VORNADO REALTY TRUST
ITEM 1. BUSINESS
Vornado is a fully-integrated REIT and conducts its business through, and substantially all of its interests in properties are held by, the Operating Partnership, a Delaware limited partnership. Accordingly, Vornado’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors. Vornado is the sole general partner of, and owned approximately 93.7% of the common limited partnership interest in the Operating Partnership at December 31, 2016.
On October 31, 2016, Vornado’s Board of Trustees approved the tax-free spin-off of our Washington, DC segment and we entered into a definitive agreement to merge it with the business and certain select assets of The JBG Companies (“JBG”), a Washington, DC real estate company. Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, will be Chairman of the Board of Trustees of the new company, which will be named JBG SMITH Properties. Mitchell Schear, President of our Washington, DC business, will be a member of the Board of Trustees of the new company. The pro rata distribution to Vornado common shareholders and Class A Operating Partnership unitholders is intended to be treated as a tax-free spin-off for U.S. federal income tax purposes. It is expected to be made on a pro rata 1:2 basis. The initial Form 10 registration statement relating to the spin-off and merger was filed with the SEC on January 23, 2017 and the distribution and combination are expected to be completed in the second quarter of 2017. The distribution and combination are subject to certain conditions, including the SEC declaring the Form 10 registration statement effective, filing and approval of the new company’s listing application, receipt of regulatory approvals and third party consents by each of the Company and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. The distribution and combination are not subject to a vote by Vornado’s shareholders or Operating Partnership unitholders. Vornado’s Board of Trustees has approved the transaction. JBG has obtained all requisite approvals from its investment funds for this transaction. There can be no assurance that this transaction will be completed.
We currently own all or portions of:
New York:
· 20.2 million square feet of Manhattan office space in 36 properties;
· 2.7 million square feet of Manhattan street retail space in 70 properties;
· 2,004 units in twelve residential properties;
· The 1,700 room Hotel Pennsylvania located on Seventh Avenue at 33rd Street in the heart of the Penn Plaza district;
· A 32.4% interest in Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX), which owns seven properties in the greater New York metropolitan area, including 731 Lexington Avenue, the 1.3 million square foot Bloomberg, L.P. headquarters building;
Washington, DC:
· 11.1 million square feet of office space in 44 properties;
· 3,156 units in nine residential properties;
Other Real Estate and Related Investments:
· The 3.7 million square foot Mart (“theMART”) in Chicago;
· A 70% controlling interest in 555 California Street, a three-building office complex in San Francisco’s financial district aggregating 1.8 million square feet, known as the Bank of America Center;
· A 25.0% interest in Vornado Capital Partners, our real estate fund. We are the general partner and investment manager of the fund;
· A 32.5% interest in Toys “R” Us, Inc. (“Toys”); and
· Other real estate and other investments.
OBJECTIVES AND STRATEGY
Our business objective is to maximize Vornado shareholder value. We intend to achieve this objective by continuing to pursue our investment philosophy and execute 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, where we believe there is a high likelihood of capital appreciation;
· acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;
· investing in retail properties in select under-stored locations such as the New York City metropolitan area;
· developing and redeveloping our existing properties to increase returns and maximize value; and
· investing in operating companies that have a significant real estate component.
We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from asset sales and by accessing the public and private capital markets. We may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire these securities in the future.
ACQUISITIONS
There were no significant acquisitions during 2016.
DISPOSITIONS
On May 27, 2016, we sold a 47% ownership interest in 7 West 34th Street for net proceeds of $127.4 million.
On August 24, 2016, the Skyline properties, located in Fairfax, Virginia, were placed in receivership. On December 21, 2016, the final disposition of the Skyline properties was completed by the receiver. In connection therewith, the Skyline properties’ assets (approximately $236.5 million) and liabilities (approximately $724.4 million), were removed from our consolidated balance sheet which resulted in a net gain of $487.9 million. There was no taxable income related to this transaction.
On December 19, 2016, we sold a 20% ownership interest in Fairfax Square for $15.5 million.
FINANCINGS
We completed the following financing transactions during 2016:
· $900 million refinancing of 280 Park Avenue (50% owned);
· $700 million refinancing of 770 Broadway for net proceeds of approximately $330 million;
· $675 million refinancing of theMART for net proceeds of approximately $124 million;
· $400 million refinancing of 350 Park Avenue for net proceeds of approximately $111 million;
· $300 million refinancing of One Park Avenue (55% owned);
· $300 million financing of 7 West 34th Street (53% owned as of May 27, 2016);
· $273 million refinancing of The Warner Building (55% owned);
· $ 80 million refinancing of 50-70 West 93rd Street (49.9% owned); and
· $247 million redemption of all of the outstanding 6.875% Series J cumulative redeemable preferred shares
We also extended one of our two $1.25 billion unsecured revolving credit facilities to February 2021 with two six-month extension options, lowering the interest rate from LIBOR plus 115 basis points to LIBOR plus 100 basis points. The facility fee remains unchanged at 20 basis points.
DEVELOPMENT AND REDEVELOPMENT EXPENDITURES
We are constructing a residential condominium tower containing 397,000 salable square feet on our 220 Central Park South development site. The incremental development cost of this project is estimated to be approximately $1.3 billion, of which $609,420,000 has been expended as of December 31, 2016.
We are developing a 173,000 square foot Class-A office building at 512 West 22nd Street, along the western edge of the High Line in the West Chelsea submarket of Manhattan (55.0% owned). The incremental development cost of this project is estimated to be approximately $130,000,000, of which our share is $72,000,000. As of December 31, 2016, $30,143,000 has been expended, of which our share is $16,579,000.
We are developing a 170,000 square foot office and retail building at 61 Ninth Avenue, located on the southwest corner of Ninth Avenue and 15th Street in the West Chelsea submarket of Manhattan. In February 2016, the venture purchased an adjacent five story loft building and air rights in exchange for a 10% common and preferred equity interest in the venture valued at $19,400,000, which reduced our ownership interest to 45.1% from 50.1%. On December 21, 2016, the venture obtained a $90,000,000 construction loan. The loan matures in December 2020 with two six-month extension options. The interest rate is LIBOR plus 3.05%. As of December 31, 2016, there was nothing drawn on this loan. The incremental development cost of this project is estimated to be approximately $150,000,000, of which our share is $68,000,000. As of December 31, 2016, $38,499,000 has been expended, of which our share is $17,363,000.
We are developing a 34,000 square foot office and retail building at 606 Broadway, located on the northeast corner of Broadway and Houston Street in Manhattan (50.0% owned). At closing, the joint venture obtained a $65,000,000 construction loan, of which approximately $25,800,000 was outstanding as of December 31, 2016. The loan, which bears interest at LIBOR plus 3.00% (3.66% at December 31, 2016), matures in May 2019 with two one-year extension options. The venture’s incremental development cost of this project is estimated to be approximately $60,000,000, of which our share is $30,000,000. As of December 31, 2016, $20,833,000 has been expended, of which our share is $10,417,000.
We are in the process of demolishing two adjacent Washington, DC office properties, 1726 M Street and 1150 17th Street, and will replace them in the future with a new 335,000 square foot Class A office building, to be addressed 1700 M Street. The incremental development cost of the project is estimated to be approximately $170,000,000, of which $10,500,000 has been expended as of December 31, 2016.
In September 2016, a joint venture between the Related Companies and Vornado was designated by New York State to redevelop the historic Farley Post Office building. The building will include a new Moynihan Train Hall and approximately 850,000 rentable square feet of office space and ancillary train hall retail. The joint venture will enter into a 99-year, triple-net lease and make a $230,000,000 contribution towards the construction of the train hall. Total costs for the redevelopment of the office and retail space are yet to be determined.
We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including, in particular, the Penn Plaza District.
There can be no assurance that any of our development or redevelopment projects will commence, or if commenced, be completed, or completed on schedule or within budget.
SEGMENT DATA
We operate in the following business segments: New York and Washington, DC. Financial information related to these business segments for the years ended December 31, 2016, 2015 and 2014 is set forth in Note 23 - Segment Information to our consolidated financial statements in this Annual Report on Form 10-K.
SEASONALITY
Our revenues and expenses are subject to seasonality during the year which impacts quarterly net earnings, cash flows and funds from operations, and therefore impacts comparisons of the current quarter to the previous quarter. The New York and Washington, DC segments have historically experienced higher utility costs in the first and third quarters of the year.
tenants ACCOUNTING FOR over 10% of revenues
None of our tenants accounted for more than 10% of total revenues in any of the years ended December 31, 2016, 2015 and 2014.
Certain Activities
We do not base our acquisitions and investments on specific allocations by type of property. We have historically held our properties for long-term investment; however, it is possible that properties in our portfolio may be sold when circumstances warrant. Further, we have not adopted a policy that limits the amount or percentage of assets which could be invested in a specific property or property type. While we may seek the vote of our shareholders in connection with any particular material transaction, generally our activities are reviewed and may be modified from time to time by Vornado’s Board of Trustees without the vote of our shareholders or Operating Partnership unitholders.
Employees
As of December 31, 2016, we have approximately 4,225 employees, of which 284 are corporate staff. The New York segment has 3,265 employees, including 2,634 employees of Building Maintenance Services LLC, a wholly owned subsidiary, which provides cleaning, security and engineering services primarily to our New York and Washington, DC properties and 459 employees at the Hotel Pennsylvania. The Washington, DC segment and theMART properties have 456 and 220 employees, respectively. The foregoing does not include employees of partially owned entities.
principal executive offices
Our principal executive offices are located at 888 Seventh Avenue, New York, New York 10019; telephone (212) 894-7000.
MATERIALS AVAILABLE ON OUR WEBSITE
Copies of our 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, 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 our website (www.vno.com) as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Also available on our website are 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 our website. Copies of these documents are also available directly from us free of charge. Our website also includes other financial information, including certain non-GAAP financial measures, none of which is a part of this Annual Report on Form 10-K. Copies of our filings under the Securities Exchange Act of 1934 are also available free of charge from us, upon request.
ITEM 1A. RISK FACTORS
Material factors that may adversely affect our business, operations and financial condition are summarized below. We refer to the equity and debt securities of both Vornado and the Operating Partnership as our “securities” and the investors who own shares or units, or both, as our “equity holders.” The risks and uncertainties described herein may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. See “Forward-Looking Statements” contained herein on page 6.
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 adversely impact our revenues and cash flows.
The factors that affect the value of our real estate investments include, among other things:
· global, national, regional and local economic conditions;
· competition from other available space;
· local conditions such as an oversupply of space or a reduction in demand for real estate in the area;
· how well we manage our properties;
· the development and/or redevelopment of our properties;
· changes in market rental rates;
· the timing and costs associated with property improvements and rentals;
· whether we are able to pass all or portions of any increases in operating costs through to tenants;
· changes in real estate taxes and other expenses;
· whether tenants and users such as customers and shoppers consider a property attractive;
· changes in space utilization by our tenants due to technology, economic conditions and business environment;
· the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
· availability of financing on acceptable terms or at all;
· inflation or deflation;
· fluctuations in interest rates;
· our ability to obtain adequate insurance;
· changes in zoning laws and taxation;
· government regulation;
· consequences of any armed conflict involving, or terrorist attacks against, the United States or individual acts of violence in public spaces including retail centers;
· potential liability under environmental or other laws or regulations;
· natural disasters;
· general competitive factors; and
· climate changes.
The rents or sales proceeds we receive and the occupancy levels at our properties may decline as a result of adverse changes in any of these factors. If rental revenues, sales proceeds and/or occupancy levels decline, we generally would expect to have less cash available to pay indebtedness and for distribution to equity holders. 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.
Capital markets and economic conditions can materially affect our liquidity, financial condition and results of operations as well as the value of our debt and equity securities.
There are many factors that can affect the value of our debt and equity securities, including the state of the capital markets and the economy. Demand for office and retail space may decline nationwide, as it did in 2008 and 2009 due to the economic downturn, bankruptcies, downsizing, layoffs and cost cutting. Government action or inaction may adversely affect the state of the capital markets. The cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads, which may adversely affect our liquidity and financial condition, including our results of operations, and the liquidity and financial condition of our tenants. Our inability or the inability of our tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs may materially affect our financial condition and results of operations and the value of our securities.
Real estate is a competitive business.
We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, sales prices, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the global, national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, population and employment trends.
We depend on leasing space to tenants on economically favorable terms and collecting rent from tenants who may not be able to pay.
Our financial results depend significantly on leasing space in our properties to tenants on economically favorable terms. In addition, because a majority of our income comes from renting of real property, our income, funds available to pay indebtedness and funds available for distribution to equity holders will decrease if a significant number of our tenants cannot pay their rent or if we are not able to maintain occupancy levels on favorable terms. If a tenant does not pay its rent, we may not be able to enforce our rights as landlord without delays and may incur substantial legal costs. During periods of economic adversity, there may be an increase in the number of tenants that cannot pay their rent and an increase in vacancy rates.
We may be unable to renew leases or relet space as leases expire.
When our tenants decide not to renew their leases upon their expiration, we may not be able to relet the space. Even if tenants do renew or we can relet the space, the terms of renewal or reletting, taking into account among other things, the cost of improvements to the property and leasing commissions, may be less favorable than the terms in the expired leases. In addition, changes in space utilization by our tenants may impact our ability to renew or relet space without the need to incur substantial costs in renovating or redesigning the internal configuration of the relevant property. If we are unable to promptly renew the leases or relet the space at similar rates or if we incur substantial costs in renewing or reletting the space, our cash flow and ability to service debt obligations and pay dividends and distributions to equity holders could be adversely affected.
Bankruptcy or insolvency of tenants may decrease our revenue, net income and available cash.
From time to time, some of our tenants have declared bankruptcy, and other tenants may declare bankruptcy or become insolvent in the future. The bankruptcy or insolvency of a major tenant could cause us to suffer lower revenues and operational difficulties, including leasing the remainder of the property. As a result, the bankruptcy or insolvency of a major tenant could result in decreased revenue, net income and funds available to pay our indebtedness or make distributions to equity holders.
We may incur significant costs to comply with environmental laws and environmental contamination may impair our ability to lease and/or sell real estate.
Our 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 some 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 our 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) are also regulated by federal and state laws. We are also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. Our predecessor companies may be subject to similar liabilities for activities of those companies in the past. We could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or related claims arising out of environmental contamination or human exposure to contamination at or from our properties.
Each of our properties has been subject to varying degrees of environmental assessment. To date, these environmental assessments have not revealed any environmental condition material to our business. However, identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, human exposure to contamination or changes in clean-up or compliance requirements could result in significant costs to us.
In addition, we may become subject to costs or taxes, or increases therein, associated with natural resource or energy usage (such as a “carbon tax”). These costs or taxes could increase our operating costs and decrease the cash available to pay our obligations or distribute to equity holders.
We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign Assets Control and similar requirements.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”) from conducting business or engaging in transactions in the United States and thereby restricts our doing business with such persons. In addition, our leases, loans and other agreements may require us to comply with OFAC and related requirements, and any failure to do so may result in a breach of such agreements. If a tenant or other party with whom we conduct business is placed on the OFAC list or is otherwise a party with whom we are prohibited from doing business, we may be required to terminate the lease or other agreement. Any such termination could result in a loss of revenue or otherwise negatively affect our financial results and cash flows.
Our business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.
The occurrence of cyber incidents, or a deficiency in our cyber security, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships or reputation, all of which could negatively impact our financial results.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons who access our systems from inside or outside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving our IT networks and related systems could disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes; result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space; require significant management attention and resources to remedy any damages that result; subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or damage our reputation among our tenants and investors generally. Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
Some of our potential losses may not be covered by insurance.
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as flood and earthquake. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence and in the annual aggregate, subject to a deductible in the amount of 5% of the value of the affected property. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, and $2.0 billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by Terrorism Risk Insurance Program Reauthorization Act of 2015, which expires in December 2020.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism including NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $1,622,000 ($1,976,000 for 2017) and 16% (17% for 2017) of the balance of a covered loss and the Federal government is responsible for the remaining portion of a covered loss. We are ultimately responsible for any loss incurred by PPIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future.
Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.
Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.
The Americans with Disabilities Act (“ADA”) generally requires that public buildings, including our properties, meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants and/or legal fees to their counsel. From time to time persons have asserted claims against us with respect to some of our properties under the ADA, but to date such claims have not resulted in any material expense or liability. If, under the ADA, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to equity holders.
Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.
OUR INVESTMENTS ARE CONCENTRATED CURRENTLY IN THE NEW YORK CITY METROPOLITAN AREA AND WASHINGTON, DC/NORTHERN VIRGINIA AREA AND CIRCUMSTANCES AFFECTING THESE AREAS GENERALLY COULD ADVERSELY AFFECT OUR BUSINESS. UPON COMPLETION OF OUR PROPOSED SPIN-OFF OF OUR WASHINGTON, DC SEGMENT, OUR BUSINESS AND INVESTMENTS WILL BE LESS DIVERSIFIED AND MORE CONCENTRATED IN THE NEW YORK CITY METROPOLITAN AREA.
A significant portion of our properties are located currently in the New York City/New Jersey metropolitan area and Washington, DC/Northern Virginia area and are affected by the economic cycles and risks inherent to those areas.
In 2016, approximately 91% of our EBITDA, as adjusted, came from properties located in the New York City metropolitan area and the Washington, DC/Northern Virginia area. We may continue to concentrate a significant portion of our future acquisitions in these areas or in other geographic real estate markets in the United States or abroad. Real estate markets are subject to economic downturns and we cannot predict how economic conditions will impact these markets in either the short or long term. Declines in the economy or declines in real estate markets in these areas could hurt our financial performance and the value of our properties. In addition to the factors affecting the national economic condition generally, the factors affecting economic conditions in these regions include:
· financial performance and productivity of the media, advertising, financial, technology, retail, insurance and real estate industries;
· with respect to our Washington, DC segment, space needs of, and budgetary constraints affecting, the United States Government, including the effect of a deficit reduction plan and/or base closures and repositioning under the Defense Base Closure and Realignment Act of 2005, as amended;
· business layoffs or downsizing;
· industry slowdowns;
· relocations of businesses;
· changing demographics;
· increased telecommuting and use of alternative work places;
· changes in the number of domestic and international tourists to our markets (including, as a result of changes in the relative strengths of world currencies);
· infrastructure quality; and
· any oversupply of, or reduced demand for, real estate.
Assuming we complete the spin-off of our Washington, DC segment as expected, our real estate investments will be more concentrated in New York City and less diversified than prior to the spin-off. After giving effect to the spin-off and assuming it was completed as of January 1, 2016, 89% of our EBITDA, as adjusted, came from properties located in the New York City metropolitan area.
It is impossible for us to assess the future effects of trends in the economic and investment climates of the geographic areas in which we concentrate, and more generally of the United States, or the real estate markets in these areas. Local, national or global economic downturns, would negatively affect our businesses and profitability.
Terrorist attacks, such as those of September 11, 2001 in New York City and the Washington, DC 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, Washington, DC, Chicago and San Francisco metropolitan areas. In response to a terrorist attack or the perceived threat of terrorism, tenants in these areas may choose to relocate their businesses to less populated, lower-profile areas of the United States that may be perceived to be less likely targets of future terrorist activity and fewer customers may choose to patronize businesses in these areas. 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 space on less favorable terms. As a result, the value of our properties and the level of our revenues and cash flows could decline materially.
Natural disasters and the effects of climate change could have a concentrated impact on the areas where we operate and could adversely impact our results.
Our investments are concentrated in the New York, Washington, DC, Chicago and San Francisco metropolitan areas. Natural disasters, including earthquakes, storms and hurricanes, could impact our properties in these and other areas in which we operate. Potentially adverse consequences of “global warming” could similarly have an impact on our properties. As a result, we could become subject to significant losses and/or repair costs that may or may not be fully covered by insurance and to the risk of business interruption. The incurrence of these losses, costs or business interruptions may adversely affect our operating and financial results.
We May Acquire or Sell Assets or Entities or Develop 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 may acquire, develop or redevelop real estate and acquire related companies and this may create risks.
We may acquire, develop or redevelop properties or acquire real estate related companies when we believe doing so is consistent with our business strategy. We may not succeed in (i) developing, redeveloping or acquiring real estate and real estate related companies; (ii) completing these activities on time or within budget; and (iii) leasing or selling developed, redeveloped or acquired properties at amounts sufficient to cover our costs. Competition in these activities could also significantly increase our costs. Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management’s attention. Acquisitions or developments in new markets or industries where we do not have the same level of market knowledge may result in weaker than anticipated performance. We may also abandon acquisition or development opportunities that we have begun pursuing and consequently fail to recover expenses already incurred. Furthermore, we may be exposed to the liabilities of properties or companies acquired, some of which we may not be aware of at the time of acquisition.
From time to time we have made, and in the future we may seek to make, one or more material acquisitions. The announcement of such a material acquisition may result in a rapid and significant decline in the price of our securities.
We are continuously looking at material transactions that we believe will maximize shareholder value. However, an announcement by us of one or more significant acquisitions could result in a quick and significant decline in the price of our securities.
It may be difficult to buy and sell real estate quickly, which may limit our flexibility.
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. In addition, when we dispose of or sell assets, we may not be able to reinvest the sales proceeds and earn similar returns.
As part of an acquisition of a property, or a portfolio of properties, we may agree, and in the past have agreed, not to dispose of the acquired properties or reduce the mortgage indebtedness for a long-term period, unless we pay certain of the resulting tax costs of the seller. These agreements could result in us holding on to properties that we would otherwise sell and not pay down or refinance. In addition, when we dispose of or sell assets, we may not be able to reinvest the sales proceeds and earn returns similar to those generated by the assets that were sold.
From time to time we have made, and in the future we may seek to make, investments in companies over which we do not have sole control. Some of these companies operate in industries with different risks than investing and operating real estate.
From time to time we have made, and in the future we may seek to make, investments in companies that we may not control, including, but not limited to, Alexander’s, Inc. (“Alexander’s”), Toys “R” Us, Inc. (“Toys”), Lexington Realty Trust (“Lexington”), Urban Edge Properties (“UE”), Pennsylvania Real Estate Investment Trust (“PREIT”), and other equity and loan investments. Although these businesses generally have a significant real estate component, some of them operate in businesses that are different from investing and operating real estate, including operating or managing toy stores. Consequently, we are subject to operating and financial risks of those industries and to the risks associated with lack of control, such as having differing objectives than our partners or the entities in which we invest, or becoming involved in disputes, or competing directly or indirectly with these partners or entities. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us.
We are subject to risks that affect the general and New York City retail environments.
Certain of our properties are Manhattan street retail properties. As such, these properties are affected by the general and New York City retail environments, including the level of consumer spending and consumer confidence, change in relative strengths of world currencies, the threat of terrorism, increasing competition from retailers, outlet malls, retail websites and catalog companies and the impact of technological change upon the retail environment generally. These factors could adversely affect the financial condition of our retail tenants and the willingness of retailers to lease space in our retail locations, and in turn, adversely affect us.
Our investment in Toys has in the past and may in the future result in increased seasonality and volatility in our reported earnings.
We carry our Toys investment at zero. As a result, we no longer record our equity in Toys' income or loss. Because Toys is a retailer, its operations subject us to the risks of a retail company that are different than those presented by our other lines of business. The business of Toys is highly seasonal and substantially all of Toys net income is generated in its fourth quarter. It is possible that the value of Toys may increase and we could again resume recording our equity in Toys' income or loss, which would increase the seasonality and volatility of our reported earnings.
Our decision to dispose of real estate assets would change the holding period assumption in our valuation analyses, which could result in material impairment losses and adversely affect our financial results.
We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If we change our intended holding period, due to our intention to sell or otherwise dispose of an asset, then under accounting principles generally accepted in the United States of America, we must reevaluate whether that asset is impaired. Depending on the carrying value of the property at the time we change our intention and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our financial results. This loss could be material to our results of operations in the period that it is recognized.
We invest in marketable equity securities. The value of these investments may decline as a result of operating performance or economic or market conditions.
We invest in marketable equity securities of publicly-traded companies, such as Lexington. As of December 31, 2016, our marketable securities have an aggregate carrying amount of $203,704,000, at market. Significant declines in the value of these investments due to, among other reasons, operating performance or economic or market conditions, may result in the recognition of impairment losses which could be material.
We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.
Although we believe that separating our Washington, DC segment will provide benefits to us and our shareholders, the spin-off may not provide such results on the scope or scale we anticipate, and neither we nor JBG SMITH may realize the intended benefits of the spin-off. In addition, we will incur one-time costs in connection with the spin-off that may exceed our estimates and negate some of the benefits we expect to achieve. Further, if the proposed spin-off is completed, our operational and financial profile will change upon the separation of the Washington, DC segment from us. As a result, our diversification of revenue sources will diminish, and our results of operations, cash flows, working capital, and financing requirements may be subject to increased volatility.
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 distributes 90% of its taxable income, excluding net capital gains, to its shareholders. This, in turn, requires the Operating Partnership to make distributions to its unitholders. There is a separate requirement to distribute net capital gains or pay a corporate level tax in lieu thereof. 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. Although we believe that we will be able to finance any investments we may wish to make in the foreseeable future, there can be no assurance that new financing will be available or 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.
We depend on dividends and distributions from our direct and indirect subsidiaries. The creditors and preferred equity holders of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or distributions to us.
Substantially all of Vornado’s assets are held through its Operating Partnership that holds substantially all of its properties and assets through subsidiaries. The Operating Partnership’s cash flow is dependent on cash distributions to it by its subsidiaries, and in turn, substantially all of Vornado’s cash flow is dependent on cash distributions to it by the Operating Partnership. The creditors of each of Vornado’s direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before distributions may be made by that subsidiary to its equity holders. Thus, the Operating Partnership’s ability to make distributions to its equity holders depends on its subsidiaries’ ability first to satisfy their obligations to their creditors and then to make distributions to the Operating Partnership. Likewise, Vornado’s ability to pay dividends to its holders of common and preferred shares depends on the Operating Partnership’s ability first to satisfy its obligations to its creditors and make distributions payable to holders of preferred units and then to make distributions to Vornado.
