UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-K

 

 

For the transition period from                                           to                                                          

 

Commission File Number:                                           000-22635                                                    

 

VORNADO REALTY L.P.

(Exact name of Registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act: NONE

 

Securities registered pursuant to Section 12(g) of the Act:

 

Class A Units of Limited Partnership Interest

Series A Preferred Units of Limited Partnership Interest

 

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    ý     NO       o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES   ý  NO  o

 

There is no public market for the Class A units of the limited partnership interest of Vornado Realty L.P.  Based on the closing stock price of Vornado Realty Trust’s common shares on June 30, 2003, which are issuable upon redemption of the Class A units, the aggregate market value of the Class A units held by non-affiliates of the registrant, i.e. by persons other than Vornado Realty Trust and officers and trustees of Vornado Realty, Trust was $3,549,034,000.

 

Documents Incorporated by Reference

Part III:  Portions of Vornado Realty Trust’s Proxy Statement for Annual Meeting of Shareholders to be held on May 27, 2004.

 

 

TABLE OF CONTENTS

 

	Item
Part I.	1.	Business	4
	2.	Properties	26
	3.	Legal Proceedings	58
	4.	Submission of Matters to a Vote of Security Holders	59
		Executive Officers of the Registrant	59
Part II.	5.	Market for the Registrant’s Common Equity and Related Shareholder Matters	60
	6.	Selected Financial Data	61
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
	7A.	Quantitative and Qualitative Disclosures about Market Risk	105
	8.	Financial Statements and Supplementary Data	106
	9.	Change In and Disagreements With Independent Auditors on Accounting and Financial Disclosure	155
	9A.	Controls and Procedures	155
Part III.	10.	Directors and Executive Officers of the Registrant	155	(1)
	11.	Executive Compensation	155	(1)
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	155	(1)
	13.	Certain Relationships and Related Transactions	156	(1)
	14.	Principal Accountant Fees and Services	156	(1)
Part IV.	15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	157
Signatures			158

 

(1)                Vornado Realty Trust, the Registrant’s general partner, will file a definitive Proxy Statement pursuant to Regulation 14A involving the election of trustees with the Securities and Exchange Commission not later than 120 days after December 31, 2003, portions of which are incorporated by reference herein. Information relating to Executive Officers of Vornado Realty Trust appears on page 59 of this Annual Report on Form 10-K.

 

2

 

FORWARD LOOKING STATEMENTS

 

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements are not guarantees of performance.  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 “plans,” “intends,” “estimates,” “anticipates,” “expects,” “believes” or similar expressions in this annual report on Form 10-K.  These forward-looking statements are subject to numerous assumptions, risks and uncertainties.  Many of the factors that will determine these items are beyond our ability to control or predict.  For further discussion of these factors see “Item 1. Business – Certain Factors That May Adversely Affect Our Business and Operations” in this annual report on Form 10-K.

 

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this annual report on Form 10-K or the date of any document incorporated by reference.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Form 10-K.

 

3

 

PART I

 

ITEM 1.                             BUSINESS

 

THE COMPANY

 

Vornado Realty L.P. (the “Operating Partnership” and/or the “Company”) is a Delaware limited partnership. Vornado Realty Trust (“Vornado”), a fully-integrated real estate investment trust (“REIT”), is the sole general partner of, and owned approximately 82% of the common limited partnership interest in, the Operating Partnership at February 16, 2004. All references to “We,” “Us,” and “Company” refer to the Operating Partnership and its consolidated subsidiaries.

 

The Company currently owns directly or indirectly:

 

Office Properties (“Office”):

 

(i)            all or portions of 83 office properties aggregating approximately 27.3 million square feet in the New York City metropolitan area (primarily Manhattan) and in the Washington D.C. and Northern Virginia area;

 

Retail Properties (“Retail”):

 

(ii)           60 retail properties in six states and Puerto Rico aggregating approximately 12.9 million square feet, including 2.7 million square feet built by tenants on land leased from the Company;

 

Merchandise Mart Properties:

 

(iii)          8.6 million square feet of showroom and office space, including the 3.4 million square foot Merchandise Mart in Chicago;

 

Temperature Controlled Logistics:

 

(iv)          a 60% interest in the Vornado Crescent Portland Partnership that owns 87 cold storage warehouses nationwide with an aggregate of approximately 440.7 million cubic feet of refrigerated space leased to AmeriCold Logistics;

 

Other Real Estate Investments:

 

(v)           33.1% of the outstanding common stock of Alexander’s, Inc. (“Alexander’s”);

 

(vi)          the Hotel Pennsylvania in New York City consisting of a hotel portion containing 1.0 million square feet with 1,700 rooms and a commercial portion containing .4 million square feet of retail and office space;

 

(vii)         a 22.6% interest in The Newkirk Master Limited Partnership (“Newkirk MLP”) which owns office, retail and industrial properties net leased primarily to credit rated tenants, and various debt interests in such properties;

 

(viii)        eight dry warehouse/industrial properties in New Jersey containing approximately 2.0 million square feet; and

 

(ix)           other investments, including interests in other real estate, loans and notes receivable and marketable securities.

 

4

 

OBJECTIVES AND STRATEGY

 

Our business objective is to maximize shareholder value.  We intend to achieve this 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, D.C., where we believe there is high likelihood of capital appreciation;

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

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

•                  Investing in fully integrated operating companies that have a significant real estate component with qualified, experienced operating management and strong growth potential which can benefit from our access to efficient capital;

•                  Developing/redeveloping our existing properties to increase returns and maximize value; and

•                  On occasion, providing specialty financing to real estate companies.

 

We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets.

 

5

 

ACQUISITIONS

 

Building Maintenance Service Company (“BMS”)

 

On January 1, 2003, the Company acquired for $13,000,000 in cash BMS, which provides cleaning, security and engineering services principally to the Company’s Manhattan office properties.  This company was previously owned by the estate of Bernard Mendik and certain other individuals including David R. Greenbaum, one of the Company’s executive officers.

 

Kaempfer Company (“Kaempfer”)

 

On April 9, 2003, the Company acquired Kaempfer which owns partial interests in six Class “A” office properties in Washington D.C. containing 1.8 million square feet, manages and leases these properties and four others for which it receives customary fees and has options to acquire certain other real estate interests, including the Waterfront project discussed below.  Kaempfer’s equity interest in the properties approximates 5.0%.  The aggregate purchase price for the equity interests and the management and leasing business was $32,200,000 (consisting of $28,600,000 in cash and approximately 99,300 Operating Partnership units valued at $3,600,000) and may be increased by up to $9,000,000 based on the performance of the management company.

 

On October 7, 2003, the Company acquired a 2.5% interest in the planned redevelopment of Waterfront, located at 401 M Street, a mixed-use project in Washington D.C. (the “Waterfront Interest”) for $2,171,000, of which the Company paid $1,545,000 in cash and issued 12,500 Operating Partnership units valued at $626,000.  The partnership units were issued to Mitchell N. Schear, one of the partners in the Waterfront interest, who became the President of the Company’s CESCR division.

 

20 Broad Street

 

On May 2, 2003, the Company acquired the remaining 40% of a 78-year leasehold interest in 20 Broad Street it did not already own.  The purchase price was approximately $30,000,000 in cash.  20 Broad Street contains 466,000 square feet of office space, of which 348,000 square feet is leased to the New York Stock Exchange.

 

2101 L Street

 

On August 4, 2003, the Company completed the acquisition of 2101 L Street, a 370,000 square foot office building located in Washington D.C.  The consideration for the acquisition consisted of approximately 1.1 million newly issued Operating Partnership units (valued at approximately $49,517,000) and the assumption of existing mortgage debt and transaction costs totaling approximately $32,000,000.  Robert H. Smith and Robert P. Kogod, trustees of Vornado, together with family members owned approximately 24 percent of the limited partnership that sold the building and Mr. Smith was a general partner.  On August 5, 2003, the Company repaid the mortgage of $29,056,000.

 

General Motors Building Mezzanine Loans

 

On October 20, 2003, the Company made a $200,000,000 mezzanine loan secured by partnership interests in the General Motors Building. The General Motors Building was acquired by Macklowe Properties in September 2003 for approximately $1.4 billion. Vornado’s loan is subordinate to $900,000,000 of other debt. The loan is based on a rate of LIBOR plus 8.685% (with a LIBOR floor of 1.5%) and currently yields 10.185%.  Further, on October 30, 2003, the Company made an additional $25,000,000 loan, as part of a $50,000,000 loan, the balance of which was funded by an affiliate of Soros Fund Management LLC. This loan, which is junior to the $1.1 billion of loans noted above, is based on a rate of LIBOR plus 12.81% (with a LIBOR floor of 1.5%) and currently yields 14.31%. These loans mature in October 2005, with three one-year extensions.

 

6

 

Bergen Mall

 

On December 12, 2003, the Company acquired the Bergen Mall for approximately $145,000,000. This purchase was funded as part of a Section 1031 tax-free “like-kind” exchange with a portion of the proceeds from the sale of the Company’s Two Park Avenue property.  The Bergen Mall is a 903,000 square foot shopping center located on Route 4 East in Paramus, New Jersey. The center is anchored by Macy’s, Value City, Marshalls and Off Saks Fifth Avenue.  The Company intends to expand, re-tenant and redevelop the asset.

 

Further details of the Company’s acquisition activities are disclosed in Part II.  Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements in this annual report on Form 10-K.

 

DISPOSITIONS

 

On June 13, 2003, the Company received its $5,000,000 share of a settlement with affiliates of Primestone Investment Partners of the amounts due under the guarantees of the Primestone loans.  In connection therewith, the Company recognized a $1,388,000 loss on settlement of the guarantees.

 

On October 10, 2003, the Company sold Two Park Avenue, a 965,000 square foot office building, for $292,000,000 to SEB Immobilien-Investment GMBH, a German capital investment company, which resulted in a net gain on the sale after closing costs of $156,433,000.

 

In addition, the Company sold two strip shopping centers in 2003, for an aggregate of $7,852,000, which resulted in net gains of $4,589,000.

 

On February 2, 2004, the Palisades Venture in which the Company owns a 75% interest entered into an agreement to sell its only asset, a 538 unit high-rise residential apartment tower in Fort Lee, New Jersey, for $222,500,000.  On February 27, 2004, in order to permit a potential “like kind exchange,” the Company acquired the remaining 25% interest it did not previously own for its partner’s share of the net sales price (approximately $17,000,000).  The Company’s gain on sale after closing costs will be approximately $70,000,000.  The sale, which is subject to customary closing conditions, is expected to be completed by the third quarter of 2004.

 

Further details of the Company’s dispositions are disclosed in Part II.  Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements in this annual report on Form 10-K.

 

7

 

DEVELOPMENT AND REDEVELOPMENT PROJECTS

 

The Company is currently engaged in various development/redevelopment projects for which it has budgeted approximately $561.7 million.  Of this amount $111.1 million was expended in 2003 and $169 million is estimated to be expended in 2004.  Below is a description of these projects.

 

				The Company’s Share of
($in millions)		Estimated Completion Date		Estimated Project Cost			Costs Expended in Year Ended December 31, 2003			Estimated Costs to Complete
Office:
New York City:
640 Fifth Avenue – construction of additional 47,000 square feet of office space and redevelopment of existing building		Summer 2004		$	62.5		$	29.4		$	14.1
CESCR:
Crystal City Office space to be vacated by the U.S. Government Patent Office (“PTO”):
(i)Renovation of buildings (see next page)		2005-2007		90.0		(1)	—			90.0
(ii)Cost to retenant		2005-2007		60.0			—			60.0
Crystal Drive Retail – construction of additional 57,000 square feet of retail space and improvements to the infrastructure including streets, signals and signs as part of “way finding” program		Fall 2004		43.0			12.5			28.7
Retail:
4 Union Square South – redevelopment of 198,000 square feet, of which 193,000 square feet has been leased to Whole Foods, Forever 21, DSW Shoe Warehouse and Filenes		Spring 2005		54.3			14.0			34.8
Green Acres Mall – interior renovation, construction of an additional 70,000 square feet of free-standing retail space, parking decks and site-work and tenant improvements for B.J.’s Wholesale who will construct its own store (2)		2006		63.3			1.0			62.3
Strip shopping centers: (i) site work and/or demolition of existing buildings as part of the redevelopment of 7 properties released to Wal-Mart and Lowes, who will construct their own stores at these sites (six of these locations were previously leased to Bradlees).		2004-2005		21.3			6.4			14.9
(ii) expansion of shopping centers in Bensalem, Kearny and Marlton aggregating 120,000 square feet (2)		2004-2005		9.5			—			9.5
715 Lexington Avenue – demolition of existing building and construction of 24,000 square feet of retail space on four floors		Summer 2005		18.1			1.6			16.5
968 Third Avenue (50% interest) – demolition of existing building and construction of 8,300 square feet of retail space on three floors		Fall 2004		5.7			—			5.7
Merchandise Mart:
350 North Orleans, Chicago – addition of 40,000 square feet at street level and new lobby		Fall 2004		18.2			1.6			16.6
Other:
400 North LaSalle, Chicago (85% interest) – construction of 381,000 square foot high rise rental apartment complex containing 452 apartments		Spring 2004		78.9			35.7			5.6
Penn Plaza Signage District – construction of approximately 21 signs at various locations in the Penn Plaza District, of which 7 have been completed as of December 31, 2003		Fall 2006		36.9			8.9			24.8
				$	561.7		$	111.1		$	383.5

 

(1)                            In January 2002, when the Company acquired the remaining 66% of CESCR it did not already own, it estimated that these costs would be approximately $75.0.

(2)                            Subject to governmental approvals.

 

The Company is also in the pre-development phase of a number of other projects including (i) retail space in the Penn Plaza area, (ii) repositioning of the Hotel Pennsylvania, (iii) expansion and redevelopment of the Bergen Mall, (iv) expansion of Monmouth Mall and (v) renovation of the 2101 L Street office building.

 

There can be no assurance that any of the above projects will commence or be completed on schedule or on budget.

 

8

 

The Company plans to renovate the buildings occupied by the PTO as their leases expire over the next three years as follows:

 

		Square Feet Expiring (in thousands)
		Total		2004		2005								2006
				Q4		Q1		Q2		Q3		Q4		Q1
Crystal Plaza Two		181		—		—		—		181		—		—
Crystal Plaza Three		263		263		—		—		—		—		—
Crystal Plaza Four		234		234		—		—		—		—		—
Crystal Park One		224		13		109		64		—		38		—
Crystal Park Two		406		39		103		77		—		98		89
Crystal Park Three		107		67		—		24		—		—		16
Crystal Park Five		194		—		—		—		194		—		—
Crystal Mall One		180		180		—		—		—		—		—
Other Buildings		150		141		—		—		7		—		2
		1,939		937		212		165		382		136		107

 

Renovations to Crystal Mall One, Crystal Park One, and Crystal Plaza Three and Four totaling 901,000 square feet will include new restrooms, lobbies, corridors and elevator modernization.  In Crystal Plaza Three and Four, the renovations will also include new mechanical systems.  The portions of these buildings vacated by the PTO will be taken out of service during redevelopment which is expected to be completed over a 12 to 18 month period.  Renovations to the remaining buildings will consist of common area and exterior renovations to upgrade the buildings that will not require the buildings to be taken out of service.

