Edgar Filing: VORNADO REALTY TRUST

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended:

June 30, 2017

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

For the transition period from:

Commission File Number:	001-11954 (Vornado Realty Trust)
Commission File Number:	001-34482 (Vornado Realty L.P.)

Vornado Realty Trust

Vornado Realty L.P.

(Exact name of registrants as specified in its charter)

Vornado Realty Trust	Maryland	22-1657560
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Vornado Realty L.P.	Delaware	13-3925979
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

888 Seventh Avenue, New York, New York, 10019

(Address of principal executive offices) (Zip Code)

(212) 894-7000

(Registrants’ telephone number, including area code)

N/A

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

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

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

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

Vornado Realty Trust:

☑ Large Accelerated Filer		☐ Accelerated Filer
☐ Non-Accelerated Filer (Do not check if smaller reporting company)		☐ Smaller Reporting Company
		☐ Emerging Growth Company

Vornado Realty L.P.:

☐ Large Accelerated Filer		☐ Accelerated Filer
☑ Non-Accelerated Filer (Do not check if smaller reporting company)		☐ Smaller Reporting Company
		☐ Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Vornado Realty Trust: Yes ☐ No ☑ Vornado Realty L.P.: Yes ☐ No ☑

As of June 30, 2017, 189,465,023 of Vornado Realty Trust’s common shares of beneficial interest are outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2017 of Vornado Realty Trust and Vornado Realty L.P. Unless stated otherwise or the context otherwise requires, references to “Vornado” refer to Vornado Realty Trust, a Maryland real estate investment trust (“REIT”), and references to the “Operating Partnership” refer to Vornado Realty L.P., a Delaware limited partnership. References to the “Company,” “we,” “us” and “our” mean collectively Vornado, the Operating Partnership and those subsidiaries consolidated by Vornado.

The Operating Partnership is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. Vornado is the sole general partner and also a 93.6% limited partner of the Operating Partnership. As the sole general partner of the Operating Partnership, Vornado has exclusive control of the Operating Partnership’s day-to-day management.

Under the limited partnership agreement of the Operating Partnership, unitholders may present their Class A units for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time). 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. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. Vornado generally expects that it will elect to issue its common shares in connection with each such presentation for redemption rather than having the Operating Partnership pay cash. With each such exchange or redemption, Vornado’s percentage ownership in the Operating Partnership will increase. In addition, whenever Vornado issues common shares other than to acquire Class A units of the Operating Partnership, Vornado must contribute any net proceeds it receives to the Operating Partnership and the Operating Partnership must issue to Vornado an equivalent number of Class A units of the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.

The Company believes that combining the quarterly reports on Form 10-Q of Vornado and the Operating Partnership into this single report provides the following benefits:

•	enhances investors’ understanding of Vornado and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•	eliminates duplicative disclosure and provides a more streamlined and readable presentation because a substantial portion of the disclosure applies to both Vornado and the Operating Partnership; and
•	creates time and cost efficiencies in the preparation of one combined report instead of two separate reports.

The Company believes it is important to understand the few differences between Vornado and the Operating Partnership in the context of how Vornado and the Operating Partnership operate as a consolidated company. The financial results of the Operating Partnership are consolidated into the financial statements of Vornado. Vornado does not have any significant assets, liabilities or operations, other than its investment in the Operating Partnership. The Operating Partnership, not Vornado, generally executes all significant business relationships other than transactions involving the securities of Vornado. The Operating Partnership holds substantially all of the assets of Vornado. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by Vornado, which are contributed to the capital of the Operating Partnership in exchange for units of limited partnership in the Operating Partnership, as applicable, the Operating Partnership generates all remaining capital required by the Company’s business. These sources may include working capital, net cash provided by operating activities, borrowings under the revolving credit facility, the issuance of secured and unsecured debt and equity securities, and proceeds received from the disposition of certain properties.

To help investors better understand the key differences between Vornado and the Operating Partnership, certain information for Vornado and the Operating Partnership in this report has been separated, as set forth below:

•	Item 1. Financial Statements (unaudited), which includes the following specific disclosures for Vornado Realty Trust and Vornado Realty L.P.:
	•	Note 10. Redeemable Noncontrolling Interests/Redeemable Partnership Units
	•	Note 18. Income Per Share/Income Per Class A Unit

•	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes information specific to each entity, where applicable.

