UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark one)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:      September 30, 2004
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:                   to

 

Commission File Number:  000-22635

 

VORNADO REALTY L.P.

(Exact name of registrant as specified in its charter)

 

 

(212) 894-7000

(Registrant’s telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

ý Yes    o No

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

ý Yes    o No

 

 

INDEX

 

					Page Number
PART I.		Financial Information:
	Item 1.			Financial Statements:
				Consolidated Balance Sheets (Unaudited) as of September 30, 2004 and December 31, 2003	3
				Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2004 and September 30, 2003	4
				Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and September 30, 2003	5
				Notes to Consolidated Financial Statements (Unaudited)	6
				Report of Independent Registered Public Accounting Firm	27
	Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3.			Quantitative and Qualitative Disclosures About Market Risks	56
	Item 4.			Controls and Procedures	56
PART II.				Other Information:
	Item 1.			Legal Proceedings	57
	Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	57
	Item 6.			Exhibits	57
Signatures					58
Exhibit Index					59

 

2

 

PART I.  FINANCIAL INFORMATION

Item 1.            Financial Statements

 

VORNADO REALTY L.P.

CONSOLIDATED BALANCE SHEETS

 

(Amounts in thousands, except unit amounts)

 

		(UNAUDITED)
		September 30, 2004			December 31, 2003
ASSETS
Real estate, at cost:
Land		$	1,575,211		$	1,503,965
Buildings and improvements		6,316,899			6,038,275
Development costs and construction in progress		148,766			133,915
Leasehold improvements and equipment		90,954			72,297
Total		8,131,830			7,748,452
Less accumulated depreciation and amortization		(1,017,452		)	(869,849		)
Real estate, net		7,114,378			6,878,603
Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $40,150 and $30,310		212,074			320,542
Escrow deposits and restricted cash		206,482			161,833
Marketable securities		148,051			81,491
Investments and advances to partially-owned entities, including Alexander’s of $205,075 and $207,872		771,893			900,600
Due from officers		21,743			19,628
Accounts receivable, net of allowance for doubtful accounts of $12,960 and $15,246		88,449			83,913
Notes and mortgage loans receivable		490,468			285,965
Receivable arising from the straight-lining of rents, net of allowance of $2,551 and $2,830		311,901			267,848
Other assets		385,864			376,801
Assets related to discontinued operations		908			141,704
TOTAL ASSETS		$	9,752,211		$	9,518,928
LIABILITIES AND PARTNERS’ CAPITAL
Notes and mortgages payable		$	3,261,112		$	3,339,365
Senior unsecured notes due 2007 through 2010		967,454			725,020
Revolving credit facility		—			—
Accounts payable and accrued expenses		242,970			226,100
Officers’ compensation payable		35,246			23,349
Deferred credit		103,049			74,253
Other liabilities		11,482			11,982
Liabilities related to discontinued operations		—			120,000
Total liabilities		4,621,313			4,520,069
Minority interest		2,077			3,055
Commitments and contingencies
Partners’ Capital:
Equity		5,040,109			4,982,630
Retained earnings (deficit)		21,100			(38,497		)
		5,061,209			4,944,133
Deferred compensation units earned but not yet delivered		69,229			70,610
Deferred compensation units issued but not yet earned		(10,819		)	(7,295		)
Accumulated other comprehensive income (loss)		13,906			(6,940		)
Due from officers for purchase of Class A units of beneficial interest		(4,704		)	(4,704		)
Total partners’ capital		5,128,821			4,995,804
TOTAL LIABILITIES AND PARTNERS’ CAPITAL		$	9,752,211		$	9,518,928

 

See notes to consolidated financial statements.

 

3

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

(Amounts in thousands, except per unit amounts)

 

		For The Three Months Ended September 30,						For The Nine Months Ended September 30,
		2004			2003			2004			2003
Revenues:
Rentals		$	341,113		$	318,516		$	1,004,108		$	937,777
Expense reimbursements		48,793			46,390			141,815			133,631
Fee and other income		26,944			15,262			64,031			44,872
Total revenues		416,850			380,168			1,209,954			1,116,280
Expenses:
Operating		161,132			148,843			459,756			434,860
Depreciation and amortization		59,981			51,871			175,013			155,497
General and administrative		29,774			31,972			90,652			86,642
Costs of acquisition not consummated		1,475			—			1,475			—
Total expenses		252,362			232,686			726,896			676,999
Operating income		164,488			147,482			483,058			439,281
Income applicable to Alexander’s		1,127			739			4,377			12,341
Income from partially-owned entities		9,826			11,132			33,642			54,165
Interest and other investment income		17,813			2,800			36,667			16,224
Interest and debt expense		(61,163		)	(56,261		)	(176,989		)	(170,798		)
Net gain (loss) on disposition of wholly-owned and partially-owned assets other than real estate		—			499			776			(607		)
Minority interest		87			(268		)	212			(1,079		)
Income from continuing operations		132,178			106,123			381,743			349,527
Income from discontinued operations		9,795			5,534			78,384			16,588
Net income		141,973			111,657			460,127			366,115
Preferred unit distributions		(21,334		)	(28,723		)	(75,354		)	(86,823		)
NET INCOME applicable to class A units		$	120,639		$	82,934		$	384,773		$	279,292
NET INCOME PER CLASS A UNIT – BASIC:
Income from continuing operations		$	.76		$	.59		$	2.14		$	2.01
Income from discontinued operations		.07			.04			.54			.13
Net income per class A unit		$	.83		$	.63		$	2.68		$	2.14
NET INCOME PER CLASS A UNIT – DILUTED:
Income from continuing operations		$	.73		$	.57		$	2.06		$	1.96
Income from discontinued operations		.07			.04			.52			.12
Net income per class A unit		$	.80		$	.61		$	2.58		$	2.08

 

See notes to consolidated financial statements.

