<Page>
EXHIBIT INDEX ON PAGE 49
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: JUNE 30, 2002
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission File Number: 000-22635
VORNADO REALTY L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3925979
- ----------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
888 SEVENTH AVENUE, NEW YORK, NEW YORK 10019
- ----------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(212) 894-7000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/X/ Yes / / No
Page 1
<Page>
INDEX
<Table>
<Caption>
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001....................................... 3
Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 2002 and June 30, 2001..................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and June 30, 2001........................................... 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 46
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings......................................................... 47
Item 6. Exhibits and Reports on Form 8-K.......................................... 47
Signatures .......................................................................... 48
Exhibit Index .......................................................................... 49
</Table>
Page 2
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VORNADO REALTY L.P.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
(amounts in thousands, except unit and per unit amounts) JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Real estate, at cost:
Land................................................................................. $ 1,491,706 $ 895,831
Buildings and improvements........................................................... 5,613,451 3,480,249
Development costs and construction in progress....................................... 125,608 258,357
Leasehold improvements and equipment................................................. 65,699 55,774
----------- ------------
Total........................................................................... 7,296,464 4,690,211
Less accumulated depreciation and amortization....................................... (639,704) (506,225)
----------- ------------
Real estate, net................................................................ 6,656,760 4,183,986
Cash and cash equivalents, including U.S. government obligations under
repurchase agreements of $90,520 and $15,235......................................... 684,183 265,584
Escrow deposits and restricted cash..................................................... 355,198 204,463
Marketable securities................................................................... 77,201 126,774
Investments in and advances to partially-owned entities, including
Alexander's of $185,953 and $188,522................................................. 948,825 1,270,195
Due from officers....................................................................... 18,266 18,197
Accounts receivable, net of allowance for doubtful accounts
of $9,303 and $8,831................................................................. 70,698 47,406
Notes and mortgage loans receivable..................................................... 94,887 258,555
Receivable arising from the straight-lining of rents.................................... 157,093 138,154
Other assets............................................................................ 309,626 264,029
----------- ------------
$ 9,372,737 $ 6,777,343
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Notes and mortgages payable............................................................. $ 3,935,646 $ 2,477,173
Senior unsecured notes due 2007......................................................... 499,283 --
Accounts payable and accrued expenses................................................... 199,960 179,597
Officers' compensation payable.......................................................... 14,120 6,708
Deferred leasing fee income............................................................. 11,579 11,940
Other liabilities....................................................................... 1,707 51,895
----------- ------------
Total liabilities.................................................................... 4,662,295 2,727,313
----------- ------------
Minority interest....................................................................... 24,655 25,795
----------- ------------
Commitments and contingencies
Partners' capital:
Equity............................................................................... 4,809,973 4,089,313
Distributions in excess of net income................................................ (128,768) (95,647)
----------- ------------
4,681,205 3,993,666
Deferred compensation units earned but not yet delivered............................. 38,253 38,253
Deferred compensation units issued but not yet earned................................ (16,286) --
Accumulated other comprehensive loss................................................. (12,681) (2,980)
Due from officers for purchase of common units of beneficial interest................ (4,704) (4,704)
----------- ------------
Total partners' capital......................................................... 4,685,787 4,024,235
----------- ------------
$ 9,372,737 $ 6,777,343
=========== ============
</Table>
See notes to consolidated financial statements.
