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| VNO > SEC Filings for VNO > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-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 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 and our future results and financial condition,
see "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended
December 31, 2007. 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 include a discussion of our consolidated financial statements for the three and nine months ended September 30, 2008. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2007 in Management's Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2008.
Business Objective and Operating Strategy
Our business objective is to maximize shareholder value. We measure our success in meeting this objective by our total return to shareholders. Below is a table comparing our performance to the Morgan Stanley REIT Index ("RMS") and the SNL REIT Index ("SNL") for the following periods ending September 30, 2008:
Total Return (1)
Vornado RMS SNL
One-year (13.8%) (11.6%) (9.9%)
Three-years 17.8% 17.1% 19.2%
Five-years 134.4% 85.8% 91.0%
Ten-years 365.3% 221.5% 228.0%
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(1) Past performance is not necessarily indicative of how we will perform in the future.
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;
• Investing in fully-integrated operating companies that have a significant real estate component;
• Developing and redeveloping our existing properties to increase returns and maximize value; and
• Providing specialty financing to real estate related companies.
We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets.
We have a large concentration of properties in the New York City metropolitan area and in the Washington, DC and Northern Virginia areas. 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 rent charged, attractiveness of location, the quality of the property and breadth and quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.
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 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 existing real estate portfolio may 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 has recently announced layoffs, second quarter losses and is considering significant store-closures. Circuit City leases 12 locations in our portfolio aggregating 380,000 square feet (approximately $8,100,000 of annual property rental income and approximately $13,000,000 of unamortized costs at September 30, 2008, including tenant improvements, leasing commissions and receivables arising from the straight-lining of rent). In addition, the value of our investments in joint ventures, marketable securities, and mezzanine loans may decline, which may result in impairment charges and/or valuation allowances and a corresponding decrease in net income and funds from operations. It is difficult to predict when or if these markets will return to historical capacity and pricing levels.
Quarter Ended September 30, 2008 Financial Results Summary
Net income applicable to common shares for the quarter ended September 30, 2008 was $31,430,000, or $0.20 per diluted share, versus $116,546,000, or $0.74 per diluted share, for the quarter ended September 30, 2007. Net income for the quarters ended September 30, 2008 and 2007 include $1,313,000 and $31,922,000, respectively, for our share of net gains on sale of real estate. Net income for the quarters ended September 30, 2008 and 2007 also include certain items that affect comparability which are listed in the table below. The aggregate of these items and net gains on sale of real estate, net of minority interest, decreased net income applicable to common shares for the quarter ended September 30, 2008 by $31,236,000 or $0.20 per diluted share and increased net income applicable to common shares for the quarter ended September 30, 2007 by $54,489,000, or $0.33 per diluted share.
Funds from operations applicable to common shares plus assumed conversions ("FFO") for the quarter ended September 30, 2008 was $173,787,000, or $1.06 per diluted share, compared to $221,199,000, or $1.35 per diluted share, for the prior year's quarter. FFO for the quarters ended September 30, 2008 and 2007 include certain items that affect comparability which are listed in the table below. The aggregate of these items, net of minority interest, decreased FFO for the quarter ended September 30, 2008 by $33,542,000, or $0.20 per diluted share and increased FFO for the quarter ended September 30, 2007 by $28,215,000, or $0.17 per diluted share.
For the Three Months
(Amounts in thousands) Ended September 30,
Items that affect comparability (income) expense: 2008 2007
Alexander's stock appreciation rights compensation expense (income) $ 14,557 $ (3,075 )
Marketable equity securities - impairment losses 11,808 -
Lexington MLP - impairment loss 7,175 -
Land held for development - impairment loss 5,000 -
Derivative positions in marketable equity securities 3,982 (18,606 )
After-tax net gain on sale of residential condominiums (3,570 ) -
Other, net (2,151 ) (2,029 )
36,801 (23,710 )
47.6% share of Americold's FFO (Net loss of $1,343 in the three months ended
September 30, 2007) - sold in March 2008 - (5,673 )
13.8% share of GMH's FFO (Equity in net income of $5,708 in the three months
ended September 30, 2007) - sold in June 2008 - (1,685 )
36,801 (31,068 )
Minority limited partners' share of above adjustments (3,259 ) 2,853
Total items that affect comparability $ 33,542 $ (28,215 )
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We did not recognize income during the quarter ended September 30, 2008, on certain assets with an aggregate carrying amount of approximately $1.5 billion at September 30, 2008, because they were out of service for redevelopment. Assets under development include all or portions of the Bergen Town Center, 2101 L Street, 220 20th Street, 1229-1231 25th Street ("West End 25"), 1999 K Street, 220 Central Park South, and certain investments in joint ventures including Beverly Connection, Wasserman and 800 17th Street/PNC Place investments.