 

9

 

OTHER INVESTMENTS

 

The Company’s other investments are comprised of:

(Amounts in thousands except per share/unit amounts and square feet)

 

		As of December 31, 2003
Other Real Estate Investments:
Consolidated:
The Palisades Joint Venture (1)		$	143,875
400 North LaSalle Venture (2)		59,414
Student Housing (3)		25,069
Carried at Equity:
Monmouth Mall Joint Venture (4)		30,612
Starwood Ceruzzi Joint Venture (5)		23,821
		$	282,791
Marketable Securities, including $29,259 of Capital Trust, Inc. (“Capital Trust”) preferred securities (6)		$	81,491
Notes and Mortgage Loans Receivable:
General Motors Building Mezzanine Loans (7)		$	223,075
Commonwealth Atlantic Properties, an affiliate of Lazard Freres Real Estate Investors L.L.C. (“CAPI”) (8)		38,500
Vornado Operating Company (see page 14 for further details)		21,989
Other		2,401
		$	285,965

 

(1)   The Palisades Joint Venture

The Palisades Joint Venture was formed in 1999 to develop an 855,000 square foot high-rise residential tower in Fort Lee, New Jersey, containing 538 apartments.  The joint venture agreement provides for the Company to contribute 95% of the equity and receive 75% of the net profit after a 10% preferred return. The Company placed the property into service on March 1, 2002.  On February 2, 2004, the Palisades Venture entered into an agreement to sell the asset for $222,500.  On February 27, 2004, in order to permit a potential “like kind exchange,” the Company acquired the remaining 25% interest it did not previously own for its partner’s share of the net sales price (approximately $17,000).  The Company’s gain on sale after closing costs will be approximately $70,000.  The sale, which is subject to customary closing conditions, is expected to be completed by the third quarter of 2004.

 

(2)   400 North LaSalle Venture

The 400 North LaSalle joint venture was formed in July 2001, to develop a 381,000 square foot, high-rise residential tower with an attached parking garage in Chicago Illinois, containing 452 apartments.  Under the venture agreement the Company contributed 92% of the equity and is entitled to 85% of the profits.  The development of the residential tower and garage was substantially completed and fully placed into service as of January 2004.  As of December 31, 2003, the tower is 22.5% occupied.

 

(3)   Student Housing

In January 2000, the Company and its joint venture partner acquired a 252-unit student housing complex in Gainesville, Florida, for approximately $27,000.  The Company has a 90% interest in the joint venture.

 

10

 

(4)   Monmouth Mall Joint Venture

On October 10, 2002, a joint venture in which the Company has a 50% interest acquired the Monmouth Mall, an enclosed super regional shopping center located in Eatontown, New Jersey containing approximately 1.5 million square feet, including four department stores, three of which aggregating 719,000 square feet are owned by the tenants.  The Company made a $7,000 common equity investment in the venture and provided it with $23,500 of preferred equity yielding 14%.  The venture financed the purchase of the Mall with $135,000 of floating rate debt at LIBOR plus 2.05% (with a LIBOR floor of 2.50% on $35,000), a three-year term and two one-year extension options.

 

(5)   Starwood Ceruzzi Joint Venture

The Starwood Ceruzzi Joint Venture in which the Company is an 80% non-managing partner and Starwood Ceruzzi is the 20% managing partner, was formed in 2000 to acquire a group of retail fee and leasehold interests in properties formerly occupied by Hechinger, a home improvement retailer which was liquidated.  The venture currently owns one fee interest and four leasehold interests aggregating 500,000 square feet.  The properties are located in Pennsylvania, Virginia and Maryland.  In 2001, the venture sold one of the fee interests acquired resulting in a gain of $1,744 (of which the Company’s share was $1,395).  One of the leasehold interests was net leased to Home Depot in 2002, and the other four sites are currently vacant.

 

(6)   Capital Trust Preferred Securities

At December 31, 2003, the Company owns $30,000 of 8.25% step-up convertible junior subordinated debentures which are convertible into shares of Class A common stock of Capital Trust (NYSE:CT) at a conversion price of $7.00 per share.  The securities are redeemable by Capital Trust, in whole or in part, on or after September 30, 2004.  Steven Roth, the Chairman and Chief Executive Officer of Vornado Realty Trust, is a member of the Board of Directors of Capital Trust, nominated by the Company.

 

(7)   General Motors Building Mezzanine Loans

On October 20, 2003 the Company made a $200,000 mezzanine loan secured by partnership interests in the General Motors Building. The General Motors Building was acquired by Macklowe Properties in September 2003 for approximately $1.4 billion. Vornado’s loan is subordinate to $900,000 of other debt. The loan is based on a rate of LIBOR plus 8.685% (with a LIBOR floor of 1.5%) and currently yields 10.185%.  Further, on October 30, 2003, the Company made an additional $25,000 loan, as part of a $50,000 loan, the balance of which was funded by an affiliate of Soros Fund Management LLC. This loan, which is junior to the $1.1 billion of loans noted above, is based on a rate of LIBOR plus 12.81% (with a LIBOR floor of 1.5%) and currently yields 14.31%. These loans mature in October 2005, with three one-year extensions.

 

(8)   CAPI

In March 1999, in connection with the Company’s acquisition of land under certain of the CESCR office properties from CAPI, the Company made a $41,200 recourse loan to CAPI with interest at 8.5%, which matures in June 2004.  The loan is secured by approximately 1,100,000 of the Company’s Series E-1 convertible preferred units issued to CAPI.  Each Series E-1 convertible preferred unit is convertible into 1.1364 shares of Vornado common shares.  At December 31, 2003, the balance of the loan was $38,500.  In February 2004, CAPI converted all of its Series E-1 units into 5,679,727 Vornado common shares.  Subsequent to the conversion the loan is secured by 1,250,000 Vornado common shares.

 

11

 

FINANCING ACTIVITIES

 

On July 3, 2003, the Company entered into a new $600,000,000 unsecured revolving credit facility, which has replaced its $1,000,000,000 unsecured revolving credit facility, which was to mature in July 2003.  The new facility has a three-year term, a one-year extension option and bears interest at LIBOR plus .65%.  The Company also has the ability under the new facility to seek up to $800 million of commitments during the facility’s term.  The new facility contains financial covenants similar to the prior facility.

 

On November 11, 2003, the Company redeemed all of its 8.5% Series D-1 Cumulative Redeemable Preferred Units issued in 1998 at a redemption price equal to the par value of $25.00 per unit or an aggregate of $87,500,000 plus accrued distributions of $849,000.  This amount exceeded the carrying amount by $2,100,000, representing the original issuance costs.  Upon the redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to common shares in accordance with the July 2003 EITF clarification of Topic-D-42.

 

On November 17, 2003, Vornado sold $40,000,000 of 7.00% Series D-10 Cumulative Redeemable Preferred Shares to an institutional investor in a registered offering. Immediately prior to that sale, the Company sold $80,000,000 of 7.00% Series D-10 Cumulative Redeemable Preferred Units to an institutional investor in a separate private offering. Both the perpetual Preferred Units and perpetual Preferred Shares may be called without penalty at the option of the Company commencing in November 2008.

 

On November 25, 2003, the Company completed an offering of $200,000,000 aggregate principal amount of 4.75% senior unsecured notes due December 1, 2010.  Interest on the notes is payable semi-annually on June 1st and December 1st, commencing in 2004.  The notes were priced at 99.869% of their face amount to yield 4.772%. The notes contain the same financial covenants that are in the Company’s notes issued in June 2002, except the maximum ratio of secured debt to total assets is now 50% (previously 55%).  The net proceeds of approximately $198,500,000 were used primarily to repay existing mortgage debt.

 

Further details of the Company’s financing activities are disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this annual report on Form 10-K.

 

At December 31, 2003, the ratio of debt-to-enterprise value (market equity value plus debt less cash) was 35% based on debt of $5.115 billion, including the Company’s proportionate share of debt of partially-owned non-consolidated entities.  In the future, in connection with the Company’s strategy for growth, this percentage may change.  The Company’s policy concerning the incurrence of debt may be reviewed and modified from time to time without the vote of the partners.

 

The Company may seek to obtain funds through equity offerings, debt financings or asset sales, although there is no express policy with respect thereto. The Company may offer units in exchange for property and may repurchase or otherwise re-acquire its units or any other securities in the future.

 

12

 

EBITDA BY SEGMENT AND REGION

 

The following table sets forth the percentage of the Company’s EBITDA(1) by segment and region for the years ended December 31, 2003, 2002, and 2001.  EBITDA for the year ended December 31, 2003, includes gains on sale of real estate of $161,789,000, of which $157,200,000 and $4,589,000 relate to New York Office and Retail segments, respectively.  The pro forma column gives effect to the January 1, 2002 acquisition by the Company of the remaining 66% interest in CESCR described previously, as if it had occurred on January 1, 2001.

 

		Percentage of EBITDA(1)
		Years Ended December 31,
		2003		2002		2001		2001
						Pro forma
Segment
Office:
New York		40	%	33	%	32	%	38	%
CESCR		24	%	30	%	27	%	11	%
Total		64	%	63	%	59	%	49	%
Retail		12	%	12	%	12	%	15	%
Merchandise Mart Properties		10	%	12	%	11	%	14	%
Temperature Controlled Logistics		6	%	7	%	8	%	9	%
Other Investments		8	%	6	%	10	%	13	%
		100	%	100	%	100	%	100	%
Region
New York City metropolitan area		49	%	41	%	42	%	52	%
Washington, D.C./Northern Virginia metropolitan area		24	%	30	%	26	%	11	%
Chicago		10	%	11	%	9	%	11	%
Philadelphia metropolitan area		2	%	1	%	—	%	1	%
Puerto Rico		1	%	1	%	1	%	2	%
Other regions (2)		14	%	16	%	22	%	23	%
		100	%	100	%	100	%	100	%

 

(1)          EBITDA represents “Earnings before Interest, Taxes, Depreciation and Amortization.”  EBITDA should not be considered a substitute for net income.  EBITDA may not be comparable to similarly titled measures employed by other companies.  See “Item 7. Management’s Discussion and Analysis of Financial Condition Results of Operations –Summary of Net Income and EBITDA” for a reconciliation of EBITDA to net income.

(2)          Other regions include the Temperature Controlled Logistics segment which has cold storage warehouses in 32 states.  See page 47 for details.

 

13

 

VORNADO OPERATING COMPANY (“Vornado Operating”)

 

In October 1998, Vornado Operating was spun off from the Company in order to own assets that the Company could not itself own and conduct activities that the Company could not itself conduct.  The Company and Vornado Operating are parties to certain agreements described below.

 

Agreement with Vornado Operating

 

The Company and Vornado Operating are parties to an agreement pursuant to which, among other things, (i) the Company will under certain circumstances offer Vornado Operating an opportunity to become the lessee of certain real property owned now or in the future by the Company (under mutually satisfactory lease terms) and (ii) Vornado Operating will not make any real estate investment or other REIT-qualified investment unless it first offers the Company the opportunity to make such investment and the Company has rejected that opportunity.

 

Under the agreement, the Company provides Vornado Operating with certain administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. For these services, Vornado Operating compensates the Company in an amount determined in good faith by the Company as the amount an unaffiliated third party would charge Vornado Operating for comparable services and reimburses the Company for certain costs incurred and paid to third parties on behalf of Vornado Operating.  Pursuant to the agreement, compensation for such services was approximately $330,000 for each of the years ended December 31, 2003 and 2002, and $371,000 for the year ended December 31, 2001.

 

Vornado Operating and the Company each have the right to terminate the agreement if the other party is in material default of the agreement or upon 90 days written notice to the other party at any time.  In addition, the Company has the right to terminate the agreement upon a change in control of Vornado Operating.

 

Vornado Operating’s Management

 

Steven Roth, Michael Fascitelli, Richard West and Russell Wight are directors of Vornado Operating.  Steven Roth is also Chairman of the Board and Chief Executive Officer of Vornado Operating, Michael Fascitelli is also President of Vornado Operating, and certain other members of the Company’s senior management hold corresponding positions with Vornado Operating.

 

Temperature Controlled Logistics Business

 

On March 11, 1999, the Vornado Crescent Portland Partnership (“the Landlord”) in which the Company has a 60% general partnership interest and Crescent Real Estate Equities has a 40% general partnership interest, sold all of the non-real estate assets of Temperature Controlled Logistics encompassing the operations of the temperature controlled business to a new partnership (“AmeriCold Logistics”) owned 60% by Vornado Operating and 40% by Crescent Operating Inc. AmeriCold Logistics leases the underlying temperature controlled warehouses used in this business from the Landlord which continues to own the real estate through its ownership of AmeriCold Realty Trust. The leases, as amended, generally have a 15 year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on revenue AmeriCold Logistics receives from its customers. The contractual rent for 2003 was $155,450,000. The Landlord’s share of annual maintenance capital expenditures was $9,500,000. In accordance with the leases, AmeriCold Logistics deferred payment of $41,811,000 of 2003 rent due to the Landlord, of which the Company’s share was $25,087,000. Based on the joint venture’s policy of recognizing rental income when earned and collection is assured or cash is received, the joint venture did not recognize the amount of the rent deferred by AmeriCold Logistics in the year ended December 31, 2003. At December 31, 2003, the Company’s share of the joint venture’s total deferred rent receivable from the tenant was $49,436,000.

 

On February 5, 2004, AmeriCold Realty Trust completed a $254,400,000 mortgage financing for 21 of its owned and 7 of its leased temperature-controlled warehouses.  The loan bears interest at LIBOR plus 2.95% (with a LIBOR floor of 1.5% with respect to $54,400,000 of the loan) and requires principal payments of $5,000,000 annually.  The loan matures in April 2009 and is pre-payable without penalty after February 5, 2006.  The net proceeds were approximately $225,000,000 after providing for usual escrows, closing costs and the repayment of $12,900,000 of existing mortgages on two of the warehouses, of which $135,000,000 was distributed to the Company and the remainder was distributed to its partner.

 

14

 

Revolving Credit Agreement

 

Vornado Operating was granted a $75,000,000 unsecured revolving credit facility from the Company which expires on December 31, 2004.  Borrowings under the revolving credit facility bear interest at LIBOR plus 3%.  The Company receives a commitment fee equal to 1% per annum on the average daily unused portion of the facility.  No amortization is required to be paid under the revolving credit facility during its term.  The revolving credit facility prohibits Vornado Operating from incurring indebtedness to third parties (other than certain purchase money debt and certain other exceptions) and prohibits Vornado Operating from paying dividends.  As of December 31, 2003, 2002 and 2001, amounts outstanding under the credit facility were $21,989,000, $21,989,000 and $31,424,000.

 

Vornado Operating has disclosed that there is substantial doubt as to its ability to continue as a going concern and its ability to discharge its liabilities in the normal course of business.  Vornado Operating has incurred losses since its inception and in the aggregate its investments do not, and for the foreseeable future are not expected to, generate sufficient cash flow to pay all of its debts and expenses.  Vornado Operating estimates that it has adequate borrowing capacity under its credit facility with the Company to meet its cash needs until December 31, 2004.  However, the principal, interest and fees outstanding under the line of credit come due on such date.  Further, Vornado Operating states that its only investee, AmeriCold Logistics (“Tenant”), anticipates that its Landlord, a partnership 60% owned by the Company and 40% owned by Crescent Real Estate Equities, will need to restructure the leases between the Landlord and the Tenant to provide additional cash flow to the Tenant (the Landlord has previously restructured the leases to provide additional cash flow to the Tenant).  Management anticipates a further lease restructuring in 2004, although it is under no obligation to do so and there can be no assurance that it will do so.  Vornado Operating is expected to have a source to repay the debt under this facility from the lease restructuring or other options, although not by its original due date.  Since January 1, 2002, the Company has not recognized interest income on the debt under this facility.

 

On February 23, 2004, AmeriCold Logistics announced that Alec Covington resigned as President and Chief Executive Officer effective March 31, 2004, to take an opportunity in an unrelated industry.  A search to identify a successor is currently underway.

 

ALEXANDER’S

 

The Company owns 33.1% of the outstanding shares of common stock of Alexander’s. See “Interstate Properties” below for a description of Interstate’s ownership of the Company and Alexander’s.

 

Alexander’s has six properties (see Item 2. Properties—Alexander’s).

 

At December 31, 2003, the Company had loans receivable from Alexander’s of $124,000,000, including $29,000,000 drawn under a $50,000,000 line of credit.  The maturity date of the loans is the earlier of January 3, 2006, or the date the Alexander’s Lexington Avenue construction loan is finally repaid.  The Company accrues interest at 12.48% on the loans, which resets quarterly using a 9.48% spread to one-year treasuries with a 3% floor for treasuries.

