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EX-31 - EXHIBIT 31.1 - VORNADO REALTY LPexhibit311.htm
EX-31 - EXHIBIT 31.2 - VORNADO REALTY LPexhibit312.htm
EX-32 - EXHIBIT 32.2 - VORNADO REALTY LPexhibit322.htm
EX-32 - EXHIBIT 32.1 - VORNADO REALTY LPexhibit321.htm
EXCEL - IDEA: XBRL DOCUMENT - VORNADO REALTY LPFinancial_Report.xls
EX-15 - EXHIBIT 15.1 - VORNADO REALTY LPexhibit151.htm
 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended:   

March 31, 2015

 

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:

 

to

 

Commission File Number:

001-34482

 

 

VORNADO REALTY L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3925979

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

888 Seventh Avenue, New York, New York

 

10019

(Address of principal executive offices)

 

(Zip Code)

 

 

(212) 894-7000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

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

 

o Large Accelerated Filer

 

o Accelerated Filer

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

 

o Smaller Reporting Company

 

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

 

 

 

 


 

 

PART I.

Financial Information:

Page Number

Item 1.

Financial Statements:

Consolidated Balance Sheets (Unaudited) as of

March 31, 2015 and December 31, 2014

3

Consolidated Statements of Income (Unaudited) for the

Three Months Ended March 31, 2015 and 2014

4

Consolidated Statements of Comprehensive Income (Unaudited)

for the Three Months Ended March 31, 2015 and 2014

5

Consolidated Statements of Changes in Equity (Unaudited) for the

Three Months Ended March 31, 2015 and 2014

6

Consolidated Statements of Cash Flows (Unaudited) for the

Three Months Ended March 31, 2015 and 2014

8

Notes to Consolidated Financial Statements (Unaudited)

10

Report of Independent Registered Public Accounting Firm

31

Item 2.

Management's Discussion and Analysis of Financial Condition

and Results of Operations

32

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

Item 4.

Controls and Procedures

58

PART II.

Other Information:

Item 1.

Legal Proceedings

59

Item 1A.

Risk Factors

59

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

59

SIGNATURES

60

EXHIBIT INDEX

61

2

 


 

 

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

 

VORNADO REALTY L.P.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Amounts in thousands, except unit amounts)

March 31,

December 31,

ASSETS

2015 

2014 

Real estate, at cost:

Land

$

3,914,401 

$

3,861,913 

Buildings and improvements

11,881,228 

11,705,749 

Development costs and construction in progress

1,157,180 

1,128,037 

Leasehold improvements and equipment

127,534 

126,659 

Total

17,080,343 

16,822,358 

Less accumulated depreciation and amortization

(3,248,078)

(3,161,633)

Real estate, net

13,832,265 

13,660,725 

Cash and cash equivalents

1,067,568 

1,198,477 

Restricted cash

198,672 

176,204 

Marketable securities

184,991 

206,323 

Tenant and other receivables, net of allowance for doubtful accounts of $12,456 and $12,210

110,477 

109,998 

Investments in partially owned entities

1,408,214 

1,246,496 

Real estate fund investments

554,426 

513,973 

Receivable arising from the straight-lining of rents, net of allowance of $3,083 and $3,188

816,661 

787,271 

Deferred leasing and financing costs, net of accumulated amortization of $289,589 and $281,109

478,507 

475,158 

Identified intangible assets, net of accumulated amortization of $200,330 and $199,821

229,579 

225,155 

Assets related to discontinued operations

35,342 

2,238,474 

Other assets

344,349 

410,066 

$

19,261,051 

$

21,248,320 

LIABILITIES, REDEEMABLE PARTNERSHIP UNITS AND EQUITY

Mortgages payable

$

8,316,793 

$

8,263,165 

Senior unsecured notes

847,332 

1,347,159 

Revolving credit facility debt

400,000 

-   

Accounts payable and accrued expenses

432,970 

447,745 

Deferred revenue

346,026 

358,613 

Deferred compensation plan

121,530 

117,284 

Liabilities related to discontinued operations

11,354 

1,511,362 

Other liabilities

436,608 

375,830 

Total liabilities

10,912,613 

12,421,158 

Commitments and contingencies

Redeemable partnership units:

Class A units - 11,640,982 and 11,356,550 units outstanding

1,303,790 

1,336,780 

Series D cumulative redeemable preferred unit - 1 unit outstanding

1,000 

1,000 

Total redeemable partnership units

1,304,790 

1,337,780 

Equity:

Partners' capital

8,219,728 

8,157,544 

Earnings less than distributions

(2,006,439)

(1,505,385)

Accumulated other comprehensive income

72,609 

93,267 

Total Vornado Realty L.P. equity

6,285,898 

6,745,426 

Noncontrolling interests in consolidated subsidiaries

757,750 

743,956 

Total equity

7,043,648 

7,489,382 

$

19,261,051 

$

21,248,320 

See notes to consolidated financial statements (unaudited).

3

 


 

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

For the Three

Months Ended March 31,

(Amounts in thousands, except per unit amounts)

2015 

2014 

REVENUES:

Property rentals

$

500,274 

$

467,140 

Tenant expense reimbursements

66,921 

59,301 

Fee and other income

39,607 

35,940 

Total revenues

606,802 

562,381 

EXPENSES:

Operating

254,493 

236,561 

Depreciation and amortization

124,122 

131,792 

General and administrative

58,492 

47,502 

Acquisition and transaction related costs

1,981 

1,285 

Total expenses

439,088 

417,140 

Operating income

167,714 

145,241 

(Loss) income from partially owned entities

(2,405)

1,979 

Income from real estate fund investments

24,089 

18,148 

Interest and other investment income, net

10,792 

11,850 

Interest and debt expense

(91,674)

(96,312)

Net gain on disposition of wholly owned and partially

owned assets

1,860 

9,635 

Income before income taxes

110,376 

90,541 

Income tax expense

(971)

(851)

Income from continuing operations

109,405 

89,690 

Income from discontinued operations

15,841 

8,466 

Net income

125,246 

98,156 

Less net income attributable to noncontrolling interests in consolidated subsidiaries

(15,882)

(11,579)

Net income attributable to Vornado Realty L.P.

109,364 

86,577 

Preferred unit distributions

(19,496)

(20,380)

NET INCOME attributable to Class A unitholders

$

89,868 

$

66,197 

INCOME PER CLASS A UNIT - BASIC:

Income from continuing operations, net

$

0.37 

$

0.29 

Income from discontinued operations, net

0.08 

0.04 

Net income per Class A unit

$

0.45 

$

0.33 

Weighted average units outstanding

198,675 

197,917 

INCOME PER CLASS A UNIT - DILUTED:

Income from continuing operations, net

$

0.36 

$

0.29 

Income from discontinued operations, net

0.08 

0.04 

Net income per Class A unit

$

0.44 

$

0.33 

Weighted average units outstanding

200,749 

199,354 

DISTRIBUTIONS PER CLASS A UNIT

$

0.63 

$

0.73 

See notes to consolidated financial statements (unaudited).

4

 


 

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

For the Three

Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Net income

$

125,246 

$

98,156 

Other comprehensive income (loss):

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

(21,332)

13,125 

Pro rata share of other comprehensive income (loss) of

nonconsolidated subsidiaries

157 

(8,286)

Change in value of interest rate swap and other

(771)

1,611 

Comprehensive income

103,300 

104,606 

Less comprehensive income attributable to noncontrolling interests in consolidated

subsidiaries

(15,882)

(11,579)

Comprehensive income attributable to Vornado Realty L.P.

$

87,418 

$

93,027 

See notes to consolidated financial statements (unaudited).

5

 


 

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

Non-

Accumulated

controlling

(Amounts in thousands)

Class A Units

Earnings

Other

Interests in

Preferred Units

Owned by Vornado

Less Than

Comprehensive

Consolidated

Total

Units

Amount

Units

Amount

Distributions

Income (Loss)

Subsidiaries

Equity

Balance, December 31, 2014

52,679 

$

1,277,026 

187,887 

$

6,880,518 

$

(1,505,385)

$

93,267 

$

743,956 

$

7,489,382 

Net income attributable to Vornado Realty L.P.

-   

-   

-   

-   

109,364 

-   

-   

109,364 

Net income attributable to noncontrolling

interests in consolidated subsidiaries

-   

-   

-   

-   

-   

-   

15,882 

15,882 

Net income attributable to redeemable

partnership units

-   

-   

-   

-   

(5,287)

-   

-   

(5,287)

Distribution of Urban Edge Properties

-   

-   

-   

-   

(464,262)

-   

(341)

(464,603)

Distributions to Vornado

-   

-   

-   

-   

(118,447)

-   

-   

(118,447)

Distributions to preferred unitholders

-   

-   

-   

-   

(19,484)

-   

-   

(19,484)

Class A units issued to Vornado:

Upon redemption of Class A

units, at redemption value

-   

-   

210 

23,493 

-   

-   

-   

23,493 

Under Vornado's employees' share option plan

-   

-   

165 

11,679 

(2,579)

-   

-   

9,100 

Under Vornado's dividend reinvestment plan

-   

-   

338 

-   

-   

-   

338 

Contributions:

Real estate fund investments

-   

-   

-   

-   

-   

-   

51,350 

51,350 

Distributions:

Real estate fund investments

-   

-   

-   

-   

-   

-   

(52,882)

(52,882)

Other

-   

-   

-   

-   

-   

-   

(125)

(125)

Conversion of Series A preferred units to

Class A units

-   

(12)

12 

-   

-   

-   

-   

Deferred compensation units and options

-   

-   

1,325 

(359)

-   

-   

966 

Change in unrealized net loss on

available-for-sale securities

-   

-   

-   

-   

-   

(21,332)

-   

(21,332)

Pro rata share of other comprehensive income of

nonconsolidated subsidiaries

-   

-   

-   

-   

-   

157 

-   

157 

Change in value of interest rate swap

-   

-   

-   

-   

-   

(776)

-   

(776)

Adjustments to carry redeemable

Class A units at redemption value

-   

-   

-   

25,349 

-   

-   

-   

25,349 

Redeemable partnership units' share of

above adjustments

-   

-   

-   

-   

-   

1,288 

-   

1,288 

Other

-   

-   

-   

-   

-   

(90)

(85)

Balance, March 31, 2015

52,679 

$

1,277,014 

188,273 

$

6,942,714 

$

(2,006,439)

$

72,609 

$

757,750 

$

7,043,648 

See notes to consolidated financial statements (unaudited).

 

6

 


 

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED

(UNAUDITED)

Non-

Accumulated

controlling

(Amounts in thousands)

Class A Units

Earnings

Other

Interests in

Preferred Units

Owned by Vornado

Less Than

Comprehensive

Consolidated

Total

Units

Amount

Units

Amount

Distributions

Income (Loss)

Subsidiaries

Equity

Balance, December 31, 2013

52,683 

$

1,277,225 

187,285 

$

7,151,309 

$

(1,734,839)

$

71,537 

$

829,512 

$

7,594,744 

Net income attributable to Vornado Realty L.P.

-   

-   

-   

-   

86,577 

-   

-   

86,577 

Net income attributable to noncontrolling

interests in consolidated subsidiaries

-   

-   

-   

-   

-   

-   

11,579 

11,579 

Net income attributable to redeemable

partnership units

-   

-   

-   

-   

(3,860)

-   

-   

(3,860)

Distributions to Vornado

-   

-   

-   

-   

(136,761)

-   

-   

(136,761)

Distributions to preferred unitholders

-   

-   

-   

-   

(20,368)

-   

-   

(20,368)

Class A units issued to Vornado:

Upon redemption of Class A

units, at redemption value

-   

-   

55 

5,156 

-   

-   

-   

5,156 

Under Vornado's employees' share option plan

-   

-   

60 

3,230 

-   

-   

-   

3,230 

Under Vornado's dividend reinvestment plan

-   

-   

446 

-   

-   

-   

446 

Distributions:

Real estate fund investments

-   

-   

-   

-   

-   

-   

(1,950)

(1,950)

Other

-   

-   

-   

-   

-   

-   

(142)

(142)

Deferred compensation units and options

-   

-   

2,119 

(340)

-   

-   

1,779 

Change in unrealized net gain on

available-for-sale securities

-   

-   

-   

-   

-   

13,125 

-   

13,125 

Pro rata share of other comprehensive loss of

nonconsolidated subsidiaries

-   

-   

-   

-   

-   

(8,286)

-   

(8,286)

Change in value of interest rate swap

-   

-   

-   

-   

-   

1,610 

-   

1,610 

Adjustments to carry redeemable

Class A units at redemption value

-   

-   

-   

(136,937)

-   

-   

-   

(136,937)

Redeemable partnership units' share of above

adjustments

-   

-   

-   

-   

-   

(361)

-   

(361)

Other

-   

-   

-   

(238)

(18)

(254)

Balance, March 31, 2014

52,683 

$

1,277,225 

187,412 

$

7,025,085 

$

(1,809,609)

$

77,626 

$

839,000 

$

7,409,327 

See notes to consolidated financial statements (unaudited).

