures at 220 Central Park South.

 

On September 30, 2014, we extended one of our two $1.25 billion unsecured revolving credit facilities from November 2015 to November 2018 with two six-month extension options.  The interest rate on the extended facility was lowered from LIBOR plus 125 basis points to LIBOR plus 105 basis points and the facility fee was reduced from 25 to 20 basis points. 

 

On October 1, 2014, we redeemed all of the $445,000,000 principal amount of our outstanding 7.875% senior unsecured notes, which were scheduled to mature on October 1, 2039, at a redemption price of 100% of the principal amount plus accrued interest through the redemption date.  In the fourth quarter of 2014, we will write off $12,532,000 of unamortized deferred financing costs, which will be included as a component of “interest and debt expense” on our consolidated statements of income.

 

The following is a summary of our debt:

Interest Rate at

Balance at

(Amounts in thousands)

September 30, 2014

September 30, 2014

December 31, 2013

Mortgages Payable:

Fixed rate

4.47%

$

7,723,956 

$

7,563,133 

Variable rate

2.29%

1,549,256 

768,860 

4.11%

$

9,273,212 

$

8,331,993 

Unsecured Debt:

Senior unsecured notes

4.88%

$

1,791,987 

$

1,350,855 

Revolving credit facility debt

1.30%

88,138 

295,870 

4.71%

$

1,880,125 

$

1,646,725 

19

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

12.    Redeemable Noncontrolling Interests

 

Redeemable noncontrolling interests on our consolidated balance sheets are comprised primarily of Class A Operating Partnership units that are held by third parties and are recorded at the greater of their carrying amount or redemption value at the end of each reporting period.  Changes in the value from period to period are charged to “additional capital” in our consolidated statements of changes in equity.  Below is a table summarizing the activity of redeemable noncontrolling interests.

 

(Amounts in thousands)

Balance at December 31, 2012

$

944,152 

Net income

28,960 

Other comprehensive income

5,982 

Distributions

(25,827)

Redemption of Class A units for common shares, at redemption value

(19,627)

Adjustments to carry redeemable Class A units at redemption value

43,709 

Redemption of Series D-15 redeemable units

(36,900)

Other, net

10,649 

Balance at September 30, 2013

$

951,098 

Balance at December 31, 2013

$

1,003,620 

Net income

16,552 

Other comprehensive loss

(109)

Distributions

(25,166)

Redemption of Class A units for common shares, at redemption value

(22,668)

Adjustments to carry redeemable Class A units at redemption value

144,231 

Other, net

23,592 

Balance at September 30, 2014

$

1,140,052 

 

As of September 30, 2014 and December 31, 2013, the aggregate redemption value of redeemable Class A units was $1,139,052,000 and $1,002,620,000, respectively. 

 

Redeemable noncontrolling interests exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares.  Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $55,097,000 as of September 30, 2014 and December 31, 2013. 

20

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

13.    Accumulated Other Comprehensive Income (“AOCI”)

 

The following tables set forth the changes in accumulated other comprehensive income (loss) by component.

 

For the Three Months Ended September 30, 2014

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of June 30, 2014

$

92,221 

$

134,312 

$

(5,624)

$

(30,817)

$

(5,650)

OCI before reclassifications

(22,641)

(22,764)

(6,028)

4,781 

1,370 

Amounts reclassified from AOCI

-   

-   

-   

-   

-   

Net current period OCI

(22,641)

(22,764)

(6,028)

4,781 

1,370 

Balance as of September 30, 2014

$

69,580 

$

111,548 

$

(11,652)

$

(26,036)

$

(4,280)

For the Three Months Ended September 30, 2013

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of June 30, 2013

$

132,894 

$

188,570 

$

(12,041)

$

(35,505)

$

(8,130)

OCI before reclassifications

(7,163)

(8,252)

(1,669)

(295)

3,053 

Amounts reclassified from AOCI

(42,404)

(42,404)

(1)

-   

-   

-   

Net current period OCI

(49,567)

(50,656)

(1,669)

(295)

3,053 

Balance as of September 30, 2013

$

83,327 

$

137,914 

$

(13,710)

$

(35,800)

$

(5,077)

(1)

Reclassified to "net gain (loss) on disposition of wholly owned and partially owned assets" on our consolidated statements of income.

For the Nine Months Ended September 30, 2014

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of December 31, 2013

$

71,537 

$

119,309 

$

(11,501)

$

(31,882)

$

(4,389)

OCI before reclassifications

(1,957)

(7,761)

(151)

5,846 

109 

Amounts reclassified from AOCI

-   

-   

-   

-   

-   

Net current period OCI

(1,957)

(7,761)

(151)

5,846 

109 

Balance as of September 30, 2014

$

69,580 

$

111,548 

$

(11,652)

$

(26,036)

$

(4,280)

For the Nine Months Ended September 30, 2013

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of December 31, 2012

$

(18,946)

$

19,432 

$

11,313 

$

(50,065)

$

374 

OCI before reclassifications

144,677 

160,886 

(25,023)

14,265 

(5,451)

Amounts reclassified from AOCI

(42,404)

(42,404)

(1)

-   

-   

-   

Net current period OCI

102,273 

118,482 

(25,023)

14,265 

(5,451)

Balance as of September 30, 2013

$

83,327 

$

137,914 

$

(13,710)

$

(35,800)

$

(5,077)

(1)

Reclassified to "net gain (loss) on disposition of wholly owned and partially owned assets" on our consolidated statements of income.

21

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

14.    Variable Interest Entities (“VIEs”)

 

At September 30, 2014, we have unconsolidated VIEs comprised of our investments in the entities that own One Park Avenue, Independence Plaza and the Warner Building, and at December 31, 2013, our unconsolidated VIEs comprised of our investments in the entities that own Independence Plaza and the Warner Building.  We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance.  We account for our investment in these entities under the equity method.  As of September 30, 2014 and December 31, 2013, the net carrying amounts of our investment in these entities were $284,440,000 and $152,929,000, respectively, and our maximum exposure to loss in these entities is limited to our investment.  We did not have any consolidated VIEs as of September 30, 2014 and December 31, 2013.   

 

15.    Fair Value Measurements

 

ASC 820, Fair Value Measurement and Disclosures defines fair value and establishes a framework for measuring fair value.  The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value.  Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities.  Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.   

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) marketable securities, (ii) Real Estate Fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) interest rate swaps and (v) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units).  The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at September 30, 2014 and December 31, 2013, respectively.

 

As of September 30, 2014

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

184,154 

$

184,154 

$

-   

$

-   

Real Estate Fund investments (75% of which is attributable to

noncontrolling interests)

495,392 

-   

-   

495,392 

Deferred compensation plan assets (included in other assets)

113,549 

50,366 

-   

63,183 

Total assets

$

793,095 

$

234,520 

$

-   

$

558,575 

Mandatorily redeemable instruments (included in other liabilities)

$

55,096 

$

55,096 

$

-   

$

-   

Interest rate swap (included in other liabilities)

26,036 

-   

26,036 

-   

Total liabilities

$

81,132 

$

55,096 

$

26,036 

$

-   

As of December 31, 2013

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

191,917 

$

191,917 

$

-   

$

-   

Real Estate Fund investments (75% of which is attributable to

noncontrolling interests)

667,710 

-   

-   

667,710 

Deferred compensation plan assets (included in other assets)

116,515 

47,733 

-   

68,782 

Total assets

$

976,142 

$

239,650 

$

-   

$

736,492 

Mandatorily redeemable instruments (included in other liabilities)

$

55,097 

$

55,097 

$

-   

$

-   

Interest rate swap (included in other liabilities)

31,882 

-   

31,882 

-   

Total liabilities

$

86,979 

$

55,097 

$

31,882 

$

-   

 

22

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

15.  Fair Value Measurements – continued

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued

 

Real Estate Fund Investments

 

At September 30, 2014, our Real Estate Fund had seven investments with an aggregate fair value of $495,392,000, or $158,317,000 in excess of cost.  These investments are classified as Level 3.  We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period.  The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 0.5 to 5.8 years.  Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit.  Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor.  Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods.  Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs. 

 

The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates.  These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments.  Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these Fund investments at September 30, 2014.

 

Weighted Average

(based on fair

Unobservable Quantitative Input

Range

value of investments)

Discount rates

12.0% to 17.5%

13.7%

Terminal capitalization rates

5.0% to 6.3%

5.8%

 

The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit.  Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments.  The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows.  Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate, may be partially offset by a change in the discount rate.  It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values. 

 

The table below summarizes the changes in the fair value of Fund investments that are classified as Level 3, for the three and nine months ended September 30, 2014 and 2013.

 

Real Estate Fund Investments

Real Estate Fund Investments

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Beginning balance

$

549,091 

$

622,124 

$

667,710 

$

600,786 

Purchases

725 

7,406 

3,392 

38,299 

Dispositions / Distributions

(74,755)

(14,184)

(307,268)

(70,848)

Net unrealized gains

18,333 

12,367 

55,221 

59,476 

Net realized gains

51,584 

8,184 

126,653 

8,184 

Previously recorded unrealized gains

(49,586)

-   

(50,316)

-   

Other, net

-   

93 

-   

93 

Ending balance

$

495,392 

$

635,990 

$

495,392 

$

635,990 

 

23

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

15.    Fair Value Measurements – continued

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued

 

Deferred Compensation Plan Assets

 

Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties.  We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund.  The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis.  The third-party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements.

 

The table below summarizes the changes in the fair value of Deferred Compensation Plan Assets that are classified as Level 3, for the three and nine months ended September 30, 2014 and 2013. 

 

Deferred Compensation Plan Assets

Deferred Compensation Plan Assets

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Beginning balance

$

64,609 

$

66,502 

$

68,782 

$

62,631 

Purchases

1,377 

880 

10,936 

4,027 

Sales

(4,917)

(873)

(21,296)

(5,318)

Realized and unrealized gain (loss)

927 

(42)

2,901 

4,094 

Other, net

1,187 

58 

1,860 

1,091 

Ending balance

$

63,183 

$

66,525 

$

63,183 

$

66,525 

                               

 

Fair Value Measurements on a Nonrecurring Basis

 

Assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consist primarily of real estate assets, our investment in Suffolk Downs and our investment in Toys that were written-down to estimated fair value at September 30, 2014 or at December 31, 2013.  The fair value of our real estate assets and our investment in Suffolk Downs was determined using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity.  In determining the fair value of our investment in Toys, we considered, among other inputs, a December 31, 2013 third-party valuation of Toys and Toys’ historical results, financial forecasts and business outlook.  Our determination of the fair value of our investment in Toys included consideration of the following widely-used valuation methodologies: (i) market multiple methodology, that considered comparable publicly traded retail companies and a range of EBITDA multiples from 5.75x to 6.5x, (ii) comparable sales transactions methodology, that considered sales of retailers ranging in size from $150 million to $3 billion, (iii) a discounted cash flow methodology, that utilized five-year financial projections and assumed a terminal EBITDA multiple of 5.75x, a 10% discount rate and a 38% tax rate, and (iv) a Black-Scholes valuation analysis, that assumed one, two and three year time-to-expiration periods and 24% to 29% volatility factors.  Generally, we consider a number of valuation techniques when measuring fair values but in certain circumstances, a single valuation technique may be appropriate.  The tables below aggregate the fair values of these assets by their levels in the fair value hierarchy.

 

As of September 30, 2014

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Investment in Suffolk Downs

$

1,328 

$

-   

$

-   

$

1,328 

As of December 31, 2013

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Real estate assets

$

354,351 

$

-   

$

-   

$

354,351 

Investment in Toys "R" Us

83,224 

-   

-   

83,224 

Total assets

$

437,575 

$

-   

$

-   

$

437,575 

 

24

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

15.    Fair Value Measurements – continued

 

Financial Assets and Liabilities not Measured at Fair Value

 

Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), mortgage and mezzanine loans receivable and our secured and unsecured debt.  Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist.  For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument.  The fair value of cash equivalents and borrowings under our revolving credit facility is classified as Level 1, and the fair value of our mortgage and mezzanine loans receivable is classified as Level 3.  The fair value of our secured and unsecured debt are classified as Level 2.  The table below summarizes the carrying amounts and fair value of these financial instruments as of September 30, 2014 and December 31, 2013.

 

As of September 30, 2014

As of December 31, 2013

Carrying

Fair

Carrying

Fair

(Amounts in thousands)

Amount

Value

Amount

Value

Cash equivalents

$

1,361,305 

$

1,361,000 

$

295,000 

$

295,000 

Mortgage and mezzanine loans receivable

17,085 

17,000 

170,972 

171,000 

$

1,378,390 

$

1,378,000 

$

465,972 

$

466,000 

Debt:

Mortgages payable

$

9,273,212 

$

9,192,000 

$

8,331,993 

$

8,104,000 

Senior unsecured notes

1,791,987 

1,840,000 

1,350,855 

1,402,000 

Revolving credit facility debt

88,138 

88,000 

295,870 

296,000 

$

11,153,337 

$

11,120,000 

$

9,978,718 

$

9,802,000 

 

16.    Incentive Compensation

 

Our 2010 Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, restricted Operating Partnership units and out-performance plan awards to certain of our employees and officers.  We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation.  Stock-based compensation expense was $8,315,000 and $9,201,000 in the three months ended September 30, 2014 and 2013, respectively and $28,389,000 and $25,796,000 in the nine months ended September 30, 2014 and 2013, respectively.

 

On January 10, 2014, the Compensation Committee approved the 2014 Outperformance Plan, a multi-year, performance-based equity compensation plan and related form of award agreement (the “2014 OPP”). Under the 2014 OPP, participants have the opportunity to earn compensation payable in the form of operating partnership units during a three-year performance measurement period, if and only if we outperform a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to relative TSR. Awards under the 2014 OPP may be earned if we (i) achieve a TSR level greater than 7% per annum, or 21% over the three-year performance measurement period (the “Absolute Component”), and/or (ii) achieve a TSR above that of the SNL US REIT Index (the “Index”) over a three-year performance measurement period (the “Relative Component”). To the extent awards would be earned under the Absolute Component but we underperform the Index, such awards earned under the Absolute Component would be reduced (and potentially fully negated) based on the degree to which we underperform the Index. In certain circumstances, in the event we outperform the Index but awards would not otherwise be earned under the Absolute Component, awards may be increased under the Relative Component. To the extent awards would otherwise be earned under the Relative Component but we fail to achieve at least a 6% per annum absolute TSR, such awards earned under the Relative Component would be reduced based on our absolute TSR, with no awards being earned in the event our TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which we may outperform the Index. If the designated performance objectives are achieved, OPP Units are also subject to time-based vesting requirements. Awards earned under the 2014 OPP vest 33% in year three, 33% in year four and 34% in year five. Dividends on awards earned accrue during the performance measurement period. In addition, our executive officers (for the purposes of Section 16 of the Exchange Act) are required to hold any earned OPP awards (or related equity) for at least one year following vesting.

25

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

17.    Fee and Other Income

 

The following table sets forth the details of fee and other income:

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2014 

2013 

2014 

2013 

BMS cleaning fees

$

22,467 

$

15,898 

$

63,618 

$

49,071 

Signage revenue

7,698 

8,738 

25,889 

23,566 

Management and leasing fees

4,662 

7,977 

17,027 

19,661 

Lease termination fees (1)

3,764 

20,344 

12,102 

87,353 

Other income

7,820 

7,892 

23,982 

25,872 

$

46,411 

$

60,849 

$

142,618 

$

205,523 

(1)

The three and nine months ended September 30, 2013 includes a $19,500 termination fee income from a tenant at 1290 Avenue of the Americas. The nine months ended September 30, 2013 also includes $59,599 of income pursuant to a settlement agreement with Stop & Shop.

 

Management and leasing fees include management fees from Interstate Properties, a related party, of $132,000 and $134,000 for the three months ended September 30, 2014 and 2013, respectively, and $397,000 and $467,000 for the nine months ended September 30, 2014 and 2013, respectively.  The above table excludes fee income from partially owned entities, which is typically included in “(loss) income from partially owned entities” (see Note 8 – Investments in Partially Owned Entities).

