Edgar Filing: VORNADO REALTY TRUST

Document

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:	March 31, 2019



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



For the transition period from:		to



Commission File Number:	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 every Interactive Data File required to be submitted 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” "non-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		☐ Smaller Reporting Company
		☐ Emerging Growth Company



Vornado Realty L.P.:
☐ Large Accelerated Filer		☐ Accelerated Filer
☑ Non-Accelerated Filer		☐ 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 March 31, 2019, 190,761,498 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 March 31, 2019 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 93.4% 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, the net proceeds of debt offerings by Vornado, and the net proceeds which are contributed to the Operating Partnership in exchange for debt securities of the Operating Partnership, 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 12. Redeemable Noncontrolling Interests/Redeemable Partnership Units


•	Note 13. Shareholders' Equity/Partners' Capital


•	Note 19. Income (Loss) Per Share/Income (Loss) 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 March 31, 2019 and December 31, 2018	5

		Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018	6

		Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018	7

		Consolidated Statements of Changes in Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018	8

		Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018	10

		Financial Statements of Vornado Realty L.P.:

		Consolidated Balance Sheets (Unaudited) as of March 31, 2019 and December 31, 2018	12

		Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018	13

		Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018	14

		Consolidated Statements of Changes in Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018	15

		Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018	17

		Vornado Realty Trust and Vornado Realty L.P.:

		Notes to Consolidated Financial Statements (Unaudited)	19

		Reports of Independent Registered Public Accounting Firm	48

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	50

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77

	Item 4.	Controls and Procedures	78

PART II.		Other Information:

	Item 1.	Legal Proceedings	79

	Item 1A.	Risk Factors	79

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79

	Item 3.	Defaults Upon Senior Securities	79

	Item 4.	Mine Safety Disclosures	79

	Item 5.	Other Information	79

	Item 6.	Exhibits	79

EXHIBIT INDEX			80

SIGNATURES			81

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)	March 31, 2019			December 31, 2018
ASSETS
Real estate, at cost:
Land	$	2,608,770		$	3,306,280
Buildings and improvements	7,821,301			10,110,992
Development costs and construction in progress	1,961,512			2,266,491
Moynihan Train Hall development expenditures	550,996			445,693
Leasehold improvements and equipment	115,756			108,427
Total	13,058,335			16,237,883
Less accumulated depreciation and amortization	(2,845,120		)	(3,180,175		)
Real estate, net	10,213,215			13,057,708
Assets held for sale	3,027,058			—
Right-of-use assets	457,662			—
Cash and cash equivalents	307,047			570,916
Restricted cash	593,759			145,989
Marketable securities	39,866			152,198
Tenant and other receivables, net of allowance for doubtful accounts of $4,154 as of December 31, 2018	73,404			73,322
Investments in partially owned entities	730,264			858,113
Real estate fund investments	322,858			318,758
220 Central Park South condominium units ready for sale	229,567			99,627
Receivable arising from the straight-lining of rents, net of allowance of $1,644 as of December 31, 2018	766,634			935,131
Deferred leasing costs, net of accumulated amortization of $180,953 and $207,529	345,241			400,313
Identified intangible assets, net of accumulated amortization of $97,749 and $172,114	34,161			136,781
Other assets	497,219			431,938
	$	17,637,955		$	17,180,794
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Mortgages payable, net	$	6,519,189		$	8,167,798
Senior unsecured notes, net	845,261			844,002
Unsecured term loan, net	745,076			744,821
Unsecured revolving credit facilities	530,000			80,000
Liabilities related to assets held for sale	1,097,350			—
Lease liabilities	484,173			—
Moynihan Train Hall obligation	550,996			445,693
Accounts payable and accrued expenses	442,496			430,976
Deferred revenue	71,328			167,730
Deferred compensation plan	101,922			96,523
Other liabilities	292,187			311,806
Total liabilities	11,679,978			11,289,349
Commitments and contingencies
Redeemable noncontrolling interests:
Class A units - 12,789,891 and 12,544,477 units outstanding	862,550			778,134
Series D cumulative redeemable preferred units - 141,401 and 177,101 units outstanding	4,535			5,428
Total redeemable noncontrolling interests	867,085			783,562
Shareholders' equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000 shares; issued and outstanding 36,797,580 and 36,798,580 shares	891,263			891,294
Common shares of beneficial interest: $0.04 par value per share; authorized 250,000,000 shares; issued and outstanding 190,761,498 and 190,535,499 shares	7,609			7,600
Additional capital	7,676,770			7,725,857
Earnings less than distributions	(4,120,265		)	(4,167,184		)
Accumulated other comprehensive (loss) income	(11,385		)	7,664
Total shareholders' equity	4,443,992			4,465,231
Noncontrolling interests in consolidated subsidiaries	646,900			642,652
Total equity	5,090,892			5,107,883
	$	17,637,955		$	17,180,794