7

 


 

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the Three Months Ended

March 31,

2015 

2014 

(Amounts in thousands)

Cash Flows from Operating Activities:

Net income

$

125,246 

$

98,156 

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

Depreciation and amortization (including amortization of deferred financing costs)

131,112 

153,869 

Return of capital from real estate fund investments

72,208 

-   

Net gains on sale of real estate and other

(32,243)

-   

Straight-lining of rental income

(29,474)

(13,236)

Net realized and unrealized gains on real estate fund investments

(17,639)

(14,169)

Distributions of income from partially owned entities

15,874 

12,966 

Other non-cash adjustments

15,865 

11,885 

Amortization of below-market leases, net

(12,754)

(12,144)

Loss (income) from partially owned entities

2,405 

(1,979)

Net gain on disposition of wholly owned and partially owned assets

(1,860)

(9,635)

Impairment losses

256 

20,842 

Changes in operating assets and liabilities:

Real estate fund investments

(95,022)

(123)

Accounts receivable, net

975 

(7,624)

Prepaid assets

62,658 

53,841 

Other assets

(13,093)

(18,297)

Accounts payable and accrued expenses

(12,691)

31,554 

Other liabilities

(17,307)

3,225 

Net cash provided by operating activities

194,516 

309,131 

Cash Flows from Investing Activities:

Proceeds from sales of real estate and related investments

334,725 

120,270 

Development costs and construction in progress

(88,052)

(90,653)

Additions to real estate

(54,466)

(53,103)

Acquisitions of real estate and other

(49,878)

-   

Investments in partially owned entities

(23,912)

(16,633)

Proceeds from repayments of mortgage and mezzanine loans receivable and other

16,763 

69,347 

Distributions of capital from partially owned entities

13,409 

1,277 

Restricted cash

1,282 

52,256 

Net cash provided by investing activities

149,871 

82,761 

See notes to consolidated financial statements (unaudited).

 

8

 


 

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

For the Three Months Ended

March 31,

2015 

2014 

(Amounts in thousands)

Cash Flows from Financing Activities:

Repayments of borrowings

$

(907,431)

$

(233,198)

Proceeds from borrowings

800,000 

600,000 

Cash included in the spin-off of Urban Edge Properties

(225,000)

-   

Distributions to Vornado

(118,447)

(136,761)

Distributions to redeemable security holders and noncontrolling interests

(60,287)

(10,474)

Contributions from noncontrolling interests in consolidated subsidiaries

51,350 

-   

Distributions to preferred unitholders

(19,484)

(20,368)

Proceeds received from exercise of Vornado stock options

12,018 

3,676 

Debt issuance costs

(5,076)

(20,752)

Repurchase of Class A units related to stock compensation agreements and/or related

tax withholdings

(2,939)

(578)

Net cash (used in) provided by financing activities

(475,296)

181,545 

Net (decrease) increase in cash and cash equivalents

(130,909)

573,437 

Cash and cash equivalents at beginning of period

1,198,477 

583,290 

Cash and cash equivalents at end of period

$

1,067,568 

$

1,156,727 

Supplemental Disclosure of Cash Flow Information:

Cash payments for interest, excluding capitalized interest of $8,479 and $13,622

$

91,702 

$

100,209 

Cash payments for income taxes

$

2,175 

$

1,214 

Non-Cash Investing and Financing Activities:

Non-cash distribution of Urban Edge Properties:

Assets

$

1,722,263 

$

-   

Liabilities

(1,482,660)

-   

Equity

(239,603)

-   

Transfer of interest in real estate to Pennsylvania Real Estate Investment Trust

(145,313)

-   

Accrued capital expenditures included in accounts payable and accrued expenses

87,232 

74,424 

Financing assumed in acquisitions

62,000 

-   

Like-kind exchange of real estate:

Acquisitions

57,722 

-   

Dispositions

(38,822)

-   

Adjustments to carry redeemable Class A units at redemption value

25,349 

(136,937)

Receipt of security deposits included in restricted cash and other liabilities

42,346 

-   

Write-off of fully depreciated assets

(18,790)

(67,204)

Elimination of a mortgage and mezzanine loan asset and liability

-   

59,375 

See notes to consolidated financial statements (unaudited).

9

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.     Organization

 

Vornado Realty L.P. (the “Operating Partnership” and/or the “Company”) is a Delaware limited partnership. Vornado Realty Trust (“Vornado”) is the sole general partner of, and owned approximately 93.9% of the common limited partnership interest in, the Operating Partnership at March 31, 2015.  All references to “we,” “us,” “our,” the “Company” and “the Operating Partnership” refer to Vornado Realty L.P. and its consolidated subsidiaries.

 

On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to Urban Edge Properties (“UE”) (NYSE: UE). As part of this transaction, we retained 5,717,184 UE operating partnership units (5.4% ownership interest). We are providing transition services to UE for an initial period of up to two years, including information technology, human resources, tax and financial reporting. UE is providing us with leasing and property management services for (i) the Monmouth Mall, (ii) certain small retail properties that we plan to sell, and (iii) our affiliate, Alexander’s, Inc. (NYSE: ALX), Rego Park retail assets. Steven Roth, Chairman of Vornado’s Board of Trustees and its Chief Executive Officer is a member of the Board of Trustees of UE. The spin-off distribution was effected by Vornado distributing one UE common share for every two Vornado common shares. Beginning in the first quarter of 2015, the historical financial results of UE are reflected in our consolidated financial statements as discontinued operations for all periods presented. 

 

 

2.    Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and include the accounts of Vornado Realty L.P. and its consolidated subsidiaries.  All intercompany amounts have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the SEC and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014, as filed with the SEC.

 

We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results for the full year.  

 

Certain prior year balances have been reclassified in order to conform to the current period presentation.  Beginning in the three months ended March 31, 2015, the Company classified signage revenue within “property rentals”.  For the three months ended March 31, 2014, $9,300,000 related to signage revenue has been reclassified from “fee and other income” to “property rentals” to conform to the current period presentation.

    

10

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

3.    Recently Issued Accounting Literature

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment. Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that began after December 15, 2014. Upon adoption of this standard on January 1, 2015, individual properties sold in the ordinary course of business are not expected to qualify as discontinued operations. The financial results of UE and certain other retail assets are reflected in our consolidated financial statements as discontinued operations for all periods presented (see Note 8 – Dispositions).

 

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

 

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

 

In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation.  ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities.  Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities.  ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015.  We are currently evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements. 

 

In April 2015, the FASB issued an update (“ASU 2015-03”) Simplifying the Presentation of Debt Issuance Costs to ASC Topic 835, Interest.  ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets.  ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.  The adoption of this update on January 1, 2016 will not have a material impact on our consolidated financial statements.

 

4.    Acquisitions

 

On January 20, 2015, we and one of the Fund’s limited partners co-invested with the Fund to buy out the Fund’s joint venture partner’s 57% interest in the Crowne Plaza Times Square Hotel (see Note 5 – Vornado Capital Partners Real Estate Fund).

 

On March 18, 2015, we acquired the Center Building, a 437,000 square foot office building, located at 33-00 Northern Boulevard in Long Island City, New York, for $142,000,000, including the assumption of an existing $62,000,000, 4.43% mortgage maturing in October 2018. 

 

As of March 31, 2015, we have made a $25,000,000 non-refundable deposit related to an agreement to acquire a property in the Penn Plaza submarket in Manhattan for $355,000,000.

 

On April 8, 2015, we made an $11,000,000 refundable contribution to a joint venture, in which we will have a 55% interest.  The joint venture plans to develop a 173,000 square foot Class-A office building, located on the western side of the High Line at 510 West 22nd Street.

11

 


 
 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

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

 

We are the general partner and investment manager of the Fund, which has an eight-year term and a three-year investment period that ended in July 2013. During the investment period, the Fund was our exclusive investment vehicle for all investments that fit within its investment parameters, as defined.  The Fund is accounted for under ASC 946, Financial Services – Investment Companies and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings.  We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting.

 

On January 20, 2015, we and one of the Fund’s limited partners co-invested with the Fund to buy out the Fund’s joint venture partner’s 57% interest in the Crowne Plaza Times Square Hotel (the “Co-Investment”).  The purchase price for the 57% interest was approximately $95,000,000 (our share $39,000,000) which valued the property at approximately $480,000,000.  The property is encumbered by a newly placed $310,000,000 mortgage loan bearing interest at LIBOR plus 2.80% which matures in December 2018 with a one-year extension option.  Our aggregate ownership interest in the property increased to 33% from 11%.  The Co-Investment is included as a component of “real estate fund investments” on our consolidated balance sheets. 

 

On March 25, 2015, the Fund completed the sale of 520 Broadway in Santa Monica, CA for $91,650,000. The Fund realized a $24,705,000 net gain over the holding period.

 

At March 31, 2015, we had six investments with an aggregate fair value of $554,426,000, or $169,832,000 in excess of cost, and had remaining unfunded commitments of $102,324,000, of which our share was $25,581,000.  Below is a summary of income from the Fund for the three months ended March 31, 2015 and 2014.

 

For the Three Months

 

(Amounts in thousands)

Ended March 31,

 

2015 

2014 

 

Net investment income

$

6,450 

$

3,979 

 

Net realized gains on exited investments

24,705 

 

Previously recorded unrealized gains on exited investments

(23,279)

 

Net unrealized gains on held investments

16,213 

14,169 

 

Income from real estate fund investments

24,089 

18,148 

 

Less income attributable to noncontrolling interests

(13,539)

(10,849)

 

Income from real estate fund investments attributable to Vornado Realty L.P.(1)

$

10,550 

$

7,299 

 

___________________________________

 
 

(1)     Excludes property management, leasing and development fees of $704 and $618 for the three months ended March 31, 2015 and 2014,

          respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

 
               

 

 

6.    Marketable Securities

 

Below is a summary of our marketable securities portfolio as of March 31, 2015 and December 31, 2014.

 

(Amounts in thousands)

As of March 31, 2015

As of December 31, 2014

GAAP

Unrealized

GAAP

Unrealized

Fair Value

Cost

Gain

Fair Value

Cost

Gain

Equity securities:

Lexington Realty Trust

$

181,550 

$

72,549 

$

109,001 

$

202,789 

$

72,549 

$

130,240 

Other

3,441 

-   

3,441 

3,534 

-   

3,534 

$

184,991 

$

72,549 

$

112,442 

$

206,323 

$

72,549 

$

133,774 

12

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities

 

Toys “R” Us (“Toys”)

 

As of March 31, 2015, we own 32.6% of Toys.  We have not guaranteed any of Toys’ obligations and are not committed to provide any support to Toys.  Pursuant to ASC 323-10-35-20, we discontinued applying the equity method for our Toys’ investment when the carrying amount was reduced to zero in the third quarter of 2014.  We will resume application of the equity method if, during the period the equity method has been suspended, our share of unrecognized net income exceeds our share of unrecognized net losses.

In the first quarter of 2014, we recognized our share of Toys’ fourth quarter net income of $75,196,000 and a corresponding non-cash impairment loss of the same amount.

 

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

 

(Amounts in thousands)

Balance as of

Balance Sheet:

January 31, 2015

November 1, 2014

Assets

$

9,958,000 

$

11,267,000 

Liabilities

9,014,000 

10,377,000 

Noncontrolling interests

85,000 

82,000 

Toys “R” Us, Inc. equity (1)

859,000 

808,000 

For the Three Months Ended

Income Statement:

January 31, 2015

February 1, 2014

Total revenues

$

4,983,000 

$

5,267,000 

Net income attributable to Toys

193,700 

82,500 

(1)

At March 31, 2015, the carrying amount of our investment in Toys is less than our share of Toys' equity by approximately $279,936. This basis difference results primarily from non-cash impairment losses aggregating $355,953 that we have recognized through March 31, 2015. We have allocated the basis difference primarily to Toys' real estate, which is being amortized over its remaining estimated useful life.

 

 

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

 

As of March 31, 2015, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity.  We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.

As of March 31, 2015, the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s March 31, 2015 closing share price of $456.58, was $755,214,000, or $623,071,000 in excess of the carrying amount on our consolidated balance sheet.  As of March 31, 2015, the carrying amount of our investment in Alexander’s exceeds our share of the equity in the net assets of Alexander’s by approximately $41,048,000.  The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets.  Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to real estate (land and buildings).  We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives.  This depreciation is not material to our share of equity in Alexander’s net income.  The basis difference related to the land will be recognized upon disposition of our investment.

 

13

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities - continued

 

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

 

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

 

(Amounts in thousands)

Balance as of

Balance Sheet:

March 31, 2015

December 31, 2014

Assets

$

1,433,000 

$

1,423,000 

Liabilities

1,084,000 

1,075,000 

Stockholders' equity

349,000 

348,000 

For the Three Months Ended March 31,

Income Statement:

2015 

2014 

Total revenues

$

52,000 

$

49,000 

Net income attributable to Alexander’s

18,000 

15,000 

                   

 

 

Urban Edge Properties (“UE”) (NYSE: UE)

 

As part of our spin-off of substantially all of our retail segment to UE on January 15, 2015 (see Note 1 – Organization), we retained 5,717,184 UE operating partnership units, representing a 5.4% ownership interest in UE.  We account for our investment in UE under the equity method and will recognize our share of UE’s earnings on a one-quarter lag basis.  We are providing transition services to UE for an initial period of up to two years, including information technology, human resources, tax and financial reporting.  UE is providing us with leasing and property management services for (i) the Monmouth Mall, (ii) certain small retail properties that we plan to sell, and (iii) our affiliate, Alexander’s, Rego Park retail assets.