 

The Company manages, develops and leases the Alexander’s properties under a management and development agreement and a leasing agreement pursuant to which the Company receives annual fees from Alexander’s.  Further, the Company has agreed to guarantee to the construction lender, the lien free, timely completion of the construction of Alexander’s Lexington Avenue development project and funding of project costs in excess of a stated budget, if not funded by Alexander’s.  These agreements are described in Note 5 to the Company’s consolidated financial statements.  See Item 2 - “Properties” for a description of Alexander’s properties and development and redevelopment projects.

 

Messrs. Roth, Fascitelli, Mandelbaum, West and Wight, trustees of Vornado, are also directors of Alexander’s.  Mr. Roth is also Chief Executive Officer of Alexander’s and Mr. Fascitelli is also President of Alexander’s.  Joseph Macnow, Executive Vice President - Finance and Administration and Chief Financial Officer of Vornado, is also Chief Financial Officer of Alexander’s.

 

Alexander’s common stock is listed on the New York Stock Exchange under the symbol “ALX”.

 

15

 

INTERSTATE PROPERTIES

 

As of December 31, 2003, Interstate Properties and its partners owned approximately 11.7% of the common shares of beneficial interest of Vornado, the Company’s sole general partner, 27.5% of Alexander’s common stock and beneficial ownership of 7.9% of Vornado Operating (17.0% assuming redemption of 447,017 units of Vornado Operating that are redeemable for cash, or at Vornado Operating’s election, common stock of Vornado Operating). Interstate Properties is a general partnership in which Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the partners.  Mr. Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties, and the Chief Executive Officer and a director of both Alexander’s and Vornado Operating.  Mr. Wight is a trustee of the Company and is also a director of both Alexander’s and Vornado Operating.  Mr. Mandelbaum is a trustee of the Company and is also a director of Alexander’s.

 

COMPETITION

 

The Company’s business segments – Office, Retail, Merchandise Mart Properties, Temperature Controlled Logistics, and Other operate in highly competitive environments.  The Company has a large concentration of properties in the New York City metropolitan area and in the Washington, D.C. and Northern Virginia area.  The Company competes with a large number of real estate property owners and developers.  Principal factors of competition are rent charged, attractiveness of location, the quality of the property and breadth and quality of services provided.  The Company’s success depends upon, among other factors, trends of the national and local economies, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

 

TENANTS WHICH ACCOUNTED FOR OVER 10% OF REVENUES

 

In 2003, the Company had 124 separate leases with the U.S. Government, the rent from which accounted for 12.7% of the Company’s total revenues.  The loss of this tenant would have a material adverse effect on the Company’s finances as a whole.

 

ENVIRONMENTAL REGULATIONS

 

The Company’s operations and properties are subject to various federal, state and local laws and regulations concerning the protection of the environment including air and water quality, hazardous or toxic substances and health and safety. Under certain of these environmental laws a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property.  The owner or operator may also be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by those parties because of the contamination.  These laws often impose liability without regard to whether the owner or operator knew of the release of the substances or caused the release.  The presence of contamination or the failure to remediate contamination may impair the Company’s ability to sell or lease real estate or to borrow using the real estate as collateral. Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air.  The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (PCBs) and underground storage tanks are also regulated by federal and state laws.  The Company could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or exposure at or from the Company’s properties.

 

Each of the Company’s properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any environmental condition material to the Company’s business.  However, identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to the Company.

 

16

 

CERTAIN ACTIVITIES

 

Acquisitions and investments are not required to be based on specific allocation by type of property. The Company has historically held its properties for long-term investment; however, it is possible that properties in the portfolio may be sold in whole or in part, as circumstances warrant, from time to time. Further, the Company has not adopted a policy that limits the amount or percentage of assets which would be invested in a specific property. While the Company may seek the vote of its partners in connection with any particular material transaction, generally the Company’s activities are reviewed and may be modified from time to time by its Board of Trustees without the vote of its partners.

 

EMPLOYEES

 

As of December 31, 2003, the Company had approximately 2,700 employees consisting of 1,511 in the Office Properties segment, 61 in the Retail Properties segment, 470 in the Merchandise Mart Properties segment, 440 at the Hotel Pennsylvania and 218 corporate staff.  This does not include employees of partially-owned entities.

 

INSURANCE

 

The Company carries comprehensive liability and all risk property insurance ((i) fire, (ii) flood, (iii) extended coverage, (iv) “acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2002 which expires in 2004 with a possible extension through 2005 and (v) rental loss insurance) with respect to its assets.  Below is a summary of the all risk property insurance and terrorism risk insurance for each of the Company’s business segments:

 

 

		Coverage Per Occurrence
		All Risk (1)			Sub-Limits for Acts of Terrorism
New York Office		$	1,000,000,000		$	300,000,000
CESCR Office		$	1,000,000,000		$	300,000,000
Retail		$	500,000,000		$	500,000,000
Merchandise Mart		$	1,000,000,000		$	300,000,000
Temperature Controlled Logistics		$	225,000,000		$	225,000,000

 

(1)                            Limited as to terrorism insurance by the sub-limit shown in the adjacent column.

 

In addition to the coverage above, the Company carries lesser amounts of coverage for terrorist acts not covered by the Terrorism Risk Insurance Act of 2002.

 

The Company’s debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company), its senior unsecured notes due 2007 and 2010 and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. Although the Company believes that it has adequate insurance coverage under these agreements, the Company 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 the Company is able to obtain, it could adversely affect the Company’s ability to finance and/or refinance its properties and expand its portfolio.

 

17

 

SEGMENT DATA

 

The Company operates in four business segments: Office Properties, Retail Properties, Merchandise Mart Properties and Temperature Controlled Logistics.  The Company engages in no foreign operations.  Information related to the Company’s business segments for the years 2003, 2002 and 2001 is set forth in Note 18 to the Company’s consolidated financial statements in this annual report on Form 10-K.

 

The Company’s principal executive offices are located at 888 Seventh Avenue, New York, New York 10019; telephone (212) 894-7000.

 

MATERIALS AVAILABLE ON VORNADO’S WEBSITE

 

Copies of Vornado’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as Reports on Forms 3, 4 and 5 regarding Officers, Trustees or 10% Beneficial Owners of Vornado, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934 are available free of charge through its website (www.vno.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.  Vornado has made available on its website copies of our Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee Charter, Code of Business Conduct and Ethics and Corporate Governance Guidelines.  In the event of any changes to these charters or the code or guidelines, changed copies will also be made available on the website.

 

18

 

CERTAIN FACTORS THAT MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS

 

Set forth below are certain factors that may adversely affect our business and operations.

 

Real Estate Investments’ Value and Income Fluctuate Due to Various Factors.

 

The value of real estate fluctuates depending on conditions in the general economy and the real estate business. These conditions may also limit our revenues and available cash.

 

The factors that affect the value of the our real estate include, among other things, national, regional and local economic conditions; consequences of any armed conflict involving, or terrorist attack against, the United States; our ability to secure adequate insurance; local conditions such as an oversupply of space or a reduction in demand for real estate in the area; competition from other available space; whether tenants consider a property attractive; the financial condition of our tenants, including the extent of tenant bankruptcies or defaults; whether we are able to pass some or all of any increased operating costs through to tenants; how well we manage our properties; fluctuations in interest rates; changes in real estate taxes and other expenses; changes in market rental rates; the timing and costs associated with property improvements and rentals; changes in taxation or zoning laws; government regulation; availability of financing on acceptable terms or at all; potential liability under environmental or other laws or regulations; and general competitive factors.

 

The rents we receive and the occupancy levels at our properties may decline as a result of adverse changes in any of these factors.  If our rental revenues decline, we generally would expect to have less cash available to pay our indebtedness and distribute to our partners. In addition, some of our major expenses, including mortgage payments, real estate taxes and maintenance costs, generally do not decline when the related rents decline.

 

We depend on leasing space to tenants on economically favorable terms and collecting rent from our tenants, who may not be able to pay.

 

Our financial results depend on leasing space in our properties to tenants on economically favorable terms. In addition, because substantially all of our income comes from renting of real property, our income, funds available to pay indebtedness and funds available for distribution to our partners will decrease if a significant number of our tenants cannot pay their rent.  If a tenant does not pay its rent, we might not be able to enforce our rights as landlord without delays and might incur substantial legal costs. For information regarding the bankruptcy of our tenants, see “—Bankruptcy of tenants may decrease our revenues and available cash” below.

 

Bankruptcy or insolvency of tenants may decrease our revenues and available cash.

 

A number of companies, including some of our tenants, have declared bankruptcy in recent years, and other tenants may declare bankruptcy or become insolvent in the future.  If a major tenant declares bankruptcy or becomes insolvent, the rental property where it leases space may have lower revenues and operational difficulties, and, in the case of our shopping centers, we may have difficulty leasing the remainder of the affected property.  Our leases generally do not contain restrictions designed to ensure the creditworthiness of its tenants. As a result, the bankruptcy or insolvency of a major tenant could result in a lower level of funds from operations available for distribution to our partners or the payment of our indebtedness.

 

In February 2003, KoninKlijke Ahold NV, parent of Stop & Shop, announced that it overstated its 2002 and 2001 earnings by at least $500 million and is under investigation by the U.S. Justice Department and Securities and Exchange Commission.  See Item 2. Properties - Retail Segment - Former Bradlees locations for information about former Bradlees leases guaranteed by Stop & Shop.  We cannot predict what effect, if any, this situation may have on Stop & Shop’s ability to satisfy its obligation under the Bradlees guarantees and rent for existing Stop & Shop leases aggregating approximately $10.5 million per annum.

 

The risk that some of our tenants may declare bankruptcy has been higher because of the September 11, 2001 terrorist attacks and the resulting decline in the economy.  If there is not a sustained recovery of the economy, this risk may increase. 

 

19

 

All of Our Temperature Controlled Logistics Warehouses Are Leased to One Tenant, and That Tenant Is Experiencing Operating Difficulties.

 

The Operating Partnership owns a 60% general partnership interest in a partnership, which we refer to as the “Vornado Crescent Portland Partnership,” that owns 87 cold storage warehouses nationwide with an aggregate of approximately 440.7 million cubic feet of refrigerated, frozen and dry storage space. In 1998, the Vornado Crescent Portland Partnership sold all of the non-real estate assets encompassing the operations of the temperature controlled business to a new partnership named AmeriCold Logistics, owned 60% by Vornado Operating Company, an independent, public company, which we refer to as “Vornado Operating,” and 40% by Crescent Operating Inc. AmeriCold Logistics leases the underlying temperature controlled warehouses used in this business from the Vornado Crescent Portland Partnership (“the Landlord”) which continues to own the real estate.  During 2003, AmeriCold Logistics generated approximately 9% of our EBITDA.  The leases, as amended, generally have a 15-year term with two-five year renewal options and provide for the payment of fixed base rent and percentage rent based on revenue AmeriCold Logistics receives from its customers.  The contractual rent for 2003 was $155,450,000.  The Landlord’s share of annual maintenance capital expenditures is $9,500,000.  In accordance with the leases, AmeriCold Logistics deferred payment of $41,811,000 of 2003 rent due to the Landlord, of which our share was $25,087,000.  Based on the joint venture’s policy of recognizing rental income when earned and collection is assured or cash is received, the joint venture did not recognize the amount of the rent deferred by AmeriCold Logistics in the year ended December 31, 2003.  At December 31, 2003, our share of the joint venture’s total deferred rent receivable from the tenant is $49,436,000.

 

To the extent that the operations of AmeriCold Logistics may affect its ability to pay rent, including percentage rent due under the leases, we indirectly bear the risks associated with AmeriCold Logistics’ cold storage business. The cold storage business is extremely competitive. Factors affecting AmeriCold Logistics’ ability to compete include, among others, (a) general economic conditions, (b) customer policies about outsourcing warehouse and logistic services (c) warehouse locations, (d) customer mix and (e) availability, quality and price of additional services.

 

Real estate is a competitive business.

 

For a discussion of risks related to competition in the real estate business, see “Item 1.  Business – Competition.”

 

We may incur costs to comply with environmental laws.

 

For a discussion of risks related to the Company’s compliance with environmental laws, see “Item 1.  Business – Environmental Regulations.”

 

Some of our potential losses may not be covered by insurance.

 

For a discussion of risks related to our insurance coverage, see “Item 1.  Business – Insurance.”

 

Our Investments Are Concentrated in the New York City/New Jersey and Washington, D.C. Metropolitan Areas.  Circumstances Affecting These Areas Generally Could Adversely Affect Our Business.

 

A significant proportion of our properties are in the New York City/New Jersey and Washington, D.C. metropolitan areas and are affected by the economic cycles and risks inherent to those regions.

 

During 2003, 73% of our EBITDA came from properties located in New Jersey and the New York City and Washington, D.C. metropolitan areas.  In addition, we may continue to concentrate a significant portion of our future acquisitions in New Jersey and the New York City and Washington, D.C. metropolitan areas.  Like other real estate markets, the real estate markets in these areas have experienced economic downturns in the past, and we cannot predict how the current economic conditions will impact these markets in both the short and long term.  Further declines in the economy or a decline in the real estate markets in these areas could hurt our financial performance and the value of our properties.  The factors affecting economic conditions in these regions include: space needs of the United States Government, business layoffs or downsizing; industry slowdowns; relocations of businesses; changing demographics; increased telecommuting and use of alternative work places; financial performance and productivity of the publishing, advertising, financial, technology, retail, insurance and real estate industries; infrastructure quality; and any oversupply of or reduced demand for real estate.

 

20

 

It is impossible for us to assess the future effects of the current uncertain trends in the economic and investment climates of the New York City/New Jersey and Washington, D.C. regions, and more generally of the United States, or the real estate markets in these areas.  If these conditions persist or if any local, national or global economic recovery is of a short term, businesses and future profitability may be adversely affected.

 

Terrorist Attacks such as those of September 11, 2001 in New York City and the Washington, D.C. Area May Adversely Affect the Value of Our Properties and Our Ability to Generate Cash Flow.

 

We have significant investments in large metropolitan areas, including the New York/New Jersey, Washington, D.C. and Chicago metropolitan areas. In the aftermath of the terrorist attacks, tenants in these areas may choose to relocate their business to less populated, lower-profile areas of the United States that may be perceived to be less likely targets of future terrorist activity. This in turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease our properties on less favorable terms. As a result, the value of our properties and the level of our revenues could decline materially.

 

We May Acquire or Sell Additional Assets or Develop Additional Properties.  Our Failure or Inability to Consummate These Transactions or Manage the Results of These Transactions Could Adversely Affect Our Operations and Financial Results.

 

We have grown rapidly through acquisitions.  We may not be able to maintain this rapid growth and our failure to do so could adversely affect our stock price.

 

We have experienced rapid growth in recent years, increasing our total assets from approximately $565 million at December 31, 1996, to approximately $9.5 billion at December 31, 2003.  We may not be able to maintain a similar rate of growth in the future or manage our growth effectively.  Our failure to do so may have a material adverse effect on our financial condition and results of operations and ability to pay distributions to our partners.

 

We may acquire or develop new properties and this may create risks.

 

We may acquire or develop properties or acquire other real estate companies when we believe that an acquisition or development is consistent with our business strategies. We may not, however, succeed in consummating desired acquisitions or in completing developments on time or within budget. We also may not succeed in leasing newly developed or acquired properties at rents sufficient to cover their costs of acquisition or development and operations.  Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management’s attention.

 

It may be difficult to buy and sell real estate quickly.

 

Real estate investments are relatively difficult to buy and sell quickly.  Consequently, we may have limited ability to vary our portfolio promptly in response to changes in economic or other conditions.

 

We may not be permitted to dispose of certain properties or pay down the debt associated with those properties when we might otherwise desire to do so without incurring additional costs.

 

As part of an acquisition of a property, including our January 1, 2002, acquisition of CESCR’s 13.0 million square foot portfolio, we may agree, and in the case of CESCR did agree with the seller that we will not dispose of the acquired properties or reduce the mortgage indebtedness on them for significant periods of time unless we pay certain of the resulting tax costs of the seller.  These agreements could result in our holding on to properties that we would otherwise sell and not pay down or refinance indebtedness that we would otherwise pay down or refinance.