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 March 31,
	2019			2018
REVENUES:
Rental revenues	$	499,877		$	500,420
Fee and other income	34,791			36,017
Total revenues	534,668			536,437
EXPENSES:
Operating	(246,895		)	(237,602		)
Depreciation and amortization	(116,709		)	(108,686		)
General and administrative	(58,020		)	(42,533		)
(Expense) benefit from deferred compensation plan liability	(5,433		)	404
Transaction related costs and other	(149		)	(13,156		)
Total expenses	(427,206		)	(401,573		)

Income (loss) from partially owned entities	7,320			(9,904		)
Loss from real estate fund investments	(167		)	(8,807		)
Interest and other investment income (loss), net	5,045			(24,384		)
Income (loss) from deferred compensation plan assets	5,433			(404		)
Interest and debt expense	(102,463		)	(88,166		)
Net gains on disposition of wholly owned and partially owned assets	220,294			—
Income before income taxes	242,924			3,199
Income tax expense	(29,743		)	(2,554		)
Income from continuing operations	213,181			645
Loss from discontinued operations	(137		)	(363		)
Net income	213,044			282
Less net (income) loss attributable to noncontrolling interests in:
Consolidated subsidiaries	(6,820		)	8,274
Operating Partnership	(12,202		)	1,124
Net income attributable to Vornado	194,022			9,680
Preferred share dividends	(12,534		)	(13,035		)
Preferred share issuance costs	—			(14,486		)
NET INCOME (LOSS) attributable to common shareholders	$	181,488		$	(17,841	)

INCOME (LOSS) PER COMMON SHARE – BASIC:
Net income (loss) per common share	$	0.95		$	(0.09	)
Weighted average shares outstanding	190,689			190,081

INCOME (LOSS) PER COMMON SHARE – DILUTED:
Net income (loss) per common share	$	0.95		$	(0.09	)
Weighted average shares outstanding	190,996			190,081

See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



(Amounts in thousands)	For the Three Months Ended March 31,
	2019			2018
Net income	$	213,044		$	282
Other comprehensive (loss) income:
(Reduction) increase in value of interest rate swaps	(17,029		)	10,258
Amount reclassified from accumulated other comprehensive loss relating to a nonconsolidated subsidiary	(2,311		)	—
Other comprehensive (loss) income of nonconsolidated subsidiaries	(985		)	346
Comprehensive income	192,719			10,886
Less comprehensive (income) loss attributable to noncontrolling interests	(17,746		)	8,744
Comprehensive income attributable to Vornado	$	174,973		$	19,630

See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)



(Amounts in thousands)	Preferred Shares					Common Shares			Additional Capital			Earnings Less Than Distributions			Accumulated Other Comprehensive (Loss) Income			Non-controlling Interests in Consolidated Subsidiaries			Total Equity
	Shares		Amount			Shares	Amount		Additional Capital			Earnings Less Than Distributions			Accumulated Other Comprehensive (Loss) Income			Non-controlling Interests in Consolidated Subsidiaries			Total Equity
Balance, December 31, 2018	36,800		$	891,294		190,535	$	7,600	$	7,725,857		$	(4,167,184	)	$	7,664		$	642,652		$	5,107,883
Net income attributable to Vornado	—		—			—	—		—			194,022			—			—			194,022
Net income attributable to noncontrolling interests in consolidated subsidiaries	—		—			—	—		—			—			—			6,820			6,820
Dividends on common shares	—		—			—	—		—			(125,876		)	—			—			(125,876		)
Dividends on preferred shares	—		—			—	—		—			(12,534		)	—			—			(12,534		)
Common shares issued:
Upon redemption of Class A units, at redemption value	—		—			48	2		3,179			—			—			—			3,181
Under employees' share option plan	—		—			162	7		1,164			(8,692		)	—			—			(7,521		)
Under dividend reinvestment plan	—		—			5	—		340			—			—			—			340
Contributions:
Real estate fund investments	—		—			—	—		—			—			—			3,384			3,384
Other	—		—			—	—		—			—			—			1,810			1,810
Distributions:
Real estate fund investments	—		—			—	—		—			—			—			—			—
Other	—		—			—	—		—			—			—			(7,764		)	(7,764		)
Conversion of Series A preferred shares to common shares	(1	)	(31		)	2	—		31			—			—			—			—
Deferred compensation shares and options	—		—			9	—		297			—			—			—			297
Amount reclassified related to a nonconsolidated subsidiary	—		—			—	—		—			—			(2,311		)	—			(2,311		)
Other comprehensive loss of nonconsolidated subsidiaries	—		—			—	—		—			—			(985		)	—			(985		)
Reduction in value of interest rate swaps	—		—			—	—		—			—			(17,029		)	—			(17,029		)
Unearned 2016 Out-Performance Plan awards acceleration	—		—			—	—		11,720			—			—			—			11,720
Adjustments to carry redeemable Class A units at redemption value	—		—			—	—		(65,818		)	—			—			—			(65,818		)
Redeemable noncontrolling interests' share of above adjustments	—		—			—	—		—			—			1,276			—			1,276
Other	(1	)	—			—	—		—			(1		)	—			(2		)	(3		)
Balance, March 31, 2019	36,798		$	891,263		190,761	$	7,609	$	7,676,770		$	(4,120,265	)	$	(11,385	)	$	646,900		$	5,090,892