 

Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)

 

On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT Associates, L.P., which is the operating partnership of PREIT, in exchange for $485,313,000; comprised of $340,000,000 of cash and 6,250,000 PREIT operating partnership units (valued at $145,313,000 or $23.25 per PREIT unit) (See Note 8 – Dispositions).  $19,000,000 of tenant improvements and allowances was credited to PREIT as a closing adjustment.  As a result of this transaction, we own an 8.1% interest in PREIT.  We account for our investment in PREIT under the equity method and will recognize our share of PREIT’s earnings on a one-quarter lag basis.  

 

14

 


 
 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

7.    Investments in Partially Owned Entities – continued

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

 

Percentage

(Amounts in thousands)

Ownership at

Balance as of

Investments:

March 31, 2015

March 31, 2015

December 31, 2014

Partially owned office buildings (1)

Various

$

766,074 

$

760,749 

PREIT Associates

8.1% 

144,681 

-   

Alexander’s

32.4% 

132,143 

131,616 

India real estate ventures

4.1%-36.5%

67,159 

76,752 

Urban Edge

5.4% 

25,206 

-   

Toys

32.6% 

-   

-   

Other investments (2)

Various

272,951 

277,379 

$

1,408,214 

$

1,246,496 

(1)

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

(2)

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

 

Percentage

For the Three Months

(Amounts in thousands)

Ownership at

Ended March 31,

Our Share of Net (Loss) Income:

March 31, 2015

2015 

2014 

Partially owned office buildings (1)

Various

$

(9,296)

$

(2,395)

Alexander's:

Equity in net income

32.4% 

5,594 

4,759 

Management, leasing and development fees

2,097 

1,626 

7,691 

6,385 

Toys:

Equity in net income

32.6% 

-   

75,196 

Non-cash impairment losses

-   

(75,196)

Management fees

1,454 

1,847 

1,454 

1,847 

Urban Edge (2)

5.4% 

584 

-   

India real estate ventures

4.1%-36.5%

(109)

(137)

Other investments (3)

Various

(2,729)

(3,721)

$

(2,405)

$

1,979 

(1)

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

(2)

Represents fees earned pursuant to our transition services agreement with UE.

(3)

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

15

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

8.    Dispositions

 

Discontinued Operations

 

On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to UE (NYSE: UE) (see Note 1 – Organization).

 

On March 13, 2015, we sold our lease position in Geary Street, CA for $34,189,000, which resulted in a net gain of $21,376,000.

 

On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT (see Note 7 – Investments in Partially Owned Entities).  The financial statement gain was $7,823,000, of which $7,192,000 was recognized in the first quarter of 2015 and the remaining $631,000 was deferred based on our ownership interest in PREIT.  On March 31, 2018, we will be entitled to additional consideration of 50% of the increase in the value of Springfield Town Center, if any, over $465,000,000, calculated utilizing a 5.5% capitalization rate.  In the first quarter of 2014, we recorded a non-cash impairment loss of $20,000,000 on Springfield Town Center which is included in “income from discontinued operations” on our consolidated statements of income. 

 

During the first quarter of 2015, we sold five residual retail properties, in separate transactions, for an aggregate of $10,731,000, which resulted in net gains of $3,675,000.      

 

We have reclassified the revenues and expenses of the properties discussed above to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying consolidated financial statements.  The net gains resulting from the sale of these properties are included in “income from discontinued operations” on our consolidated statements of income.  The tables below set forth the assets and liabilities related to discontinued operations at March 31, 2015 and December 31, 2014 and their combined results of operations and cash flows for the three months ended March 31, 2015 and 2014.

  

Balance as of

(Amounts in thousands)

March 31,

December 31,

2015 

2014 

Assets related to discontinued operations:

Real estate, net

$

27,199 

$

2,028,677 

Other assets

8,143 

209,797 

$

35,342 

$

2,238,474 

Liabilities related to discontinued operations:

Mortgages payable

1,288,535 

Other liabilities (primarily deferred revenue in 2014)

11,354 

222,827 

$

11,354 

$

1,511,362 

For the Three Months

(Amounts in thousands)

Ended March 31,

2015 

2014 

Income from discontinued operations

Total revenues

$

19,958 

$

106,563 

Total expenses

13,373 

76,025 

6,585 

30,538 

Net gain on sale of lease position in Geary Street, CA

21,376 

Net gains on sale of real estate

10,867 

Transaction related costs

(22,645)

(499)

Impairment losses

(256)

(20,842)

Pretax income from discontinued operations

15,927 

9,197 

Income tax expense

(86)

(731)

Income from discontinued operations

$

15,841 

$

8,466 

Cash flows related to discontinued operations:

Cash flows from operating activities

$

(36,672)

$

15,535 

Cash flows from investing activities

310,069 

(30,397)

16

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

9.    Identified Intangible Assets and Liabilities

 

 

The following summarizes our identified intangible assets (primarily acquired in-place and above-market leases) and liabilities (primarily acquired below-market leases) as of March 31, 2015 and December 31, 2014.

 

Balance as of

March 31,

December 31,

(Amounts in thousands)

2015 

2014 

Identified intangible assets:

Gross amount

$

429,909 

$

424,976 

Accumulated amortization

(200,330)

(199,821)

Net

$

229,579 

$

225,155 

Identified intangible liabilities (included in deferred revenue):

Gross amount

$

620,891 

$

657,976 

Accumulated amortization

(304,929)

(329,775)

Net

$

315,962 

$

328,201 

 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $12,450,000 and $9,712,000 for the three months ended March 31, 2015 and 2014, respectively.  Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2016 is as follows:

 

(Amounts in thousands)

2016 

$

36,804 

2017 

34,829 

2018 

33,546 

2019 

23,514 

2020 

21,505 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $6,185,000 and $8,891,000 for the three months ended March 31, 2015 and 2014, respectively.  Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years commencing January 1, 2016 is as follows:

 

(Amounts in thousands)

2016 

$

22,523 

2017 

17,692 

2018 

13,373 

2019 

11,425 

2020 

10,651 

 

We are a tenant under ground leases for certain properties.  Amortization of these acquired below-market leases, net of above-market leases resulted in an increase to rent expense of $458,000 for the three months ended March 31, 2015 and 2014.  Estimated annual amortization of these below-market leases, net of above-market leases for each of the five succeeding years commencing January 1, 2016 is as follows:

 

(Amounts in thousands)

2016 

$

1,832 

2017 

1,832 

2018 

1,832 

2019 

1,832 

2020 

1,832 

17

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

10.    Debt

 

On January 1, 2015, we redeemed all of the $500,000,000 principal amount of our outstanding 4.25% senior unsecured notes, which were scheduled to mature on April 1, 2015, at a redemption price of 100% of the principal amount plus accrued interest through December 31, 2014.

 

On April 1, 2015, we completed a $308,000,000 refinancing of RiverHouse Apartments, a three building, 1,670 unit rental complex located in Arlington, VA.  The loan is interest-only at LIBOR plus 1.28% and matures in 2025.  We realized net proceeds of approximately $43,000,000.  The property was previously encumbered by a 5.43%, $195,000,000 mortgage maturing in April 2015 and a $64,000,000 mortgage at LIBOR plus 1.53% maturing in 2018. 

 

 

The following is a summary of our debt:

Interest Rate at

Balance at

(Amounts in thousands)

March 31, 2015

March 31, 2015

December 31, 2014

Mortgages Payable:

Fixed rate

4.46% 

$

6,553,924 

$

6,499,396 

Variable rate

2.21% 

1,762,869 

1,763,769 

3.99% 

$

8,316,793 

$

8,263,165 

Unsecured Debt:

Senior unsecured notes

3.68% 

$

847,332 

$

1,347,159 

Revolving credit facility debt

1.23% 

400,000 

-   

3.39% 

$

1,247,332 

$

1,347,159 

18

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

11.    Redeemable Partnership Units

 

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

 

(Amounts in thousands)

Balance at December 31, 2013

$

1,003,620 

Net income

3,860 

Other comprehensive income

361 

Distributions

(8,383)

Redemption of Class A units, at redemption value

(5,156)

Adjustments to carry redeemable Class A units at redemption value

136,937 

Other, net

9,592 

Balance at March 31, 2014

$

1,140,831 

Balance at December 31, 2014

$

1,337,780 

Net income

5,287 

Other comprehensive loss

(1,288)

Distributions

(7,280)

Redemption of Class A units, at redemption value

(23,493)

Adjustments to carry redeemable Class A units at redemption value

(25,349)

Other, net

19,133 

Balance at March 31, 2015

$

1,304,790 

 

As of March 31, 2015 and December 31, 2014, the aggregate redemption value of redeemable Class A units, which are those units held by third parties, was $1,303,790,000 and $1,336,780,000, respectively. 

 

Redeemable partnership units exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares.  Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $55,097,000 as of March 31, 2015 and December 31, 2014.  Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income. 

19

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

12.    Accumulated Other Comprehensive Income (“AOCI”)

 

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

 

For the Three Months Ended March 31, 2014

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of December 31, 2013

$

71,537 

$

119,309 

$

(11,501)

$

(31,882)

$

(4,389)

OCI before reclassifications

6,089 

13,125 

(8,286)

1,610 

(360)

Amounts reclassified from AOCI

-   

-   

-   

-   

-   

Net current period OCI

6,089 

13,125 

(8,286)

1,610 

(360)

Balance as of March 31, 2014

$

77,626 

$

132,434 

$

(19,787)

$

(30,272)

$

(4,749)

For the Three Months Ended March 31, 2015

Securities

Pro rata share of

Interest

available-

nonconsolidated

rate

(Amounts in thousands)

Total

for-sale

subsidiaries' OCI

swap

Other

Balance as of December 31, 2014

$

93,267 

$

133,774 

$

(8,992)

$

(25,803)

$

(5,712)

OCI before reclassifications

(20,658)

(21,332)

157 

(776)

1,293 

Amounts reclassified from AOCI

-   

-   

-   

-   

-   

Net current period OCI

(20,658)

(21,332)

157 

(776)

1,293 

Balance as of March 31, 2015

$

72,609 

$

112,442 

$

(8,835)

$

(26,579)

$

(4,419)

20

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

13.    Variable Interest Entities (“VIEs”)

 

At March 31, 2015 and December 31, 2014, we have unconsolidated VIEs comprised of our investments in the entities that own One Park Avenue, Independence Plaza and the Warner Building.  We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance.  We account for our investment in these entities under the equity method.  As of March 31, 2015 and December 31, 2014, the net carrying amounts of our investment in these entities were $286,876,000 and $286,783,000, respectively, and our maximum exposure to loss in these entities is limited to our investment.  We did not have any consolidated VIEs as of March 31, 2015 and December 31, 2014.   

 

14.    Fair Value Measurements

 

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

 

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

 

Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) marketable securities, (ii) real estate fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units), and (v) an interest rate swap.  The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at March 31, 2015 and December 31, 2014, respectively.

 

As of March 31, 2015

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

184,991 

$

184,991 

$

-   

$

-   

Real estate fund investments (75% of which is attributable to

noncontrolling interests)

554,426 

-   

-   

554,426 

Deferred compensation plan assets (included in other assets)

121,530 

56,694 

-   

64,836 

Total assets

$

860,947 

$

241,685 

$

-   

$

619,262 

Mandatorily redeemable instruments (included in other liabilities)

$

55,097 

$

55,097 

$

-   

$

-   

Interest rate swap (included in other liabilities)

26,574 

-   

26,574 

-   

Total liabilities

$

81,671 

$

55,097 

$

26,574 

$

-   

As of December 31, 2014

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Marketable securities

$

206,323 

$

206,323 

$

-   

$

-   

Real estate fund investments (75% of which is attributable to

noncontrolling interests)

513,973 

-   

-   

513,973 

Deferred compensation plan assets (included in other assets)

117,284 

53,969 

-   

63,315 

Total assets

$

837,580 

$

260,292 

$

-   

$

577,288 

Mandatorily redeemable instruments (included in other liabilities)

$

55,097 

$

55,097 

$

-   

$

-   

Interest rate swap (included in other liabilities)

25,797 

-   

25,797 

-   

Total liabilities

$

80,894 

$

55,097 

$

25,797 

$

-   

 

21

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

14.  Fair Value Measurements – continued

 

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

 

Real Estate Fund Investments

 

At March 31, 2015, we had six investments with an aggregate fair value of $554,426,000, or $169,832,000 in excess of cost.  These investments are classified as Level 3.  We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period.  The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 0.8 to 5.8 years.  Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit.  Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor.  Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods.  Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs. 

 

The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates.  These rates are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from original underwriting assumptions, industry publications and from the experience of our Acquisitions and Capital Markets departments.  Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these real estate fund investments at March 31, 2015 and December 31, 2014.