 

18.     Interest and Other Investment Income (Loss), Net

 

The following table sets forth the details of interest and other investment income (loss):

 

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2014 

2013 

2014 

2013 

Dividends and interest on marketable securities

$

3,200 

$

2,804 

$

9,504 

$

8,344 

Mark-to-market of investments in our deferred compensation plan (1)

1,352 

269 

8,132 

6,207 

Interest on mezzanine loans receivable

404 

4,766 

3,524 

14,783 

Loss from the mark-to-market of J.C. Penney

derivative position

-   

(20,012)

-   

(33,487)

Non-cash impairment loss on J.C. Penney common shares

-   

-   

-   

(39,487)

Income from prepayment penalties in connection with the

repayment of a mezzanine loan receivable

-   

-   

-   

5,267 

Other, net

2,646 

1,898 

7,770 

5,438 

$

7,602 

$

(10,275)

$

28,930 

$

(32,935)

(1)

This income is entirely offset by the expense resulting from the mark-to-market of the deferred compensation plan liability, which is included in "general and administrative" expense.

 

19.     Interest and Debt Expense

 

The following table sets forth the details of interest and debt expense:

 

For the Three Months

For the Nine Months

(Amounts in thousands)

Ended September 30,

Ended September 30,

2014 

2013 

2014 

2013 

Interest expense

$

124,163 

125,256 

$

367,899 

$

373,619 

Amortization of deferred financing costs

7,292 

4,952 

20,231 

15,084 

Capitalized interest

(16,335)

(10,532)

(46,517)

(28,024)

$

115,120 

$

119,676 

$

341,613 

$

360,679 

26

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

20.    Income Per Share

 

 

The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options and restricted share awards.

 

For the Three Months

For the Nine Months

(Amounts in thousands, except per share amounts)

Ended September 30,

Ended September 30,

2014 

2013 

2014 

2013 

Numerator:

Income from continuing operations, net of income attributable

to noncontrolling interests

$

96,725 

$

82,959 

$

273,015 

$

243,857 

Income from discontinued operations, net of income attributable

to noncontrolling interests

54,799 

20,415 

58,234 

280,633 

Net income attributable to Vornado

151,524 

103,374 

331,249 

524,490 

Preferred share dividends

(20,365)

(20,369)

(61,099)

(62,439)

Preferred unit and share redemptions

-   

-   

-   

(1,130)

Net income attributable to common shareholders

131,159 

83,005 

270,150 

460,921 

Earnings allocated to unvested participating securities

(19)

(24)

(70)

(97)

Numerator for basic income per share

131,140 

82,981 

270,080 

460,824 

Impact of assumed conversions:

Convertible preferred share dividends

23 

-   

49 

54 

Numerator for diluted income per share

$

131,163 

$

82,981 

$

270,129 

$

460,878 

Denominator:

Denominator for basic income per share – weighted average shares

187,671 

186,969 

187,503 

186,885 

Effect of dilutive securities(1):

Employee stock options and restricted share awards

1,099 

755 

1,046 

746 

Convertible preferred shares

42 

-   

43 

48 

Denominator for diluted income per share – weighted average

shares and assumed conversions

188,812 

187,724 

188,592 

187,679 

INCOME PER COMMON SHARE – BASIC:

Income from continuing operations, net

$

0.41 

$

0.33 

$

1.13 

$

0.97 

Income from discontinued operations, net

0.29 

0.11 

0.31 

1.50 

Net income per common share

$

0.70 

$

0.44 

$

1.44 

$

2.47 

INCOME PER COMMON SHARE – DILUTED:

Income from continuing operations, net

$

0.40 

$

0.33 

$

1.12 

$

0.96 

Income from discontinued operations, net

0.29 

0.11 

0.31 

1.50 

Net income per common share

$

0.69 

$

0.44 

$

1.43 

$

2.46 

(1)

The effect of dilutive securities in the three months ended September 30, 2014 and 2013 excludes an aggregate of 11,245 and 12,002 weighted average common share equivalents, respectively, and 11,257 and 11,890 weighted average common share equivalents in the nine months ended September 30, 2014 and 2013, respectively, as their effect was anti-dilutive.

27

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

21.    Commitments and Contingencies

 

Insurance 

 

We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as floods.  Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate.  We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, including terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2014.

 

Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for NBCR acts.  Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the federal government with no direct exposure to PPIC.  For NBCR acts, PPIC is responsible for a deductible of $2,150,000 and 15% of the balance of a covered loss and the federal government is responsible for the remaining 85% of a covered loss.  We are ultimately responsible for any loss incurred by PPIC.

 

We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism.  However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future.

 

Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.

 

Other Commitments and Contingencies

 

We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of September 30, 2014, the aggregate dollar amount of these guarantees and master leases is approximately $360,000,000.

 

At September 30, 2014, $39,947,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

As of September 30, 2014, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $111,000,000. 

28

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

22.    Subsequent Events

 

 

On October 27, 2014, we completed a $140,000,000 financing of 655 Fifth Avenue, a 57,500 square foot retail and office property.  The loan is interest only at LIBOR plus 1.40% and matures in October 2019 with two one-year extension options.

 

On October 31, 2014, we entered into an agreement to sell 1740 Broadway, a 601,000 square foot office building in Manhattan for approximately $605,000,000.  The sale will result in net proceeds of approximately $585,000,000, after closing costs, and result in a financial statement gain of approximately $443,000,000.  The tax gain will be approximately $483,000,000, which will be deferred in like-kind exchanges, primarily for the St. Regis Fifth Avenue retail (see Note 4 – Acquisitions).  The sale is subject to customary closing conditions and is expected to be completed in the fourth quarter of 2014.  

 

29

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

23.    Segment Information

 

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three and nine months ended September 30, 2014 and 2013.  

(Amounts in thousands)

For the Three Months Ended September 30, 2014

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

670,909 

$

394,579 

$

133,541 

$

82,442 

$

-   

$

60,347 

Total expenses

450,310 

243,314 

88,375 

44,466 

-   

74,155 

Operating income (loss)

220,599 

151,265 

45,166 

37,976 

-   

(13,808)

(Loss) income from partially owned

entities, including Toys

(25,663)

5,810 

(1,411)

371 

(18,418)

(12,015)

Income from Real Estate Fund

24,160 

-   

-   

-   

-   

24,160 

Interest and other investment

income, net

7,602 

1,859 

15 

-   

5,719 

Interest and debt expense

(115,120)

(43,061)

(18,685)

(10,056)

-   

(43,318)

Net gain on disposition of wholly owned and

partially owned assets

2,665 

-   

-   

-   

-   

2,665 

Income (loss) before income taxes

114,243 

115,873 

25,085 

28,300 

(18,418)

(36,597)

Income tax expense

(3,177)

(802)

(130)

(525)

-   

(1,720)

Income (loss) from continuing operations

111,066 

115,071 

24,955 

27,775 

(18,418)

(38,317)

Income from discontinued operations

58,131 

-   

-   

57,499 

-   

632 

Net income (loss)

169,197 

115,071 

24,955 

85,274 

(18,418)

(37,685)

Less net income attributable to

noncontrolling interests

(17,673)

(2,690)

-   

(76)

-   

(14,907)

Net income (loss) attributable to Vornado

151,524 

112,381 

24,955 

85,198 

(18,418)

(52,592)

Interest and debt expense(2)

160,252 

58,010 

22,208 

11,205 

22,471 

46,358 

Depreciation and amortization(2)

160,270 

79,446 

36,411 

15,256 

9,923 

19,234 

Income tax expense (benefit) (2)

2,232 

746 

145 

525 

(1,536)

2,352 

EBITDA(1)

$

474,278 

$

250,583 

(3)

$

83,719 

(4)

$

112,184 

(5)

$

12,440 

$

15,352 

(6)

 

(Amounts in thousands)

For the Three Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

668,989 

$

388,747 

$

137,604 

$

81,439 

$

-   

$

61,199 

Total expenses

434,138 

223,992 

87,612 

45,461 

-   

77,073 

Operating income (loss)

234,851 

164,755 

49,992 

35,978 

-   

(15,874)

(Loss) income from partially owned

entities, including Toys

(32,756)

4,189 

(2,003)

188 

(34,209)

(921)

Income from Real Estate Fund

22,913 

-   

-   

-   

-   

22,913 

Interest and other investment

(loss) income, net

(10,275)

1,468 

17 

-   

(11,761)

Interest and debt expense

(119,676)

(42,349)

(27,246)

(10,834)

-   

(39,247)

Net gain on disposition of wholly owned and

partially owned assets

15,138 

-   

-   

1,377 

-   

13,761 

Income (loss) before income taxes

110,195 

128,063 

20,760 

26,710 

(34,209)

(31,129)

Income tax expense

(2,222)

(65)

(766)

(731)

-   

(660)

Income (loss) from continuing operations

107,973 

127,998 

19,994 

25,979 

(34,209)

(31,789)

Income from discontinued operations

24,278 

2,883 

-   

21,149 

-   

246 

Net income (loss)

132,251 

130,881 

19,994 

47,128 

(34,209)

(31,543)

Less net income attributable to

noncontrolling interests

(28,877)

(6,556)

-   

(2,970)

-   

(19,351)

Net income (loss) attributable to Vornado

103,374 

124,325 

19,994 

44,158 

(34,209)

(50,894)

Interest and debt expense(2)

183,116 

59,344 

30,717 

12,119 

38,435 

42,501 

Depreciation and amortization(2)

172,756 

67,294 

35,403 

17,573 

32,176 

20,310 

Income tax (benefit) expense (2)

(20,292)

67 

828 

731 

(22,690)

772 

EBITDA(1)

$

438,954 

$

251,030 

(3)

$

86,942 

(4)

$

74,581 

(5)

$

13,712 

$

12,689 

(6)

See notes on page 32.

 

30

 


 
 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

23.    Segment Information – continued

(Amounts in thousands)

For the Nine Months Ended September 30, 2014

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

1,997,702 

$

1,151,395 

$

403,645 

$

253,623 

$

-   

$

189,039 

Total expenses

1,383,618 

716,125 

265,299 

173,945 

-   

228,249 

Operating income (loss)

614,084 

435,270 

138,346 

79,678 

-   

(39,210)

(Loss) income from partially owned

entities, including Toys

(77,426)

16,372 

(4,925)

1,250 

(74,162)

(15,961)

Income from Real Estate Fund

142,418 

-   

-   

-   

-   

142,418 

Interest and other investment

income, net

28,930 

4,979 

93 

26 

-   

23,832 

Interest and debt expense

(341,613)

(134,970)

(56,692)

(28,565)

-   

(121,386)

Net gain on disposition of wholly

owned and partially owned assets

13,205 

-   

-   

-   

-   

13,205 

Income (loss) before income taxes

379,598 

321,651 

76,822 

52,389 

(74,162)

2,898 

Income tax expense

(8,358)

(2,997)

(46)

(1,575)

-   

(3,740)

Income (loss) from continuing operations

371,240 

318,654 

76,776 

50,814 

(74,162)

(842)

Income from discontinued operations

61,800 

-   

-   

60,993 

-   

807 

Net income (loss)

433,040 

318,654 

76,776 

111,807 

(74,162)

(35)

Less net income attributable to

noncontrolling interests

(101,791)

(7,203)

-   

(114)

-   

(94,474)

Net income (loss) attributable to Vornado

331,249 

311,451 

76,776 

111,693 

(74,162)

(94,509)

Interest and debt expense(2)

510,724 

180,150 

67,469 

31,989 

100,549 

130,567 

Depreciation and amortization(2)

530,052 

241,040 

108,367 

56,387 

64,533 

59,725 

Income tax expense (2)

21,489 

3,069 

88 

1,575 

12,106 

4,651 

EBITDA(1)

$

1,393,514 

$

735,710 

(3)

$

252,700 

(4)

$

201,644 

(5)

$

103,026 

$

100,434 

(6)

 

 

(Amounts in thousands)

For the Nine Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

2,058,525 

$

1,129,248 

$

406,652 

$

303,704 

$

-   

$

218,921 

Total expenses

1,362,975 

700,652 

258,591 

140,343 

-   

263,389 

Operating income (loss)

695,550 

428,596 

148,061 

163,361 

-   

(44,468)

(Loss) income from partially owned

entities, including Toys

(45,620)

14,020 

(6,545)

1,512 

(69,311)

14,704 

Income from Real Estate Fund

73,947 

-   

-   

-   

-   

73,947 

Interest and other investment (loss)

income, net

(32,935)

4,076 

99 

-   

(37,113)

Interest and debt expense

(360,679)

(125,428)

(83,350)

(32,637)

-   

(119,264)

Net (loss) gain on disposition of wholly

owned and partially owned assets

(20,581)

-   

-   

1,377 

-   

(21,958)

Income (loss) before income taxes

309,682 

321,264 

58,265 

133,616 

(69,311)

(134,152)

Income tax expense

(6,172)

(1,298)

(1,949)

(1,480)

-   

(1,445)

Income (loss) from continuing operations

303,510 

319,966 

56,316 

132,136 

(69,311)

(135,597)

Income (loss) from discontinued operations

299,989 

8,539 

-   

292,279 

-   

(829)

Net income (loss)

603,499 

328,505 

56,316 

424,415 

(69,311)

(136,426)

Less net income attributable to

noncontrolling interests

(79,009)

(9,518)

-   

(3,079)

-   

(66,412)

Net income (loss) attributable to Vornado

524,490 

318,987 

56,316 

421,336 

(69,311)

(202,838)

Interest and debt expense(2)

551,357 

163,579 

93,715 

40,057 

119,347 

134,659 

Depreciation and amortization(2)

549,072 

220,280 

105,799 

52,440 

103,732 

66,821 

Income tax expense(2)

18,101 

1,444 

2,134 

1,480 

10,959 

2,084 

EBITDA(1)

$

1,643,020 

$

704,290 

(3)

$

257,964 

(4)

$

515,313 

(5)

$

164,727 

$

726 

(6)

See notes on the following page.

 

31

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

23.    Segment Information – continued

Notes to preceding tabular information:

(1)

EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental non-GAAP financial measure for making decisions and assessing the unlevered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.

(2)

Interest and debt expense, depreciation and amortization and income tax expense (benefit) in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.

(3)

The elements of "New York" EBITDA are summarized below.

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Office(a)

$

159,568 

$

172,367 

$

480,280 

$

476,849 

Retail

71,327 

59,782 

205,469 

177,394 

Alexander's

10,387 

10,387 

31,088 

31,141 

Hotel Pennsylvania

9,301 

8,494 

18,873 

18,906 

Total New York

$

250,583 

$

251,030 

$

735,710 

$

704,290 

(a)

The three months ended September 30, 2014 and 2013, includes $2,140 and $12,029, respectively, of lease termination income, net. The nine months ended September 30, 2014 and 2013, includes $4,543 and $17,373, respectively, of lease termination income, net.

(4)

The elements of "Washington, DC" EBITDA are summarized below.

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Office, excluding the Skyline Properties

$

65,904 

$

69,220 

$

200,218 

$

202,463 

Skyline properties

7,698 

6,841 

21,270 

22,546 

Total Office

73,602 

76,061 

221,488 

225,009 

Residential

10,117 

10,881 

31,212 

32,955 

Total Washington, DC

$

83,719 

$

86,942 

$

252,700 

$

257,964 

(5)

The elements of "Retail Properties" EBITDA are summarized below.

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Strip shopping centers(a)

$

97,122 

$

59,175 

$

178,499 

$

264,065 

Regional malls(b)

15,062 

15,406 

23,145 

251,248 

Total Retail properties

$

112,184 

$

74,581 

$

201,644 

$

515,313 

(a)

The three months ended September 30, 2014 and 2013, includes $57,796 and $16,087, respectively, of net gains on sale of real estate. The nine months ended September 30, 2014 and 2013, includes $57,796 and $81,806, respectively, of net gains on sale of real estate and the nine months ended September 30, 2013 also includes $59,599 of income pursuant to a settlement agreement with Stop & Shop.

(b)

The nine months ended September 30, 2014, includes a $20,000 non-cash impairment loss on Springfield Town Center. The nine months ended September 30, 2013, includes a $202,275 net gain on sale of the Green Acres Mall.

 

32

 


 

VORNADO REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

23.    Segment Information – continued

Notes to preceding tabular information - continued:

(6)

The elements of "other" EBITDA are summarized below.

