UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-K

 

ý              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended:  December 31, 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)

 

Delaware		13-3925979
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
888 Seventh Avenue, New York, New York		10019
(Address of Principal Executive Offices)		(Zip Code)
Registrant’s telephone number including area code:                 (212) 894-7000

 

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, 2004, 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 $5,790,469,000.

 

Documents Incorporated by Reference

 

Part III:  Portions of Vornado Realty Trust’s Proxy Statement for Annual Meeting of Shareholders to be held on May 18, 2005.

 

 

TABLE OF CONTENTS

 

	Item		Page
Part I.	1.	Business	4
	2.	Properties	17
	3.	Legal Proceedings	45
	4.	Submission of Matters to a Vote of Security Holders	46
		Executive Officers of the Registrant (1)	46
Part II.	5.	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	47
	6.	Selected Financial Data	48
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
	7A.	Quantitative and Qualitative Disclosures about Market Risk	99
	8.	Financial Statements and Supplementary Data	101
	9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	154
	9A.	Controls and Procedures	154
	9B.	Other Information	156
Part III.	10.	Directors and Executive Officers of the Registrant	156
	11.	Executive Compensation (1)	156
	12.	Security Ownership of Certain Beneficial Owners and Management	156
	13.	Certain Relationships and Related Transactions	157
	14.	Principal Accountant Fees and Services	157
Part IV.	15.	Exhibits and Financial Statement Schedules	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, 2004, portions of which are incorporated by reference herein. Information relating to Executive Officers of Vornado Realty Trust appears on page 46 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 annual report on 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 87% of the common limited partnership interest in, the Operating Partnership at December 31, 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 86 office properties aggregating approximately 27.6 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)          94 retail properties in seven states and Puerto Rico aggregating approximately 14.2 million square feet, including 2.8 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 47.6% interest in Americold Realty Trust which owns and operates 88 cold storage warehouses nationwide;

 

Other Real Estate Investments:

 

(v)         33% of the outstanding common stock of Alexander’s, Inc. (“Alexander’s”) which has six properties in the greater New York metropolitan area;

 

(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 0.4 million square feet of retail and office space;

 

(vii)       a 22.4% 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)      seven dry warehouse/industrial properties in New Jersey containing approximately 1.7 million square feet;

 

(ix)         mezzanine loans to real estate related companies; and

 

(x)          interests in other real estate including a 12.25% interest in GMH Communities L.P. (which owns and manages student and military housing properties throughout the United States), other investments 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

•                  Providing specialty financing to real estate related 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

 

2004 ACQUISITIONS AND INVESTMENTS

 

During the year ended December 31, 2004, the Company has completed $328,600,000 of acquisitions and investments in real estate, of which $246,600,000 related to the retail segment.  In addition, the Company made $183,400,000 of mezzanine loans during 2004 which increased the outstanding balance of Notes and Mortgage Loans Receivable to $440,186,000 at December 31, 2004.  Details of these transactions are described in 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.

 

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 accrued on the full committed balance of the investment, whether or not drawn, from July 20, 2004, at a rate of 16.27%.  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.  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, through May 6, 2006, at an exercise price of $9.10 per unit.  As of November 3, 2004, the Company had funded a total of $113,777,000 of the commitment.

 

On November 3, 2004, GMH Communities Trust (“GCT”) closed its initial public offering (“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 previously funded by the Company under the $159,000,000 commitment was 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, which resulted in a gain of $29,500,000.  The Company accounts for its interest in the partnership units on the equity-method based on its 12.25% ownership interest and right to appoint one of its executive officers to GCT’s Board of Trustees.  The Company records its pro-rata share of GMH’s net income or loss on a one-quarter lag basis as the Company files its financial statements on Form 10-K or 10-Q prior to the time GMH files its financial statements.