 

4

 

VORNADO REALTY L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in thousands)

 

		For The Nine Months Ended September 30,
		2004			2003
Cash Flows From Operating Activities:
Net income		$	460,127		$	366,115
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including debt issuance costs)		180,226			159,651
Minority interest		(212		)	1,079
Gains on sale of real estate		(75,755		)	(3,411		)
Straight-lining of rental income		(44,826		)	(31,785		)
Equity in income of partially-owned entities		(33,642		)	(54,165		)
Amortization of acquired below market leases, net		(11,492		)	(6,914		)
Equity in income of Alexander’s		(4,377		)	(12,341		)
Costs of acquisition not consummated		1,475			—
Net (gain) loss on disposition of wholly-owned and partially-owned assets other than real estate		(776		)	607
Changes in operating assets and liabilities		847			6,772
Net cash provided by operating activities		471,595			425,608
Cash Flows From Investing Activities:
Investments in notes and mortgage loans receivable		(246,005		)	(7,300		)
Acquisitions of real estate and other		(194,399		)	(31,189		)
Proceeds from sale of real estate		233,347			5,436
Distributions from partially-owned entities		173,365			42,027
Development costs and construction in progress		(87,798		)	(102,254		)
Additions to real estate		(81,413		)	(78,353		)
Investments in marketable securities		(45,509		)	(10,419		)
Cash restricted for escrows and deposits		(44,649		)	142,363
Repayment of notes and mortgage loans receivable		38,500			26,092
Investments in partially-owned entities		(6,220		)	(10,360		)
Acquisition of Building Maintenance Service Company		—			(13,000		)
Acquisition of Kaempfer Management Company		—			(27,622		)
Net cash used in investing activities		(260,781		)	(64,579		)
Cash Flows From Financing Activities:
Repayments of borrowings		(542,297		)	(593,780		)
Proceeds from borrowings		575,158			448,987
Distributions to Class A unitholders		(325,176		)	(227,079		)
Redemption of perpetual preferred units		(112,467		)	—
Proceeds from issuance of perpetual preferred units		106,655			—
Distributions to preferred unitholders		(75,354		)	(127,973		)
Exercise of unit options		54,199			54,474
Net cash used in financing activities		(319,282		)	(445,371		)
Net decrease in cash and cash equivalents		(108,468		)	(84,342		)
Cash and cash equivalents at beginning of period		320,542			208,200
Cash and cash equivalents at end of period		$	212,074		$	123,858
Supplemental Disclosure Of Cash Flow Information:
Cash payments for interest (including capitalized interest of $5,003 and $3,565)		$	113,382		$	179,098
Non-Cash Transactions:
Financing assumed in acquisitions		18,500			—
Unrealized gain on securities available for sale		20,544			8,698
Capitalized leasing and development payroll		4,859			2,484

 

See notes to consolidated financial statements.

 

5

 

VORNADO REALTY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.              Organization

 

Vornado Realty L.P. (the “Operating Partnership” and/or the “Company”) is a Delaware limited partnership. Vornado Realty Trust (“Vornado”), a fully-integrated real estate investment trust (“REIT”), is the sole general partner of, and owned approximately 86.8% of the limited partnership interest in, the Operating Partnership at September 30, 2004. All references to “We,” “Us,” and “Company” refer to the Operating Partnership and its consolidated subsidiaries.

 

2.              Basis of Presentation

 

The accompanying consolidated financial statements are unaudited.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.  The results of operations for the three and nine months ended September 30, 2004, are not necessarily indicative of the operating results for the full year.

 

The accompanying consolidated financial statements include the accounts of Vornado Realty L.P. as well as certain entities in which the Company owns (i) more than 50% unless a partner has shared board and management representation and authority and substantive participation rights on all significant business decisions or (ii) 50% or less when the Company is considered the primary beneficiary and the entity qualifies as a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised) – Consolidation of Variable Interest Entities (“FIN 46R”), which became effective on March 31, 2004.  All significant intercompany amounts have been eliminated.  Equity interests in partially-owned corporate entities are accounted for under the equity method of accounting when the Company’s ownership interest is more than 20% but less than 50%.  When partially-owned investments are in partnership form, the 20% threshold for equity method accounting may be reduced.  Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company’s share of the net income or loss and cash contributions and distributions to or from these entities.  For all other investments, the Company uses the cost method.

 

Management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Certain prior year balances have been reclassified in order to conform to current year presentation.

 

6

 

3.              Recently Issued Accounting Standards

 

FASB Interpretation No. 46 (Revised) - Consolidation of Variable Interest Entities (“FIN 46R”)

 

In January 2003, the FASB issued FIN 46, as amended in December 2003 by FIN 46R, which deferred the effective date until the first interim or annual reporting period ending after March 15, 2004.  FIN 46R requires the consolidation of an entity by an enterprise known as a “primary beneficiary,” (i) if that enterprise has a variable interest that will absorb a majority of the entity’s expected losses, if they occur, receive a majority of the entity’s expected residual returns, if they occur, or both and (ii) if the entity is a variable interest entity (“VIE”), as defined.  An entity qualifies as a VIE if (i) the total equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the equity investors do not have the characteristics of a controlling financial interest in the entity.  The initial determination of whether an entity is a VIE shall be made as of the date at which an enterprise becomes involved with the entity and re-evaluated as of the date of triggering events, as defined.  The Company has evaluated each partially-owned entity to determine whether any qualify as a VIE, and if so, whether the Company is the primary beneficiary, as defined.  The Company has determined that its investment in Newkirk Master Limited Partnership (“Newkirk MLP”), in which it owns a 22.3% equity interest (see Note 5 – Investments and Advances to Partially-Owned Entities), qualifies as a VIE.  However, the Company has also determined that it is not the primary beneficiary and accordingly, consolidation is not required.  The Company’s maximum exposure to loss as a result of its involvement in Newkirk MLP is limited to its equity investment of approximately $153,758,000, as of September 30, 2004.  In addition, the Company has variable interests in certain other entities which are primarily financing arrangements.  The Company has evaluated these entities in accordance with FIN 46R and has determined that they are not VIEs.  Based on the Company’s evaluations, the adoption of FIN 46R on March 31, 2004 did not have a material effect on its consolidated financial statements.

