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| ALX > SEC Filings for ALX > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results, financial condition, results of operations and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "would," "may" or other similar expressions in this Quarterly Report on Form 10-Q. We also note the following forward-looking statements: in the case of our development project, the estimated completion date, estimated project costs and costs to complete. These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For a further discussion of factors that could materially affect the outcome of our forward-looking statements, see "Item 1A - Risk Factors" in our Annual Report on Form 10-K.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly, any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
Management's Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three and nine months ended September 30, 2008 and 2007. 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.
Alexander's, Inc. is a real estate investment trust ("REIT"), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to "we," "us," "our," or "Company" refer to Alexander's, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust ("Vornado"). We have seven properties in the greater New York City metropolitan area including the 731 Lexington Avenue property, a 1.3 million square foot multi-use building in Manhattan, and the Kings Plaza Regional Shopping Center located in Brooklyn.
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 the location, the quality of the property and breadth and quality of the services provided. Our success depends upon, among other factors, trends of national 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.
In the second half of 2007 the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining home values and increasing inventory nationwide. In 2008, the "credit crisis" spread to the broader commercial credit and financial markets resulting in a illiquidity and extreme volatility in the equity and bond markets. These factors coupled with a slowing economy, higher unemployment, and lower consumer sentiment, have significantly reduced the volume of real estate transactions and increased capitalization rates. Our real estate portfolio may also be affected by tenant bankruptcies, store-closures, lower occupancy and effective rents, which would result in a corresponding decrease in net income, funds from operations and cash flow. For example, Circuit City, which leases 50,000 square feet at Rego Park I (approximately $2,600,000 of annual property rental income and approximately $5,980,000 of unamortized costs at September 30, 2008, including tenant improvements, leasing commissions and straight-line rent receivable), has recently announced layoffs, second quarter losses, and is considering significant store-closures. It is difficult to predict when or if these markets will return to historical capacity and pricing levels.
Stock Appreciation Rights
Stock appreciation rights ("SARs") are granted at 100% of the market price of our common stock on the date of grant. Compensation expense for each SAR is measured by the excess of stock price at the current balance sheet date over the stock price at the previous balance sheet date. If the stock price is lower at the current balance sheet date, previously recognized expense is reversed but not below zero. At September 30, 2008, 400,000 SARs were outstanding and exercisable. In the three and nine months ended September 30, 2008, we accrued $44,655,000 and $23,330,000, respectively, for SARs compensation expense, based on our closing stock price of $400.00 at September 30, 2008 (compared to $310.60 at June 30, 2008 and $353.25 at December 31, 2007) and the September 2008 exercise of the 100,000 SARS discussed below. In the three and nine months ended September 30, 2007, we reversed $9,375,000 and $27,411,000, respectively, of previously recognized expense, based on our closing stock price of $385.50 at September 28, 2007 (compared to $404.25 at June 30, 2007 and $419.65 at December 31, 2006) and the March 2007 exercise of the 350,000 SARs discussed below.
On September 15, 2008, Steven Roth, the Chairman of our Board of Directors and Chief Executive Officer, exercised 100,000 of his existing SARs, which were scheduled to expire on March 4, 2009, and received gross proceeds of $32,440,000.
On October 14, 2008, Mr. Roth exercised an additional 100,000 of his SARs, which were scheduled to expire on March 4, 2009, and received gross proceeds of $29,669,000.
On March 13, 2007, Michael Fascitelli, our President, exercised 350,000 of his existing SARs, which were scheduled to expire on March 14, 2007, and he received gross proceeds of $50,465,000.
Special Dividend
On September 9, 2008, our Board of Directors declared a special dividend of $7.00 per share, or $35,600,000 in the aggregate, payable on October 30, 2008, to stockholders of record on October 14, 2008. The dividend is attributable to the liquidation of the wholly owned 731 Lexington Avenue taxable REIT subsidiary into Alexander's.
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2007 in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 2 - Summary of Significant Accounting Policies" to the consolidated financial statements included therein. There have been no significant changes to those policies during 2008.
