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| ALX > SEC Filings for ALX > Form 10-Q on 2-Nov-2009 | All Recent SEC Filings |
2-Nov-2009
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, 2009 and 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.
Alexander's, Inc. (NYSE: ALX) is a real estate investment trust ("REIT"), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to "we," "us," "our," 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 illiquidity and volatility in the bond and equity markets. These trends and the related economic recession have continued in 2009. This economic recession has negatively affected substantially all businesses, including ours. Real estate transactions have diminished significantly and capitalization rates have risen. The commercial real estate industry may continue to be affected by declining demand for office and retail space due to bankruptcies, layoffs, downsizing, cost cutting as well as general economic conditions, which would result in lower occupancy rates and effective rents and a corresponding decrease in net income, funds from operations and cash flow. It is not possible for us to quantify the impact of the above trends, which may persist for the remainder of 2009 and beyond, on our future financial results.
Stock Appreciation Rights ("SARs")
On March 2, 2009, Steven Roth, the Chairman of our Board of Directors and Chief Executive Officer and Michael Fascitelli, our President, each exercised 150,000 SARs, which were scheduled to expire on March 4, 2009. Mr. Roth and Mr. Fascitelli each received gross proceeds of $11,419,000. As a result of the March 2, 2009 exercises, we reversed $34,275,000 of previously recognized SARs compensation expense. As of September 30, 2009, there were no SARs outstanding. In the three and nine months ended September 30, 2008, we recognized $44,655,000 and $23,330,000, respectively, of 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 exercise of 100,000 of SARs by Mr. Roth on September 15, 2008.
Liability for Income Taxes
On September 30, 2009, we reversed a portion of our liability for income taxes due to the expiration of the applicable statute of limitations and recognized an aggregate of $42,472,000 of income, of which $37,307,000 was included as a component of "income tax benefit (expense)" and $5,165,000 was included on a reduction of "interest and debt expense" on our consolidated statement of operations.
Flushing
In February 2009, we sub-leased the Flushing property to a developer for the remainder of our ground lease term.
Rego Park I
On March 10, 2009, we repaid the $78,246,000 outstanding balance of the Rego Park I mortgage loan which was scheduled to mature in June 2009, and simultaneously completed a refinancing in the same amount. The new loan bears interest at 75 basis points, is secured by the property and is 100% cash collateralized. The proceeds of the new loan were placed in a non-interest bearing restricted mortgage escrow account. The loan is prepayable at any time without penalty.
731 Lexington Avenue
On March 25, 2009, Citibank N.A. completed the assignment of its lease aggregating 176,000 square feet to Bloomberg L.P., which now occupies all of the office space at this property.
Rego Park II
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. As of September 30, 2009, we have leased 138,000 square feet to Home Depot (which was assigned to Costco in October 2009), 134,000 square feet to Century 21 department store, and 132,000 square feet to Kohl's, (collectively, the "anchor tenants"). During the second quarter of 2009, we tendered possession to our anchor tenants and placed that portion of the asset into service; accordingly, we transferred approximately $222,000,000 from "Construction in progress" to "Buildings, leaseholds and leasehold improvements."
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, 2008 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 2009.
In December 2007, the FASB issued an update to ASC 805, Business Combinations. The amended guidance contained in ASC 805 applies 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. The amended guidance also expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. The amended guidance became effective for all transactions entered into, on or after January 1, 2009. The adoption of this guidance on January 1, 2009, did not have any effect on our consolidated financial statements.
In December 2007, the FASB issued an update to ASC 810, Consolidation. The amended guidance contained in ASC 810 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. It 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. The amended guidance became effective on January 1, 2009 and resulted in (i) the reclassification of our minority interest in consolidated subsidiary to "noncontrolling interest in consolidated subsidiary," a component of permanent equity on our consolidated balance sheets, and (ii) the reclassification of minority interest expense to "net income attributable to the noncontrolling interest" on our consolidated statements of operations.
On May 28, 2009, the FASB issued ASC 855, Subsequent Events. Although ASC 855 does not significantly change current practice surrounding the disclosure of subsequent events, it provides guidance on management's assessment of subsequent events and the requirement to disclose the date through which subsequent events have been evaluated. The ASC 855 became effective on June 30, 2009. We have evaluated subsequent events through November 1, 2009 for this quarterly report on Form 10-Q for the quarter ended September 30, 2009.
On June 12, 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) ("SFAS 167"). SFAS 167 modifies the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity ("VIE") by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. SFAS 167 becomes effective for all new and existing VIEs on January 1, 2010. The adoption of SFAS 167 will not have a material affect on our consolidated financial statements.
Significant Tenants
Bloomberg L.P. accounted for approximately 35% and 33% of our consolidated revenues in the three months ended September 30, 2009 and 2008, respectively, and 36% and 32% of our consolidated revenues in the nine months ended September 30, 2009 and 2008, respectively. No other tenant accounted for more than 10% of our consolidated revenues.