 

Weighted Average

Range

(based on fair value of investments)

Unobservable Quantitative Input

March 31, 2015

December 31, 2014

March 31, 2015

December 31, 2014

Discount rates

12.0% to 14.5%

12.0% to 17.5%

13.4%

13.7%

Terminal capitalization rates

4.8% to 6.5%

4.7% to 6.5%

5.5%

5.3%

 

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

 

The table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3, for the three months ended March 31, 2015 and 2014.

 

Real Estate Fund Investments

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Beginning balance

$

513,973 

$

667,710 

Purchases

95,000 

123 

Dispositions / Distributions

(72,186)

-   

Net unrealized gains

16,213 

14,169 

Net realized gains

1,426 

-   

Ending balance

$

554,426 

$

682,002 

 

22

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

14.    Fair Value Measurements – continued

 

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

 

Deferred Compensation Plan Assets

 

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

 

The table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3, for the three months ended March 31, 2015 and 2014. 

 

Deferred Compensation Plan Assets

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Beginning balance

$

63,315 

$

68,782 

Purchases

624 

1,644 

Sales

(438)

(5,124)

Realized and unrealized gain

1,335 

2,172 

Other, net

-   

153 

Ending balance

$

64,836 

$

67,627 

                   

 

Fair Value Measurements on a Nonrecurring Basis

 

Assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consist primarily of real estate assets required to be measured for impairment at December 31, 2014.  The fair value of our real estate assets was determined using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity.

 

As of December 31, 2014

(Amounts in thousands)

Total

Level 1

Level 2

Level 3

Real estate assets

$

4,848 

$

-   

$

-   

$

4,848 

 

23

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

14.    Fair Value Measurements – continued

 

Financial Assets and Liabilities not Measured at Fair Value

 

Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), mortgage and mezzanine loans receivable and our secured and unsecured debt.  Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist.  For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument.  The fair value of cash equivalents and borrowings under our revolving credit facility is classified as Level 1, and the fair value of our mortgage and mezzanine loans receivable is classified as Level 3.  The fair value of our secured and unsecured debt are classified as Level 2.  The table below summarizes the carrying amounts and fair value of these financial instruments as of March 31, 2015 and December 31, 2014.

 

As of March 31, 2015

As of December 31, 2014

Carrying

Fair

Carrying

Fair

(Amounts in thousands)

Amount

Value

Amount

Value

Cash equivalents

$

526,218 

$

526,000 

$

749,418 

$

749,000 

Mortgage and mezzanine loans receivable

-   

-   

16,748 

17,000 

$

526,218 

$

526,000 

$

766,166 

$

766,000 

Debt:

Mortgages payable

$

8,316,793 

$

8,334,000 

$

8,263,165 

$

8,224,000 

Senior unsecured notes

847,332 

898,000 

1,347,159 

1,385,000 

Revolving credit facility debt

400,000 

400,000 

-   

-   

$

9,564,125 

$

9,632,000 

$

9,610,324 

$

9,609,000 

 

15.    Incentive Compensation

 

Vornado’s 2010 Omnibus Share Plan (the “Plan”) provides for grants of incentive and non-qualified Vornado stock options, Vornado restricted stock, restricted units and Out-Performance Plan awards to certain of Vornado’s employees and officers.  We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation.  Stock-based compensation expense was $20,142,000 and $11,024,000 in the three months ended March 31, 2015 and 2014, respectively.

24

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

16.    Fee and Other Income

 

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

For the Three Months

(Amounts in thousands)

Ended March 31,

2015 

2014 

BMS cleaning fees

$

22,633 

$

18,956 

Management and leasing fees

4,192 

5,828 

Lease termination fees

3,747 

3,577 

Other income

9,035 

7,579 

$

39,607 

$

35,940 

Management and leasing fees include management fees from Interstate Properties, a related party, of $139,000 and $134,000 for the three months ended March 31, 2015 and 2014, respectively.  The above table excludes fee income from partially owned entities, which is typically included in “(loss) income from partially owned entities” (see Note 7 – Investments in Partially Owned Entities).

 

17.     Interest and Other Investment Income, Net

 

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

 

For the Three Months

(Amounts in thousands)

Ended March 31,

2015 

2014 

Dividends and interest on marketable securities

$

3,203 

$

3,106 

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

2,859 

4,400 

Interest on mezzanine loans receivable

1,674 

2,384 

Other, net

3,056 

1,960 

$

10,792 

$

11,850 

(1)

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

 

18.     Interest and Debt Expense

 

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

 

For the Three Months

(Amounts in thousands)

Ended March 31,

2015 

2014 

Interest expense

$

95,328 

$

105,512 

Amortization of deferred financing costs

7,456 

4,422 

Capitalized interest and debt expense

(11,110)

(13,622)

$

91,674 

$

96,312 

25

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

19.    Income Per Class A Unit

 

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

 

For the Three Months

(Amounts in thousands, except per units amounts)

Ended March 31,

2015 

2014 

Numerator:

Income from continuing operations, net of income attributable to noncontrolling interests

$

93,523 

$

78,111 

Income from discontinued operations, net of income attributable to noncontrolling interests

15,841 

8,466 

Net income attributable to Vornado Realty L.P.

109,364 

86,577 

Preferred unit distributions

(19,496)

(20,380)

Net income attributable to Class A unitholders

89,868 

66,197 

Earnings allocated to unvested participating securities

(749)

(899)

Numerator for diluted income per Class A unit

$

89,119 

$

65,298 

Denominator:

Denominator for basic income per Class A unit – weighted average units

198,675 

197,917 

Effect of dilutive securities(1):

Vornado stock options and restricted unit awards

2,074 

1,437 

Denominator for diluted income per Class A unit – weighted average units

and assumed conversions

200,749 

199,354 

INCOME PER CLASS A UNIT – BASIC:

Income from continuing operations, net

$

0.37 

$

0.29 

Income from discontinued operations, net

0.08 

0.04 

Net income per Class A unit

$

0.45 

$

0.33 

INCOME PER CLASS A UNIT – DILUTED:

Income from continuing operations, net

$

0.36 

$

0.29 

Income from discontinued operations, net

0.08 

0.04 

Net income per Class A unit

$

0.44 

$

0.33 

(1)

The effect of dilutive securities in the three months ended March 31, 2015 and 2014 excludes an aggregate of 76 and 213 weighted average Class A unit equivalents, respectively, as their effect was anti-dilutive.

26

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

20.    Commitments and Contingencies

 

Insurance 

 

We maintain general liability insurance with limits of $300,000,000 per occurrence and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as floods.  Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $180,000,000 annual aggregate. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, and $2.0 billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020.

 

Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for NBCR acts.  Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC.  For NBCR acts, PPIC is responsible for a deductible of $2,480,000 and 15% of the balance of a covered loss (16% effective January 1, 2016) and the Federal government is responsible for the remaining 85% of a covered loss (84% effective January 1, 2016).  We are ultimately responsible for any loss incurred by PPIC.

 

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

 

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

 

 

Other Commitments and Contingencies

 

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

 

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

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of March 31, 2015, the aggregate dollar amount of these guarantees and master leases is approximately $349,000,000.

 

At March 31, 2015, $39,632,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

As of March 31, 2015, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $78,000,000. 

27

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

21.    Segment Information

 

As a result of the spin-off of substantially all of our Retail Properties segment (see Note 8 - Dispositions), the remaining retail properties no longer meet the criteria to be a separate reportable segment.  In addition, as a result of our investment in Toys being reduced to zero, we suspended equity method accounting for our investment in Toys (see Note 7 - Investments in Partially Owned Entities) and the Toys segment no longer meets the criteria to be a separate reportable segment.  Accordingly, effective January 1, 2015, the Retail Properties segment and Toys have been reclassified to the Other segment.  We have also reclassified the prior period segment financial results to conform to the current period presentation.  Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2015 and 2014.  

(Amounts in thousands)

For the Three Months Ended March 31, 2015

Total

New York

Washington, DC

Other

Total revenues

$

606,802 

$

399,513 

$

133,968 

$

73,321 

Total expenses

439,088 

252,760 

92,997 

93,331 

Operating income (loss)

167,714 

146,753 

40,971 

(20,010)

(Loss) income from partially owned entities

(2,405)

(5,663)

131 

3,127 

Income from real estate fund investments

24,089 

-   

-   

24,089 

Interest and other investment income, net

10,792 

1,862 

13 

8,917 

Interest and debt expense

(91,674)

(45,351)

(18,160)

(28,163)

Net gain on disposition of wholly owned and partially

owned assets

1,860 

-   

-   

1,860 

Income (loss) before income taxes

110,376 

97,601 

22,955 

(10,180)

Income tax (expense) benefit

(971)

(943)

674 

(702)

Income (loss) from continuing operations

109,405 

96,658 

23,629 

(10,882)

Income from discontinued operations

15,841 

-   

-   

15,841 

Net income

125,246 

96,658 

23,629 

4,959 

Less net income attributable to noncontrolling interests in

consolidated subsidiaries

(15,882)

(1,506)

-   

(14,376)

Net income (loss) attributable to Vornado Realty L.P.

109,364 

95,152 

23,629 

(9,417)

Interest and debt expense(2)

114,675 

58,667 

21,512 

34,496 

Depreciation and amortization(2)

156,450 

94,124 

40,752 

21,574 

Income tax (benefit) expense (2)

(739)

1,002 

(2,636)

895 

EBITDA(1)

$

379,750 

$

248,945 

(3)

$

83,257 

(4)

$

47,548 

(5)

 

 

(Amounts in thousands)

For the Three Months Ended March 31, 2014

Total

New York

Washington, DC

Other

Total revenues

$

562,381 

$

361,184 

$

135,278 

$

65,919 

Total expenses

417,140 

237,734 

89,572 

89,834 

Operating income (loss)

145,241 

123,450 

45,706 

(23,915)

Income (loss) from partially owned entities

1,979 

1,566 

(1,266)

1,679 

Income from real estate fund investments

18,148 

-   

-   

18,148 

Interest and other investment income, net

11,850 

1,441 

36 

10,373 

Interest and debt expense

(96,312)

(42,839)

(19,347)

(34,126)

Net gain on disposition of wholly owned and partially

owned assets

9,635 

-   

-   

9,635 

Income (loss) before income taxes

90,541 

83,618 

25,129 

(18,206)

Income tax (expense) benefit

(851)

(969)

199 

(81)

Income (loss) from continuing operations

89,690 

82,649 

25,328 

(18,287)

Income from discontinued operations

8,466 

5,867 

-   

2,599 

Net income (loss)

98,156 

88,516 

25,328 

(15,688)

Less net income attributable to noncontrolling interests in

consolidated subsidiaries

(11,579)

(1,405)

-   

(10,174)

Net income (loss) attributable to Vornado Realty L.P.

86,577 

87,111 

25,328 

(25,862)

Interest and debt expense(2)

170,952 

58,068 

22,798 

90,086 

Depreciation and amortization(2)

196,339 

87,587 

36,150 

72,602 

Income tax expense (benefit)(2)

19,831 

1,032 

(189)

18,988 

EBITDA(1)

$

473,699 

$

233,798 

(3)

$

84,087 

(4)

$

155,814 

(5)

See notes on the following page.

 

28

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

21.    Segment Information – continued

Notes to preceding tabular information:

(1)

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

(2)

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

(3)

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

For the Three Months

Ended March 31,

(Amounts in thousands)

2015 

2014 

Office

$

159,359 

$

157,879 

Retail

81,305 

66,195 

Alexander's

10,407 

10,430 

Hotel Pennsylvania

(2,126)

(706)

Total New York

$

248,945 

$

233,798 

(4)

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

For the Three Months

Ended March 31,

(Amounts in thousands)

2015 

2014 

Office, excluding the Skyline Properties

$

67,385 

$

67,257 

Skyline properties

6,055 

6,499 

Total Office

73,440 

73,756 

Residential

9,817 

10,331 

Total Washington, DC

$

83,257 

$

84,087 

 

29

 


 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(UNAUDITED)

 

 

21.    Segment Information – continued

Notes to preceding tabular information - continued:

(5)

The elements of "other" EBITDA are summarized below.

For the Three Months

Ended March 31,

(Amounts in thousands)

2015 

2014 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

1,614 

$

1,982 

Net realized/unrealized gains on investments

5,548 

3,542 

Carried interest

3,388 

1,775 

Total

10,550 

7,299 

The Mart and trade shows

21,041 

19,087 

555 California Street

12,401 

12,066 

India real estate ventures

1,841 

1,824 

Our share of Toys "R" Us(a)

-   

83,550 

Other investments

9,109 

9,447 

54,942 

133,273 

Corporate general and administrative expenses(b)

(35,942)

(25,982)

Investment income and other, net(b)

8,762 

8,073 

Urban Edge Properties and residual retail properties discontinued operations(c)

19,907 

32,100 

Acquisition and transaction related costs

(1,981)

(1,285)

Net gain on sale of residential condominiums and a land parcel

1,860 

9,635 

$

47,548 

$

155,814 

(a)

As a result of our investment being reduced to zero, we suspended equity method accounting in the third quarter of 2014 (see Note 7 - Investments in Partially Owned Entities). The three months ended March 31, 2014 includes an impairment loss of $75,196.

(b)

The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $2,859 and $4,400 for the three months ended March 31, 2015 and 2014, respectively. The three months ended March 31, 2015 include $8,817 from the acceleration of the recognition of compensation expense related to 2013-2015 Out-Performance Plans due to the modification of the vesting criteria of awards such that they will fully vest at age 65. The accelerated expense will result in lower general and administrative expense for the remainder of 2015 of $2,600 and $6,217 thereafter.

(c)

The three months ended March 31, 2015 and 2014, include $22,645 and $499, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls (see Note 1 - Organization).

30

 


 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Partners

Vornado Realty L.P.

New York, New York

 

We have reviewed the accompanying consolidated balance sheet of Vornado Realty L.P. (the “Company”) as of March 31, 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the three-month periods ended March 31, 2015 and 2014.  These interim financial statements are the responsibility of the Company’s management.

 

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

 

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

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vornado Realty L.P. as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 2015, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP

 

Parsippany, New Jersey

May 8, 2015

31

 


 

 

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

 

 

Certain statements contained in this Quarterly Report constitute forward‑looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10‑Q.  We also note the following forward-looking statements:  in the case of our development and redevelopment projects, the estimated completion date, estimated project cost and cost to complete; and estimates of future capital expenditures, and operating partnership distributions.  Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three months ended March 31, 2015.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results for the full year.  Certain prior year balances have been reclassified in order to conform to current year presentation.

32

 


 

 

Overview

 

Business Objective and Operating Strategy

Our business objective is to maximize Vornado shareholder value, which we measure by the total return provided to Vornado’s shareholders. Below is a table comparing Vornado’s performance to the FTSE NAREIT Office REIT Index (“Office REIT”) and the Morgan Stanley REIT Index (“RMS”) for the following periods ended March 31, 2015.

 

Total Return(1)

Vornado

Office REIT

RMS

Three-month

5.6% 

6.7% 

4.7% 

One-year

28.8% 

20.8% 

24.2% 

Three-year

63.3% 

46.2% 

48.8% 

Five-year

93.8% 

74.8% 

109.0% 

Ten-year

165.2% 

109.2% 

151.5% 

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

 

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

 

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

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

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

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

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

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

 

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

 

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

 

33

 


 

 

Overview – continued

 

 

Quarter Ended March 31, 2015 Financial Results Summary

 

Net income attributable to Class A unitholders for the quarter ended March 31, 2015 was $89,868,000, or $0.44 per diluted unit, compared to $66,197,000, or $0.33 per diluted unit for the quarter ended March 31, 2014.  Net income for the quarters ended March 31, 2015 and 2014 include $256,000 and $20,842,000 of real estate impairment losses, respectively.  Net income for the quarter ended March 31, 2015 also includes $10,867,000 of net gains on sale of real estate.  In addition, the quarters ended March 31, 2015 and 2014 include certain other items that affect comparability, which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below increased net income attributable to Class A unitholders for the quarter ended March 31, 2015 by $19,895,000, or $0.10 per diluted unit, and by $17,488,000 or $0.09 per diluted unit for the quarter ended March 31, 2014.

 

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Items that affect comparability income (expense):

Income from discontinued operations (including Urban Edge spin-off related

costs of $22,645 in 2015)

$

5,230 

$

28,133 

Net gain on sale of residential condominiums and a land parcel

1,860 

9,635 

Toys "R" Us net income

1,454 

1,847 

Other, net

740 

(1,285)

Items that affect comparability

$

9,284 

$

38,330 

 

The percentage increase (decrease) in same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)  and cash basis same store EBITDA of our operating segments for the quarter ended March 31, 2015 over the quarter ended March 31, 2014 and the trailing quarter ended December 31, 2014 are summarized below.

Same Store EBITDA:

New York

Washington, DC

March 31, 2015 vs. March 31, 2014

Same store EBITDA

3.2

%

(1)

(0.2

%)

Cash basis same store EBITDA

5.5

%

(1)

(5.5

%)

March 31, 2015 vs. December 31, 2014

Same store EBITDA

(4.3

%)

(2)

2.4

%

Cash basis same store EBITDA

(3.9

%)

(2)

(0.8

%)

__________________________________

(1)

Excluding Hotel Pennsylvania, same store EBITDA increased by 3.8% and by 6.1% on a cash basis.

(2)

Excluding Hotel Pennsylvania, same store EBITDA increased by 1.5% and by 2.6% on a cash basis.

 

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

 

34

 


 

 

Overview – continued

 

2015 Acquisitions

 

On January 20, 2015, we and one of the Fund’s limited partners co-invested with the Fund to buy out the Fund’s joint venture partner’s 57% interest in the Crowne Plaza Times Square Hotel.  The purchase price for the 57% interest was approximately $95,000,000 (our share $39,000,000) which valued the property at approximately $480,000,000.  The property is encumbered by a newly placed $310,000,000 mortgage loan bearing interest at LIBOR plus 2.80% which matures in December 2018 with a one-year extension option.  Our aggregate ownership interest in the property increased to 33% from 11%.

 

On March 18, 2015, we acquired the Center Building, a 437,000 square foot office building, located at 33-00 Northern Boulevard in Long Island City, New York, for $142,000,000, including the assumption of an existing $62,000,000, 4.43% mortgage maturing in October 2018.

 

As of March 31, 2015, we have made a $25,000,000 non-refundable deposit related to an agreement to acquire a property in the Penn Plaza submarket in Manhattan for $355,000,000.

 

On April 8, 2015, we made an $11,000,000 refundable contribution to a joint venture, in which we will have a 55% interest.  The joint venture plans to develop a 173,000 square foot Class-A office building, located on the western side of the High Line at 510 West 22nd Street.

 

 

 

2015 Dispositions

 

On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to Urban Edge Properties (“UE”) (NYSE: UE).  As part of this transaction, we retained 5,717,184 UE operating partnership units (5.4% ownership interest).  We are providing transition services to UE for an initial period of up to two years, including information technology, human resources, tax and financial reporting. UE is providing us with leasing and property management services for (i) the Monmouth Mall, (ii) certain small retail properties that we plan to sell, and (iii) our affiliate, Alexander’s, Inc. (NYSE: ALX), Rego Park retail assets. Steven Roth, Chairman of Vornado’s Board of Trustees and its Chief Executive Officer is a member of the Board of Trustees of UE.  The spin-off distribution was effected by Vornado distributing one UE common share for every two Vornado common shares.

 

On March 13, 2015, we sold our lease position in Geary Street, CA for $34,189,000, which resulted in a net gain of $21,376,000.

 

On March 25, 2015, the Fund completed the sale of 520 Broadway in Santa Monica, CA for $91,650,000.  The Fund realized a $24,705,000 net gain over the holding period.

 

On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT Associates, L.P., which is the operating partnership of Pennsylvania Real Estate Investment Trust (NYSE: PEI) (collectively, “PREIT”).  The financial statement gain was $7,823,000, of which $7,192,000 was recognized in the first quarter of 2015 and the remaining $631,000 was deferred based on our ownership interest in PREIT.  In the first quarter of 2014, we recorded a non-cash impairment loss of $20,000,000 on Springfield Town Center which is included in “income from discontinued operations” on our consolidated statements of income.

 

During the first quarter of 2015, we sold five residual retail properties, in separate transactions, for an aggregate of $10,731,000, which resulted in net gains of $3,675,000.           

 

 

 

 

 

 

 

 

 

 

 

 

 

35

 


 

 

 

Overview – continued

 

2015 Financings

 

On January 1, 2015, we redeemed all of the $500,000,000 principal amount of our outstanding 4.25% senior unsecured notes, which were scheduled to mature on April 1, 2015, at a redemption price of 100% of the principal amount plus accrued interest through December 31, 2014.

 

On April 1, 2015, we completed a $308,000,000 refinancing of RiverHouse Apartments, a three building, 1,670 unit rental complex located in Arlington, VA.  The loan is interest-only at LIBOR plus 1.28% and matures in 2025.  We realized net proceeds of approximately $43,000,000.  The property was previously encumbered by a 5.43%, $195,000,000 mortgage maturing in April 2015 and a $64,000,000 mortgage at LIBOR plus 1.53% maturing in 2018. 

 

Recently Issued Accounting Literature

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-08”) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to ASC Topic 205, Presentation of Financial Statements and ASC Topic 360, Property Plant and Equipment. Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for interim and annual reporting periods in fiscal years that began after December 15, 2014. Upon adoption of this standard on January 1, 2015, individual properties sold in the ordinary course of business are not expected to qualify as discontinued operations. The financial results of UE and certain other retail assets are reflected in our consolidated financial statements as discontinued operations for all periods presented.

 

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

 

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

 

In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation.  ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities.  Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities.  ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015.  We are currently evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements. 

 

In April 2015, the FASB issued an update (“ASU 2015-03”) Simplifying the Presentation of Debt Issuance Costs to ASC Topic 835, Interest.  ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets.  ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.  The adoption of this update on January 1, 2016 will not have a material impact on our consolidated financial statements.

 

Critical Accounting Policies

 

A summary of our critical accounting policies is included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014 in Management’s Discussion and Analysis of Financial Condition. There have been no significant changes to our policies during 2015.

36

 


 

 

Overview - continued

 

Leasing Activity:

 

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

 

New York

Washington, DC

 

(Square feet in thousands)

Office

Retail

Office

 

 

Quarter Ended March 31, 2015

 

Total square feet leased

553 

754 

 

Our share of square feet leased:

417 

696 

 

Initial rent (1)

$

77.85 

$

362.96 

$

35.06 

 

Weighted average lease term (years)

8.7 

12.2 

11.1 

 

Second generation relet space:

 

Square feet

263 

505 

 

Cash basis:

 

Initial rent (1)

$

74.67 

$

302.30 

$

33.30 

(3)

 

Prior escalated rent

$

63.78 

$

258.75 

$

40.39 

(3)

 

Percentage increase (decrease)

17.1% 

16.8% 

(17.6%)

(3)

 

GAAP basis:

 

Straight-line rent (2)

$

71.14 

$

330.95 

$

31.13 

(3)

 

Prior straight-line rent

$

60.16 

$

241.36 

$

37.51 

(3)

 

Percentage increase (decrease)

18.2% 

37.1% 

(17.0%)

(3)

 

Tenant improvements and leasing commissions:

 

Per square foot

$

74.72 

$

296.70 

$

84.37 

 

Per square foot per annum

$

8.59 

$

24.32 

$

7.60 

 

Percentage of initial rent

11.0% 

6.7% 

21.7% 

 

 

(1)

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

(2)

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

(3)

Excluding 371 square feet of leasing activity with the U.S. Marshals Service (of which 293 square feet are second generation relet space), our initial rent and prior escalated rent on a cash basis was $35.11 and $35.26 per square foot, respectively (0.4% decrease), and our initial rent and prior escalated rent on a GAAP basis was $32.72 and $33.77 per square foot, respectively (3.1% decrease).

                                                                         

 

37

 


 

 

Overview - continued

 

Square footage (in service) and Occupancy as of March 31, 2015:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

Properties

Portfolio

Share

Occupancy %

New York:

Office

32 

20,695 

17,363 

97.3%

Retail

57 

2,474 

2,201 

96.0%

Alexander's

2,178 

706 

99.7%

Hotel Pennsylvania

1,400 

1,400 

Residential - 1,654 units

1,521 

761 

96.1%

28,268 

22,431 

97.3%

Washington, DC:

Office, excluding the Skyline Properties

51 

13,457 

11,083 

88.2%

Skyline Properties

2,648 

2,648 

53.4%

Total Office

59 

16,105 

13,731 

81.5%

Residential - 2,414 units

2,597 

2,455 

97.1%

Other

384 

384 

100.0%

19,086 

16,570 

84.2%

Other:

The Mart

3,587 

3,578 

94.5%

555 California Street

1,802 

1,261 

97.5%

85 Tenth Avenue(1)

614 

306 

100.0%

Other Properties

2,135 

1,174 

96.6%

8,138 

6,319 

Total square feet at March 31, 2015

55,492 

45,320 

(1)

As of March 31, 2015, we own junior and senior mezzanine loans of 85 Tenth Avenue with an accreted balance of $151.4 million. The junior and senior mezzanine loans bear paid-in-kind interest of 12% and 9%, respectively and mature in May 2017. We account for our investment in 85 Tenth Avenue using the equity method of accounting because we will receive a 49.9% interest in the property after repayment of the junior mezzanine loan. As a result of recording our share of the GAAP losses of the property, the net carrying amount of these loans is $26.2 million on our consolidated balance sheets.

 

38

 


 

 

Overview - continued

Square footage (in service) and Occupancy as of December 31, 2014:

Square Feet (in service)

Number of

Total

Our

(Square feet in thousands)

properties

Portfolio

Share

Occupancy %

New York:

Office

31 

20,052 

16,808 

96.9%

Retail

56 

2,450 

2,179 

96.4%

Alexander's

2,178 

706 

99.7%

Hotel Pennsylvania

1,400 

1,400 

Residential - 1,654 units

1,524 

763 

95.2%

27,604 

21,856 

96.9%

Washington, DC:

Office, excluding the Skyline Properties

51 

13,461 

11,083 

87.5%

Skyline Properties

2,648 

2,648 

53.5%

Total Office

59 

16,109 

13,731 

80.9%

Residential - 2,414 units

2,597 

2,455 

97.4%

Other

384 

384 

100.0%

19,090 

16,570 

83.8%

Other:

The Mart

3,587 

3,578 

94.7%

555 California Street

1,801 

1,261 

97.6%

85 Tenth Avenue(1)

613 

306 

100.0%

Other Properties

2,135 

1,174 

96.8%

8,136 

6,319 

Total square feet at December 31, 2014

54,830 

44,745 

(1)

As of December 31, 2014, we own junior and senior mezzanine loans of 85 Tenth Avenue with an accreted balance of $147.6 million. The junior and senior mezzanine loans bear paid-in-kind interest of 12% and 9%, respectively and mature in May 2017. We account for our investment in 85 Tenth Avenue using the equity method of accounting because we will receive a 49.9% interest in the property after repayment of the junior mezzanine loan. As a result of recording our share of the GAAP losses of the property, the net carrying amount of these loans is $28.2 million on our consolidated balance sheets.

 

39

 


 

 

Overview - continued

 

 

Washington, DC Segment

 

We expect 2015 EBITDA from continuing operations will be flat to 2014 EBITDA.  Of the 2,395,000 square feet subject to the effects of the Base Realignment and Closure (“BRAC”) statute, 393,000 square feet has been taken out of service for redevelopment and 1,260,000 square feet has been leased or is pending.  The table below summarizes the status of the BRAC space as of March 31, 2015.

 

Rent Per

Square Feet

Square Foot

Total

Crystal City

Skyline

Rosslyn

Resolved:

Relet as of March 31, 2015

$

37.14 

1,133,000 

671,000 

381,000 

81,000 

Leases pending

43.02 

127,000 

124,000 

-   

3,000 

Taken out of service for redevelopment

393,000 

393,000 

-   

-   

1,653,000 

1,188,000 

381,000 

84,000 

To Be Resolved:

Vacated as of March 31, 2015

35.42 

693,000 

204,000 

425,000 

64,000 

Expiring in 2015

42.98 

49,000 

44,000 

5,000 

-   

742,000 

248,000 

430,000 

64,000 

Total square feet subject to BRAC

2,395,000 

1,436,000 

811,000 

148,000 

40

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended March 31, 2015 and 2014

Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended March 31, 2015 and 2014.

(Amounts in thousands)

For the Three Months Ended March 31, 2015

Total

New York

Washington, DC

Other

Total revenues

$

606,802 

$

399,513 

$

133,968 

$

73,321 

Total expenses

439,088 

252,760 

92,997 

93,331 

Operating income (loss)

167,714 

146,753 

40,971 

(20,010)

(Loss) income from partially owned entities

(2,405)

(5,663)

131 

3,127 

Income from real estate fund investments

24,089 

-   

-   

24,089 

Interest and other investment income, net

10,792 

1,862 

13 

8,917 

Interest and debt expense

(91,674)

(45,351)

(18,160)

(28,163)

Net gain on disposition of wholly owned and partially

owned assets

1,860 

-   

-   

1,860 

Income (loss) before income taxes

110,376 

97,601 

22,955 

(10,180)

Income tax (expense) benefit

(971)

(943)

674 

(702)

Income (loss) from continuing operations

109,405 

96,658 

23,629 

(10,882)

Income from discontinued operations

15,841 

-   

-   

15,841 

Net income

125,246 

96,658 

23,629 

4,959 

Less net income attributable to noncontrolling interests in

consolidated subsidiaries

(15,882)

(1,506)

-   

(14,376)

Net income (loss) attributable to Vornado Realty L.P.

109,364 

95,152 

23,629 

(9,417)

Interest and debt expense(2)

114,675 

58,667 

21,512 

34,496 

Depreciation and amortization(2)

156,450 

94,124 

40,752 

21,574 

Income tax (benefit) expense (2)

(739)

1,002 

(2,636)

895 

EBITDA(1)

$

379,750 

$

248,945 

(3)

$

83,257 

(4)

$

47,548 

(5)

 

(Amounts in thousands)

For the Three Months Ended March 31, 2014

Total

New York

Washington, DC

Other

Total revenues

$

562,381 

$

361,184 

$

135,278 

$

65,919 

Total expenses

417,140 

237,734 

89,572 

89,834 

Operating income (loss)

145,241 

123,450 

45,706 

(23,915)

Income (loss) from partially owned entities

1,979 

1,566 

(1,266)

1,679 

Income from real estate fund investments

18,148 

-   

-   

18,148 

Interest and other investment income, net

11,850 

1,441 

36 

10,373 

Interest and debt expense

(96,312)

(42,839)

(19,347)

(34,126)

Net gain on disposition of wholly owned and partially

owned assets

9,635 

-   

-   

9,635 

Income (loss) before income taxes

90,541 

83,618 

25,129 

(18,206)

Income tax (expense) benefit

(851)

(969)

199 

(81)

Income (loss) from continuing operations

89,690 

82,649 

25,328 

(18,287)

Income from discontinued operations

8,466 

5,867 

-   

2,599 

Net income (loss)

98,156 

88,516 

25,328 

(15,688)

Less net income attributable to noncontrolling interests in

consolidated subsidiaries

(11,579)

(1,405)

-   

(10,174)

Net income (loss) attributable to Vornado Realty L.P.

86,577 

87,111 

25,328 

(25,862)

Interest and debt expense(2)

170,952 

58,068 

22,798 

90,086 

Depreciation and amortization(2)

196,339 

87,587 

36,150 

72,602 

Income tax expense (benefit)(2)

19,831 

1,032 

(189)

18,988 

EBITDA(1)

$

473,699 

$

233,798 

(3)

$

84,087 

(4)

$

155,814 

(5)

_____________________________

See notes on the following page.

 

41

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended March 31, 2015 and 2014 - continued

 

Notes to preceding tabular information:

(1)

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

(2)

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

(3)

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

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Office

$

159,359 

$

157,879 

Retail

81,305 

66,195 

Alexander's

10,407 

10,430 

Hotel Pennsylvania

(2,126)

(706)

Total New York

$

248,945 

$

233,798 

(4)

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

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Office, excluding the Skyline Properties

$

67,385 

$

67,257 

Skyline properties

6,055 

6,499 

Total Office

73,440 

73,756 

Residential

9,817 

10,331 

Total Washington, DC

$

83,257 

$

84,087 

 

42

 


 

 

Net Income and EBITDA by Segment for the Three Months Ended March 31, 2015 and 2014 - continued

 

Notes to preceding tabular information - continued:

(5)

The elements of "other" EBITDA are summarized below.

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Our share of Real Estate Fund:

Income before net realized/unrealized gains

$

1,614 

$

1,982 

Net realized/unrealized gains on investments

5,548 

3,542 

Carried interest

3,388 

1,775 

Total

10,550 

7,299 

The Mart and trade shows

21,041 

19,087 

555 California Street

12,401 

12,066 

India real estate ventures

1,841 

1,824 

Our share of Toys "R" Us(a)

-   

83,550 

Other investments

9,109 

9,447 

54,942 

133,273 

Corporate general and administrative expenses(b)

(35,942)

(25,982)

Investment income and other, net(b)

8,762 

8,073 

Urban Edge Properties and residual retail properties discontinued operations(c)

19,907 

32,100 

Acquisition and transaction related costs

(1,981)

(1,285)

Net gain on sale of residential condominiums and a land parcel

1,860 

9,635 

$

47,548 

$

155,814 

(a)

As a result of our investment being reduced to zero, we suspended equity method accounting in the third quarter of 2014. The three months ended March 31, 2014 includes an impairment loss of $75,196.

(b)

The amounts in these captions (for this table only) exclude income/expense from the mark-to-market of our deferred compensation plan of $2,859 and $4,400 for the three months ended March 31, 2015 and 2014, respectively. The three months ended March 31, 2015 include $8,817 from the acceleration of the recognition of compensation expense related to 2013-2015 Out-Performance Plans due to the modification of the vesting criteria of awards such that they will fully vest at age 65. The accelerated expense will result in lower general and administrative expense for the remainder of 2015 of $2,600 and $6,217 thereafter.

(c)

The three months ended March 31, 2015 and 2014, include $22,645 and $499, respectively, of transaction costs related to the spin-off of our strip shopping centers and malls.

 

EBITDA by Region

 

Below is a summary of the percentages of EBITDA by geographic region, excluding discontinued operations and other items that affect comparability.

 

For the Three Months

Ended March 31,

2015 

2014 

Region:

New York City metropolitan area

68%

66%

Washington, DC / Northern Virginia metropolitan area

23%

25%

Chicago, IL

6%

5%

San Francisco, CA

3%

4%

100%

100%

43

 


 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014

 

 

Revenues

Our revenues, which consist primarily of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $606,802,000 for the three months ended March 31, 2015, compared to $562,381,000 in the prior year’s three months, an increase of $44,421,000.  Below are the details of the increase (decrease) by segment:

 

(Amounts in thousands)

Increase (decrease) due to:

Total

New York

Washington, DC

Other

Property rentals:

Acquisitions and other

$

8,031 

$

7,145 

$

886 

$

-   

Properties placed into (taken out of) service

for redevelopment

10,441 

10,543 

(679)

577 

Hotel Pennsylvania

(1,126)

(1,126)

-   

-   

Trade Shows

2,945 

-   

-   

2,945 

Same store operations

12,843 

10,110 

815 

1,918 

33,134 

26,672 

1,022 

5,440 

Tenant expense reimbursements:

Acquisitions and other

206 

206 

-   

-   

Properties placed into (taken out of) service

for redevelopment

828 

795 

38 

(5)

Same store operations

6,586 

4,607 

(104)

2,083 

7,620 

5,608 

(66)

2,078 

Fee and other income:

BMS cleaning fees

3,677 

3,345 

-   

332 

(1)

Management and leasing fees

(1,636)

(1,617)

60 

(79)

Lease termination fees

170 

2,704 

(2,367)

(167)

Other income (loss)

1,456 

1,617 

41 

(202)

3,667 

6,049 

(2,266)

(116)

Total increase (decrease) in revenues

$

44,421 

$

38,329 

$

(1,310)

$

7,402 

(1)

Represents the change in the elimination of intercompany fees from operating segments upon consolidation. See note (2) on page 45.

 

44

 


 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014 - continued

 

 

Expenses

Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $439,088,000 for the three months ended March 31, 2015, compared to $417,140,000 in the prior year’s three months, an increase of $21,948,000.  Below are the details of the increase by segment:

 

(Amounts in thousands)

Increase (decrease) due to:

Total

New York

Washington, DC

Other

Operating:

Acquisitions and other

$

689 

$

698 

$

(9)

$

-   

Properties placed into (taken out of) service

for redevelopment

4,519 

3,430 

(23)

1,112 

Non-reimbursable expenses, including bad debt reserves

555 

-   

-   

555 

Hotel Pennsylvania

375 

375 

-   

-   

Trade Shows

1,202 

-   

-   

1,202 

BMS expenses

3,474 

3,091 

-   

383 

(2)

Same store operations

7,118 

5,481 

571 

1,066 

17,932 

13,075 

539 

4,318 

Depreciation and amortization:

Acquisitions and other

5,202 

5,202 

-   

-   

Properties taken out of service

for redevelopment

(19,077)

(11,313)

(206)

(7,558)

Same store operations

6,205 

3,810 

4,835 

(2,440)

(7,670)

(2,301)

4,629 

(9,998)

General and administrative:

Mark-to-market of deferred compensation plan liability (1)

(1,541)

-   

-   

(1,541)

Severance costs (primarily reduction in force at the Mart)

(120)

-   

-   

(120)

Same store operations

12,651 

(3)

4,252 

(1,743)

10,142 

10,990 

4,252 

(1,743)

8,481 

Acquisition and transaction related costs

696 

-   

-   

696 

Total increase in expenses

$

21,948 

$

15,026 

$

3,425 

$

3,497 

(1)

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

(2)

Represents the change in the elimination of intercompany fees from operating segments upon consolidation. See note (1) on page 44.

(3)

Results primarily from the acceleration of the recognition of compensation expense of $11,065 related to 2013-2015 Out-Performance Plans due to the modification of the vesting criteria of awards such that they fully vest at age 65. The accelerated expense will result in lower general and administrative expense during the remainder of 2015 of $3,231 and $7,834 thereafter.

 

45

 


 
 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014 - continued

 

 

(Loss) Income from Partially Owned Entities

Summarized below are the components of (loss) income from partially owned entities for the three months ended March 31, 2015 and 2014.

Percentage

For the Three Months Ended

Ownership at

March 31,

(Amounts in thousands)

March 31, 2015

2015 

2014 

Equity in Net (Loss) Income:

Partially owned office buildings (1)

Various

$

(9,296)

$

(2,395)

Alexander's

32.4%

7,691 

6,385 

Toys (2)

32.6%

1,454 

1,847 

Urban Edge (3)

5.4%

584 

-   

India real estate ventures

4.1%-36.5%

(109)

(137)

Other investments (4)

Various

(2,729)

(3,721)

$

(2,405)

$

1,979 

(1)

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

(2)

In the three months ended March 31, 2015, we recognized net income of $1,454 from our investment in Toys, representing management fees earned and received, compared to $1,847 for the three months ended March 31, 2014. In the three months ended March 31, 2014, we recognized our share of the equity in earnings of Toys’ fourth quarter totaling $75,196 and a corresponding non-cash impairment loss of the same amount.