 

Under the warrant agreement, the number of GMH partnership units or GCT common shares underlying the warrants is adjusted for dividends declared by GCT.  On December 16, 2004, GCT declared a dividend of $.16 per common share, which increased the number of shares underlying the warrants from 5,496,724 to 5,563,417 and the exercise price was decreased from $9.10 to $8.99 per share.   Because these warrants are derivatives and do not qualify for hedge accounting treatment, the gains and losses resulting from the mark-to-market of the warrants at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on the Company’s consolidated statement of income.  In the quarter ended December 31, 2004, the Company recognized income of $24,190,000 from the mark-to-market of these warrants, which were valued using a trinomial option pricing model based on GCT’s closing stock price on the NYSE of $14.10 per share on December 31, 2004.

 

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.

 

6

 

Investment in Sears, Roebuck and Co.

 

In July and August 2004, the Company acquired an aggregate of 1,176,600 common shares of Sears, Roebuck and Co. (“Sears”) for $41,945,000, an average price of $35.65 per share. Included in the cost is $1,361,000 for a performance-based participation.  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” in the partners’ capital section of the Company’s consolidated balance sheet and not recognized in income.  At December 31, 2004, based on Sears’ closing stock price of $51.03 per share, $18,105,000 of appreciation in the value of these shares was included in “accumulated other comprehensive income.”

 

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 an initial weighted-average strike price of  $39.82 per share, or an aggregate of $315,250,000, 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 are recognized as an increase or decrease in “interest and other investment income” on the Company’s consolidated statement of income.  During the year ended December 31, 2004, the Company recorded net income of $81,730,000, comprised of (i) $88,782,000 from the mark-to-market of the options on December 31, 2004, based on Sears’ closing stock price of $51.03 per share and (ii) $2,295,000 for accrued dividends, partially offset by (i) $5,972,000 for a performance-based participation, (ii) $2,371,000 for the increase in strike price resulting from the LIBOR charge and (iii) $1,004,000 of professional fees.

 

On November 16, 2004, Kmart Holding Corporation (“Kmart”) and Sears entered into an Agreement and Plan of Merger.  Upon the effective date of the merger, each share of Sears common stock will be converted into the right to receive, at the election of the holder, (i) $50.00 in cash or (ii) 0.50 shares of common stock of the merged company, subject to proration so that 55% of the Sears shares are exchanged for shares of the merged company.

 

Based on Sears’ most recent filing with the Securities and Exchange Commission, the Company’s aggregate investment in Sears represents 4.2% of Sears’ outstanding common shares.

 

2004 DISPOSITIONS

 

On June 29, 2004, the Company sold the Palisades Residential Complex for $222,500,000, which resulted in a net gain on sale after closing costs of $65,905,000.  Substantially all of the proceeds from the sale were reinvested in tax-free “like kind” exchange investments pursuant to Section 1031 of the Internal Revenue Code (“Section 1031”).

 

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.  Substantially all of the proceeds from the sale have been reinvested in tax-free “like-kind” exchange investments pursuant to Section 1031 .

 

On November 4, 2004, Americold Realty Trust (“Americold”), owned 60% by the Company, purchased its tenant, AmeriCold Logistics, for $47,700,000 in cash.  On November 18, 2004 the Company and its 40% partner, Crescent Real Estate Equities Company (“CEI”) collectively sold 20.7% of Americold’s common shares to The Yucaipa Companies (“Yucaipa”) for $145,000,000, which resulted in a gain, of which the Company’s share was $18,789,000.  In connection with the governance provisions of the transaction, the Company has the right to appoint three of the five members to Americold’s Board of Trustees.  Consequently, the Company is deemed to exercise control over Americold and on November 18, 2004 began to consolidate Americold’s operations and financial position and no longer accounts for its investment on the equity method.

 