This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of Vornado and the Operating Partnership in order to establish that the requisite certifications have been made and that Vornado and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

PART I.		Financial Information:	Page Number

	Item 1.	Financial Statements of Vornado Realty Trust:

		Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016	5

		Consolidated Statements of Income (Unaudited) for the
		Three and Six Months Ended June 30, 2017 and 2016	6

		Consolidated Statements of Comprehensive Income (Unaudited)
		for the Three and Six Months Ended June 30, 2017 and 2016	7

		Consolidated Statements of Changes in Equity (Unaudited) for the
		Six Months Ended June 30, 2017 and 2016	8

		Consolidated Statements of Cash Flows (Unaudited) for the
		Six Months Ended June 30, 2017 and 2016	10

		Financial Statements of Vornado Realty L.P.:

		Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016	12

		Consolidated Statements of Income (Unaudited) for the
		Three and Six Months Ended June 30, 2017 and 2016	13

		Consolidated Statements of Comprehensive Income (Unaudited)
		for the Three and Six Months Ended June 30, 2017 and 2016	14

		Consolidated Statements of Changes in Equity (Unaudited) for the
		Six Months Ended June 30, 2017 and 2016	15

		Consolidated Statements of Cash Flows (Unaudited) for the
		Six Months Ended June 30, 2017 and 2016	17

		Vornado Realty Trust and Vornado Realty L.P.:

		Notes to Consolidated Financial Statements (Unaudited)	19

		Reports of Independent Registered Public Accounting Firm	50

	Item 2.	Management's Discussion and Analysis of Financial Condition
		and Results of Operations	52

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	100

	Item 4.	Controls and Procedures	101

PART II.		Other Information:

	Item 1.	Legal Proceedings	102

	Item 1A.	Risk Factors	102

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	102

	Item 3.	Defaults Upon Senior Securities	102

	Item 4.	Mine Safety Disclosures	102

	Item 5.	Other Information	102

	Item 6.	Exhibits	102

SIGNATURES			103

EXHIBIT INDEX			105

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VORNADO REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Amounts in thousands, except unit, share, and per share amounts)			June 30, 2017		December 31, 2016
ASSETS
Real estate, at cost:
	Land		$	4,048,971	$	4,065,142
	Buildings and improvements			12,750,314		12,727,980
	Development costs and construction in progress			1,676,353		1,430,276
	Leasehold improvements and equipment			119,852		116,560
		Total		18,595,490		18,339,958
	Less accumulated depreciation and amortization			(3,682,903)		(3,513,574)
Real estate, net				14,912,587		14,826,384
Cash and cash equivalents				1,471,303		1,501,027
Restricted cash				86,386		98,295
Marketable securities				187,489		203,704
Tenant and other receivables, net of allowance for doubtful accounts of $11,513 and $10,920				83,768		94,467
Investments in partially owned entities				1,354,089		1,428,019
Real estate fund investments				455,692		462,132
Receivable arising from the straight-lining of rents, net of allowance of $1,656 and $2,227				1,062,456		1,032,736
Deferred leasing costs, net of accumulated amortization of $242,373 and $228,862				449,714		454,345
Identified intangible assets, net of accumulated amortization of $211,285 and $207,330				176,506		192,731
Assets related to discontinued operations				4,378		5,570
Other assets				644,922		515,437
			$	20,889,290	$	20,814,847

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net			$	9,502,694	$	9,278,263
Senior unsecured notes, net				846,286		845,577
Unsecured term loan, net				372,975		372,215
Unsecured revolving credit facilities				115,630		115,630
Accounts payable and accrued expenses				427,401		458,694
Deferred revenue				264,035		287,846
Deferred compensation plan				104,566		121,374
Liabilities related to discontinued operations				2,406		2,870
Other liabilities				431,983		435,436
	Total liabilities			12,067,976		11,917,905
Commitments and contingencies						-
Redeemable noncontrolling interests:
	Class A units - 12,477,710 and 12,197,162 units outstanding			1,171,656		1,273,018
	Series D cumulative redeemable preferred units - 177,101 units outstanding			5,428		5,428
		Total redeemable noncontrolling interests		1,177,084		1,278,446
Vornado shareholders' equity:
	Preferred shares of beneficial interest: no par value per share; authorized 110,000,000
		shares; issued and outstanding 42,823,428 and 42,824,829 shares		1,038,011		1,038,055
	Common shares of beneficial interest: $.04 par value per share; authorized
		250,000,000 shares; issued and outstanding 189,465,023 and 189,100,876 shares		7,556		7,542
	Additional capital			7,279,834		7,153,332
	Earnings less than distributions			(1,524,806)		(1,419,382)
	Accumulated other comprehensive income			115,839		118,972
		Total Vornado shareholders' equity		6,916,434		6,898,519
Noncontrolling interests in consolidated subsidiaries				727,796		719,977
	Total equity			7,644,230		7,618,496
			$	20,889,290	$	20,814,847