See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED

(UNAUDITED)



(Amounts in thousands)	Preferred Shares				Common Shares			Additional Capital		Earnings Less Than Distributions			Accumulated Other Comprehensive Income			Non- controlling Interests in Consolidated Subsidiaries			Total Equity
	Shares	Amount			Shares	Amount		Additional Capital		Earnings Less Than Distributions			Accumulated Other Comprehensive Income			Non- controlling Interests in Consolidated Subsidiaries			Total Equity
Balance, December 31, 2017	36,800	$	891,988		189,984	$	7,577	$	7,492,658	$	(4,183,253	)	$	128,682		$	670,049		$	5,007,701
Cumulative effect of accounting change	—	—			—	—		—		122,893			(108,374		)	—			14,519
Net income attributable to Vornado	—	—			—	—		—		9,680			—			—			9,680
Net loss attributable to noncontrolling interests in consolidated subsidiaries	—	—			—	—		—		—			—			(8,274		)	(8,274		)
Dividends on common shares	—	—			—	—		—		(119,764		)	—			—			(119,764		)
Dividends on preferred shares	—	—			—	—		—		(13,035		)	—			—			(13,035		)
Preferred share issuance costs	—	—			—	—		—		(14,486		)	—			—			(14,486		)
Common shares issued:
Upon redemption of Class A units, at redemption value	—	—			118	5		8,387		—			—			—			8,392
Under employees' share option plan	—	—			55	2		3,432		—			—			—			3,434
Under dividend reinvestment plan	—	—			5	—		335		—			—			—			335
Contributions	—	—			—	—		—		—			—			8,370			8,370
Distributions:
Real estate fund investments	—	—			—	—		—		—			—			(1,910		)	(1,910		)
Other	—	—			—	—		—		—			—			(3,450		)	(3,450		)
Preferred share issuance	—	(663		)	—	—		—		—			—			—			(663		)
Deferred compensation shares and options	—	—			7	—		298		(121		)	—			—			177
Other comprehensive income of nonconsolidated subsidiaries	—	—			—	—		—		—			346			—			346
Increase in value of interest rate swaps	—	—			—	—		—		—			10,258			—			10,258
Unearned 2015 Out-Performance Plan awards acceleration	—	—			—	—		9,046		—			—			—			9,046
Adjustments to carry redeemable Class A units at redemption value	—	—			—	—		114,856		—			—			—			114,856
Redeemable noncontrolling interests' share of above adjustments	—	—			—	—		—		—			(654		)	—			(654		)
Other	—	—			—	—		1		(2		)	—			1			—
Balance, March 31, 2018	36,800	$	891,325		190,169	$	7,584	$	7,629,013	$	(4,198,088	)	$	30,258		$	664,786		$	5,024,878

See notes to consolidated financial statements (unaudited).

VORNADO REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



(Amounts in thousands)	For the Three Months Ended March 31,
	2019			2018
Cash Flows from Operating Activities:
Net income	$	213,044		$	282
Adjustments to reconcile net income to net cash provided by operating activities:
Net gains on disposition of wholly owned and partially owned assets	(220,294		)	—
Depreciation and amortization (including amortization of deferred financing costs)	123,135			115,337
Stock-based compensation expense	31,654			13,669
Distributions of income from partially owned entities	14,316			20,559
Equity in net (income) loss of partially owned entities	(7,320		)	9,904
Amortization of below-market leases, net	(6,525		)	(10,581		)
Straight-lining of rents	1,140			(7,430		)
(Increase) decrease in fair value of marketable securities	(461		)	32,986
Net realized and unrealized (gain) loss on real estate fund investments	(100		)	911
Return of capital from real estate fund investments	—			14,966
Other non-cash adjustments	1,639			1,067
Changes in operating assets and liabilities:
Real estate fund investments	(4,000		)	(2,950		)
Tenant and other receivables, net	(835		)	(5,702		)
Prepaid assets	(82,862		)	77,053
Other assets	(6,044		)	(15,151		)
Accounts payable and accrued expenses	10,426			19,835
Other liabilities	(2,795		)	663
Net cash provided by operating activities	64,118			265,418

Cash Flows from Investing Activities: