Overview

Alexander's, Inc. (NYSE: ALX) is a real estate investment trust ("REIT") engaged in leasing, managing, developing and redeveloping properties. All references to "we," "us," "our," "Company," and "Alexander's", refer to Alexander's, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust ("Vornado") (NYSE: VNO). We have seven properties in the greater New York City metropolitan area including the 731 Lexington Avenue property, a 1,307,000 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. Our success depends upon, among other factors, trends of national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation, population trends, zoning laws, and our ability to lease, sublease or sell our properties, at profitable levels. Our success is also subject to our ability to refinance existing debt as it comes due and on acceptable terms.

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 volatility in the bond and equity markets. We are currently in an economic recession, which has negatively affected all businesses, including ours. During the past year, real estate transactions have diminished significantly and capitalization rates have risen. Our real estate portfolio may be affected by declining demand for office and retail space and 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, a tenant which leases space at our Rego Park I location aggregating 50,000 square feet, approximately $2,600,000 of annual property rental income, recently announced that it is liquidating pursuant to Bankruptcy Court approval. As a result, we wrote-off approximately $4,909,000 of unamortized costs at December 31, 2008, including tenant improvements and receivables arising from the straight-lining of rent.

Year Ended December 31, 2008 Financial Results Summary

Net income for the year ended December 31, 2008 was $76,288,000, or $14.96 per diluted share, compared to net income of $114,341,000, or $22.44 per diluted share, for the year ended December 31, 2007. Funds from operations ("FFO") for the year ended December 31, 2008 was $99,916,000, or $19.60 per diluted share, compared to FFO of $136,284,000, or $26.75 per diluted share, for the year ended December 31, 2007.

Net income and FFO for the year ended December 31, 2008 include $20,254,000, or $3.97 per diluted share, for the reversal of a portion of stock appreciation rights ("SARs") compensation expense, compared to $43,536,000, or $8.55 per diluted share, for such reversal in the prior year.

Rego Park Shopping Center

The development at our Rego Park II location consists of a 600,000 square foot shopping center on four levels and a parking deck containing approximately 1,400 spaces. As of December 31, 2008, $181,695,000 was drawn on the construction loan. The loan has an interest rate of LIBOR plus 1.20% (3.08% at December 31, 2008), and matures in December 2010, with a one-year extension option. The shopping center will be anchored by a 134,000 square foot Century 21 department store, a 138,000 square foot Home Depot and 132,000 square foot Kohl's.

Flushing

In February 2009, we leased the Flushing property to a developer for the remainder of our ground lease term.

Stock Appreciation Rights

On September 15 and October 14, 2008, Steven Roth, the Chairman of our Board of Directors and Chief Executive Officer, exercised an aggregate of 200,000 of his existing SARs, which were scheduled to expire on March 4, 2009, and received gross proceeds of $62,809,000.

Special Dividend

On September 9, 2008, our Board of Directors declared a special dividend of $7.00 per share, or $35,571,000 in the aggregate, which was paid on October 30, 2008, to stockholders of record on October 14, 2008. The dividend was attributable to the liquidation of the wholly owned 731 Lexington Avenue taxable REIT subsidiary into Alexander's.

Critical Accounting Policies and Estimates

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which 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. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our consolidated financial statements. This summary should be read in conjunction with a more complete discussion of our accounting policies included in Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.

Real Estate

Real estate is carried at cost, net of accumulated depreciation and amortization. As of December 31, 2008 and 2007, the carrying amount of our real estate, net of accumulated depreciation, was $853,740,000 and $738,898,000, respectively. Depreciation is provided on a straight-line basis over the assets' estimated useful lives, which range from 7 to 50 years. Betterments, significant renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. As real estate is undergoing development activities, all property operating expenses, including interest expense, are capitalized to the cost of the real property to the extent that we believe such costs are recoverable through the value of the property. The recognition of depreciation expense requires estimates by us of the useful life of each property and improvement, as well as an allocation of the costs associated with a property to its various components. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense could be misstated.

Our properties, including any related intangible assets, are individually reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over our anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property's carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, our anticipated holding period for properties, or the estimated fair value of properties change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.

Allowance for Doubtful Accounts

We periodically evaluate the collectibility of amounts due from tenants and maintain an allowance for doubtful accounts ($1,357,000 and $667,000 as of December 31, 2008 and 2007, respectively) for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. We also maintain an allowance for receivables arising from the straight-lining of rents, if necessary. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. As of December 31, 2008 and 2007, there were no allowances for receivables arising from the straight lining of rents. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.

Revenue Recognition

We have the following revenue sources and revenue recognition policies:

• Base Rent (revenue arising from tenant leases) - These rents are recognized over the non-cancelable term of the related leases on a straight-line basis, which includes the effects of rent steps and free rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease.

• Percentage Rent (revenue arising from retail tenant leases that is contingent upon the sales of tenants exceeding defined thresholds) - These rents are recognized in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, which states that this contingent revenue is only to be recognized after the contingency has been removed (i.e., the sales threshold has been achieved).

• Expense Reimbursement (revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective properties) - This revenue is accrued in the same periods as the expenses are incurred.

• Parking income (revenue arising from the rental of parking space at our properties) - This income is recognized as cash is received.

We assess, among other things, the collectibility of revenue before recognition. If we incorrectly assess collectibility of revenue, net earnings and assets could be misstated.

Stock Appreciation Rights

Stock Appreciation Rights ("SARs") are granted at 100% of the market price of our common stock on the date of grant. Because the SARs were granted in 1999, they are accounted for under the intrinsic value method in accordance with FASB Interpretation ("FIN"), an interpretation Accounting Principles Board ("APB") Opinions 15 and 25. Accordingly, compensation expense for each SAR is measured by the excess of the 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.

Income Taxes

We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). In order to maintain our qualification as a REIT, we are required, among other conditions, to distribute as dividends to our stockholders at least 90% of annual REIT taxable income. As of December 31, 2008 and 2007, we had net operating loss carryovers ("NOLs") of approximately $29,211,000 and $1,597,000, respectively. Pursuant to the Code, our NOLs generally would be available to offset the amount of our REIT taxable income that would otherwise be required to be distributed as dividends to our stockholders. Accordingly, no regular dividends were paid in 2008 and 2007.

Prior to its liquidation on September 12, 2008, our wholly owned subsidiary, 731 Residential LLC, was treated as a taxable REIT subsidiary ("TRS"). The TRS was subject to income tax at regular corporate tax rates. Our NOLs were not available to offset taxable income of the TRS. In the years ended December 31, 2008 and 2007, the TRS paid $1,742,000 and $1,580,000, respectively. Under Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting For Income Taxes, deferred income taxes would be recognized for temporary differences between the financial reporting basis of assets and liabilities and their respective tax basis and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors. As of December 31, 2008 and 2007, there were no deferred tax assets or liabilities on our consolidated balance sheets.

In September 2006, the FASB issued 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 non-financial assets and liabilities until January 1, 2009. SFAS No. 157 did not materially affect how we measure and value financial assets and will not have a material impact on how we measure and value non-financial assets.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for us on January 1, 2008. We did not elected the fair value option for any of our existing financial instruments on the effective date and have not determined whether or not 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 stipulates that acquisition related costs 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 believe that the adoption of this standard on January 1, 2009, will not have a material effect 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.

Years Ended December 31, 2008 and December 31, 2007

Net income was $76,288,000 for the year ended December 31, 2008, compared to $114,341,000 for the year ended December 31, 2007. Net income for the year ended December 31, 2008 includes $20,254,000 for the reversal of a portion of stock appreciation rights ("SARs") compensation expense, compared to $43,536,000 for such reversal in the prior year.

Property Rentals

Property rentals were $143,004,000 in the year ended December 31, 2008, compared to $141,629,000 in the year ended December 31, 2007, an increase of $1,375,000. 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 $68,093,000 in the year ended December 31, 2008, compared to $66,351,000 in the year ended December 31, 2007, an increase of $1,742,000, which resulted primarily from higher real estate taxes.

Operating Expense

Operating expenses were $77,110,000 in the year ended December 31, 2008, compared to $70,496,000 in the year ended December 31, 2007, an increase of $6,614,000. This increase results primarily from (i) a $3,707,000 write-off of the Circuit City receivables, primarily related to the straight-lining of rents, in the fourth quarter of 2008 (ii) higher real estate taxes of $1,601,000 and
(iii) higher bad debt expense of $624,000.

General and Administrative

Excluding $20,254,000 for the reversal of a portion of SARs compensation expense in the year ended December 31, 2008 and $43,536,000 for such reversal in the prior year, general and administrative expenses were higher by $490,000 in the current year.

Depreciation and Amortization

Depreciation and Amortization was $24,066,000 in the year ended December 31, 2008, compared to $22,343,000 in the year ended December 31, 2007, an increase of $1,723,000. This increase resulted primarily from a write-off of $1,430,000 of tenant improvements relating to Circuit City at Rego Park I.

Interest and Other Income, net

Interest and other income, net was $15,222,000 in the year ended December 31, 2008, compared to $27,351,000 in the year ended December 31, 2007, a decrease of $12,129,000. This decrease was primarily comprised of $12,584,000 from 2.3% lower average yields on existing cash balances and a $1,349,000 gain on sale of certain "emission reduction credits" attributable to the Kings Plaza energy plant joint venture in 2007, partially offset by $1,872,000 for the net gain on the sale of real estate tax abatement certificates in 2008.

Interest and Debt Expense

Interest and debt expense was $62,474,000 in the year ended December 31, 2008, compared to $65,322,000 in the year ended December 31, 2007, a decrease of $2,848,000. This decrease was primarily due to higher capitalized interest in the current year as a result of our Rego Park II development project, partially offset by higher average debt outstanding.

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, which became operational in March 2007. In the year ended December 31, 2008, we had $7,000 of minority interest expense, compared to $1,168,000 of such expense in the year ended December 31, 2007, a decrease of $1,161,000. This decrease results primarily from minority interest attributable to our venture partner for their share of the net gain on the sale of certain "emission reduction credits" in 2007.

Income Tax Expense of the Taxable REIT Subsidiary

Income tax expense was $941,000 in the year ended December 31, 2008, and relates primarily to the interest income of our taxable REIT subsidiary, which was liquidated during the fourth quarter of 2008.

Years Ended December 31, 2007 and December 31, 2006

Net income was $114,341,000 for the year ended December 31, 2007, compared to net loss of $74,983,000, for the year ended December 31, 2006. Net income for 2007 includes $43,536,000 for the reversal of a portion of stock appreciation rights ("SARs") compensation expense. Net loss for the year ended December 31, 2006 includes $148,613,000, for an accrual of SARs compensation expense, partially offset by a $13,256,000 after-tax net gain from the sale of residential condominium units at 731 Lexington Avenue. The net of these items decreased net income by $135,357,000.

Property Rentals

Property rentals were $141,629,000 in 2007, compared to $137,072,000 in 2006, an increase of $4,557,000. This increase was primarily attributable to rents from tenants at 731 Lexington Avenue as a result of the lease-up of the remaining vacant space during the second half of 2006, as well as rent from the commencement of the Lowe's ground lease at Kings Plaza in February 2007.

Expense Reimbursements

Tenant expense reimbursements were $66,351,000 in 2007, compared to $61,700,000 in 2006, an increase of $4,651,000. This increase resulted primarily from higher utility recoveries at Kings Plaza and real estate tax reimbursements in excess of expense recognized, from tenants at 731 Lexington Avenue, under leases that do not participate in a tax credit program.

Operating Expense

Operating expenses were $70,496,000 in 2007, compared to $71,980,000 in 2006, a decrease of $1,484,000. This decrease was primarily due to $2,108,000 of lower operating costs at our Kings Plaza energy plant, due to start-up expenses and an oil spill in 2006, partially offset by higher costs for repairs and maintenance.

General and Administrative

Excluding $43,536,000 for the reversal of a portion of SARs compensation expense in 2007 and $148,613,000 for an accrual of SARs compensation expense in 2006, general and administrative expenses were lower by $1,034,000 in 2007. This decrease resulted primarily from organization costs incurred in 2006 in connection with forming the Kings Plaza energy plant joint venture.

Interest and Other Income, net

Interest and other income, net was $27,351,000 in 2007, compared to $28,257,000 in 2006, a decrease of $906,000. This decrease resulted primarily from lower average cash balances of $42,200,000 at an average yield of 4.6%, partially offset by a net gain from the sale of certain "emission reduction credits" by our consolidated partially owned entity, the Kings Plaza energy plant joint venture.

Interest and Debt Expense

Interest and debt expense was $65,322,000 in 2007, compared to $67,726,000 in 2006, a decrease of $2,404,000. This decrease was primarily due to higher capitalized interest of $4,567,000 in 2007 as a result of our Rego Park development project, partially offset by, $2,466,000 of accrued interest on the liability for unrecognized tax benefits, in connection with the adoption of FASB Interpretation No. 48.

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, which became operational in March 2007. Minority interest of partially owned entity was expense of $1,168,000 in 2007, compared to income of $1,095,000 in 2006, a change of $2,263,000. This change resulted primarily from income in 2007 as a result of a net gain on sale of certain "emission reduction credits," compared to a loss in 2006 as a result of organization cost expensed in connection with forming the joint venture.

Vornado

At December 31, 2008, Vornado owned 32.5% of our outstanding common stock. We are managed by, and our properties are leased and developed by, Vornado, pursuant to the agreements described below, which expire in March of each year and are automatically renewable.

In conjunction with the closing of the Rego Park II construction loan on December 21, 2007, we bifurcated the management, development and leasing agreements described below to cover the Rego Park II property separately. In addition, we amended the Rego Park II management and development agreement, to provide for a term through substantial completion of the construction, with automatic renewals, and for payment of the Rego Park II development fees upon the earlier of substantial completion of the construction, or the transfer of the property to an unaffiliated third party.

Management and Development Agreements

We pay Vornado an annual management fee equal to the sum of (i) $3,000,000, (ii) 3% of gross income from the Kings Plaza Regional Shopping Center, (iii) $0.50 per square foot of the tenant-occupied office and retail space at 731 Lexington Avenue, and (iv) $234,000, escalating at 3% per annum, for managing the common area of 731 Lexington Avenue.

In addition, Vornado is entitled to a development fee of 6% of development costs, as defined, with minimum guaranteed fees of $750,000 per annum.

Leasing Agreements

Vornado also provides us with leasing services for a fee of 3% of rent for the first ten years of a lease term, 2% of rent for the eleventh through the twentieth year of a lease term, and 1% of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by tenants. In the event third-party real estate brokers are used, the fees to Vornado increase by 1% and Vornado is responsible for the fees to the third-party real estate brokers. Vornado is also entitled to a commission upon the sale of any of our assets equal to 3% of gross proceeds, as defined, for asset sales less than $50,000,000 and 1% of gross proceeds, as defined, for asset sales of $50,000,000 or more. The total of these amounts is payable in annual installments in an amount not to exceed $4,000,000, with interest on the unpaid balance at LIBOR plus 1% (5.19% at December 31, 2008).

Other Agreements

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

The following table shows the amounts incurred under the agreements discussed above.

(Amounts in thousands)                                 Year Ended December 31,
                                                      2008        2007       2006
Company management fees                            $    3,000   $  3,000   $  3,000
Development fees                                        6,520      6,476        755
Leasing fees                                            2,946      4,411      4,505
Property management fees and payments for
. . .