 

4.              Acquisitions, Dispositions and Financings

 

Acquisitions

 

On February 3, 2004, the Company acquired the Forest Plaza Shopping Center for approximately $32,500,000, of which $14,000,000 was paid in cash and $18,500,000 was debt assumed.  The purchase was funded as part of a Section 1031 tax-free “like-kind” exchange with the remaining portion of the proceeds from the sale of the Company’s Two Park Avenue property.  Forest Plaza is a 165,000 square foot shopping center located in Staten Island, New York, anchored by a Waldbaum’s supermarket.  The operations of Forest Plaza are consolidated into the accounts of the Company from the date of acquisition.

 

On March 19, 2004, the Company acquired a 62,000 square foot freestanding retail building located at 25 W. 14th Street in Manhattan for $40,000,000 in cash.  The operations of 25 W. 14th Street are consolidated into the accounts of the Company from the date of acquisition.

 

On July 1, 2004, the Company acquired the Marriott hotel located in its Crystal City office complex from a limited partnership in which Robert H. Smith and Robert P. Kogod, trustees of the Company, together with family members own approximately 67 percent.  The purchase price of $21,500,000 was paid in cash.  The hotel contains 343 rooms and is leased to an affiliate of Marriott International, Inc. until July 31, 2015, with one 10-year extension option.  The land under the hotel was acquired in 1999.  The operations of the hotel are consolidated into the accounts of the Company from the date of acquisition.

 

On July 29, 2004, the Company acquired a real estate portfolio containing 25 supermarkets for $65,000,000.  These properties, all of which are all located in Southern California and contain an aggregate of approximately 766,000 square feet, were purchased from the Newkirk MLP, in which the Company currently owns a 22.3% interest.  The supermarkets are net leased to Stater Brothers for an initial term expiring in 2008, with six 5-year extension options.  Stater Brothers is a Southern California regional grocery chain that operates 158 supermarkets and has been in business since 1936.  The operations of this portfolio are consolidated into the accounts of the Company from the date of acquisition.  The Company’s share of gain recognized by Newkirk MLP on this transaction was $7,119,000 and was reflected as an adjustment to the Company’s basis in its investment in Newkirk MLP and not recognized as income.

 

7

 

On August 30, 2004, the Company acquired a 68,000 square foot free-standing building in Forest Hills, New York for $26,500,000.  The property is located at 99-01 Queens Boulevard and its principal tenants are Rite Aid and Fleet Bank.  The operations of this property are consolidated into the accounts of the Company from the date of acquisition.

 

The acquisitions of 25 West 14^th Street, the Crystal City Marriott, the Stater Brothers real estate portfolio, and the Queens Boulevard properties were 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 Palisades Residential Complex (see Dispositions).

 

Investment in GMH Communities L.P.

 

On July 20, 2004, the Company committed to make up to a $159,000,000 convertible preferred investment in GMH Communities L.P. (“GMH”), a partnership focused on the student and military housing sectors.  Distributions accrue on the full committed balance of the investment, whether or not drawn, from July 20, 2004, at a rate of 16.27%, and the Company receives a monthly cash payment of 8.0% on the weighted average amount funded.  In connection with this commitment, the Company received a placement fee of $3,200,000.  The Company also purchased for $1,000,000, warrants to acquire GMH common equity.  As a result of GMH Communities Trust (“GCT”) initial public offering (“IPO”) discussed below, these warrants entitle the Company to acquire (i) 6,666,667 limited partnership units in GMH at an exercise price of $7.50 per unit and (ii) 5,496,724 limited partnership units at an exercise price of $9.10 per unit.  As of September 30, 2004, the Company has funded $80,378,000 of its commitment, which is included in Notes and Mortgage Loans Receivable on the Company’s consolidated balance sheet.  In October 2004, the Company funded an additional $33,399,000 of the commitment.

 

On November 3, 2004, GCT closed its IPO at a price of $12.00 per share.  GCT is a real estate investment trust that conducts its business through GMH, of which it is the sole general partner.  In connection with the IPO, the $113,777,000 funded of the Company’s $159,000,000 commitment has been repaid, together with accrued distributions of $13,381,000.  The Company also exercised warrants to purchase 6,666,667 limited partnership units at a price of $7.50 per unit, or $50,000,000 in total.  The Company has recorded a gain of approximately $29,500,000 on the acquisition of these units which is the difference between cost (exercise price of $7.50 plus $0.08 warrant purchase price allocation) and the $12.00 market price.  In addition, the Company retains warrants to purchase an additional 5,496,724 limited partnership units of GMH or common shares of GCT at a price of $9.10 per unit or share through May 2, 2006.  Until these warrants are exercised or sold, they will be marked-to-market at the end of each reporting period and the resulting gain or loss will be recognized in earnings.