Further details regarding the Company’s dispositions are disclosed in 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 $470.0 million.  Of this amount $30.9 million was expended in 2004 (excluding $104.5 million for projects completed in 2004) and $310.0 million is estimated to be expended in 2005.  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, 2004			Estimated Costs to Complete
In Progress:
New York Office:
Redevelopment of 7 West 34th Street office space to permanent showroom space for Gift industry manufacturers and wholesalers		2005-2006		$	33.0		$	.5		$	32.5
CESCR:
Crystal City Office space to be vacated by the U.S. Government Patent and Trade Office (“PTO”):
(i) Renovation of buildings (see next page)		2005-2007		75.0		(1)	11.0			64.0
(ii) Cost to retenant		2005-2007		75.0		(1)	—			75.0
Retail:
Green Acres Mall – interior and exterior renovation, construction of an additional 63,600 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		71.0			1.0			69.0
Bergen Mall – expand, re-tenant and redevelop the mall (2)		2008		102.0			1.6			100.0
Strip shopping centers – redevelopment of five properties and one industrial warehouse (2)		2005-2006		54.0			7.2			44.0
715 Lexington Avenue – demolition of existing building and construction of 24,000 square feet of retail space on four floors		Fall 2005		19.0			4.9			12.0
968 Third Avenue (50% interest) – demolition of existing building and construction of 5,700 square feet of retail space on three floors		Spring 2005		6.0			1.8			1.0
Other:
Penn Plaza Signage District - construction of approximately 21 signs at various locations in the Penn Plaza District, of which 10 have been completed as of December 31, 2004		Ongoing		35.0			2.9			20.0
				$	470.0		$	30.9		$	417.5

 

(1)                        Revised from the prior estimate of $90.0 million to renovate the buildings and $60.0 million to re-tenant the space.

(2)                        Subject to governmental approvals.

 

The Company is also in the pre-development phase of other projects including, retail space in the Penn Plaza area, repositioning of the Hotel Pennsylvania, expansion of the Monmouth Mall and 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 has substantially completed the following projects during 2004:

 

		The Company’s Share of
($ in millions)		Project Cost			Costs Expended in Year Ended December 31, 2004			Estimated Costs to Complete
Completed in 2004:
New York City:
640 Fifth Avenue – construction of additional 47,000 square feet of office space and redevelopment of existing building		$	64.0		$	13.9		$	6.0
CESCR:
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		43.0			25.5			3.0
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		54.0			29.6			6.0
Strip shopping centers – site work and/or demolition of existing buildings as part of the redevelopment of six properties released to Wal-Mart and Lowes (each of these locations were previously leased to Bradlees.)		18.0			16.9			—
Merchandise Mart:
350 West Mart Center, Chicago – addition of 40,000 square feet at street level and new lobby and drive		18.0			14.6			2.0
Other:
400 North LaSalle (85% interest) – construction of 381,000 square foot, high-rise rental apartment complex containing 452 apartments		78.0			4.0			1.0
		$	275.0		$	104.5		$	18.0

 

PTO Space Redevelopment:

 

The Company plans to redevelop certain office buildings in which the PTO has vacated or will vacate space as their leases expire over the next two years as follows:

 

				Square Feet Vacated		Square Feet Expiring (in thousands)
				2004		2005								2006
		Total		Q4		Q1		Q2		Q3		Q4		Q1
Taken out of Service:
Crystal Plaza Three		263		263		—		—		—		—		—
Crystal Plaza Four		234		234		—		—		—		—		—
Remaining in Service:
Crystal Plaza Two		181		—		181		—		—		—		—
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		—		—		—		9		—
		1,939		937		393		359		—		145		105

 

Renovations to Crystal Plaza Three and Four will include new mechanical systems, new restrooms, lobbies and corridors.  These buildings have been taken out of service for 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 be taken out of service.

 

See page 56 for details of the projected lease up of the PTO space.

 

9

 

FINANCING ACTIVITIES

 

During 2004, the Company and Vornado issued (i) $425,000,000 of Cumulative Redeemable Preferred Shares at a weighted average rate of 6.74%, (ii) $55,000,000 Cumulative Redeemable Preferred Units of the Operating Partnership at a weighted average rate of 6.96%, (iii) $46,700,000 of 3.0% Series D-13 preferred units and (iv) redeemed $85,000,000 and $27,500,000 of outstanding Cumulative Redeemable Preferred Shares and Units with a weighted average rate of 8.50% and 8.38%, respectively.  In addition, the Company completed property level financings of $520,000,000 and issued $250,000,000 of senior unsecured notes.  Details of these transactions as well as other financing activities are described in 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.

 

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 common shares of Vornado or Operating Partnership units in exchange for property and may repurchase or otherwise re-acquire its shares or any other securities in the future.

 

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.

 

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.