Net income attributable to common stockholders for the quarter ended September 30, 2009 was $58,029,000, compared to a net loss of $31,443,000 for the quarter ended September 30, 2008. Net income attributable to common stockholders for the quarter ended September 30, 2009 includes $42,472,000 of income from the reversal of a portion of the liability for income taxes due to the expiration of the applicable statute of limitations. Net loss attributable to common stockholders for the quarter ended September 30, 2008 includes $44,655,000 for an accrual of SARs compensation expense.
Property Rentals
Property rentals were $40,762,000 in the quarter ended September 30, 2009, compared to $35,154,000 in the prior year's quarter, an increase of $5,608,000. This increase was primarily attributable to tendering possession to our anchor tenants at the Rego Park II property, whose space was placed into service during the second quarter of 2009.
Expense Reimbursements
Tenant expense reimbursements were $17,648,000 in the quarter ended September 30, 2009, compared to $17,799,000 in the prior year's quarter, a decrease of $151,000. This decrease was primarily due to lower operating expenses.
Operating Expenses
Operating expenses were $18,402,000 in the quarter ended September 30, 2009, compared to $19,202,000 in the prior year's quarter, a decrease of $800,000. This decrease was primarily due to lower operating costs at our Kings Plaza energy plant, partially offset by higher real estate taxes.
General and Administrative Expenses
General and administrative expenses decreased by $33,000 from the prior year's quarter, excluding $44,655,000 for an accrual of SARs compensation expense and $412,000 for professional fees at our Kings Plaza energy plant joint venture in the quarter ended September 30, 2008.
Depreciation and Amortization
Depreciation and amortization was $7,328,000 in the quarter ended September 30, 2009, compared to $5,698,000 in the prior year's quarter, an increase of $1,630,000. This increase was primarily due to depreciation on the portion of Rego Park II placed into service during the second quarter of 2009.
Interest and Other Income, net
Interest and other income, net was $758,000 in the quarter ended September 30, 2009, compared to $2,973,000 in the prior year's quarter, a decrease of $2,215,000. This decrease was primarily comprised of $2,072,000 from lower average yields on investments (0.55% in the quarter ended September 30, 2009 compared to 2.16% in the quarter ended September 30, 2008) and $167,000 from lower average cash balances.
Interest and Debt Expense
Interest and debt expense was $10,924,000 in the quarter ended September 30,
2009, compared to $15,546,000 in the prior year's quarter, a decrease of
$4,622,000. This decrease was primarily due to (i) a $5,165,000 reversal of a
portion of the liability for income taxes in the current quarter (which was
previously recognized as interest expense), due to the expiration of the
applicable statute of limitations, (ii) $1,292,000 of interest savings from the
refinancing of the Rego Park I mortgage loan in March 2009, partially offset by
(iii) $2,362,000 of lower capitalized interest as a result of placing a portion
of the Rego Park II property in service during the second quarter of 2009.
Income Tax Benefit (Expense)
In the quarter ended September 30, 2009, we had an income tax benefit of $37,065,000, compared to an expense of $276,000 in the prior year's quarter, a decrease of $37,341,000. This decrease was primarily due to a $37,307,000 reversal of a portion of the liability for income taxes in the current quarter, due to the expiration of the applicable statute of limitations.
Net Income Attributable to the Noncontrolling Interest
Net income attributable to the noncontrolling interest was $460,000 in the three months ended September 30, 2009, compared to $457,000 in the three months ended September 30, 2008 and represents our venture partner's 75% pro rata share of income from our consolidated partially owned entity, the Kings Plaza energy plant joint venture.
Net income attributable to common stockholders for the nine months ended September 30, 2009 was $117,088,000, compared to $22,163,000 for the nine months ended September 30, 2008. Net income attributable to common stockholders for the nine months ended September 30, 2009 includes $42,472,000 of income from the reversal of a portion of the liability for income taxes, due to the expiration of the applicable statute of limitations, and $34,275,000 of income from the reversal of a portion of previously recognized SARs compensation expense. Net income for the nine months ended September 30, 2008 includes $23,330,000 for an accrual of SARs compensation expense.
Property Rentals
Property rentals were $114,837,000 in the nine months ended September 30, 2009, compared to $106,600,000 in the prior year's nine months, an increase of $8,237,000. This increase was primarily attributable to tendering possession to our anchor tenants at the Rego Park II property, whose space was placed into service during the second quarter of 2009.
Expense Reimbursements
Tenant expense reimbursements were $51,538,000 in the nine months ended September 30, 2009, compared to $49,597,000 in the prior year's nine months, an increase of $1,941,000. This increase was primarily due to reimbursements for higher real estate taxes.
Operating Expenses
Operating expenses were $55,689,000 in the nine months ended September 30, 2009, compared to $54,240,000 in the prior year's nine months, an increase of $1,449,000. This increase was primarily due to higher real estate taxes.
General and Administrative Expenses
General and administrative expenses decreased by $315,000 from the prior year's nine months, excluding (i) $34,275,000 for the reversal of a portion of previously recognized SARs compensation expense in the current nine month period and $23,330,000 for an accrual of SARs compensation expense in the prior year's nine month period, (ii) $1,407,000 for the write-off of previously capitalized costs at our Flushing property in the current nine month period and (iii) $412,000 for professional fees at our Kings Plaza energy plant joint venture in the prior year's nine month period.