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(Amounts in thousands)

2014 

2013 

2014 

2013 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

2,059 

$

2,086 

$

6,676 

$

5,737 

Net realized gains on exited investments

12,896 

2,046 

31,663 

2,046 

Previously recorded unrealized gains on exited investments

(12,397)

-   

(12,579)

-   

Net unrealized gains on held investments

4,583 

3,092 

13,805 

14,869 

Carried interest

8,431 

267 

21,636 

11,974 

Total

15,572 

7,491 

61,201 

34,626 

The Mart and trade shows

19,497 

14,925 

61,038 

54,232 

555 California Street

11,994 

10,720 

35,566 

32,371 

India real estate ventures

2,651 

695 

4,574 

4,708 

LNR(a)

-   

-   

-   

20,443 

Other investments

4,618 

5,330 

13,825 

21,138 

54,332 

39,161 

176,204 

167,518 

Corporate general and administrative expenses(b)

(22,948)

(23,467)

(71,952)

(71,054)

Investment income and other, net(b)

6,659 

11,108 

22,764 

39,153 

Suffolk Downs impairment loss and loan loss reserve

(10,263)

-   

(10,263)

-   

Acquisition and transaction related costs(c)

(7,105)

(2,818)

(12,972)

(6,769)

Net gain on sale of residential condominiums and a land parcel

2,665 

134 

13,205 

1,139 

Net gain on sale of marketable securities

-   

31,741 

-   

31,741 

Loss from the mark-to-market of J.C. Penney

derivative position

-   

(20,012)

-   

(33,487)

Loss on sale of J.C. Penney common shares

-   

(18,114)

-   

(54,914)

Non-cash impairment loss on J.C. Penney common shares

-   

-   

-   

(39,487)

Severance costs (primarily reduction-in-force at the Mart)

-   

-   

-   

(4,154)

Net income attributable to noncontrolling interests in

the Operating Partnership

(7,975)

(5,032)

(16,514)

(27,814)

Preferred unit distributions of the Operating Partnership

(13)

(12)

(38)

(1,146)

$

15,352 

$

12,689 

$

100,434 

$

726 

(a)

On April 19, 2013, LNR was sold for $1.053 billion.

(b)

The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $1,352 and $269 for the three months ended September 30, 2014 and 2013, respectively, and $8,132 and $6,207 for the nine months ended September 30, 2014 and 2013, respectively.

(c)

The three and nine months ended September 30, 2014, includes $5,828 and $9,343, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls (see Note 1 - Organization).

33

 


 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Shareholders and Board of Trustees

Vornado Realty Trust

New York, New York

 

We have reviewed the accompanying consolidated balance sheet of Vornado Realty Trust (the “Company”) as of September 30, 2014, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013 and changes in equity and cash flows for the nine-month periods ended September 30, 2014 and 2013.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty Trust as of December 31, 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2014, 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, 2013 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 3, 2014

34

 


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Certain statements contained in this Quarterly Report constitute forward‑looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q.  Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2013.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three and nine months ended September 30, 2014.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the operating results for the full year.  Certain prior year balances have been reclassified in order to conform to current year presentation.

35

 


 
 

 

Overview

 

Business Objective and Operating Strategy

Our business objective is to maximize shareholder value, which we measure by the total return provided to our shareholders. Below is a table comparing our performance to the FTSE NAREIT Office REIT Index (“Office REIT”) and the Morgan Stanley REIT Index (“RMS”) for the following periods ended September 30, 2014.

 

Total Return(1)

Vornado

Office REIT

RMS

Three-month

(5.7%) 

(5.2%) 

(3.1%) 

Nine-month

15.1% 

11.7% 

14.0% 

One-year

22.5% 

12.4% 

13.3% 

Three-year

49.7% 

47.9% 

58.6% 

Five-year

85.6% 

69.6% 

109.7% 

Ten-year

139.4% 

89.1% 

124.1% 

(1) Past performance is not necessarily indicative of future performance.

 

We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:

 

·      Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;

·      Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is a high likelihood of capital appreciation;

·      Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;

·      Investing in retail properties in select under-stored locations such as the New York City metropolitan area;

·      Developing and redeveloping existing properties to increase returns and maximize value; and

·      Investing in operating companies that have a significant real estate component.

 

We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from asset sales and by accessing the public and private capital markets.  We may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire these securities in the future.

 

We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.  See “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for additional information regarding these factors.

 

On April 11, 2014, we announced a plan to spin off our shopping center business, consisting of 80 strip centers, four malls and a warehouse park adjacent to our East Hanover strip center, into a new publicly traded REIT, Urban Edge Properties (“UE”), formerly Vornado Spinco.  The spin-off is expected to be effectuated through a pro rata distribution of UE’s common shares to Vornado common shareholders and Vornado Realty L.P. common unitholders, and is intended to be treated as tax-free for U.S. federal income tax purposes.  We expect the spin-off to be completed by the end of 2014, subject to certain conditions, including the Securities and Exchange Commission (“SEC”) declaring UE’s Form 10 registration statement effective, filing and approval of UE’s listing application with the NYSE, receipt of third party consents, and formal approval and declaration of the distribution by Vornado’s Board of Trustees.  Vornado may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms.  Vornado will retain, for disposition in the near term, 20 small retail assets which do not fit UE’s strategy, and the Springfield Town Center, which is under contract for disposition (see Note 9 – Dispositions). 

 

36

 


 
 

 

Overview – continued

 

 

Quarter Ended September 30, 2014 Financial Results Summary

 

Net income attributable to common shareholders for the quarter ended September 30, 2014 was $131,159,000, or $0.69 per diluted share, compared to $83,005,000, or $0.44 per diluted share for the quarter ended September 30, 2013.  Net income for the quarters ended September 30, 2014 and 2013 include $57,796,000 and $16,087,000, respectively, of net gains on sale of real estate and $2,546,000 of real estate impairment losses in the quarter ended September 30, 2013.  In addition, the quarters ended September 30, 2014 and 2013 include certain other items that affect comparability, which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders for the quarter ended September 30, 2014 by $23,250,000, or $0.12 per diluted share, and decreased net income attributable to common shareholders for the quarter ended September 30, 2013 by $20,564,000 or $0.11 per diluted share.

 

Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the quarter ended September 30, 2014 was $217,362,000, or $1.15 per diluted share, compared to $210,627,000, or $1.12 per diluted share for the prior year’s quarter.  FFO for the quarters ended September 30, 2014 and 2013 include certain items that affect comparability, which are listed in the table below.  The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO by $30,824,000, or $0.16 per diluted share for the quarter ended September 30, 2014, and $21,270,000, or $0.11 per diluted share for the quarter ended September 30, 2013.

 

For the Three Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Items that affect comparability income (expense):

Toys "R" Us Negative FFO

$

(18,035)

$

(22,343)

Impairment loss and loan loss reserve on investment in Suffolk Downs

(10,263)

-   

Acquisition and transaction related costs

(7,105)

(2,818)

Net gain on sale of residential condominiums

2,665 

134 

FFO from discontinued operations

335 

7,169 

Losses from the disposition of investment in J.C. Penney

-   

(38,126)

Net gain on sale of marketable securities

-   

31,741 

Other, net

(324)

1,377 

(32,727)

(22,866)

Noncontrolling interests' share of above adjustments

1,903 

1,596 

Items that affect comparability, net

$

(30,824)

$

(21,270)

 

The percentage increase (decrease) in same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)  and Cash basis same store EBITDA of our operating segments for the quarter ended September 30, 2014 over the quarter ended September 30, 2013 and the trailing quarter ended June 30, 2014 are summarized below.

Same Store EBITDA:

Retail Properties

New York

Washington, DC

UE

Total

September 30, 2014 vs. September 30, 2013

Same store EBITDA

4.6

%

(2.7

%)

1.3

%

1.1

%

Cash basis same store EBITDA

5.2

%

(4.1

%)

2.9

%

1.8

%

September 30, 2014 vs. June 30, 2014

Same store EBITDA

(0.9

%)

(0.6

%)

0.6

%

0.3

%

Cash basis same store EBITDA

(1.2

%)

(0.9

%)

0.3

%

(0.2

%)

 

 

37

 


 
 

 

Overview – continued

 

 

Nine Months Ended September 30, 2014 Financial Results Summary

 

Net income attributable to common shareholders for the nine months ended September 30, 2014 was $270,150,000, or $1.43 per diluted share, compared to $460,921,000, or $2.46 per diluted share for the nine months ended September 30, 2013. Net income for the nine months ended September 30, 2014 and 2013 include $57,796,000 and $284,546,000, respectively, of net gains on sale of real estate, and $20,842,000 and $10,823,000, respectively, of real estate impairment losses.  In addition, the nine months ended September 30, 2014 and 2013 include certain items that affect comparability, which are listed in the table below.  The aggregate of real estate impairment losses, net gains on sale of real estate and the items in the table below, net of amounts attributable to noncontrolling interests, decreased net income attributable to common shareholders for the nine months ended September 30, 2014 by $45,488,000, or $0.24 per diluted share, and increased net income attributable to common shareholders for the nine months ended September 30, 2013 by $178,460,000, or $0.95 per diluted share.

 

FFO for the nine months ended September 30, 2014 was $684,247,000, or $3.63 per diluted share, compared to $647,767,000, or $3.45 per diluted share for the nine months ended September 30, 2013.  FFO for the nine months ended September 30, 2014 and 2013 include certain items that affect comparability, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO by $66,161,000, or $0.35 per diluted share for the nine months ended September 30, 2014 and $35,574,000, or $0.19 per diluted share for the nine months ended September 30, 2013.

 

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Items that affect comparability income (expense):

Toys "R" Us Negative FFO (including impairment losses of $75,196 and $78,542,

respectively)

$

(60,630)

$

(30,747)

Net gain on sale of residential condominiums and a land parcel in 2014

13,205 

1,139 

Acquisition and transaction related costs

(12,972)

(6,769)

Impairment loss and loan loss reserve on investment in Suffolk Downs

(10,263)

-   

FFO from discontinued operations, including LNR in 2013

6,316 

42,179 

Defeasance cost in connection with the refinancing of 909 Third Avenue

(5,589)

-   

Losses from the disposition of investment in J.C. Penney

-   

(127,888)

Stop & Shop litigation settlement income

-   

59,599 

Net gain on sale of marketable securities

-   

31,741 

The Mart reduction-in-force and severance costs

-   

(4,154)

Preferred unit and share redemptions

-   

(1,130)

Other, net

(324)

(1,742)

(70,257)

(37,772)

Noncontrolling interests' share of above adjustments

4,096 

2,198 

Items that affect comparability, net

$

(66,161)

$

(35,574)

 

The percentage increase (decrease) in same store EBITDA and Cash basis same store EBITDA of our operating segments for the nine months ended September 30, 2014 over the nine months ended September 30, 2013 is summarized below.

 

Same Store EBITDA:

Retail Properties

New York

Washington, DC

UE

Total

September 30, 2014 vs. September 30, 2013

Same store EBITDA

5.3

%

(2.4

%)

1.7

%

1.4

%

Cash basis same store EBITDA

7.4

%

(1.8

%)

2.5

%

2.1

%

 

Calculations of same store EBITDA, reconciliations of our net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.

 

38

 


 
 

 

Overview – continued

 

2014 Acquisitions

 

On June 26, 2014, we invested an additional $22,700,000 to increase our ownership in One Park Avenue to 55.0% from 46.5% through a joint venture with an institutional investor, who increased his ownership interest to 45.0%.  The transaction was based on a property value of $560,000,000.  The property is encumbered by a $250,000,000 interest-only mortgage loan that bears interest at 4.995% and matures in March 2016. 

 

On July 23, 2014, a joint venture in which we are a 50.1% partner entered into a 99-year ground lease for 61 Ninth Avenue located on the Southwest corner of Ninth Avenue and 15th Street in Manhattan.  The venture’s current plans are to construct an office building, with retail at the base, of approximately 130,000 square feet.  Total development costs are currently estimated to be approximately $125,000,000.

 

On August 1, 2014, we acquired the land under our 715 Lexington Avenue retail property located on the Southeast corner of 58th Street and Lexington Avenue in Manhattan, for $63,000,000.

 

On October 28, 2014, we completed the purchase of the St. Regis Fifth Avenue retail for $700,000,000.  We own approximately 75% of the joint venture which owns the property.  The acquisition will be used in a like-kind exchange for income tax purposes for the sale of 1740 Broadway (see Note 22 – Subsequent Events).  We consolidate the accounts of the venture into our consolidated financial statements from the date of acquisition.  As of September 30, 2014, the venture’s $50,000,000 non-refundable deposit was included in “other assets” on our consolidated balance sheet.   

 

 

2014 Dispositions

 

On February 24, 2014, we completed the sale of Broadway Mall in Hicksville, Long Island, New York for $94,000,000.  The sale resulted in net proceeds of $92,174,000 after closing costs.

 

On March 2, 2014, we entered into an agreement to transfer upon completion, the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to Pennsylvania Real Estate Investment Trust (NYSE: PEI) (“PREIT”) in exchange for $465,000,000 comprised of $340,000,000 of cash and $125,000,000 of PREIT operating partnership units.  In connection therewith, we recorded a non-cash impairment loss of $20,000,000 in the first quarter of 2014, which is included in “impairment losses, acquisition and transaction related costs” on our consolidated statements of income. The redevelopment was completed in October 2014 and the closing will be no later than March 31, 2015.

 

On July 8, 2014, we completed the sale of Beverly Connection, a 335,000 square foot power shopping center in Los Angeles, California, for $260,000,000, of which $239,000,000 was cash and $21,000,000 was 10-year mezzanine seller financing. The sale resulted in a net gain of approximately $44,155,000, which was recognized in the third quarter of 2014.

 

During the third quarter of 2014, we sold two of the 20 strip shopping centers which do not fit UE's strategy (see Note 1 – Organization), in separate transactions, for an aggregate of $15,000,000 in cash, which resulted in a net gain aggregating $13,641,000.

 

On October 31, 2014, we entered into an agreement to sell 1740 Broadway, a 601,000 square foot office building in Manhattan for approximately $605,000,000.  The sale will result in net proceeds of approximately $585,000,000, after closing costs, and result in a financial statement gain of approximately $443,000,000.  The tax gain will be approximately $483,000,000, which will be deferred in like-kind exchanges, primarily for the St. Regis Fifth Avenue retail (see Note 4 – Acquisitions).  The sale is subject to customary closing conditions and is expected to be completed in the fourth quarter of 2014.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 


 
 

 

Overview – continued

 

2014 Financings

 

On January 31, 2014, we completed a $600,000,000 loan secured by our 220 Central Park South development site.  The loan bears interest at LIBOR plus 2.75% (2.90% at September 30, 2014) and matures in January 2016, with three one-year extension options.

 

On April 16, 2014, we completed a $350,000,000 refinancing of 909 Third Avenue, a 1.3 million square foot Manhattan office building.  The seven-year interest only loan bears interest at 3.91% and matures in May 2021.  We realized net proceeds of approximately $145,000,000 after defeasing the existing 5.64%, $193,000,000 mortgage, defeasance cost and other closing costs.

 

On June 16, 2014, we completed a green bond public offering of $450,000,000 2.50% senior unsecured notes due June 30, 2019.  The notes were sold at 99.619% of their face amount to yield 2.581%.

 

On July 16, 2014, we completed a $130,000,000 financing of Las Catalinas, a 494,000 square foot mall located in the San Juan area of Puerto Rico. The 10-year fixed rate loan bears interest at 4.43% and matures in August 2024.  The loan amortizes based on a 30-year schedule beginning in year six.

 

On August 12, 2014, we completed a $185,000,000 financing of the Universal buildings, a 690,000 square foot, two-building office complex located in Washington, DC. The loan bears interest at LIBOR plus 1.90% (2.06% at September 30, 2014) and matures in August 2019 with two one-year extension options. The loan amortizes based on a 30-year schedule beginning in the fourth year.

 

On August 26, 2014, we obtained a standby commitment for up to $500,000,000 of five-year mezzanine loan financing to fund a portion of the development expenditures at 220 Central Park South.

 

On September 30, 2014, we extended one of our two $1.25 billion unsecured revolving credit facilities from November 2015 to November 2018 with two six-month extension options.  The interest rate on the extended facility was lowered from LIBOR plus 125 basis points to LIBOR plus 105 basis points and the facility fee was reduced from 25 to 20 points. 

 

On October 1, 2014, we redeemed all of the $445,000,000 principal amount of our outstanding 7.875% senior unsecured notes, which were scheduled to mature on October 1, 2039, at a redemption price of 100% of the principal amount plus accrued interest through the redemption date.  In the fourth quarter of 2014, we will write off $12,532,000 of unamortized deferred financing costs, which will be included as a component of “interest and debt expense” on our consolidated statements of income.