 

10

 

TENANTS WHICH ACCOUNTED FOR OVER 10% OF REVENUES

 

In 2004, the Company had 106 separate leases with various agencies of the U.S. Government, the rent from which accounted for 12.5% of the Company’s consolidated total revenues.  The loss of this tenant would have a material adverse effect on the Company’s finances as a whole.

 

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 Vornado may seek the vote of its shareholders in connection with any particular material transaction, generally the Company’s activities are reviewed and may be modified from time to time by Vornado’s Board of Trustees without the vote of securityholders.

 

EMPLOYEES

 

As of December 31, 2004, the Company and its majority-owned subsidiaries had approximately 2,592 employees, of which 186 were corporate staff.  The Office segment had 269 employees and 1,123 employees of Building Maintenance Services, a wholly-owned subsidiary.  The Retail segment, the Merchandise Mart segment and the Hotel Pennsylvania had 61, 479 and 474 employees, respectively.  This does not include employees of partially-owned entities, including Americold Realty Trust which had 6,058 employees as of December 31, 2004.

 

SEGMENT DATA

 

The Company operates in four business segments: Office Properties, Retail Properties, Merchandise Mart Properties and Temperature Controlled Logistics.  The Merchandise Mart segment has trade show operations in Canada.  The Temperature Controlled Logistics segment operates one managed warehouse in Canada.  Information related to the Company’s business segments for the years 2004, 2003 and 2002 is set forth in Note 18. Segment Information 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 the Company, 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 Vornado’s website (www.vno.com) as soon as reasonably practicable after it is electronically filed with, or furnished to, the Securities and Exchange Commission.  We also have made available on Vornado’s 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 Vornado’s website.

 

11

 

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 shareholders. 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 shareholders 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 to enforce those rights. For information regarding the bankruptcy of our tenants, see “Bankruptcy or insolvency 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 our tenants. As a result, the bankruptcy or insolvency of a major tenant could result in a lower level of funds available for distribution to our securityholders or the payment of our indebtedness.

 

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.”

 

12

 

Some of our potential losses may not be covered by 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 2005 and (v) rental loss insurance) with respect to its assets.  In April 2004, the Company reviewed its all risk policies and increased its coverage for Acts of Terrorism for each of its New York Office, CESCR Office, Retail and Merchandise Mart divisions.  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		$	1,400,000,000		$	750,000,000
CESCR Office		1,400,000,000			750,000,000
Retail		500,000,000			500,000,000
Merchandise Mart		1,400,000,000			750,000,000
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.  To the extent the Company incurs losses in excess of its insurance coverage, these losses would be born by the Company and could be significant.

 

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, 2009 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, or if the Terrorism Risk Insurance Act of 2002 is not extended, it could adversely affect the Company’s ability to finance and/or refinance its properties and expand its portfolio.

 

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 2004, 64.2% of our EBITDA, excluding items that affect comparability, 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.

 

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.  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.  In addition, threatened or actual future terrorist attacks in these areas could directly or

 

13

 

indirectly impact our properties.  As a result of the foregoing, 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 $11.6 billion at December 31, 2004.  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 securityholders.

 

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 consummating desired acquisitions and 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, we may 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.

 

For example, 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, until 2014 with respect to certain properties located in the Crystal City area of Arlington, Virginia or until 2008 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.

 

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

 

We depend primarily on external financing to fund the growth of our 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.

 

14

 

We have indebtedness, and this indebtedness may increase.

 

As of December 31, 2004, we had approximately $5.2 billion in total debt outstanding including the Company’s proportionate share of debt of partially-owned entities.  Our ratio of total debt to total enterprise value was 30.4%. When we say “enterprise value” in the preceding sentence, we mean market equity value of Vornado Realty Trust plus total debt outstanding, including the Company’s pro-rata share of partially-owned entities 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, 2004, Interstate Properties, a New Jersey general partnership, and its partners owned approximately 10.8% of the common shares of Vornado Realty Trust and approximately 27.4% of the common stock of Alexander’s, Inc.  Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the partners of Interstate Properties. Mr. Roth is the Chairman of the Board and Chief Executive Officer of Vornado Realty Trust, the managing general partner of Interstate Properties, the Chief Executive Officer and a director of Alexander’s.