Furthermore, the holders of preferred units of the Operating Partnership are entitled to receive preferred distributions before payment of distributions to the Operating Partnership’s equity holders, including Vornado. Thus, Vornado’s ability to pay cash dividends to its equity holders and satisfy its debt obligations depends on the Operating Partnership’s ability first to satisfy its obligations to its creditors and make distributions to holders of its preferred units and then to its equity holders, including Vornado. As of December 31, 2016, there were four series of preferred units of the Operating Partnership not held by Vornado with a total liquidation value of $56,047,000.
In addition, Vornado’s participation in any distribution of the assets of any of its direct or indirect subsidiaries upon the liquidation, reorganization or insolvency, is only after the claims of the creditors, including trade creditors and preferred equity holders, are satisfied.
We have a substantial amount of indebtedness that could affect our future operations.
As of December 31, 2016, our consolidated mortgages and unsecured indebtedness, excluding related premium, discount and deferred financing costs, net, totaled $10.7 billion. We are subject to the risks normally associated with debt financing, including the risk that our cash flow from operations will be insufficient to meet required debt service. Our debt service costs generally will not be reduced if developments at the property, such as the entry of new competitors or the loss of major tenants, cause a reduction in the income from the property. Should such events occur, our operations may be adversely affected. If a property is mortgaged to secure payment of indebtedness and income from such property is insufficient to pay that indebtedness, the property could be foreclosed upon by the mortgagee resulting in a loss of income and a decline in our total asset value.
We have outstanding debt, and the amount of debt and its cost may increase and refinancing may not be available on acceptable terms.
We rely on both secured and unsecured, variable rate and non-variable rate debt to finance acquisitions and development activities and for working capital. If we are unable to obtain debt financing or refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely affected. In addition, the cost of our existing debt may increase, especially in the case of a rising interest rate environment, and we may not be able to refinance our existing debt in sufficient amounts or on acceptable terms. If the cost or amount of our indebtedness increases or we cannot refinance our debt in sufficient amounts or on acceptable terms, we are at risk of credit ratings downgrades and default on our obligations that could adversely affect our financial condition and results of operations.
Covenants in our debt instruments could adversely affect our financial condition and our acquisitions and development activities.
The mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. Our unsecured indebtedness and debt that we may obtain in the future may contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including covenants that limit our ability to incur debt based upon the level of our ratio of total debt to total assets, our ratio of secured debt to total assets, our ratio of EBITDA to interest expense, and fixed charges, and that require us to maintain a certain level of unencumbered assets to unsecured debt. Our ability to borrow is subject to compliance with these and other covenants. In addition, failure to comply with our covenants could cause a default under the applicable debt instrument, and we may then be required to repay such debt with capital from other sources or give possession of a secured property to the lender. Under those circumstances, other sources of capital may not be available to us, or may be available only on unattractive terms.
A downgrade in our credit ratings could materially adversely affect our business and financial condition.
Our credit rating and the credit ratings assigned to our debt securities and our preferred shares could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and any rating could be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant such action. Moreover, these credit ratings are not recommendations to buy, sell or hold our common shares or any other securities. If any of the credit rating agencies that have rated our securities downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a “watch list” for a possible downgrading or lowering, or otherwise indicates that its outlook for that rating is negative, such action could have a material adverse effect on our costs and availability of funding, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading/redemption price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our equity holders.
Vornado may fail to qualify or remain qualified as a REIT and may be required to pay income taxes at corporate rates.
Although we believe that Vornado will remain organized and will continue to operate so as to qualify as a REIT for federal income tax purposes, Vornado may fail to remain so qualified. Qualifications are governed by highly technical and complex provisions of the Internal Revenue Code for which there are only limited judicial or administrative interpretations and depend on various facts and circumstances that are not entirely within our control. In addition, legislation, new regulations, administrative interpretations or court decisions may significantly change the relevant tax laws and/or the federal income tax consequences of qualifying as a REIT. If, with respect to any taxable year, Vornado fails to maintain its qualification as a REIT and does not qualify under statutory relief provisions, Vornado could not deduct distributions to shareholders in computing our taxable income and would have to pay federal income tax on its taxable income at regular corporate rates. The federal income tax payable would include any applicable alternative minimum tax. If Vornado had to pay federal income tax, the amount of money available to distribute to equity holders and pay its indebtedness would be reduced for the year or years involved, and Vornado would not be required to make distributions to shareholders in that taxable year and in future years until it was able to qualify as a REIT. In addition, Vornado would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost, unless Vornado were entitled to relief under the relevant statutory provisions.
We face possible adverse changes in tax laws, which may result in an increase in our tax liability.
From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. The shortfall in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends and distributions.
Loss of our key personnel could harm our operations and adversely affect the value of our common shares and Operating Partnership Class A units.
We are dependent on the efforts of Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado. While we believe that we could find a replacement for him and other key personnel, the loss of their services could harm our operations and adversely affect the value of our securities.
Vornado’s charter documents and applicable law may hinder any attempt to acquire us.
Vornado’s Amended and Restated Declaration of Trust (the “declaration of trust”) sets limits on the ownership of its shares.
Generally, for Vornado to maintain its qualification as a REIT under the Internal Revenue Code, not more than 50% in value of the outstanding shares of beneficial interest of Vornado may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of Vornado’s taxable year. The Internal Revenue Code defines “individuals” for purposes of the requirement described in the preceding sentence to include some types of entities. Under Vornado’s declaration of trust, as amended, no person may own more than 6.7% of the outstanding common shares of any class, or 9.9% of the outstanding preferred shares of any class, with some exceptions for persons who held common shares in excess of the 6.7% limit before Vornado adopted the limit and other persons approved by Vornado’s Board of Trustees. These restrictions on transferability and ownership may delay, deter or prevent a change in control of Vornado or other transaction that might involve a premium price or otherwise be in the best interest of equity holders.
The Maryland General Corporation Law (the “MGCL”) contains provisions that may reduce the likelihood of certain takeover transactions.
The MGCL imposes conditions and restrictions on certain “business combinations” (including, among other transactions, a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance of equity securities) between a Maryland REIT and certain persons who beneficially own at least 10% of the corporation’s stock (an “interested shareholder”). Unless approved in advance by the board of trustees of the trust, or otherwise exempted by the statute, such a business combination is prohibited for a period of five years after the most recent date on which the interested shareholder became an interested shareholder. After such five-year period, a business combination with an interested shareholder must be: (a) recommended by the board of trustees of the trust, and (b) approved by the affirmative vote of at least (i) 80% of the trust’s outstanding shares entitled to vote and (ii) two-thirds of the trust’s outstanding shares entitled to vote which are not held by the interested shareholder with whom the business combination is to be effected, unless, among other things, the trust’s common shareholders receive a “fair price” (as defined by the statute) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for his or her shares.
In approving a transaction, Vornado’s Board of Trustees may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the Board of Trustees. Vornado’s Board of Trustees has adopted a resolution exempting any business combination between Vornado and any trustee or officer of Vornado or its affiliates. As a result, any trustee or officer of Vornado or its affiliates may be able to enter into business combinations with Vornado that may not be in the best interest of our equity holders. With respect to business combinations with other persons, the business combination provisions of the MGCL may have the effect of delaying, deferring or preventing a change in control of Vornado or other transaction that might involve a premium price or otherwise be in the best interest of our equity holders. The business combination statute may discourage others from trying to acquire control of Vornado and increase the difficulty of consummating any offer.
Until 2019, Vornado has a classified Board of Trustees and that may reduce the likelihood of certain takeover transactions.
Vornado’s Board of Trustees is divided currently into three classes of trustees. Commencing this year, each class of trustees that is up for election will be elected for a one-year term with all trustees forming a single class elected annually commencing in 2019. Historically trustees of each class have been chosen for three-year staggered terms. Staggered terms of trustees may reduce the possibility of a tender offer or an attempt to change control of Vornado, even though a tender offer or change in control might be in the best interest of our equity holders.
Vornado may issue additional shares in a manner that could adversely affect the likelihood of certain takeover transactions.
Vornado’s declaration of trust authorizes the Board of Trustees to:
· cause Vornado to issue additional authorized but unissued common shares or preferred shares;
· classify or reclassify, in one or more series, any unissued preferred shares;
· set the preferences, rights and other terms of any classified or reclassified shares that Vornado issues; and
· increase, without shareholder approval, the number of shares of beneficial interest that Vornado may issue.
Vornado’s Board of Trustees could establish a series of preferred shares whose terms could delay, deter or prevent a change in control of Vornado, and therefore of the Operating Partnership, or other transaction that might involve a premium price or otherwise be in the best interest of our equity holders, although Vornado’s Board of Trustees does not now intend to establish a series of preferred shares of this kind. Vornado’s declaration of trust and bylaws contain other provisions that may delay, deter or prevent a change in control of Vornado or other transaction that might involve a premium price or otherwise be in the best interest of our equity holders.
We may change our policies without obtaining the approval of our equity holders.
Our operating and financial policies, including our policies with respect to acquisitions of real estate or other companies, growth, operations, indebtedness, capitalization, dividends and distributions, are exclusively determined by Vornado’s Board of Trustees. Accordingly, our equity holders do not control these policies.
Our Ownership Structure and Related-Party Transactions May Give Rise to Conflicts of Interest.
Steven Roth and Interstate Properties may exercise substantial influence over us. They and some of Vornado’s other trustees and officers have interests or positions in other entities that may compete with us.
As of December 31, 2016, Interstate Properties, a New Jersey general partnership, and its partners owned an aggregate of approximately 7.1% of the common shares of Vornado and 26.3% of the common stock of Alexander’s, which is described below. Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are the three partners of Interstate Properties. Mr. Roth is the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, the managing general partner of Interstate Properties, and the Chairman of the Board of Directors and Chief Executive Officer of Alexander’s. Messrs. Wight and Mandelbaum are Trustees of Vornado and also Directors of Alexander’s.
Because of these overlapping interests, Mr. Roth and Interstate Properties and its partners may have substantial influence over Vornado, and therefore over the Operating Partnership, and on the outcome of any matters submitted to Vornado’s shareholders for approval. In addition, certain decisions concerning our operations or financial structure may present conflicts of interest among Messrs. Roth, Mandelbaum and Wight and Interstate Properties and our other equity holders. In addition, Mr. Roth, Interstate Properties and its partners, and Alexander’s 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 us, 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, competition for properties and tenants, possible corporate transactions such as acquisitions and other strategic decisions affecting the future of these entities.
We manage and lease the real estate assets of Interstate Properties under a management agreement for which we receive an annual fee equal to 4% of annual base rent and percentage rent. See Note 21 - Related Party Transactions to our consolidated financial statements in this Annual Report on Form 10-K for additional information.
There may be conflicts of interest between Alexander’s and us.
As of December 31, 2016, we owned 32.4% of the outstanding common stock of Alexander’s. Alexander’s is a REIT that has seven properties, which are located in the greater New York metropolitan area. In addition to the 2.3% that they indirectly own through Vornado, Interstate Properties, which is described above, and its partners owned 26.3% of the outstanding common stock of Alexander’s as of December 31, 2016. Mr. Roth is the Chairman of the Board of Trustees and Chief Executive Office of Vornado, the managing general partner of Interstate Properties, and the Chairman of the Board of Directors and Chief Executive Officer of Alexander’s. Messrs. Wight and Mandelbaum are Trustees of Vornado and also Directors of Alexander’s and general partners of Interstate Properties. Dr. Richard West is a Trustee of Vornado and a Director of Alexander’s. In addition, Joseph Macnow, our Executive Vice President - Finance and Chief Administrative Officer, is the Executive Vice President and Chief Financial Officer of Alexander’s, and Stephen W. Theriot, our Chief Financial Officer, is the Assistant Treasurer of Alexander’s.
We manage, develop and lease Alexander’s properties under management and development agreements and leasing agreements under which we receive annual fees from Alexander’s. See Note 21 - Related Party Transactions to our consolidated financial statements in this Annual Report on Form 10-K for additional information.
The Number of Shares of Vornado Realty Trust and the Market for Those Shares Give Rise to Various Risks.
The trading price of Vornado’s common shares has been volatile and may fluctuate.
The trading price of Vornado’s common shares has been volatile and may continue to fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have in the past and may in the future adversely affect the market price of Vornado’s common shares and the redemption price of the Operating Partnership’s Class A units. Among those factors are:
· our financial condition and performance;
· the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
· actual or anticipated quarterly fluctuations in our operating results and financial condition;
· our dividend policy;
· the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;
· uncertainty and volatility in the equity and credit markets;
· fluctuations in interest rates;
· changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;
· failure to meet analysts’ revenue or earnings estimates;
· speculation in the press or investment community;
· strategic actions by us or our competitors, such as acquisitions or restructurings;
· the extent of institutional investor interest in us;
· the extent of short-selling of Vornado common shares and the shares of our competitors;
· fluctuations in the stock price and operating results of our competitors;
· general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related companies;
· domestic and international economic factors unrelated to our performance; and
· all other risk factors addressed elsewhere in this Annual Report on the Form 10-K.
A significant decline in Vornado’s stock price could result in substantial losses for our equity holders.
Vornado has many shares available for future sale, which could hurt the market price of its shares and the redemption price of the Operating Partnership’s units.
The interests of equity holders could be diluted if we issue additional equity securities. As of December 31, 2016, Vornado had authorized but unissued, 60,899,124 common shares of beneficial interest, $.04 par value and 67,116,023 preferred shares of beneficial interest, no par value; of which 19,538,084 common shares are reserved for issuance upon redemption of Class A Operating Partnership units, convertible securities and employee stock options and 11,200,000 preferred shares are reserved for issuance upon redemption of preferred Operating Partnership units. Any shares not reserved may be issued from time to time in public or private offerings or in connection with acquisitions. In addition, common and preferred shares reserved may be sold upon issuance in the public market after registration under the Securities Act or under Rule 144 under the Securities Act or other available exemptions from registration. We cannot predict the effect that future sales of Vornado’s common and preferred shares or Operating Partnership Class A and preferred units will have on the market prices of our securities.
In addition, under Maryland law, Vornado’s Board of Trustees has the authority to increase the number of authorized shares without shareholder approval.
Item 1b. unresolved staff comments
There are no unresolved comments from the staff of the Securities Exchange Commission as of the date of this Annual Report on Form 10-K.
Item 2. Properties
We operate in two business segments: New York and Washington, DC. The following pages provide details of our real estate properties as of December 31, 2016.
Item 2. Properties - continued
Item 2. Properties - continued
Item 2. Properties - continued
New York
As of December 31, 2016, our New York segment consisted of 28.3 million square feet in 86 properties. The 28.3 million square feet is comprised of 20.2 million square feet of office space in 36 properties, 2.7 million square feet of retail space in 70 properties, 2,004 units in twelve residential properties, the 1.4 million square foot Hotel Pennsylvania, and our 32.4% interest in Alexander’s, Inc. (“Alexander’s”), which owns seven properties in the greater New York metropolitan area. The New York segment also includes 11 garages totaling 1.7 million square feet (4,970 spaces) which are managed by, or leased to, third parties.
New York lease terms generally range from five to seven years for smaller tenants to as long as 20 years for major tenants, and may provide for extension options at market rates. Leases typically provide for periodic step-ups in rent over the term of the lease and pass through to tenants their 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 free rent and tenant improvement allowances for all or a portion of the tenant’s initial construction costs of its premises.
As of December 31, 2016, the occupancy rate for our New York segment was 96.5%.
Alexander’s As of December 31, 2016, we own 32.4% of the outstanding common stock of Alexander’s, which owns seven properties in the greater New York metropolitan area aggregating 2.4 million square feet, including 731 Lexington Avenue, the 1.3 million square foot Bloomberg L.P. headquarters building. Alexander’s had $1.05 billion of outstanding debt, net at December 31, 2016, of which our pro rata share was $341.0 million, none of which is recourse to us.
Hotel Pennsylvania We own the Hotel Pennsylvania which is located in New York City on Seventh Avenue at 33rd Street in the heart of the Penn Plaza district and consists of a hotel portion containing 1,000,000 square feet of hotel space with 1,700 rooms and a commercial portion containing 400,000 square feet of retail and office space.
Washington, DC
On October 31, 2016, Vornado’s Board of Trustees approved the tax-free spin-off of our Washington, DC segment and we entered into a definitive agreement to merge it with the business and certain select assets of The JBG Companies (“JBG”), a Washington, DC real estate company. Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, will be Chairman of the Board of Trustees of the new company, which will be named JBG SMITH Properties. Mitchell Schear, President of our Washington, DC business, will be a member of the Board of Trustees of the new company. The pro rata distribution to Vornado common shareholders and Class A Operating Partnership unitholders is intended to be treated as a tax-free spin-off for U.S. federal income tax purposes. It is expected to be made on a pro rata 1:2 basis. The initial Form 10 registration statement relating to the spin-off and merger was filed with the SEC on January 23, 2017 and the distribution and combination are expected to be completed in the second quarter of 2017. The distribution and combination are subject to certain conditions, including the SEC declaring the Form 10 registration statement effective, filing and approval of the new company’s listing application, receipt of regulatory approvals and third party consents by each of the Company and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. The distribution and combination are not subject to a vote by Vornado’s shareholders or Operating Partnership unitholders. Vornado’s Board of Trustees has approved the transaction. JBG has obtained all requisite approvals from its investment funds for this transaction. There can be no assurance that this transaction will be completed.
On August 24, 2016, the Skyline properties, located in Fairfax, Virginia, were placed in receivership. On December 21, 2016, the final disposition of the Skyline properties was completed by the receiver. In connection therewith, the Skyline properties’ assets (approximately $236,535,000) and liabilities (approximately $724,412,000), were removed from our consolidated balance sheet which resulted in a net gain of $487,877,000. There was no taxable income related to this transaction.
On December 19, 2016, we completed the sale of our 20% interest in Fairfax Square to our joint venture partner for $15,500,000, which resulted in a net gain of approximately $15,302,000.
Washington, DC - CONTINUED
As of December 31, 2016, our Washington, DC segment consisted of 58 properties aggregating 14.7 million square feet including 11.1 million square feet of office space in 44 properties, nine residential properties containing 3,156 units and a hotel property. The Washington, DC segment also includes 45 garages totaling approximately 7.0 million square feet (22,110 spaces) which are managed by, or leased to, third parties.
Washington, DC office lease terms generally range from five to seven years for smaller tenants to as long as 15 years for major tenants, and may provide for extension options at either pre-negotiated or market rates. Leases typically provide for periodic step-ups in rent over the term of the lease and pass through to tenants, the tenants’ share of increases in real estate taxes and certain property operating expenses over a base year. Periodic step-ups in rent are usually based upon fixed percentage increases. Leases also typically provide for free rent and tenant improvement allowances for all or a portion of the tenant’s initial construction costs of its premises.
As of December 31, 2016, the occupancy rate for our Washington DC segment was 90.5%, and 22.4% of the occupied space was leased to various agencies of the U.S. Government.
OTHER INVESTMENTS
theMART As of December 31, 2016, we own the 3.7 million square foot theMART in Chicago, whose largest tenant is Motorola Mobility at 609,000 square feet, the lease of which is guaranteed by Google. theMART is encumbered by a $675,000,000 mortgage loan that bears interest at a fixed rate of 2.70% and matures in September 2021. As of December 31, 2016, theMART had an occupancy rate of 98.9% and a weighted average annual rent per square foot of $40.39.
California Street As of December 31, 2016, we own a 70% controlling interest in a three-building office complex containing 1.8 million square feet, known as the Bank of America Center, located at California and Montgomery Streets in San Francisco’s financial district (“555 California Street”). 555 California Street is encumbered by a $579,795,000 mortgage loan that bears interest at a fixed rate of 5.10% and matures in September 2021. As of December 31, 2016, 555 California Street had an occupancy rate of 92.4% and a weighted average annual rent per square foot of $68.43.
Vornado Capital Partners Real Estate Fund (the “Fund”) and Crowne Plaza Times Square Hotel Joint Venture (the “Crowne Plaza Joint Venture”)
As of December 31, 2016, we own a 25.0% interest in the Fund which currently has six investments, one of which is the Crowne Plaza Times Square Hotel in which we also own an additional interest through a joint venture. We are the general partner and investment manager of the Fund. As of December 31, 2016, these six investments are carried on our consolidated balance sheet at an aggregate fair value of $462,132,000, including the Crowne Plaza Joint Venture. As of December 31, 2016, our share of unfunded commitments was $34,422,000.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related STOCKholder Matters and issuer purchases of equity securities
Vornado’s common shares are traded on the New York Stock Exchange under the symbol “VNO.”
Quarterly high and low sales prices of Vornado’s common shares and dividends paid per common share for the years ended December 31, 2016 and 2015 were as follows:
As of February 1, 2017, there were 1,051 holders of record of Vornado common shares.
There is no established trading market for Class A units of the Operating Partnership. As of February 1, 2017, there were 997 Class A unitholders of record.
Recent Sales of Unregistered Securities
During 2016, the Operating Partnership issued 491,920 Class A units in connection with equity awards issued pursuant to Vornado’s omnibus share plan, including with respect to grants of restricted Vornado common shares and restricted units of the Operating Partnership and upon conversion, surrender or exchange of the Operating Partnership’s units or Vornado stock options, and consideration received included $8,540,019 in cash proceeds. Such units were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
Information relating to compensation plans under which Vornado’s equity securities are authorized for issuance is set forth under Part III, Item 12 of this Annual Report on Form 10-K and such information is incorporated by reference herein.
Recent Purchases of Equity Securities
In December 2016, we received 2,755 Vornado common shares at a weighted average price of $103.62 per share as payment for the exercise price of certain employees’ stock options.
Performance Graph
The following graph is a comparison of the five-year cumulative return of Vornado’s common shares, the Standard & Poor’s 500 Index (the “S&P 500 Index”) and the National Association of Real Estate Investment Trusts’ (“NAREIT”) All Equity Index, a peer group index. The graph assumes that $100 was invested on December 31, 2011 in our common shares, the S&P 500 Index and the NAREIT All Equity Index and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.
ITEM 6. SELECTED FINANCIAL DATA
Vornado Realty Trust
(Amounts in thousands, except per share amounts)
Year Ended December 31,
Operating Data:
Revenues:
Property rentals
$
2,103,728
$
2,076,586
$
1,911,487
$
1,880,405
$
1,771,264
Tenant expense reimbursements
260,667
260,976
245,819
226,831
207,149
Cleveland Medical Mart development project
-
-
-
36,369
235,234
Fee and other income
141,807
164,705
155,206
155,571
119,077
Total revenues
2,506,202
2,502,267
2,312,512
2,299,176
2,332,724
Expenses:
Operating
1,024,336
1,011,249
953,611
928,565
891,637
Depreciation and amortization
565,059
542,952
481,303
461,627
435,545
General and administrative
179,279
175,307
169,270
177,366
167,194
Cleveland Medical Mart development project
-
-
-
32,210
226,619
Skyline properties impairment loss
160,700
-
-
-
-
Acquisition and transaction related costs
26,037
12,511
18,435
24,857
17,386
Total expenses
1,955,411
1,742,019
1,622,619
1,624,625
1,738,381
Operating income
550,791
760,248
689,893
674,551
594,343
(Loss) income from real estate fund investments
(23,602)
74,081
163,034
102,898
63,936
Income (loss) from partially owned entities
165,389
(12,630)
(59,861)
(340,882)
421,668
Interest and other investment income (loss), net
29,546
26,978
38,752
(24,887)
(261,200)
Interest and debt expense
(402,674)
(378,025)
(412,755)
(425,782)
(431,235)
Net gain on extinguishment of Skyline properties debt
487,877
-
-
-
-
Net gain on disposition of wholly owned and partially
owned assets
175,735
251,821
13,568
2,030
4,856
Income (loss) before income taxes
983,062
722,473
432,631
(12,072)
392,368
Income tax (expense) benefit
(8,312)
84,695
(9,281)
8,717
(8,132)
Income (loss) from continuing operations
974,750
807,168
423,350
(3,355)
384,236
Income from discontinued operations
7,172
52,262
585,676
568,095
310,305
Net income
981,922
859,430
1,009,026
564,740
694,541
Less net income attributable to noncontrolling interests in:
Consolidated subsidiaries
(21,351)
(55,765)
(96,561)
(63,952)
(32,018)
Operating Partnership
(53,654)
(43,231)
(47,613)
(24,817)
(45,263)
Net income attributable to Vornado
906,917
760,434
864,852
475,971
617,260
Preferred share dividends
(75,903)
(80,578)
(81,464)
(82,807)
(76,937)
Preferred unit and share redemptions
(7,408)
-
-
(1,130)
8,948
Net income attributable to common shareholders
$
823,606
$
679,856
$
783,388
$
392,034
$
549,271
Per Share Data:
Income (loss) from continuing operations, net - basic
$
4.32
$
3.35
$
1.23
$
(0.75)
$
1.37
Income (loss) from continuing operations, net - diluted
4.30
3.33
1.22
(0.75)
1.37
Net income per common share - basic
4.36
3.61
4.18
2.10
2.95
Net income per common share - diluted
4.34
3.59
4.15
2.09
2.94
Dividends per common share
2.52
2.52
(1)
2.92
2.92
3.76
(2)
Balance Sheet Data:
Total assets
$
20,814,847
$
21,143,293
$
21,157,980
$
20,018,210
$
21,978,802
Real estate, at cost
18,339,958
18,090,137
16,822,358
15,392,968
15,287,078
Accumulated depreciation and amortization
(3,513,574)
(3,418,267)
(3,161,633)
(2,829,862)
(2,524,718)
Debt, net
10,611,685
11,091,010
9,530,337
8,708,414
9,714,819
Total equity
7,618,496
7,476,078
7,489,382
7,594,744
7,904,144
(1)
Post spin-off of Urban Edge Properties (NYSE: UE) on January 15, 2015.