 

On October 27, 2014, we completed a $140,000,000 financing of 655 Fifth Avenue, a 57,500 square foot retail and office property.  The loan is interest only at LIBOR plus 1.40% and matures in October 2019 with two one-year extension options.

 

 

Vornado Capital Partners Real Estate Fund (the “Fund”)

 

On June 26, 2014, the Fund sold its 64.7% interest in One Park Avenue to a newly formed joint venture that we and an institutional investor own 55% and 45%, respectively.  This transaction was based on a property value of $560,000,000.  From the inception of this investment through its disposition, the Fund realized a $75,529,000 net gain.

 

On August 21, 2014, the Fund and its 50% joint venture partner completed the sale of The Shops at Georgetown Park, a 305,000 square foot retail property, for $272,500,000. From the inception of this investment through its disposition, the Fund realized a $51,124,000 net gain.

 

 

40

 


 
 

 

Overview – continued

 

Recently Issued Accounting Literature

 

In June 2013, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2013-08”) to Accounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies (“Topic 946”).  ASU 2013-08 amends the guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures.  ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.  The adoption of this update as of January 1, 2014, did not have any impact on our real estate fund or our consolidated financial statements.

 

In April 2014, the FASB issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment.  Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations.  ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2014.  We are currently evaluating the impact of ASU 2014-08 on our consolidated financial statements. 

 

In May 2014, the FASB issued an update ("ASU 2014-09") establishing ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.  ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016.  We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

 

In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation.  ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects vesting.  ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.  We are currently evaluating the impact of the adoption of ASU 2014-12 on our consolidated financial statements.

 

 

Critical Accounting Policies

 

A summary of our critical accounting policies is included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2013 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2014.

41

 


 
 

 

Overview - continued

 

Leasing Activity:

 

The leasing activity and related statistics in the table below are based on leases signed during the period and are not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Second generation relet space represents square footage that has not been vacant for more than nine months and tenant improvements and leasing commissions are based on our share of square feet leased during the period.

 

New York

Washington, DC

Retail Properties

 

(Square feet in thousands)

Office

Retail

Office

Strips

Malls

 

 

Quarter Ended September 30, 2014

 

Total square feet leased

556 

33 

450 

243 

25 

 

Our share of square feet leased:

483 

29 

377 

243 

19 

 

Initial rent (1)

$

68.44 

$

168.22 

$

38.32 

$

17.66 

$

42.03 

 

Weighted average lease term (years)

9.7 

11.2 

7.1 

9.0 

5.7 

 

Second generation relet space:

 

Square feet

243 

15 

193 

31 

 

Cash basis:

 

Initial rent (1)

$

70.88 

$

238.45 

$

39.30 

$

27.19 

$

86.42 

 

Prior escalated rent

$

60.13 

$

168.14 

$

42.41 

$

25.22 

$

70.11 

 

Percentage increase (decrease)

17.9% 

41.8% 

(7.3%) 

7.8% 

23.3% 

 

GAAP basis:

 

Straight-line rent (2)

$

69.12 

$

247.02 

$

39.07 

$

27.89 

$

86.77 

 

Prior straight-line rent

$

61.40 

$

161.01 

$

40.15 

$

24.74 

$

65.89 

 

Percentage increase (decrease)

12.6% 

53.4% 

(2.7%) 

12.7% 

31.7% 

 

Tenant improvements and leasing

 

commissions:

 

Per square foot

$

82.95 

$

18.90 

$

34.33 

$

28.31(3)

$

31.04(4)

 

Per square foot per annum

$

8.55 

$

1.69 

$

4.84 

$

3.15(3)

$

5.45(4)

 

Percentage of initial rent

12.5% 

1.0% 

12.6% 

17.8%(3)

13.0%(4)

 

 

Nine Months Ended September 30, 2014:

 

Total square feet leased

2,726 

68 

1,159 

(5)

707 

104 

 

Our share of square feet leased:

2,321 

63 

1,055 

(5)

707 

91 

 

Initial rent (1)

$

66.78 

$

259.92 

$

39.57 

$

18.86 

$

28.70 

 

Weighted average lease term (years)

10.9 

10.9 

7.5 

7.0 

5.2 

 

Second generation relet space:

 

Square feet

1,817 

47 

660 

366 

55 

 

Cash basis:

 

Initial rent (1)

$

68.14 

$

318.17 

$

39.93 

$

21.38 

$

24.30 

 

Prior escalated rent

$

60.47 

$

236.71 

$

42.56 

$

20.19 

$

22.66 

 

Percentage increase (decrease)

12.7% 

34.4% 

(6.2%) 

5.9% 

7.2% 

 

GAAP basis:

 

Straight-line rent (2)

$

67.29 

$

353.95 

$

38.76 

$

21.75 

$

24.71 

 

Prior straight-line rent

$

57.12 

$

233.53 

$

39.20 

$

19.50 

$

22.46 

 

Percentage increase (decrease)

17.8% 

51.6% 

(1.1%) 

11.5% 

10.0% 

 

Tenant improvements and leasing

 

commissions:

 

Per square foot

$

74.65 

$

56.44 

$

38.14 

$

11.53 

$

9.32 

 

Per square foot per annum

$

6.85 

$

5.18 

$

5.09 

$

1.65 

$

1.79 

 

Percentage of initial rent

10.3% 

2.0% 

12.9% 

8.7% 

6.2% 

 

(1)

Represents the cash basis weighted average starting rent per square foot, which is generally indicative of market rents. Most leases include free rent and periodic step-ups in rent which are not included in the initial cash basis rent per square foot but are included in the GAAP basis straight-line rent per square foot.

(2)

Represents the GAAP basis weighted average rent per square foot that is recognized over the term of the respective leases, and includes the effect of free rent and periodic step-ups in rent.

(3)

Excluding tenant improvements and leasing commissions for a 58,652 square foot lease at our Kearny strip shopping center, the tenant improvements and leasing commissions per square foot were $3.12 instead of $28.31, $0.45 per square foot per annum instead of $3.15 per square foot per annum and 2.5% of initial rent instead of 17.8% of initial rent.

(4)

Represents tenant improvements and leasing commissions for a 6,914 square foot lease at our Las Catalinas shopping mall. There were no other tenant improvements and leasing commissions during the quarter ended September 30, 2014.

(5)

Excludes (i) 165 square feet leased to WeWork that will be redeveloped into rental residential apartments (see page 69), and (ii) 71 square feet of retail space that was leased at an initial rent of $47.06 per square foot.

                                                                                 

 

42

 


 

 

Overview – continued

 

Square footage (in service) and Occupancy as of September 30, 2014:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

Properties

Portfolio

Share

Occupancy %

New York:

Office

32 

19,922 

16,660 

96.6%

Retail

56 

2,370 

2,186 

96.9%

Alexander's

2,178 

706 

99.7%

Hotel Pennsylvania

1,400 

1,400 

Residential - 1,655 units

1,523 

762 

94.7%

27,393 

21,714 

96.7%

Washington, DC:

Office, excluding the Skyline Properties

51 

13,340 

11,021 

87.1%

Skyline Properties

2,648 

2,648 

53.2%

Total Office

59 

15,988 

13,669 

80.5%

Residential - 2,414 units

2,597 

2,455 

97.0%

Other

381 

381 

100.0%

18,966 

16,505 

83.4%

Retail Properties:

Strip Shopping Centers

100 

14,439 

14,013 

94.5%

Regional Malls

4,132 

2,644 

95.5%

18,571 

16,657 

94.6%

Other:

The Mart

3,586 

3,577 

96.7%

555 California Street

1,799 

1,259 

96.8%

Primarily Warehouses

971 

971 

45.6%

6,356 

5,807 

Total square feet at September 30, 2014

71,286 

60,683 

 

43

 


 

 

Overview - continued

Square footage (in service) and Occupancy as of December 31, 2013:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

properties

Portfolio

Share

Occupancy %

New York:

Office

31 

19,799 

16,358 

96.6%

Retail

55 

2,389 

2,166 

97.4%

Alexander's

2,178 

706 

99.4%

Hotel Pennsylvania

1,400 

1,400 

Residential - 1,655 units

1,523 

762 

94.8%

27,289 

21,392 

96.8%

Washington, DC:

Office, excluding the Skyline Properties

51 

13,581 

11,151 

85.4%

Skyline Properties

2,652 

2,652 

60.8%

Total Office

59 

16,233 

13,803 

80.7%

Residential - 2,405 units

2,588 

2,446 

96.3%

Other

379 

379 

100.0%

19,200 

16,628 

83.4%

Retail Properties:

Strip Shopping Centers

101 

14,490 

14,111 

94.7%

Regional Malls

4,135 

2,646 

95.9%

18,625 

16,757 

94.9%

Other:

The Mart

3,703 

3,694 

96.3%

555 California Street

1,795 

1,257 

94.5%

Primarily Warehouses

971 

971 

45.6%

6,469 

5,922 

Total square feet at December 31, 2013

71,583 

60,699 

 

44

 


 

 

Overview - continued

 

 

Washington, DC Segment

 

We estimate that 2014 EBITDA from continuing operations will be between $5,000,000 and $10,000,000 lower than 2013 EBITDA, due to the effects of Base Realignment and Closure (“BRAC”) related move-outs and the sluggish leasing environment in the Washington, DC / Northern Virginia area.  EBITDA from continuing operations for the nine months ended September 30, 2014, was lower than the prior year’s nine months by $5,264,000, which was offset by an interest expense reduction of $18,318,000 from the restructuring of the Skyline properties mortgage loan in October 2013.  As a result of this and other items, the overall earnings in the nine months ended September 30, 2014 were higher than the prior year’s nine months.

 

Of the 2,395,000 square feet subject to the effects of the BRAC statute, 393,000 square feet has been taken out of service for redevelopment and 952,000 square feet has been leased.  The table below summarizes the status of the BRAC space as of September 30, 2014.

 

Rent Per

Square Feet

Square Foot

Total

Crystal City

Skyline

Rosslyn

Resolved:

Relet as of September 30, 2014

$

37.97 

952,000 

591,000 

281,000 

80,000 

Taken out of service for redevelopment

393,000 

393,000 

-   

-   

1,345,000 

984,000 

281,000 

80,000 

To Be Resolved:

Vacated as of September 30, 2014

36.41 

835,000 

367,000 

402,000 

66,000 

Expiring in:

2014 

39.54 

26,000 

-   

26,000 

-   

2015 

36.76 

189,000 

88,000 

101,000 

-   

1,050,000 

455,000 

529,000 

66,000 

Total square feet subject to BRAC

2,395,000 

1,439,000 

810,000 

146,000 

45

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2014 and 2013

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended September 30, 2014 and 2013.

(Amounts in thousands)

For the Three Months Ended September 30, 2014

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

670,909 

$

394,579 

$

133,541 

$

82,442 

$

-   

$

60,347 

Total expenses

450,310 

243,314 

88,375 

44,466 

-   

74,155 

Operating income (loss)

220,599 

151,265 

45,166 

37,976 

-   

(13,808)

(Loss) income from partially owned

entities, including Toys

(25,663)

5,810 

(1,411)

371 

(18,418)

(12,015)

Income from Real Estate Fund

24,160 

-   

-   

-   

-   

24,160 

Interest and other investment

income, net

7,602 

1,859 

15 

-   

5,719 

Interest and debt expense

(115,120)

(43,061)

(18,685)

(10,056)

-   

(43,318)

Net gain on disposition of wholly owned and

partially owned assets

2,665 

-   

-   

-   

-   

2,665 

Income (loss) before income taxes

114,243 

115,873 

25,085 

28,300 

(18,418)

(36,597)

Income tax expense

(3,177)

(802)

(130)

(525)

-   

(1,720)

Income (loss) from continuing operations

111,066 

115,071 

24,955 

27,775 

(18,418)

(38,317)

Income from discontinued operations

58,131 

-   

-   

57,499 

-   

632 

Net income (loss)

169,197 

115,071 

24,955 

85,274 

(18,418)

(37,685)

Less net income attributable to

noncontrolling interests

(17,673)

(2,690)

-   

(76)

-   

(14,907)

Net income (loss) attributable to Vornado

151,524 

112,381 

24,955 

85,198 

(18,418)

(52,592)

Interest and debt expense(2)

160,252 

58,010 

22,208 

11,205 

22,471 

46,358 

Depreciation and amortization(2)

160,270 

79,446 

36,411 

15,256 

9,923 

19,234 

Income tax expense (benefit) (2)

2,232 

746 

145 

525 

(1,536)

2,352 

EBITDA(1)

$

474,278 

$

250,583 

(3)

$

83,719 

(4)

$

112,184 

(5)

$

12,440 

$

15,352 

(6)

 

(Amounts in thousands)

For the Three Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

668,989 

$

388,747 

$

137,604 

$

81,439 

$

-   

$

61,199 

Total expenses

434,138 

223,992 

87,612 

45,461 

-   

77,073 

Operating income (loss)

234,851 

164,755 

49,992 

35,978 

-   

(15,874)

(Loss) income from partially owned

entities, including Toys

(32,756)

4,189 

(2,003)

188 

(34,209)

(921)

Income from Real Estate Fund

22,913 

-   

-   

-   

-   

22,913 

Interest and other investment

(loss) income, net

(10,275)

1,468 

17 

-   

(11,761)

Interest and debt expense

(119,676)

(42,349)

(27,246)

(10,834)

-   

(39,247)

Net gain on disposition of wholly owned and

partially owned assets

15,138 

-   

-   

1,377 

-   

13,761 

Income (loss) before income taxes

110,195 

128,063 

20,760 

26,710 

(34,209)

(31,129)

Income tax expense

(2,222)

(65)

(766)

(731)

-   

(660)

Income (loss) from continuing operations

107,973 

127,998 

19,994 

25,979 

(34,209)

(31,789)

Income from discontinued operations

24,278 

2,883 

-   

21,149 

-   

246 

Net income (loss)

132,251 

130,881 

19,994 

47,128 

(34,209)

(31,543)

Less net income attributable to

noncontrolling interests

(28,877)

(6,556)

-   

(2,970)

-   

(19,351)

Net income (loss) attributable to Vornado

103,374 

124,325 

19,994 

44,158 

(34,209)

(50,894)

Interest and debt expense(2)

183,116 

59,344 

30,717 

12,119 

38,435 

42,501 

Depreciation and amortization(2)

172,756 

67,294 

35,403 

17,573 

32,176 

20,310 

Income tax (benefit) expense (2)

(20,292)

67 

828 

731 

(22,690)

772 

EBITDA(1)

$

438,954 

$

251,030 

(3)

$

86,942 

(4)

$

74,581 

(5)

$

13,712 

$

12,689 

(6)

_____________________________

See notes on the following page.

 

46

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2014 and 2013 - continued

Notes to preceding tabular information:

(1)

EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental non-GAAP financial measure for making decisions and assessing the unlevered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.

(2)

Interest and debt expense, depreciation and amortization and income tax expense (benefit) in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.

(3)

The elements of "New York" EBITDA are summarized below.

For the Three Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Office(a)

$

159,568 

$

172,367 

Retail

71,327 

59,782 

Alexander's

10,387 

10,387 

Hotel Pennsylvania

9,301 

8,494 

Total New York

$

250,583 

$

251,030 

(a)

Includes $12,121 of termination fee income, net, from a tenant at 1290 Avenue of the Americas and $2,368 from discontinued operations in the three months ended September 30, 2013. Excluding these items, EBITDA for the three months ended September 30, 2013 was $157,878.

(4)

The elements of "Washington, DC" EBITDA are summarized below.

For the Three Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Office, excluding the Skyline Properties

$

65,904 

$

69,220 

Skyline properties

7,698 

6,841 

Total Office

73,602 

76,061 

Residential

10,117 

10,881 

Total Washington, DC

$

83,719 

$

86,942 

(5)

The elements of "Retail Properties" EBITDA are summarized below.

For the Three Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Strip shopping centers(a)

$

97,122 

$

59,175 

Regional malls(b)

15,062 

15,406 

Total Retail properties

$

112,184 

$

74,581 

(a)

Includes discontinued operations and other gains and losses that affect comparability, aggregating $57,676 and $19,352 for the three months ended September 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $39,446 and $39,823, respectively.

(b)

Includes discontinued operations and other gains and losses that affect comparability, aggregating to a loss of $177 and income of $2,140 for the three months ended September 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $15,239 and $13,266, respectively.

 

47

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended September 30, 2014 and 2013 - continued

Notes to preceding tabular information - continued:

(6)

The elements of "other" EBITDA are summarized below.