 

Of the $46,033,000 of income the Company recorded from these transactions, $5,527,000 was recognized in the quarter ended September 30, 2004 and $40,506,000 will be recognized in the fourth quarter of 2004 (in addition to the unrealized gain on the mark-to-market of the remaining warrants and the Company’s pro rata share of GMH’s net income or loss).

 

Further, in connection with the IPO, the Company contributed its 90% interest in Campus Club Gainesville, which it acquired in 2000, in exchange for an additional 671,190 GMH limited partnership units.

 

Of the Company’s GMH units, 6,666,667 may be converted into an equivalent number of common shares of GCT commencing on May 2, 2005 and 671,190 units may be converted commencing on November 2, 2005.  The Company has agreed not to sell any common shares or units it owns or may acquire until May 2, 2005.

 

8

 

On November 2, 2004, the Company acquired a 50% joint venture interest in a 92,500 square foot retail property located at Broome Street and Broadway in New York City.  The Company contributed $4,462,000 of equity and provided a $24,000,000 bridge loan for 90 days with interest at 10% per annum.  Upon refinancing of the bridge loan, the Company will be repaid $15,106,000 and the balance of $8,894,000 will remain in the venture as additional equity.

 

Dispositions

 

On January 9, 2003, the Company sold its Baltimore, Maryland shopping center for $4,752,000, which resulted in a net gain on sale after closing costs of $2,644,000.

 

On June 29, 2004, the Company sold its Palisades Residential Complex for $222,500,000, which resulted in a gain on sale after closing costs of $65,905,000.  All or a portion of the proceeds from the sale will be reinvested pursuant to Section 1031 tax-free “like kind” exchanges, including certain of the acquisitions described above.  On February 27, 2004, the Company had acquired the remaining 25% interest in the Palisades venture it did not previously own for approximately $17,000,000 in cash.

 

On August 12, 2004, the Company sold its Dundalk, Maryland shopping center for $12,900,000, which resulted in a net gain on sale after closing costs of $9,850,000.  All of the proceeds from the sale were deposited into an account to permit Section 1031 tax-free “like-kind” exchange investments.

 

Net gain on disposition of wholly-owned and partially-owned assets other than depreciated real estate of $776,000 for the nine months ended September 30, 2004 represents a gain on sale of certain partially-owned development property.  Net loss on disposition of wholly-owned and partially-owned assets other than depreciated real estate of $607,000 the nine months ended September 30, 2003 includes the Company’s $1,388,000 share of loss on settlement of guarantees with affiliates of Primestone Investment Partners, partially offset by gains on sale of condominiums and land parcels of $282,000 and $499,000, respectively.

 

Financings

 

On January 6, 2004, the Company redeemed all of its 8.375% Series D-2 Cumulative Redeemable Preferred Units at a redemption price equal to $50.00 per unit for an aggregate of $27,500,000 plus accrued distributions.  The redemption amount exceeded the carrying amount by $700,000, representing the original issuance costs.  Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to Class A units, in accordance with the July 2003 EITF clarification of Topic D-42.

 

On March 17, 2004, the Company redeemed all of its Series B Preferred Units at a redemption price equal to $25.00 per unit for an aggregate of $85,000,000 plus accrued distributions.  The redemption amount exceeded the carrying amount by $3,195,000, representing the original issuance costs.  Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to Class A units, in accordance with the July 2003 EITF clarification of Topic D-42.

 

On May 27, 2004, the Company sold $35,000,000 of 7.2% Series D-11 Cumulative Redeemable Preferred Units to an institutional investor in a private placement. These perpetual preferred units may be called without penalty at the Company’s option commencing in May 2009.

 

On August 16, 2004, the Company completed a public offering of $250,000,000 aggregate principal amount of 4.50% senior unsecured notes due August 15, 2009.  Interest on the notes is payable semi-annually on February 15, and August 15, commencing February 15, 2005.  The notes were priced at 99.797% of their face amount to yield 4.546%.  The notes are subject to the same financial covenants as the Company’s previously issued senior unsecured debt.

 

On August 18, 2004, the Company sold $75,000,000 of 7.0% Series E Cumulative Redeemable Preferred Units at a price of $25.00 per unit.  The Company may redeem the Series E Preferred Units at a redemption price of $25.00 per unit after August 20, 2009.

 

9

 

5.              Investments and Advances to Partially-Owned Entities

 

The Company’s investments in partially-owned entities and income recognized from such investments are as follows:

 

Investments:

 

(Amounts in thousands)		September 30, 2004			December 31, 2003
Temperature Controlled Logistics		$	302,696		$	436,225
Alexander’s		205,075			207,872
Newkirk MLP		153,758			138,762
Partially-Owned Office Buildings		45,543			44,645
Monmouth Mall Joint Venture		29,854			30,612
Starwood Ceruzzi Joint Venture		19,002			23,821
Other		15,965			18,663
		$	771,893		$	900,600

Equity in Income (loss):

 

		For The Three Months Ended September 30,						For The Nine Months Ended September 30,
(Amounts in thousands)		2004			2003			2004			2003
Income applicable to Alexander’s:
33% share of equity in income before stock appreciation rights compensation expense		$	4,788		$	1,628		$	9,817		$	4,698
33% share of stock appreciation rights compensation expense		(8,796		)	(6,192		)	(20,880		)	(9,477		)
33% share of equity in net loss		(4,008		)(1)	(4,564		)	(11,063		)(1)	(4,779		)
Interest income (2)		2,039			2,666			6,637			7,760
Development and guarantee fees (2)		925			1,548			2,991			6,107
Management and leasing fees (2)		2,171			1,089			5,812			3,253
		$	1,127		$	739		$	4,377		$	12,341
Temperature Controlled Logistics:
60% share of equity in net income		$	1,298		$	901		$	1,167		$	6,578
Management fees		1,393			1,398			4,148			4,151
Other		90			102			289			474
		2,781			2,401			5,604			11,203
Newkirk MLP:
22.3% share of equity in income		4,904		(3)	5,990		(3)	17,049		(4)	29,547		(4)
Interest and other income		803			1,782			10,557		(5)	5,353
		5,707			7,772			27,606			34,900
Partially-Owned Office Buildings		692			659			1,979			2,068
Other		646			300			(1,547		)(6)	5,994		(7)
		$	9,826		$	11,132		$	33,642		$	54,165