(2)
Includes a special long-term capital gain dividend of $1.00 per share.
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
Vornado Realty Trust
(Amounts in thousands)
Year Ended December 31,
Other Data:
Funds From Operations ("FFO")(1):
Net income attributable to common shareholders
$
823,606
$
679,856
$
783,388
$
392,034
$
549,271
FFO adjustments:
Depreciation and amortization of real property
$
531,620
$
514,085
$
517,493
$
501,753
$
504,407
Net gains on sale of real estate
(177,023)
(289,117)
(507,192)
(411,593)
(245,799)
Real estate impairment losses
160,700
26,518
37,170
129,964
Proportionate share of adjustments to equity in net income
(loss) of partially owned entities to arrive at FFO:
Depreciation and amortization of real property
154,795
143,960
117,766
157,270
154,680
Net gains on sale of real estate
(2,853)
(4,513)
(11,580)
(465)
(241,602)
Real estate impairment losses
6,328
16,758
-
6,552
11,673
Income tax effect of above adjustments
-
-
(7,287)
(26,703)
(27,493)
673,567
381,429
135,718
263,984
285,830
Noncontrolling interests' share of above adjustments
(41,267)
(22,342)
(8,073)
(15,089)
(16,649)
FFO adjustments, net
$
632,300
$
359,087
$
127,645
$
248,895
$
269,181
FFO attributable to common shareholders
$
1,455,906
$
1,038,943
$
911,033
$
640,929
$
818,452
Convertible preferred share dividends
Earnings allocated to Out-Performance Plan units
1,591
-
-
-
-
FFO attributable to common shareholders plus assumed
conversions(1)
$
1,457,583
$
1,039,035
$
911,130
$
641,037
$
818,565
(1) FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are non-GAAP financial measures used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies.
ITEM 6. SELECTED FINANCIAL DATA
Vornado Realty L.P.
(Amounts in thousands, except per unit amounts)
Year Ended December 31,
Operating Data:
Revenues:
Property rentals
$
2,103,728
$
2,076,586
$
1,911,487
$
1,880,405
$
1,771,264
Tenant expense reimbursements
260,667
260,976
245,819
226,831
207,149
Cleveland Medical Mart development project
-
-
-
36,369
235,234
Fee and other income
141,807
164,705
155,206
155,571
119,077
Total revenues
2,506,202
2,502,267
2,312,512
2,299,176
2,332,724
Expenses:
Operating
1,024,336
1,011,249
953,611
928,565
891,637
Depreciation and amortization
565,059
542,952
481,303
461,627
435,545
General and administrative
179,279
175,307
169,270
177,366
167,194
Cleveland Medical Mart development project
-
-
-
32,210
226,619
Skyline properties impairment loss
160,700
-
-
-
-
Acquisition and transaction related costs
26,037
12,511
18,435
24,857
17,386
Total expenses
1,955,411
1,742,019
1,622,619
1,624,625
1,738,381
Operating income
550,791
760,248
689,893
674,551
594,343
(Loss) income from real estate fund investments
(23,602)
74,081
163,034
102,898
63,936
Income (loss) from partially owned entities
165,389
(12,630)
(59,861)
(340,882)
421,668
Interest and other investment income (loss), net
29,546
26,978
38,752
(24,887)
(261,200)
Interest and debt expense
(402,674)
(378,025)
(412,755)
(425,782)
(431,235)
Net gain on extinguishment of Skyline properties debt
487,877
-
-
-
-
Net gain on disposition of wholly owned and partially
owned assets
175,735
251,821
13,568
2,030
4,856
Income (loss) before income taxes
983,062
722,473
432,631
(12,072)
392,368
Income tax (expense) benefit
(8,312)
84,695
(9,281)
8,717
(8,132)
Income (loss) from continuing operations
974,750
807,168
423,350
(3,355)
384,236
Income from discontinued operations
7,172
52,262
585,676
568,095
310,305
Net income
981,922
859,430
1,009,026
564,740
694,541
Less net income attributable to noncontrolling interests in
consolidated subsidiaries
(21,351)
(55,765)
(96,561)
(63,952)
(32,018)
Net income attributable to Vornado Realty L.P.
960,571
803,665
912,465
500,788
662,523
Preferred unit distributions
(76,097)
(80,736)
(81,514)
(83,965)
(86,873)
Preferred unit redemptions
(7,408)
-
-
(1,130)
8,948
Net income attributable to Class A unitholders
$
877,066
$
722,929
$
830,951
$
415,693
$
584,598
Per Unit Data:
Income (loss) from continuing operations, net - basic
$
4.32
$
3.35
$
1.22
$
(0.79)
$
1.37
Income (loss) from continuing operations, net - diluted
4.29
3.31
1.21
(0.78)
1.37
Net income per Class A unit - basic
4.36
3.61
4.17
2.09
2.95
Net income per Class A unit - diluted
4.32
3.57
4.14
2.08
2.93
Distributions per Class A unit
2.52
2.52
(1)
2.92
2.92
3.76
(2)
Balance Sheet Data:
Total assets
$
20,814,847
$
21,143,293
$
21,157,980
$
20,018,210
$
21,978,802
Real estate, at cost
18,339,958
18,090,137
16,822,358
15,392,968
15,287,078
Accumulated depreciation and amortization
(3,513,574)
(3,418,267)
(3,161,633)
(2,829,862)
(2,524,718)
Debt, net
10,611,685
11,091,010
9,530,337
8,708,414
9,714,819
Total equity
7,618,496
7,476,078
7,489,382
7,594,744
7,904,144
(1)
Post spin-off of Urban Edge Properties (NYSE: UE) on January 15, 2015.
(2)
Includes a special long-term capital gain distribution of $1.00 per unit.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Page Number
Overview
Overview - Leasing activity
Critical Accounting Policies
Net Income and EBITDA by Segment for the Years Ended
December 31, 2016, 2015 and 2014
Results of Operations:
Year Ended December 31, 2016 Compared to December 31, 2015
Year Ended December 31, 2015 Compared to December 31, 2014
Supplemental Information:
Net Income and EBITDA by Segment for the Three Months Ended
December 31, 2016 and 2015
Three Months Ended December 31, 2016 Compared to December 31, 2015
Three Months Ended December 31, 2016 Compared to September 30, 2016
Related Party Transactions
Liquidity and Capital Resources
Financing Activities and Contractual Obligations
Certain Future Cash Requirements
Cash Flows for the Year Ended December 31, 2016
Cash Flows for the Year Ended December 31, 2015
Cash Flows for the Year Ended December 31, 2014
Funds From Operations for the Three Months and Years Ended
December 31, 2016 and 2015
Overview
Vornado Realty Trust (“Vornado”) is a fully-integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Accordingly, Vornado’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors. Vornado is the sole general partner of, and owned approximately 93.7% of the common limited partnership interest in the Operating Partnership as of December 31, 2016. All references to the “Company,” “we,” “us” and “our” mean collectively Vornado, the Operating Partnership and those entities/subsidiaries consolidated by Vornado.
On October 31, 2016, Vornado’s Board of Trustees approved the tax-free spin-off of our Washington, DC segment and we entered into a definitive agreement to merge it with the business and certain select assets of The JBG Companies (“JBG”), a Washington, DC real estate company. Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, will be Chairman of the Board of Trustees of the new company, which will be named JBG SMITH Properties. Mitchell Schear, President of our Washington, DC business, will be a member of the Board of Trustees of the new company. The pro rata distribution to Vornado common shareholders and Class A Operating Partnership unitholders is intended to be treated as a tax-free spin-off for U.S. federal income tax purposes. It is expected to be made on a pro rata 1:2 basis. The initial Form 10 registration statement relating to the spin-off and merger was filed with the SEC on January 23, 2017 and the distribution and combination are expected to be completed in the second quarter of 2017. The distribution and combination are subject to certain conditions, including the SEC declaring the Form 10 registration statement effective, filing and approval of the new company’s listing application, receipt of regulatory approvals and third party consents by each of the Company and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. The distribution and combination are not subject to a vote by Vornado’s shareholders or Operating Partnership unitholders. Vornado’s Board of Trustees has approved the transaction. JBG has obtained all requisite approvals from its investment funds for this transaction. There can be no assurance that this transaction will be completed.
We own and operate office and retail properties with large concentrations in the New York City metropolitan area and in the Washington, DC/Northern Virginia area. In addition, we have a 32.4% interest in Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX), which owns seven properties in the greater New York metropolitan area, a 32.5% interest in Toys “R” Us, Inc. (“Toys”) as well as interests in other real estate and related investments.
Our business objective is to maximize Vornado shareholder value, which we measure by the total return provided to our shareholders. Below is a table comparing Vornado’s performance to the FTSE NAREIT Office Index (“Office REIT”) and the MSCI US REIT Index (“MSCI”) for the following periods ended December 31, 2016:
Overview - continued
We intend to achieve this objective by continuing to pursue our investment philosophy and execute 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, where we believe there is a high likelihood of capital appreciation;
· acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;
· investing in retail properties in select under-stored locations such as the New York City metropolitan area;
· developing and redeveloping our existing properties to increase returns and maximize value; and
· investing in operating companies that have a significant real estate component.
We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from asset sales and by accessing the public and private capital markets. We may also offer Vornado common or preferred shares or Operating Partnership units in exchange for property and may repurchase or otherwise reacquire these securities in the future.
We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rents charged, sales prices, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the global, national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, population and employment trends. See “Risk Factors” in Item 1A for additional information regarding these factors.
Vornado Realty Trust
Year Ended December 31, 2016 Financial Results Summary
Net income attributable to common shareholders for the year ended December 31, 2016 was $823,606,000, or $4.34 per diluted share, compared to $679,856,000, or $3.59 per diluted share, for the year ended December 31, 2015. The years ended December 31, 2016 and 2015 include certain items that impact net income attributable to common shareholders, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders by $569,725,000 and $369,455,000, or $3.00 and $1.95 per diluted share, for the years ended December 31, 2016 and 2015, respectively.
Funds From Operations attributable to common shareholders plus assumed conversions (“FFO”) for the year ended December 31, 2016 was $1,457,583,000, or $7.66 per diluted share, compared to $1,039,035,000, or $5.48 per diluted share, for the year ended December 31, 2015. The years ended December 31, 2016 and 2015 include certain items that impact FFO, which are listed in the table on page 43. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO by $570,780,000 and $138,158,000, or $3.00 and $0.73 per diluted share, for the years ended December 31, 2016 and 2015, respectively.
Net income as adjusted and FFO as adjusted for the year ended December 31, 2016 include $41,373,000, or $0.20 per diluted share, for our 33.0% share of a non-cash unrealized loss and related reduction in our carried interest accrual, resulting from the fourth quarter mark-to-market fair value adjustment of our real estate funds’ investment in the Crowne Plaza Times Square Hotel.
Overview - continued
Vornado Realty Trust - continued
Quarter Ended December 31, 2016 Financial Results Summary
Net income attributable to common shareholders for the quarter ended December 31, 2016 was $651,181,000, or $3.43 per diluted share, compared to $230,742,000, or $1.22 per diluted share, for the prior year’s quarter. The quarters ended December 31, 2016 and 2015 include certain items that impact net income attributable to common shareholders, which are listed in the table below. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased net income attributable to common shareholders by $594,473,000 and $144,301,000, or $3.13 and $0.76 per diluted share, for the quarters ended December 31, 2016 and 2015, respectively.
FFO for the quarter ended December 31, 2016 was $797,734,000, or $4.20 per diluted share, compared to $259,528,000, or $1.37 per diluted share, for the prior year’s quarter. The quarters ended December 31, 2016 and 2015 include certain items that impact FFO, which are listed in the table on the following page. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO by $582,996,000 and $21,469,000, or $3.07 and $0.11 per diluted share, for the quarters ended December 31, 2016 and 2015, respectively.
Net income as adjusted and FFO as adjusted for the quarter ended December 31, 2016 include $41,373,000, or $0.20 per diluted share, for our 33.0% share of a non-cash unrealized loss and related reduction in our carried interest accrual, resulting from the fourth quarter mark-to-market fair value adjustment of our real estate funds’ investment in the Crowne Plaza Times Square Hotel.
Overview - continued
Vornado Realty Trust - continued
Vornado Realty L.P.
Year Ended December 31, 2016 Financial Results Summary
Net income attributable to Class A unitholders for the year ended December 31, 2016 was $877,066,000, or $4.32 per diluted Class A unit, compared to $722,929,000, or $3.57 per diluted Class A unit, for the year ended December 31, 2015. The year ended December 31, 2016 and 2015 include certain items that impact net income attributable to Class A unitholders which are listed in the table on the following page. The aggregate of these items increased net income attributable to Class A unitholders by $606,756,000, or $3.00 per diluted Class A unit, and $392,036,000, or $1.95 per diluted Class A unit, for the years ended December 31, 2016 and 2015, respectively.
Net income as adjusted for the year ended December 31, 2016 includes $41,373,000, or $0.20 per diluted Class A unit, for our 33.0% share of a non-cash unrealized loss and related reduction in our carried interest accrual, resulting from the fourth quarter mark-to-market fair value adjustment of our real estate funds’ investment in the Crowne Plaza Times Square Hotel.
Quarter Ended December 31, 2016 Financial Results Summary
Net income attributable to Class A unitholders for the quarter ended December 31, 2016 was $693,377,000, or $3.43 per diluted Class A unit, compared to $245,735,000, or $1.21 per diluted Class A unit, for the prior year’s quarter. The quarters ended December 31, 2016 and 2015 include certain items that impact net income attributable to Class A unitholders, which are listed in the table on the following page. The aggregate of these items increased net income attributable to Class A unitholders by $632,149,000, or $3.13 per diluted Class A unit, and $153,446,000, or $0.76 per diluted Class A unit, for the quarters ended December 31, 2016 and 2015, respectively.
Net income, as adjusted for the quarter ended December 31, 2016 includes $41,373,000, or $0.20 per diluted Class A unit, for our 33.0% share of a non-cash unrealized loss and related reduction in our carried interest accrual, resulting from the fourth quarter mark-to-market fair value adjustment of our real estate funds’ investment in the Crowne Plaza Times Square Hotel.
Overview - continued
Vornado Realty L.P. - continued
Vornado Realty Trust and Vornado Realty L.P.
Same Store EBITDA and Cash Basis Same Store EBITDA
The percentage increase (decrease) in same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and cash basis same store EBITDA of our operating segments are summarized below.
Calculations of same store EBITDA, reconciliations of our net income to EBITDA and FFO and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.
Overview - continued
Washington, DC Segment
Excluding the Skyline Properties which were disposed of on December 21, 2016, our Washington, DC segment EBITDA as adjusted was $290,500,000 for the year ended December 31, 2016, which is flat to 2015 as a result of an increase in EBITDA from the core business of $3,100,000, offset by a decline in EBITDA from properties taken out-of-service of $3,100,000. These results are slightly ahead of the guidance we published for 2016.
We expect to complete the spin-off of our Washington, DC segment in the second quarter of 2017. We expect that Washington, DC’s EBITDA as adjusted during the first half of 2017 will be lower than the first half of 2016 by approximately $1,000,000 to $5,000,000, comprised of:
(i) core business approximately $2,000,000 to $6,000,000 higher than 2016, offset by,
(ii) reduction in EBITDA of approximately $6,000,000 to $8,000,000 from 1700 M Street, 1800 South Bell and 1750 Crystal Drive being taken out-of-service for redevelopment.
Investments
On March 17, 2016, we entered into a joint venture, in which we own a 33.3% interest, which owns a $150,000,000 mezzanine loan with an interest rate of LIBOR plus 8.88% and an initial maturity date in November 2016, with two three-month extension options. On November 9, 2016, the mezzanine loan was extended to May 2017 with an interest rate of LIBOR plus 9.42% (10.08% at December 31, 2016) during the extension period. As of December 31, 2016, the joint venture has fully funded its commitments. The joint venture’s investment is subordinate to $350,000,000 of third party debt. We account for our investment in the joint venture under the equity method.
On May 20, 2016, we contributed $19,650,000 for a 50.0% equity interest in a joint venture that will develop 606 Broadway, a 34,000 square foot office and retail building, located on Houston Street in Manhattan. The development cost of this project is estimated to be approximately $104,000,000. At closing, the joint venture obtained a $65,000,000 construction loan, of which approximately $25,800,000 was outstanding at December 31, 2016. The loan, which bears interest at LIBOR plus 3.00% (3.66% at December 31, 2016), matures in May 2019 with two one-year extension options. Because this joint venture is a VIE and we determined we are the primary beneficiary, we consolidate the accounts of this joint venture from the date of our investment.
Dispositions
On May 27, 2016, we sold a 47% ownership interest in 7 West 34th Street, a 479,000 square foot Manhattan office building leased to Amazon, and retained the remaining 53% interest. This transaction was based on a property value of approximately $561,000,000 or $1,176 per square foot. We received net proceeds of $127,382,000 from the sale and realized a net gain of $203,324,000, of which $159,511,000 was recognized in the second quarter of 2016 and is included in “net gain on disposition of wholly owned and partially owned assets” in our consolidated statements of income. The remaining net gain of $43,813,000 has been deferred until our guarantee of payment of loan principal and interest is removed or the loan is repaid. We realized a net tax gain of $90,017,000. We continue to manage and lease the property. We share control over major decisions with our joint venture partner. Accordingly, this property is accounted for under the equity method from the date of sale.
On December 19, 2016, we completed the sale of our 20% interest in Fairfax Square to our joint venture partner for $15,500,000, which resulted in a net gain of approximately $15,302,000.
On August 24, 2016, the Skyline properties, located in Fairfax, Virginia, were placed in receivership. On December 21, 2016, the final disposition of the Skyline properties was completed by the receiver. In connection therewith, the Skyline properties’ assets (approximately $236,535,000) and liabilities (approximately $724,412,000), were removed from our consolidated balance sheet which resulted in a net gain of $487,877,000. There was no taxable income related to this transaction.
Overview - continued
Financings
Unsecured Revolving Credit Facility
On November 7, 2016, we extended one of our two $1.25 billion unsecured revolving credit facilities from June 2017 to February 2021 with two six-month extension options. The interest rate on the extended facility was lowered from LIBOR plus 115 basis points to LIBOR plus 100 basis points. The facility fee remains unchanged at 20 basis points.
Secured Debt
On February 8, 2016, we completed a $700,000,000 refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.75% (2.40% at December 31, 2016), which was swapped for four and a half years to a fixed rate of 2.56%. The Company realized net proceeds of approximately $330,000,000. The property was previously encumbered by a 5.65%, $353,000,000 mortgage which was scheduled to mature in March 2016.
On May 16, 2016, we completed a $300,000,000 recourse financing of 7 West 34th Street. The ten-year loan is interest only at a fixed rate of 3.65% and matures in June 2026.
On September 6, 2016, we completed a $675,000,000 refinancing of theMART, a 3,652,000 square foot commercial building in Chicago. The five-year loan is interest only and has a fixed rate of 2.70%. The Company realized net proceeds of approximately $124,000,000. The property was previously encumbered by a 5.57%, $550,000,000 mortgage which was scheduled to mature in December 2016.
On December 2, 2016, we completed a $400,000,000 refinancing of 350 Park Avenue, a 571,000 square foot Manhattan office building. The ten-year loan is interest only and has a fixed rate of 3.92%. The Company realized net proceeds of approximately $111,000,000. The property was previously encumbered by a 3.75%, $284,000,000 mortgage which was scheduled to mature in January 2017.
Preferred Securities
On September 1, 2016, we redeemed all of the outstanding 6.875% Series J cumulative redeemable preferred shares/units at their redemption price of $25.00 per share/unit, or $246,250,000 in the aggregate, plus accrued and unpaid dividends/distributions through the date of redemption. In connection therewith, we expensed $7,408,000 of issuance costs, which reduced net income attributable to common shareholders and net income attributable to Class A unitholders in the twelve months ended December 31, 2016. These costs had been initially recorded as a reduction of shareholders’ equity and partners’ capital.
Overview - continued
Leasing Activity
The leasing activity and related statistics in the tables below are based on leases signed during the period and are not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Second generation relet space represents square footage that has not been vacant for more than nine months and tenant improvements and leasing commissions are based on our share of square feet leased during the period.
Critical Accounting Policies
In preparing the consolidated financial statements we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Set forth below is a summary of the accounting policies that we believe are critical to the preparation of our consolidated financial statements. The summary should be read in conjunction with the more complete discussion of our accounting policies included in Note 2 - Basis of Presentation and Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the improvement and leasing of real estate are capitalized. Maintenance and repairs are expensed as incurred. For redevelopment of existing operating properties, the net book value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete. If the cost of the redeveloped property, including the net book value of the existing property, exceeds the estimated fair value of redeveloped property, the excess is charged to expense. Depreciation is recognized on a straight-line basis over estimated useful lives which range from 7 to 40 years. Tenant allowances are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets.
Upon the acquisition of real estate that meets the criteria of a business under ASU 2017-01, we assess the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above and below-market leases, acquired in-place leases and tenant relationships) and acquired liabilities and we allocate the purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known trends, and market/economic conditions. We record acquired intangible assets (including acquired above-market leases, acquired in-place leases and tenant relationships) and acquired intangible liabilities (including below-market leases) at their estimated fair value separate and apart from goodwill. We amortize identified intangibles that have finite lives over the period they are expected to contribute directly or indirectly to the future cash flows of the property or business acquired.
As of December 31, 2016 and 2015, the carrying amounts of real estate, net of accumulated depreciation, were $14.8 billion and $14.7 billion, respectively. As of December 31, 2016 and 2015, the carrying amounts of identified intangible assets (including acquired above-market leases, tenant relationships and acquired in-place leases) were $192,731,000 and $227,901,000, respectively, and the carrying amounts of identified intangible liabilities, a component of “deferred revenue” on our consolidated balance sheets, were $263,786,000 and $318,148,000, respectively.
Our properties, including any related intangible assets, are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
Critical Accounting Policies - continued
Partially Owned Entities
We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and whether we are the primary beneficiary. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. We generally do not control a partially owned entity if the entity is not considered a VIE and the approval of all of the partners/members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of real property, the hiring of a chief executive officer, the commencement, compromise or settlement of any lawsuit, legal proceeding or arbitration or the placement of new or additional financing secured by assets of the venture. We account for investments under the equity method when the requirements for consolidation are not met, and we have significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently adjusted for our share of net income or loss and cash contributions and distributions each period. Investments that do not qualify for consolidation or equity method accounting are accounted for on the cost method.
Investments in partially owned entities are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the time the analyses are prepared. The ultimate realization of our investments in partially owned entities is dependent on a number of factors, including the performance of each investment and market conditions. If our estimates of the projected future cash flows, the nature of development activities for properties for which such activities are planned and the estimated fair value of the investment change based on market conditions or otherwise, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.
As of December 31, 2016 and 2015, the carrying amounts of investments in partially owned entities were $1.4 billion and $1.6 billion, respectively.
Allowance for Doubtful Accounts
We periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts ($10,920,000 and $11,908,000 as of December 31, 2016 and 2015, respectively) for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. We also maintain an allowance for receivables arising from the straight-lining of rents ($2,227,000 and $2,751,000 as of December 31, 2016 and 2015, respectively). This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.
Critical Accounting Policies - continued
Revenue Recognition
We have the following revenue sources and revenue recognition policies:
· Base Rent - income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease.
· Percentage Rent - income arising from retail tenant leases that is contingent upon tenant sales exceeding defined thresholds. These rents are recognized only after the contingency has been removed (i.e., when tenant sales thresholds have been achieved).
· Hotel Revenue - income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is recognized when rooms are occupied. Food and beverage and banquet revenue are recognized when the services have been rendered.
· Trade Shows Revenue - income arising from the operation of trade shows, including rentals of booths. This revenue is recognized when the trade shows have occurred.
· Expense Reimbursements - revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is recognized in the same periods as the expenses are incurred.
· Management, Leasing and Other Fees - income arising from contractual agreements with third parties or with partially owned entities. This revenue is recognized as the related services are performed under the respective agreements.
Before we recognize revenue, we assess, among other things, its collectability. If our assessment of the collectability of revenue changes, the impact on our consolidated financial statements could be material.
Income Taxes
Vornado operates in a manner intended to enable it to continue to qualify as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Vornado distributes to its shareholders 100% of its taxable income and therefore, no provision for Federal income taxes is required. If Vornado fails to distribute the required amount of income to its shareholders, or fails to meet other REIT requirements, it may fail to qualify as a REIT which may result in substantial adverse tax consequences.
Recent Accounting Pronouncements
See Note 2 - Basis of Presentation and Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K for a discussion concerning recent accounting pronouncements.
Net Income and EBITDA by Segment for the Years Ended December 31, 2016, 2015 and 2014
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the years ended December 31, 2016 and 2015.
____________________________
See notes on pages 56 and 57.
Net Income and EBITDA by Segment for the Years Ended December 31, 2016, 2015 and 2014 - continued
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the year ended December 31, 2014.
____________________________
See notes on the following pages.
Net Income and EBITDA by Segment for the Years Ended December 31, 2016, 2015 and 2014 - continued
Net Income and EBITDA by Segment for the Years Ended December 31, 2016, 2015 and 2014 - continued
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region, excluding gains on sale of real estate, non-cash impairment losses, and operations of sold properties.
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015
Revenues
Our revenues, which consist of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $2,506,202,000 in the year ended December 31, 2016, compared to $2,502,267,000 in the prior year, an increase of $3,935,000. Below are the details of the increase (decrease) by segment:
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015 - continued
Expenses
Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $1,955,411,000 in the year ended December 31, 2016, compared to $1,742,019,000 in the prior year, an increase of $213,392,000. Below are the details of the increase by segment:
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015 - continued
(Loss) Income from Real Estate Fund Investments
Below are the components of the (loss) income from our real estate fund investments for the years ended December 31, 2016 and 2015.