Page 3
<Page>
VORNADO REALTY L.P.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands except per unit amounts)
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Rentals ........................................................ $ 309,869 $ 212,252 $ 611,629 $ 416,970
Expense reimbursements ......................................... 36,315 31,543 74,119 66,635
Other income (including fee income
from related parties of $381 and $514 in each
three month period and $584 and $884 in each
six month period) ........................................... 7,063 2,280 13,823 5,080
--------- --------- --------- ---------
Total revenues.................................................... 353,247 246,075 699,571 488,685
--------- --------- --------- ---------
Expenses:
Operating ...................................................... 126,267 96,831 253,713 197,214
Depreciation and amortization .................................. 49,563 30,086 97,151 61,951
General and administrative ..................................... 23,759 22,415 47,226 36,663
Amortization of Officer's deferred compensation expense ........ 6,875 -- 13,750 --
Costs of acquisitions not consummated .......................... -- -- -- 5,000
--------- --------- --------- ---------
Total expenses.................................................... 206,464 149,332 411,840 300,828
--------- --------- --------- ---------
Operating income ................................................. 146,783 96,743 287,731 187,857
Income applicable to Alexander's ................................. 4,487 4,676 10,055 16,980
Income from partially-owned entities ............................. 9,826 19,228 23,612 43,218
Interest and other investment income ............................. 9,934 15,874 19,577 29,347
Interest and debt expense ........................................ (60,119) (43,994) (118,137) (93,389)
Net gain (loss) on disposition of wholly-owned and partially-owned
assets ......................................................... (4,981) 1,934 (3,450) (2,789)
Minority interest................................................. (554) (409) (1,543) (768)
--------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle and extraordinary item ............................... 105,376 94,052 217,845 180,456
Cumulative effect of change in accounting principle .............. -- -- (30,129) (4,110)
Extraordinary item ............................................... -- -- -- 1,170
--------- --------- --------- ---------
Net income ....................................................... 105,376 94,052 187,716 177,516
Preferential allocations.......................................... (24,142) (23,576) (48,203) (46,885)
Preferred unit distributions (including accretion of issuance
expenses of $240 and $958 in 2001) ............................. (5,896) (9,192) (12,027) (18,865)
--------- --------- --------- ---------
NET INCOME applicable to Class A Units ........................... $ 75,338 $ 61,284 $ 127,486 $ 111,766
========= ========= ========= =========
NET INCOME PER CLASS A UNIT - BASIC .............................. $ .59 $ .65 $ 1.01 $ 1.19
========= ========= ========= =========
NET INCOME PER CLASS A UNIT- DILUTED ............................. $ .57 $ .64 $ .97 $ 1.16
========= ========= ========= =========
</Table>
See notes to consolidated financial statements.
Page 4
<Page>
VORNADO REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 187,716 $ 177,516
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting principle................. 30,129 4,110
Extraordinary item.................................................. -- (1,170)
Minority interest................................................... 1,543 768
Net gain on disposition of wholly-owned and
partially-owned assets............................................. 3,450 2,789
Depreciation and amortization....................................... 97,151 61,951
Amortization of Officer's deferred compensation expense............. 13,750 --
Straight-lining of rental income.................................... (18,939) (14,542)
Equity in income of Alexander's..................................... (10,055) (16,980)
Equity in income of partially-owned entities........................ (23,612) (43,218)
Changes in operating assets and liabilities......................... (33,835) 21,642
----------- -----------
Net cash provided by operating activities................................ 247,298 192,866
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development costs and construction in progress........................... (34,841) (74,856)
Investments in partially-owned entities.................................. (21,984) (25,221)
Distributions from partially-owned entities.............................. 67,454 93,032
Investment in notes and mortgage loans receivable........................ (741) (30,767)
Repayment of notes and mortgage loans receivable......................... 60,000 6,057
Cash restricted, primarily mortgage escrows.............................. (113,831) 27,851
Additions to real estate................................................. (60,323) (49,326)
Purchases of marketable securities ...................................... -- (9,350)
Proceeds from sale of marketable securities ............................. 53,445 1,121
Real estate deposits and other........................................... (24,970) 1,493
----------- -----------
Net cash used in investing activities.................................... (75,791) (59,966)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................................. 622,765 118,853
Repayments of borrowings................................................. (200,612) (111,748)
Debt issuance costs...................................................... (2,800) --
Proceeds from issuance of Class A Units.................................. 56,658 --
Distributions to Class A unitholders..................................... (169,838) (90,992)
Distributions to preferred unitholders................................... (82,809) (71,636)
Exercise of unit options................................................. 23,728 5,554
----------- -----------
Net cash provided by (used in) financing activities...................... 247,092 (149,969)
----------- -----------
Net increase (decrease) in cash and cash equivalents..................... 418,599 (17,069)
Cash and cash equivalents at beginning of period......................... 265,584 136,989
----------- -----------
Cash and cash equivalents at end of period............................... $ 684,183 $ 119,920
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest (including capitalized interest of $4,721 in
2002 and $7,556 in 2001)............................................. $ 113,172 $ 95,737
=========== ===========
NON-CASH TRANSACTIONS:
Class A units issued in acquisitions..................................... $ 607,155 $ --
Financing assumed in acquisitions........................................ 991,980 --
Unrealized gain on securities available for sale......................... -- 2,760
</Table>
See notes to consolidated financial statements.