Recently Issued Accounting Literature
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 became effective for our financial assets and liabilities on January 1, 2008. The FASB has deferred the implementation of the provisions of SFAS No. 157 relating to certain nonfinancial assets and liabilities until January 1, 2009. SFAS No. 157 did not materially affect how we determine fair value.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to measure many financial instruments and certain other items at fair value. SFAS No. 159 became effective for us on January 1, 2008. We did not elect the fair value option for any of our existing financial instruments on the effective date and have not determined whether we will elect this option for any eligible financial instruments we acquire in the future.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and acquisition related costs will generally be expensed rather than included as part of the basis of the acquisition. SFAS No. 141R expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS No. 141R is effective for all transactions entered into, on or after January 1, 2009. We are currently evaluating the impact SFAS No. 141R will have on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. SFAS No. 160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS No. 160 also calls for consistency in the manner of reporting changes in the parent's ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS No. 160 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009, will not have a material effect on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133. SFAS No. 161 enhances required disclosures regarding derivative instruments and hedging activities, including enhanced disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and the impact of derivative instruments and related hedged items on an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective on January 1, 2009. We believe that the adoption of this standard on January 1, 2009, will not have a material effect on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The purpose of this statement is to improve financial reporting by providing a consistent framework for determining applicable accounting principles to be used in the preparation of financial statements presented in conformity with accounting principles generally accepted in the United States of America. SFAS No. 162 will become effective 60 days after the SEC's approval. We believe that the adoption of this standard on its effective date will not have a material effect on our consolidated financial statements.
Significant Tenants
Bloomberg L.P. accounted for approximately 33% and 31% of our consolidated revenues in each of the three-month periods ended September 30, 2008 and 2007, respectively, and 32% and 31% of our consolidated revenue in each of the nine-month periods ended September 30, 2008 and 2007, respectively. No other tenant accounted for more than 10% of our consolidated revenues.
Net loss for the quarter ended September 30, 2008 was $31,443,000, compared to net income of $28,626,000 for the quarter ended September 30, 2007. Net loss for the quarter ended September 30, 2008 includes $44,655,000 for an accrual of SARs compensation expense, compared to $9,375,000 for a reversal of previously recognized SARs compensation expense in the quarter ended September 30, 2007.
Property Rentals
Property rentals were $35,154,000 in the quarter ended September 30, 2008, compared to $35,319,000 in the prior year's quarter, a decrease of $165,000.
Expense Reimbursements
Tenant expense reimbursements were $17,799,000 in the quarter ended September 30, 2008, compared to $17,105,000 in the prior year's quarter, an increase of $694,000, which resulted from higher real estate taxes.
Operating Expenses
Operating expenses were $19,202,000 in the quarter ended September 30, 2008, compared to $17,653,000 in the prior year's quarter, an increase of $1,549,000. This increase was primarily due to $1,022,000 for higher real estate taxes.
General and Administrative Expenses
Excluding $44,655,000 for an accrual of SARs compensation expense in the quarter ended September 30, 2008, and $9,375,000 for the reversal of a portion of previously recognized SARs compensation expense in the quarter ended September 30, 2007, general and administrative expenses increased by $515,000 from the prior year's quarter. This increase resulted primarily from $489,000 of Kings Plaza energy plant joint venture professional fees, of which $412,000 related to prior periods.
Interest and Other Income, net
Interest and other income, net, was $2,973,000 in the quarter ended September 30, 2008, compared to $6,426,000 in the prior year's quarter, a decrease of $3,453,000. This decrease was primarily due to lower interest income of $3,377,000 from lower average yields on existing cash balances.
Interest and Debt Expense
Interest and debt expense was $15,546,000 in the quarter ended September 30, 2008, compared to $16,154,000 in the prior year's quarter, a decrease of $608,000. This decrease was primarily due to higher capitalized interest relating to our Rego II development project.
Minority Interest of Partially Owned Entity
Minority interest of partially owned entity represents our venture partner's 75% pro rata share of net income or loss in our consolidated partially owned entity, the Kings Plaza energy plant joint venture.
Income Tax (Expense) Benefit of the Taxable REIT Subsidiary
Income tax expense was $276,000 in the quarter ended September 30, 2008, compared to an income tax benefit of $1,284,000 in the quarter ended September 30, 2007, an increase of $1,560,000. The income tax benefit in the prior year's quarter resulted from the finalization of Alexander's 2006 income tax return.
Net income for the nine months ended September 30, 2008 was $22,163,000, compared to $80,411,000 for the nine months ended September 30, 2007. Net income for the nine months ended September 30, 2008 includes $23,330,000 for an accrual of SARs compensation expense, compared to $27,411,000 for a reversal of previously recognized SARs compensation expense in the nine months ended September 30, 2007.