Income (Loss) from Partially Owned Entities
Summarized below are the components of income (loss) from partially owned entities for the years ended December 31, 2016 and 2015.
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015 - continued
Interest and Other Investment Income, net
Interest and other investment income, net was $29,546,000 in the year ended December 31, 2016, compared to $26,978,000 in the prior year, an increase of $2,568,000. This increase resulted primarily from an increase in the value of investments in our deferred compensation plan (offset by a corresponding decrease in the liability for plan assets in general and administrative expenses).
Interest and Debt Expense
Interest and debt expense was $402,674,000 in the year ended December 31, 2016, compared to $378,025,000 in the prior year, an increase of $24,649,000. This increase was primarily due to (i) $23,205,000 of higher interest expense from the full year effect of 2015 financings of the St. Regis Retail, 150 West 34th Street, 100 West 33rd Street, and from the $375,000,000 drawn on our $750,000,000 delayed draw term loan, (ii) $10,208,000 of lower capitalized interest, and (iii) $7,823,000 of default interest on our Skyline properties mortgage loan, partially offset by (iv) $13,127,000 of interest savings from the re-financings of 888 7th Avenue and 770 Broadway and (v) $4,177,000 of interest savings from the repayment of the Bowen Building loan.
Net Gain on Extinguishment of Skyline Properties Debt
In the year ended December 31, 2016, upon the final disposition of the Skyline properties, all assets (approximately $236,535,000) and liabilities (approximately $724,412,000), were removed from our consolidated balance sheet which resulted in a net gain of $487,877,000.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets
The net gain of $175,735,000 in the year ended December 31, 2016, consists primarily of a $159,511,000 net gain on sale of our 47% ownership interest in 7 West 34th Street and a $15,302,000 net gain on sale of our 20% ownership interest in Fairfax Square. The net gain of $251,821,000 in the prior year, consists of a $142,693,000 net gain on sale of 20 Broad Street, a $102,404,000 net gain on sale of 1750 Pennsylvania Avenue and $6,724,000 from the sale of residential condominiums.
Income Tax (Expense) Benefit
In the year ended December 31, 2016, we had an income tax expense of $8,312,000, compared to a benefit of $84,695,000 in the prior year, an increase in expense of $93,007,000. This increase in expense resulted primarily from the prior year reversal of $90,030,000 of valuation allowances against certain of our deferred tax assets, as we concluded that it was more-likely-than-not that we will generate sufficient taxable income from the sale of 220 Central Park South residential condominium units to realize the deferred tax assets.
Income from Discontinued Operations
We have reclassified the revenues and expenses of our strip shopping center and mall business which was spun off to UE on January 15, 2015 and other related retail assets that were sold or are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all the periods presented in the accompanying financial statements. The table below sets forth the combined results of assets related to discontinued operations for the years ended December 31, 2016 and 2015.
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015 - continued
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $21,351,000 in the year ended December 31, 2016, compared to $55,765,000 in the prior year, a decrease of $34,414,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests of our real estate fund investments.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $53,654,000 in the year ended December 31, 2016, compared to $43,231,000 in the prior year, an increase of $10,423,000. This increase resulted primarily from higher net income subject to allocation to unitholders.
Preferred Share Dividends of Vornado Realty Trust
Preferred share dividends were $75,903,000 in the year ended December 31, 2016, compared to $80,578,000 in the prior year, a decrease of $4,675,000. This decrease resulted primarily from the redemption of the 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
Preferred Unit Distributions of Vornado Realty L.P.
Preferred unit distributions were $76,097,000 in the year ended December 31, 2016, compared to $80,736,000 in the prior year, a decrease of $4,639,000. This decrease resulted primarily from the redemption of the 6.875% Series J cumulative redeemable preferred units on September 1, 2016.
Preferred Share Issuance Costs
In the year ended December 31, 2016, we recognized a $7,408,000 expense in connection with the write-off of issuance costs upon redeeming all of the outstanding 6.875% Series J cumulative redeemable preferred shares on September 1, 2016.
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015 - continued
Same Store EBITDA
Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods. Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items. We also present same store EBITDA on a cash basis (which excludes income from the straight-lining of rents, amortization of acquired below-market leases, net of above-market leases and other non-cash adjustments). We present these non-GAAP financial measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers. Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies.
Below is the reconciliation of EBITDA to same store EBITDA for each of our segments for the year ended December 31, 2016, compared to the year ended December 31, 2015.
Results of Operations - Year Ended December 31, 2016 Compared to December 31, 2015 - continued
Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014
Revenues
Our revenues, which consist of property rentals (including hotel and trade show revenues), tenant expense reimbursements, and fee and other income, were $2,502,267,000 in the year ended December 31, 2015, compared to $2,312,512,000 in the year ended December 31, 2014, an increase of $189,755,000. Below are the details of the increase (decrease) by segment:
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014 - continued
Expenses
Our expenses, which consist primarily of operating (including hotel and trade show expenses), depreciation and amortization and general and administrative expenses, were $1,742,019,000 in the year ended December 31, 2015, compared to $1,622,619,000 in the year ended December 31, 2014, an increase of $119,400,000. Below are the details of the increase by segment:
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014 - continued
Income from Real Estate Fund Investments
Below are the components of the income from our real estate fund investments for the years ended December 31, 2015 and 2014.
Loss from Partially Owned Entities
Summarized below are the components of loss from partially owned entities for the years ended December 31, 2015 and 2014.
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014 - continued
Interest and Other Investment Income, net
Interest and other investment income, net, was $26,978,000 in the year ended December 31, 2015, compared to $38,752,000 in the year ended December 31, 2014, a decrease of $11,774,000. This decrease resulted primarily from a decrease in the value of investments in our deferred compensation plan (offset by a corresponding increase in the liability for plan assets in general and administrative expenses).
Interest and Debt Expense
Interest and debt expense was $378,025,000 in the year ended December 31, 2015, compared to $412,755,000 in the year ended December 31, 2014, a decrease of $34,730,000. This decrease was primarily due to (i) $26,652,000 of interest savings from the redemption of the $445,000,000 principal amount of the outstanding 7.875% senior unsecured notes during the fourth quarter of 2014, (ii) $21,375,000 of interest savings from the redemption of the $500,000,000 principal amount of the outstanding 4.25% senior unsecured notes on January 1, 2015, partially offset by (iii) $5,297,000 of interest expense from the issuance of $450,000,000 of 2.50% senior unsecured notes in June 2014, (iv) $5,182,000 of interest expense from the current year’s financings of 150 West 34th Street and the Center Building, and (v) $3,481,000 of lower capitalized interest.
Net Gain on Disposition of Wholly Owned and Partially Owned Assets
The net gain of $251,821,000 in year ended December 31, 2015, consists of a $142,693,000 net gain on sale of 20 Broad Street, a $102,404,000 net gain on sale of 1750 Pennsylvania Avenue and $6,724,000 from the sale of residential condominiums. The net gain of $13,568,000 in the year ended December 31, 2014 is from the sale of residential condominiums and a land parcel.
Income Tax Benefit (Expense)
In the year ended December 31, 2015, we had an income tax benefit of $84,695,000, compared to an expense of $9,281,000 in the year ended December 31, 2014, a decrease in expense of $93,976,000. This decrease in expense resulted primarily from the reversal of the valuation allowances against certain of our deferred tax assets, as we concluded that it was more-likely than not that we will generate sufficient taxable income from the sale of 220 Central Park South residential condominium units to realize the deferred tax assets.
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014 - continued
Income from Discontinued Operations
The table below sets forth the combined results of operations of assets related to discontinued operations for the years ended December 31, 2015 and 2014.
Net Income Attributable to Noncontrolling Interests in Consolidated Subsidiaries
Net income attributable to noncontrolling interests in consolidated subsidiaries was $55,765,000 in the year ended December 31, 2015, compared to $96,561,000 in the year ended December 31, 2014, a decrease of $40,796,000. This decrease resulted primarily from lower net income allocated to the noncontrolling interests, including noncontrolling interests of our real estate fund investments.
Net Income Attributable to Noncontrolling Interests in the Operating Partnership (Vornado Realty Trust)
Net income attributable to noncontrolling interests in the Operating Partnership was $43,231,000 in the year ended December 31, 2015, compared to $47,613,000 in the year ended December 31, 2014, a decrease of $4,382,000. This decrease resulted primarily from lower net income subject to allocation to unitholders.
Preferred Share Dividends of Vornado Realty Trust
Preferred share dividends were $80,578,000 in the year ended December 31, 2015, compared to $81,464,000 in the year ended December 31, 2014, a decrease of $886,000.
Preferred Unit Distributions of Vornado Realty L.P.
Preferred unit distributions were $80,736,000 in the year ended December 31, 2015, compared to $81,514,000 in the year ended December 31, 2014, a decrease of $778,000.
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014 - continued
Same Store EBITDA
Below is the reconciliation of EBITDA to same store EBITDA for each of our segments for the year ended December 31, 2015, compared to the year ended December 31, 2014.
Results of Operations - Year Ended December 31, 2015 Compared to December 31, 2014 - continued
Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA
Supplemental Information
Net Income and EBITDA by Segment for the Three Months Ended December 31, 2016 and 2015
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended December 31, 2016.
_________________________
See notes on pages 74 and 75.
Supplemental Information - continued
Net Income and EBITDA by Segment for the Three Months Ended December 31, 2016 and 2015 - continued
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the three months ended December 31, 2015.
_________________________
See notes on the following pages.
Supplemental Information - continued
Net Income and EBITDA by Segment for the Three Months Ended December 31, 2016 and 2015 - continued
Supplemental Information - continued
Net Income and EBITDA by Segment for the Three Months Ended December 31, 2016 and 2015 - continued
EBITDA by Region
Below is a summary of the percentages of EBITDA by geographic region, excluding gains on sale of real estate, non-cash impairment losses, and operations of sold properties.
Supplemental Information - continued
Three Months Ended December 31, 2016 Compared to December 31, 2015
Same Store EBITDA
Same store EBITDA represents EBITDA from property level operations which are owned by us in both the current and prior year reporting periods. Same store EBITDA excludes segment-level overhead expenses, which are expenses that we do not consider to be property-level expenses, as well as other non-operating items. We also present same store EBITDA on a cash basis (which excludes income from the straight-lining of rents, amortization of acquired below-market leases, net of above-market leases and other non-cash adjustments). We present these non-GAAP financial measures to (i) facilitate meaningful comparisons of the operational performance of our properties and segments, (ii) make decisions on whether to buy, sell or refinance properties, and (iii) compare the performance of our properties and segments to those of our peers. Same store EBITDA should not be considered as an alternative to net income or cash flow from operations and may not be comparable to similarly titled measures employed by other companies.
Below is the reconciliation of EBITDA to same store EBITDA for each of our segments for the three months ended December 31, 2016, compared to the three months ended December 31, 2015.
Supplemental Information - continued
Three Months Ended December 31, 2016 Compared to December 31, 2015 - continued
Reconciliation of Same Store EBITDA to Cash basis Same Store EBITDA
Supplemental Information - continued
Three Months Ended December 31, 2016 Compared to September 30, 2016
Below is the reconciliation of Net Income to EBITDA for the three months ended September 30, 2016.
Below is the reconciliation of EBITDA to same store EBITDA for each of our segments for the three months ended December 31, 2016, compared to the three months ended September 30, 2016.
Supplemental Information - continued
Three Months Ended December 31, 2016 Compared to September 30, 2016 - continued
Reconciliation of Same Store EBITDA to Cash Basis Same Store EBITDA
Related Party Transactions
Alexander’s, Inc.
We own 32.4% of Alexander’s. Steven Roth, the Chairman of Vornado’s Board of Trustees and its Chief Executive Officer is also the Chairman of the Board and Chief Executive Officer of Alexander’s. We provide various services to Alexander’s in accordance with management, development and leasing agreements. These agreements are described in Note 5 - Investments in Partially Owned Entities to our consolidated financial statements in this Annual Report on Form 10-K.
Urban Edge Properties
We own 5.4% of UE. During 2015, we provided transition services to UE, primarily for information technology, human resources, tax and financial planning. In 2016, we continue to provide UE transition services for information technology and human resources. UE is providing us with leasing, development and property management services for certain of our retail properties including the retail assets of Alexander’s. Fees to UE for servicing the retail assets of Alexander’s are similar to the fees that we are receiving from Alexander’s as described in Note 5 - Investments in Partially Owned Entities to our consolidated financial statements in this Annual Report on Form 10-K.
Interstate Properties (“Interstate”)
Interstate is a general partnership in which Mr. Roth is the managing general partner. David Mandelbaum and Russell B. Wight, Jr., Trustees of Vornado and Directors of Alexander’s, are Interstate’s two other general partners. As of December 31, 2016, Interstate and its partners beneficially owned an aggregate of approximately 7.1% of the common shares of beneficial interest of Vornado and 26.3% of Alexander’s common stock.
We manage and lease the real estate assets of Interstate pursuant to a management agreement for which we receive an annual fee equal to 4% of annual base rent and percentage rent. 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. We believe, based upon comparable fees charged by other real estate companies, that the management agreement terms are fair to us. We earned $521,000, $541,000, and $535,000 of management fees under the agreement for the years ended December 31, 2016, 2015 and 2014, respectively.
Liquidity and Capital Resources
Property rental income is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties. Our cash requirements include property operating expenses, capital improvements, tenant improvements, debt service, leasing commissions, dividends to shareholders and distributions to unitholders of the Operating Partnership, as well as acquisition and development costs. Other sources of liquidity to fund cash requirements include proceeds from debt financings, including mortgage loans, senior unsecured borrowings, unsecured term loan and unsecured revolving credit facilities; proceeds from the issuance of common and preferred equity securities; and asset sales.
We anticipate that cash flow from continuing operations over the next twelve months will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to shareholders, debt amortization and recurring capital expenditures. Capital requirements for development expenditures and acquisitions may require funding from borrowings and/or equity offerings.
We may from time to time purchase or retire outstanding preferred shares and debt securities. Such purchases, if any, will depend on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Dividends
On January 18, 2017, Vornado declared a quarterly common dividend of $0.71 per share (an indicated annual rate of $2.84 per common share). This dividend, if continued for all of 2017, would require Vornado to pay out approximately $537,000,000 of cash for common share dividends. In addition, during 2017, Vornado expects to pay approximately $65,000,000 of cash dividends on outstanding preferred shares and approximately $35,000,000 of cash distributions to unitholders of the Operating Partnership.
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Financing Activities and Contractual Obligations
We have an effective shelf registration for the offering of our equity and debt securities that is not limited in amount due to our status as a “well-known seasoned issuer.” We have issued senior unsecured notes from a shelf registration statement that contain financial covenants that restrict our ability to incur debt, and that require us to maintain a level of unencumbered assets based on the level of our secured debt. Our unsecured revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our unsecured revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal. As of December 31, 2016, we are in compliance with all of the financial covenants required by our senior unsecured notes and our unsecured revolving credit facilities.
As of December 31, 2016, we had $1,501,027,000 of cash and cash equivalents and $2,364,523,000 of borrowing capacity under our unsecured revolving credit facilities, net of outstanding borrowings and letters of credit of $115,630,000 and $19,847,000, respectively. A summary of our consolidated debt as of December 31, 2016 and 2015 is presented below.
During 2017 and 2018, $118,585,000 and $209,208,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it using cash and cash equivalents or our unsecured revolving credit facilities. We may also refinance or prepay other outstanding debt depending on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Below is a schedule of our contractual obligations and commitments at December 31, 2016.
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Details of 2016 financing activities are provided in the “Overview” of Management’s Discussion and Analysis of Financial Conditions and Results of Operations. Details of 2015 financing activities are discussed below.
Secured Debt
On April 1, 2015, we completed a $308,000,000 refinancing of RiverHouse Apartments, a three building, 1,670 unit rental complex located in Arlington, VA. The loan is interest only at LIBOR plus 1.28% and matures in 2025. We realized net proceeds of approximately $43,000,000. The property was previously encumbered by a 5.43%, $195,000,000 mortgage which was scheduled to mature in April 2015 and a $64,000,000 mortgage at LIBOR plus 1.53% which was scheduled to mature in 2018.
On June 2, 2015, we completed a $205,000,000 financing in connection with the acquisition of 150 West 34th Street. The loan bears interest at LIBOR plus 2.25% and matures in 2018 with two one-year extension options.
On July 28, 2015, we completed a $580,000,000 refinancing of 100 West 33rd Street, a 1.1 million square foot property comprised of 855,000 square feet of office space and the 256,000 square foot Manhattan Mall. The loan is interest only at LIBOR plus 1.65% and matures in July 2020. We realized net proceeds of approximately $242,000,000.
On September 22, 2015, we upsized the loan on our 220 Central Park South development by $350,000,000 to $950,000,000. The interest rate on the loan is LIBOR plus 2.00% and the final maturity date is 2020. In connection with the upsizing, the standby commitment for a $500,000,000 mezzanine loan for this development has been terminated by payment of a $15,000,000 contractual termination fee, which was capitalized as a component of “development costs and construction in progress” on our consolidated balance sheet as of December 31, 2015.
On December 11, 2015, we completed a $375,000,000 refinancing of 888 Seventh Avenue, a 882,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.60% which was swapped for the term of the loan to a fixed rate of 3.15% and matures in December 2020. We realized net proceeds of approximately $49,000,000.
On December 21, 2015, we completed a $450,000,000 financing of the retail condominium of the St. Regis Hotel and the adjacent retail town house located on Fifth Avenue at 55th Street. The loan matures in December 2020, with two one-year extension options. The loan is interest only at LIBOR plus 1.80% for the first three years, LIBOR plus 1.90% for years four and five, and LIBOR plus 2.00% during the extension periods. We own a 74.3% controlling interest in the joint venture which owns the property.
Senior Unsecured Notes
On January 1, 2015, we redeemed all of the $500,000,000 principal amount of our outstanding 4.25% senior unsecured notes, which were scheduled to mature on April 1, 2015, at a redemption price of 100% of the principal amount plus accrued interest through December 31, 2014.
Unsecured Term Loan
On October 30, 2015, we entered into an unsecured delayed-draw term loan facility in the maximum amount of $750,000,000. The facility matures in October 2018 with two one-year extension options. The interest rate is LIBOR plus 1.15% with a fee of 0.20% per annum on the unused portion. At closing, we drew $187,500,000. The facility provides that the maximum amount available is twice the amount outstanding on April 29, 2016, limited to $750,000,000, and all draws must be made by October 2017. This facility, together with the $950,000,000 development loan mentioned above, provides the funding for our 220 Central Park South development.
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Acquisitions and Investments
On January 20, 2015, we co-invested with the Vornado Capital Partners Real Estate Fund (“Fund”) and one of the Fund’s limited partners to buy out the Fund’s joint venture partner’s 57.1% interest in the Crowne Plaza Times Square Hotel. The purchase price for the 57.1% interest was approximately $95,000,000 (our share $39,000,000) which valued the property at approximately $480,000,000. The property is encumbered by a $310,000,000 mortgage loan bearing interest at LIBOR plus 2.80% and maturing in December 2018 with a one-year extension option. Our aggregate ownership interest in the property increased to 33% from 11%.
On March 18, 2015, we acquired the Center Building, a 437,000 square foot office building, located at 33-00 Northern Boulevard in Long Island City, New York, for $142,000,000, including the assumption of an existing $62,000,000, 4.43% mortgage maturing in October 2018.
On June 2, 2015, we completed the acquisition of 150 West 34th Street, a 78,000 square foot retail property leased to Old Navy through May 2019, and 226,000 square feet of additional zoning air rights, for approximately $355,000,000. At closing we completed a $205,000,000 financing of the property.
On June 24, 2015, we entered into a joint venture, in which we own a 55% interest, to develop a 173,000 square foot Class-A office building, located along the western edge of the High Line at 512 West 22nd Street. The development cost of this project is approximately $235,000,000. The development commenced during the fourth quarter of 2015 and is expected to be completed in 2018. We account for our investment in the joint venture under the equity method.
On July 31, 2015, we acquired 260 Eleventh Avenue, a 235,000 square foot office property leased to the City of New York through 2021 with two five-year renewal options, a 10,000 square foot parking lot and additional air rights. The transaction is structured as a 99-year ground lease with an option to purchase the land for $110,000,000. The $3,900,000 annual ground rent and the purchase option price escalate annually at the lesser of 1.5% or CPI. The buildings were purchased for 813,900 newly issued Operating Partnership units valued at approximately $80,000,000.
On September 25, 2015, we acquired 265 West 34th Street, a 1,700 square foot retail property and 15,200 square feet of additional zoning air rights, for approximately $28,500,000.
Certain Future Cash Requirements
Capital Expenditures
The following table summarizes anticipated 2017 capital expenditures.
The table above excludes anticipated capital expenditures of each of our partially owned non-consolidated subsidiaries, as these entities fund their capital expenditures without additional equity contributions from us.
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Development and Redevelopment Expenditures
We are constructing a residential condominium tower containing 397,000 salable square feet on our 220 Central Park South development site. The incremental development cost of this project is estimated to be approximately $1.3 billion, of which $609,420,000 has been expended as of December 31, 2016.
We are developing a 173,000 square foot Class-A office building at 512 West 22nd Street, along the western edge of the High Line in the West Chelsea submarket of Manhattan (55.0% owned). The incremental development cost of this project is estimated to be approximately $130,000,000, of which our share is $72,000,000. As of December 31, 2016, $30,143,000 has been expended, of which our share is $16,579,000.
We are developing a 170,000 square foot office and retail building at 61 Ninth Avenue, located on the southwest corner of Ninth Avenue and 15th Street in the West Chelsea submarket of Manhattan. In February 2016, the venture purchased an adjacent five story loft building and air rights in exchange for a 10% common and preferred equity interest in the venture valued at $19,400,000, which reduced our ownership interest to 45.1% from 50.1%. On December 21, 2016, the venture obtained a $90,000,000 construction loan. The loan matures in December 2020 with two six-month extension options. The interest rate is LIBOR plus 3.05%. As of December 31, 2016, there was nothing drawn on this loan. The incremental development cost of this project is estimated to be approximately $150,000,000, of which our share is $68,000,000. As of December 31, 2016, $38,499,000 has been expended, of which our share is $17,363,000.
We are developing a 34,000 square foot office and retail building at 606 Broadway, located on the northeast corner of Broadway and Houston Street in Manhattan (50.0% owned). At closing, the joint venture obtained a $65,000,000 construction loan, of which approximately $25,800,000 was outstanding as of December 31, 2016. The loan, which bears interest at LIBOR plus 3.00% (3.66% at December 31, 2016), matures in May 2019 with two one-year extension options. The venture’s incremental development cost of this project is estimated to be approximately $60,000,000, of which our share is $30,000,000. As of December 31, 2016, $20,833,000 has been expended, of which our share is $10,417,000.
We are in the process of demolishing two adjacent Washington, DC office properties, 1726 M Street and 1150 17th Street, and will replace them in the future with a new 335,000 square foot Class A office building, to be addressed 1700 M Street. The incremental development cost of the project is estimated to be approximately $170,000,000, of which $10,500,000 has been expended as of December 31, 2016.
In September 2016, a joint venture between the Related Companies and Vornado was designated by New York State to redevelop the historic Farley Post Office building. The building will include a new Moynihan Train Hall and approximately 850,000 rentable square feet of office space and ancillary train hall retail. The joint venture will enter into a 99-year, triple-net lease and make a $230,000,000 contribution towards the construction of the train hall. Total costs for the redevelopment of the office and retail space are yet to be determined.
We are also evaluating other development and redevelopment opportunities at certain of our properties in Manhattan, including, in particular, the Penn Plaza District.
There can be no assurance that any of our development or redevelopment projects will commence, or if commenced, be completed, or completed on schedule or within budget.
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Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as flood and earthquake. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence and in the annual aggregate, subject to a deductible in the amount of 5% of the value of the affected property. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, and $2.0 billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by Terrorism Risk Insurance Program Reauthorization Act of 2015, which expires in December 2020.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism including NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $1,622,000 ($1,976,000 for 2017) and 16% (17% for 2017) of the balance of a covered loss and the Federal government is responsible for the remaining portion of a covered loss. We are ultimately responsible for any loss incurred by PPIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future.
Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.
Other Commitments and Contingencies
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
Our mortgage loans are non-recourse to us. However, in certain cases we have provided guarantees or master leased tenant space. These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans. As of December 31, 2016, the aggregate dollar amount of these guarantees and master leases is approximately $737,000,000.
As of December 31, 2016, $19,847,000 of letters of credit were outstanding under one of our unsecured revolving credit facilities. Our unsecured revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our unsecured revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.
As of December 31, 2016, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $173,000,000, which includes our share of the commitments of the Farley Post Office redevelopment joint venture.
As of December 31, 2016, we have construction commitments aggregating $653,940,000.
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Cash Flows for the Year Ended December 31, 2016
Our cash and cash equivalents were $1,501,027,000 at December 31, 2016, a $334,680,000 decrease from the balance at December 31, 2015. Our consolidated outstanding debt, net was $10,611,685,000 at December 31, 2016, a $479,325,000 decrease from the balance at December 31, 2015. As of December 31, 2016 and December 31, 2015, $115,630,000 and $550,000,000, respectively, was outstanding under our revolving credit facilities. During 2017 and 2018, $118,585,000 and $209,208,000, respectively, of our outstanding debt matures; we may refinance this maturing debt as it comes due or choose to repay it.
Net Cash Provided by Operating Activities
Cash flows provided by operating activities of $1,000,667,000 was comprised of (i) net income of $981,922,000, (ii) distributions of income from partially owned entities of $217,468,000, (iii) return of capital from real estate fund investments of $71,888,000, partially offset by (iv) $197,568,000 of non-cash adjustments, which include depreciation and amortization expense, net gain on extinguishment of Skyline properties debt, net gain on the disposition of wholly owned and partially owned assets, equity in net income from partially owned entities, real estate impairment losses, the effect of straight-lining of rental income, amortization of below-market leases, net realized and unrealized loss on real estate fund investments and net gains on sale of real estate and other, and (v) the net change in operating assets and liabilities of $73,043,000.