See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(Amounts in thousands, except per share amounts)		For the Three Months Ended				For the Six Months Ended
		June 30,				June 30,
		2017		2016		2017		2016
REVENUES:
	Property rentals	$	529,294	$	527,178	$	1,043,112	$	1,046,670
	Tenant expense reimbursements		60,687		60,841		128,357		120,416
	Fee and other income		36,058		33,689		75,418		67,659
Total revenues			626,039		621,708		1,246,887		1,234,745
EXPENSES:
	Operating		256,687		245,138		517,594		501,487
	Depreciation and amortization		137,015		141,313		275,826		284,270
	General and administrative		42,470		45,564		99,128		94,268
	Acquisition and transaction related costs		6,471		2,879		14,476		7,486
	Skyline properties impairment loss		-		-		-		160,700
Total expenses			442,643		434,894		907,024		1,048,211
Operating income			183,396		186,814		339,863		186,534
Income (loss) from partially owned entities			46,276		642		47,721		(3,598)
Income from real estate fund investments			4,391		16,389		4,659		27,673
Interest and other investment income, net			9,307		10,236		18,535		13,754
Interest and debt expense			(96,797)		(105,576)		(191,082)		(206,065)
Net gains on disposition of wholly owned
	and partially owned assets		-		159,511		501		160,225
Income before income taxes			146,573		268,016		220,197		178,523
Income tax benefit (expense)			248		(2,109)		(1,957)		(4,940)
Income from continuing operations			146,821		265,907		218,240		173,583
Income from discontinued operations			663		2,475		3,091		3,191
Net income			147,484		268,382		221,331		176,774
Less net income attributable to noncontrolling interests in:
	Consolidated subsidiaries		(7,677)		(13,025)		(14,414)		(22,703)
	Operating Partnership		(7,706)		(14,531)		(10,935)		(7,044)
Net income attributable to Vornado			132,101		240,826		195,982		147,027
Preferred share dividends			(16,129)		(20,363)		(32,258)		(40,727)
NET INCOME attributable to common shareholders		$	115,972	$	220,463	$	163,724	$	106,300


INCOME PER COMMON SHARE - BASIC:
	Income from continuing operations, net	$	0.61	$	1.16	$	0.84	$	0.54
	Income from discontinued operations, net		-		0.01		0.02		0.02
	Net income per common share	$	0.61	$	1.17	$	0.86	$	0.56
	Weighted average shares outstanding		189,395		188,772		189,304		188,715

INCOME PER COMMON SHARE - DILUTED:
	Income from continuing operations, net	$	0.61	$	1.15	$	0.84	$	0.54
	Income from discontinued operations, net		-		0.01		0.02		0.02
	Net income per common share	$	0.61	$	1.16	$	0.86	$	0.56
	Weighted average shares outstanding		190,444		189,885		190,674		190,000

DIVIDENDS PER COMMON SHARE		$	0.71	$	0.63	$	1.42	$	1.26


See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)


(Amounts in thousands)			For the Three Months Ended				For the Six Months Ended
			June 30,				June 30,
			2017		2016		2017		2016
Net income			$	147,484	$	268,382	$	221,331	$	176,774
Other comprehensive (loss) income:
	(Reduction) increase in unrealized net gain on
		available-for-sale securities		(1,206)		28,019		(16,215)		39,113
	Pro rata share of amounts reclassified from accumulated
		other comprehensive income of a
		nonconsolidated subsidiary		-		-		9,268		-
	Pro rata share of other comprehensive loss of
		nonconsolidated subsidiaries		(980)		(628)		(1,031)		(622)
	(Reduction) increase in value of interest rate swaps and other			(1,204)		(6,976)		4,638		(11,171)
Comprehensive income				144,094		288,797		217,991		204,094
Less comprehensive income attributable to noncontrolling interests				(15,173)		(28,814)		(25,142)		(31,432)
Comprehensive income attributable to Vornado Realty Trust			$	128,921	$	259,983	$	192,849	$	172,662


See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)