 

(1)          The three and nine months ended September 30, 2004, includes the Company’s $1,274 share of Alexander’s gain on sale of a land parcel.  The nine months ended September 30, 2004, also includes the Company’s $1,010 share of Alexander’s loss on early extinguishment of debt.

(2)          The Company recognizes 67% of amounts charged to Alexander’s as income and the remaining 33% (representing the Company’s ownership) is reflected as a reduction of the Company’s carrying amount of its investment in Alexander’s.

(3)          The three months ended September 30, 2004 includes $759 for the Company’s share of an impairment loss on one of Newkirk MLP’s assets.

(4)          The nine months ended September 30, 2004 includes $2,479 for the Company’s share of net gains on sale of real estate and $2,901 representing the Company’s share of impairment losses.  The nine months ended September 30, 2003 includes the Company’s $9,900 share of gains from the sale of properties and early extinguishment of debt.

(5)          Includes a gain of $7,494 resulting from the exercise of an option by the Company’s joint venture partner to acquire certain MLP units held by the Company.  The MLP units subject to this option had been issued to the Company on behalf of the Company’s joint venture partner in exchange for the Company’s Operating Partnership units as part of the tender offers to acquire certain of the units of the MLP in 1998 and 1999.

(6)          Includes the Company’s $3,833 share of an impairment loss on one of Starwood Ceruzzi Joint Venture’s properties.

(7)          Includes the Company’s $4,413 share of Prime Group Realty L.P.’s lease termination fee income recognized in the second quarter of 2003.  On May 23, 2003, the Company exchanged the units it owned of Prime Group L.P. for common shares of its parent and no longer accounted for its investment in the partnership on the equity method.

 

10

 

Below is a summary of the debt of partially-owned entities as of September 30, 2004 and December 31, 2003, none of which is guaranteed by the Company.

 

		100% of Partially-Owned Entities Debt
(Amounts in thousands)		September 30, 2004			December 31, 2003
Alexander’s (33% interest):
Lexington Avenue mortgage note payable collateralized by the office space, due in February 2014, with interest at 5.33%		$	400,000		$	—
Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011, with interest at 7.46% (prepayable with yield maintenance)		214,463			216,586
Due to Vornado on January 3, 2006 with interest at 9.0% (one-year treasuries plus 6.0% with a 3.0% floor for treasuries) (prepayable without penalty)		124,000			124,000
Rego Park mortgage note payable, due in June 2009, with interest at 7.25%		81,841			82,000
Paramus mortgage note payable, due in October 2011, with interest at 5.92% (prepayable without penalty)		68,000			68,000
Lexington Avenue construction loan payable, due in January 2006, plus two one-year extensions, with interest at 4.34% (LIBOR plus 2.50%)		45,675			240,899
Temperature Controlled Logistics (60% interest):
Mortgage notes payable collateralized by 85 temperature controlled warehouses, due 2009 with a weighted average interest rate of 6.15% at September 30, 2004 (various prepayment terms)		738,277			509,456
Other notes payable		35,073			39,365
Newkirk MLP (22.3% interest):
Portion of first mortgages collateralized by the partnership’s real estate, due from 2004 to 2024, with a weighted average interest rate of 7.18% at September 30, 2004 (various prepayment terms)		877,988			1,069,545
Partially-Owned Office Buildings:
Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%		67,450			68,051
330 Madison Avenue (25% interest) mortgage note payable, due in April 2008, with interest at 6.52% (prepayable with yield maintenance)		60,000			60,000
825 Seventh Avenue (50% interest) mortgage note payable, due in October 2014, with interest at 8.07% (prepayable with yield maintenance)		22,854			23,060
Wells/Kinzie Garage (50% interest) mortgage note payable, due in May 2009, with interest at 7.03%		15,404			15,606
Orleans Hubbard (50% interest) mortgage note payable, due in March 2009, with interest at 7.03%		9,670			9,799
Kaempfer Equity Interests (2.1% to 10% interests in five partnerships) Mortgage notes payable, collateralized by the partnerships’ real estate, due from 2007 to 2031, with a weighted average interest rate of 6.15% at September 30, 2004 (various prepayment terms)		340,418			361,263
Monmouth Mall (50% interest):
Mortgage note payable, due in November 2005, with interest at LIBOR plus 2.05% and two one-year extension options (3.53% at September 30, 2004)		135,000			135,000

 

Based on the Company’s ownership interest in the partially-owned entities above, the Company’s share of the debt of these partially-owned entities was $1,084,228,000 and $930,567,000 as of September 30, 2004 and December 31, 2003, respectively.

 

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Temperature Controlled Logistics

 

Based on the joint venture’s policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $7,913,000 and $24,029,000 of rent it was due for the three and nine months ended September 30, 2004 and $8,416,000 and $19,518,000 of rent it was due for the three and nine months ended September 30, 2003, which together with previously unrecognized rent is $73,465,000.  This unrecognized rent was eliminated as a result of the acquisition of OPCO on November 4, 2004 (see below).