For the Three Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

2,059 

$

2,086 

Net realized gains on exited investments

12,896 

2,046 

Previously recorded unrealized gains on exited investments

(12,397)

-   

Net unrealized gains on held investments

4,583 

3,092 

Carried interest

8,431 

267 

Total

15,572 

7,491 

The Mart and trade shows

19,497 

14,925 

555 California Street

11,994 

10,720 

India real estate ventures

2,651 

695 

Other investments

4,618 

5,330 

54,332 

39,161 

Corporate general and administrative expenses(a)

(22,948)

(23,467)

Investment income and other, net(a)

6,659 

11,108 

Impairment loss and loan loss reserve on investment in Suffolk Downs

(10,263)

-   

Acquisition and transaction related costs(b)

(7,105)

(2,818)

Net gain on sale of residential condominiums and a land parcel

2,665 

134 

Net gain on sale of marketable securities

-   

31,741 

Loss from the mark-to-market of J.C. Penney derivative position

-   

(20,012)

Loss on sale of J.C. Penney common shares

-   

(18,114)

Net income attributable to noncontrolling interests in the Operating Partnership

(7,975)

(5,032)

Preferred unit distributions of the Operating Partnership

(13)

(12)

$

15,352 

$

12,689 

(a)

The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $1,352 and $269 for the three months ended September 30, 2014 and 2013, respectively.

(b)

The three months ended September 30, 2014, includes $5,828 of transaction costs related to the spin-off of our strip shopping centers and malls.

 

EBITDA by Region

 

Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations, other gains and losses that affect comparability and our Toys and Other Segments).

 

For the Three Months

Ended September 30,

2014 

2013 

Region:

New York City metropolitan area

75%

74%

Washington, DC / Northern Virginia metropolitan area

22%

23%

Puerto Rico

1%

1%

Other geographies

2%

2%

100%

100%

48

 


 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013

 

 

Revenues

Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $670,909,000 in the three months ended September 30, 2014, compared to $668,989,000 in the prior year’s quarter, an increase of $1,920,000.

 

(Amounts in thousands)

Retail

Increase (Decrease) due to:

Total

New York

Washington, DC

Properties

Other

Property rentals:

Acquisitions and other

$

3,565 

$

4,822 

$

(1,388)

$

(65)

$

196 

Properties taken out of / placed into

service for redevelopment

(3,366)

(1,221)

(497)

426 

(2,074)

Hotel Pennsylvania

1,009 

1,009 

-   

-   

-   

Trade Shows

1,714 

-   

-   

-   

1,714 

Same store operations

13,813 

8,473 

1,485 

988 

2,867 

16,735 

13,083 

(400)

1,349 

2,703 

Tenant expense reimbursements:

Acquisitions and other

624 

311 

286 

(4)

31 

Properties placed into / taken out of

service for redevelopment

(814)

(530)

43 

(165)

(162)

Same store operations

4,706 

5,287 

(890)

(446)

755 

4,516 

5,068 

(561)

(615)

624 

Cleveland Medical Mart development

project

(4,893)

(1)

-   

-   

-   

(4,893)

(1)

Fee and other income:

BMS cleaning fees

6,569 

6,075 

-   

-   

494 

(2)

Signage revenue

(1,040)

(1,040)

-   

-   

-   

Management and leasing fees

(3,315)

(1,203)

(2,199)

25 

62 

Lease termination fees

(16,579)

(16,387)

(3)

(659)

464 

Other income

(73)

236 

(244)

(220)

155 

(14,438)

(12,319)

(3,102)

269 

714 

Total increase (decrease) in revenues

$

1,920 

$

5,832 

$

(4,063)

$

1,003 

$

(852)

(1)

Due to completion of the project. This decrease in revenue is substantially offset by a decrease in development costs expensed in the period. See note (3) on page 50.

(2)

Represents the change in the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 50.

(3)

Primarily due to a $19,500 termination fee from a tenant at 1290 Avenue of the Americas recognized during the third quarter of 2013.

 

49

 


 
 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Expenses

Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $450,310,000 in the three months ended September 30, 2014, compared to $434,138,000 in the prior year’s quarter, an increase of $16,172,000.

 

(Amounts in thousands)

Retail

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Other

Operating:

Acquisitions and other

$

(928)

$

(897)

$

45 

$

(22)

$

(54)

Properties taken out of / placed into

service for redevelopment

(3,234)

(1,545)

(200)

199 

(1,688)

Non-reimbursable expenses, including

bad debt reserves

1,734 

2,049 

-   

-   

(315)

Hotel Pennsylvania

250 

250 

-   

-   

-   

Trade Shows

339 

-   

-   

-   

339 

BMS expenses

4,605 

3,847 

-   

-   

758 

(2)

Same store operations

3,908 

7,105 

(352)

(613)

(2,232)

6,674 

10,809 

(507)

(436)

(3,192)

Depreciation and amortization:

Acquisitions and other

1,960 

1,961 

-   

(1)

-   

Properties placed into / taken out of

service for redevelopment

1,767 

3,464 

(215)

(790)

(692)

Same store operations

4,362 

1,933 

1,718 

309 

402 

8,089 

7,358 

1,503 

(482)

(290)

General and administrative:

Mark-to-market of deferred

compensation plan liability (1)

1,143 

-   

-   

-   

1,143 

Same store operations

(782)

1,155 

(233)

(77)

(1,627)

361 

1,155 

(233)

(77)

(484)

 

Cleveland Medical Mart development

project

(3,239)

(3)

-   

-   

-   

(3,239)

(3)

Acquisition and transaction related costs

4,287 

-   

-   

-   

4,287 

Total increase (decrease) in expenses

$

16,172 

$

19,322 

$

763 

$

(995)

$

(2,918)

(1)

This decrease in expense is entirely offset by a corresponding decrease in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment income (loss), net” on our consolidated statements of income.

(2)

Represents the change in the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 49.

(3)

Due to the completion of the project. This decrease in expense is offset by the decrease in development revenue in the period. See note (1) on page 49.

 

50

 


 
 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

(Loss) Applicable to Toys

 

In the three months ended September 30, 2014, we recognized a net loss of $18,418,000 from our investment in Toys, comprised of $20,357,000 for our share of Toys’ net loss, partially offset by $1,939,000 of management fees earned and received. 

 

In the three months ended September 30, 2013, we recognized a net loss of $34,209,000 from our investment in Toys, comprised of $36,056,000 for our share of Toys’ net loss, partially offset by $1,847,000 of management fees earned and received.

 

 

(Loss) Income from Partially Owned Entities

Summarized below are the components of (loss) income from partially owned entities for the three months ended September 30, 2014 and 2013.

 

Percentage

For the Three Months Ended

 

Ownership at

September 30,

 

(Amounts in thousands)

September 30, 2014

2014 

 

2013 

 

Equity in Net (Loss) Income:

Alexander's

32.4%

$

7,192 

$

5,975 

India real estate ventures

4.1%-36.5%

(262)

(1,449)

Partially owned office buildings (1)

Various

18 

38 

Other investments (2)

Various

(14,193)

(3,111)

$

(7,245)

$

1,453 

(1)

Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.

(2)

Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others. The three months ended September 30, 2014 includes a $10,263 non-cash impairment loss and loan loss reserve on our equity and debt investments in Suffolk Downs race track and adjacent land.

 

 

Income from Real Estate Fund

Below are the components of the income from our Real Estate Fund for the three months ended September 30, 2014 and 2013.

 

(Amounts in thousands)

For the Three Months Ended September 30,

2014 

2013 

Net investment income

$

3,829 

$

2,362 

Net realized gains on exited investments

51,584 

8,184 

Previously recorded unrealized gains on exited investments

(49,586)

Net unrealized gains on held investments

18,333 

12,367 

Income from Real Estate Fund

24,160 

22,913 

Less income attributable to noncontrolling interests

(8,588)

(15,422)

Income from Real Estate Fund attributable to Vornado (1)

$

15,572 

$

7,491 

___________________________________

(1)

Excludes management, leasing and development fees of $759 and $770 for the three months ended September 30, 2014 and 2013, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

51

 


 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Interest and Other Investment Income (Loss), net

 

Interest and other investment income (loss), net was income of $7,602,000 in the three months ended September 30, 2014, compared to a loss of $10,275,000 in the prior year’s quarter, an increase in income of $17,877,000. This increase resulted from:

 

(Amounts in thousands)

J.C. Penney derivative position mark-to-market loss in 2013

$

20,012 

Lower interest on mezzanine loans receivable in the current year

(4,362)

Increase in the value of investments in our deferred compensation plan (offset by a corresponding

increase in the liability for plan assets in general and administrative expenses)

1,083 

Other, net

1,144 

$

17,877 

 

 

Interest and Debt Expense

 

Interest and debt expense was $115,120,000 in the three months ended September 30, 2014, compared to $119,676,000 in the prior year’s quarter, a decrease of $4,556,000. This decrease was primarily due to (i) $5,803,000 of higher capitalized interest in the current year’s quarter and (ii) $6,314,000 of interest savings from the restructuring of the Skyline properties mortgage loan in October 2013, partially offset by (iii) $3,522,000 of interest expense from the $600,000,000 financing of our 220 Central Park South development site in January 2014 and (iv) $2,899,000 of interest expense from the issuance of $450,000,000 of senior unsecured notes in June 2014.

 

 

Net Gain (Loss) on Disposition of Wholly Owned and Partially Owned Assets

In the three months ended September 30, 2014, we recognized net gains of $2,665,000 from the sale of residential condominiums.  In the three months ended September 30, 2013, we recognized a $15,138,000 net gain on disposition of wholly owned and partially owned assets, primarily from a $31,741,000 net gain on the sale of a marketable security, partially offset by an $18,114,000 net loss on sale of the remaining 13,400,000 J.C. Penney common shares.

 

 

Income Tax Expense

 

Income tax expense was $3,177,000 in the three months ended September 30, 2014, compared to $2,222,000 in the prior year’s quarter, an increase of $955,000.  This increase was primarily attributable to higher income from our taxable REIT subsidiaries.

 

 

Income from Discontinued Operations

 

We have reclassified the revenues and expenses of the properties that were sold or are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements.  The table below sets forth the combined results of assets related to discontinued operations for the three months ended September 30, 2014 and 2013.

For the Three Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Total revenues

$

836 

$

17,354 

Total expenses

501 

11,352 

335 

6,002 

Net gain on sale of Beverly Connection

44,155 

-   

Net gains on sale of other real estate

13,641 

18,996 

Impairment losses

-   

(720)

Income from discontinued operations

$

58,131 

$

24,278 

 

52

 


 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $9,685,000 in the three months ended September 30, 2014, compared to $23,833,000 in the prior year’s quarter, a decrease of $14,148,000.  This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our Real Estate Fund.

 

 

Net Income Attributable to Noncontrolling Interests in the Operating Partnership

 

Net income attributable to noncontrolling interests in the Operating Partnership was $7,975,000 in the three months ended September 30, 2014, compared to $5,032,000 in the prior year’s quarter, an increase of $2,943,000.  This increase resulted primarily from higher net income subject to allocation to unitholders.

 

 

Preferred Unit Distributions of the Operating Partnership

 

Preferred unit distributions of the Operating Partnership were $13,000 in the three months ended September 30, 2014, compared to $12,000 in the prior year’s quarter, an increase of $1,000. 

 

Preferred Share Dividends

Preferred share dividends were $20,365,000 in the three months ended September 30, 2014, compared to $20,369,000 in the prior year’s quarter, a decrease of $4,000. 

 

 

53

 


 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Same Store EBITDA

Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods.  Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items.  We also present same store EBITDA on a cash basis which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments. We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers.  Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies. 

 

Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the three months ended September 30, 2014, compared to the three months ended September 30, 2013.

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

EBITDA for the three months ended September 30, 2014

$

250,583 

$

83,719 

$

112,184 

Add-back:

Non-property level overhead expenses included above

7,986 

6,454 

4,163 

Less EBITDA from:

Acquisitions

(8,640)

-   

-   

Dispositions, including net gains on sale

-   

(73)

(57,501)

Properties taken out-of-service for redevelopment

(5,897)

(994)

(1,638)

Other non-operating income

(3,078)

(421)

(4,217)

Same store EBITDA for the three months ended September 30, 2014

$

240,954 

$

88,685 

$

52,991 

EBITDA for the three months ended September 30, 2013

$

251,030 

$

86,942 

$

74,581 

Add-back:

Non-property level overhead expenses included above

6,831 

6,687 

4,240 

Less EBITDA from:

Acquisitions

(11)

-   

-   

Dispositions, including net gains on sale

(2,481)

-   

(21,543)

Properties taken out-of-service for redevelopment

(5,412)

(1,592)

(1,512)

Other non-operating income

(19,543)

(914)

(3,342)

Same store EBITDA for the three months ended September 30, 2013

$

230,414 

$

91,123 

$

52,424 

Increase (decrease) in same store EBITDA -

Three months ended September 30, 2014 vs. September 30, 2013(1)

$

10,540 

$

(2,438)

$

567 

% increase (decrease) in same store EBITDA

4.6% 

(2.7%) 

1.1% 

(1)

See notes on following page

 

54

 


 

 

Results of Operations – Three Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Notes to preceding tabular information

 

 

New York:

 

The $10,540,000 increase in New York same store EBITDA resulted primarily from increases in Retail and Office of $5,064,000 and $4,698,000, respectively.  The Retail and Office increases resulted primarily from higher average rent per square foot, partially offset by higher operating expenses, net of reimbursements, of $1,818,000.

 

 

Washington, DC:

 

The $2,438,000 decrease in Washington, DC same store EBITDA resulted primarily from a lower leasing fee in 2014.

 

 

Retail Properties:

 

The $567,000 increase in Retail Properties same store EBITDA resulted primarily from an increase in rental revenue of $988,000, primarily due to an increase in average annual rents per square foot and same store occupancy, partially offset by an increase in operating expenses, net of reimbursements. 

 

 

Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA

 

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

Same store EBITDA for the three months ended September 30, 2014

$

240,954 

$

88,685 

$

52,991 

Less: Adjustments for straight line rents, amortization of acquired

below-market leases, net, and other non-cash adjustments

(28,363)

(2,771)

(2,019)

Cash basis same store EBITDA for the three months ended

September 30, 2014

$

212,591 

$

85,914 

$

50,972 

Same store EBITDA for the three months ended September 30, 2013

$

230,414 

$

91,123 

$

52,424 

Less: Adjustments for straight line rents, amortization of acquired

below-market leases, net, and other non-cash adjustments

(28,345)

(1,514)

(2,329)

Cash basis same store EBITDA for the three months ended

September 30, 2013

$

202,069 

$

89,609 

$

50,095 

Increase (decrease) in Cash basis same store EBITDA -

Three months ended September 30, 2014 vs. September 30, 2013

$

10,522 

$

(3,695)

$

877 

% increase (decrease) in Cash basis same store EBITDA

5.2% 

(4.1%) 

1.8% 

55

 


 

 

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2014 and 2013

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the nine months ended September 30, 2014 and 2013.