The percentage increase in the same-store Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") of our operating segments for the quarter ended September 30, 2008 over the quarter ended September 30, 2007 and the trailing quarter ended June 30, 2008 are summarized below.
New York Washington, DC Merchandise
Quarter Ended: Office Office Retail Mart
September 30, 2008 vs. September 30, 2007 5.0% 3.0% 3.0% (9.5%)
September 30, 2008 vs. June 30, 2008 (1.2%)(1) (2.4%)(1) 0.7% (26.1%)(2)
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(1) Results primarily from seasonal increases in utility costs.
(2) Results primarily from seasonality of operations.
Calculations of same-store EBITDA, reconciliations of 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 Financial Condition and Results of Operations.
Nine Months Ended September 30, 2008 Financial Results Summary
Net income applicable to common shares for the nine months ended September 30, 2008 was $554,738,000, or $3.48 per diluted share, versus $420,806,000 or $2.65 per diluted share, for the nine months ended September 30, 2007. Net income for the nine months ended September 30, 2008 and 2007 include $65,918,000 and $32,415,000, respectively, for our share of net gains on sale of real estate. Net income for the nine months ended September 30, 2008 and 2007 also include certain items that affect comparability which are listed in the table below. The aggregate of these items and net gains on sale of real estate, net of minority interest, increased net income applicable to common shares for the nine months ended September 30, 2008 by $275,551,000, or $1.68 per diluted share and increased net income applicable to common shares for the nine months ended September 30, 2007 by $114,200,000, or $0.70 per diluted share.
FFO for the nine months ended September 30, 2008 was $917,258,000, or $5.60 per diluted share, compared to $773,457,000, or $4.71 per diluted share, for the prior year's nine months. FFO for the nine months ended September 30, 2008 and 2007 include certain items that affect comparability which are listed in the table below. The aggregate of these items, net of minority interest, increased FFO for the nine months ended September 30, 2008 by $222,089,000, or $1.36 per diluted share and increased FFO for the nine months ended September 30, 2007 by $102,888,000, or $0.63 per diluted share.
For the Nine Months
(Amounts in thousands) Ended September 30,
Items that affect comparability (income) expense: 2008 2007
Reversal of deferred income taxes initially recorded in connection with H Street acquisition $ (222,174 ) $ -
Net gain on sale of our 47.6% interest in Americold (112,690 ) -
Write-off of pre-development costs 34,200 -
Derivative positions in marketable equity securities 25,812 (100,060 )
Marketable equity securities - impairment losses 20,881 -
Partially owned entities - non-cash purchase price accounting adjustments:
Toys 14,900 -
Beverly Connection (4,100 ) -
Reversal of MPH mezzanine loan loss accrual (10,300 ) -
Alexander's stock appreciation rights compensation expense (income) 7,605 (8,991 )
Lexington MLP - impairment loss 7,175 -
Land held for development - impairment loss 5,000 -
After-tax net gain on sale of residential condominiums (3,570 ) -
Costs of acquisitions not consummated 3,009 8,807
Net gain on disposition of our 13.8% interest in GMH (2,038 )
Prepayment penalties and write-off of unamortized
financing costs - 7,562
Other, net (1,642 ) 1,969
(237,932 ) (90,713 )
47.6% share of Americold's FFO (Net losses of $1,076 and $2,848 in each nine-month period,
respectively) - sold in March 2008 (6,098 ) (17,824 )
13.8% share of GMH's FFO (Equity in net income of $5,427 in the nine months ended
September 30, 2007) - sold in June 2008 - (4,718 )
(244,030 ) (113,255 )
Minority limited partners' share of above adjustments 21,941 10,367
Total items that affect comparability $ (222,089 ) $ (102,888 )
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The percentage increase in the same-store "EBITDA" of our operating segments for the nine months ended September 30, 2008 over the nine months ended September 30, 2007 is summarized below.