 

In the first quarter of 2004, a joint venture in which the Company has a 44% interest acquired an aggregate of $10,200,000 of trade receivables from AmeriCold Logistics (“AmeriCold”) for $10,000,000 in cash.  These receivables have been subsequently collected in full.  In the third quarter of 2004, the joint venture acquired an additional $11,730,000 of trade receivables for $11,500,000 in cash.

 

On February 5, 2004, AmeriCold Realty Trust (“AmeriCold”) 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 April 9, 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 November 4, 2004, AmeriCold purchased its tenant, OPCO, for $47,700,000 in cash.  As part of this transaction, Vornado Operating Company repaid the $21,989,000 loan due to the Company as well as $4,771,000 of interest applicable thereto.  Since the Company stopped recognizing interest income on this loan in January 2002, it will recognize the $4,771,000 income upon collection in the fourth quarter 2004.  In addition, the Company and its 40% partner, Crescent Real Estate Equities Company (“CEI”) entered into a definitive agreement to collectively sell 20.7% of AmeriCold’s common shares to The Yucaipa Companies (“Yucaipa”) for $145,000,000, which will result in a gain, of which the Company’s share is approximately $20,000,000. The purchase price was based on a $1.450 billion valuation for AmeriCold before debt and other obligations.  The agreement provides for Yucaipa to earn a promote of 20% of the increase in the value of AmeriCold through December 31, 2007, limited to 10% of the Company’s and CEI’s remaining interest in AmeriCold.  Yucaipa is a private equity firm with significant expertise in the food distribution, logistics and retail industries.  Upon closing of the sale to Yucaipa, which is scheduled to close before year-end, AmeriCold will be owned 47.6% by the Company, 31.7% by CEI and 20.7% by Yucaipa. Further, the joint venture between the Company and CEI will be dissolved and the Company will have three of the five members of AmeriCold’s Board of Trustees and will consolidate the operations and financial position of AmeriCold into its accounts rather than account for the investment on the equity method.

 

Alexander’s

 

The Company owns 33% of the outstanding common stock of Alexander’s at September 30, 2004.  Alexander’s is managed, and its properties are leased and developed, by the Company.  In addition, Building Maintenance Services (“BMS”), a wholly-owned subsidiary of the Company, supervises the cleaning, engineering and security at 731 Lexington Avenue for a fee of 6% of Alexander’s costs for such services.  On May 27, 2004, the Company entered into a further agreement with Alexander’s under which the Company provides property management services to Alexander’s for an annual fee of $0.50 per square foot of tenant-occupied office and retail space at 731 Lexington Avenue.  The agreements covering all of the above expire in March of each year and are automatically renewable, except for the 731 Lexington Avenue development agreement which provides for a term lasting until substantial completion of the development of the property.

 

Effective April 1, 2004, based on Alexander’s improved liquidity, the Company modified its term loan and line of credit to Alexander’s to reduce the spread on the interest rate it charges from 9.48% to 6%.  Accordingly, the current interest rate was reduced from 12.48% to 9%.

 

As of September 30, 2004, the Company had a receivable from Alexander’s of $46,788,000 under the agreements discussed above.  In addition, in the three and nine months ended September 30, 2004, Alexander’s paid $370,000 and $940,000, respectively, to BMS for cleaning and engineering services at Alexander’s Lexington Avenue project.

 

12

 

On February 13, 2004, Alexander’s completed a $400,000,000 mortgage financing on the office space of its Lexington Avenue development project which was 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.  $253,529,000 of the loan proceeds was used to repay the entire amount outstanding under the construction loan with Hypo Real Estate Capital Corporation (“the Construction Loan”).  The Construction Loan was modified so that the remaining availability is $237,000,000, which was approximately the amount estimated to complete the Lexington Avenue development project.  The interest rate on the Construction Loan is LIBOR plus 2.5% (3.82% at September 30, 2004) 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 fully repaid.  In connection with reducing the principal amount of the Construction Loan, Alexander’s wrote-off $3,050,000 of unamortized deferred financing costs in the first quarter of 2004, of which the Company’s share was $1,010,000.

 

Equity in income from Alexander’s includes Alexander’s stock appreciation rights compensation expense of which the Company’s share was $8,796,000 and $20,880,000 for the three and nine months ended September 30, 2004, based on a closing Alexander’s stock price of $199.10 on September 30, 2004.  The three and nine months ended September 30, 2003 include the Company’s $6,192,000 and $9,477,000 share of Alexander’s stock appreciation rights compensation expense based on a closing Alexander’s stock price of $105.50 on September 30, 2003.

 

6.              Notes, Mortgage Loans Receivable and Other Investments

 

On March 1, 2004, the Company’s note receivable of $38,500,000 from Commonwealth Atlantic Properties was repaid.

 

On May 12, 2004, the Company made an $83,000,000 mezzanine loan secured by ownership interests in a subsidiary of Extended Stay America, Inc., which was recently acquired for approximately $3.1 billion by an affiliate of the Blackstone Group. The loan is part of a $166,000,000 facility, the balance of which was funded by Soros Credit LP, and is subordinate to $2.3 billion of other debt. The loan bears interest at LIBOR plus 5.50% (7.34% at September 30, 2004) and matures in May 2007, with two one-year extensions.  Extended Stay America owns and operates 485 hotels in 42 states.

 

On June 1, 2004, and September 24, 2004, the Company acquired Verde Group LLC (“Verde”) convertible subordinated debentures for $14,350,000 and $8,150,000, in cash, bringing its total investment in Verde at September 30, 2004 to $25,000,000 (of a $25,000,000 commitment).  Verde invests, operates and develops residential communities on the Texas-Mexico border.  The debentures yield a fixed rate of 4.75% per annum.