 

As of December 31, 2004, we owned 33% 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 Realty Trust, are directors of Alexander’s. Messrs. Mandelbaum, West and Wight are trustees of Vornado Realty Trust and are also directors of Alexander’s.

 

Prior to the dissolution of Vornado Operating on December 29, 2004, Interstate was also a significant equity holder of Vornado Operating.  When it existed, Vornado Operating’s principal business was operating, as tenant, the cold storage warehouses owned by our partially-owned subsidiary, Americold Realty Trust.  Messrs. Roth and Fascitelli were officers and directors of Vornado Operating.  Mr. Wight was also a director of Vornado Operating.

 

Because of these overlapping interests, Mr. Roth and Interstate Properties and its partners may have substantial influence over Vornado Realty Trust (and therefore the Company) and Alexander’s and on the outcome of any matters submitted to Vornado Realty Trust or Alexander’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 or Alexander’s, 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 and Alexander’s, 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 $726,000, $703,000, and $747,000 of management fees under the management agreement for the years ended December 31, 2004, 2003 and 2002.  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.

 

15

 

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

 

At December 31, 2004, the Company had loans receivable from Alexander’s of $124,000,000 at an interest rate of 9.0%, 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 finally repaid. 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 Realty Trust 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.

 

Interstate Properties, which is further described above, owned an additional 27.4% of the outstanding common stock of Alexander’s as of December 31, 2004.  Mr. Roth, Chairman of the Board and Chief Executive Officer of Vornado Realty Trust, is Chief Executive Officer and a director of Alexander’s, and Mr. Fascitelli, President and a trustee of Vornado Realty Trust, is President and a director of Alexander’s.  Messrs. Mandelbaum, West and Wight, trustees of the Company, are also directors of Alexander’s.  Alexander’s common stock is listed on the New York Stock Exchange under the symbol “ALX.”

 

For a description of Interstate Properties’ ownership of Vornado Realty Trust 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.

 

16

 

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, GMH Communities L.P., dry warehouses and industrial buildings.

 

Office Segment

 

The Company currently owns all or a portion of 86 office properties containing approximately 27.6 million square feet.  Of these properties, 20 containing 13.4 million square feet are located in the New York City metropolitan area (primarily Manhattan) (the “New York City Office Properties”) and 66 containing 14.2 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 12,607,000 square feet of office space and 805,000 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.

 

The following table sets forth the percentage of the New York City Office Properties 2004 revenue by tenants’ industry:

 

 

The Company’s New York City Office properties 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.

 

17

 

Below is a listing of tenants that accounted for 2% or more of the New York City Office Properties revenues in 2004:

 

Tenant		Square Feet Leased		2004 Revenues			Percentage of New York City Office Revenues		Percentage of Company Revenues
The McGraw-Hill Companies, Inc.		520,000		$	20,612,000		3.3	%	1.2	%
VNU Inc.		515,000		19,544,000			3.2	%	1.1	%
Sterling Winthrop, Inc.		429,000		18,879,000			3.0	%	1.1	%
Cablevision/Madison Square Garden L.P./ Rainbow Media Holdings, Inc.		285,000		14,905,000			2.4	%	0.9	%
Federated Department Stores		357,000		14,622,000			2.4	%	0.9	%
U.S. Government		639,000		14,411,000			2.3	%	0.8	%
New York Stock Exchange, Inc.		348,000		14,268,000			2.3	%	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.

 

 

During 2004, the Company leased 1,623,000 square feet of New York City Office space as follows:

 

 

(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 51,000 square feet of retail space at a weighted average initial rent of $118.39 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, 2004, for each of the next 10 years assuming that none of the tenants exercise their renewal options.