(Amounts in thousands)																	Non-
															Accumulated		controlling
													Earnings		Other		Interests in
			Preferred Shares				Common Shares				Additional		Less Than		Comprehensive		Consolidated		Total
			Shares		Amount		Shares		Amount		Capital		Distributions		Income		Subsidiaries		Equity
Balance, December 31, 2016				42,825	$	1,038,055		189,101	$	7,542	$	7,153,332	$	(1,419,382)	$	118,972	$	719,977	$	7,618,496
Net income attributable to
	Vornado			-		-		-		-		-		195,982		-		-		195,982
Net income attributable to
	noncontrolling interests in
	consolidated subsidiaries			-		-		-		-		-		-		-		14,414		14,414
Dividends on common shares				-		-		-		-		-		(268,817)		-		-		(268,817)
Dividends on preferred shares				-		-		-		-		-		(32,258)		-		-		(32,258)
Common shares issued:
	Upon redemption of Class A
		units, at redemption value		-		-		249		10		25,552		-		-		-		25,562
	Under employees' share
		option plan		-		-		103		4		8,842		-		-		-		8,846
	Under dividend reinvestment plan			-		-		8		-		780		-		-		-		780
Contributions				-		-		-		-		-		-		-		991		991
Distributions:
	Real estate fund investments			-		-		-		-		-		-		-		(6,200)		(6,200)
	Other			-		-		-		-		-		-		-		(1,339)		(1,339)
Conversion of Series A preferred
	shares to common shares			(2)		(44)		2		-		44		-		-		-		-
Deferred compensation shares
	and options			-		-		2		-		1,076		(285)		-		-		791
Reduction in unrealized net gain on
	available-for-sale securities			-		-		-		-		-		-		(16,215)		-		(16,215)
Pro rata share of amounts
	reclassified related to a
	nonconsolidated subsidiary			-		-		-		-		-		-		9,268		-		9,268
Pro rata share of other
	comprehensive loss of
	nonconsolidated subsidiaries			-		-		-		-		-		-		(1,031)		-		(1,031)
Increase in value of interest
	rate swaps			-		-		-		-		-		-		4,636		-		4,636
Adjustments to carry redeemable
	Class A units at redemption value			-		-		-		-		90,208		-		-		-		90,208
Redeemable noncontrolling interests'
	share of above adjustments			-		-		-		-		-		-		207		-		207
Other				-		-		-		-		-		(46)		2		(47)		(91)
Balance, June 30, 2017				42,823	$	1,038,011		189,465	$	7,556	$	7,279,834	$	(1,524,806)	$	115,839	$	727,796	$	7,644,230


See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
(UNAUDITED)


(Amounts in thousands)																	Non-
															Accumulated		controlling
													Earnings		Other		Interests in
			Preferred Shares				Common Shares				Additional		Less Than		Comprehensive		Consolidated		Total
			Shares		Amount		Shares		Amount		Capital		Distributions		Income		Subsidiaries		Equity
Balance, December 31, 2015				52,677	$	1,276,954		188,577	$	7,521	$	7,132,979	$	(1,766,780)	$	46,921	$	778,483	$	7,476,078
Net income attributable to Vornado				-		-		-		-		-		147,027		-		-		147,027
Net income attributable to
	noncontrolling interests in
	consolidated subsidiaries			-		-		-		-		-		-		-		22,703		22,703
Dividends on common shares				-		-		-		-		-		(237,832)		-		-		(237,832)
Dividends on preferred shares				-		-		-		-		-		(40,727)		-		-		(40,727)
Common shares issued:
	Upon redemption of Class A
		units, at redemption value		-		-		195		8		18,200		-		-		-		18,208
	Under employees' share
		option plan		-		-		38		1		3,092		-		-		-		3,093
	Under dividend reinvestment plan			-		-		8		-		717		-		-		-		717
Contributions				-		-		-		-		-		-		-		19,674		19,674
Distributions:
	Real estate fund investments			-		-		-		-		-		-		-		(56,533)		(56,533)
	Other			-		-		-		-		-		-		-		(10,970)		(10,970)
Deferred compensation shares
	and options			-		-		7		1		953		(186)		-		-		768
Increase in unrealized net gain
	on available-for-sale securities			-		-		-		-		-		-		39,113		-		39,113
Pro rata share of other
	comprehensive loss of
	nonconsolidated subsidiaries			-		-		-		-		-		-		(622)		-		(622)
Reduction in value of interest
	rate swaps			-		-		-		-		-		-		(11,170)		-		(11,170)
Adjustments to carry redeemable