(Amounts in thousands)

For the Nine Months Ended September 30, 2014

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

1,997,702 

$

1,151,395 

$

403,645 

$

253,623 

$

-   

$

189,039 

Total expenses

1,383,618 

716,125 

265,299 

173,945 

-   

228,249 

Operating income (loss)

614,084 

435,270 

138,346 

79,678 

-   

(39,210)

(Loss) income from partially owned

entities, including Toys

(77,426)

16,372 

(4,925)

1,250 

(74,162)

(15,961)

Income from Real Estate Fund

142,418 

-   

-   

-   

-   

142,418 

Interest and other investment

income, net

28,930 

4,979 

93 

26 

-   

23,832 

Interest and debt expense

(341,613)

(134,970)

(56,692)

(28,565)

-   

(121,386)

Net gain on disposition of wholly

owned and partially owned assets

13,205 

-   

-   

-   

-   

13,205 

Income (loss) before income taxes

379,598 

321,651 

76,822 

52,389 

(74,162)

2,898 

Income tax expense

(8,358)

(2,997)

(46)

(1,575)

-   

(3,740)

Income (loss) from continuing operations

371,240 

318,654 

76,776 

50,814 

(74,162)

(842)

Income from discontinued operations

61,800 

-   

-   

60,993 

-   

807 

Net income (loss)

433,040 

318,654 

76,776 

111,807 

(74,162)

(35)

Less net income attributable to

noncontrolling interests

(101,791)

(7,203)

-   

(114)

-   

(94,474)

Net income (loss) attributable to Vornado

331,249 

311,451 

76,776 

111,693 

(74,162)

(94,509)

Interest and debt expense(2)

510,724 

180,150 

67,469 

31,989 

100,549 

130,567 

Depreciation and amortization(2)

530,052 

241,040 

108,367 

56,387 

64,533 

59,725 

Income tax expense (2)

21,489 

3,069 

88 

1,575 

12,106 

4,651 

EBITDA(1)

$

1,393,514 

$

735,710 

(3)

$

252,700 

(4)

$

201,644 

(5)

$

103,026 

$

100,434 

(6)

 

(Amounts in thousands)

For the Nine Months Ended September 30, 2013

Retail

Total

New York

Washington, DC

Properties

Toys

Other

Total revenues

$

2,058,525 

$

1,129,248 

$

406,652 

$

303,704 

$

-   

$

218,921 

Total expenses

1,362,975 

700,652 

258,591 

140,343 

-   

263,389 

Operating income (loss)

695,550 

428,596 

148,061 

163,361 

-   

(44,468)

(Loss) income from partially owned

entities, including Toys

(45,620)

14,020 

(6,545)

1,512 

(69,311)

14,704 

Income from Real Estate Fund

73,947 

-   

-   

-   

-   

73,947 

Interest and other investment (loss)

income, net

(32,935)

4,076 

99 

-   

(37,113)

Interest and debt expense

(360,679)

(125,428)

(83,350)

(32,637)

-   

(119,264)

Net (loss) gain on disposition of wholly

owned and partially owned assets

(20,581)

-   

-   

1,377 

-   

(21,958)

Income (loss) before income taxes

309,682 

321,264 

58,265 

133,616 

(69,311)

(134,152)

Income tax expense

(6,172)

(1,298)

(1,949)

(1,480)

-   

(1,445)

Income (loss) from continuing operations

303,510 

319,966 

56,316 

132,136 

(69,311)

(135,597)

Income (loss) from discontinued operations

299,989 

8,539 

-   

292,279 

-   

(829)

Net income (loss)

603,499 

328,505 

56,316 

424,415 

(69,311)

(136,426)

Less net income attributable to

noncontrolling interests

(79,009)

(9,518)

-   

(3,079)

-   

(66,412)

Net income (loss) attributable to Vornado

524,490 

318,987 

56,316 

421,336 

(69,311)

(202,838)

Interest and debt expense(2)

551,357 

163,579 

93,715 

40,057 

119,347 

134,659 

Depreciation and amortization(2)

549,072 

220,280 

105,799 

52,440 

103,732 

66,821 

Income tax expense(2)

18,101 

1,444 

2,134 

1,480 

10,959 

2,084 

EBITDA(1)

$

1,643,020 

$

704,290 

(3)

$

257,964 

(4)

$

515,313 

(5)

$

164,727 

$

726 

(6)

_____________________________

See notes on the following page.

 

56

 


 

 

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2014 and 2013 - continued

Notes to preceding tabular information:

(1)

EBITDA represents "Earnings Before Interest, Taxes, Depreciation and Amortization." We consider EBITDA a supplemental non-GAAP financial measure for making decisions and assessing the unlevered performance of our segments as it relates to the total return on assets as opposed to the levered return on equity. As properties are bought and sold based on a multiple of EBITDA, we utilize this measure to make investment decisions as well as to compare the performance of our assets to that of our peers. EBITDA should not be considered a substitute for net income. EBITDA may not be comparable to similarly titled measures employed by other companies.

(2)

Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income (loss) to EBITDA includes our share of these items from partially owned entities.

(3)

The elements of "New York" EBITDA are summarized below.

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Office(a)

$

480,280 

$

476,849 

Retail

205,469 

177,394 

Alexander's

31,088 

31,141 

Hotel Pennsylvania

18,873 

18,906 

Total New York

$

735,710 

$

704,290 

(a)

Includes $12,121 of termination fee income, net, from a tenant at 1290 Avenue of the Americas and $7,207 from discontinued operations in the nine months ended September 30, 2013. Excluding these items, EBITDA for the nine months ended September 30, 2013 was $457,521.

(4)

The elements of "Washington, DC" EBITDA are summarized below.

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Office, excluding the Skyline Properties

$

200,218 

$

202,463 

Skyline properties

21,270 

22,546 

Total Office

221,488 

225,009 

Residential

31,212 

32,955 

Total Washington, DC

$

252,700 

$

257,964 

(5)

The elements of "Retail Properties" EBITDA are summarized below.

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Strip shopping centers(a)

$

178,499 

$

264,065 

Regional malls(b)

23,145 

251,248 

Total Retail properties

$

201,644 

$

515,313 

(a)

Includes discontinued operations and other gains and losses that affect comparability, aggregating $62,479 and $152,522 for the nine months ended September 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $116,020 and $111,543, respectively.

(b)

Includes discontinued operations and other gains and losses that affect comparability, aggregating to a loss of $20,016 and income of $209,332 for the nine months ended September 30, 2014 and 2013, respectively. Excluding these items, EBITDA was $43,161 and $41,916, respectively.

 

57

 


 
 

 

Net Income and EBITDA by Segment for the Nine Months Ended September 30, 2014 and 2013 - continued

 

Notes to preceding tabular information - continued:

(6)

The elements of "other" EBITDA are summarized below.

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

6,676 

$

5,737 

Net realized gains on exited investments

31,663 

2,046 

Previously recorded unrealized gains on exited investments

(12,579)

-   

Net unrealized gains on held investments

13,805 

14,869 

Carried interest

21,636 

11,974 

Total

61,201 

34,626 

The Mart and trade shows

61,038 

54,232 

555 California Street

35,566 

32,371 

India real estate ventures

4,574 

4,708 

LNR(a)

-   

20,443 

Other investments

13,825 

21,138 

176,204 

167,518 

Corporate general and administrative expenses(b)

(71,952)

(71,054)

Investment income and other, net(b)

22,764 

39,153 

Net gain on sale of residential condominiums and a land parcel

13,205 

1,139 

Acquisition and transaction related costs(c)

(12,972)

(6,769)

Impairment loss and loan loss reserve on investment in Suffolk Downs

(10,263)

-   

Loss on sale of J.C. Penney common shares

-   

(54,914)

Non-cash impairment loss on J.C. Penney common shares

-   

(39,487)

Loss from the mark-to-market of J.C. Penney derivative position

-   

(33,487)

Net gain on sale of marketable securities

-   

31,741 

Severance costs (primarily reduction-in-force at the Mart)

-   

(4,154)

Net income attributable to noncontrolling interests in the Operating Partnership

(16,514)

(27,814)

Preferred unit distributions of the Operating Partnership

(38)

(1,146)

$

100,434 

$

726 

________________________________________________

(a)

On April 19, 2013, LNR was sold for $1.053 billion.

 

(b)

 

The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $8,132 and $6,207 for the nine months ended September 30, 2014 and 2013, respectively.

 

 

(c)

The nine months ended September 30, 2014, includes $9,343 of transaction costs related to the spin-off of our strip shopping centers and malls.

 

EBITDA by Region

 

Below is a summary of the percentages of EBITDA by geographic region (excluding discontinued operations, other gains and losses that affect comparability and our Toys and Other Segments).

 

For the Nine Months

Ended September 30,

2014 

2013 

Region:

New York City metropolitan area

74%

73%

Washington, DC / Northern Virginia metropolitan area

23%

24%

Puerto Rico

2%

2%

Other geographies

1%

1%

100%

100%

58

 


 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013

 

 

Revenues

Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $1,997,702,000 for the nine months ended September 30, 2014, compared to $2,058,525,000 in the prior year’s nine months, a decrease of $60,823,000.  This decrease was primarily attributable to income in the prior year of $59,599,000 pursuant to a settlement agreement with Stop & Shop, $34,026,000 related to the Cleveland Medical Mart development project and $23,992,000 from the deconsolidation of Independence Plaza.  Excluding these items, revenues increased by $56,794,000 from the prior year’s nine months.  Below are the details of the (decrease) increase by segment:

 

(Amounts in thousands)

Retail

(Decrease) increase due to:

Total

New York

Washington, DC

Properties

Other

Property rentals:

Acquisitions and other

$

11,916 

$

15,152 

$

(844)

$

(1,113)

$

(1,279)

Deconsolidation of Independence Plaza

(23,992)

(23,992)

-   

-   

-   

Properties taken out of / placed into

service for redevelopment

(10,017)

(3,156)

(1,163)

676 

(6,374)

Hotel Pennsylvania

1,220 

1,220 

-   

-   

-   

Trade Shows

2,525 

-   

-   

-   

2,525 

Same store operations

35,430 

25,528 

(2,567)

3,248 

9,221 

17,082 

14,752 

(4,574)

2,811 

4,093 

Tenant expense reimbursements:

Acquisitions and other

(55)

(29)

204 

(36)

(194)

Properties placed into / taken out of

service for redevelopment

(2,103)

(1,603)

86 

(69)

(517)

Same store operations

21,184 

12,197 

(125)

6,614 

2,498 

19,026 

10,565 

165 

6,509 

1,787 

Cleveland Medical Mart development

project

(34,026)

(1)

-   

-   

-   

(34,026)

(1)

Fee and other income:

BMS cleaning fees

14,547 

14,956 

-   

-   

(409)

(2)

Signage revenue

2,323 

2,323 

-   

-   

-   

Management and leasing fees

(2,634)

(236)

(2,450)

(2)

54 

Lease termination fees

(75,250)

(18,312)

(3)

2,536 

(59,117)

(4)

(357)

Other income

(1,891)

(1,901)

1,316 

(282)

(1,024)

(62,905)

(3,170)

1,402 

(59,401)

(1,736)

Total (decrease) increase in revenues

$

(60,823)

$

22,147 

$

(3,007)

$

(50,081)

$

(29,882)

(1)

Due to the completion of the project. This decrease in revenue is substantially offset by a decrease in development costs expensed in the period. See note (3) on page 60.

(2)

Represents the change in the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 60.

(3)

Primarily due to a $19,500 termination fee from a tenant at 1290 Avenue of the Americas recognized in the third quarter of 2013.

(4)

Results primarily from $59,599 of income recognized in the first quarter of 2013 pursuant to a settlement agreement with Stop & Shop.

 

59

 


 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Expenses

Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $1,383,618,000 for the nine months ended September 30, 2014, compared to $1,362,975,000 in the prior year’s nine months, an increase of $20,643,000.  Excluding expenses of $20,000,000 for a non-cash impairment loss on the Springfield Town Center in 2014, $29,764,000 related to the Cleveland Medical Mart development project in 2013 and $25,899,000 from the deconsolidation of Independence Plaza, expenses increased by $56,306,000 from the prior year’s nine months.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Retail

Increase (decrease) due to:

Total

New York

Washington, DC

Properties

Other

Operating:

Acquisitions and other

$

(2,156)

$

(572)

$

$

(155)

$

(1,437)

Deconsolidation of Independence Plaza

(9,592)

(9,592)

-   

-   

-   

Properties taken out of / placed into

service for redevelopment

(10,892)

(5,007)

(380)

(422)

(5,083)

Non-reimbursable expenses, including

bad debt reserves

(813)

1,300 

-   

(825)

(1,288)

Hotel Pennsylvania

1,458 

1,458 

-   

-   

-   

Trade Shows

554 

-   

-   

-   

554 

BMS expenses

8,566 

8,975 

-   

-   

(409)

(2)

Same store operations

29,388 

18,090 

3,278 

7,241 

779 

16,513 

14,652 

2,906 

5,839 

(6,884)

Depreciation and amortization:

Acquisitions and other

6,368 

6,489 

-   

(110)

(11)

Deconsolidation of Independence Plaza

(16,307)

(16,307)

-   

-   

-   

Properties placed into / taken out of

service for redevelopment

25,806 

20,856 

(366)

7,544 

(2,228)

Same store operations

(3,578)

(10,753)

3,907 

2,224 

1,044 

12,289 

285 

3,541 

9,658 

(1,195)

General and administrative:

Mark-to-market of deferred

compensation plan liability (1)

1,985 

-   

-   

-   

1,985 

Severance costs (primarily reduction

in force at the Mart)

(4,154)

-   

-   

-   

(4,154)

Same store operations

(2,429)

536 

261 

(1,895)

(1,331)

(4,598)

536 

261 

(1,895)

(3,500)

Cleveland Medical Mart development

project

(29,764)

(3)

-   

-   

-   

(29,764)

(3)

Impairment losses, acquisition and

transaction related costs

26,203 

-   

-   

20,000 

(4)

6,203 

Total increase (decrease) in expenses

$

20,643 

$

15,473 

$

6,708 

$

33,602 

$

(35,140)

(1)

This increase in expense is entirely offset by a corresponding increase in income from the mark-to-market of the deferred compensation plan assets, a component of “interest and other investment income (loss), net” on our consolidated statements of income.

(2)

Represents the change in the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 59.

(3)

Due to the completion of the project. This decrease in expense is offset by the decrease in development revenue in the period. See note (1) on page 59.

(4)

Represents a non-cash impairment loss on the Springfield Town Center in the first quarter of 2014.

 

60

 


 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

(Loss) Applicable to Toys

 

In the nine months ended September 30, 2014, we recognized a net loss of $74,162,000 from our investment in Toys, comprised of (i) $4,691,000 for our share of Toys’ net loss and a (ii) $75,196,000 non-cash impairment loss, partially offset by (iii) $5,725,000 of management fees earned and received.

 

In the nine months ended September 30, 2013, we recognized a net loss of $69,311,000 from our investment in Toys, comprised of (i) $3,778,000 for our share of Toys’ equity in earnings and (ii) $5,453,000 of management fees earned and received, partially offset by (iii) a $78,542,000 non-cash impairment loss.

 

 

(Loss) Income from Partially Owned Entities

Summarized below are the components of (loss) income from partially owned entities for the nine months ended September 30, 2014 and 2013.

Percentage

For the Nine Months Ended

Ownership at

September 30,

(Amounts in thousands)

September 30, 2014

2014 

2013 

Equity in Net (Loss) Income:

Alexander's

32.4%

$

20,471 

$

17,802 

India real estate ventures

4.1%-36.5%

(2,440)

(2,630)

Partially owned office buildings (1)

Various

(1,387)

(1,586)

Other investments (2)

Various

(19,908)

(8,626)

LNR (3)

n/a

-   

18,731 

$

(3,264)

$

23,691 

(1)

Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others.

(2)

Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others. In the third quarter of 2014, we recognized a $10,263 non-cash impairment loss and loan loss reserve on our equity and debt investments in Suffolk Downs race track and adjacent land.

(3)

On April 19, 2013, LNR was sold for $1.053 billion.

 

61

 


 
 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Income from Real Estate Fund

 

Below are the components of the income from our Real Estate Fund for the nine months ended September 30, 2014 and 2013.

(Amounts in thousands)

For the Nine Months Ended September 30,

2014 

2013 

Net investment income

$

10,860 

$

6,287 

Net realized gains on exited investments

126,653 

8,184 

Previously recorded unrealized gains on exited investments

(50,316)

Net unrealized gains on held investments

55,221 

59,476 

Income from Real Estate Fund

142,418 

73,947 

Less income attributable to noncontrolling interests

(81,217)

(39,321)

Income from Real Estate Fund attributable to Vornado (1)

$

61,201 

$

34,626 

___________________________________

(1)

Excludes management, leasing and development fees of $2,208 and $2,446 for the nine months ended September 30, 2014 and 2013, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

Interest and Other Investment Income (Loss), net

 

Interest and other investment income (loss), net was income of $28,930,000 in the nine months ended September 30, 2014, compared to a loss of $32,935,000 in the prior year’s nine months, an increase in income of $61,865,000. This increase resulted from:

(Amounts in thousands)

J.C. Penney derivative position mark-to-market loss in 2013

$

72,974 

Lower interest on mezzanine loans receivable in the current year

(11,259)

Income from prepayment penalties in connection with the repayment of a mezzanine loan in 2013

(5,267)

Increase in the value of investments in our deferred compensation plan (offset by a corresponding

increase in the liability for plan assets in general and administrative expenses)

1,925 

Higher dividends and interest on marketable securities

1,160 

Other, net

2,332 

$

61,865 

 

Interest and Debt Expense

 

Interest and debt expense was $341,613,000 in the nine months ended September 30, 2014, compared to $360,679,000 in the prior year’s nine months, a decrease of $19,066,000.  This decrease was primarily due to (i) $18,493,000 of higher capitalized interest in the current year’s nine months and (ii) $18,318,000 of interest savings from the restructuring of the Skyline properties mortgage loan in October 2013, partially offset by (iii) $5,589,000 of defeasance cost in connection with the refinancing of 909 Third Avenue, (iv) $8,945,000 of interest expense from the $600,000,000 financing of our 220 Central Park South development site in January 2014 and (v) $3,367,000 of interest expense from the issuance of $450,000,000 of senior unsecured notes in June 2014.