Depreciation and Amortization
Depreciation and amortization was $19,886,000 in the nine months ended September 30, 2009, compared to $16,907,000 in the nine months ended September 30, 2008, an increase of $2,979,000. This increase was primarily due to depreciation on the portion of Rego Park II placed into service during 2009.
Interest and Other Income, net
Interest and other income, net was $2,390,000 in the nine months ended September 30, 2009, compared to $12,996,000 in the prior year's nine months, a decrease of $10,606,000. This decrease was primarily comprised of (i) $7,197,000 from lower average yields on investments (0.58% in the nine months ended September 30, 2009 as compared to 2.58% in the nine months ended September 30, 2009), (ii) $1,872,000 for the net gain on the sale of real estate tax abatement certificates in 2008 and (iii) $1,518,000 from lower average cash balances.
Interest and Debt Expense
Interest and debt expense was $41,770,000 in the nine months ended September 30, 2009, compared to $46,789,000 in the prior year's nine months, a decrease of $5,019,000. This decrease was primarily comprised of (i) a $5,165,000 reversal of a portion of the liability for income taxes in the current quarter (which was previously recognized as interest expense), due to the expiration of the applicable statute of limitations, (ii) interest savings of $2,933,000 from the refinancing of the Rego Park I mortgage loan in March 2009, and (iii) a $422,000 decrease in interest on the leasing commissions due to Vornado, mainly due to a lower rate in the current period, partially offset by (iv) $4,476,000 of lower capitalized interest as a result of placing a portion of the Rego Park II property into service during 2009.
Income Tax Benefit (Expense)
In the nine months ended September 30, 2009, we had an income tax benefit of $36,947,000, compared to an expense of $1,400,000 in the nine months ended September 30, 2008, a decrease of $38,347,000. This decrease was primarily due to a $37,307,000 reversal of a portion of liability for income taxes in the current year, due to the expiration of the applicable statute of limitations.
Net Income Attributable to the Noncontrolling Interest
Net income attributable to the noncontrolling interest was $687,000 in the nine months ended September 30, 2009, compared to $177,000 in the nine months ended September 30, 2008, and represents our venture partner's 75% pro rata share of net income from our consolidated partially owned entity, the Kings Plaza energy plant joint venture.
Liquidity and Capital Resources
We anticipate that cash flow from 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 substantially completed by the end of this year and estimated to cost approximately $410,000,000, of which $344,351,000 has been expended as of September 30, 2009. As of September 30, 2009, $237,968,000 was drawn on the $350,000,000 construction loan. The loan has an interest rate of LIBOR plus 1.20% (1.46% at September 30, 2009), and matures in December 2010, with a one-year extension option. As of September 30, 2009, we have leased 138,000 square feet to Home Depot (which was assigned to Costco in October 2009), 134,000 square feet to Century 21 department store, and 132,000 square feet to Kohl's, (collectively, the "anchor tenants"). During the quarter ended June 30, 2009, we tendered possession to our anchor tenants and placed that portion of the asset into service. There can be no assurance that the balance of the project will be completed, completed on time, or completed for the budgeted amount.
Insurance
We carry commercial liability with limits of $300,000,000 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 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.
Cash Flows
Rental income from our properties is our principal source of operating cash flow. Our 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 our 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, 2009
Cash and cash equivalents were $436,830,000 at September 30, 2009, compared to $515,940,000 at December 31, 2008, a decrease of $79,110,000. This decrease resulted from $141,980,000 of net cash used in investing activities, partially offset $45,843,000 of net cash provided by financing activities and $17,027,000 of net cash provided by operating activities.
Net cash provided by operating activities of $17,027,000 was comprised of net income of $117,775,000, partially offset by adjustments for non-cash items of $69,438,000 and the net change in operating assets and liabilities of $31,310,000. The adjustments for non-cash items were comprised of (i) a $42,472,000 reversal of a portion of the liability for income taxes as a result of the expiration of the applicable statute of limitations, (ii) a reversal of the liability for SARs compensation expense of $34,275,000 and (iii) straight-lining of rental income of $16,773,000, partially offset by (iv) depreciation and amortization of $22,198,000 and (v) other non-cash adjustments of $1,884,000, primarily due to a $1,407,000 write-off of previously capitalized costs at our Flushing property. The net change in operating assets and liabilities of $31,310,000 included a $22,838,000 payment for SARs compensation expense.
Net cash used in investing activities of $141,980,000 was primarily comprised of restricted cash of $83,553,000, primarily related to the fully cash-collateralized mortgage at Rego Park I, and capital expenditures of $58,427,000, primarily related to the development of our Rego Park II project.
Net cash provided by financing activities of $45,843,000 was primarily comprised of borrowings under the construction loan to fund expenditures at our Rego Park II project. Financing activities also include the $78,246,000 refinancing of the Rego Park I mortgage loan.
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, partially 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 net income of $22,340,000 and adjustments for non-cash items of $31,814,000, partially offset by the net change in operating assets and liabilities of $24,198,000. The adjustments for non-cash items were primarily comprised of (i) . . .
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