Net Cash Used in Investing Activities
Net cash used in investing activities of $889,193,000 was primarily comprised of (i) $606,565,000 of development costs and construction in progress, (ii) $387,545,000 of additions to real estate, (iii) $127,608,000 of investments in partially owned entities, (iv) $61,464,000 of acquisitions of real estate and other, (v) $42,000,000 due to the net deconsolidation of 7 West 34th Street, (vi) $11,700,000 of investments in loans receivable and other, and (vii) $4,379,000 in purchases of marketable securities, partially offset by (viii) $193,967,000 of capital distributions from partially owned entities, (ix) $153,534,000 of proceeds from sales of real estate and related investments, (x) $3,937,000 of proceeds from the sale of marketable securities, and (xi) $585,000 of changes in restricted cash.
Net Cash Used in Financing Activities
Net cash used in financing activities of Vornado Realty Trust of $446,154,000 was comprised of (i) $1,894,990,000 for the repayments of borrowings, (ii) $475,961,000 of dividends paid on common shares, (iii) $246,250,000 for the redemption of preferred shares, (iv) $130,590,000 of distributions to noncontrolling interests, (v) $80,137,000 of dividends paid on preferred shares, (vi) $42,157,000 of debt issuance and other costs, and (vii) $186,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other, partially offset by (viii) $2,403,898,000 of proceeds from borrowings, (ix) $11,950,000 of contributions from noncontrolling interests and (x) $8,269,000 of proceeds received from the exercise of employee share options.
Net cash used in financing activities of the Operating Partnership of $446,154,000 was comprised of (i) $1,894,990,000 for the repayments of borrowings, (ii) $475,961,000 of distributions to Vornado, (iii) $246,250,000 for the redemption of preferred units, (iv) $130,590,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries, (v) $80,137,000 of distributions to preferred unitholders, (vi) $42,157,000 of debt issuance and other costs, and (vii) $186,000 for the repurchase of Class A units related to equity compensation agreements and related tax withholdings and other, partially offset by (viii) $2,403,898,000 of proceeds from borrowings, (ix) $11,950,000 of contributions from noncontrolling interests in consolidated subsidiaries and (x) $8,269,000 of proceeds received from the exercise of Vornado stock options.
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Capital Expenditures for the Year Ended December 31, 2016
Capital expenditures consist of expenditures to maintain assets, tenant improvement allowances and leasing commissions. Recurring capital expenditures include expenditures to maintain a property’s competitive position within the market and tenant improvements and leasing commissions necessary to re-lease expiring leases or renew or extend existing leases. Non-recurring capital improvements include expenditures to lease space that has been vacant for more than nine months and expenditures completed in the year of acquisition and the following two years that were planned at the time of acquisition, as well as tenant improvements and leasing commissions for space that was vacant at the time of acquisition of a property.
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the year ended December 31, 2016.
Development and Redevelopment Expenditures for the Year Ended December 31, 2016
Development and redevelopment expenditures consist of all hard and soft costs associated with the development or redevelopment of a property, including capitalized interest, debt and operating costs until the property is substantially completed and ready for its intended use. Our development project budgets below include initial leasing costs, which are reflected as non-recurring capital expenditures in the table above.
Below is a summary of development and redevelopment expenditures incurred in the year ended December 31, 2016. These expenditures include interest of $34,097,000, payroll of $12,516,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $46,995,000, that were capitalized in connection with the development and redevelopment of these projects.
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Cash Flows for the Year Ended December 31, 2015
Our cash and cash equivalents were $1,835,707,000 at December 31, 2015, a $637,230,000 increase over the balance at December 31, 2014. Our consolidated outstanding debt, net was $11,091,010,000 at December 31, 2015, a $1,560,673,000 increase over the balance at December 31, 2014.
Net Cash Provided by Operating Activities
Cash flows provided by operating activities of $672,150,000 was comprised of (i) net income of $859,430,000, (ii) return of capital from real estate fund investments of $91,458,000, and (iii) distributions of income from partially owned entities of $65,018,000, partially offset by (iv) $81,654,000 of non-cash adjustments, which include depreciation and amortization expense, the reversal of allowance for deferred tax assets, the effect of straight-lining of rental income, equity in net loss from partially owned entities and net gains on sale of real estate and other, and (v) the net change in operating assets and liabilities of $262,102,000 (including $95,010,000 related to real estate fund investments).
Net Cash Used in Investing Activities
Net cash used in investing activities of $678,746,000 was comprised of (i) $490,819,000 of development costs and construction in progress, (ii) $478,215,000 of acquisitions of real estate and other, (iii) $301,413,000 of additions to real estate, (iv) $235,439,000 of investments in partially owned entities, and (v) $1,000,000 of investment in loans receivable and other, partially offset by (vi) $573,303,000 of proceeds from sales of real estate and related investments, (vii) $200,229,000 of changes in restricted cash, (viii) $37,818,000 of capital distributions from partially owned entities, and (ix) $16,790,000 of proceeds from sales and repayment of mezzanine loans receivable and other.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of Vornado Realty Trust of $643,826,000 was comprised of (i) $4,468,872,000 of proceeds from borrowings, (ii) $51,975,000 of contributions from noncontrolling interests, and (iii) $16,779,000 of proceeds received from exercise of employee share options, partially offset by (iv) $2,936,578,000 for the repayments of borrowings, (v) $474,751,000 of dividends paid on common shares, (vi) $225,000,000 of distributions in connection with the spin-off of UE, (vii) $102,866,000 of distributions to noncontrolling interests, (viii) $80,578,000 of dividends paid on preferred shares, (ix) $66,554,000 of debt issuance and other costs, and (x) $7,473,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other.
Net cash provided by financing activities of the Operating Partnership of $643,826,000 was comprised of (i) $4,468,872,000 of proceeds from borrowings, (ii) $51,975,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (iii) $16,779,000 of proceeds received from exercise of Vornado stock options, partially offset by (iv) $2,936,578,000 for the repayments of borrowings, (v) $474,751,000 of distributions to Vornado, (vi) $225,000,000 of distributions in connection with the spin-off of UE, (vii) $102,866,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries, (viii) $80,578,000 of distributions to preferred unitholders, (ix) $66,554,000 of debt issuance and other costs, and (x) $7,473,000 for the repurchase of Class A units related to stock compensation agreements and related tax withholdings and other.
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Capital Expenditures for the Year Ended December 31, 2015
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the year ended December 31, 2015.
Development and Redevelopment Expenditures for the Year Ended December 31, 2015
Below is a summary of development and redevelopment expenditures incurred in the year ended December 31, 2015. These expenditures include interest of $59,305,000, payroll of $6,077,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $90,922,000, that were capitalized in connection with the development and redevelopment of these projects.
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Cash Flows for the Year Ended December 31, 2014
Our cash and cash equivalents were $1,198,477,000 at December 31, 2014, a $615,187,000 decrease over the balance at December 31, 2013. Our consolidated outstanding debt was $9,530,337,000 at December 31, 2014, a $821,923,000 increase from the balance at December 31, 2013.
Net Cash Provided by Operating Activities
Cash flows provided by operating activities of $1,135,310,000 was comprised of (i) net income of $1,009,026,000, (ii) return of capital from real estate fund investments of $215,676,000, and (iii) distributions of income from partially owned entities of $96,286,000, partially offset by (iv) $89,536,000 of non-cash adjustments, which include depreciation and amortization expense, the effect of straight-lining of rental income, equity in net loss from partially owned entities and net gains on sale of real estate and other, and (v) the net change in operating assets and liabilities of $96,142,000, including $3,392,000 related to real estate fund investments.
Net Cash Used in Investing Activities
Net cash used in investing activities of $574,465,000 was comprised of (i) $544,187,000 of development costs and construction in progress, (ii) $279,206,000 of additions to real estate, (iii) $211,354,000 of acquisitions of real estate and other, (iv) $120,639,000 of investments in partially owned entities, and (v) $30,175,000 of investments in loans receivable and other, partially offset by (vi) $388,776,000 of proceeds from sales of real estate and related investments, (vii) $99,464,000 of changes in restricted cash, (viii) $96,913,000 of proceeds from sales and repayments of mortgages and mezzanine loans receivable and other, and (ix) $25,943,000 of capital distributions from partially owned entities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of Vornado Realty Trust of $54,342,000 was comprised of (i) $2,428,285,000 of proceeds from borrowings, (ii) $30,295,000 of contributions from noncontrolling interests, and (iii) $19,245,000 of proceeds received from exercise of employee share options, partially offset by (iv) $1,312,258,000 for the repayments of borrowings, (v) $547,831,000 of dividends paid on common shares, (vi) $220,895,000 of distributions to noncontrolling interests, (vii) purchase of marketable securities in connection with the defeasance of mortgage payable of $198,884,000, (viii) $81,468,000 of dividends paid on preferred shares, (ix) $58,336,000 of debt issuance and other costs, and (x) $3,811,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and other.
Net cash provided by financing activities of the Operating Partnership of $54,342,000 was comprised of (i) $2,428,285,000 of proceeds from borrowings, (ii) $30,295,000 of contributions from noncontrolling interests in consolidated subsidiaries, and (iii) $19,245,000 of proceeds received from exercise of Vornado stock options, partially offset by (iv) $1,312,258,000 for the repayments of borrowings, (v) $547,831,000 of distributions to Vornado, (vi) $220,895,000 of distributions to redeemable security holders and noncontrolling interests in consolidated subsidiaries, (vii) purchase of marketable securities in connection with the defeasance of mortgage payable of $198,884,000, (viii) $81,468,000 of distributions to preferred unitholders, (ix) $58,336,000 of debt issuance and other costs, and (x) $3,811,000 for the repurchase of Class A units related to stock compensation agreements and related tax withholdings and other.
Liquidity and Capital Resources - continued
Capital Expenditures for the Year Ended December 31, 2014
Below is a summary of capital expenditures, leasing commissions and a reconciliation of total expenditures on an accrual basis to the cash expended in the year ended December 31, 2014.
Development and Redevelopment Expenditures for the Year Ended December 31, 2014
Below is a summary of development and redevelopment expenditures incurred in the year ended December 31, 2014. These expenditures include interest of $62,787,000, payroll of $7,319,000, and other soft costs (primarily architectural and engineering fees, permits, real estate taxes and professional fees) aggregating $67,939,000, that were capitalized in connection with the development and redevelopment of these projects.
Funds From Operations (“FFO”)
Vornado Realty Trust
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are non-GAAP financial measures used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies.
FFO attributable to common shareholders plus assumed conversions was $1,457,583,000, or $7.66 per diluted share for the year ended December 31, 2016, compared to $1,039,035,000, or $5.48 per diluted share for the year ended December 31, 2015. FFO attributable to common shareholders plus assumed conversions was $797,734,000, or $4.20 per diluted share for the three months ended December 31, 2016, compared to $259,528,000, or $1.37 per diluted share for the three months ended December 31, 2015. Details of certain items that impact FFO are discussed in the financial results summary of our “Overview.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to fluctuations in market interest rates. Market interest rates are sensitive to many factors that are beyond our control. Our exposure to a change in interest rates on our consolidated and non-consolidated debt (all of which arises out of non-trading activity) is as follows:
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of December 31, 2016, we have an interest rate swap on a $412,000,000 mortgage loan that swapped the rate from LIBOR plus 1.65% (2.27% at December 31, 2016) to a fixed rate of 4.78% through March 2018 and an interest swap on a $375,000,000 mortgage loan on 888 Seventh Avenue that swapped the rate from LIBOR plus 1.60% (2.22% at December 31, 2016) to a fixed rate of 3.15% through December 2020.
In connection with the $700,000,000 refinancing of 770 Broadway, we entered into an interest rate swap from LIBOR plus 1.75% (2.40% at December 31, 2016) to a fixed rate of 2.56% through September 2020.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of December 31, 2016, the estimated fair value of our consolidated debt was $10,746,000,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have audited the accompanying consolidated balance sheets of Vornado Realty Trust (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty Trust at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 13, 2017
VORNADO REALTY TRUST
VORNADO REALTY TRUST
VORNADO REALTY TRUST
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VORNADO REALTY TRUST
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VORNADO REALTY TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Partners
Vornado Realty L.P.
New York, New York
We have audited the accompanying consolidated balance sheets of Vornado Realty L.P. and consolidated subsidiaries (the “Partnership”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty L.P. and consolidated subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Partnership’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2017 expressed an unqualified opinion on the Partnership’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 13, 2017
VORNADO REALTY L.P.
VORNADO REALTY L.P.
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VORNADO REALTY L.P.
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VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Vornado Realty Trust (“Vornado”) is a fully-integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Accordingly, Vornado’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors. Vornado is the sole general partner of, and owned approximately 93.7% of the common limited partnership interest in the Operating Partnership as of December 31, 2016. All references to the “Company,” “we,” “us” and “our” mean collectively Vornado, the Operating Partnership and those entities/subsidiaries consolidated by Vornado.
On October 31, 2016, Vornado’s Board of Trustees approved the tax-free spin-off of our Washington, DC segment and we entered into a definitive agreement to merge it with the business and certain select assets of The JBG Companies (“JBG”), a Washington, DC real estate company. Steven Roth, the Chairman of the Board of Trustees and Chief Executive Officer of Vornado, will be Chairman of the Board of Trustees of the new company, which will be named JBG SMITH Properties. Mitchell Schear, President of our Washington, DC business, will be a member of the Board of Trustees of the new company. The pro rata distribution to Vornado common shareholders and Class A Operating Partnership unitholders is intended to be treated as a tax-free spin-off for U.S. federal income tax purposes. It is expected to be made on a pro rata 1:2 basis. The initial Form 10 registration statement relating to the spin-off and merger was filed with the SEC on January 23, 2017 and the distribution and combination are expected to be completed in the second quarter of 2017. The distribution and combination are subject to certain conditions, including the SEC declaring the Form 10 registration statement effective, filing and approval of the new company’s listing application, receipt of regulatory approvals and third party consents by each of the Company and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. The distribution and combination are not subject to a vote by Vornado’s shareholders or Operating Partnership unitholders. Vornado’s Board of Trustees has approved the transaction. JBG has obtained all requisite approvals from its investment funds for this transaction. There can be no assurance that this transaction will be completed.
We currently own all or portions of:
New York:
· 20.2 million square feet of Manhattan office space in 36 properties;
· 2.7 million square feet of Manhattan street retail space in 70 properties;
· 2,004 units in twelve residential properties;
· The 1,700 room Hotel Pennsylvania located on Seventh Avenue at 33rd Street in the heart of the Penn Plaza district;
· A 32.4% interest in Alexander’s, Inc. (“Alexander’s”) (NYSE: ALX), which owns seven properties in the greater New York metropolitan area, including 731 Lexington Avenue, the 1.3 million square foot Bloomberg, L.P. headquarters building;
Washington, DC:
· 11.1 million square feet of office space in 44 properties;
· 3,156 units in nine residential properties;
Other Real Estate and Related Investments:
· The 3.7 million square foot Mart (“theMART”) in Chicago;
· A 70% controlling interest in 555 California Street, a three-building office complex in San Francisco’s financial district aggregating 1.8 million square feet, known as the Bank of America Center;
· A 25.0% interest in Vornado Capital Partners, our real estate fund. We are the general partner and investment manager of the fund;
· A 32.5% interest in Toys “R” Us, Inc. (“Toys”); and
· Other real estate and other investments.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Vornado and the Operating Partnership and their consolidated subsidiaries. All inter-company amounts have been eliminated. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recently Issued Accounting Literature
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update ("ASU 2014-09") establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC 606, Deferral of the Effective Date, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an update (“ASU 2016-10”) to ASC 606, Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued an update (“ASU 2016-12”) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are permitted to use either the retrospective or the modified retrospective method when adopting these standards. We are evaluating the impact of the adoption of these standards on our consolidated financial statements and have not yet concluded on the method of adoption.
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation - Stock Compensation (“ASC 718”). ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that began after December 15, 2015. The adoption of this update as of January 1, 2016, did not have any impact on our consolidated financial statements.
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this update on January 1, 2016 resulted in the identification of additional VIEs, but did not have an impact on our consolidated financial statements other than additional disclosures (see Note 11 - Variable Interest Entities).
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Basis of Presentation and Significant Accounting Policies - continued
Recently Issued Accounting Literature - continued
In January 2016, the FASB issued an update (“ASU 2016-01”) Recognition and Measurement of Financial Assets and Financial Liabilities to ASC Topic 825, Financial Instruments. ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In February 2016, the FASB issued (“ASU 2016-02”) Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. ASU 2016-02 will more significantly impact the accounting for leases in which we are a lessee. We have a number of ground leases for which we will be required to record a right-of-use asset and lease liability upon adoption of this standard. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements, including the timing of adopting this standard.
In March 2016, the FASB issued an update (“ASU 2016-09”) Improvements to Employee Share-Based Payment Accounting to ASC 718. ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.
In August 2016, the FASB issued an update (“ASU 2016-15”) Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this update is not expected to have a significant impact on our consolidated financial statements.
In November 2016, the FASB issued an update (“ASU 2016-18”) Restricted Cash to ASC Topic 230, Statement of Cash Flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period balances on the statement of cash flows upon adoption of this standard. ASU 2016-18 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted.
In January 2017, the FASB issued an update (“ASU 2017-01”) Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 provides a screen to determine when an asset acquired or group of assets acquired is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We have elected to early adopt this standard, effective as of October 1, 2016, for all future acquisitions. The adoption of this standard will result in less real estate acquisitions qualifying as businesses and, accordingly, acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. There was no impact of the adoption of this standard in the fourth quarter of 2016, as there have been no acquisitions.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Basis of Presentation and Significant Accounting Policies - continued
Significant Accounting Policies
Real Estate: Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the improvement and leasing of real estate are capitalized. Maintenance and repairs are expensed as incurred. For redevelopment of existing operating properties, the net book value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete. If the cost of the redeveloped property, including the net book value of the existing property, exceeds the estimated fair value of redeveloped property, the excess is charged to expense. Depreciation is recognized on a straight-line basis over estimated useful lives which range from 7 to 40 years. Tenant allowances are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets. Additions to real estate include interest and debt expense capitalized during construction of $34,097,000 and $59,305,000 for the years ended December 31, 2016 and 2015, respectively.
Upon the acquisition of real estate that meets the criteria of a business under ASU 2017-01, we assess the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above and below-market leases, acquired in-place leases and tenant relationships) and acquired liabilities and we allocate the purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known trends, and market/economic conditions. We record acquired intangible assets (including acquired above-market leases, acquired in-place leases and tenant relationships) and acquired intangible liabilities (including below-market leases) at their estimated fair value separate and apart from goodwill. We amortize identified intangibles that have finite lives over the period they are expected to contribute directly or indirectly to the future cash flows of the property or business acquired.
Our properties, including any related intangible assets, are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Basis of Presentation and Significant Accounting Policies - continued
Significant Accounting Policies - continued
Partially Owned Entities: We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and whether we are the primary beneficiary. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. We generally do not control a partially owned entity if the entity is not considered a VIE and the approval of all of the partners/members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of real property, the hiring of a chief executive officer, the commencement, compromise or settlement of any lawsuit, legal proceeding or arbitration or the placement of new or additional financing secured by assets of the venture. We account for investments under the equity method when the requirements for consolidation are not met, and we have significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently adjusted for our share of net income or loss and cash contributions and distributions each period. Investments that do not qualify for consolidation or equity method accounting are accounted for on the cost method.
Investments in partially owned entities are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the time the analyses are prepared. In the years ended December 31, 2016, 2015 and 2014, we recognized non-cash impairment losses on investments in partially owned entities aggregating $20,290,000, $21,260,000 and $85,459,000, respectively. Included in 2014 is a $75,196,000 impairment loss related to our investment in Toys.
Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less and are carried at cost, which approximates fair value due to their short-term maturities. The majority of our cash and cash equivalents consists of (i) deposits at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation limit, (ii) United States Treasury Bills, and (iii) Certificate of Deposits placed through an Account Registry Service (“CDARS”). To date, we have not experienced any losses on our invested cash.
Restricted Cash: Restricted cash consists of security deposits, cash restricted for the purposes of facilitating a Section 1031 Like-Kind exchange, cash restricted in connection with our deferred compensation plan and cash escrowed under loan agreements for debt service, real estate taxes, property insurance and capital improvements.
Allowance for Doubtful Accounts: We periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. We also maintain an allowance for receivables arising from the straight-lining of rents. These receivables arise from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. As of December 31, 2016 and 2015, we had $10,920,000 and $11,908,000, respectively, in allowances for doubtful accounts. In addition, as of December 31, 2016 and 2015, we had $2,227,000 and $2,751,000, respectively, in allowances for receivables arising from the straight-lining of rents.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Basis of Presentation and Significant Accounting Policies - continued
Significant Accounting Policies - continued
Deferred Charges: Direct financing costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to successful leasing activities are capitalized and amortized on a straight line basis over the lives of the related leases. All other deferred charges are amortized on a straight line basis, which approximates the effective interest rate method, in accordance with the terms of the agreements to which they relate.
Revenue Recognition: We have the following revenue sources and revenue recognition policies:
• Base Rent - income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease.
• Percentage Rent - income arising from retail tenant leases that is contingent upon tenant sales exceeding defined thresholds. These rents are recognized only after the contingency has been removed (i.e., when tenant sales thresholds have been achieved).
• Hotel Revenue - income arising from the operation of the Hotel Pennsylvania which consists of rooms revenue, food and beverage revenue, and banquet revenue. Income is recognized when rooms are occupied. Food and beverage and banquet revenue is recognized when the services have been rendered.
• Trade Shows Revenue - income arising from the operation of trade shows, including rentals of booths. This revenue is recognized when the trade shows have occurred.
• Expense Reimbursements - revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is recognized in the same periods as the expenses are incurred.
• Management, Leasing and Other Fees - income arising from contractual agreements with third parties or with partially owned entities. This revenue is recognized as the related services are performed under the respective agreements.
Derivative Instruments and Hedging Activities: ASC 815, Derivatives and Hedging, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As of December 31, 2016 and 2015, our derivative instruments consisted of two and one interest rate swaps, respectively. We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Basis of Presentation and Significant Accounting Policies - continued
Significant Accounting Policies - continued
Income Taxes: Vornado operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Vornado distributes to its shareholders 100% of its taxable income and therefore, no provision for Federal income taxes is required. Dividends distributed for the year ended December 31, 2016, were characterized, for federal income tax purposes, as 83.5% ordinary income and 16.5% long-term capital gain. Dividends distributed for the year ended December 31, 2015, were characterized, for federal income tax purposes, as long-term capital gain income. Dividends distributed for the year ended December 31, 2014, were characterized, for federal income tax purposes, as ordinary income.
The Operating Partnership’s partners are required to report their respective share of taxable income on their individual tax returns. We have elected to treat certain consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries pursuant to an amendment to the Internal Revenue Code that became effective January 1, 2001. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to Federal and State income tax at regular corporate tax rates. Our taxable REIT subsidiaries had a combined current income tax expense of approximately $7,946,000, $8,322,000 and $10,777,000 for the years ended December 31, 2016, 2015 and 2014, respectively, and have immaterial differences between the financial reporting and tax basis of assets and liabilities.
At December 31, 2016 and 2015, our taxable REIT subsidiaries had deferred tax assets related to net operating loss carryforwards of $98,013,000 and $97,104,000, respectively, which are included in “other assets” on our consolidated balance sheets. Prior to the quarter ended June 30, 2015, there was a full valuation allowance against these deferred tax assets because we had not determined that it is more-likely-than-not that we would use the net operating loss carryforwards to offset future taxable income. In our quarter ended June 30, 2015, based upon residential condominium unit sales, among other factors, we concluded that it was more-likely-than-not that we will generate sufficient taxable income to realize these deferred tax assets. Accordingly, we reversed $90,030,000 of the allowance for deferred tax assets and recognized an income tax benefit in our consolidated statements of income.
The following table reconciles net income attributable to Vornado common shareholders to estimated taxable income for the years ended December 31, 2016, 2015 and 2014.
The net basis of Vornado’s assets and liabilities for tax reporting purposes is approximately $3.7 billion lower than the amounts reported in Vornado’s consolidated balance sheet at December 31, 2016.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Real Estate Fund Investments
We are the general partner and investment manager of Vornado Capital Partners Real Estate Fund (the “Fund”) and own a 25.0% interest in the Fund, which has an eight-year term and a three-year investment period that ended in July 2013. During the investment period, the Fund was our exclusive investment vehicle for all investments that fit within its investment parameters, as defined. The Fund is accounted for under ASC 946, Financial Services - Investment Companies (“ASC 946”) and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings. We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting.
We are also the general partner and investment manager of the Crowne Plaza Times Square Hotel Joint Venture (the “Crowne Plaza Joint Venture”) and own a 57.1% interest in the joint venture which owns the 24.7% interest in the Crowne Plaza Times Square Hotel not owned by the Fund. The Crowne Plaza Joint Venture is also accounted for under ASC 946 and we consolidate the accounts of the joint venture into our consolidated financial statements, retaining the fair value basis of accounting.
At December 31, 2016, we had six real estate fund investments through the Fund and the Crowne Plaza Joint Venture with an aggregate fair value of $462,132,000, or $153,197,000 in excess of cost, and had remaining unfunded commitments of $117,907,000, of which our share was $34,422,000. At December 31, 2015, we had six real estate fund investments with an aggregate fair value of $574,761,000.
Below is a summary of income from the Fund and the Crowne Plaza Joint Venture for the years ended December 31, 2016, 2015 and 2014.