 

21

 

On January 1, 2002, we completed the acquisition of the 66% interest in CESCR that we did not previously own. The terms of the merger restrict our ability to sell or otherwise dispose of, or to finance or refinance, the properties formerly owned by Charles E. Smith Commercial Realty L.P., which could result in our inability to sell these properties at an opportune time and increased costs to us.

 

Subject to limited exceptions, we are restricted from selling or otherwise transferring or disposing of certain properties located in the Crystal City area of Arlington, Virginia or an interest in our division that manages the majority of our office properties in the Washington, D.C. metropolitan area, which we refer to as the CESCR Division, for a period of 12 years with respect to certain properties located in the Crystal City area of Arlington, Virginia or six years with respect to an interest in the CESCR Division.  These restrictions, which currently cover approximately 13.0 million square feet of space, could result in our inability to sell these properties or an interest in the CESCR Division at an opportune time and increase costs to us.

 

Our Organizational and Financial Structure Gives Rise to Operational and Financial Risks.

 

Vornado May Not Be Able to Obtain Capital to Make Investments.

 

Vornado depends primarily on external financing to fund the growth of its business. This is because one of the requirements of the Internal Revenue Code of 1986, as amended, for a REIT is that it distribute 90% of its net taxable income, excluding net capital gains, to its shareholders (there is a separate requirement to distribute net capital gains or pay a corporate level tax in lieu).  Our access to debt or equity financing depends on the willingness of third parties to lend or make equity investments and on conditions in the capital markets generally. We and other companies in the real estate industry have experienced limited availability of financing from time to time. Although we believe that we will be able to finance any investments we may wish to make in the foreseeable future, new financing may not be available on acceptable terms.

 

For information about our available sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and the notes to the consolidated financial statements in this annual report on Form 10-K.

 

The Company depends on its direct and indirect subsidiaries’ dividends and distributions, and these subsidiaries’ creditors and preferred security holders are entitled to payment of amounts payable to them by the subsidiaries before the subsidiaries may pay any distributions to the Company.

 

Substantially all of the Company’s properties and assets are held through subsidiaries. The Company therefore depends for substantially all of its cash flow on cash distributions to it by its subsidiaries.  The creditors of each of the Company’s direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before distributions may be made by that subsidiary to its equity holders. Thus, the Company’s ability to make distributions to holders of units depends on its subsidiaries’ ability first to satisfy their obligations to their creditors and then to make distributions to the Company.

 

In addition, the Company’s participation in any distribution of the assets of any of its direct or indirect subsidiaries upon the liquidation, reorganization or insolvency of the subsidiary, is only after the claims of the creditors, including trade creditors, and preferred security holders, if any, of the subsidiary are satisfied.

 

22

 

We have indebtedness, and this indebtedness may increase.

 

As of December 31, 2003, we had approximately $5.115 billion in total debt outstanding.  Our ratio of total debt to total enterprise value was 35%. When we say “enterprise value” in the preceding sentence, we mean market equity value of Vornado Realty Trust plus debt less cash. In the future, we may incur additional debt, and thus increase its ratio of total debt to total enterprise value, to finance acquisitions or property developments.

 

Loss of the Company’s key personnel could harm our operations and adversely affect the value of our common shares.

 

We are dependent on the efforts of Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado Realty Trust, and Michael D. Fascitelli, the President of Vornado Realty Trust. While we believe that we could find replacements for these key personnel, the loss of their services could harm our operations and adversely affect the value or our common shares.

 

Our Ownership Structure and Related-Party Transactions May Give Rise to Conflicts of Interest.

 

Steven Roth and Interstate Properties may exercise substantial influence over the Company. They and some of the Company’s other trustees and officers have interests or positions in other entities that may compete with the Company.

 

As of December 31, 2003, Interstate Properties, a New Jersey general partnership, and its partners owned approximately 11.7% of the common shares of Vornado, the Company’s general partner and approximately 27.5% of the common stock of Alexander’s, Inc. and beneficially owned approximately 7.9% of the common stock of Vornado Operating (approximately 17.0% assuming redemption of 447,017 units of Vornado Operating L.P., the operating subsidiary of Vornado Operating, that are beneficially owned by Interstate Properties and redeemable for common stock of Vornado Operating).  Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the three partners of Interstate Properties. Mr. Roth is the Chairman of the Board and Chief Executive Officer of Vornado, the managing general partner of Interstate Properties, the Chief Executive Officer and a director of Alexander’s and the Chairman of the Board and Chief Executive Officer of Vornado Operating. Mr. Wight is a trustee of Vornado and is also a director of both Alexander’s and Vornado Operating. Mr. Mandelbaum is a trustee of Vornado and is also a director of Alexander’s.

 

As of December 31, 2003, we owned 33.1% of the outstanding common stock of Alexander’s. Alexander’s is a REIT engaged in leasing, managing, developing and redeveloping properties, focusing primarily on the locations where its department stores operated before they ceased operations in 1992. Alexander’s has six properties, which are located in the New York City metropolitan area. Mr. Roth and Mr. Fascitelli, the President and a trustee of Vornado, are directors of Alexander’s. Messrs. Mandelbaum, West and Wight are trustees of Vornado and are also directors of Alexander’s.

 

Because of these overlapping interests, Mr. Roth and Interstate Properties and its partners may have substantial influence over Vornado (and therefore the Company), Alexander’s and Vornado Operating and on the outcome of any matters submitted to Vornado, Alexander’s or Vornado Operating’s shareholders for approval. In addition, certain decisions concerning the Company’s operations or financial structure may present conflicts of interest among Messrs. Roth, Mandelbaum and Wight and Interstate Properties and the Company’s other equity or debt holders. In addition, Mr. Roth and Interstate Properties and its partners currently and may in the future engage in a wide variety of activities in the real estate business which may result in conflicts of interest with respect to matters affecting the Company, Alexander’s or Vornado Operating, such as which of these entities or persons, if any, may take advantage of potential business opportunities, the business focus of these entities, the types of properties and geographic locations in which these entities make investments, potential competition between business activities conducted, or sought to be conducted, by the Company, Interstate Properties, Alexander’s and Vornado Operating, competition for properties and tenants, possible corporate transactions such as acquisitions and other strategic decisions affecting the future of these entities.

 

The Company currently manages and leases the real estate assets of Interstate Properties under a management agreement for which the Company receives an annual fee equal to 4% of base rent and percentage rent and certain other commissions. The management agreement has a term of one year and is automatically renewable unless terminated by either of the parties on 60 days’ notice at the end of the term. The Company earned $703,000, $747,000 and $1,133,000 of management fees under the management agreement for the years ended December 31, 2003, 2002 and 2001.  In addition, during fiscal years 2003, 2002 and 2001, as a result of a previously existing leasing arrangement with Alexander’s, Alexander’s paid to Interstate $587,000, $703,000 and $522,000, respectively, for the leasing an other services actually rendered by the Company.  Upon receipt of these payments, Interstate promptly paid them over to the Company without

 

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retaining any interest therein.  This arrangement was terminated in 2003 and all payments by Alexander’s for these leasing and other services are made directly to the Company.  Because the Company and Interstate Properties are controlled by the same persons, as described above, the terms of the management agreement and any future agreements between the Company and Interstate Properties may not be comparable to those the Company could have negotiated with an unaffiliated third party.

 

We engage in transactions with Vornado Operating on terms that may or may not be comparable to those it could negotiate with unaffiliated third parties.

 

In October 1998, Vornado Operating was spun off from the Company in order to own assets that the Company could not itself own and conduct activities that the Company could not itself conduct.  In addition to being trustees of Vornado, Messrs. Roth, Fascitelli, West and Wight are directors of Vornado Operating. Mr. Roth is also Chairman of the Board and Chief Executive Officer of Vornado Operating, Mr. Fascitelli is also President of Vornado Operating, and certain other members of the Company’s senior management hold corresponding positions with Vornado Operating.

 

The Company entered into a $75,000,000 unsecured revolving credit facility with Vornado Operating that expires on December 31, 2004. Borrowings under the revolving credit agreement bear interest at LIBOR plus 3%. The Company receives an annual commitment fee equal to 1% on the average daily unused portion of the facility. Vornado Operating is not required to pay any amortization under the revolving credit agreement during its term. The revolving credit agreement prohibits Vornado Operating from incurring indebtedness to third parties, other than certain purchase money debt and certain other exceptions, and prohibits Vornado Operating from paying dividends. As of December 31, 2003, $21,989,000 was the carrying balance on our books for the amount outstanding under the revolving credit agreement.

 

The Company and Vornado Operating are parties to an agreement under which, among other things, (a) we will offer Vornado Operating, under certain circumstances, an opportunity to become the lessee of certain real property owned now or in the future by us under mutually satisfactory lease terms and (b) Vornado Operating will not make any real estate investment or other investments known as REIT-qualified investments unless it first offers us the opportunity to make the investment and we have rejected that opportunity. Under this agreement, we provide Vornado Operating with administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources and operational services. For these services, Vornado Operating compensates us in an amount determined in good faith by us as the amount an unaffiliated third party would charge Vornado Operating for comparable services and reimburses us for certain costs incurred and paid to third parties on behalf of Vornado Operating. Under this agreement, compensation for these services was approximately $330,000, for each of the years ended December 31, 2003, and 2002 and $371,000 for the year ended December 31, 2001. Vornado Operating and the Company each have the right to terminate this agreement if the other party is in material default of the agreement or upon 90 days’ written notice to the other party at any time. In addition, we have the right to terminate this agreement upon a change in control of Vornado Operating.

 

Vornado Operating’s restated certificate of incorporation specifies that one of its corporate purposes is to perform this agreement and, for so long as the agreement remains in effect, prohibits Vornado Operating from making any real estate investment or other REIT-qualified investment without first offering the opportunity to the Company in the manner specified in the agreement.

 

The Company and Vornado Operating may enter into additional transactions in the future. Because the Company and Vornado Operating share common senior management and because four of the Company’s trustees also constitute the majority of the directors of Vornado Operating, the terms of the foregoing agreements and any future agreements between us and Vornado Operating may not be comparable to those we could have negotiated with an unaffiliated third party.

 

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There may be conflicts of interest between Alexander’s and Us

 

As of December 31, 2003, the Operating Partnership owned 33.1% of the outstanding common stock of Alexander’s.  Alexander’s is a REIT engaged in leasing, managing, developing and redeveloping properties, focusing primarily on the locations where its department stores operated before they ceased operations in 1992.  Alexander’s has six properties.  Interstate Properties, which is further described above, owned an additional 27.5% of the outstanding common stock of Alexander’s as of December 31, 2003.  Mr. Roth, Chairman of the Board and Chief Executive Officer of Vornado, is Chief Executive Officer and a director of Alexander’s, and Mr. Fascitelli, President and a trustee of Vornado, is President and a director of Alexander’s.  Messrs. Mandelbaum, West and Wight, trustees of Vornado, are also directors of Alexander’s.  Alexander’s common stock is listed on the New York Stock Exchange under the symbol “ALX.”

 

At December 31, 2003, the Company had loans receivable from Alexander’s of $124,000,000 at an interest rate of 12.48%, including $29,000,000 drawn under a $50,000,000 line of credit.  The maturity date of the loans is the earlier of January 3, 2006 or the date that Alexander’s Lexington Avenue construction loan is repaid fully. The Operating Partnership manages, develops and leases the Alexander’s properties under management and development agreements and leasing agreements under which the Operating Partnership receives annual fees from Alexander’s. These agreements have a one-year term expiring in March of each year, except that the Lexington Avenue management and development agreements have a term lasting until substantial completion of development of the Lexington Avenue property, and are all automatically renewable. Because the Company and Alexander’s share common senior management and because a majority of the trustees of Vornado also constitute the majority of the directors of Alexander’s, the terms of the foregoing agreements and any future agreements between us and Alexander’s may not be comparable to those we could have negotiated with an unaffiliated third party.

 

For a description of Interstate Properties’ ownership of Vornado, Vornado Operating and Alexander’s, see “Steven Roth and Interstate Properties may exercise substantial influence over the Company. They and some of the Company’s other trustees and officers have interests or positions in other entities that may compete with the Company” above.

 

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ITEM 2.                             PROPERTIES

 

The Company currently owns, directly or indirectly, Office properties, Retail properties, Merchandise Mart properties and Temperature Controlled Logistics refrigerated warehouses. The Company also owns or has investments in Alexander’s, Hotel Pennsylvania, The Newkirk Master Limited Partnership, and dry warehouses and industrial buildings.

 

Office Segment

 

The Company currently owns all or a portion of 83 office properties containing approximately 27.3 million square feet.  Of these properties, 20, containing 13.3 million square feet, are located in the New York City metropolitan area (primarily Manhattan) (the “New York City Office Properties”) and 63, containing 14.0 million square feet, are located in the Washington, D.C. and Northern Virginia area (the “CESCR Office Properties”).

 

New York City Office Properties:

 

The New York City Office Properties contain 12,456,000 square feet of office space and 797,000 square feet of retail space.  In addition, the New York City Office properties contain five garages totaling 332,000 square feet (1,600 spaces) which are managed by or leased to third parties.  The garage space is excluded from the statistics provided in this section.

 

On May 2, 2003, the Company acquired the remaining 40% of a 78-year leasehold interest in 20 Broad Street it did not already own.  The purchase price was approximately $30,000,000 in cash.  20 Broad Street contains 466,000 square feet of office space, of which 348,000 square feet is leased to the New York Stock Exchange.

 

On October 10, 2003, the Company sold Two Park Avenue, a 965,000 square foot office building, for $292,000,000 to SEB Immobilien-Investment GMBH, a German capital investment company.   The Company’s net gain on the sale after closing costs was approximately $156,433,000.

 

The following table sets forth the percentage of the New York City Office Properties 2003 revenue by tenants’ industry:

 

Industry		Percentage
Retail		12	%
Publishing		10	%
Government		8	%
Legal		8	%
Communication		7	%
Technology		6	%
Finance		6	%
Pharmaceuticals		5	%
Not-for-Profit		4	%
Apparel		4	%
Insurance		4	%
Real Estate		3	%
Health Services		3	%
Service Contractors		3	%
Engineering		3	%
Bank Branches		3	%
Other		11	%
		100	%

 

The Company’s New York City Office property lease terms generally range from five to seven years for smaller tenant spaces to as long as 15 years for major tenants, and may include extension options at market rates.  Leases typically provide for step-ups in rent periodically over the term of the lease and pass through to tenants the tenant’s share of increases in real estate taxes and operating expenses over a base year. Electricity is provided to tenants on a sub-metered basis or included in rent based on surveys and adjusted for subsequent utility rate increases. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant’s initial construction costs of its premises.

 

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No tenant in the New York City office segment accounted for more than 10% of the Company’s 2003 total revenue.  Below is a listing of tenants that accounted for 2% or more of the New York City Office Properties revenues in 2003:

 

Tenant		Square Feet Leased		2003 Revenues			Percentage of New York City Office Revenues		Percentage of Company Revenues
The McGraw-Hill Companies, Inc.		518,000		$	20,031,000		3.5	%	1.3	%
Sterling Winthrop, Inc.		429,000		18,932,000			3.3	%	1.3	%
VNU Inc.		515,000		18,644,000			3.2	%	1.2	%
Cablevision/Madison Square Garden L.P./ Rainbow Media Holdings, Inc.		285,000		13,877,000			2.4	%	0.9	%
New York Stock Exchange, Inc.		348,000		13,723,000			2.4	%	0.9	%
U.S. Government		646,737		13,350,000			2.3	%	0.9	%
Federated Department Stores		299,000		11,548,000			2.0	%	0.8	%

 

The following table sets forth the occupancy rate and the average annual escalated rent per square foot for the New York City Office properties, excluding garage space, at the end of each of the past five years.