(3)

Represents fees earned pursuant to our transition services agreement with UE.

(4)

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

 

Income from Real Estate Fund Investments

 

Below are the components of the income from our real estate fund investments for the three months ended March 31, 2015 and 2014.

(Amounts in thousands)

For the Three Months Ended March 31,

2015 

2014 

Net investment income

$

6,450 

$

3,979 

Net realized gains on exited investments

24,705 

Previously recorded unrealized gains on exited investments

(23,279)

Net unrealized gains on held investments

16,213 

14,169 

Income from real estate fund investments

24,089 

18,148 

Less income attributable to noncontrolling interests

(13,539)

(10,849)

Income from real estate fund investments attributable to Vornado Realty L.P. (1)

$

10,550 

$

7,299 

___________________________________

(1)

Excludes property management, leasing and development fees of $704 and $618 for the three months ended March 31, 2015 and 2014, respectively, which are included as a component of "fee and other income" on our consolidated statements of income.

                   

 

46

 


 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014 - continued

 

 

Interest and Other Investment Income, net

 

Interest and other investment income, net was $10,792,000 in the three months ended March 31, 2015, compared to $11,850,000 in the prior year’s three months, a decrease of $1,058,000. This decrease resulted primarily from a lower increase in the value of investments in our deferred compensation plan (offset by a corresponding increase in the liability for plan assets in general and administrative expenses). 

 

Interest and Debt Expense

 

Interest and debt expense was $91,674,000 in the three months ended March 31, 2015, compared to $96,312,000 in the prior year’s three months, a decrease of $4,638,000.  This decrease was primarily due to (i) $9,130,000 of interest savings from the redemption of the $445,000,000 principal amount of the outstanding 7.875% senior unsecured notes during the fourth quarter of 2014, (ii) $5,313,000 of interest savings from the redemption of the $500,000,000 principal amount of the outstanding 4.25% senior unsecured notes on January 1, 2015, partially offset by (iii) $2,898,000 of interest expense from the issuance of $450,000,000 of senior unsecured notes in June 2014, and (iv) $6,907,000 of higher deferred financing costs amortization and other.

 

 

Net Gain on Disposition of Wholly Owned and Partially Owned Assets

 

In the three months ended March 31, 2015, we recognized a $1,860,000 net gain on disposition of wholly owned and partially owned assets, primarily from the sale of residential condominiums, compared to $9,635,000 in the prior year’s three months composed of the sale of a land parcel and residential condominiums. 

 

 

Income Tax Expense

 

Income tax expense related to our taxable REIT subsidiaries was $971,000 in the three months ended March 31, 2015, compared to $851,000 in the prior year’s three months, an increase of $120,000.

 

47

 


 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014 - continued

 

 

Income from Discontinued Operations

The table below sets forth the combined results of assets related to discontinued operations for the three months ended March 31, 2015 and 2014.

For the Three Months Ended March 31,

(Amounts in thousands)

2015 

2014 

Total revenues

$

19,958 

$

106,563 

Total expenses

13,373 

76,025 

6,585 

30,538 

Net gain on sale of lease position in Geary Street, CA

21,376 

-   

Net gains on sale of real estate

10,867 

-   

Transaction related costs

(22,645)

(499)

Impairment losses

(256)

(20,842)

Pretax income from discontinued operations

15,927 

9,197 

Income tax expense

(86)

(731)

Income from discontinued operations

$

15,841 

$

8,466 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries

 

Net income attributable to noncontrolling interests in consolidated subsidiaries was $15,882,000 in the three months ended March 31, 2015, compared to $11,579,000 in the prior year’s three months, an increase of $4,303,000.  This increase resulted primarily from higher net income allocated to the noncontrolling interests, including noncontrolling interests of our Real Estate Fund.

 

Preferred Unit Distributions

 

Preferred unit distributions were $19,496,000 in the three months ended March 31, 2015, compared to $20,380,000 in the prior year’s three months, a decrease of $884,000.  

 

48

 


 
 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014 - continued

 

 

Same Store EBITDA

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

 

Below are reconciliations of EBITDA to same store EBITDA for each of our segments for the three months ended March 31, 2015, compared to three months ended March 31, 2014.

 

(Amounts in thousands)

New York

Washington, DC

EBITDA for the three months ended March 31, 2015

$

248,945 

$

83,257 

Add-back:

Non-property level overhead expenses included above

12,044 

5,704 

Less EBITDA from:

Acquisitions

(7,930)

-   

Dispositions, including net gains on sale

35 

(59)

Properties taken out-of-service for redevelopment

(13,374)

(82)

Other non-operating income

(4,008)

(129)

Same store EBITDA for the three months ended March 31, 2015

$

235,712 

$

88,691 

EBITDA for the three months ended March 31, 2014

$

233,798 

$

84,087 

Add-back:

Non-property level overhead expenses included above

7,792 

7,447 

Less EBITDA from:

Acquisitions

-   

-   

Dispositions, including net gains on sale

(6,102)

Properties taken out-of-service for redevelopment

(5,559)

(857)

Other non-operating income

(1,532)

(1,804)

Same store EBITDA for the three months ended March 31, 2014

$

228,397 

$

88,875 

Increase (decrease) in same store EBITDA -

Three months ended March 31, 2015 vs. March 31, 2014(1)

$

7,315 

$

(184)

% increase (decrease) in same store EBITDA

3.2% 

(0.2%)

(1)     See notes on following page.

 

49

 


 

 

Results of Operations – Three Months Ended March 31, 2015 Compared to March 31, 2014 - continued

 

 

Notes to preceding tabular information

 

 

New York:

 

The $7,315,000 increase in New York same store EBITDA resulted primarily from increases in Office and Retail of $2,261,000 and $6,470,000, respectively.  The Office and Retail increases resulted primarily from higher (i) rental revenue of $10,110,000 (primarily due to an increase in average rents per square foot), and (ii) cleaning fees of $3,345,000, partially offset by (iii) higher operating expenses, net of reimbursements.

 

 

Washington, DC:

 

The $184,000 decrease in Washington, DC same store EBITDA resulted primarily from (i) higher operating expenses of $571,000, and (ii) lower EBITDA from investments in partially owned entities of $585,000, partially offset by (iii) higher rental revenue of $815,000.

 

 

Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA

 

 

(Amounts in thousands)

New York

Washington, DC

Same store EBITDA for the three months ended March 31, 2015

$

235,712 

$

88,691 

Less: Adjustments for straight line rents, amortization of acquired

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

(24,900)

(5,876)

Cash basis same store EBITDA for the three months ended

March 31, 2015

$

210,812 

$

82,815 

Same store EBITDA for the three months ended March 31, 2014

$

228,397 

$

88,875 

Less: Adjustments for straight line rents, amortization of acquired

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

(28,557)

(1,194)

Cash basis same store EBITDA for the three months ended

March 31, 2014

$

199,840 

$

87,681 

Increase (decrease) in cash basis same store EBITDA -

Three months ended March 31, 2015 vs. March 31, 2014

$

10,972 

$

(4,866)

% increase (decrease) in cash basis same store EBITDA

5.5% 

(5.5%)

50

 


 

 

SUPPLEMENTAL INFORMATION

 

Reconciliation of Net Income to EBITDA for the Three Months Ended December 31, 2014

 

(Amounts in thousands)

New York

Washington, DC

Net income attributable to Vornado Realty L.P. for the three months ended December 31, 2014

$

557,145 

$

23,225 

Interest and debt expense

61,809 

21,979 

Depreciation and amortization

83,199 

37,486 

Income tax expense

1,326 

200 

EBITDA for the three months ended December 31, 2014

$

703,479 

$

82,890 

                     

 

 

Reconciliation of EBITDA to Same Store EBITDA – Three Months Ended March 31, 2015 compared to December 31, 2014

 

(Amounts in thousands)

New York

Washington, DC

EBITDA for the three months ended March 31, 2015

$

248,945 

$

83,257 

Add-back:

Non-property level overhead expenses included above

12,044 

5,704 

Less EBITDA from:

Acquisitions

(6,329)

-   

Dispositions, including net gains on sale

35 

(59)

Properties taken out-of-service for redevelopment

(13,374)

(82)

Other non-operating income

(4,008)

(129)

Same store EBITDA for the three months ended March 31, 2015

$

237,313 

$

88,691 

EBITDA for the three months ended December 31, 2014

$

703,479 

$

82,890 

Add-back:

Non-property level overhead expenses included above

6,055 

6,866 

Less EBITDA from:

Acquisitions

(4,264)

-   

Dispositions, including net gains on sale

(446,020)

(1,785)

Properties taken out-of-service for redevelopment

(8,926)

(47)

Other non-operating income

(2,467)

(1,336)

Same store EBITDA for the three months ended December 31, 2014

$

247,857 

$

86,588 

(Decrease) increase in same store EBITDA -

Three months ended March 31, 2015 vs. December 31, 2014

$

(10,544)

$

2,103 

% (decrease) increase in same store EBITDA

(4.3%)

2.4% 

 

51

 


 

 

SUPPLEMENTAL INFORMATION – CONTINUED

 

Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA – Three Months Ended March 31, 2015 Compared to December 31, 2014

 

 

(Amounts in thousands)

New York

Washington, DC

Same store EBITDA for the three months ended March 31, 2015

$

237,313 

$

88,691 

Less: Adjustments for straight line rents, amortization of acquired

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

(25,255)

(5,876)

Cash basis same store EBITDA for the three months ended

March 31, 2015

$

212,058 

$

82,815 

Same store EBITDA for the three months ended December 31, 2014

$

247,857 

$

86,588 

Less: Adjustments for straight line rents, amortization of acquired

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

(27,225)

(3,142)

Cash basis same store EBITDA for the three months ended

December 31, 2014

$

220,632 

$

83,446 

Decrease in cash basis same store EBITDA -

Three months ended March 31, 2015 vs. December 31, 2014

$

(8,574)

$

(631)

% decrease in cash basis same store EBITDA

(3.9%)

(0.8%)

52

 


 

 

Liquidity and Capital Resources

 

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

 

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

 

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

 

 

Cash Flows for the Three Months Ended March 31, 2015

Our cash and cash equivalents were $1,067,568,000 at March 31, 2015, a $130,909,000 decrease over the balance at December 31, 2014.  Our consolidated outstanding debt was $9,564,125,000 at March 31, 2015, a $46,199,000 decrease over the balance at December 31, 2014.  As of March 31, 2015 and December 31, 2014, $400,000,000 and $0, respectively, was outstanding under our revolving credit facilities.  During the remainder of 2014 and 2015, $229,132,000 and $1,410,209,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.

 

Cash flows provided by operating activities of $194,516,000 was comprised of (i) net income of $125,246,000, (ii) return of capital from real estate fund investments of $72,208,000, (iii) $55,668,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, loss from partially owned entities and impairment losses on real estate, and (iv) distributions of income from partially owned entities of $15,874,000, partially offset by (v) the net change in operating assets and liabilities of $74,480,000 (including the acquisition of real estate fund investments of $95,022,000).

 

Net cash provided by investing activities of $149,871,000 was comprised of (i) $334,725,000 of proceeds from sales of real estate and related investments, (ii) $16,763,000 of proceeds from repayments of mortgage and mezzanine loans receivable and other, (iii) $13,409,000 of capital distributions from partially owned entities, and  (iv) $1,282,000 of changes in restricted cash, partially offset by (v) $88,052,000 of development costs and construction in progress, (vi) $54,466,000 of additions to real estate, (vii) $49,878,000 of acquisitions of real estate and other, and (viii) $23,912,000 of investments in partially owned entities.

 

Net cash used in financing activities of $475,296,000 was comprised of (i) $907,431,000 for the repayments of borrowings, (ii) $225,000,000 of distributions in connection with the spin-off of Urban Edge Properties, (iii) $118,447,000 of distributions to Vornado, (iv) $60,287,000 of distributions to redeemable security holders and noncontrolling interests, (v) $19,484,000 of distributions to preferred unitholders, (vi) $5,076,000 of debt issuance cost, and (vii) $2,939,000 for the repurchase of Class A units related to stock compensation agreements and/or related tax withholdings, partially offset by (viii) $800,000,000 of proceeds from borrowings, (ix) $51,350,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (x) $12,018,000 of proceeds received from the exercise of Vornado stock options.

 

 

Capital Expenditures

 

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

 

53

 


 

 

Liquidity and Capital Resources – continued

 

 

Capital Expenditures - continued

 

Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the three months ended March 31, 2015.