On March 25, 2015, the Fund completed the sale of 520 Broadway in Santa Monica, CA for $91,650,000. The Fund realized a $23,768,000 net gain over the holding period.
On January 20, 2015, we co-invested with the Fund and one of the Fund’s limited partners to buy out the Fund’s joint venture partner’s 57.1% interest in the Crowne Plaza Times Square Hotel. The purchase price for the 57.1% interest was approximately $95,000,000 (our share $39,000,000) which valued the property at approximately $480,000,000. The property is encumbered by a $310,000,000 mortgage loan bearing interest at LIBOR plus 2.80% and maturing in December 2018 with a one-year extension option. Our aggregate ownership interest in the property increased to 33% from 11%.
On August 21, 2014, the Fund and its 50% joint venture partner completed the sale of The Shops at Georgetown Park, a 305,000 square foot retail property, for $272,500,000. From the inception of this investment through its disposition, the Fund realized a $51,124,000 net gain.
On June 26, 2014, the Fund sold its 64.7% interest in One Park Avenue to a newly formed joint venture that we and an institutional investor own 55% and 45%, respectively. This transaction was based on a property value of $560,000,000. From the inception of this investment through its disposition, the Fund realized a $75,529,000 net gain.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Marketable Securities
Our portfolio of marketable securities is comprised of equity securities that are classified as available-for-sale. Available-for-sale securities are presented on our consolidated balance sheets at fair value. Unrealized gains and losses resulting from the mark-to-market of these securities are included in “other comprehensive income (loss).” Realized gains and losses are recognized in earnings only upon the sale of the securities and are recorded based on the weighted average cost of such securities.
We evaluate our portfolio of marketable securities for impairment each reporting period. For each of the securities in our portfolio with unrealized losses, we review the underlying cause of the decline in value and the estimated recovery period, as well as the severity and duration of the decline. In our evaluation, we consider our ability and intent to hold these investments for a reasonable period of time sufficient for us to recover our cost basis. We also evaluate the near-term prospects for each of these investments in relation to the severity and duration of the decline.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investments in Partially Owned Entities
Alexander’s, Inc.
As of December 31, 2016, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity. We manage, develop and lease Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable. As of December 31, 2016 and 2015, Alexander’s owed us an aggregate of $1,070,000 and $8,551,000, respectively, pursuant to such agreements.
As of December 31, 2016 the market value (“fair value” pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s December 31, 2016 closing share price of $426.87, was $706,072,000, or $576,748,000 in excess of the carrying amount on our consolidated balance sheet. As of December 31, 2016, the carrying amount of our investment in Alexander’s exceeds our share of the equity in the net assets of Alexander’s by approximately $39,723,000. The majority of this basis difference resulted from the excess of our purchase price for the Alexander’s common stock acquired over the book value of Alexander’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander’s assets and liabilities, to real estate (land and buildings). We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This depreciation is not material to our share of equity in Alexander’s net income. The basis difference related to the land will be recognized upon disposition of our investment.
Management, Development and Leasing Agreements
We receive an annual fee for managing Alexander’s and all of its properties equal to the sum of (i) $2,800,000, (ii) 2% of the gross revenue from the Rego Park II Shopping Center, (iii) $0.50 per square foot of the tenant-occupied office and retail space at 731 Lexington Avenue, and (iv) $297,000, escalating at 3% per annum, for managing the common area of 731 Lexington Avenue. In addition, we are entitled to a development fee of 6% of development costs, as defined.
We provide Alexander’s with leasing services for a fee of 3% of rent for the first ten years of a lease term, 2% of rent for the eleventh through twentieth year of a lease term and 1% of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by Alexander’s tenants. In the event third-party real estate brokers are used, our fee increases by 1% and we are responsible for the fees to the third-parties. We are also entitled to a commission upon the sale of any of Alexander’s assets equal to 3% of gross proceeds, as defined, for asset sales less than $50,000,000, and 1% of gross proceeds, as defined, for asset sales of $50,000,000 or more.
On December 22, 2014, the leasing agreements with Alexander’s were amended to eliminate the annual installment cap of $4,000,000. In addition, Alexander’s repaid to us the outstanding balance of $40,353,000.
Other Agreements
Building Maintenance Services (“BMS”), our wholly-owned subsidiary, supervises (i) cleaning, engineering and security services at Alexander’s 731 Lexington Avenue property and (ii) security services at Alexander’s Rego Park I and Rego Park II properties. During the years ended December 31, 2016, 2015 and 2014, we recognized $2,583,000, $2,221,000 and $2,318,000 of income, respectively, for these services.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investments in Partially Owned Entities - continued
Urban Edge Properties (“UE”) (NYSE: UE)
On January 15, 2015, we completed the spin-off of UE as a separate public company. As of December 31, 2016, we own 5,717,184 UE operating partnership units, representing a 5.4% ownership interest in UE. We account for our investment in UE under the equity method and record our share of UE’s net income or loss on a one-quarter lag basis. As of December 31, 2016, the fair value of our investment in UE, based on UE’s December 31, 2016 closing share price of $27.51, was $157,280,000, or $132,757,000 in excess of the carrying amount on our consolidated balance sheet. See Note 21 - Related Party Transactions for details of our relationship with UE.
Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)
As of December 31, 2016, we own 6,250,000 PREIT operating partnership units, representing an 8.0% interest in PREIT. We account for our investment in PREIT under the equity method and record our share of PREIT’s net income or loss on a one-quarter lag basis. As of December 31, 2016, the fair value of our investment in PREIT, based on PREIT’s December 31, 2016 closing share price of $18.96, was $118,500,000, or $4,383,000 below the carrying amount on our consolidated balance sheet. As of December 31, 2016, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $63,750,000. The majority of this basis difference resulted from the excess of the fair value of the PREIT operating units received over our share of the book value of PREIT’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of PREIT’s assets and liabilities, to real estate (land and buildings). We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This depreciation is not material to our share of equity in PREIT’s net loss. The basis difference related to the land will be recognized upon disposition of our investment.
One Park Avenue
On March 7, 2016, the joint venture, in which we have a 55% ownership interest, completed a $300,000,000 refinancing of One Park Avenue, a 949,000 square foot Manhattan office building. The loan matures in March 2021 and is interest only at LIBOR plus 1.75% (2.40% at December 31, 2016). The property was previously encumbered by a 4.995%, $250,000,000 mortgage which matured in March 2016.
Mezzanine Loan - New York
On March 17, 2016, we entered into a joint venture, in which we own a 33.3% interest, which owns a $150,000,000 mezzanine loan with an interest rate of LIBOR plus 8.88% and an initial maturity date in November 2016, with two three-month extension options. On November 9, 2016, the mezzanine loan was extended to May 2017 with an interest rate of LIBOR plus 9.42% (10.08% at December 31, 2016) during the extension period. As of December 31, 2016, the joint venture has fully funded its commitments. The joint venture’s investment is subordinate to $350,000,000 of third party debt. We account for our investment in the joint venture under the equity method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investments in Partially Owned Entities - continued
The Warner Building
On May 6, 2016, the joint venture, in which we have a 55% ownership interest, completed a $273,000,000 refinancing of The Warner Building, a 622,000 square foot Washington, DC office building. The loan matures in June 2023, has a fixed rate of 3.65%, is interest only for the first two years and amortizes based on a 30-year schedule beginning in year three. The property was previously encumbered by a 6.26%, $293,000,000 mortgage which matured in May 2016.
280 Park Avenue
On May 11, 2016, the joint venture, in which we have a 50% ownership interest, completed a $900,000,000 refinancing of 280 Park Avenue, a 1,249,000 square foot Manhattan office building. The three-year loan with four one-year extensions is interest only at LIBOR plus 2.00% (2.66% at December 31, 2016). The property was previously encumbered by a 6.35%, $721,000,000 mortgage which was scheduled to mature in June 2016.
7 West 34th Street
On May 16, 2016, we completed a $300,000,000 recourse financing of 7 West 34th Street, a 479,000 square foot Manhattan office building leased to Amazon. The ten-year loan is interest only at a fixed rate of 3.65% and matures in June 2026. Subsequently, on May 27, 2016, we sold a 47% ownership interest in this property and retained the remaining 53% interest. This transaction was based on a property value of approximately $561,000,000 or $1,176 per square foot. We received net proceeds of $127,382,000 from the sale and realized a net gain of $203,324,000, of which $159,511,000 was recognized in the second quarter of 2016 and is included in “net gain on disposition of wholly owned and partially owned assets” in our consolidated statements of income. The remaining net gain of $43,813,000 has been deferred until our guarantee of payment of loan principal and interest is removed or the loan is repaid. We realized a net tax gain of $90,017,000. We continue to manage and lease the property. We share control over major decisions with our joint venture partner. Accordingly, this property is accounted for under the equity method from the date of sale.
Broadway
On May 20, 2016, we contributed $19,650,000 for a 50.0% equity interest in a joint venture that will develop 606 Broadway, a 34,000 square foot office and retail building, located on Houston Street in Manhattan. The development cost of this project is estimated to be approximately $104,000,000. At closing, the joint venture obtained a $65,000,000 construction loan, of which approximately $25,800,000 was outstanding at December 31, 2016. The loan, which bears interest at LIBOR plus 3.00% (3.66% at December 31, 2016), matures in May 2019 with two one-year extension options. Because this joint venture is a VIE and we determined we are the primary beneficiary, we consolidate the accounts of this joint venture from the date of our investment.
50-70 West 93rd Street
On August 3, 2016, the joint venture, in which we have 49.9% ownership interest, completed an $80,000,000 refinancing of 50-70 West 93rd Street, a 326 unit Manhattan residential complex. The three-year loan with two one-year extensions is interest only at LIBOR plus 1.70% (2.40% at December 31, 2016). The property was previously encumbered by a $44,980,000 first mortgage at LIBOR plus 1.90% and an $18,481,000 second mortgage at LIBOR plus 1.65%, which were scheduled to mature in September 2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investments in Partially Owned Entities - continued
85 Tenth Avenue
In 2007, we made $50,000,000 of junior and senior mezzanine loans to the owner of 85 Tenth Avenue, a 626,000 square foot Manhattan office building. The loans were secured by equity interests in the property. In connection with the loans, we received the right to acquire a 49.9% equity interest in the property upon repayment of the loans. Pursuant to ASC 310-10-25-14, we accounted for our investment as an investment in real estate under the equity method. In February 2013, through a joint venture with an affiliate of the owner of 85 Tenth Avenue, we invested an additional $14,583,000 in senior mezzanine loans. In August 2014, we made an $8,413,000 preferred equity investment in the owner of 85 Tenth Avenue, bringing our total cash investment in 85 Tenth Owner to $72,996,000.
As of December 1, 2016, our share of the net losses of 85 Tenth Avenue reduced our basis to $30,936,000. On December 1, 2016, the owner of 85 Tenth Avenue completed a 10-year, 4.55% $625,000,000 refinancing of the property and we received net proceeds of $191,779,000 in repayment of our existing loans and preferred equity investments. We recognized $160,843,000 of income and no tax gain as a result of this transaction. In conjunction with the repayment of the loans, we exercised our right to receive a 49.9% interest in the property, which we are accounting for under the equity method.
Fairfax Square
On December 19, 2016, we completed the sale of our 20% interest in Fairfax Square to our joint venture partner for $15,500,000, which resulted in a net gain of approximately $15,302,000.
Below is a summary of our investments in partially owned entities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investments in Partially Owned Entities - continued
Below is a summary of our income (loss) from partially owned entities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investments in Partially Owned Entities - continued
Below is a summary of the debt of our partially owned entities as of December 31, 2016 and 2015, none of which is recourse to us.
Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities, was $5,062,697,000 and $4,432,078,000 as of December 31, 2016 and 2015, respectively.
Summary of Condensed Combined Financial Information
The following is a summary of condensed combined financial information for all of our partially owned entities, including Toys and Alexander’s, as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Dispositions
New York
On December 22, 2015, we completed the sale of 20 Broad Street, a 473,000 square foot office building in Manhattan for an aggregate consideration of $200,000,000. The total income from this transaction was approximately $157,000,000 comprised of approximately $142,000,000 from the gain on sale and $15,000,000 of lease termination income set forth in Note 14 - Fee and Other Income.
On December 18, 2014, we completed the sale of 1740 Broadway, a 601,000 square foot office building in Manhattan for $605,000,000. The sale resulted in net proceeds of approximately $580,000,000, after closing costs, and resulted in a financial statement gain of approximately $441,000,000. The tax gain of approximately $484,000,000, was deferred in like-kind exchanges, primarily for the acquisition of the St. Regis Fifth Avenue retail.
Washington, DC
On September 9, 2015, we completed the sale of 1750 Pennsylvania Avenue, NW, a 278,000 square foot office building in Washington, DC for $182,000,000, resulting in a net gain of approximately $102,000,000 which is included in “net gain on disposition of wholly owned and partially owned assets” on our consolidated statement of income. The tax gain of approximately $137,000,000 was deferred as part of a like-kind exchange. We are managing the property on behalf of the new owner.
Discontinued Operations
On January 15, 2015, we completed the spin-off of substantially all of our retail segment comprised of 79 strip shopping centers, three malls, a warehouse park and $225,000,000 of cash to UE. In addition, we completed the following retail property sales, substantially completing the exit of the retail strips and malls business.
On March 13, 2015, we sold our Geary Street, CA lease for $34,189,000, which resulted in a net gain of $21,376,000.
On March 31, 2015, we transferred the redeveloped Springfield Town Center, a 1,350,000 square foot mall located in Springfield, Fairfax County, Virginia, to PREIT in exchange for $485,313,000, comprised of $340,000,000 of cash and 6,250,000 of PREIT operating partnership units (valued at $145,313,000 or $23.25 per PREIT unit). The financial statement gain was $7,823,000, of which $7,192,000 was recognized in the first quarter of 2015 and the remaining $631,000 was deferred based on our ownership interest in PREIT. On March 31, 2018, we will be entitled to additional consideration of 50% of the increase in the value of Springfield Town Center, if any, over $465,000,000, calculated utilizing a 5.5% capitalization rate. In the first quarter of 2014, we recorded a non-cash impairment loss of $20,000,000 on Springfield Town Center which is included in “income from discontinued operations” on our consolidated statements of income.
On August 6, 2015, we sold our 50% interest in the Monmouth Mall in Eatontown, NJ to our joint venture partner for $38,000,000, valuing the property at approximately $229,000,000, which resulted in a net gain of $33,153,000.
On February 24, 2014, we completed the sale of Broadway Mall in Hicksville, Long Island, New York, for $94,000,000. The sale resulted in net proceeds of $92,174,000 after closing costs.
On July 8, 2014, we completed the sale of Beverly Connection, a 335,000 square foot power shopping center in Los Angeles, California, for $260,000,000, of which $239,000,000 was cash and $21,000,000 was 10-year mezzanine seller financing. The sale resulted in a net gain of $44,155,000.
In 2014, we also sold six strip shopping centers, in separate transactions, for an aggregate of $66,410,000 in cash, which resulted in a net gain aggregating $22,500,000.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Dispositions - continued
In accordance with the provisions of ASC 360, Property, Plant, and Equipment, we have reclassified the revenues and expenses of our strip shopping center and mall business which was spun off to UE on January 15, 2015 and other related retail assets that were sold or are currently held for sale to “income from discontinued operations” and the related assets and liabilities to “assets related to discontinued operations” and “liabilities related to discontinued operations” for all of the periods presented in the accompanying financial statements. The net gains resulting from the sale of these properties are included in “income from discontinued operations” on our consolidated statements of income. The tables below set forth the assets and liabilities related to discontinued operations at December 31, 2016 and 2015, and their combined results of operations for the years ended December 31, 2016, 2015 and 2014.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Identified Intangible Assets and Liabilities
The following summarizes our identified intangible assets (primarily acquired above-market leases) and liabilities (primarily acquired below-market leases) as of December 31, 2016 and 2015.
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $53,202,000, $78,749,000 and $37,516,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2017 is as follows:
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $29,543,000, $36,659,000 and $28,275,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Estimated annual amortization of all other identified intangible assets including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years commencing January 1, 2017 is as follows:
We are a tenant under ground leases at certain properties. Amortization of these acquired below-market leases, net of above-market leases, resulted in an increase to rent expense of $1,832,000, $1,832,000, and $1,832,000 for the years ended December 31, 2016, 2015 and 2014. Estimated annual amortization of these below-market leases, net of above-market leases, for each of the five succeeding years commencing January 1, 2017 is as follows:
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Debt
Unsecured Revolving Credit Facility
On November 7, 2016, we extended one of our two $1.25 billion unsecured revolving credit facilities from June 2017 to February 2021 with two six-month extension options. The interest rate on the extended facility was lowered from LIBOR plus 115 basis points to LIBOR plus 100 basis points. The facility fee remains unchanged at 20 basis points.
Secured Debt
On February 8, 2016, we completed a $700,000,000 refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five-year loan is interest only at LIBOR plus 1.75% (2.40% at December 31, 2016), which was swapped for four and a half years to a fixed rate of 2.56%. The Company realized net proceeds of approximately $330,000,000. The property was previously encumbered by a 5.65%, $353,000,000 mortgage which was scheduled to mature in March 2016.
On September 6, 2016, we completed a $675,000,000 refinancing of theMART, a 3,652,000 square foot commercial building in Chicago. The five-year loan is interest only and has a fixed rate of 2.70%. The Company realized net proceeds of approximately $124,000,000. The property was previously encumbered by a 5.57%, $550,000,000 mortgage which was scheduled to mature in December 2016.
On December 2, 2016, we completed a $400,000,000 refinancing of 350 Park Avenue, a 571,000 square foot Manhattan office building. The ten-year loan is interest only and has a fixed rate of 3.92%. The Company realized net proceeds of approximately $111,000,000. The property was previously encumbered by a 3.75%, $284,000,000 mortgage which was scheduled to mature in January 2017.
On March 15, 2016, we notified the servicer of the $678,000,000 non-recourse mortgage loan on the Skyline properties located in Fairfax, Virginia, that cash flow will be insufficient to service the debt and pay other property related costs and expenses and that we were not willing to fund additional cash shortfalls. Accordingly, at our request, the loan was transferred to the special servicer. Consequently, based on the shortened holding period for the underlying assets, we concluded that the excess of carrying amount over our estimate of fair value was not recoverable and recognized a $160,700,000 non-cash impairment loss in the first quarter of 2016. The Company’s estimate of fair value was derived from a discounted cash flow model based upon market conditions and expectations of growth and utilized unobservable quantitative inputs including a capitalization rate of 8.0% and a discount rate of 8.2%. In the second quarter of 2016, cash flow became insufficient to service the debt and we ceased making debt service payments. Pursuant to the loan agreement, the loan was in default, and was subject to incremental default interest which increased the weighted average interest rate from 2.97% to 4.51% while the outstanding balance remains unpaid. For the year ended December 31, 2016, we recognized $7,823,000 of default interest expense. On August 24, 2016, the Skyline properties were placed in receivership. On December 21, 2016, the disposition of the Skyline properties was completed by the receiver. In connection therewith, the Skyline properties’ assets (approximately $236,535,000) and liabilities (approximately aggregating $724,412,000), were removed from our consolidated balance sheet which resulted in a net gain of $487,877,000. There was no taxable income related to this transaction.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Debt - continued
The following is a summary of our debt:
The net carrying amount of properties collateralizing the mortgages payable amounted to $10.7 billion at December 31, 2016. As of December 31, 2016, the principal repayments required for the next five years and thereafter are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Redeemable Noncontrolling Interests/Redeemable Partnership Units
Redeemable noncontrolling interests on Vornado’s consolidated balance sheets and redeemable partnership units on the consolidated balance sheets of the Operating Partnership are primarily comprised of Class A Operating Partnership units held by third parties and are recorded at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to “additional capital” in Vornado’s consolidated statements of changes in equity and to “partners’ capital” on the consolidated balance sheets of the Operating Partnership. Class A units may be tendered for redemption to the Operating Partnership for cash; Vornado, at its option, may assume that obligation and pay the holder either cash or Vornado common shares on a one-for-one basis. Because the number of Vornado common shares outstanding at all times equals the number of Class A units owned by Vornado, the redemption value of each Class A unit is equivalent to the market value of one Vornado common share, and the quarterly distribution to a Class A unitholder is equal to the quarterly dividend paid to a Vornado common shareholder.
Below are the details of redeemable noncontrolling interests/redeemable partnership units as of December 31, 2016 and 2015.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Redeemable Noncontrolling Interests/Redeemable Partnership Units - continued
Redeemable noncontrolling interests/redeemable partnership units exclude our Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units, as they are accounted for as liabilities in accordance with ASC 480, Distinguishing Liabilities and Equity, because of their possible settlement by issuing a variable number of Vornado common shares. Accordingly, the fair value of these units is included as a component of “other liabilities” on our consolidated balance sheets and aggregated $50,561,000 as of December 31, 2016 and 2015, respectively. Changes in the value from period to period, if any, are charged to “interest and debt expense” on our consolidated statements of income.
10. Shareholders’ Equity/Partners’ Capital
Common Shares (Vornado Realty Trust)
As of December 31, 2016, there were 189,100,876 common shares outstanding. During 2016, we paid an aggregate of $475,961,000 of common dividends comprised of quarterly common dividends of $0.63 per share.
Class A Units (Vornado Realty L.P.)
As of December 31, 2016, there were 189,100,876 Class A units outstanding that were held by Vornado. These units are classified as “partners’ capital” on the consolidated balance sheets of the Operating Partnership. As of December 31, 2016, there were 12,197,162 Class A units outstanding, that were held by third parties. These units are classified outside of “partners’ capital” as “redeemable partnership units” on the consolidated balance sheets of the Operating Partnership (See Note 9 - Redeemable Noncontrolling Interests/Redeemable Partnership Units). During 2016, the Operating Partnership paid an aggregate of $475,961,000 of distributions to Vornado comprised of quarterly common distributions of $0.63 per unit.
Preferred Share/Preferred Units
On September 1, 2016, we redeemed all of the outstanding 6.875% Series J cumulative redeemable preferred shares/units at their redemption price of $25.00 per share/unit, or $246,250,000 in the aggregate, plus accrued and unpaid dividends/distributions through the date of redemption. In connection therewith, we expensed $7,408,000 of issuance costs, which reduced net income attributable to common shareholders and net income attributable to Class A unitholders in the twelve months ended December 31, 2016. These costs had been initially recorded as a reduction of shareholders’ equity and partners’ capital.
The following table sets forth the details of our preferred shares of beneficial interest and the preferred units of the Operating Partnership as of December 31, 2016 and 2015.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Shareholders’ Equity/Partners’ Capital - continued
Accumulated Other Comprehensive Income (Loss)
The following tables set forth the changes in accumulated other comprehensive income (loss) by component.
11. Variable Interest Entities (“VIEs”)
Unconsolidated VIEs
As of December 31, 2016 and 2015, we have several unconsolidated VIEs. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities does not give us power over decisions that significantly affect these entities’ economic performance. We account for our investment in these entities under the equity method (see Note 5 - Investments in Partially Owned Entities). As of December 31, 2016 and 2015, the net carrying amount of our investments in these entities was $392,150,000 and $414,003,000, respectively, and our maximum exposure to loss in these entities, is limited to our investments.
Consolidated VIEs
We adopted ASU 2015-02 on January 1, 2016 which resulted in the identification of several VIEs which, prior to the adoption of ASU 2015-02, were consolidated under the voting interest model. Vornado’s most significant consolidated VIEs are our Operating Partnership, real estate fund investments, and certain properties that have non-controlling interests. These entities are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. We consolidate these entities because we control all significant business activities.
As of December 31, 2016, the total assets and liabilities of our consolidated VIEs, excluding the Operating Partnership, are $3,638,483,000 and $1,762,322,000, respectively.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Fair Value Measurements
ASC 820 defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) marketable securities, (ii) real estate fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheet), (iv) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units), and (v) interest rate swaps. The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy at December 31, 2016 and 2015, respectively.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Fair Value Measurements - continued
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Real Estate Fund Investments
At December 31, 2016, we had six real estate fund investments with an aggregate fair value of $462,132,000, or $153,197,000 in excess of cost. These investments are classified as Level 3. We use a discounted cash flow valuation technique to estimate the fair value of each of these investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior management at each reporting period. The discounted cash flow valuation technique requires us to estimate cash flows for each investment over the anticipated holding period, which currently ranges from 1.0 to 4.0 years. Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit. Property rental revenue is based on leases currently in place and our estimates for future leasing activity, which are based on current market rents for similar space plus a projected growth factor. Similarly, estimated operating expenses and real estate taxes are based on amounts incurred in the current period plus a projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated selling costs.
The fair value of each property is calculated by discounting the future cash flows (including the projected sales proceeds), using an appropriate discount rate and then reduced by the property’s outstanding debt, if any, to determine the fair value of the equity in each investment. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, and current and anticipated market conditions, industry publications and from the experience of our Acquisitions and Capital Markets departments. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these real estate fund investments at December 31, 2016.
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate, may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.
The table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3, for the years ended December 31, 2016 and 2015.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Fair Value Measurements - continued
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued
Deferred Compensation Plan Assets
Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The third-party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements.
The table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3, for the years ended December 31, 2016 and 2015.
Fair Value Measurements on a Nonrecurring Basis
There were no assets measured at fair value on a nonrecurring basis on our consolidated balance sheets at December 31, 2016 and 2015.
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), and our secured and unsecured debt. Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument. The fair value of cash equivalents and borrowings under our unsecured revolving credit facilities and unsecured term loan are classified as Level 1. The fair value of our secured debt and senior unsecured debt are classified as Level 2. The table below summarizes the carrying amounts and estimated fair value of these financial instruments as of December 31, 2016 and 2015.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Stock-based Compensation
Vornado’s 2010 Omnibus Share Plan (the “Plan”) provides the Compensation Committee of Vornado’s Board of Trustees (the “Committee”) the ability to grant incentive and non-qualified Vornado stock options, restricted stock, restricted Operating Partnership units and out-performance plan awards to certain of our employees and officers. Under the Plan, awards may be granted up to a maximum of 6,000,000 Vornado shares, if all awards granted are Full Value Awards, as defined, and up to 12,000,000 Vornado shares, if all of the awards granted are Not Full Value Awards, as defined, plus shares in respect of awards forfeited after May 2010 that were issued pursuant to Vornado’s 2002 Omnibus Share Plan. Full Value Awards are awards of securities, such as Vornado restricted shares, that, if all vesting requirements are met, do not require the payment of an exercise price or strike price to acquire the securities. Not Full Value Awards are awards of securities, such as Vornado stock options, that do require the payment of an exercise price or strike price. This means, for example, if the Committee were to award only Vornado restricted shares, it could award up to 6,000,000 Vornado restricted shares. On the other hand, if the Committee were to award only Vornado stock options, it could award options to purchase up to 12,000,000 Vornado common shares (at the applicable exercise price). The Committee may also issue any combination of awards under the Plan, with reductions in availability of future awards made in accordance with the above limitations. As of December 31, 2016, Vornado has approximately 2,929,000 shares available for future grants under the Plan, if all awards granted are Full Value Awards, as defined.
In the years ended December 31, 2016, 2015 and 2014, we recognized an aggregate of $33,980,000, $39,846,000 and $36,641,000, respectively, of stock-based compensation expense, which is included as a component of “general and administrative” expenses on our consolidated statements of income. The year ended December 31, 2015 includes $7,834,000 from the acceleration of the recognition of compensation expense related to 2013-2015 Out-Performance Plans due to the modification of the vesting criteria of awards such that they will fully vest at age 65. The details of the various components of our stock-based compensation are discussed on the following pages.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Stock-based Compensation - continued
Out-Performance Plans (“the OPPs”)
OPPs are multi-year, performance-based equity compensation plans under which participants have the opportunity to earn a class of units (“OPP units”) of the Operating Partnership if, and only if, Vornado outperforms a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to a relative TSR in any year during the requisite performance periods as described below. OPP units, if earned, become convertible into Class A units of the Operating Partnership (and ultimately into Vornado common shares) following vesting.
Awards under the 2014 OPP have been 99.5% earned. Awards under the 2015 and 2016 OPP may be earned if Vornado (i) achieves a TSR level greater than 7% per annum, or 21% over the three-year performance measurement periods (the “Absolute Component”), and/or (ii) achieves a TSR above that of the SNL US REIT Index (“Index”) over the three-year performance measurement periods (the “Relative Component”). To the extent awards would be earned under the Absolute Component of each of the OPPs, but Vornado underperforms the Index, such awards would be reduced (and potentially fully negated) based on the degree to which Vornado underperforms the Index. In certain circumstances, in the event Vornado outperforms the Index but awards would not otherwise be fully earned under the Absolute Component, awards may still be earned or increased under the Relative Component. To the extent awards would otherwise be earned under the Relative Component but Vornado fails to achieve at least a 6% per annum absolute TSR, such awards earned under the Relative Component would be reduced based on Vornado’s absolute TSR, with no awards being earned in the event Vornado’s TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which Vornado may outperform the Index. Dividends on awards issued and distributions on awards earned accrue during the performance period.
If the designated performance objectives are achieved, OPP units are also subject to time-based vesting requirements. Awards earned under the OPPs vest 33.33% in each of years three, four and five. Vornado’s senior executive officers are required to hold earned 2016, 2015 and 2014 OPP awards (or related equity) for at least one year following vesting.
Below is the summary of the OPP units granted during the years December 31, 2016, 2015, and 2014.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Stock-based Compensation - continued
Vornado Stock Options
Vornado stock options are granted at an exercise price equal to the average of the high and low market price of Vornado’s common shares on the NYSE on the date of grant, generally vest over four years and expire 10 years from the date of grant. Compensation expense related to Vornado stock option awards is recognized on a straight-line basis over the vesting period. In the years ended December 31, 2016, 2015 and 2014, we recognized $937,000, $1,298,000 and $4,550,000, respectively, of compensation expense related to Vornado stock options that vested during each year. As of December 31, 2016, there was $1,335,000 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.7 years.
Below is a summary of Vornado’s stock option activity for the year ended December 31, 2016.
The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions for grants in the years ended December 31, 2016, 2015 and 2014.
The weighted average grant date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $22.14, $28.85 and $20.31, respectively. Cash received from option exercises for the years ended December 31, 2016, 2015 and 2014 was $6,825,000, $15,343,000 and $17,441,000, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $5,519,000, $3,873,000 and $18,223,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Stock-based Compensation - continued
Vornado Restricted Stock
Vornado restricted stock awards are granted at the average of the high and low market price of Vornado’s common shares on the NYSE on the date of grant and generally vest over four years. Compensation expense related to Vornado’s restricted stock awards is recognized on a straight-line basis over the vesting period. In the years ended December 31, 2016, 2015 and 2014, we recognized $851,000, $837,000 and $1,303,000, respectively, of compensation expense related to Vornado restricted stock awards that vested during each year. As of December 31, 2016, there was $1,337,000 of total unrecognized compensation cost related to unvested Vornado restricted stock, which is expected to be recognized over a weighted-average period of 1.7 years. Dividends paid on unvested Vornado restricted stock are charged directly to retained earnings and amounted to $56,000, $58,000 and $88,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Below is a summary of Vornado’s restricted stock activity under the Plan for the year ended December 31, 2016.
Vornado restricted stock awards granted in 2016, 2015 and 2014 had a fair value of $927,000, $906,000 and $1,048,000, respectively. The fair value of restricted stock that vested during the years ended December 31, 2016, 2015 and 2014 was $641,000, $882,000 and $1,174,000, respectively.
Restricted Operating Partnership Units (“OP Units”)
OP Units are granted at the average of the high and low market price of Vornado’s common shares on the NYSE on the date of grant, vest ratably over four years and are subject to a taxable book-up event, as defined. Compensation expense related to OP Units is recognized ratably over the vesting period using a graded vesting attribution model. In the years ended December 31, 2016, 2015 and 2014, we recognized $21,136,000, $22,180,000 and $24,603,000, respectively, of compensation expense related to OP Units that vested during each year. As of December 31, 2016, there was $15,670,000 of total unrecognized compensation cost related to unvested OP Units, which is expected to be recognized over a weighted-average period of 1.6 years. Distributions paid on unvested OP Units are charged to “net income attributable to noncontrolling interests in the Operating Partnership” on Vornado’s consolidated statements of income and to “preferred unit distributions” on the Operating Partnership’s consolidated statements of income and amounted to $1,968,000, $2,414,000 and $2,866,000 in the years ended December 31, 2016, 2015 and 2014, respectively.
Below is a summary of restricted OP unit activity under the Plan for the year ended December 31, 2016.
OP Units granted in 2016, 2015 and 2014 had a fair value of $18,492,000, $20,293,000 and $19,669,000, respectively. The fair value of OP Units that vested during the years ended December 31, 2016, 2015 and 2014 was $22,701,000, $20,072,000 and $22,758,000, respectively.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Fee and Other Income
The following table sets forth the details of our fee and other income:
The above table excludes fee income from partially owned entities, which is included in “income (loss) from partially owned entities” (see Note 5 - Investments in Partially Owned Entities).
15. Interest and Other Investment Income, Net
The following table sets forth the details of our interest and other investment income, net:
16. Interest and Debt Expense
The following table sets forth the details of our interest and debt expense.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Income Per Share/Income Per Class A Unit
Vornado Realty Trust
The following table provides a reconciliation of both net income and the number of common shares used in the computation of (i) basic income per common share - which includes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and (ii) diluted income per common share - which includes the weighted average common shares and dilutive share equivalents. Dilutive share equivalents may include our Series A convertible preferred shares, employee stock options and restricted stock awards.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Income Per Share/Income Per Class A Unit - continued
Vornado Realty L.P.
The following table provides a reconciliation of both net income and the number of Class A units used in the computation of (i) basic income per Class A unit - which includes the weighted average number of Class A units outstanding without regard to dilutive potential common units, and (ii) diluted income per Class A unit - which includes the weighted average common units and dilutive unit equivalents. Dilutive unit equivalents may include our Series A convertible preferred units, Vornado stock options and restricted unit awards.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Leases
As lessor:
We lease space to tenants under operating leases. Most of the leases provide for the payment of fixed base rentals payable monthly in advance. Office building leases generally require the tenants to reimburse us for operating costs and real estate taxes above their base year costs. Certain leases provide for pass-through to tenants the tenant’s share of real estate taxes, insurance and maintenance. Certain leases also provide for the payment by the lessee of additional rent based on a percentage of the tenants’ sales. As of December 31, 2016, future base rental revenue under non-cancelable operating leases, excluding rents for leases with an original term of less than one year and rents resulting from the exercise of renewal options, are as follows:
These amounts do not include percentage rentals based on tenants’ sales. These percentage rents approximated $8,037,000, $5,760,000 and $6,343,000, for the years ended December 31, 2016, 2015 and 2014, respectively.
None of our tenants accounted for more than 10% of total revenues in any of the years ended December 31, 2016, 2015 and 2014.
As lessee:
We are a tenant under operating leases for certain properties. These leases have terms that expire during the next thirty years. Future minimum lease payments under operating leases at December 31, 2016 are as follows:
Rent expense, a component of “operating expenses” on our consolidated statements of income, was $42,024,000, $38,887,000 and $36,315,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Leases - continued
1535 Broadway
We are a lessee under a long-term capital lease for the retail and signage components of the Marriott Marquis Times Square Hotel at 1535 Broadway. At inception of the lease in 2012, we recorded a $240,000,000 capital lease asset and liability on our consolidated balance sheet based on the present value of future minimum lease payments. The capital lease asset is being depreciated on a straight-line basis over the estimated life of the asset and the related expense is included in “depreciation and amortization” on our consolidated statements of income. During 2016, we substantially completed the redevelopment of the leased space, as required under the lease, at a total redevelopment cost of approximately $194,147,000. The lease contains a put/call purchase option under which the lessor may exercise its “put” on predetermined dates after March 31, 2018 and we may exercise our “call” at any time after July 30, 2027 and before January 3, 2032.
As of December 31, 2016, future minimum lease payments under this capital lease are as follows:
As of December 31, 2016, the gross carrying amount of the property leased under the capital lease was $434,147,000, which is a component of “buildings and improvements” on our consolidated balance sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. Multiemployer Benefit Plans
Our subsidiaries make contributions to certain multiemployer defined benefit plans (“Multiemployer Pension Plans”) and health plans (“Multiemployer Health Plans”) for our union represented employees, pursuant to the respective collective bargaining agreements.
Multiemployer Pension Plans
Multiemployer Pension Plans differ from single-employer pension plans in that (i) contributions to multiemployer plans may be used to provide benefits to employees of other participating employers and (ii) if other participating employers fail to make their contributions, each of our participating subsidiaries may be required to bear its then pro rata share of unfunded obligations. If a participating subsidiary withdraws from a plan in which it participates, it may be subject to a withdrawal liability. As of December 31, 2016, our subsidiaries’ participation in these plans was not significant to our consolidated financial statements.
In the years ended December 31, 2016, 2015 and 2014, our subsidiaries contributed $9,479,000, $10,878,000 and $11,431,000, respectively, towards Multiemployer Pension Plans, which is included as a component of “operating” expenses on our consolidated statements of income. Our subsidiaries’ contributions did not represent more than 5% of total employer contributions in any of these plans for the years ended December 31, 2016, 2015 and 2014.
Multiemployer Health Plans
Multiemployer Health Plans in which our subsidiaries participate provide health benefits to eligible active and retired employees. In the years ended December 31, 2016, 2015 and 2014, our subsidiaries contributed $32,998,000, $29,269,000 and $29,073,000, respectively, towards these plans, which is included as a component of “operating” expenses on our consolidated statements of income.
20. Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all risk property and rental value insurance with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as flood and earthquake. Our California properties have earthquake insurance with coverage of $180,000,000 per occurrence and in the annual aggregate, subject to a deductible in the amount of 5% of the value of the affected property. We maintain coverage for terrorism acts with limits of $4.0 billion per occurrence and in the aggregate, and $2.0 billion per occurrence and in the aggregate for terrorism involving nuclear, biological, chemical and radiological (“NBCR”) terrorism events, as defined by Terrorism Risk Insurance Program Reauthorization Act of 2015, which expires in December 2020.
Penn Plaza Insurance Company, LLC (“PPIC”), our wholly owned consolidated subsidiary, acts as a re-insurer with respect to a portion of all risk property and rental value insurance and a portion of our earthquake insurance coverage, and as a direct insurer for coverage for acts of terrorism including NBCR acts. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to PPIC. For NBCR acts, PPIC is responsible for a deductible of $1,622,000 ($1,976,000 for 2017) and 16% (17% for 2017) of the balance of a covered loss and the Federal government is responsible for the remaining portion of a covered loss. We are ultimately responsible for any loss incurred by PPIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future.
Our debt instruments, consisting of mortgage loans secured by our properties which are non-recourse to us, senior unsecured notes and revolving credit agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Commitments and Contingencies - continued
Other Commitments and Contingencies
We are from time to time involved in legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
Our mortgage loans are non-recourse to us. However, in certain cases we have provided guarantees or master leased tenant space. These guarantees and master leases terminate either upon the satisfaction of specified circumstances or repayment of the underlying loans. As of December 31, 2016, the aggregate dollar amount of these guarantees and master leases is approximately $737,000,000.
As of December 31, 2016, $19,847,000 of letters of credit was outstanding under one of our unsecured revolving credit facilities. Our unsecured revolving credit facilities contain financial covenants that require us to maintain minimum interest coverage and maximum debt to market capitalization ratios, and provide for higher interest rates in the event of a decline in our ratings below Baa3/BBB. Our unsecured revolving credit facilities also contain customary conditions precedent to borrowing, including representations and warranties, and also contain customary events of default that could give rise to accelerated repayment, including such items as failure to pay interest or principal.
As of December 31, 2016, we expect to fund additional capital to certain of our partially owned entities aggregating approximately $173,000,000, which includes our share of the commitments of the Farley Post Office redevelopment joint venture.
As of December 31, 2016, we have construction commitments aggregating $653,940,000.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. Related Party Transactions
Alexander’s, Inc.
We own 32.4% of Alexander’s. Steven Roth, the Chairman of Vornado’s Board of Trustee’s and its Chief Executive Officer is also the Chairman of the Board and Chief Executive Officer of Alexander’s. We provide various services to Alexander’s in accordance with management, development and leasing agreements. These agreements are described in Note 5 - Investments in Partially Owned Entities.
Urban Edge Properties
We own 5.4% of UE. During 2015, we provided transition services to UE, primarily for information technology, human resources, tax and financial planning. In 2016, we continue to provide UE transition services for information technology and human resources. UE is providing us with leasing, development and property management services for certain of our retail properties including the retail assets of Alexander’s. Fees to UE for servicing the retail assets of Alexander’s are similar to the fees that we are receiving from Alexander’s as described in Note 5 - Investments in Partially Owned Entities.
Interstate Properties (“Interstate”)
Interstate is a general partnership in which Mr. Roth is the managing general partner. David Mandelbaum and Russell B. Wight, Jr., Trustees of Vornado and Directors of Alexander’s, are Interstate’s two other general partners. As of December 31, 2016, Interstate and its partners beneficially owned an aggregate of approximately 7.1% of the common shares of beneficial interest of Vornado and 26.3% of Alexander’s common stock.
We manage and lease the real estate assets of Interstate pursuant to a management agreement for which we receive an annual fee equal to 4% of annual base rent and percentage rent. 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. We believe, based upon comparable fees charged by other real estate companies, that the management agreement terms are fair to us. We earned $521,000, $541,000, and $535,000 of management fees under the agreement for the years ended December 31, 2016, 2015 and 2014, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. Summary of Quarterly Results (Unaudited)
Vornado Realty Trust
The following summary represents the results of operations for each quarter in 2016 and 2015:
Vornado Realty L.P.
The following summary represents the results of operations for each quarter in 2016 and 2015:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. Segment Information
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the year ended December 31, 2016.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. Segment Information - continued
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the year ended December 31, 2015.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. Segment Information - continued
Below is a summary of net income and a reconciliation of net income to EBITDA(1) by segment for the year ended December 31, 2014.
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. Segment Information - continued
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. Segment Information - continued
VORNADO REALTY TRUST AND VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. Subsequent Events
2017 Out-Performance Plan
On January 13, 2017, the Committee approved the 2017 Outperformance Plan, a multi-year, performance-based equity compensation plan (the “2017 OPP”). Awards under the 2017 OPP constitute awards under Vornado’s shareholder approved 2010 Omnibus Share Plan. Under the 2017 OPP, participants have the opportunity to earn compensation payable in the form of equity awards if, and only if, Vornado outperforms a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to relative total TSR during a three-year performance period. Specifically, awards under our 2017 OPP may potentially be earned if Vornado (i) achieves a TSR level greater than 7% per annum, or 21% over the three-year performance period (the “Absolute Component”) and/or (ii) achieves a TSR above that of the SNL US REIT Index (the “Index”) over a three-year performance period (the “Relative Component”). To the extent awards would be earned under the Absolute Component but Vornado underperforms the Index, such awards earned under the Absolute Component would be reduced (and potentially fully negated) based on the degree to which Vornado underperforms the Index. In certain circumstances, in the event Vornado outperforms the Index but awards would not otherwise be earned under the Absolute Component, awards may still be earned under the Relative Component. Moreover, to the extent awards would otherwise be earned under the Relative Component but Vornado fails to achieve at least a 3% per annum absolute TSR level, such awards earned under the Relative Component would be reduced based on Vornado’s absolute TSR performance, with no awards being earned in the event Vornado’s TSR during the applicable measurement period is 0% or negative, irrespective of the degree to which it may outperform the Index. If the designated performance objectives are achieved, OPP Units are also subject to time-based vesting requirements; 33.33% in each of years three, four and five. Dividend payments on awards issued accrue during the performance period and are paid to participants if, and only if, awards are ultimately earned based on the achievement of the designated performance objectives. In addition, all of Vornado’s senior executive officers are required to hold any earned OPP awards (or related equity) for at least one year following vesting.
ITEM 9. changes in and disagreements with accountants on accounting and financial disclosure
None.
ITEM 9A. Controls and procedures
Vornado Realty Trust
Disclosure Controls and Procedures: Our management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fourth quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of Vornado Realty Trust, together with its consolidated subsidiaries (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of Vornado’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2016, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2016 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and our trustees; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the following page, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees
Vornado Realty Trust
New York, New York
We have audited the internal control over financial reporting of Vornado Realty Trust, together with its consolidated subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of trustees, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016 of the Company and our report dated February 13, 2017 expressed an unqualified opinion on those financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 13, 2017
ITEM 9A. CONTROLS AND PROCEDURES - continued
Vornado Realty L.P.
Disclosure Controls and Procedures: Vornado Realty L.P.’s management, with the participation of Vornado’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, Vornado’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fourth quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of Vornado Realty Trust, sole general partner of Vornado Realty L.P., together with Vornado Realty L.P.’s consolidated subsidiaries (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of Vornado’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2016, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2016 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and Vornado’s trustees; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the following page, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Partners
Vornado Realty L.P.
New York, New York
We have audited the internal control over financial reporting of Vornado Realty L.P. and consolidated subsidiaries (the “Partnership”) as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management of Vornado Realty Trust, sole general partner of the Partnership, is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of trustees, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of Vornado Realty Trust; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016 of the Partnership and our report dated February 13, 2017 expressed an unqualified opinion on those financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 13, 2017
ITEM 9B. Other information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information relating to trustees of Vornado, the Operating Partnership’s sole general partner, including its audit committee and audit committee financial expert, will be contained in Vornado’s definitive Proxy Statement involving the election of Vornado’s trustees under the caption “Election of Trustees” which Vornado will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after December 31, 2016, and such information is incorporated herein by reference. Also incorporated herein by reference is the information under the caption “16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement.
The following is a list of the names, ages, principal occupations and positions with Vornado of the executive officers of Vornado and the positions held by such officers during the past five years. All executive officers of Vornado have terms of office that run until the next succeeding meeting of the Board of Trustees of Vornado following the Annual Meeting of Vornado’s Shareholders unless they are removed sooner by Vornado’s Board.
PRINCIPAL OCCUPATION, POSITION AND OFFICE
Name
Age
(Current and during past five years with Vornado unless otherwise stated)
Steven Roth
Chairman of the Board; Chief Executive Officer since April 2013 and from May 1989 to May 2009; Managing General Partner of Interstate Properties, an owner of shopping centers and an investor in securities and partnerships; Chief Executive Officer of Alexander’s, Inc. since March 1995, a Director since 1989, and Chairman since May 2004.
Michael J. Franco
Executive Vice President - Chief Investment Officer since April 2015; Executive Vice President - Head of Acquisitions and Capital Markets since November 2010; Managing Director (2003-2010) and Executive Director (2001-2003) of the Real Estate Investing Group of Morgan Stanley.
David R. Greenbaum
President of the New York Division since April 1997 (date of our acquisition); President of Mendik Realty (the predecessor to the New York Office division) from 1990 until April 1997.
Joseph Macnow
Executive Vice President - Finance and Chief Administrative Officer since June 2013; Executive Vice President - Finance and Administration from January 1998 to June 2013, and Chief Financial Officer from March 2001 to June 2013; Executive Vice President and Chief Financial Officer of Alexander's, Inc. since August 1995.
Mitchell N. Schear
President of Vornado/Charles E. Smith L.P. (our Washington, DC division) since April 2003; President of the Kaempfer Company from 1998 to April 2003 (date acquired by us).
Stephen W. Theriot
Chief Financial Officer since June 2013; Assistant Treasurer of Alexander's, Inc. since May 2014; Partner at Deloitte & Touche LLP (1994 - 2013) and most recently, leader of its Northeast Real Estate practice (2011 - 2013).
Vornado, the Operating Partnership’s sole general partner, has adopted a Code of Business Conduct and Ethics that applies to, among others, Steven Roth, Vornado’s principal executive officer, and Stephen W. Theriot, Vornado’s principal financial and accounting officer. This Code is available on Vornado’s website at www.vno.com.
ITEM 11. Executive Compensation
Information relating to Vornado’s executive officer and trustee compensation will be contained in Vornado’s Proxy Statement referred to above in Item 10, “Directors, Executive Officers and Corporate Governance,” under the caption “Executive Compensation” and such information is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners and management and related stockholder matters will be contained in Vornado’s Proxy Statement referred to in Item 10, “Directors, Executive Officers and Corporate Governance,” under the caption “Principal Security Holders” and such information is incorporated herein by reference.
Equity compensation plan information
The following table provides information as of December 31, 2016 regarding Vornado’s equity compensation plans.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to certain relationships and related transactions, and director independence will be contained in Vornado’s Proxy Statement referred to in Item 10, “Directors, Executive Officers and Corporate Governance,” under the caption “Certain Relationships and Related Transactions” and such information is incorporated herein by reference.
ITEM 14. Principal Accounting Fees and Services
Information relating to principal accounting fees and services will be contained in Vornado’s Proxy Statement referred to in Item 10, “Directors, Executive Officers and Corporate Governance,” under the caption “Ratification of Selection of Independent Auditors” and such information is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. The consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K.
The following financial statement schedules should be read in conjunction with the financial statements included in Item 8 of this Annual Report on Form 10-K.
Pages in this
Annual Report
on Form 10-K
II--Valuation and Qualifying Accounts--years ended December 31, 2016, 2015 and 2014
III--Real Estate and Accumulated Depreciation as of December 31, 2016
Schedules other than those listed above are omitted because they are not applicable or the information required is included in the consolidated financial statements or the notes thereto.
The following exhibits listed on the Exhibit Index, which is incorporated herein by reference, are filed with this Annual Report on Form 10-K.
Exhibit No.
2.1
Master Transaction Agreement, dated as of October 31, 2016, by and among Vornado Realty Trust, Vornado Realty L.P., JBG Properties, Inc., JBG/Operating Partners, L.P., certain affiliates of JBG Properties Inc. and JBG/Operating Partners set forth on Schedule A thereto, JBG SMITH Properties and JBG SMITH Properties LP
10.29
Amended and Restated Revolving Credit Agreement dated as of November 7, 2016, among Vornado Realty L.P. as Borrower,Vornado Realty Trust as General Partner, the Banks listed on the signature pages thereof, and JPMorgan Chase Bank N.A. as Administrative Agent for the Banks.
12.1
Computation of Ratios for Vornado Realty Trust
12.2
Computation of Ratios for Vornado Realty L.P.
Subsidiaries of Vornado Realty Trust and Vornado Realty L.P.
23.1
Consent of Independent Registered Public Accounting Firm for Vornado Realty Trust
23.2
Consent of Independent Registered Public Accounting Firm for Vornado Realty L.P.
31.1
Rule 13a-14 (a) Certification of Chief Executive Officer of Vornado Realty Trust
31.2
Rule 13a-14 (a) Certification of Chief Financial Officer of Vornado Realty Trust
31.3
Rule 13a-14 (a) Certification of Chief Executive Officer of Vornado Realty L.P.
31.4
Rule 13a-14 (a) Certification of Chief Financial Officer of Vornado Realty L.P.
32.1
Section 1350 Certification of the Chief Executive Officer of Vornado Realty Trust
32.2
Section 1350 Certification of the Chief Financial Officer of Vornado Realty Trust
32.3
Section 1350 Certification of the Chief Executive Officer of Vornado Realty L.P.
32.4
Section 1350 Certification of the Chief Financial Officer of Vornado Realty L.P.
101.INS
XBRL Instance Document of Vornado Realty Trust and Vornado Realty L.P.