 

As of December 31,		Rentable Square Feet		Occupancy Rate		Average Annual Escalated Rent Per Square Foot (excluding retail space)
2003		13,253,000		95.2	%	$	39.21
2002		13,957,000		95.8	%	37.36
2001		13,953,000		97.3	%	35.53
2000		14,049,000		96.2	%	32.18
1999		13,681,000		94.9	%	30.16

 

During 2003, 1,017,000 square feet of New York City office space was leased at a weighted average initial rent per square foot of $44.28.  The Company’s ownership interest in the leased square footage is 925,000 square feet at a weighted average initial rent per square foot of $44.60, a 15% increase over the weighted average escalated rent per square foot of $38.51 for the expiring leases.  Following is the detail by building:

 

		2003 Leasing Activity
Location		Square Feet		Average Initial Rent Per Square Foot(1)
888 Seventh Avenue		216,000		$	52.41
90 Park Avenue		188,000		47.18
One Penn Plaza		159,000		40.75
330 Madison Avenue (25% interest)		120,000		41.28
150 East 58th Street		69,000		43.81
595 Madison		55,000		46.88
866 U.N. Plaza		32,000		42.62
40 Fulton Street		29,000		29.38
909 Third Avenue		29,000		48.68
Eleven Penn Plaza		28,000		32.56
Two Park Avenue		27,000		36.37
330 West 34th Street		26,000		27.00
Two Penn Plaza		17,000		38.89
689 Fifth Avenue		14,000		44.00
Paramus		5,000		20.01
20 Broad Street		3,000		33.01
Total		1,017,000		44.28
Vornado’s Ownership Interest		925,000		44.60

 

(1)          Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

 

In addition to the office space noted above, the Company leased 66,000 square feet of retail space at a weighted average initial rent of $220.97 per square foot. 

 

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The following tables set forth lease expirations for the office and retail portions of the New York City Office Properties as of December 31, 2003, for each of the next 10 years assuming that none of the tenants exercise their renewal options.

 

Office Space:

 

						Percentage of		Annual Escalated Rent of Expiring Leases
Year		Number of Expiring Leases		Square Feet of Expiring Leases		New York City Office Square Feet		Total			Per Square Foot
2004		142		753,000		6.4	%	$	22,802,000		$	30.28
2005		100		529,000		4.5	%	23,233,000			43.92
2006		82		877,000		7.5	%	33,298,000			37.97
2007		76		808,000		6.9	%	34,089,000			42.19
2008		62		1,198,000	(1)	10.2	%	49,119,000			41.00
2009		58		544,000		4.6	%	21,865,000			40.19
2010		42		1,046,000		8.9	%	43,676,000			41.76
2011		23		799,000		6.8	%	38,584,000			48.29
2012		17		816,000		7.0	%	27,090,000			33.20
2013		16		597,000		5.1	%	23,043,000			38.60

 

(1)          Excludes 492,000 square feet at 909 Third Avenue leased to the U.S. Post Office for which the annual escalated rent is $4,412,000 or $8.96 per square foot.  The U.S. Post Office has 6 five-year renewal options remaining.

 

Retail Space (contained in office buildings):

 

								Annual Escalated Rent of Expiring Leases
Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of Retail Square Feet		Total			Per Square Foot
2004		15		41,000		5.5	%	$	3,012,000		$	73.46
2005		4		16,000		2.1	%	1,740,000			108.75
2006		11		60,000		7.9	%	2,902,000			48.37
2007		2		2,000		0.3	%	465,000			232.50
2008		9		29,000		3.8	%	1,601,000			55.21
2009		6		26,000		3.4	%	2,705,000			104.04
2010		4		6,000		0.9	%	526,000			87.67
2011		3		9,000		1.2	%	628,000			69.78
2012		4		69,000		9.0	%	2,446,000			35.45
2013		10		36,000		4.8	%	3,519,000			97.75

 

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The following table sets forth the New York City Office Properties owned by the Company as of December 31, 2003:

 

Location		Approximate Leasable Building Square Feet		Percent Leased		Encumbrances (in thousands)
NEW YORK (Manhattan)
One Penn Plaza (1)		2,365,000		96.3	%	$	275,000
Two Penn Plaza		1,529,000		95.6	%	151,420
909 Third Avenue (1)		1,307,000		90.6	%	125,000
770 Broadway		1,046,000		99.6	%	170,000
Eleven Penn Plaza		1,022,000		95.8	%	49,304
90 Park Avenue		890,000		98.6	%	—
888 Seventh Avenue (1)		822,000		95.9	%	105,000
330 West 34th Street (1)		637,000		99.9	%	—
1740 Broadway		566,000		98.7	%	—
150 East 58th Street (1)		521,000		87.9	%	—
866 United Nations Plaza		350,000		91.5	%	33,000
595 Madison (Fuller Building)		305,000		91.3	%	—
640 Fifth Avenue		269,000		99.4%	(2)	—
40 Fulton Street		238,000		86.6	%	—
689 Fifth Avenue		89,000		87.6	%	—
7 West 34th Street		424,000		100.0	%	—
330 Madison Avenue (25% interest)		783,000		91.0	%	60,000
20 Broad Street (1)		467,000		87.1	%	—
825 Seventh Avenue (50% interest)		165,000		86.5	%	23,060
NEW JERSEY
Paramus		128,000		93.5	%	—
Total Office Buildings		13,923,000		94.9	%	$	991,784
Vornado’s Ownership Interest		13,253,000		95.2	%	$	935,254

 

(1)          These properties are 100% ground leased with the exception of 150 East 58^th Street where less than 10% is ground leased.

(2)          Excludes 114,119 square feet under development. 

 

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Charles E. Smith Commercial Realty (“CESCR”) Office Properties:

 

CESCR owns 63 office buildings in the Washington D.C. and Northern Virginia area containing 14.0 million square feet and manages an additional 8.5 million square feet of office and other commercial properties.  In addition, CESCR’s buildings contain 19 garages totaling approximately 7.4 million square feet (25,000 spaces) which are managed by or leased to third parties.  The garage space is excluded from the statistics provided in this section.  As of December 31, 2003, 44 percent of CESCR’s property portfolio is leased to various agencies of the U.S. government.

 

On April 9, 2003, the Company acquired Kaempfer which owns partial interests in six Class “A” office properties in Washington D.C. containing 1.8 million square feet, manages and leases these properties and four others for which it receives customary fees and has options to acquire certain other real estate interests, including the Waterfront project discussed below.  Kaempfer’s equity interest in the properties approximates 5.0%.  The aggregate purchase price for the equity interests and the management and leasing business was $32,200,000 consisting of $28,600,000 in cash, approximately 99,300 Operating Partnership units valued at $3,600,000 and may be increased by up to $9,000,000 based on the performance of the management company.

 

On October 7, 2003, the Company acquired a 2.5% interest in the planned redevelopment of Waterfront, located at 401 M Street, a mixed-use project in Washington D.C. (“the Waterfront interest”) for $2,171,000, of which the Company paid $1,545,000 in cash and issued 12,500 Operating Partnership units valued at $626,000.  The partnership units were issued to Mitchell N. Schear, one of the partners in the Waterfront interest, who became the President of the Company’s CESCR division.

 

On August 4, 2003, the Company completed the acquisition of 2101 L Street, a 370,000 square foot office building located in Washington D.C.  The consideration for the acquisition consisted of approximately 1.1 million newly issued Operating Partnership units (valued at approximately $49,517,000) and the assumption of existing mortgage debt and transaction costs totaling approximately $32,000,000.  Robert H. Smith and Robert P. Kogod, trustees of Vornado, together with family members owned approximately 24 percent of the limited partnership that sold the building and Mr. Smith was a general partner.  On August 5, 2003, the Company repaid the mortgage of $29,056,000.

 

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The following table sets forth the percentage of CESCR’s Office properties 2003 revenue by tenants’ industry:

 

 

CESCR office leases are typically for four to seven year terms, and may provide for extension options at either pre-negotiated or market rates.  Most leases provide for annual rental escalations throughout the lease term, plus recovery of increases in real estate taxes and certain property operating expenses over a base year.  Annual rental escalations are typically based upon either fixed percentage increases or the consumer price index.  Leases also typically provide for tenant improvement allowances for all or a portion of the tenant’s initial construction costs of its premises.

 

Below is a listing of tenants which accounted for 2% or more of the CESCR Office properties revenues during 2003:

 

 

The following table sets forth the occupancy rate and the average annual escalated rent per square foot for the CESCR properties at the end of each of the past five years:

 

As of December 31,		Rentable Square Feet		Occupancy Rate		Average Annual Escalated Rent Per Square Foot
2003		13,963,000		93.9	%	$	29.64
2002		13,395,000		93.6	%	29.38
2001		12,899,000		94.8	%	28.59
2000		12,495,000		97.9	%	27.38
1999		10,657,000		98.6	%	26.46

 

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During 2003, 2,848,000 square feet of CESCR office space was leased at a weighted average initial rent per square foot of $30.26, a 2.6% increase over the weighted average escalated rent per square foot of $29.86 for the expiring leases.  Following is the detail by building and/or complex:

 

Location		Square Feet		Average Initial Rent Per Square Foot(1)
Crystal Gateway		577,000		$	32.30
Skylines		583,000		24.65
Crystal Mall		430,000		33.86
Crystal Square		394,000		32.80
Crystal Park		253,000		32.42
Crystal Plaza		113,000		30.72
Tysons Dulles		115,000		22.68
1730 M Street		58,000		30.52
1140 Connecticut Avenue		59,000		33.70
Courthouse Plaza		42,000		31.71
Democracy Plaza		43,000		33.96
Reston Executive		34,000		21.84
1101 17th Street		41,000		33.87
1150 17th Street		25,000		32.61
Commerce Executive		64,000		22.23
Arlington Plaza		8,000		27.16
Fairfax Square (20% interest)		8,000		28.04
1919 South Eads Street		1,000		33.50
		2,848,000		30.26

 

(1)          Most leases include periodic step-ups in rent which are not reflected in the initial rent per square foot leased.

 

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The following table sets forth lease expirations for the CESCR Office Properties as of December 31, 2003 for each of the next 10 years, assuming that none of the tenants exercise their renewal options.

 

								Annual Escalated Rent of Expiring Leases
Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of CESCR Square Feet
								Total			Per Square Foot
2004		391		3,320,000		25.5	%	$	95,220,000		$	28.68
2005		207		2,091,000		16.0	%	60,714,000			29.03
2006		171		2,225,000		17.1	%	68,990,000			31.01
2007		124		888,000		6.8	%	27,002,000			30.39
2008		123		1,130,000		8.7	%	33,641,000			29.76
2009		56		683,000		5.2	%	18,443,000			27.00
2010		45		426,000		3.3	%	13,930,000			32.72
2011		59		906,000		6.9	%	26,394,000			29.14
2012		26		556,000		4.3	%	18,125,000			32.61
2013		25		348,000		2.7	%	11,282,000			32.46

 

 

Included in the above table is 1,939,000 square feet leased to the U.S. Patent and Trademark Office (“PTO”) in the Crystal City submarket.  The PTO lease expirations are as follows:

 

		Square Feet of Expiring PTO Leases
2004		937,000
2005		895,000
2006		107,000
Total		1,939,000

 

 

The average annual escalated rent per square foot of the PTO space is $26.61.  The average escalated rent per square foot of CESCR space expiring in 2004 in the Crystal City submarket is $28.56.  The Company plans substantial renovations to this space as outlined in Item 1-Business “Development and Redevelopment Projects”.

 

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The following table sets forth the CESCR Office Properties owned by the Company as of December 31, 2003:

 

Location/Complex		Number of Buildings		Approximate Leasable Building Square Feet		Percent Leased		Encumbrances (in thousands)
Crystal Mall		4		1,064,000		99.9	%	$	53,210
Crystal Plaza		7		1,220,000		98.2	%	68,598
Crystal Square		4		1,414,000		99.4	%	187,102
Crystal Gateway		5		1,457,000		97.5	%	203,006
Crystal Park		5		2,166,000		90.4	%	257,971
1919 S. Eads Street		1		96,000		87.5	%	12,942
Total Crystal City		26		7,417,000		96.1	%	782,829
Arlington Plaza		1		176,000		84.7	%	17,256
Skyline		8		2,507,000		91.4	%	198,801
Courthouse Plaza (1)		2		618,000		98.1	%	78,483
1101 17th Street		1		206,000		91.8	%	25,783
1730 M Street		1		190,000		89.7	%	16,097
1140 Connecticut Avenue		1		179,000		96.0	%	19,070
1150 17th Street		1		226,000		95.7	%	31,134
1750 Pennsylvania Avenue		1		259,000		97.9	%	49,346
2101 L Street		1		354,000		99.9	%	—
Democracy Plaza I (1)		1		218,000		95.5	%	26,551
Tysons Dulles		3		482,000		87.3	%	—
Commerce Executive		3		416,000		73.7	%	52,582
Reston Executive		3		487,000		95.3	%	71,874
Fairfax Square (20% interest)		3		104,000		72.1	%	13,610
Kaempfer equity interests (.1% to 10% interests)		7		124,000		98.8	%	13,830
Total Office buildings (Vornado’s Interest)		63		13,963,000		93.9	%	$	1,397,246

 

(1)          These properties are 100% ground leased.

 

34

 

Retail Segment

 

The Company owns 60 retail properties, of which 48 are strip shopping centers primarily located in the Northeast and Mid-Atlantic states; five are regional malls located in New York, New Jersey and San Juan, Puerto Rico; and seven are retail properties located in Manhattan.  The Company’s strip shopping centers and malls are generally located on major regional highways in mature, densely populated areas.  The Company believes these properties attract consumers from a regional, rather than a neighborhood market place because of their location on regional highways.

 

The Company’s strip shopping centers contain an aggregate of 8.8 million square feet and are substantially (over 80%) leased to large stores (over 20,000 square feet).  Tenants include destination retailers such as discount department stores, supermarkets, home improvement stores, discount apparel stores, membership warehouse clubs and “category killers.”  Category killers are large stores that offer a complete selection of a category of items (e.g., toys, office supplies, etc.) at low prices, often in a warehouse format.  Tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price and location.

 

The Company’s five regional malls are as follows :

 

The Green Acres Mall in Long Island, New York contains 1.6 million square feet, and is anchored by four major department stores: Sears, Roebuck and Co., J.C. Penney Company, Inc., Federated Department Stores, Inc. (“Federated”) doing business as Macy’s, and Federated doing business as Stern’s, that is currently dark.  In February 2004, the Company entered into an agreement with Federated to take back 63,000 square feet of the former Stern’s store.  The remainder of the Stern’s space will be operated as a Macy’s Men’s Store and a Macy’s Home Store.  Federated will continue to pay the same rent (exclusive of real estate taxes for the space taken back by the Company).  The complex also includes The Plaza at Green Acres, a 172,000 square foot strip shopping center which is anchored by Wal-Mart and National Wholesale Liquidators.  The Company plans to renovate the interior of the mall.  In addition, the Company will construct 70,000 square feet of free-standing retail space and parking decks in the complex, subject to governmental approvals.  Further, the Company has entered into a ground lease with B.J.’s Wholesale Club who will construct its own free-standing store in the complex.  The expansion and renovation are expected to be completed by 2006.

 

The Monmouth Mall, located in Eatontown, New Jersey was acquired on October 10, 2002, by a joint venture in which the Company has a 50% interest.  The mall contains 1.5 million square feet and is anchored by four department store tenants (Macy’s, Lord & Taylor, J.C. Penney’s and Boscovs), three of which own their stores aggregating 719,000 square feet.

 

The Bergen Mall in Paramus, New Jersey, contains 903,000 square feet and is anchored by Macy’s, Value City, Marshalls and Off Saks Fifth Avenue.  The Bergen Mall was acquired on December 12, 2003, for approximately $145,000,000.

 

The Montehiedra Mall in San Juan, Puerto Rico, contains 554,000 square feet and is anchored by Home Depot, Kmart, and Marshalls.

 

The Las Catalinas Mall in San Juan, Puerto Rico, contains 493,000 square feet and is anchored by Kmart and Sears, which owns its store.

 

35

 

The following table sets forth the percentage of the Retail Properties 2003 revenues by type of retailer:

 

 

The Company’s shopping center lease terms range from five years or less in some instances for smaller tenant spaces to as long as 25 years for major tenants. Leases generally provide for additional rents based on a percentage of tenants’ sales and pass through to tenants of the tenants’ share of all common area charges (including roof and structure in strip shopping centers, unless it is the tenant’s direct responsibility), real estate taxes and insurance costs and certain capital expenditures. Percentage rent accounted for less than 1% of total shopping center revenues in 2003.  None of the tenants in the Retail Segment accounted for more than 10% of the Company’s 2003 total revenues.

 

Below is a listing of tenants which accounted for 2% or more of the Retail properties revenues in 2003:

 

 

36

 

The aggregate occupancy rate for the 12,889,000 square feet of retail properties at December 31, 2003 is 93.0%.  The occupancy rate includes leases for 691,000 square feet (6%) at four locations, which have not commenced at December 31, 2003.  The following sets forth the occupancy rate and the average annual base rent per square foot for the Strip Shopping Centers and Regional Malls at the end of each of the past five years.

 

Strip Shopping Centers:

 

 

As of December 31,		Rentable Square Feet		Occupancy Rate		Average Annual Base Rent Per Square Foot
2003		8,798,000		92.3	%	$	11.91
2002		9,295,000		85.7	%	11.11
2001		9,008,000		89.0	%	10.60
2000		9,000,000		91.1	%	10.72
1999		8,212,000		91.0	%	10.20

 

Regional Malls:

 

As of December 31,		Rentable Square Feet		Occupancy Rate		Average Annual Base Rent Per Square Foot
						Mall Tenants			Total
2003		3,766,000		94.1	%	$	31.08		$	16.41
2002		2,875,000		95.4	%	27.79			17.15
2001		2,293,000		98.7	%	34.04			15.31
2000		2,293,000		95.5	%	32.05			14.84
1999		2,293,000		95.5	%	31.66			14.50

 

Manhattan Retail and Other:

 

The Manhattan retail is comprised of seven properties containing 325,000 square feet, including 4 Union Square South, containing 198,000 square feet, which is currently under development.

 

The Company has two strip shopping centers aggregating 327,000 square feet which are classified as held for sale as of December 31, 2003.

 

37

 

During 2003, approximately 803,000 square feet of retail space was leased at a weighted average rent per square foot of $17.40, an 11.6% increase over the weighted average rent per square foot of $15.59 for the expiring leases and 243,000 square feet of land was ground leased to retailers at a weighted average rent per square foot of $10.60.  Following is the detail by property:

 

 

(1)          Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

 

38

 

Former Bradlees locations:

 

Property rentals for the year ended December 31, 2003, include $5,000,000 of additional rent which, effective December 31, 2002, was re-allocated to the former Bradlees locations in Marlton, Turnersville, Bensalem and Broomall and is payable by Stop & Shop, pursuant to the Master Agreement and Guaranty, dated May 1, 1992.  This amount is in addition to all other rent guaranteed by Stop & Shop for the former Bradlees locations.  On January 8, 2003, Stop & Shop filed a complaint with the United States District Court claiming the Company has no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated.  The Company believes the additional rent provision of the guaranty expires at the earliest in 2012 and is vigorously contesting Stop & Shop’s position.

 

In February 2003, Koninklijke Ahold NV, parent of Stop & Shop, announced that it overstated its 2002 and 2001 earnings by at least $500 million and is under investigation by the U.S. Justice Department and Securities and Exchange Commission.  The Company cannot predict what effect, if any, this situation may have on Stop & Shop’s ability to satisfy its obligation under the Bradlees guarantees and rent for existing Stop & Shop leases aggregating approximately $10.5 million per annum.

 

The following table sets forth the lease expirations for the Retail Properties as of December 31, 2003 for each of the next 10 years assuming that none of the tenants exercise their renewal options.

 

								Annual Rent of Expiring Leases
Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of Retail Square Feet
								Total			Per Square Foot
2004		115		679,000		5.6	%	$	10,315,000		$	15.19
2005		117		549,000		4.5	%	10,800,000			19.67
2006		84		817,000		6.8	%	8,511,000			10.42
2007		117		744,000		6.2	%	10,791,000			14.50
2008		98		733,000		6.1	%	10,228,000			13.95
2009		66		556,000		4.6	%	8,502,000			15.29
2010		40		440,000		3.6	%	6,646,000			15.10
2011		37		724,000		6.0	%	8,763,000			12.10
2012		45		743,000		6.1	%	8,320,000			11.20
2013		47		603,000		5.0	%	9,689,000			16.07

 

39

 

The following table sets forth the Retail Properties owned by the Company as of December 31, 2003:

 

		Approximate Leasable Building Square Footage
Location		Owned/ Leased by Company		Owned by Tenant on Land Leased from Company		Percent Leased		Encumbrances
								(in thousands)
REGIONAL MALLS:
Green Acres Mall, Valley Stream, NY (1)		1,535,000		61,000		95.6	%	155,307
Monmouth Mall, Monmouth, NJ (50% ownership)		717,000		—		94.9	%	135,000
Montehiedra, Puerto Rico		554,000		—		90.8	%	58,855
Las Catalinas, Puerto Rico		354,000		—		94.5	%	66,729
Bergen Mall, Paramus, NJ (Acquired 12/12/03)		893,000		10,000		93.0	%	—
Total Regional Malls		4,053,000		71,000		94.2	%	415,891
Vornado’s ownership interest		3,694,000		71,000		94.1	%	348,391
STRIP SHOPPING CENTERS:
NEW JERSEY
Bordentown		179,000		—		95.0	%	7,990	(2)
Bricktown		260,000		3,000		96.0	%	16,147	(2)
Cherry Hill		58,000		206,000		91.1	%	14,850	(2)
Delran		169,000		3,000		95.5	%	6,365	(2)
Dover		173,000		—		98.8	%	7,278	(2)
East Brunswick		221,000		10,000		100.0	%	22,546	(2)
East Hanover I and II		348,000		—		87.0	%	27,031	(2)
Hackensack		209,000		60,000		98.2	%	24,770	(2)
Jersey City		47,000		173,000		100.0	%	18,963	(2)
Kearny		40,000		66,000		98.2	%	3,702	(2)
Lawnside		142,000		3,000		78.8	%	10,493	(2)
Lodi		171,000		—		100.0	%	9,299	(2)
Manalapan		196,000		2,000		100.0	%	12,410	(2)
Marlton		174,000		7,000		96.1	%	12,067	(2)
Middletown		180,000		52,000		93.0	%	16,289	(2)
Morris Plains		176,000		1,000		100.0	%	11,924	(2)
North Bergen		7,000		55,000		100.0	%	3,926	(2)
North Plainfield (1)		219,000		—		88.1	%	10,779	(2)
Totowa		178,000		139,000		100.0	%	29,252	(2)
Turnersville		89,000		7,000		100.0	%	4,047	(2)
Union		120,000		159,000		95.6	%	33,220	(2)
Watchung		50,000		116,000		96.5	%	13,404	(2)
Woodbridge		88,000		140,000		85.7	%	21,897	(2)
Total New Jerseyz		3,494,000		1,202,000		95.0	%	338,649
NEW YORK
Albany (Menands)		140,000		—		74.0	%	6,158	(2)
Buffalo (Amherst) (1)		185,000		112,000		81.1	%	6,939	(2)
Freeport		167,000		—		100.0	%	14,658	(2)
New Hyde Park (1)		101,000		—		100.0	%	7,398	(2)
North Syracuse (1)		98,000		—		100.0	%	—
Rochester (Henrietta) (1)		148,000		—		58.6	%	—
Rochester		—		205,000		100.0	%	—
Total New York		839,000		317,000		86.7	%	35,153

 

40

 

		Approximate Leasable Building Square Footage
Location		Owned/ Leased by Company		Owned by Tenant on Land Leased from Company		Percent Leased		Encumbrances
								(in thousands)
PENNSYLVANIA
Allentown		269,000		354,000		97.3	%	23,019	(2)
Bensalem		122,000		8,000		97.6	%	6,361	(2)
Bethlehem		159,000		—		74.4	%	4,026	(2)
Broomall		147,000		22,000		86.5	%	9,680	(2)
Glenolden		10,000		92,000		100.0	%	7,260	(2)
Lancaster		58,000		170,000		93.6	%	—
Levittown		105,000		—		100.0	%	3,253	(2)
10th and Market Streets, Philadelphia		271,000		—		76.2	%	8,867	(2)
Upper Moreland		122,000		—		100.0	%	6,883	(2)
York		111,000		—		24.6	%	4,070	(2)
Total Pennsylvania		1,374,000		646,000		87.8	%	73,419
MARYLAND
Baltimore (Towson)		152,000		—		79.3	%	11,280	(2)
Glen Burnie		65,000		56,000		100.0	%	5,805	(2)
Total Maryland		217,000		56,000		88.5	%	17,085
CONNECTICUT
Newington		43,000		140,000		100.0	%	6,483	(2)
Waterbury		146,000		—		92.2	%	—
Total Connecticut		189,000		140,000		96.5	%	6,483
MASSACHUSETTS
Chicopee		—		116,000		100.0	%	—
Milford (1)		83,000		—		100.0	%	—
Springfield		8,000		117,000		100.0	%	3,095
Total Massachusetts		91,000		233,000		100.0	%	3,095
Total Strip Shopping Centers		6,204,000		2,594,000		92.3	%	473,884
OTHER RETAIL:
NEW YORK (Manhattan)
1135 Third Avenue		25,000		—		100.0	%	—
4 Union Square South (in development)		198,000		—		97.5	%	—
424 Sixth Avenue		10,000		—		100.0	%	—
435 Seventh Avenue		43,000		—		100.0	%	—
484 Eighth Avenue		14,000		—		100.0	%	—
715 Lexington Avenue		32,000		—		—		—
825 Seventh Avenue		3,000		—		100.0	%	—
Total Other Retail		325,000		—		98.3	%	—
Total Retail Space		10,582,000		2,665,000		93.0	%	889,775
Vornado’s Ownership Interest		10,223,000		2,665,000		93.0	%	822,275
ASSETS HELD FOR SALE:
Vineland, New Jersey		143,000		—		5.6	%	—
Baltimore (Dundalk), Maryland		181,000		3,000		83.4	%	—
Total Assets Held for Sale		324,000		3,000		49.4	%	—

 

(1)          100% ground and/or building leasehold interest; other than Green Acres, where approximately 10% of the ground is leased.

(2)          These encumbrances are cross collateralized under a blanket mortgage in the amount of $481,902 at December 31, 2003.

 

41

 

Merchandise Mart Segment

 

The Merchandise Mart Properties are a portfolio of 9 properties containing an aggregate of 8.6 million square feet.

 

Below is a breakdown of square feet by location and use as of December 31, 2003.

 

						Showroom
		Total		Office		Total		Permanent		Temporary Trade Show		Retail
Chicago, Illinois
Merchandise Mart		3,463,000		1,134,000		2,237,000		1,950,000		287,000		92,000
350 N. Orleans		1,150,000		861,000		289,000		289,000		—		—
33 N. Dearborn		328,000		316,000		—		—		—		12,000
Total Chicago, Illinois		4,941,000		2,311,000		2,526,000		2,239,000		287,000		104,000
HighPoint, North Carolina
Market Square Complex		1,751,000		—		1,751,000		1,181,000		570,000		—
National Furniture Mart		259,000		—		259,000		259,000		—		—
Total HighPoint, North Carolina		2,010,000		—		2,010,000		1,440,000		570,000		—
L.A. Mart		774,000		—		774,000		720,000		54,000		—
Washington, D.C.
Washington Office Center		396,000		360,000		—		—		—		36,000
Washington Design Center		390,000		60,000		330,000		330,000		—		—
South Capitol		94,000		94,000		—		—		—		—
Total Washington, D.C.		880,000		514,000		330,000		330,000		—		36,000
Total Merchandise Mart Properties		8,605,000		2,825,000		5,640,000		4,729,000		911,000		140,000
Occupancy rate		94.2	%	92.6	%	95.1	%					88.8	%

 

In addition to the Office, Showroom and Retail space, the Merchandise Mart Properties contains eight parking garages totaling 1,200,000 square feet (3,600 spaces).  The garage space is excluded from the statistics provided in this section.

 

Office Space

 

The following table sets forth the percentage of the Merchandise Mart Properties 2003 office revenues by tenants’ industry during 2003:

 

 

42

 

The Company’s Merchandise Mart properties lease terms generally range from three to seven years for smaller tenants to as long as 15 years for large tenants. Leases typically provide for step-ups in rent periodically over the term of the lease and pass through to tenants the tenants’ share of increases in real estate taxes and operating expenses for a building over a base year. Electricity is provided to tenants on a sub-metered basis or included in rent and adjusted for subsequent utility rate increases. Leases also typically provide for tenant improvement allowances for all or a portion of the tenant’s initial construction of its premises.

 

No tenant in the Merchandise Mart properties segment accounted for more than 10% of the Company’s 2003 total revenue. Below is a listing of the Merchandise Mart Properties office tenants which accounted for 2% or more of the Merchandise Mart Properties’ revenues in 2003:

 

 

 

The following table sets forth the occupancy rate and the average annual escalated rent per square foot for the Merchandise Mart Properties’ office space at the end of each of the past five years.

 

 

 

During 2003, 270,000 square feet of Merchandise Mart Properties office space was leased at a weighted average initial rent per square foot of $21.24, a decrease of 5.3% over the weighted average escalated rent per square foot of $22.44 for the leases expiring.  Following is the detail by building:

 

(1)          Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased.

 

43

 

The following table sets forth lease expirations for the Merchandise Mart Properties office space as of December 31, 2003 for each of the next 10 years assuming that none of the tenants exercise their renewal options.

 

Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of Merchandise Mart Office Square Feet		Annual Escalated Rent of Expiring Leases
								Total			Per Square Foot
2004		22		385,000		14.8	%	$	8,073,000		$	21.00
2005		15		170,000		6.5	%	4,468,000			26.32
2006		17		130,000		5.0	%	3,108,000			23.98
2007		16		269,000		10.3	%	6,297,000			23.42
2008		21		277,000		10.7	%	7,206,000			26.00
2009		8		285,000		11.0	%	8,611,000			30.23
2010		3		359,000		13.8	%	12,022,000			33.53
2011		1		193,000		7.4	%	5,925,000			30.65
2012		9		70,000		2.7	%	1,843,000			26.32
2013		11		94,000		3.6	%	2,641,000			28.16

 

Showroom Space

 

The showrooms provide manufacturers and wholesalers with permanent and temporary space in which to display products for buyers, specifiers and end users.  The showrooms are also used for hosting trade shows for the contract furniture, casual furniture, gifts, carpet, residential furnishings, building products, crafts, apparel and design industries.  Merchandise Mart Properties own and operate five of the leading furniture and gifts trade shows including the contract furniture industry’s largest annual trade show, NeoCon, which attracts over 40,000 attendees each June and is hosted at the Merchandise Mart building in Chicago. The Market Square Complex co-hosts the home furniture industry’s semi-annual (April and October) market weeks which occupy over 11,500,000 square feet in the High Point, North Carolina region.

 

The following table sets forth the percentage of the Merchandise Mart Properties 2003 showroom revenues by tenants’ industry:

 

 

44

 

The following table sets forth the occupancy rate and the average escalated rent per square foot for this space at the end of each of the past five years.

 

 

During 2003, 1,157,000 square feet of Merchandise Mart Properties showroom space was leased at a weighted average initial rent per square foot of $23.43, a 0.6% increase over the weighted average escalated rent per square foot of $23.28 for the leases expiring. Following is the detail by building:

 

 

(1)          Most leases include periodic step-ups in rent which are not reflected in the initial rent per square foot leased.

 

The following table sets forth lease expirations for the Merchandise Mart Properties showroom space as of December 31, 2003 for each of the next 10 years assuming that none of the tenants exercise their renewal options.