Property Rentals
Property rentals were $106,600,000 in the nine months ended September 30, 2008, compared to $105,415,000 in the prior year's nine months, an increase of $1,185,000. This increase was primarily attributable to the Lowe's ground lease at Kings Plaza, which commenced at the end of February 2007.
Expense Reimbursements
Tenant expense reimbursements were $49,597,000 in the nine months ended September 30, 2008, compared to $50,274,000 in the prior year's nine months, a decrease of $677,000. This decrease was primarily due to a true-up in billings for operating expense reimbursements.
Operating Expenses
Operating expenses were $54,240,000 in the nine months ended September 30, 2008, compared to $52,700,000 in the prior year's nine months, an increase of $1,540,000. This increase was primarily due to higher real estate taxes and higher operating costs at the Kings Plaza energy plant.
General and Administrative Expenses
Excluding $23,330,000 of an accrual of SARs compensation expense in the nine months ended September 30, 2008 and $27,411,000 for the reversal of a portion of previously recognized SARs compensation expense in the nine months ended 2007, general and administrative expenses decreased by $156,000 from the prior year's nine months. This decrease resulted primarily from $350,000 of organization costs incurred in connection with forming the Kings Plaza energy plant joint venture and $167,000 of "ground-breaking" costs at Rego Park II that were incurred in the prior year's nine months, partially offset by $489,000 of Kings Plaza energy plant joint venture professional fees of which $257,000 related to prior periods.
Interest and Other Income, net
Interest and other income, net was $12,996,000 in the nine months ended September 30, 2008, compared to $20,543,000 in the prior year's nine months, a decrease of $7,547,000. This decrease was comprised of $9,303,000 from lower average yields on existing cash balances, partially offset by $1,872,000 for the net gain on the sale of real estate tax abatement certificates.
Interest and Debt Expense
Interest and debt expense was $46,789,000 in the nine months ended September 30, 2008, compared to $49,299,000 in the prior year's nine months, a decrease of $2,510,000. This decrease was primarily due to higher capitalized interest in the current year's nine months as a result of our Rego Park II development project, partially offset by higher average debt outstanding in 2008.
Minority Interest of Partially Owned Entity
Minority interest of partially owned entity represents our venture partner's 75% pro rata share of net loss in our consolidated partially owned entity, the Kings Plaza energy plant joint venture, which became operational in March 2007.
Income Tax (Expense) Benefit of the Taxable REIT Subsidiary
Income tax expense was $1,400,000 in the nine months ended September 30, 2008, compared to an income tax benefit of $178,000 in the nine months ended September 30, 2007, an increase of $1,578,000. The income tax benefit in the prior year resulted from the finalization of Alexander's 2006 income tax return.
We anticipate that cash from operations, together with existing cash balances, will be adequate to fund our business operations, recurring capital expenditures, and debt amortization over the next twelve months.
Rego Park II Development Project
We own approximately 6.6 acres of land adjacent to our Rego Park I property in Queens, New York, which comprises the entire square block bounded by the Horace Harding Service Road (of the Long Island Expressway), 97th Street, 62nd Drive and Junction Boulevard. The development at Rego Park II consists of a 600,000 square foot shopping center on four levels and a parking deck containing approximately 1,400 spaces. Construction is expected to be completed in 2009 and estimated to cost approximately $410,000,000, of which $263,000,000 has been expended as of September 30, 2008. The development may also include an apartment tower containing up to 315 apartments.
On December 21, 2007, we obtained a construction loan providing up to $350,000,000 to finance the construction of the shopping center. The loan bears interest at LIBOR plus 1.20% (3.68% at September 30, 2008) and has a three-year term, with a one-year extension option. As of September 30, 2008, we have drawn $143,571,000 under the construction loan, of which $87,785,000 was borrowed in the current year. The shopping center will be anchored by a 134,000 square foot Century 21 department store, a 138,000 square foot Home Depot and a 132,000 square foot Kohl's.
There can be no assurance that this project will be completed, completed on time, or completed for the budgeted amount.
Insurance
We carry commercial liability with limits of $200,000,000 per location and all risk property insurance for (i) fire, (ii) flood, (iii) rental loss, (iv) extended coverage, and (v) "acts of terrorism," as defined in the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA") of 2007, with respect to our assets, with limits of $1.7 billion per occurrence, including terrorist acts, as defined, for all of our properties. To the extent that we incur losses in excess of our insurance coverage, these losses would be borne by us and could be material.
Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for the 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 and/or refinance our properties.
Stock Appreciation Rights
On September 15, 2008, Mr. Roth exercised 100,000 of his existing SARs and received gross proceeds of $32,440,000. On October 14, 2008, Mr. Roth exercised an additional 100,000 of his existing SARs and received gross proceeds of $29,669,000. After this exercise, 300,000 SARs were outstanding and exercisable. These SARs have a weighted average exercise price of $70.38 and are scheduled to expire on March 4, 2009. Since the SARs agreements require that they be settled in cash, we would have had to pay $98,888,000 if the holders of these SARs had exercised their SARs on September 30, 2008. Any change in our stock price from the closing price of $400.00 at September 30, 2008 would increase or decrease the amount we would have to pay upon exercise.
Special Dividend
On September 9, 2008, our Board of Directors declared a special dividend of $7.00 per share, or $35,600,000 in the aggregate, payable on October 30, 2008, to stockholders of record on October 14, 2008. The dividend is attributable to the liquidation of the wholly owned 731 Lexington Avenue taxable REIT subsidiary into Alexander's.
Rental income from our properties is our principal source of operating cash flow. Property rental income is dependent on a number of factors including the occupancy level and rental rates of our properties, as well as our tenants' ability to pay their rents. Our properties provide us with a relatively consistent stream of cash flow that enables us to pay our operating expenses, non-development capital improvements and interest expense. Other sources of liquidity to fund our cash requirements include existing cash, proceeds from debt financings, including mortgage or construction loans secured by our properties and proceeds from asset sales.
Nine Months Ended September 30, 2008
Cash and cash equivalents were $571,916,000 at September 30, 2008, compared to $560,231,000 at December 31, 2007, an increase of $11,685,000. This increase resulted from $29,956,000 of net cash provided by operating activities and $78,691,000 of net cash provided by financing activities, offset by $96,962,000 of net cash used in investing activities.
Net cash provided by operating activities of $29,956,000 was comprised of (i) net income of $22,163,000 and (ii) adjustments for non-cash items of $31,991,000, partially offset by (iii) the net change in operating assets and liabilities of $24,198,000. The adjustments for non-cash items were primarily comprised of (a) an accrual of stock appreciation rights compensation expense of $23,330,000 and (b) depreciation and amortization of $18,897,000, partially offset by (c) $7,916,000 for the straight-lining of rental income and (d) a net gain on the sale of real estate tax abatement certificates of $1,872,000. The net change in operating assets and liabilities was primarily comprised of a $32,440,000 payment for a portion of the liability for stock appreciation rights.
Net cash used in investing activities of $96,962,000 was primarily comprised of capital expenditures of $96,702,000, primarily related to the development of our Rego Park II project.
Net cash provided by financing activities of $78,691,000 was primarily comprised of $87,785,000 of borrowings under the construction loan to fund expenditures at our Rego Park II project and the exercise of share options of $2,578,000, partially offset by repayments of borrowings of $10,997,000.
Nine Months Ended September 30, 2007
Cash and cash equivalents were $529,581,000 at September 30, 2007, compared to $615,516,000 at December 31, 2006 a decrease of $85,935,000. This decrease resulted primarily from $84,712,000 of net cast used in investing activities and $9,894,000 of net cash used in financing activities, partially offset by $8,671,000 of net cash provide by operating activities.
Net cash provided by operating activities of $8,671,000 was primarily comprised of (i) net income of $80,411,000, partially offset by, (ii) the net change in operating assets and liabilities of $51,807,000 and (iii) adjustments for non-cash items of $19,933,000. The net change in operating assets and liabilities was primarily comprised of a $50,465,000 payment for a portion of the liability for stock appreciation rights. The adjustments for non-cash items were primarily comprised of (a) liability for stock appreciation rights of $27,411,000 and (b) straight-lining of rental income of $11,576,000, partially offset by, (c) minority interest of $321,000 and (d) depreciation and amortization of $18,733,000.
Net cash used in financing activities of $84,712,000 was primarily comprised of capital expenditures of $80,566,000 and an increase in restricted cash of $4,146,000.
Net cash used in financing activities of $9,894,000 was primarily comprised of repayments of borrowings of $10,457,000, partially offset by, $563,000 for the exercise of share options.
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 net income or loss determined in accordance with Generally Accepted Accounting Principles ("GAAP"), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously . . .
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