(Amounts in thousands)

Total

New York

Washington, DC

Other

Expenditures to maintain assets

$

20,935 

$

12,810 

$

1,986 

$

6,139 

Tenant improvements

50,900 

9,762 

37,011 

4,127 

Leasing commissions

8,281 

3,744 

3,748 

789 

Non-recurring capital expenditures

35,987 

19,774 

16,129 

84 

Total capital expenditures and leasing commissions (accrual basis)

116,103 

46,090 

58,874 

11,139 

Adjustments to reconcile to cash basis:

Expenditures in the current year applicable to prior periods

40,209 

26,220 

6,924 

7,065 

Expenditures to be made in future periods for the current period

(88,136)

(28,594)

(54,612)

(4,930)

Total capital expenditures and leasing commissions (cash basis)

$

68,176 

$

43,716 

$

11,186 

$

13,274 

Tenant improvements and leasing commissions:

Per square foot per annum

$

8.04 

$

8.95 

$

7.60 

$

n/a

Percentage of initial rent

15.2%

10.8%

21.7%

n/a

 

Development and Redevelopment Expenditures

 

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

 

We are in the process of redeveloping the retail space at the Marriott Marquis Times Square Hotel, including converting the below grade parking garage into retail, which is expected to be completed by the end of 2015.  The retail space includes 20,000 square feet on grade and 24,000 square feet below grade.  As part of the redevelopment, we have completed the construction of a six-story, 300 foot wide block front, dynamic LED sign, which was lit for the first time in November 2014.  The incremental development cost of this project is approximately $220,000,000, of which $179,000,000 has been expended as of March 31, 2015.

 

We are constructing a residential condominium tower containing 472,000 zoning square feet on our 220 Central Park South development site.  The incremental development cost of this project is approximately $1.0 billion, of which $130,000,000 has been expended as of March 31, 2015.  In January 2014, we completed a $600,000,000 loan secured by this site.  On August 26, 2014, we obtained a standby commitment for up to $500,000,000 of five-year mezzanine loan financing to fund a portion of the development expenditures at 220 Central Park South.

 

We are developing The Bartlett, a 699-unit residential project in Pentagon City, which is expected to be completed in 2016.  The project will include a 37,000 square foot Whole Foods Market at the base of the building.  The incremental development cost of this project is approximately $250,000,000, of which $67,000,000 has been expended as of March 31, 2015.

 

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

 

We have substantially completed the repositioning of 280 Park Avenue (50% owned). Our share of the incremental development costs of this project is approximately $63,000,000, of which $59,000,000 was expended as of March 31, 2015.

 

We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including the Penn Plaza District, and in Washington, including Crystal City, Rosslyn and Pentagon City.

 

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

 

 

54

 


 

 

Liquidity and Capital Resources – continued

 

Development and Redevelopment Expenditures - continued

 

Below is a summary of development and redevelopment expenditures incurred in the three months ended March 31, 2015.  These expenditures include interest of $11,110,000, payroll of $1,026,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $29,134,000, that were capitalized in connection with the development and redevelopment of these projects.

(Amounts in thousands)

Total

New York

Washington, DC

Other

220 Central Park South

$

20,277 

$

-   

$

-   

$

20,277 

Springfield Town Center

14,478 

-   

-   

14,478 

The Bartlett

13,791 

-   

13,791 

-   

330 West 34th Street

11,902 

11,902 

-   

-   

Marriott Marquis Times Square - retail and signage

10,651 

10,651 

-   

-   

90 Park Avenue

5,173 

5,173 

-   

-   

Wayne Towne Center

2,362 

-   

-   

2,362 

Penn Plaza

1,163 

1,163 

-   

-   

2221 South Clark Street

1,127 

-   

1,127 

-   

Other

7,128 

2,254 

4,628 

246 

$

88,052 

$

31,143 

$

19,546 

$

37,363 

 

 

Cash Flows for the Three Months Ended March 31, 2014

 

Our cash and cash equivalents were $1,156,727,000 at March 31, 2014, a $573,437,000 increase over the balance at December 31, 2013. The increase is primarily due to cash flows from operating, financing, and investing activities, as discussed below.

 

Cash flows provided by operating activities of $309,131,000 was comprised of (i) net income of $98,156,000, (ii) $135,433,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, income from partially owned entities and impairment losses on real estate, (iii) the net change in operating assets and liabilities of $62,576,000, including $123,000 related to real estate fund investments, and (iv) distributions of income from partially owned entities of $12,966,000.

 

Net cash provided by investing activities of $82,761,000 was comprised of (i) $120,270,000 of proceeds from sales of real estate and related investments, (ii) $69,347,000 of proceeds from repayments of mortgage and mezzanine loans receivable and other, (iii) $52,256,000 of changes in restricted cash, and (iv) $1,277,000 of capital distributions from partially owned entities, partially offset by (v) $90,653,000 of development costs and construction in progress, (vi) $53,103,000 of additions to real estate, and (vii) $16,633,000 of investments in partially owned entities.

 

Net cash provided by financing activities of $181,545,000 was comprised of (i) $600,000,000 of proceeds from borrowings, and (ii) $3,676,000 of proceeds received from the exercise of Vornado stock options, partially offset by (iii) $233,198,000 for the repayments of borrowings, (iv) $136,761,000 of distributions to Vornado, (v) $20,752,000 of debt issuance costs, (vi) $20,368,000 of distributions to preferred unitholders, (vii) $10,474,000 of distributions to redeemable security holders and noncontrolling interests, and (viii) $578,000 for the repurchase of Class A units related to stock compensation agreements and/or related tax withholdings.

 

55

 


 

 

Liquidity and Capital Resources – continued

 

 

Capital Expenditures in the three months ended March 31, 2014

 

 

Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the three months ended March 31, 2014.

 

 

(Amounts in thousands)

Total

New York

Washington, DC

Other

Expenditures to maintain assets

$

12,208 

$

8,931 

$

1,521 

$

1,756 

Tenant improvements

57,964 

40,311 

11,680 

5,973 

Leasing commissions

18,095 

14,018 

2,322 

1,755 

Non-recurring capital expenditures

84 

84 

-   

-   

Total capital expenditures and leasing commissions (accrual basis)

88,351 

63,344 

15,523 

9,484 

Adjustments to reconcile to cash basis:

Expenditures in the current year applicable to prior periods

40,186 

18,716 

12,186 

9,284 

Expenditures to be made in future periods for the current period

(56,023)

(40,184)

(12,807)

(3,032)

Total capital expenditures and leasing commissions (cash basis)

$

72,514 

$

41,876 

$

14,902 

$

15,736 

Tenant improvements and leasing commissions:

Per square foot per annum

$

5.95 

$

6.19 

$

5.23 

$

n/a

Percentage of initial rent

10.4%

9.8%

12.3%

n/a

 

 

Development and Redevelopment Expenditures in the three months ended March 31, 2014

 

Below is a summary of development and redevelopment expenditures incurred in the three months ended March 31, 2014.  These expenditures include interest of $13,622,000, payroll of $1,770,000 and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $14,700,000, that were capitalized in connection with the development and redevelopment of these projects.

 

(Amounts in thousands)

Total

New York

Washington, DC

Other

Springfield Town Center

$

25,172 

$

-   

$

-   

$

25,172 

Marriott Marquis Times Square - retail and signage

12,822 

12,822 

-   

-   

330 West 34th Street

9,541 

9,541 

-   

-   

220 Central Park South

9,034 

-   

-   

9,034 

608 Fifth Avenue

7,248 

7,248 

-   

-   

The Bartlett

4,517 

-   

4,517 

-   

7 West 34th Street

3,044 

3,044 

-   

-   

Wayne Towne Center

2,419 

-   

-   

2,419 

Other

16,856 

6,526 

7,068 

3,262 

$

90,653 

$

39,181 

$

11,585 

$

39,887 

 

56

 


 

 

Liquidity and Capital Resources – continued

 

 

Other Commitments and Contingencies

 

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

 

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

 

Our mortgage loans are non-recourse to us.  However, in certain cases we have provided guarantees or master leased tenant space.  These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans.  As of March 31, 2015, the aggregate dollar amount of these guarantees and master leases is approximately $349,000,000.

 

At March 31, 2015, $39,632,000 of letters of credit were outstanding under one of our revolving credit facilities.  Our revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.

 

As of March 31, 2015, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $78,000,000.

57

 


 

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

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

 

(Amounts in thousands, except per unit amounts)

2015 

2014 

Weighted

Effect of 1%

Weighted

March 31,

Average

Change In

December 31,

Average

Consolidated debt:

Balance

Interest Rate

Base Rates

Balance

Interest Rate

Variable rate

$

2,162,869 

2.32%

$

21,629 

$

1,763,769 

2.20%

Fixed rate

7,401,256 

4.37%

-   

7,846,555 

4.36%

$

9,564,125 

3.91%

21,629 

$

9,610,324 

3.97%

Pro rata share of debt of non-consolidated

entities (non-recourse):

Variable rate – excluding Toys

$

318,935 

1.74%

3,189 

$

319,387 

1.72%

Variable rate – Toys

892,325 

8.04%

8,923 

1,199,835 

6.47%

Fixed rate (including $657,540 and

$674,443 of Toys debt in 2015 and 2014)

2,745,890 

6.47%

-   

2,754,410 

6.45%

$

3,957,150 

6.44%

12,112 

$

4,273,632 

6.10%

Total change in annual net income

$

33,741 

Per diluted unit

$

0.17 

 

We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of March 31, 2015, we have one interest rate swap on a $421,000,000 mortgage loan that swapped the rate from LIBOR plus 1.65% (1.82% at March 31, 2015) to a fixed rate of 4.78% through March 2018. 

 

 

Fair Value of Debt

 

The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the rate at which similar loans could be made currently to borrowers with similar credit ratings, for the remaining term of such debt.  As of March 31, 2015, the estimated fair value of our consolidated debt was $9,632,000,000.

 

 

Item 4.   Controls and Procedures

Disclosure Controls and Procedures:  Vornado’s management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2015, such disclosure  controls and procedures were effective.

 

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

 

58

 


 
 

 

PART II.   OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

 

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

 

 

Item 1A. Risk Factors

 

 

There were no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014.

 

 

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

 

During the quarter ended March 31, 2015, we issued 546,351 Class A Units to Vornado upon conversion, surrender or exchange of equity awards issued pursuant to Vornado’s omnibus share plans and consideration received included $11,680,953 in cash proceeds.   Such Units were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. 

 

 

Item 3.   Defaults Upon Senior Securities

        None.

 

 

Item 4.   Mine Safety Disclosures

        Not applicable.

 

 

Item 5.   Other Information

        None.

 

Item 6.   Exhibits

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

 

59

 


 
 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

VORNADO REALTY L.P.

 

 

(Registrant)

 

 

 

 

 

 

Date: May 8, 2015

By:

/s/ Stephen W. Theriot

 

 

Stephen W. Theriot, Chief Financial Officer of

Vornado Realty Trust, sole General Partner of

Vornado Realty L.P. (duly authorized officer and principal

financial and accounting officer)

60

 


 
 

 

 

EXHIBIT INDEX

Exhibit No.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.31

**

-

Form of Vornado Realty Trust 2015 Outperformance Plan Award Agreement. Incorporated

*

 

 

 

 

by reference to Exhibit 99.1 to Vornado Realty Trust’s Current Report on Form 8-K

 

 

 

 

 

(File No. 001-11954), filed on January 21, 2015.

 

 

 

 

 

 

 

 

10.32

**

-

Form of Vornado Realty Trust Outperformance Plan Award Agreement Amendment.

*

 

 

 

 

Incorporated by reference to Exhibit 99.2 to Vornado Realty Trust’s Current Report on

 

 

 

 

 

Form 8-K (File No. 001-11954), filed on January 21, 2015.

 

 

 

 

 

 

 

 

10.33

**

-

Letter Agreement between Vornado Realty Trust and Wendy A. Silverstein, dated

*

 

 

 

 

March 6, 2015. Incorporated by reference to Exhibit 99.1 to Vornado Realty Trust’s

 

 

 

 

 

Current Report on Form 8-K (File No. 001-11954), filed on March 10, 2015.

 

 

 

 

 

 

 

 

10.34

**

-

Waiver and Release between Vornado Realty Trust and Wendy A. Silverstein, dated

*

 

 

 

 

March 6, 2015. Incorporated by reference to Exhibit 99.2 to Vornado Realty Trust’s

 

 

 

 

 

Current Report on Form 8-K (File No. 001-11954), filed on March 10, 2015.

 

 

 

 

 

 

 

 

15.1

 

-

Letter regarding Unaudited Interim Financial Information

 

 

 

 

 

 

 

 

31.1

 

-

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

     

 

31.2

 

-

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

     

 

32.1

 

-

Section 1350 Certification of the Chief Executive Officer

     

 

32.2

 

-

Section 1350 Certification of the Chief Financial Officer

 

 

 

 

 

 

 

101.INS

 

-

XBRL Instance Document

     

 

101.SCH

 

-

XBRL Taxonomy Extension Schema

     

 

101.CAL

 

-

XBRL Taxonomy Extension Calculation Linkbase

     

 

101.DEF

 

-

XBRL Taxonomy Extension Definition Linkbase

     

 

101.LAB

 

-

XBRL Taxonomy Extension Label Linkbase

     

 

101.PRE

 

-

XBRL Taxonomy Extension Presentation Linkbase

     

 

 

 

 

 

 

 

 

 

 

______________________________

 

 

 

*

 

Incorporated by reference.

 

 

 

**

 

Management contract or compensation agreement.

 

61