 

Office Space:

 

Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of New York City Office Square Feet		Annual Escalated Rent of Expiring Leases
								Total			Per Square Foot
2005		170		698,000		5.5	%	$	29,312,000		$	41.99
2006		80		709,000		5.6	%	27,592,000			38.92
2007		81		632,000		5.0	%	26,494,000			41.92
2008		69		1,171,000	(1)	9.3	%	50,180,000			42.85
2009		84		653,000		5.2	%	27,271,000			41.76
2010		55		1,043,000		8.3	%	43,672,000			41.87
2011		35		863,000		6.8	%	43,036,000			49.87
2012		24		860,000		6.8	%	30,529,000			35.50
2013		20		584,000		4.6	%	22,909,000			39.23
2014		26		351,000		2.8	%	16,400,000			46.72

 

(1)          Excludes 492,000 square feet at 909 Third Avenue leased to the U.S. Post Office through 2038 (including six five-year renewal options) for which the annual escalated rent is $8.96 per square foot.

 

Retail Space (contained in office buildings):

 

Year		Number of Expiring Leases		Square Feet of Expiring Leases		Percentage of Retail Square Feet		Annual Escalated Rent of Expiring Leases
								Total			Per Square Foot
2005		11		24,000		3.0	%	$	1,473,000		$	61.38
2006		10		63,000		7.8	%	3,028,000			48.06
2007		3		4,000		0.5	%	770,000			192.50
2008		5		27,000		3.4	%	1,511,000			55.96
2009		6		26,000		3.2	%	4,509,000			173.42
2010		4		6,000		0.7	%	535,000			89.17
2011		3		9,000		1.1	%	667,000			74.11
2012		4		69,000		8.6	%	2,406,000			34.87
2013		10		36,000		4.5	%	3,629,000			100.56
2014		13		106,000		13.2	%	16,719,000			157.73

 

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The following table sets forth the New York City Office Properties owned by the Company as of December 31, 2004:

 

Location		Approximate Leasable Building Square Feet		Percent Leased		Encumbrances (in thousands)
NEW YORK (Manhattan)
One Penn Plaza (1)		2,379,000		94.0	%	$	—
Two Penn Plaza		1,543,000		91.7	%	300,000
909 Third Avenue (1)		1,359,000		98.5	%	125,000
770 Broadway		1,046,000		99.6	%	170,000
Eleven Penn Plaza		1,029,000		96.8	%	219,777
90 Park Avenue		890,000		98.5	%	—
888 Seventh Avenue (1)		833,000		99.0	%	105,000
330 West 34th Street (1)		637,000		99.9	%	—
1740 Broadway		567,000		96.1	%	—
150 East 58th Street (2)		522,000		90.5	%	—
866 United Nations Plaza		349,000		91.1	%	48,130
595 Madison (Fuller Building)		307,000		95.1	%	—
640 Fifth Avenue		324,000		99.5	%	—
40 Fulton Street		240,000		89.4	%	—
689 Fifth Avenue		90,000		98.8	%	—
7 West 34th Street		424,000		100.0	%	—
330 Madison Avenue (25% interest)		784,000		94.1	%	60,000
20 Broad Street (1)		466,000		85.3	%	—
825 Seventh Avenue (50% interest)		165,000		100.0	%	23,104
NEW JERSEY
Paramus		128,000		91.2	%	—
Total Office Buildings		14,082,000		95.6	%	$	1,051,011
Vornado’s Ownership Interest		13,412,000		95.6	%	$	994,459

 

(1)          Ground leased.

(2)          Less than 10% of this property is ground leased.

 

20

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

 

CESCR owns 66 office buildings and a hotel in the Washington D.C. and Northern Virginia area containing 14.2 million square feet, including two buildings taken out of service for redevelopment.  CESCR manages an additional 7.1 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, 2004, 35 percent of CESCR’s property portfolio is leased to various agencies of the U.S. government.

 

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 following table sets forth the percentage of CESCR’s Office properties 2004 revenue by tenants’ industry:

 

Industry		Percentage
U.S. Government		42	%
Government Contractors		29	%
Legal Services		4	%
Communication		3	%
Transportation by Air		3	%
Real Estate		3	%
Trade Associations		2	%
Business Services		2	%
Eating and Drinking Places		1	%
Health Services		1	%
Other		10	%
		100	%

 

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 2004:

 