 

On June 1, 2004, the Company invested $5,000,000 in a senior mezzanine loan, and $3,050,000 in senior preferred equity of 3700 Associates, LLC which owns 3700 Las Vegas Boulevard, a development land parcel located in Las Vegas, Nevada.  The loan bears interest at 12% and matures on March 31, 2007.  The preferred equity yields a 10% per annum cumulative preferred return.

 

On September 1, 2004, the Company acquired a $50,000,000 participation in an existing $200,000,000 loan on the General Motors Building made by an affiliate of Soros Fund Management LLC.  This loan, which is subordinate to $1.15 billion of other debt, is secured by partnership interests in the building and additional guarantees and collateral.  The $50,000,000 participation bears interest at 16%, matures on March 25, 2005 and is prepayable at any time.

 

13

 

Also included in the “Notes and Mortgage Loans Receivable” as of September 30, 2004 is $80,378,000 representing the amount funded by the Company on its $159,000,000 convertible preferred commitment to GMH Communities L.P. (see page 8 for details of this transaction).

 

On September 21, 2004, the Company converted its $30,000,000 Capital Trust Convertible Preferred Securities into 1,424,474 common shares of Capital Trust with a market value of $39,073,000, based on the then closing stock price on the NYSE of $27.43.  Upon conversion, the Company’s unamortized discount of $622,000 was recognized as investment income and the difference between the $30,000,000 face amount of the preferred securities and the $39,073,000 market value of the common shares of $9,073,000 was recorded as “accumulated other comprehensive income (loss)”, a component of partners’ capital on the Company’s consolidated balance sheet.  The common shares are classified as marketable equity securities – available for sale on the Company’s consolidated balance sheet.

 

In July and August 2004, the Company acquired an aggregate of 1,176,600 common shares of Sears, Roebuck and Co. (“Sears”) for $40,576,000, an average price of $34.44 per share. These shares are recorded as marketable securities on the Company’s consolidated balance sheet and are classified as “available for sale.”  Appreciation or depreciation in the fair market value of these shares is recorded as an increase or decrease in “accumulated other comprehensive income (loss)” in the shareholders’ equity section of the Company’s consolidated balance sheet and not recognized in income.  At September 30, 2004, based on Sears’ closing stock price of $39.85 per share, $6,312,000 of appreciation was included in “accumulated other comprehensive income (loss).”

 

In August and September 2004, the Company acquired an economic interest in an additional 7,916,900 Sears common shares through a series of privately negotiated transactions with a financial institution pursuant to which the Company purchased a call option and simultaneously sold a put option at the same strike price on Sears common shares.  These call and put options have a weighted-average strike price of $39.82 per share, or an aggregate of $315,200,000, expire in April 2006 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points and is credited for the dividends received on the shares.  The options provide the Company with the same economic gain or loss as if it had purchased the underlying common shares and borrowed the aggregate strike price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period is recognized as an increase or decrease in “interest and other investment income” on the Company’s consolidated statement of income.  During the quarter ended September 30, 2004, the Company recorded a net expense of $88,000 on these transactions, comprised of (i) $966,000 of accrued interest expense and (ii) $572,000 of legal fees, partially offset by (iii) $1,214,000 of accrued dividends on the common shares and (iv) the $238,000 increase in the value of the options resulting from an increase in the market price of the underlying common shares.

 

Based on Sears’ most recent Form 10-Q, the Company’s aggregate investment represents 4.3% of Sears outstanding common shares.  As of November 4, 2004, based on the closing price of Sears common shares on the NYSE of $37.18 per share, the market value of the 7,916,900 shares underlying the option agreements was $294,350,000, and the market value of the 1,176,600 shares owned by the Company was $43,746,000.  As of November 4, 2004, the Company has funded $64,205,000 to the financial institution as margin collateral which earns interest at an annual rate of LIBOR plus 45 basis points.

 

14

 

7.              Identified Intangible Assets and Goodwill

 

The following summarizes the Company’s identified intangible assets, intangible liabilities (deferred credit) and goodwill as of September 30, 2004 and December 31, 2003.

 

(Amounts in thousands)		September 30, 2004			December 31, 2003
Identified intangible assets (included in other assets):
Gross amount		$	189,533		$	171,950
Accumulated amortization		(56,647		)	(41,075		)
Net		$	132,886		$	130,875
Goodwill (included in other assets):
Gross amount		$	4,345		$	4,345
Identified intangible liabilities (included in deferred credit):
Gross amount		$	115,508		$	79,146
Accumulated amortization		(47,277		)	(31,787		)
Net		$	68,231		$	47,359

 

Amortization of acquired below market leases net of acquired above market leases (components of rental income) was $4,730,000 and $11,492,000 for the three and nine months ended September 30, 2004, and $3,162,000 and $6,914,000 for the three and nine months ended September 30, 2003.  The estimated annual amortization of acquired below market lease net of acquired above market leases for each of the five succeeding years is as follows:

 

(Amounts in thousands)
2005		$	8,714
2006		5,817
2007		4,832
2008		4,025
2009		3,731

 

The estimated annual amortization of all other identified intangible assets (a component of depreciation and amortization expense) including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years is as follows:

 

(Amounts in thousands)
2005		$	13,066
2006		11,719
2007		11,152
2008		11,006
2009		10,364

 

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8.              Notes and Mortgages Payable

 

Following is a summary of the Company’s debt:

 