 

Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of Merchandise Mart Showroom Square Feet		Annual Escalated Rent of Expiring Leases
								Total			Per Square Foot
2004		364		779,000		14.6	%	$	17,636,000		$	22.65
2005		251		677,000		12.7	%	15,750,000			23.26
2006		250		914,000		17.1	%	23,770,000			26.00
2007		170		891,000		16.7	%	19,359,000			21.72
2008		129		487,000		9.1	%	12,884,000			26.47
2009		50		279,000		5.2	%	6,389,000			22.94
2010		46		214,000		4.0	%	6,380,000			29.77
2011		18		118,000		2.2	%	3,252,000			27.59
2012		12		44,000		0.8	%	1,268,000			28.86
2013		41		265,000		5.0	%	7,256,000			27.36

 

 

Retail Space

 

The Merchandise Mart Properties portfolio also contains approximately 140,000 square feet of retail space which was 88.8% occupied at December 31, 2003.

 

45

 

The following table sets forth the Merchandise Mart Properties owned by the Company as of December 31, 2003:

 

 

46

 

Temperature Controlled Logistics Segment

 

The Company has a 60% interest in Vornado Crescent Portland Partnership (“the Landlord”) that owns 87 temperature controlled warehouses, through a wholly-owned subsidiary (AmeriCold Realty Trust), with an aggregate of approximately 440.7 million cubic feet.  AmeriCold Logistics leases all of the partnerships’ facilities.  The Temperature Controlled Logistics segment is headquartered in Atlanta, Georgia.

 

AmeriCold Logistics provides the food industry with refrigerated warehousing and transportation management services. Refrigerated warehouses are comprised of production, distribution and public facilities. Production facilities typically serve one or a small number of customers, generally food processors that are located nearby. These customers store large quantities of processed or partially processed products in the facilities until they are shipped to the next stage of production or distribution. Distribution facilities primarily warehouse a wide variety of customers’ finished products until future shipment to end-users. Each distribution facility generally services the surrounding regional market. Public facilities generally serve the needs of local and regional customers under short-term agreements. Food manufacturers and processors use these facilities to store capacity overflow from their production facilities or warehouses. AmeriCold Logistics’ transportation management services include freight routing, dispatching, freight rate negotiation, backhaul coordination, freight bill auditing, network flow management, order consolidation and distribution channel assessment. AmeriCold Logistics’ temperature controlled logistics expertise and access to both frozen food warehouses and distribution channels enable its customers to respond quickly and efficiently to time-sensitive orders from distributors and retailers.

 

AmeriCold Logistics’ customers consist primarily of national, regional and local frozen food manufacturers, distributors, retailers and food service organizations.  Below is a listing of customers which accounted for 2% or more of AmeriCold Logistics’ revenue in 2003:

 

 

On February 5, 2004, AmeriCold Realty Trust completed a $254,400,000 mortgage financing for 21 of its owned and 7 of its leased temperature-controlled warehouses.  The loan bears interest at LIBOR plus 2.95% (with a LIBOR floor of 1.5% with respect to $54,400,000 of the loan) and requires principal payments of $5,000,000 annually.  The loan matures in April 2009 and is pre-payable without penalty after February 5, 2006.  The net proceeds were approximately $225,000,000 after providing for usual escrows, closing costs and the repayment of $12,900,000 of existing mortgages on two of the warehouses, of which $135,000,000 was distributed to the Company and the remainder was distributed to its partner.

 

On February 23, 2004, AmeriCold Logistics announced that Alec Covington resigned as President and Chief Executive Officer effective March 31, 2004, to take an opportunity in an unrelated industry.  A search to identify a successor is currently underway.

 

47

 

The following table sets forth certain information for the Temperature Controlled Logistics properties as of December 31, 2003:

 

Property			Cubic Feet			Square Feet				Property			Cubic Feet			Square Feet
			(in millions)			(in thousands)							(in millions)			(in thousands)
ALABAMA										INDIANA
Birmingham			2.0			85.6				Indianapolis			9.1			311.7
Montgomery			2.5			142.0
Gadsden (1)			4.0			119.0				IOWA
Albertville			2.2			64.5				Fort Dodge			3.7			155.8
			10.7			411.1				Bettendorf			8.8			336.0
ARIZONA													12.5			491.8
Phoenix			2.9			111.5				KANSAS
										Wichita			2.8			126.3
ARKANSAS										Garden City			2.2			84.6
Fort Smith			1.4			78.2							5.0			210.9
West Memphis			5.3			166.4				KENTUCKY
Texarkana			4.7			137.3				Sebree			2.7			79.4
Russellville			5.6			164.7
Russellville			9.5			279.4				MAINE
Springdale			6.6			194.1				Portland			1.8			151.6
			33.1			1,020.1
CALIFORNIA										MASSACHUSETTS
Ontario (1)			8.1			279.6				Gloucester			1.9			95.5
Fullerton (1)			2.8			107.7				Gloucester			0.3			13.6
Pajaro (1)			1.4			53.8				Gloucester			2.8			95.2
Turlock			2.5			108.4				Gloucester			2.4			126.4
Watsonville (1)			5.4			186.0				Boston			3.1			218.0
Turlock			3.0			138.9							10.5			548.7
Ontario			1.9			55.9				MISSOURI
			25.1			930.3				Marshall			4.8			160.8
COLORADO										Carthage			42.0			2,564.7
Denver			2.8			116.3							46.8			2,725.5
										MISSISSIPPI
FLORIDA										West Point			4.7			180.8
Tampa			0.4			22.2
Plant City			0.8			30.8				NEBRASKA
Bartow			1.4			56.8				Fremont			2.2			84.6
Tampa			2.9			106.0				Grand Island			2.2			105.0
Tampa (1)			1.0			38.5							4.4			189.6
			6.5			254.3				NEW YORK
GEORGIA										Syracuse			11.8			447.2
Atlanta			11.1			476.7
Atlanta			2.9			157.1				NORTH CAROLINA
Augusta			1.1			48.3				Charlotte			1.0			58.9
Atlanta			11.4			334.7				Charlotte			4.1			164.8
Atlanta			5.0			125.7				Tarboro			4.9			147.4
Montezuma			4.2			175.8							10.0			371.1
Atlanta			6.9			201.6				OHIO
Thomasville			6.9			202.9				Massillon			5.5			163.2
			49.5			1,722.8
IDAHO										OKLAHOMA
Burley		10.7				407.2			Oklahoma City			0.7			64.1
Nampa		8.0				364.0			Oklahoma City			1.4			74.1
		18.7				771.2						2.1			138.2
ILLINOIS
Rochelle		6.0				179.7
East Dubuque		5.6				215.4
		11.6				395.1

 

48

 

Property		Cubic Feet		Square Feet		Property		Cubic Feet			Square Feet
		(in millions)		(in thousands)				(in millions)			(in thousands)
OREGON						TEXAS
Hermiston		4.0		283.2		Amarillo		3.2				123.1
Milwaukee		4.7		196.6		Ft. Worth		3.4				102.0
Salem		12.5		498.4				6.6				225.1
Woodburn		6.3		277.4		UTAH
Brooks		4.8		184.6		Clearfield		8.6				358.4
Ontario		8.1		238.2
		40.4		1,678.4		VIRGINIA
PENNSYLVANIA						Norfolk		1.9				83.0
Leesport		5.8		168.9		Strasburg		6.8				200.0
Fogelsville		21.6		683.9				8.7				283.0
		27.4		852.8		WASHINGTON
						Burlington		4.7				194.0
SOUTH CAROLINA						Moses Lake		7.3				302.4
Columbia		1.6		83.7		Walla Walla		3.1				140.0
						Connell		5.7				235.2
SOUTH DAKOTA						Wallula		1.2				40.0
Sioux Falls		2.9		111.5		Pasco		6.7				209.0
								28.7				1,120.6
TENNESSEE						WISCONSIN
Memphis		5.6		246.2		Tomah		4.6				161.0
Memphis		0.5		36.8		Babcock		3.4				111.1
Murfreesboro		4.5		106.4		Plover		9.4				358.4
		10.6		389.4				17.4				630.5
						Total Temperature Controlled Logistics Properties		440.7				17,475.8

 

(1)          Leasehold interest

 

49

 

Alexander’s

 

The Company owns 33.1% of Alexander’s outstanding common shares.  The following table shows the location, approximate size and leasing status of each of the properties owned by Alexander’s as of December 31, 2003.

 

 

(1)                    Excludes parking garages.

(2)                    Excludes 339,000 square foot Macy’s store, owned and operated by Federated Department Stores, Inc.

(3)                    Leased by Alexander’s through January 2027.

(4)                    Ground leased to IKEA.

 

The development at Lexington Avenue consists of an approximately 1.3 million square foot multi-use building.  The building will contain approximately 885,000 net rentable square feet of office space, approximately 171,000 net rentable square feet of retail space and approximately 248,000 net saleable square feet of residential space consisting of condominium units (through a taxable REIT subsidiary (“TRS”)).  Of the construction budget of $630,000,000 (which excludes $29,000,000 for development and guarantee fees to the Company), $402,000,000 has been expended through December 31, 2003 and an additional $62,200,000 has been committed to at December 31, 2003.  Construction is expected to be completed in 2005.

 

Bloomberg L.P. has leased 695,000 square feet of the office space (the “Bloomberg Space”).  On November 15, 2003 Alexander’s delivered approximately 87% of that space.  As of February 9, 2004, the remainder of the Bloomberg space has been delivered.  At December 31, 2003, 115,000 square feet of retail space has been leased, of which the Home Depot and Hennes & Mauritz have leased 83,000 and 27,000 square feet, respectively.  The residential space is comprised of 105 condominium units.  The original offering plan filed for these units, as amended for price increases through December 31, 2003, would produce (inclusive of the value of existing contracts) an aggregate sale price of $457,000,000.  As of December 31, 2003, Alexander’s has received deposits of $10,425,000 on sales of the condominium units.

 

50

 

On February 13, 2004, Alexander’s completed a $400,000,000 mortgage financing on the Office Space of its Lexington Avenue development project placed by German American Capital Corporation, an affiliate of Deutsche Bank.  The loan bears interest at 5.33%, matures in February 2014 and beginning in the third year, provides for principal payments based on a 25-year amortization schedule such that over the remaining eight years of the loan, ten years of amortization will be paid.  Of the loan proceeds, $253,529,000 was used to repay the entire amount outstanding under the Construction Loan with HVB Real Estate Capital (Hypo).  The Construction Loan was modified so that the remaining availability is $237,000,000, which is approximately the amount estimated to complete the Lexington Avenue development project.  The interest rate on the Construction Loan is LIBOR plus 2.5% (currently 3.64%) and matures in January 2006, with two one-year extensions.  The collateral for the Construction Loan is the same, except that the Office Space has been removed from the lien.  Further, the Construction Loan permits the release of the retail space for $15,000,000 and requires all proceeds from the sale of the residential condominiums units to be applied to the Construction Loan balance until it is finally repaid.  In connection with reducing the principal amount of the Construction loan Alexander’s will write-off $3,050,000 of unamortized deferred financing costs in the first quarter of 2004, of which the Company’s share is $1,010,000.

 

The Company has agreed to guarantee to the construction lender, the lien free, timely completion of the construction of the project and funding of project costs in excess of a stated loan budget, if not funded by Alexander’s (the “Completion Guarantee”).  The $6,300,000 estimated fee payable by Alexander’s to the Company for the Completion Guarantee is 1% of construction costs (as defined).  Based upon the current status of construction, Management does not anticipate the need to fund pursuant to the Completion Guarantee.

 

51

 

The Newkirk Master Limited Partnership

 

In 1998, the Company and affiliates of Apollo Real Estate Investment Fund III, L.P. (“Apollo”) formed a joint venture (30% owned by the Company and 70% owned by Apollo) (“Newkirk JV”) to acquire general and limited partnership interests in a portfolio of 104 partnerships, which own triple net leased properties.  Since its formation, Newkirk JV has acquired equity interests in the above partnerships, which own approximately 19.6 million square feet of real estate and acquired certain first and second mortgages (“Contract Rights”) secured by a portion of these properties.  On January 1, 2002, Newkirk JV completed a merger of 91 of the partnerships as well as the other assets it owned relating to the other 13 partnerships into The Newkirk Master Limited Partnership (“MLP”).  The partnerships were merged into MLP to create a vehicle to enable the partners to have greater access to capital and future investment opportunities.  In connection with the merger, the Company received limited partner interests in the MLP equal to an approximate 21.1% interest and Apollo received limited partner interests in the MLP equal to an approximate 54.5% interest. At December 31, 2003, the Company has a 22.6% interest in the MLP and Apollo has a 54.1% interest.  Newkirk JV is the general partner of the MLP.

 

Simultaneously with the merger on January 1, 2002, the MLP completed a $225,000,000 secured financing collateralized by its interests in the entities that own the properties, subject to the existing first and certain second mortgages on those properties. The loan bears interest at LIBOR plus 5.5% with a LIBOR floor of 3% (8.5% at December 31, 2003) and matures on January 31, 2005, with two one-year extension options. As a result of the financing, on February 6, 2002 the MLP repaid approximately $28,200,000 of existing joint venture debt and distributed approximately $37,000,000 to the Company.

 

On November 24, 2003, Newkirk JV and the MLP obtained new financing in the amount of $525,000,000.  Of this amount $316,527,000 is secured by the Contract Rights and guaranteed by the MLP and $208,473,000 is secured by the assets of the MLP.  The loan bears interest at a rate equal to the lesser of (i) LIBOR plus 4.5% or (ii) Prime plus 2.5%.  The loan matures on November 24, 2006 and has two one-year extensions.  The proceeds of the loan were used primarily to repay the MLP’s outstanding balance of the existing $225,000,000 credit facility and to distribute funds to its partners, of which the Company’s share was $74,106,000.

 

The Company’s share of the MLP and the joint venture debt was approximately $266,024,000 at December 31, 2003.

 

52

 

The following table sets forth a summary of the real estate owned by the MLP:

 

 

As of December 31, 2003, the occupancy rate of the properties is 99.4%.

 

The primary lease terms range from 20 to 25 years from their original commencement dates with rents, typically above market, which fully amortize the first mortgage debt on the properties.  In addition, tenants generally have multiple renewal options, with rents, on average, below market.

 

Below is a listing of tenants which accounted for 2% or more of the MLP’s revenues in 2003:

 

Tenant		Square Feet Leased		2003 Revenues			Percentage
Raytheon		2,007,000		$	40,421,000		13.9	%
Albertson’s Inc.		2,610,000		29,857,000			10.3	%
The Saint Paul Co.		530,000		25,532,000			8.8	%
Honeywell		728,000		19,799,000			6.8	%
Federal Express		592,000		14,812,000			5.1	%
Cummins Engine Company, Inc.		390,000		13,557,000			4.7	%
Owens-Illinois		707,000		13,363,000			4.6	%
Entergy Gulf States		453,000		11,395,000			3.9	%
Stater Bros Markets		1,434,000		9,319,000			3.2	%
Safeway Inc.		736,000		8,543,000			2.9	%
Hibernia Bank		403,000		8,196,000			2.8	%
Nevada Power Company		282,000		7,189,000			2.5	%
The Kroger Company		474,000		6,920,000			2.4	%

 

The following table sets forth lease expirations for each of the next 10 years, as of December 31, 2003, assuming that none of the tenants exercise their renewal options.