Tenant		Square Feet Leased		2004 Revenues			Percentage of CESCR Revenues		Percentage of Company Revenues
U.S. Government (93 separate leases)		5,043,000		$	186,315,000		41.9	%	10.9	%
Science Applications International Corp		499,000		12,631,000			2.8	%	0.7	%
TKC Communications		305,000		10,221,000			2.3	%	0.6	%
The Boeing Company		283,000		9,035,000			2.0	%	0.5	%

 

21

 

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
2004		14,216,000		91.5	%	$	30.06
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

 

During 2004, the Company leased 2,824,000 square feet of CESCR office space as follows:

 

Location		Square Feet		Average Initial Rent Per Square Foot(1)
Skylines		762,000		$	26.13
Crystal Gateway		529,000		32.53
Crystal Plaza		499,000		29.40
Crystal Park		201,000		32.62
Crystal Square		158,000		32.83
Tysons Dulles		142,000		24.25
Reston Executive		90,000		24.19
Courthouse Plaza		88,000		26.61
Commerce Executive		83,000		19.97
1919 South Eads Street		57,000		33.22
1730 M Street		45,000		31.14
Arlington Plaza		36,000		29.35
Crystal Mall		32,000		29.00
Fairfax Square (20% interest)		30,000		26.75
1101 17th Street		20,000		33.63
1150 17th Street		19,000		34.00
1140 Connecticut Avenue		12,000		33.39
Democracy Plaza		11,000		33.54
1750 Pennsylvania		10,000		38.00
		2,824,000		28.93

 

(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, 2004 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 CESCR Square Feet		Annual Escalated Rent of Expiring Leases
								Total			Per Square Foot
2005		375		2,909,000		20.5	%	$	87,280,000		$	30.00
2006		195		2,362,000		16.6	%	75,044,000			31.77
2007		157		1,075,000		7.6	%	33,134,000			30.83
2008		135		1,246,000		8.8	%	38,598,000			30.99
2009		126		1,305,000		9.2	%	37,874,000			29.02
2010		49		447,000		3.1	%	14,152,000			31.66
2011		62		952,000		6.7	%	28,391,000			29.81
2012		28		620,000		4.4	%	20,743,000			33.46
2013		24		361,000		2.5	%	12,172,000			33.70
2014		24		441,000		3.1	%	11,236,000			25.47

 

The above table includes 1,002,000 square feet leased to the U.S. Patent and Trademark Office (“PTO”) in the Crystal City submarket.  Of this square feet, 393,000 expires in Q1 2005, 359,000 expires in Q2 2005, 145,000 expires in Q4 2005 and 105,000 expires in Q1 2006.  In addition, the PTO vacated 937,000 square feet in the fourth quarter of 2004, of which 497,000 has been taken out of service, and will vacate another 1,002,000 square feet during 2005 and the first quarter of 2006.  As of February 1, 2005, the Company has leased 416,000 square feet of the PTO space vacated.  Of this space, 262,000 square feet was leased to the Federal Supply Service which will be relocated from 240,000 square feet in other Crystal City buildings, 122,000 square feet was leased to the Public Broadcasting Service and 32,000 square feet was leased to Lockheed Martin.

 

Below is a comparison of the Company’s actual leasing activity to the Company’s projection for the lease-up of this space:

 

		Square Feet Leased (in thousands)
Period in which rent commences:		Projection		Actual Through February 1, 2005
Q4 2004		—		32
Q3 2005		—		122
Q4 2005		247		—
Q1 2006		793		262
Q2 2006		404		—
Q3 2006		252		—
Q4 2006		98		—
Q1 2007		145		—
		1,939		416

 

Straight-line rent per square foot for the actual square feet leased is $32.34 as compared to $31.94 projected.  Actual tenant improvements and leasing commissions per square foot is $45.25 as compared to $45.28 projected.

 

The Company’s original redevelopment plans for the PTO space included taking Crystal Park One and Crystal Plaza Three and Four out of service.  Plans for Crystal Plaza Three and Four have not changed.  Current plans for Crystal Park One are to lease its 224,000 square feet to private sector tenants, which will not require taking the building out of service, as opposed to leasing it to another government agency which would have required taking it out of service.  As a result, the Company will recognize approximately $4,000,000 of expense in 2005, which under the original plan would have been capitalized as part of development costs.

 

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