101.SCH
XBRL Taxonomy Extension Schema of Vornado Realty Trust and Vornado Realty L.P.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.DEF
XBRL Taxonomy Extension Definition Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.LAB
XBRL Taxonomy Extension Label Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VORNADO REALTY TRUST
(Registrant)
Date: February 13, 2017
By:
/s/ Stephen W. Theriot
Stephen W. Theriot, Chief Financial Officer
(duly authorized officer and principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
By:
/s/Steven Roth
Chairman of the Board of Trustees
February 13, 2017
(Steven Roth)
and Chief Executive Officer
By:
/s/Candace K. Beinecke
Trustee
February 13, 2017
(Candace K. Beinecke)
By:
/s/Michael D. Fascitelli
Trustee
February 13, 2017
(Michael D. Fascitelli)
By:
/s/Robert P. Kogod
Trustee
February 13, 2017
(Robert P. Kogod)
By:
/s/Michael Lynne
Trustee
February 13, 2017
(Michael Lynne)
By:
/s/David Mandelbaum
Trustee
February 13, 2017
(David Mandelbaum)
By:
/s/Mandakini Puri
Trustee
February 13, 2017
(Mandakini Puri)
By:
/s/Daniel R. Tisch
Trustee
February 13, 2017
(Daniel R. Tisch)
By:
/s/Richard R. West
Trustee
February 13, 2017
(Richard R. West)
By:
/s/Russell B. Wight
Trustee
February 13, 2017
(Russell B. Wight, Jr.)
By:
/s/Stephen W. Theriot
Chief Financial Officer
February 13, 2017
(Stephen W. Theriot)
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VORNADO REALTY L.P.
(Registrant)
Date: February 13, 2017
By:
/s/ Stephen W. Theriot
Stephen W. Theriot, Chief Financial Officer of
Vornado Realty Trust, sole general partner of
Vornado Realty L.P. (duly authorized officer and principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
By:
/s/Steven Roth
Chairman of the Board of Trustees and
February 13, 2017
(Steven Roth)
Chief Executive Officer of Vornado Realty Trust
By:
/s/Candace K. Beinecke
Trustee of Vornado Realty Trust
February 13, 2017
(Candace K. Beinecke)
By:
/s/Michael D. Fascitelli
Trustee of Vornado Realty Trust
February 13, 2017
(Michael D. Fascitelli)
By:
/s/Robert P. Kogod
Trustee of Vornado Realty Trust
February 13, 2017
(Robert P. Kogod)
By:
/s/Michael Lynne
Trustee of Vornado Realty Trust
February 13, 2017
(Michael Lynne)
By:
/s/David Mandelbaum
Trustee of Vornado Realty Trust
February 13, 2017
(David Mandelbaum)
By:
/s/Mandakini Puri
Trustee of Vornado Realty Trust
February 13, 2017
(Mandakini Puri)
By:
/s/Daniel R. Tisch
Trustee of Vornado Realty Trust
February 13, 2017
(Daniel R. Tisch)
By:
/s/Richard R. West
Trustee of Vornado Realty Trust
February 13, 2017
(Richard R. West)
By:
/s/Russell B. Wight
Trustee of Vornado Realty Trust
February 13, 2017
(Russell B. Wight, Jr.)
By:
/s/Stephen W. Theriot
Chief Financial Officer of Vornado Realty Trust
February 13, 2017
(Stephen W. Theriot)
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit No.
2.1
-
Master Transaction Agreement, dated as of October 31, 2016, by and among Vornado
Realty Trust, Vornado Realty L.P., JBG Properties, Inc., JBG/Operating Partners, L.P.,
certain affiliates of JBG Properties Inc. and JBG/Operating Partners set forth on
Schedule A thereto, JBG SMITH Properties and JBG SMITH Properties LP
3.1
-
Articles of Restatement of Vornado Realty Trust, as filed with the State
*
Department of Assessments and Taxation of Maryland on July 30, 2007 - Incorporated
by reference to Exhibit 3.75 to Vornado Realty Trust’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007 (File No. 001-11954), filed on July 31, 2007
3.2
-
Amended and Restated Bylaws of Vornado Realty Trust, as amended on March 2, 2000 -
*
Incorporated by reference to Exhibit 3.12 to Vornado Realty Trust’s Annual Report on
Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on
March 9, 2000
3.3
-
Articles Supplementary, 5.40% Series L Cumulative Redeemable Preferred Shares of
*
Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by
reference to Exhibit 3.6 to Vornado Realty Trust’s Registration Statement on Form 8-A
(File No. 001-11954), filed on January 25, 2013
3.4
-
Second Amended and Restated Agreement of Limited Partnership of Vornado Realty L.P.,
*
dated as of October 20, 1997 (the “Partnership Agreement”) - Incorporated by reference
to Exhibit 3.26 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003
3.5
-
Amendment to the Partnership Agreement, dated as of December 16, 1997 - Incorporated by
*
reference to Exhibit 3.27 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003
3.6
-
Second Amendment to the Partnership Agreement, dated as of April 1, 1998 - Incorporated
*
by reference to Exhibit 3.5 to Vornado Realty Trust’s Registration Statement on Form S-3
(File No. 333-50095), filed on April 14, 1998
3.7
-
Third Amendment to the Partnership Agreement, dated as of November 12, 1998 -
*
Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on
Form 8-K (File No. 001-11954), filed on November 30, 1998
3.8
-
Fourth Amendment to the Partnership Agreement, dated as of November 30, 1998 -
*
Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on
Form 8-K (File No. 001-11954), filed on February 9, 1999
3.9
-
Fifth Amendment to the Partnership Agreement, dated as of March 3, 1999 - Incorporated by
*
reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on March 17, 1999
3.10
-
Sixth Amendment to the Partnership Agreement, dated as of March 17, 1999 - Incorporated
*
by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on July 7, 1999
3.11
-
Seventh Amendment to the Partnership Agreement, dated as of May 20, 1999 - Incorporated
*
by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on July 7, 1999
3.12
-
Eighth Amendment to the Partnership Agreement, dated as of May 27, 1999 - Incorporated
*
by reference to Exhibit 3.4 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on July 7, 1999
___________________________________________
*
Incorporated by reference.
3.13
-
Ninth Amendment to the Partnership Agreement, dated as of September 3, 1999 -
*
Incorporated by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on
Form 8-K (File No. 001-11954), filed on October 25, 1999
3.14
-
Tenth Amendment to the Partnership Agreement, dated as of September 3, 1999 -
*
Incorporated by reference to Exhibit 3.4 to Vornado Realty Trust's Current Report on
Form 8-K (File No. 001-11954), filed on October 25, 1999
3.15
-
Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999 -
*
Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on
Form 8-K (File No. 001-11954), filed on December 23, 1999
3.16
-
Twelfth Amendment to the Partnership Agreement, dated as of May 1, 2000 - Incorporated
*
by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on May 19, 2000
3.17
-
Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000 -
*
Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on
Form 8-K (File No. 001-11954), filed on June 16, 2000
3.18
-
Fourteenth Amendment to the Partnership Agreement, dated as of December 8, 2000 -
*
Incorporated by reference to Exhibit 3.2 to Vornado Realty Trust’s Current Report on
Form 8-K (File No. 001-11954), filed on December 28, 2000
3.19
-
Fifteenth Amendment to the Partnership Agreement, dated as of December 15, 2000 -
*
Incorporated by reference to Exhibit 4.35 to Vornado Realty Trust’s Registration
Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001
3.20
-
Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001 - Incorporated
*
by reference to Exhibit 3.3 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001 11954), filed on October 12, 2001
3.21
-
Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001 -
*
Incorporated by reference to Exhibit 3.4 to Vornado Realty Trust’s Current Report on
Form 8 K (File No. 001-11954), filed on October 12, 2001
3.22
-
Eighteenth Amendment to the Partnership Agreement, dated as of January 1, 2002 -
*
Incorporated by reference to Exhibit 3.1 to Vornado Realty Trust’s Current Report on
Form 8-K/A (File No. 001-11954), filed on March 18, 2002
3.23
-
Nineteenth Amendment to the Partnership Agreement, dated as of July 1, 2002 - Incorporated
*
by reference to Exhibit 3.47 to Vornado Realty Trust’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 (File No. 001-11954), filed on August 7, 2002
3.24
-
Twentieth Amendment to the Partnership Agreement, dated April 9, 2003 - Incorporated by
*
reference to Exhibit 3.46 to Vornado Realty Trust’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003 (File No. 001-11954), filed on May 8, 2003
3.25
-
Twenty-First Amendment to the Partnership Agreement, dated as of July 31, 2003 -
*
Incorporated by reference to Exhibit 3.47 to Vornado Realty Trust’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003 (File No. 001-11954), filed on
November 7, 2003
3.26
-
Twenty-Second Amendment to the Partnership Agreement, dated as of November 17, 2003 -
*
Incorporated by reference to Exhibit 3.49 to Vornado Realty Trust’s Annual Report on
Form 10-K for the year ended December 31, 2003 (File No. 001-11954), filed on
March 3, 2004
___________________________________________
*
Incorporated by reference.
3.27
-
Twenty-Third Amendment to the Partnership Agreement, dated May 27, 2004 - Incorporated
*
by reference to Exhibit 99.2 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on June 14, 2004
3.28
-
Twenty-Fourth Amendment to the Partnership Agreement, dated August 17, 2004 -
*
Incorporated by reference to Exhibit 3.57 to Vornado Realty Trust and Vornado Realty
L.P.’s Registration Statement on Form S-3 (File No. 333-122306), filed on
January 26, 2005
3.29
-
Twenty-Fifth Amendment to the Partnership Agreement, dated November 17, 2004 -
*
Incorporated by reference to Exhibit 3.58 to Vornado Realty Trust and Vornado Realty
L.P.’s Registration Statement on Form S-3 (File No. 333-122306), filed on
January 26, 2005
3.30
-
Twenty-Sixth Amendment to the Partnership Agreement, dated December 17, 2004 -
*
Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on
Form 8-K (File No. 000-22685), filed on December 21, 2004
3.31
-
Twenty-Seventh Amendment to the Partnership Agreement, dated December 20, 2004 -
*
Incorporated by reference to Exhibit 3.2 to Vornado Realty L.P.’s Current Report on
Form 8-K (File No. 000-22685), filed on December 21, 2004
3.32
-
Twenty-Eighth Amendment to the Partnership Agreement, dated December 30, 2004 -
*
Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on
Form 8-K (File No. 000-22685), filed on January 4, 2005
3.33
-
Twenty-Ninth Amendment to the Partnership Agreement, dated June 17, 2005 - Incorporated
*
by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K
(File No. 000-22685), filed on June 21, 2005
3.34
-
Thirtieth Amendment to the Partnership Agreement, dated August 31, 2005 - Incorporated by
*
reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on Form 8-K
(File No. 000-22685), filed on September 1, 2005
3.35
-
Thirty-First Amendment to the Partnership Agreement, dated September 9, 2005 -
*
Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s Current Report on
Form 8-K (File No. 000-22685), filed on September 14, 2005
3.36
-
Thirty-Second Amendment and Restated Agreement of Limited Partnership, dated as of
*
December 19, 2005 - Incorporated by reference to Exhibit 3.59 to Vornado Realty L.P.’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006
(File No. 000-22685), filed on May 8, 2006
3.37
-
Thirty-Third Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of April 25, 2006 - Incorporated by reference to Exhibit 10.2 to
Vornado Realty Trust’s Form 8-K (File No. 001-11954), filed on May 1, 2006
3.38
-
Thirty-Fourth Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of May 2, 2006 - Incorporated by reference to Exhibit 3.1 to
Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on
May 3, 2006
3.39
-
Thirty-Fifth Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of August 17, 2006 - Incorporated by reference to Exhibit 3.1 to
Vornado Realty L.P.’s Form 8-K (File No. 000-22685), filed on August 23, 2006
3.40
-
Thirty-Sixth Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of October 2, 2006 - Incorporated by reference to Exhibit 3.1 to
Vornado Realty L.P.’s Form 8-K (File No. 000-22685), filed on January 22, 2007
___________________________________________
*
Incorporated by reference.
3.41
-
Thirty-Seventh Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of June 28, 2007 - Incorporated by reference to Exhibit 3.1 to
Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on
June 27, 2007
3.42
-
Thirty-Eighth Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of June 28, 2007 - Incorporated by reference to Exhibit 3.2 to
Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on
June 27, 2007
3.43
-
Thirty-Ninth Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of June 28, 2007 - Incorporated by reference to Exhibit 3.3 to
Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on
June 27, 2007
3.44
-
Fortieth Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of June 28, 2007 - Incorporated by reference to Exhibit 3.4 to
Vornado Realty L.P.’s Current Report on Form 8-K (File No. 000-22685), filed on
June 27, 2007
3.45
-
Forty-First Amendment to Second Amended and Restated Agreement of Limited
*
Partnership, dated as of March 31, 2008 - Incorporated by reference to Exhibit 3.44 to
Vornado Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2008 (file No. 001-11954), filed on May 6, 2008
3.46
-
Forty-Second Amendment to Second Amended and Restated Agreement of Limited Partnership,
*
dated as of December 17, 2010 - Incorporated by reference to Exhibit 99.1 to Vornado
Realty L.P.'s Current Report on Form 8-K (File No. 000-22685), filed on December 21, 2010
3.47
-
Forty-Third Amendment to Second Amended and Restated Agreement of Limited Partnership,
*
dated as of April 20, 2011 - Incorporated by reference to Exhibit 3.1 to Vornado
Realty L.P.'s Current Report on Form 8-K (File No. 000-22685), filed on April 21, 2011
3.48
-
Forty-Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership
*
of Vornado Realty L.P., dated as of March 30, 2012 - Incorporated by reference to Exhibit 99.1
to Vornado Realty L.P.'s Current Report on Form 8-K (File No. 001-34482), filed on
April 5, 2012
3.49
-
Forty-Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership
*
dated as of July 18, 2012 - Incorporated by reference to Exhibit 3.1 to Vornado Realty L.P.’s
Current Report on Form 8-K (File No. 001-34482), filed on July 18, 2012
3.50
-
Forty-Fifth Amendment to Second Amended and Restated Agreement of Limited Partnership,
*
dated as of January 25, 2013 - Incorporated by reference to Exhibit 3.1 to Vornado Realty
L.P.’s Current Report on Form 8-K (File No. 001-34482), filed on January 25, 2013
3.51
-
Forty-Sixth Amendment to Second Amended and Restated Agreement of Limited Partnership
*
of Vornado Realty L.P., dated April 1, 2015 - Incorporated by reference to Exhibit 3.1
to Vornado Realty L.P.'s Current Report on Form 8-K (File No. 001-34482), filed on
April 2, 2015
4.1
-
Indenture, dated as of November 25, 2003, between Vornado Realty L.P. and The Bank of
*
New York, as Trustee - Incorporated by reference to Exhibit 4.10 to Vornado Realty
Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005
(File No. 001-11954), filed on April 28, 2005
___________________________________________
*
Incorporated by reference.
4.2
-
Indenture, dated as of November 20, 2006, among Vornado Realty Trust, as Issuer, Vornado
*
Realty L.P., as Guarantor and The Bank of New York, as Trustee - Incorporated by
reference to Exhibit 4.1 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on November 27, 2006
Certain instruments defining the rights of holders of long-term debt securities of Vornado
Realty Trust and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation
S-K. Vornado Realty Trust hereby undertakes to furnish to the Securities and Exchange
Commission
10.1
-
Registration Rights Agreement between Vornado, Inc. and Steven Roth, dated December 29,
*
1992 - Incorporated by reference to Vornado Realty Trust’s Annual Report on Form 10-K
for the year ended December 31, 1992 (File No. 001-11954), filed February 16, 1993
10.2
**
-
Management Agreement between Interstate Properties and Vornado, Inc. dated July 13, 1992
*
- Incorporated by reference to Vornado, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 1992 (File No. 001-11954), filed February 16, 1993
10.3
**
-
Employment Agreement, dated as of April 15, 1997, by and among Vornado Realty Trust,
*
The Mendik Company, L.P. and David R. Greenbaum - Incorporated by reference to
Exhibit 10.4 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on April 30, 1997
10.4
-
Tax Reporting and Protection Agreement, dated December 31, 2001, by and among Vornado,
*
Vornado Realty L.P., Charles E. Smith Commercial Realty L.P. and Charles E. Smith
Commercial Realty L.L.C. - Incorporated by reference to Exhibit 10.3 to Vornado Realty
Trust’s Current Report on Form 8-K/A (File No. 1-11954), filed on March 18, 2002
10.5
**
-
Amendment to Real Estate Retention Agreement, dated as of July 3, 2002, by and between
*
Alexander’s, Inc. and Vornado Realty L.P. - Incorporated by reference to Exhibit
10(i)(E)(3) to Alexander’s Inc.’s Quarterly Report for the quarter ended June 30, 2002
(File No. 001-06064), filed on August 7, 2002
10.6
**
-
59th Street Real Estate Retention Agreement, dated as of July 3, 2002, by and between
*
Vornado Realty L.P., 731 Residential LLC and 731 Commercial LLC - Incorporated by
reference to Exhibit 10(i)(E)(4) to Alexander’s Inc.’s Quarterly Report for the quarter
ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002
10.7
-
Amended and Restated Management and Development Agreement, dated as of July 3, 2002,
*
by and between Alexander's, Inc., the subsidiaries party thereto and Vornado
Management Corp. - Incorporated by reference to Exhibit 10(i)(F)(1) to Alexander's
Inc.'s Quarterly Report for the quarter ended June 30, 2002 (File No. 001-06064),
filed on August 7, 2002
10.8
**
-
Form of Vornado Realty Trust's 2002 Omnibus Share Plan - Incorporated by reference to
*
Exhibit 4.2 to Vornado Realty Trust's Registration Statement on Form S-8
(File No. 333-102216), filed on December 26, 2002.
10.9
**
-
Amended and Restated Employment Agreement between Vornado Realty Trust and Joseph
*
Macnow dated July 27, 2006 - Incorporated by reference to Exhibit 10.54 to Vornado
Realty Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006
(File No. 001-11954), filed on August 1, 2006
10.10
**
-
Amendment to Real Estate Retention Agreement, dated January 1, 2007, by and between
*
Vornado Realty L.P. and Alexander’s Inc. - Incorporated by reference to Exhibit 10.55
to Vornado Realty Trust’s Annual Report on Form 10-K for the year ended
December 31, 2006 (File No. 001-11954), filed on February 27, 2007
___________________________________________
*
Incorporated by reference.
**
Management contract or compensatory agreement.
10.11
**
-
Amendment to 59th Street Real Estate Retention Agreement, dated January 1, 2007, by and
*
among Vornado Realty L.P., 731 Retail One LLC, 731 Restaurant LLC, 731 Office One
LLC and 731 Office Two LLC. - Incorporated by reference to Exhibit 10.56 to
Vornado Realty Trust’s Annual Report on Form 10-K for the year ended
December 31, 2006 (File No. 001-11954), filed on February 27, 2007
10.12
**
-
Employment Agreement between Vornado Realty Trust and Mitchell Schear, as of April 19,
*
2007 - Incorporated by reference to Exhibit 10.46 to Vornado Realty Trust’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 001-11954),
filed on May 1, 2007
10.13
**
-
Amendment to Employment Agreement between Vornado Realty Trust and Joseph Macnow,
*
dated December 29, 2008. Incorporated by reference to Exhibit 10.48 to Vornado Realty
Trust’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No.
001-11954) filed on February 24, 2009
10.14
**
-
Amendment to Employment Agreement between Vornado Realty Trust and David R.
*
Greenbaum, dated December 29, 2008. Incorporated by reference to Exhibit 10.49 to
Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31,
2008 (File No. 001-11954) filed on February 24, 2009
10.15
**
-
Amendment to Indemnification Agreement between Vornado Realty Trust and David R.
*
Greenbaum, dated December 29, 2008. Incorporated by reference to Exhibit 10.50 to
Vornado Realty Trust’s Annual Report on Form 10-K for the year ended December 31,
2008 (File No. 001-11954) filed on February 24, 2009
10.16
**
-
Amendment to Employment Agreement between Vornado Realty Trust and Mitchell N.
*
Schear, dated December 29, 2008. Incorporated by reference to Exhibit 10.51 to Vornado
Realty Trust’s Annual Report on Form 10-K for the year ended December 31, 2008 (File
No. 001-11954) filed on February 24, 2009
10.17
**
-
Vornado Realty Trust's 2010 Omnibus Share Plan - Incorporated by reference to Exhibit 10.41 to
*
Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010
(File No. 001-11954) filed on August 3, 2010
10.18
**
-
Form of Vornado Realty Trust 2010 Omnibus Share Plan Incentive / Non-Qualified Stock Option
*
Agreement. Incorporated by reference to Exhibit 99.1 to Vornado Realty Trust's Current
Report on Form 8-K (File No. 001-11954) filed on April 5, 2012
10.19
**
-
Form of Vornado Realty Trust 2010 Omnibus Share Plan Restricted Stock Agreement.
*
Incorporated by reference to Exhibit 99.2 to Vornado Realty Trust's Current Report on Form
8-K (File No. 001-11954) filed on April 5, 2012
10.20
**
-
Form of Vornado Realty Trust 2010 Omnibus Share Plan Restricted LTIP Unit Agreement.
*
Incorporated by reference to Exhibit 99.3 to Vornado Realty Trust's Current Report on Form
8-K (File No. 001-11954) filed on April 5, 2012
10.21
**
-
Form of Vornado Realty Trust 2012 Outperformance Plan Award Agreement.
*
Incorporated by reference to Exhibit 10.45 to Vornado Realty Trust's Annual Report on Form
10-K for the year ended December 31, 2012 (File No. 001-11954) filed on February 26, 2013
___________________________________________
*
Incorporated by reference.
**
Management contract or compensatory agreement.
10.22
**
-
Form of Vornado Realty Trust 2013 Outperformance Plan Award Agreement. Incorporated
*
by reference to Exhibit 10.50 to Vornado Realty Trust’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2013 (File No. 001-11954), filed on May 6, 2013
10.23
**
-
Employment agreement between Vornado Realty Trust and Stephen W. Theriot dated
*
June 1, 2013. Incorporated by reference to Exhibit 10.51 to Vornado Realty Trust’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 001-11954),
filed on August 5, 2013
10.24
**
-
Employment agreement between Vornado Realty Trust and Michael J. Franco dated
*
January 10, 2014. Incorporated by reference to Exhibit 10.52 to Vornado Realty Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (File No. 001-11954),
filed on May 5, 2014
10.25
**
-
Form of Vornado Realty Trust 2014 Outperformance Plan Award Agreement. Incorporated
*
by reference to Exhibit 10.53 to Vornado Realty Trust's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2014 (File No. 001-11954), filed on May 5, 2014
10.26
-
Amended and Restated Revolving Credit Agreement dated as of September 30, 2014, by and
*
among Vornado Realty L.P. as Borrower, Vornado Realty Trust as General Partner, the
Banks listed on the signature pages thereof, and JPMorgan Chase Bank N.A. as
Administrative Agent for the Banks. Incorporated by reference to Exhibit 10.54 to
Vornado Realty Trust's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2014 (File No. 001-11954), filed on November 3, 2014
10.27
**
-
Form of Vornado Realty Trust 2016 Outperformance Plan Award Agreement. Incorporated by
*
reference to Exhibit 99.1 to Vornado Realty Trust’s Current Report on Form 8-K
(File No. 001-11954), filed on January 21, 2016
10.28
-
Term Loan Agreement dated as of October 30, 2015, by and among Vornado Realty L.P. as
*
Borrower, Vornado Realty Trust as General Partner, the Banks listed on the signature
pages thereof, and JPMorgan Chase Bank, N.A. as Administrative Agent for the Banks.
Incorporated by reference to Exhibit 10.32 to Vornado Realty Trust's Annual Report on
Form 10-K for the year ended December 31, 2015 (File No. 001-11954), filed on
February 16, 2016.
10.29
-
Amended and Restated Revolving Credit Agreement dated as of November 7, 2016, among
Vornado Realty L.P. as Borrower,Vornado Realty Trust as General Partner, the Banks
listed on the signature pages thereof, and JPMorgan Chase Bank N.A. as Administrative
Agent for the Banks.
___________________________________________
*
Incorporated by reference.
**
Management contract or compensatory agreement.
12.1
-
Computation of Ratios for Vornado Realty Trust
12.2
Computation of Ratios for Vornado Realty L.P.
-
Subsidiaries of Vornado Realty Trust and Vornado Realty L.P.
23.1
-
Consent of Independent Registered Public Accounting Firm for Vornado Realty Trust
23.2
-
Consent of Independent Registered Public Accounting Firm for Vornado Realty L.P.
31.1
-
Rule 13a-14 (a) Certification of the Chief Executive Officer of Vornado Realty Trust
31.2
-
Rule 13a-14 (a) Certification of the Chief Financial Officer of Vornado Realty Trust
31.3
-
Rule 13a-14 (a) Certification of the Chief Executive Officer of Vornado Realty L.P.
31.4
-
Rule 13a-14 (a) Certification of the Chief Financial Officer of Vornado Realty L.P.
32.1
-
Section 1350 Certification of the Chief Executive Officer of Vornado Realty Trust
32.2
-
Section 1350 Certification of the Chief Financial Officer of Vornado Realty Trust
32.3
-
Section 1350 Certification of the Chief Executive Officer of Vornado Realty L.P.
32.4
-
Section 1350 Certification of the Chief Financial Officer of Vornado Realty L.P.
101.INS
-
XBRL Instance Document of Vornado Realty Trust and Vornado Realty L.P.
101.SCH
-
XBRL Taxonomy Extension Schema of Vornado Realty Trust and Vornado Realty L.P.
101.CAL
-
XBRL Taxonomy Extension Calculation Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.DEF
-
XBRL Taxonomy Extension Definition Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.LAB
-
XBRL Taxonomy Extension Label Linkbase of Vornado Realty Trust and Vornado Realty L.P.
101.PRE
-
XBRL Taxonomy Extension Presentation Linkbase of Vornado Realty Trust and Vornado Realty L.P.