 

Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of MLP Square Feet		Annual Escalated Rent of Expiring Leases
								Total			Per Square Foot
2004		6		280,000		2.7	%	$	6,873,000		$	24.53
2005		23		1,003,000		2.6	%	6,639,000			6.62
2006		28		2,102,000		9.9	%	25,455,000			12.11
2007		32		2,943,000		14.4	%	37,266,000			12.66
2008		86		6,730,000		37.0	%	95,660,000			14.21
2009		29		2,678,000		27.0	%	69,880,000			26.01
2010		1		821,000		1.1	%	2,780,000			3.39
2011		2		155,000		0.8	%	2,177,000			14.07
2012		9		395,000		1.2	%	3,187,000			8.07
2013		1		40,000		0.3	%	789,000			19.92

 

53

 

The following table sets forth The Newkirk Master Limited Partnership Properties as of December 31, 2003:

 

Location		Approximate Leasable Building Square Footage		Location		Approximate Leasable Building Square Footage
Office:				Retail:
ARKANSAS				ALABAMA
Little Rock		36,000		Dothan (1)		54,000
Pine Bluff		27,000		Florence		42,000
		63,000		Hunstville (1)		60,000
CALIFORNIA				Huntsville (1)		58,000
El Segundo (1)		185,000		Montgomery (1)		54,000
El Segundo (1)		185,000		Montgomery		66,000
Long Beach		478,000		Tuscaloosa (1)		53,000
Walnut Creek (1)		55,000				387,000
		903,000		ARIZONA
COLORADO				Bisbee (1)		30,000
Colorado Springs		71,000		Tucson (1)		37,000
						67,000
FLORIDA				CALIFORNIA
Orlando (1)		184,000		Anaheim (1)		26,000
Orlando (1)		357,000		Barstow		30,000
		541,000		Beaumont		29,000
INDIANA				Calimesa		29,000
Columbus (1)		390,000		Colton		73,000
				Colton		26,000
MARYLAND				Corona (1)		33,000
Baltimore (1)		530,000		Corona (1)		9,000
				Costa Mesa (1)		18,000
MISSOURI				Costa Mesa (1)		17,000
Bridgeton (1)		54,000		Desert Hot Springs (1)		29,000
				Downey		39,000
NEW JERSEY				Fontana		26,000
Carteret		96,000		Garden Grove (1)		26,000
Elizabeth (1)		30,000		Glen Avon Heights (1)		42,000
Morris Township (1)		225,000		Huntington Beach		44,000
Morris Township (1)		50,000		Indio (1)		10,000
Morris Township (1)		137,000		Lancaster		42,000
Morris Township		221,000		Livermore (1)		53,000
Morristown (1)		316,000		Lomita (1)		33,000
Plainsboro (1)		2,000		Mammoth Lakes (1)		44,000
		1,077,000		Mojave (1)		34,000
NEVADA				Ontario (1)		24,000
Las Vegas		282,000		Orange (1)		26,000
				Pinole (1)		58,000
OHIO				Pleasanton		175,000
Miamisburg (1)		61,000		Rancho Cucamonga		24,000
Miamisburg (1)		86,000		Rialto		29,000
Toledo (1)		707,000		Rubidoux		39,000
		854,000		San Bernadino		30,000
PENNSYLVANIA				San Bernadino		40,000
Allentown		71,000		San Diego (1)		226,000
				Santa Ana (1)		26,000
TENNESSEE				Santa Monica		150,000
Johnson City		64,000		Santa Rosa (1)		22,000
Kingport		43,000		Simi Valley (1)		40,000
Memphis (1)		75,000		Sunnymead		30,000
Memphis (1)		521,000		Ventura (1)		40,000
		703,000		Westminster		26,000
TEXAS				Yucaipa		31,000
Beaumont (1)		426,000				1,748,000
Beaumont (1)		50,000		COLORADO
Bedford (1)		207,000		Aurora (1)		41,000
Dallas (1)		185,000		Aurora		29,000
Dallas		151,000		Aurora		42,000
		1,019,000		Aurora		24,000
				Littleton		29,000
Total Office		6,558,000		Littleton		39,000
						204,000

 

54

 

Location		Approximate Leasable Building Square Footage		Location		Approximate Leasable Building Square Footage
Retail—continued:				Retail—continued:
FLORIDA				NEBRASKA
Bradenton (1)		60,000		Omaha		73,000
Cape Coral		30,000		Omaha		66,000
Casselberry (1)		68,000		Omaha		67,000
Gainsville		41,000				206,000
Largo		54,000		NEW JERSEY
Largo		40,000		Garwood (1)		52,000
Largo		30,000
Orlando (1)		58,000		NEW YORK
Pinellas Park		60,000		Portchester (1)		59,000
Port Richey (1)		54,000
Stuart (1)		54,000		NEW MEXICO
Tallahassee (1)		54,000		Albuquerque (1)		35,000
Venice (1)		42,000		Las Cruces (1)		30,000
		645,000				65,000
GEORGIA				NEVADA
Atlanta (1)		6,000		Las Vegas		38,000
Atlanta (1)		4,000		Las Vegas		60,000
Chamblee (1)		5,000		Las Vegas		38,000
Cumming (1)		14,000		Reno		42,000
Duluth (1)		9,000				178,000
Forest Park (1)		15,000		OHIO
Jonesboro (1)		5,000		Cincinnati		26,000
Stone Mountain (1)		6,000		Columbus		34,000
		64,000		Franklin		29,000
IDAHO						89,000
Boise (1)		37,000		OKLAHOMA
Boise (1)		43,000		Lawton		31,000
		80,000
ILLINOIS				OREGON
Champaign		31,000		Beaverton		42,000
Freeport		30,000		Grants Pass (1)		34,000
Rock Falls		28,000		Portland		42,000
		89,000		Salem		52,000
INDIANA						170,000
Carmel (1)		39,000		PENNSYLVANIA
Lawrence (1)		29,000		Doylestown		4,000
		68,000		Lansdale		4,000
KENTUCKY				Lima		4,000
Louisville		10,000		Philadelphia		50,000
Louisville		40,000		Philadelphia		4,000
		50,000		Philadelphia		4,000
LOUISIANA				Philadelphia		4,000
Baton Rouge		58,000		Philadelphia		4,000
Minden		35,000		Philadelphia		4,000
		93,000		Philadelphia		4,000
MONTANA				Philadelphia		4,000
Billings (1)		41,000		Philadelphia		4,000
Bozeman (1)		21,000		Philadelphia		4,000
		62,000		Richboro		4,000
NORTH CAROLINA				Wayne		4,000
Charlotte		34,000				106,000
Concord		32,000		SOUTH CAROLINA
Jacksonville		23,000		Moncks Corner		23,000
Jefferson (1)		23,000
Lexington (1)		23,000		TENNESSEE
Mint Hill		23,000		Chattanooga		42,000
Thomasville(1)		21,000		Paris		31,000
		179,000				73,000

 

55

 

Location		Approximate Leasable Building Square Footage		Location		Approximate Leasable Building Square Footage
Retail—continued:				Other
TEXAS
Carrolton (1)		61,000		ARIZONA
Dallas (1)		68,000		Flagstaff (1)		10,000
Fort Worth (1)		44,000		Sun City (1)		10,000
Garland (1)		40,000				20,000
Granbury (1)		35,000		CALIFORNIA
Grand Prairie (1)		49,000		Colton		668,000
Greenville (1)		48,000		El Segundo		959,000
Hillsboro (1)		35,000		Long Beach (1)		201,000
Houston (1)		52,000		Palo Alto (1)		123,000
Lubbock (1)		54,000				1,951,000
Midland		60,000		COLORADO
Rockdale		44,000		Ft. Collins (1)		10,000
Taylor		62,000
Texarkana		46,000		FLORIDA
Woodville		44,000		Orlando (1)		205,000
		742,000
UTAH				MAINE
Bountiful (1)		50,000		North Berwick		821,000
Sandy (1)		42,000
		92,000		NEW MEXICO
VIRGINIA				Carlsbad (1)		10,000
Staunton (1)		23,000
				PENNSYLVANIA
WASHINGTON				New Kingston (1)		430,000
Bothell		28,000
Edmonds		35,000		SOUTH CAROLINA
Everett		35,000		N. Myrtle Beach (1)		37,000
Federal Way		42,000
Graham		45,000		TENNESSEE
Kent		42,000		Franklin (1)		289,000
Milton		45,000		Memphis (1)		780,000
Port Orchard		28,000				1,069,000
Redmond		45,000
Spokane		42,000		TEXAS
Spokane		39,000		Lewisville		256,000
Woodinville		30,000		Corpus Christi (1)		10,000
		456,000		El Paso (1)		10,000
WYOMING				Euless (1)		10,000
Cheyenne		12,000		Lewisville (1)		10,000
Cheyenne		31,000		McAllen (1)		10,000
Douglas		12,000		Victoria (1)		10,000
Evanston		28,000				316,000
Evanston		10,000		WISCONSIN
Torrington		12,000		Windsor (1)		356,000
		105,000		Total Other		5,225,000
Total Retail		6,206,000
				GRAND TOTAL		17,989,000

 

(1)          leasehold interest.

 

56

 

Hotel Pennsylvania

 

The Hotel Pennsylvania is located in New York City on Seventh Avenue opposite Madison Square Garden and consists of a hotel portion containing 1,000,000 square feet of hotel space with 1,700 rooms and a commercial portion containing 400,000 square feet of retail and office space.

 

The Hotel is dependent on tourism and was severely impacted by the events of September 11, 2001, accelerating a trend that began in the first quarter of 2001.  The following table presents rental information for the Hotel:

 

 

Dry Warehouse/Industrial Properties

 

The Company’s dry warehouse/industrial properties consist of eight buildings in New Jersey containing approximately 2.0 million square feet.  The average term of a tenant’s lease is three to five years.

 

The following table sets forth the occupancy rate and average annual rent per square foot at the end of each of the past five years.

 

 

(1)          Excludes East Brunswick warehouse currently under development.

 

In November 2002, the Company entered into an agreement to ground lease its East Brunswick industrial property to Lowe’s.  The Company will demolish the existing warehouse containing 326,000 square feet and Lowe’s will construct its own retail store.  This lease is expected to commence in approximately 12 to 18 months.

 

 

400 North LaSalle

 

The 400 North LaSalle venture was formed in July 2001, to develop a 381,000 square foot, high-rise residential tower with an attached parking garage in Chicago Illinois, containing 452 apartments.  Under the agreement the Company contributed 92% of the equity and is entitled to receive 85% of the profits.  The development of the residential tower and garage was substantially completed and phased into service as of January 2004.  As of December 31, 2003, the tower is 22.5% occupied.

 

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ITEM 3.                             LEGAL PROCEEDINGS

 

The Company is from time to time involved in legal actions arising in the ordinary course of its business.  In the opinion of management, after consultation with legal counsel, the outcome of such matters, including in respect of the matter referred to below, is not expected to have a material adverse effect on the Company’s financial position or results of operation.

 

 

Stop & Shop

 

On January 8, 2003, Stop & Shop filed a complaint with the United States District Court for the District of New Jersey (“USDC-NJ”) claiming the Company has no right to reallocate and therefore continue to collect the $5,000,000 of annual rent from Stop & Shop pursuant to the Master Agreement and Guaranty, because of the expiration of the East Brunswick, Jersey City, Middletown, Union and Woodbridge leases to which the $5,000,000 of additional rent was previously allocated.  Stop & Shop asserted that a prior order of the Bankruptcy Court for the Southern District of New York dated February 6, 2001, as modified on appeal to the District Court for the Southern District of New York on February 13, 2001, terminated the Company’s right to reallocate.  On March 3, 2003, after the Company moved to dismiss for lack of jurisdiction, Stop & Shop voluntarily withdrew its complaint.

 

On March 26, 2003, Stop & Shop filed a new complaint in New York Supreme Court, asserting substantially the same claims as in its USDC-NJ complaint.  On April 9, 2003, the Company moved the New York Supreme Court action to the United States District Court for the Southern District of New York.  On June 30, 2003, the District Court ordered that the case be placed in suspension and ordered the parties to proceed in a related case that the Company commenced in the United States Bankruptcy Court for the Southern District of New York.  On July 24, 2003, the Bankruptcy Court referred the related case to mediation.  The Company believes that the additional rent provision of the guaranty expires at the earliest in 2012 and will vigorously oppose Stop & Shop’s complaint.

 

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ITEM 4.                             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2003.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The Operating Partnership is managed by Vornado, its sole general partner.  The following is a list of the names, ages, principal occupations and positions with Vornado of the executive officers of Vornado and the positions held by such officers during the past five years. All executive officers of Vornado have terms of office that run until the next succeeding meeting of the Board of Trustees of Vornado following the Annual Meeting of Shareholders unless they are removed sooner by the Board.

 

Name		Age		PRINCIPAL OCCUPATION, POSITION AND OFFICE (current and during past five years with Vornado unless otherwise stated)
Steven Roth		62		Chairman of the Board, Chief Executive Officer and Chairman of the Executive Committee of the Board; the Managing General Partner of Interstate Properties, an owner of shopping centers and an investor in securities and partnerships; Chief Executive Officer of Alexander’s, Inc. since March 1995 and a Director since 1989; Chairman and CEO of Vornado Operating since 1998.
Michael D. Fascitelli		47		President and a Trustee since December 1996; President of Alexander’s Inc. since August 2000 and Director since December 1996; Director of Vornado Operating since 1998; Partner at Goldman, Sachs & Co. in charge of its real estate practice from December 1992 to December 1996; and Vice President at Goldman, Sachs & Co., prior to December 1992.
Melvyn H. Blum		57		Executive Vice President-Development since January 2000; Senior Managing Director at Tishman Speyer Properties in charge of its development activities in the United States from July 1998 to January 2000; and Managing Director of Development and Acquisitions at Tishman Speyer Properties prior to July 1998.
Michelle Felman		41		Executive Vice President-Acquisitions since September 2000; Independent Consultant to Vornado from October 1997 to September 2000; Managing Director-Global Acquisitions and Business Development of GE Capital from 1991 to July 1997.
David R. Greenbaum		52		President of the New York City Office Division since April 1997 (date of the Company’s acquisition); President of Mendik Realty (the predecessor to the New York City Office Properties Division) from 1990 until April 1997.
Christopher Kennedy		40		President of the Merchandise Mart Division since September 2000; Executive Vice President of the Merchandise Mart Division from April 1998 to September 2000; Executive Vice President of Merchandise Mart Properties, Inc. from 1994 to April 1998.
Joseph Macnow		58		Executive Vice President-Finance and Administration since January 1998 and Chief Financial Officer since March 2001; Executive Vice President — Finance and Administration of Vornado Operating since 1998; Vice President-Chief Financial Officer of the Company from 1985 to January 1998; Executive Vice President and Chief Financial Officer of Alexander’s, Inc. since August 1995.
Sandeep Mathrani		41		Executive Vice President-Retail Real Estate since March 2002; Executive Vice President, Forest City Ratner from 1994 to February 2002.
Mitchell N. Schear		45		President of Charles E. Smith Commercial Realty since April 2003; President of Kaempfer Company from 1998 to April 2003 (date acquired by the Company).
Wendy Silverstein		43		Executive Vice President-Capital Markets since April 1998; Senior Credit Officer of Citicorp Real Estate and Citibank, N.A. from 1986 to 1998.
Robert H. Smith		75		Chairman of Charles E. Smith Commercial Realty since January 2002 (date acquired by the Company); Co-Chief Executive Officer and Co-Chairman of the Board of Charles E. Smith Commercial Realty L.P. (the predecessor to Charles E. Smith Commercial Realty) prior to January 2002.

 

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PART II

 

ITEM 5.                             MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED UNITHOLDER MATTERS

 

There is no established trading market for the units of the Operating Partnership.  At December 31, 2003, there were 1,692 Class A unitholders of record.

 

Distributions

 

During the year ended December 31, 2003, the Company declared four quarterly distributions in the amounts of $0.68, $0.68, $0.68 and $0.87 per unit from the first to the fourth quarter, respectively.  The fourth quarter distribution was comprised of a regular distribution of $0.71 per unit and a special capital gain cash distribution of $0.16 per unit.

 

During the year ended December 31, 2002, the Company declared four quarterly distributions in the amounts of $0.66, $0.66, $0.66 and $0.68 per unit from the first to the fourth quarter, respectively.

 

Recent Sales of Unregistered Securities

 

During the three months ended December 31, 2003, the Company issued 695,894 Class A units.  12,500 of those Class A units were issued as consideration in connection with the October 7, 2003 acquisition of the Waterfront Interest.  The remainder of those units were issued to holders of the Company's C-1 preferred units in a 1 for 1.1431 exchange of the C-1 preferred units.  These units were issued without registration under the Securities Act of 1933 in reliance on Regulation D of that Act.

 

                On November 17, 2003, the Company sold $80,000,000 of 7.00% Series D-10 Cumulative Redeemable Preferred Units to an institutional investor in a private offering.  These units were issued without registration under the Securities Act of 1933 in reliance on Regulation D of that Act.

 

Information relating to compensation plans under which equity securities of Vornado are authorized for issuance is set forth under Part III, Item 12 of this annual report on Form 10-K and such information is incorporated herein by reference.

 

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