New York Washington, DC Merchandise
Office Office Retail Mart
September 30, 2008 vs. September 30, 2007 6.1% 4.6% 3.8% 1.3%
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Reversal of Deferred Tax Liabilities
In connection with the purchase accounting for H Street, in July 2005 and April 2007 we recorded an aggregate of $222,174,000 of deferred tax liabilities representing the differences between the tax basis and the book basis of the acquired assets and liabilities multiplied by the effective tax rate. We were required to record these deferred tax liabilities because H Street and its partially owned entities were operated as C Corporations at the time they were acquired. As of January 16, 2008, we had completed all of the actions necessary to enable these entities to elect REIT status effective for the tax year beginning on January 1, 2008. Consequently, in the first quarter of 2008, we reversed the deferred tax liabilities and recognized an income tax benefit of $222,174,000 in our consolidated statement of income.
Marketable Securities
At March 31, 2008, we concluded that an investment in a marketable equity security was other-than-temporarily impaired and recognized a non-cash impairment charge $9,073,000, based on the March 31, 2008 closing share price of that security. At September 30, 2008, we concluded that certain other investments in marketable equity securities were other-than-temporarily impaired based on the severity of the declines in the market value ("fair value" pursuant to SFAS 157) of those securities at September 30, 2008 and, accordingly, we recognized a non-cash impairment charge of $11,808,000. These non-cash charges are included in "interest and other investment income" on our consolidated statement of income. Based on the October 31, 2008 closing share prices of these securities, their market value is approximately $39,100,000 below their carrying amount.
The Lexington Master Limited Partnership ("Lexington MLP")
At September 30, 2008, we owned 8,149,594 limited partnership units of Lexington MLP which are exchangeable on a one-for-one basis into common shares of Lexington Realty Trust ("Lexington") (NYSE: LXP) or a 7.7% limited partnership interest. We account for our investment on the equity method. We record our pro rata share of Lexington MLP's net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.
Based on Lexington's September 30, 2008 closing share price of $17.22, the market value ("fair value" pursuant to SFAS 157) of our investment in Lexington MLP was $140,336,000, or $7,175,000 below the carrying amount on our consolidated balance sheet. We have concluded that our investment is "other-than-temporarily" impaired and recorded a $7,175,000 non-cash impairment loss on our consolidated statement of income. Our conclusion was based on the recent deterioration in the capital and financial markets and our inability to forecast a recovery in the near-term.
On October 28, 2008, we acquired 8,000,000 Lexington common shares for $5.60 per share, or $44,800,000. The purchase price consisted of $22,400,000 in cash and a $22,400,000 margin loan recourse only to the 8,000,000 shares acquired. In addition, we exchanged our existing limited partnership units of Lexington MLP for 8,149,592 common shares of Lexington. We now own 16,149,592 Lexington common shares, or approximately 17.6% of Lexington's common equity, with a carrying amount of $185,136,000, or $11.46 per share.
Subsequent to September 30, 2008, the market value of Lexington's common shares declined substantially, as did share prices of many public companies. Based on Lexington's October 31, 2008 closing share price of $8.03, the market value of our investment is approximately $55,500,000 below its carrying amount.
Other Non-Cash Charges
During the quarter ended March 31, 2008, we recognized a non-cash charge of $34,200,000 for the write-off for our share of two joint ventures' pre-development costs, of which $23,000,000 represented our 50% share of costs in connection with the abandonment of the "arena move"/Moynihan East portions of the Farley project. During the quarter ended September 30, 2008, we recognized a non-cash charge of $5,000,000 to write-down the carrying amount of land held for development to its fair value.
2008 Dispositions
On March 31, 2008, we sold our 47.6% interest in Americold, our Temperature Controlled Logistics segment, for $220,000,000, in cash, which resulted in a net gain of $112,690,000.