				Interest Rate		Balance as of
(Amounts in thousands)		Maturity		as at September 30, 2004		September 30, 2004			December 31, 2003
Notes and Mortgages Payable:
Fixed Interest:
Office:
NYC Office:
Two Penn Plaza (1)		02/11		4.97%		$	300,000		$	151,420
888 Seventh Avenue		02/06		6.63%		105,000			105,000
Eleven Penn Plaza		05/07		8.39%		48,433			49,304
866 UN Plaza			(2)		(2)	—			33,000
CESCR Office:
Crystal Park 1-5		07/06-08/13		6.66%-7.08%		255,181			258,733
Crystal Gateway 1-4 Crystal Square 5		07/12-01/25		6.75%-7.09%		213,152			214,323
Crystal Square 2, 3 and 4		10/10-11/14		6.82%-7.08%		142,246			143,854
Skyline Place		08/06-12/09		6.60%-6.93%		133,533			135,955
1101 17th , 1140 Connecticut, 1730 M and 1150 17th		08/10		6.74%		94,853			95,860
Courthouse Plaza 1 and 2		01/08		7.05%		77,884			78,848
Reston Executive I, II and III		01/06		6.75%		71,988			72,769
Crystal Gateway N., Arlington Plaza and 1919 S. Eads		11/07		6.77%		70,547			71,508
Crystal Plaza 1-6			(3)		(3)	—			68,654
One Skyline Tower		06/08		7.12%		64,078			64,818
Crystal Malls 1-4		12/11		6.91%		56,665			60,764
1750 Pennsylvania Avenue		06/12		7.26%		49,002			49,346
One Democracy Plaza		02/05		6.75%		26,358			26,900
Retail:
Cross collateralized mortgages payable on 42 shopping centers		03/10		7.93%		477,547			481,902
Green Acres Mall		02/08		6.75%		146,566			148,386
Las Catalinas Mall		11/13		6.97%		65,961			66,729
Montehiedra Town Center		05/07		8.23%		58,241			58,855
Forest Plaza		05/09		4.00%		21,149			—
Other		08/21		9.90%		6,904			6,920
Merchandise Mart:
Washington Design Center		11/11		6.95%		47,633			48,012
Market Square Complex		07/11		7.95%		45,802			46,816
Furniture Plaza		02/13		5.23%		44,854			45,775
Washington Office Center			(4)		(4)	—			43,166
Other		10/10-06/28		7.52%-7.71%		18,228			18,434
Other:
Industrial Warehouses		10/11		6.95%		48,566			48,917
Student Housing Complex		11/07		7.45%		18,589			18,777
Total Fixed Interest Notes and Mortgages Payable				7.15%		2,708,960			2,713,745

 

16

 

						Interest Rate
				Spread		as at		Balance as of
(Amounts in thousands)		Maturity		over LIBOR		September 30, 2004		September 30, 2004			December 31, 2003
Notes and Mortgages Payable:
Variable Interest:
Office:
NYC Office:
One Penn Plaza (1)		06/05		L+125		3.10	%	$	200,000		$	275,000
770 Broadway		06/06		L+105		2.86	%	170,000			170,000
909 Third Avenue		08/06		L+70		2.45	%	125,000			125,000
CESCR Office:
Commerce Executive III, IV and V		07/05		L+150		3.15	%	42,037			42,582
Commerce Executive III, IV and V B		07/05		L+85		2.50	%	10,000			10,000
Other:
400 North LaSalle		02/05		L+250		4.75	%	5,115			3,038
Total Variable Interest Notes and Mortgages Payable						2.89	%	552,152			625,620
Total Notes and Mortgages Payable						6.42	%	$	3,261,112		$	3,339,365
Unsecured revolving credit facility		07/06		L+65				$	—		$	—
Liabilities related to discontinued operations:
Palisades construction loan (5)								$	—		$	120,000
Senior Unsecured Notes:
Senior unsecured notes due 2007 at fair value (accreted carrying amount of $499,607 and $499,499) (6)		06/07		L+77		2.13	%	$	518,184		$	525,279
Senior unsecured notes due 2009 (7)		08/09				4.50	%	$	249,501		$	—
Senior unsecured notes due 2010		12/10				4.77	%	$	199,769		$	199,741

 

(1)          On February 5, 2004, the Company completed a $300,000 refinancing of Two Penn Plaza.  The loan bears interest at 4.97% and matures in February 2011.  The Company retained net proceeds of $41,000 after repaying the existing $151,000 loan, $75,000 of the $275,000 mortgage loan on its One Penn Plaza property and the $33,000 mortgage loan on 866 UN Plaza.

(2)          Repaid in February 2004.

(3)          Repaid in July 2004.

(4)          Repaid in January 2004.

(5)          Repaid in June 2004 in connection with the sale of the Palisades.

(6)          Upon the issuance of the notes, the Company entered into interest rate swap agreements that effectively converted the interest rate from a fixed rate of 5.625% to a floating rate of LIBOR plus ..7725%, based upon the trailing three month LIBOR rate (2.13% on September 30, 2004).  In accordance with SFAS No. 133, as amended, the Company is required to fair value the debt at each reporting period.  At September 30, 2004, the fair value adjustment was $18,577 and is included in the balance of the senior unsecured notes above.

(7)          On August 16, 2004, the Company completed an offering of $250,000, aggregate principal amount of 4.50% senior unsecured notes due August 15, 2009.  Interest on the notes is payable semi-annually on August 15th and February 15th, commencing in 2005.  The notes were priced at 99.797% of their face amount to yield 4.546%. The notes contain the same financial covenants as the Company previously issued senior unsecured notes.  The net proceeds of approximately $247,700 were used primarily for general corporate purposes.

 

17