 

 

Net Gain (Loss) on Disposition of Wholly Owned and Partially Owned Assets

 

In the nine months ended September 30, 2014, we recognized a $13,205,000 net gain on disposition of wholly owned and partially owned assets, primarily from the sale of residential condominiums and a land parcel, compared to a $20,581,000 net loss in the prior year’s nine months, primarily from a $54,914,000 net loss on the sale of the J.C. Penney common shares, partially offset by a $31,741,000 net gain on the sale of a marketable security. 

 

 

Income Tax Expense

 

Income tax expense was $8,358,000 in the nine months ended September 30, 2014, compared to $6,172,000 in the prior year’s nine months, an increase of $2,186,000. This increase was primarily attributable to higher income from our taxable REIT subsidiaries.

 

62

 


 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Income from Discontinued Operations

We have reclassified the revenues and expenses of the properties that were sold or are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements.  The table below sets forth the combined results of assets related to discontinued operations for the nine months ended September 30, 2014 and 2013.

For the Nine Months Ended September 30,

(Amounts in thousands)

2014 

2013 

Total revenues

$

13,473 

$

63,048 

Total expenses

8,627 

45,322 

4,846 

17,726 

Net gain on sale of Beverly Connection

44,155 

-   

Net gain on sale of Green Acres Mall

-   

202,275 

Net gains on sales of other real estate

13,641 

84,715 

Impairment losses

(842)

(4,727)

Income from discontinued operations

$

61,800 

$

299,989 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $85,239,000 in the nine months ended September 30, 2014, compared to $50,049,000 in the prior year’s nine months, an increase of $35,190,000.  This increase resulted primarily from higher net income allocated to the noncontrolling interests, including noncontrolling interests of our Real Estate Fund.

 

Net Income Attributable to Noncontrolling Interests in the Operating Partnership

 

Net income attributable to noncontrolling interests in the Operating Partnership was $16,514,000 in the nine months ended September 30, 2014, compared to $27,814,000 in the prior year’s nine months, a decrease of $11,300,000.  This decrease resulted primarily from lower net income subject to allocation to unitholders.

 

Preferred Unit Distributions of the Operating Partnership

 

Preferred unit distributions of the Operating Partnership were $38,000 in the nine months ended September 30, 2014, compared to $1,146,000 in the prior year’s nine months, a decrease of $1,108,000.  This decrease resulted from the redemption of the 6.875% Series D-15 cumulative redeemable preferred units in May 2013.

 

Preferred Share Dividends

 

Preferred share dividends were $61,099,000 in the nine months ended September 30, 2014, compared to $62,439,000 in the prior year’s nine months, a decrease of $1,340,000.  This decrease resulted primarily from the redemption of the 6.75% Series F and Series H cumulative redeemable preferred shares in February 2013.

 

Preferred Unit and Share Redemptions

 

In the nine months ended September 30, 2013, we recognized $1,130,000 of expense in connection with preferred unit and share redemptions, comprised of $9,230,000 of expense from the redemption of the 6.75% Series F and Series H cumulative redeemable preferred shares in February 2013, partially offset by $8,100,000 of income from the redemption of all the 6.875% Series D-15 cumulative redeemable preferred units in May 2013. 

 

63

 


 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Same Store EBITDA

Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods.  Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items.  We also present same store EBITDA on cash basis (which excludes income from the straight-lining of rents, amortization of below-market leases, net of above-market leases and other non-cash adjustments).  We present these non-GAAP measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers.  Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies. 

 

Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the nine months ended September 30, 2014, compared to nine months ended September 30, 2013.

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

EBITDA for the nine months ended September 30, 2014

$

735,710 

$

252,700 

$

201,644 

Add-back:

Non-property level overhead expenses included above

22,424 

20,473 

12,929 

Less EBITDA from:

Acquisitions

(24,213)

-   

-   

Dispositions, including net gains on sale

-   

(73)

(62,478)

Properties taken out-of-service for redevelopment

(17,295)

(2,872)

(3,131)

Other non-operating (income) expense

(6,378)

(4,109)

9,652 

Same store EBITDA for the nine months ended September 30, 2014

$

710,248 

$

266,119 

$

158,616 

EBITDA for the nine months ended September 30, 2013

$

704,290 

$

257,964 

$

515,313 

Add-back:

Non-property level overhead expenses included above

21,888 

20,212 

14,824 

Less EBITDA from:

Acquisitions

(239)

-   

-   

Dispositions, including net gains on sale

(7,522)

(117)

(302,266)

Properties taken out-of-service for redevelopment

(14,744)

(4,640)

(2,094)

Other non-operating income

(29,051)

(813)

(69,354)

Same store EBITDA for the nine months ended September 30, 2013

$

674,622 

$

272,606 

$

156,423 

Increase (decrease) in same store EBITDA -

Nine months ended September 30, 2014 vs. September 30, 2013(1)

$

35,626 

$

(6,487)

$

2,193 

% increase (decrease) in same store EBITDA

5.3% 

(2.4%) 

1.4% 

(1)

See notes on following page.

 

64

 


 

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to September 30, 2013 - continued

 

 

Notes to preceding tabular information

 

 

New York:

 

The $35,626,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail of $23,755,000 and $11,953,000, respectively.  The Office and Retail increases resulted primarily from higher (i) rental revenue of $25,860,000 (primarily due to an increase in average rent per square foot), and (ii) cleaning fees and signage revenue of $4,000,000, partially offset by (iii) higher operating expenses, net of reimbursements.

 

 

Washington, DC:

 

The $6,487,000 decrease in Washington, DC same store EBITDA resulted primarily from lower management and leasing fee income of $2,450,000 and higher operating expenses, net of reimbursements.

 

 

Retail Properties:

 

The $2,193,000 increase in Retail Properties same store EBITDA resulted primarily from an increase in rental revenue of $3,248,000, primarily due to an increase in average same store occupancy, partially offset by higher operating expenses, net of reimbursements.

 

 

Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA

 

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

Same store EBITDA for the nine months ended September 30, 2014

$

710,248 

$

266,119 

$

158,616 

Less: Adjustments for straight line rents, amortization of acquired

below-market leases, net, and other non-cash adjustments

(79,715)

(6,435)

(5,425)

Cash basis same store EBITDA for the nine months ended

September 30, 2014

$

630,533 

$

259,684 

$

153,191 

Same store EBITDA for the nine months ended September 30, 2013

$

674,622 

$

272,606 

$

156,423 

Less: Adjustments for straight line rents, amortization of acquired

below-market leases, net, and other non-cash adjustments

(87,603)

(8,281)

(6,387)

Cash basis same store EBITDA for the nine months ended

September 30, 2013

$

587,019 

$

264,325 

$

150,036 

Increase (decrease) in Cash basis same store EBITDA -

Nine months ended September 30, 2014 vs. September 30, 2013

$

43,514 

$

(4,641)

$

3,155 

% increase (decrease) in Cash basis same store EBITDA

7.4% 

(1.8%) 

2.1% 

65

 


 

 

SUPPLEMENTAL INFORMATION

 

Reconciliation of Net Income to EBITDA for the Three Months Ended June 30, 2014

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

Net income attributable to Vornado for the three months ended

June 30, 2014

$

111,959 

$

26,493 

$

27,625 

Interest and debt expense

64,072 

22,463 

10,433 

Depreciation and amortization

74,007 

35,806 

15,803 

Income tax expense

1,291 

132 

319 

EBITDA for the three months ended June 30, 2014

$

251,329 

$

84,894 

$

54,180 

                           

 

 

Reconciliation of EBITDA to Same Store EBITDA – Three Months Ended September 30, 2014 compared to June 30, 2014

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

EBITDA for the three months ended September 30, 2014

$

250,583 

$

83,719 

$

112,184 

Add-back:

Non-property level overhead expenses included above

7,986 

6,454 

4,163 

Less EBITDA from:

Acquisitions

(1,850)

-   

-   

Dispositions, including net gains on sale

-   

(73)

(57,501)

Properties taken out-of-service for redevelopment

(5,897)

(994)

(1,638)

Other non-operating income

(3,078)

(421)

(4,217)

Same store EBITDA for the three months ended September 30, 2014

$

247,744 

$

88,685 

$

52,991 

EBITDA for the three months ended June 30, 2014

$

251,329 

$

84,894 

$

54,180 

Add-back:

Non-property level overhead expenses included above

6,646 

6,572 

4,110 

Less EBITDA from:

Acquisitions

-   

-   

-   

Dispositions, including net gains on sale

-   

(2)

(2,120)

Properties taken out-of-service for redevelopment

(6,093)

(606)

(637)

Other non-operating income

(1,862)

(1,659)

(2,684)

Same store EBITDA for the three months ended June 30, 2014

$

250,020 

$

89,199 

$

52,849 

(Decrease) increase in same store EBITDA -

Three months ended September 30, 2014 vs. June 30, 2014

$

(2,276)

$

(514)

$

142 

% (decrease) increase in same store EBITDA

(0.9%) 

(0.6%) 

0.3% 

 

66

 


 

 

SUPPLEMENTAL INFORMATION – CONTINUED

 

Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA – Three Months Ended September 30, 2014 Compared to June 30, 2014

 

 

(Amounts in thousands)

New York

Washington, DC

Retail Properties

Same store EBITDA for the three months ended September 30, 2014

$

247,744 

$

88,685 

$

52,991 

Less: Adjustments for straight line rents, amortization of acquired

below-market leases, net, and other non-cash adjustments

(31,139)

(2,771)

(2,019)

Cash basis same store EBITDA for the three months ended

September 30, 2014

$

216,605 

$

85,914 

$

50,972 

Same store EBITDA for the three months ended June 30, 2014

$

250,020 

$

89,199 

$

52,849 

Less: Adjustments for straight line rents, amortization of acquired

below-market leases, net, and other non-cash adjustments

(30,790)

(2,462)

(1,758)

Cash basis same store EBITDA for the three months ended

June 30, 2014

$

219,230 

$

86,737 

$

51,091 

Decrease in Cash basis same store EBITDA -

Three months ended September 30, 2014 vs. June 30, 2014

$

(2,625)

$

(823)

$

(119)

% decrease in Cash basis same store EBITDA

(1.2%) 

(0.9%) 

(0.2%) 

67

 


 
 

 

Liquidity and Capital Resources

 

Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties.   Our cash requirements include property operating expenses, capital improvements, tenant improvements, leasing commissions, dividends to shareholders, distributions to unitholders of the Operating Partnership, as well as acquisition and development costs.  Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, and our revolving credit facilities; proceeds from the issuance of common and preferred equity; and asset sales.    

 

We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures.  Capital requirements for development expenditures and acquisitions may require funding from borrowings and/or equity offerings.

 

We may from time to time purchase or retire outstanding debt securities or redeem our equity securities.  Such purchases, if any, will depend on prevailing market conditions, liquidity requirements and other factors.  The amounts involved in connection with these transactions could be material to our consolidated financial statements.

 

 

Cash Flows for the Nine Months Ended September 30, 2014

Our cash and cash equivalents were $1,683,142,000 at September 30, 2014, a $1,099,852,000 increase over the balance at December 31, 2013.  Our consolidated outstanding debt was $11,153,337,000 at September 30, 2014, a $1,174,619,000 increase over the balance at December 31, 2013.  As of September 30, 2014 and December 31, 2013, $88,138,000 and $295,870,000, respectively, was outstanding under our revolving credit facilities.  During the remainder of 2014 and 2015, $0 and $744,248,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.

 

Cash flows provided by operating activities of $828,569,000 was comprised of (i) net income of $433,040,000, (ii) $264,302,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net loss of partially owned entities and impairment losses on real estate, (iii) proceeds from Real Estate Fund investments of $215,676,000 and (iv) distributions of income from partially owned entities of $42,164,000, partially offset by (v) the net change in operating assets and liabilities of $126,613,000, including $3,392,000 related to Real Estate Fund investments.

 

Net cash used in investing activities of $197,139,000 was comprised of (i) $368,571,000 of development costs and construction in progress, (ii) $171,660,000 of additions to real estate, (iii) $95,546,000 of acquisitions of real estate and other, (iv) $91,697,000 of investments in partially owned entities, and  (v) $11,380,000 of investment in mortgage and mezzanine loans receivable and other, partially offset by (vi) $335,489,000 of proceeds from sales of real estate and related investments, (vii) $101,592,000 of changes in restricted cash, (viii) $96,504,000 of proceeds from repayments of mortgage and mezzanine loans receivable and other and (ix) $8,130,000 of capital distributions from partially owned entities.   

 

Net cash provided by financing activities of $468,422,000 was comprised of (i) $1,713,285,000 of proceeds from borrowings, (ii) $13,738,000 of proceeds received from the exercise of employee share options, and (iii) $5,297,000 of contributions from noncontrolling interests, partially offset by (iv) $410,724,000 of dividends paid on common shares, (v) $343,354,000 for the repayments of borrowings, (vi) $208,773,000 of distributions to noncontrolling interests, (vii) purchase of marketable securities in connection with the defeasance of mortgage notes payable of $198,884,000, (viii) $61,102,000 of dividends paid on preferred shares, (ix) $40,424,000 of debt issuance costs and (x) $637,000 for the repurchase of shares related to stock compensation agreements and/or related tax withholdings.

 

 

Capital Expenditures

 

Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions.  Recurring capital expenditures include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases.  Non-recurring capital improvements include expenditures to lease space that has been vacant for more than nine months and expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition, as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property.

 

68

 


 
 

 

Liquidity and Capital Resources – continued

 

 

Capital Expenditures - continued

 

Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the nine months ended September 30, 2014.

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Expenditures to maintain assets

$

61,235 

$

33,464 

$

9,815 

$

4,848 

$

13,108 

Tenant improvements

135,999 

102,411 

16,280 

390 

16,918 

Leasing commissions

59,322 

50,173 

3,555 

145 

5,449 

Non-recurring capital expenditures

67,016 

25,038 

23,428 

8,456 

10,094 

Total capital expenditures and leasing

commissions (accrual basis)

323,572 

211,086 

53,078 

13,839 

45,569 

Adjustments to reconcile to cash basis:

Expenditures in the current year

applicable to prior periods

110,934 

40,117 

48,294 

3,873 

18,650 

Expenditures to be made in future

periods for the current period

(209,157)

(132,814)

(35,664)

(8,766)

(31,913)

Total capital expenditures and leasing

commissions (cash basis)

$

225,349 

$

118,389 

$

65,708 

$

8,946 

$

32,306 

Tenant improvements and leasing commissions:

Per square foot per annum

$

5.75 

$

6.80 

$

5.09 

$

1.66 

$

n/a

Percentage of initial rent

10.6%

9.5%

12.9%

8.3%

n/a

 

Development and Redevelopment Expenditures

 

Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including capitalized interest and operating costs until the property is substantially completed and ready for its intended use. 

 

On March 2, 2014, we entered into an agreement to transfer upon completion, the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to Pennsylvania Real Estate Investment Trust (NYSE: PEI) (“PREIT’) in exchange for $465,000,000 comprised of $340,000,000 of cash and $125,000,000 of PREIT operating partnership units.  The incremental development cost of this project was approximately $250,000,000, of which $202,000,000 has been expended as of September 30, 2014.  The redevelopment was completed in October 2014 and the closing will be no later than March 31, 2015.

 

We are in the process of redeveloping and substantially expanding the existing retail space at the Marriott Marquis Times Square Hotel, including converting the below grade parking garage into retail and creating a six-story, 300 foot wide block front, dynamic LED sign, all of which is expected to be completed by the end of 2014.  Upon completion of the redevelopment, the retail space will include 20,000 square feet on grade and 20,000 square feet below grade.  The incremental development cost of this project is approximately $210,000,000, of which $136,000,000 has been expended as of September 30, 2014.

 

We are constructing a residential condominium tower containing 472,000 zoning square feet on our 220 Central Park South development site.  The incremental development cost of this project is approximately $1.0 billion, of which $106,000,000 has been expended as of September 30, 2014.  In January 2014, we completed a $600,000,000 loan secured by this site.  On August 26, 2014, we obtained a standby commitment for up to $500,000,000 of five-year mezzanine loan financing to fund a portion of the development expenditures at 220 Central Park South.

 

We are developing The Bartlett, a 699-unit residential project in Pentagon City, which is expected to be completed in 2016.  The project will include a 37,000 square foot Whole Foods Market at the base of the building.  The incremental development cost of this project is approximately $250,000,000, of which $29,000,000 has been expended as of September 30, 2014.

 

We plan to redevelop an existing 165,000 square foot office building in Crystal City (2221 S. Clark Street), which we have leased to WeWork, into approximately 250 rental residential units.  The incremental development cost of this project is approximately $40,000,000.  The redevelopment is expected to be completed in the second half of 2015.

 

69

 


 
 

 

Liquidity and Capital Resources – continued

 

Development and Redevelopment Expenditures - continued

 

Below is a summary of development and redevelopment expenditures incurred in the nine months ended September 30, 2014.  These expenditures include interest of $46,517,000, payroll of $5,460,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $46,799,000, that were capitalized in connection with the development and redevelopment of these projects.

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Springfield Town Center

$

92,696 

$

-   

$

-   

$

92,696 

$

-   

Marriott Marquis Times Square - retail and signage

71,566 

71,566 

-   

-   

-   

220 Central Park South

54,543 

-   

-   

-   

54,543 

330 West 34th Street

32,014 

32,014 

-   

-   

-   

The Bartlett

20,300 

-   

20,300 

-   

-   

608 Fifth Avenue

18,127 

18,127 

-   

-   

-   

Wayne Towne Center

16,109 

-   

16,109 

-   

7 West 34th Street

9,454 

9,454 

-   

-   

-   

90 Park Avenue

6,293 

6,293 

-   

-   

-   

Other

47,469 

13,347 

23,443 

5,856 

4,823 

$

368,571 

$

150,801 

$

43,743 

$

114,661 

$

59,366 

 

In addition to the development and redevelopment projects above, we are in the process of repositioning and re-tenanting 280 Park Avenue (49.5% owned).  Our share of the incremental development cost of this project is approximately $62,000,000, of which $34,700,000 was expended prior to 2014, and $16,900,000 has been expended in 2014.

 

We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including the Hotel Pennsylvania and in Washington, including 1900 Crystal Drive, Rosslyn and Pentagon City.

 

There can be no assurance that any of our development or redevelopment projects will commence, or if commenced, be completed, or completed on schedule or within budget.   

 

70

 


 

 

Liquidity and Capital Resources – continued

 

Cash Flows for the Nine Months Ended September 30, 2013

 

Our cash and cash equivalents were $872,323,000 at September 30, 2013, an $87,996,000 decrease over the balance at December 31, 2012.  This decrease is primarily due to cash flows from financing activities, partially offset by cash flows from operating and investing activities, as discussed below.

 

Cash flows provided by operating activities of $789,592,000 was comprised of (i) net income of $603,499,000, (ii) $188,740,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net income of partially owned entities and net gains on sale of real estate, (iii) proceeds from Real Estate Fund investments of $56,664,000, and (iv) distributions of income from partially owned entities of $34,350,000, partially offset by (v) the net change in operating assets and liabilities of $93,661,000, including $32,392,000 related to Real Estate Fund investments.

 

Net cash provided by investing activities of $1,020,400,000 was comprised of (i) $734,427,000 of proceeds from sales of real estate and related investments, (ii) $378,676,000 of proceeds from the sales of marketable securities, (iii) $287,944,000 of capital distributions from partially owned entities, (iv) $240,474,000 from the sale of LNR, (v) $101,150,000 from the return of the J.C. Penney derivative collateral, (vi) $49,452,000 of proceeds from repayments of mortgage and mezzanine loans receivable and other, and (vii) $21,883,000 of changes in restricted cash, partially offset by (viii) $212,624,000 of investments in partially owned entities, (ix) $186,079,000 for the funding of the J.C. Penney derivative collateral and settlement of derivative, (x) $170,424,000 of additions to real estate, (xi) $149,010,000 of development costs and construction in progress, (xii) $75,079,000 of acquisitions of real estate and other, and (xiii) $390,000 of investment in mortgage and mezzanine loans receivable and other.

 

Net cash used in financing activities of $1,897,988,000 was comprised of (i) $2,851,420,000 for the repayments of borrowings, (ii) $409,332,000 of dividends paid on common shares, (iii) $299,400,000 for purchases of outstanding preferred units and shares, (iv) $200,667,000 of distributions to noncontrolling interests, (v) $62,820,000 of dividends paid on preferred shares, (vi) $9,982,000 of debt issuance costs, and (vii) $332,000 for the repurchase of shares related to stock compensation agreements and/or related tax withholdings, partially offset by (viii) $1,600,357,000 of proceeds from borrowings, (ix) $290,536,000 of proceeds from the issuance of preferred shares, (x) $40,015,000 of contributions from noncontrolling interests, and (xi) $5,057,000 of proceeds received from the exercise of employee share options.

 

71

 


 
 

 

Liquidity and Capital Resources – continued

 

 

Capital Expenditures in the nine months ended September 30, 2013

 

 

Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the nine months ended September 30, 2013.

 

 

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Expenditures to maintain assets

$

39,322 

$

20,665 

$

9,244 

$

3,160 

$

6,253 

Tenant improvements

117,088 

67,476 

32,087 

11,075 

6,450 

Leasing commissions

42,341 

31,324 

8,030 

1,686 

1,301 

Non-recurring capital expenditures

6,454 

6,183 

-   

-   

271 

Total capital expenditures and leasing

commissions (accrual basis)

205,205 

125,648 

49,361 

15,921 

14,275 

Adjustments to reconcile to cash basis:

Expenditures in the current year

applicable to prior periods

111,984 

43,536 

22,228 

4,577 

41,643 

Expenditures to be made in future

periods for the current period

(116,655)

(68,813)

(34,191)

(12,556)

(1,095)

Total capital expenditures and leasing

commissions (cash basis)

$

200,534 

$

100,371 

$

37,398 

$

7,942 

$

54,823 

Tenant improvements and leasing commissions:

Per square foot per annum

$

4.19 

$

5.54 

$

4.71 

$

1.52 

$

n/a

Percentage of initial rent

9.7%

8.0%

11.8%

7.9%

n/a

 

 

Development and Redevelopment Expenditures in the nine months ended September 30, 2013

 

Below is a summary of development and redevelopment expenditures incurred in the nine months ended September 30, 2013.  These expenditures include interest of $28,024,000, payroll of $2,887,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $18,293,000, that were capitalized in connection with the development and redevelopment of these projects.

 

Retail

(Amounts in thousands)

Total

New York

Washington, DC

Properties

Other

Springfield Town Center

$

39,810 

$

-   

$

-   

$

39,810 

$

-   

220 Central Park South

23,946 

-   

-   

-   

23,946 

Marriott Marquis Times Square - retail and signage

13,920 

13,920 

-   

-   

-   

1290 Avenue of the Americas

11,374 

11,374 

-   

-   

-   

The Bartlett

5,054 

-   

5,054 

-   

-   

LED Signage

4,589 

4,589 

-   

-   

-   

1540 Broadway

4,267 

4,267 

-   

-   

-   

1851 South Bell Street (1900 Crystal Drive)

3,739 

-   

3,739 

-   

-   

Other

42,311 

7,949 

15,039 

15,910 

3,413 

$

149,010 

$

42,099 

$

23,832 

$

55,720 

$

27,359 

 

72

 


 

 

Liquidity and Capital Resources – continued

 

 

Other Commitments and Contingencies

 

We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of September 30, 2014, the aggregate dollar amount of these guarantees and master leases is approximately $360,000,000.

 

At September 30, 2014, $39,947,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

As of September 30, 2014, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $111,000,000.

73

 


 
 

 

Funds From Operations (“FFO”)

 

FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gain from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets, extraordinary items and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries.  FFO and FFO per diluted share are non-GAAP financial measures used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions.  FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flows as a liquidity measure.  FFO may not be comparable to similarly titled measures employed by other companies.  The calculations of both the numerator and denominator used in the computation of income per share are disclosed in Note 20 – Income per Share, in our consolidated financial statements on page 27 of this Quarterly Report on Form 10-Q.

 

FFO for the Three and Nine Months Ended September 30, 2014 and 2013

 

FFO attributable to common shareholders plus assumed conversions was $217,362,000, or $1.15 per diluted share for the three months ended September 30, 2014, compared to $210,627,000, or $1.12 per diluted share, for the prior year’s quarter.  FFO attributable to common shareholders plus assumed conversions was $684,247,000, or $3.63 per diluted share for the nine months ended September 30, 2014, compared to $647,767,000, or $3.45 per diluted share for the prior year’s nine months.  Details of certain items that affect comparability are discussed in the financial results summary of our “Overview”.

 

For The Three Months

For The Nine Months

(Amounts in thousands, except per share amounts)

Ended September 30,

Ended September 30,

Reconciliation of our net income to FFO:

2014 

2013 

2014 

2013 

Net income attributable to Vornado

$

151,524 

$

103,374 

$

331,249 

$

524,490 

Depreciation and amortization of real property

123,578 

117,901 

387,549 

377,142 

Net gains on sale of real estate

(57,796)

(16,087)

(57,796)

(284,081)

Real estate impairment losses

-   

720 

20,842 

4,727 

Proportionate share of adjustments to equity in net (loss) of

Toys, to arrive at FFO:

Depreciation and amortization of real property

1,350 

16,430 

21,579 

53,235 

Net gains on sale of real estate

(760)

-   

(760)

-   

Real estate impairment losses

-   

1,826 

-   

6,096 

Income tax effect of above adjustments

(207)

(6,390)

(7,287)

(20,766)

Proportionate share of adjustments to equity in net (loss) income of

partially owned entities, excluding Toys, to arrive at FFO:

Depreciation and amortization of real property

25,254 

20,931 

71,837 

62,247 

Net gains on sale of real estate

-   

-   

-   

(465)

Noncontrolling interests' share of above adjustments

(5,240)

(7,736)

(21,916)

(11,343)

FFO

237,703 

230,969 

745,297 

711,282 

Preferred share dividends

(20,365)

(20,369)

(61,099)

(62,439)

Preferred unit and share redemptions

-   

-   

-   

(1,130)

FFO attributable to common shareholders

217,338 

210,600 

684,198 

647,713 

Convertible preferred share dividends

24 

27 

49 

54 

FFO attributable to common shareholders plus assumed conversions

$

217,362 

$

210,627 

$

684,247 

$

647,767 

Reconciliation of Weighted Average Shares

Weighted average common shares outstanding

187,671 

186,969 

187,503 

186,885 

Effect of dilutive securities:

Employee stock options and restricted share awards

1,099 

755 

1,046 

746 

Convertible preferred shares

42 

47 

43 

48 

Denominator for FFO per diluted share

188,812 

187,771 

188,592 

187,679 

FFO attributable to common shareholders plus assumed conversions

per diluted share

$

1.15 

$

1.12 

$

3.63 

$

3.45 

74

 


 

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:

 

(Amounts in thousands, except per share amounts)

2014 

2013 

Weighted

Effect of 1%

Weighted

September 30,

Average

Change In

December 31,

Average

Consolidated debt:

Balance

Interest Rate

Base Rates

Balance

Interest Rate

Variable rate

$

1,637,394 

2.23%

$

16,374 

$

1,064,730 

2.01%

Fixed rate

9,515,943 

4.55%

-   

8,913,988 

4.73%

$

11,153,337 

4.21%

16,374 

$

9,978,718 

4.44%

Pro rata share of debt of non-consolidated

entities (non-recourse):

Variable rate – excluding Toys

$

303,145 

1.75%

3,031 

$

196,240 

2.09%

Variable rate – Toys

1,075,239 

5.56%

10,752 

1,179,001 

5.45%

Fixed rate (including $683,616 and

$682,484 of Toys debt in 2014 and 2013)

2,778,274 

6.47%

-   

2,814,162 

6.46%

$

4,156,658 

5.89%

13,783 

$

4,189,403 

5.97%

Noncontrolling interests’ share of above

(1,758)

Total change in annual net income

$

28,399 

Per share-diluted

$

0.15 

 

We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of September 30, 2014, we have an interest rate cap with a notional amount of $60,000,000 that caps LIBOR at a rate of 5.00%.  In addition, we have an interest rate swap on a $423,000,000 mortgage loan that swapped the rate from LIBOR plus 2.00% (2.15% at September 30, 2014) to a fixed rate of 5.13% for the remaining four-year term of the loan. 

 

 

Fair Value of Debt

 

The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt.  As of September 30, 2014, the estimated fair value of our consolidated debt was $11,120,000,000.

75

 


 

 

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 September 30, 2014, such disclosure controls and procedures were effective.

 

Internal Control Over Financial Reporting:  There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

76

 


 

 

PART II.   OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

 

We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

 

Item 1A. Risk Factors

 

 

There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2013.

 

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

During the third quarter of 2014, we issued 28,177 common shares upon the redemption of Class A units of the Operating Partnership held by persons who received units, in private placements in earlier periods, in exchange for their interests in limited partnerships that owned real estate. The common shares were issued without registration under the Securities Act of 1933 in reliance on Section 4 (2) of that Act.

 

Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under Part III, Item 12 of the Annual Report on Form 10-K, as amended, for the year ended December 31, 2013, and such information is incorporated by reference herein.

 

 

Item 3.   Defaults Upon Senior Securities

        None.

 

 

Item 4.   Mine Safety Disclosures

        Not applicable.

 

 

Item 5.   Other Information

        None.

 

Item 6.   Exhibits

Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index.

 

77

 


 

 

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.

 

 

 

VORNADO REALTY TRUST

 

 

(Registrant)

 

 

 

 

 

 

Date: November 3, 2014

By:

/s/ Stephen W. Theriot

 

 

Stephen W. Theriot, Chief Financial Officer
(duly authorized officer and principal financial and
accounting officer)

78

 


 
 

 

 

EXHIBIT INDEX

Exhibit No.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.52

**

-

Employment agreement between Vornado Realty Trust and Michael J. Franco dated

*

 

 

 

 

January 10, 2014. Incorporated by reference to Exhibit 10.52 to Vornado Realty Trust’s

 

 

 

 

 

Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (File No. 001-11954),

 

 

 

 

 

filed on May 5, 2014

 

 

 

 

 

 

 

 

10.53

**

-

Form of Vornado Realty Trust 2014 Outperformance Plan Award Agreement. Incorporated

*

 

 

 

 

by reference to Exhibit 10.53 to Vornado Realty Trust’s Quarterly Report on Form 10-Q

 

 

 

 

 

for the quarter ended March 31, 2014 (File No. 001-11954), filed on May 5, 2014

 

 

 

 

 

 

 

 

10.54

 

-

Amended and Restated Revolving Credit Agreement dated as of September 30, 2014, by and

 

 

 

 

 

among Vornado Realty L.P. as borrower, Vornado Realty Trust as General Partner, the

 

 

 

 

 

Banks listed on the signature pages thereof, and JPMorgan Chase Bank N.A. as

 

 

 

 

 

Administrative Agent for the Banks.

 

 

 

 

 

 

 

 

15.1

 

-

Letter regarding Unaudited Interim Financial Information

 

 

 

 

 

 

 

 

31.1

 

-

Rule 13a-14 (a) Certification of the Chief Executive Officer

     

 

31.2

 

-

Rule 13a-14 (a) Certification of the Chief Financial Officer

     

 

32.1

 

-

Section 1350 Certification of the Chief Executive Officer

     

 

32.2

 

-

Section 1350 Certification of the Chief Financial Officer

 

 

 

 

 

 

 

101.INS

 

-

XBRL Instance Document

     

 

101.SCH

 

-

XBRL Taxonomy Extension Schema

     

 

101.CAL

 

-

XBRL Taxonomy Extension Calculation Linkbase

     

 

101.DEF

 

-

XBRL Taxonomy Extension Definition Linkbase

     

 

101.LAB

 

-

XBRL Taxonomy Extension Label Linkbase

     

 

101.PRE

 

-

XBRL Taxonomy Extension Presentation Linkbase

     

 

 

 

 

 

 

 

 

 

 

______________________________

 

   

*

Incorporated by reference

 

 

**

 

Management contract or compensation agreement

 

79