On June 6, 2008, we sold our Tysons Dulles Plaza office building complex located in Tysons Corner, Virginia for approximately $152,800,000, in cash, which resulted in a net gain of $56,831,000.
Pursuant to the sale of GMH's military housing division and the merger of its
student housing division with American Campus Communities, Inc ("ACC") (NYSE:
ACC), in June 2008 we received an aggregate of $105,180,000, consisting of
$82,142,000 in cash and 753,126 shares of ACC common stock valued at $23,038,000
based on ACC's then closing share price of $30.59, in exchange for our entire
interest in GMH. We subsequently sold all of the ACC common shares. The above
transactions resulted in a net gain of $2,038,000, which was recognized in the
second quarter of 2008, and is included as a component of "net gains on
disposition of wholly owned and partially owned assets other than depreciable
real estate" in our consolidated statement of income.
2008 Financings
On January 18, 2008, we closed a construction loan providing up to $87,000,000 to finance the residential redevelopment project at 220 20th Street (formally Crystal Plaza Two). The construction loan bears interest at LIBOR plus 1.15% (4.34% at September 30, 2008) and matures in January 2011 with two six-month extension options. As of September 30, 2008, $27,291,000 was drawn under this loan.
On February 11, 2008, we completed a $335,000,000 refinancing of the Green Acres regional mall. This interest-only loan has a rate of LIBOR plus 1.40% (3.89% at September 30, 2008) and matures in February 2011, with two one-year extension options. We retained net proceeds of $193,000,000 after repaying the existing loan.
On February 20, 2008, we closed a construction loan providing up to $104,000,000 to finance the residential redevelopment project at 1229-1231 25th Street NW ("West End 25"). The construction loan bears interest at LIBOR plus 1.30% (3.79% at September 30, 2008) and matures in February 2011 with two six-month extension options. As of September 30, 2008, $15,583,000 was drawn under this loan.
On February 26, 2008, we completed a $150,000,000 financing of our 2101 L Street property located in Washington, DC. The loan bears interest at LIBOR plus 1.20% (4.91% at September 30, 2008) and matures in February 2011 with two one-year extension options. We retained net proceeds of $148,000,000.
On March 12, 2008 we completed a $260,000,000 refinancing of the River House Apartment Complex. The financing is comprised of a $196,000,000 interest-only seven year 5.43% fixed rate mortgage and a $64,000,000 interest-only ten year floating rate mortgage at the Freddie Mac Reference Note Rate plus 1.53% (3.81% at September 30, 2008). We retained net proceeds of $205,000,000 after repaying the existing loan.
On March 24, 2008, we closed a construction loan providing up to $290,000,000 to finance the redevelopment of a portion of the Bergen Town Center. The interest-only loan has a rate of LIBOR plus 1.50% (3.94% at September 30, 2008) and matures in March 2011 with two one-year extension options. As of September 30, 2008, $214,279,000 was drawn under this loan.
On March 27, 2008, we closed a construction loan providing up to $124,000,000 to finance the redevelopment of 1999 K Street. The interest-only loan has a rate of LIBOR plus 1.30% (5.01% at September 30, 2008) and matures in December 2010 with two six-month extension options. As of September 30, 2008, $59,230,000 was drawn under this loan.
On September 9, 2008, we purchased $50,000,000 of our senior unsecured notes due August 15, 2009 for $49,746,000.
Leasing Activity
The following table sets forth certain information for the properties we own directly or indirectly, including leasing activity. The leasing activity presented below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue recognition in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Tenant improvements and leasing commissions are presented below based on square feet leased during the period, on a per square foot and per square foot per annum basis based on weighted average lease terms and as a percentage of initial rent per square foot.
(Square feet in thousands)
New York Washington, DC Merchandise Mart
As of September 30, 2008: Office Office Retail Office Showroom
Square feet (in service) 16,093 17,649 21,837 2,408 6,348
Number of properties 28 85 176 8 8
Occupancy rate 97.1% 95.7% 94.1% 96.5% 92.3%
Leasing Activity:
. . .
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