Page 5
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Vornado Realty L.P. (the "Operating Partnership") is a Delaware limited
partnership. Vornado Reatly Trust ("Vornado"), a fully-integrated real estate
investment trust ("REIT"), is the sole general partner of, and owned
approximately 79% of the common limited partnership interest in, the Operating
Partnership at June 30, 2002. All references to the "Company" refer to the
Operating Partnership and its consolidated subsidiaries.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 2002, the consolidated
statements of income for the three and six months ended June 30, 2002 and 2001
and the consolidated statements of cash flows for the six months ended June 30,
2002 and 2001 are unaudited. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows have
been made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 as
filed with the Securities and Exchange Commission. The results of operations for
the six months ended June 30, 2002 are not necessarily indicative of the
operating results for the full year.
The accompanying consolidated financial statements include the accounts of
the Company, as well as entities in which the Company has a 50% or greater
interest, provided that the Company exercises control (where the Company does
not exercise control, such entities are accounted for under the equity method).
All significant intercompany amounts have been eliminated. Equity interests in
partially-owned corporate entities are accounted for under the equity method of
accounting when the Company's ownership interest is more than 20% but less than
50%. When partially-owned investments are in partnership form, the 20% threshold
may be reduced. For all other investments, the Company uses the cost method.
Equity investments are recorded initially at cost and subsequently adjusted for
the Company's share of the net income or loss and cash contributions and
distributions to or from these entities.
Management has made estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
Page 6
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS
No. 142 specifies that goodwill and some intangible assets will no longer be
amortized but instead be subject to periodic impairment testing. In the first
quarter of 2002, the Company wrote-off goodwill of approximately $30,129,000 of
which (i) $15,490,000 represents its share of the goodwill arising from the
Company's investment in Temperature Controlled Logistics and (ii) $14,639,000
represents goodwill arising from the Company's acquisition of the Hotel
Pennsylvania. The write-off has been reflected as a cumulative effect of a
change in accounting principle. Earnings allocable to the minority limited
partners has been reduced by their pro-rata share of the write-off of goodwill.
Previously reported Net Income Applicable to Class A Units for the three and six
months ended June 30, 2001 would have been approximately $300,000 and $600,000
higher if such goodwill was not amortized in the prior year's quarter and six
months.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002).
SFAS No. 143 requires the recording of the fair value of a liability for an
asset retirement obligation in the period which it is incurred. SFAS No. 144
supersedes current accounting literature and now provides for a single
accounting model for long-lived assets to be disposed of by sale and requires
discontinued operations presentation for disposals of a "component" of an
entity. The adoption of these statements did not have a material effect on the
Company's financial statements; however under SFAS No. 144, if the Company were
to dispose of a material operating property, such property's results of
operations will have to be separately disclosed as discontinued operations in
the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF SFAS NO. 4, 44,
AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTION. SFAS No. 145
rescinds SFAS No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT,
SFAS No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS, and SFAS No.
64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. SFAS No.
145 requires, among other things, (i) that the modification of a lease that
results in a change of the classification of the lease from capital to operating
under the provisions of SFAS No. 13 be accounted for as a sale-leaseback
transaction and (ii) the reporting of gains or losses from the early
extinguishment of debt as extraordinary items only if they met the criteria of
Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS.
The rescission of SFAS No. 4 is effective January 1, 2003. The amendment of SFAS
No. 13 is effective for transactions occurring on or after May 15, 2002. The
adoption of this statement will not have a material effect on the Company's
financial statements.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
anticipate the adoption of this statement will have a material effect on the
Company's financial statements.
Page 7
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
CHARLES E. SMITH COMMERCIAL REALTY L.P.
On January 1, 2002, the Company completed the combination of Charles E.
Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination,
Vornado owned a 34% interest in CESCR. The consideration for the remaining 66%
of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly
issued Vornado Realty L.P. Operating Partnership units (valued at $607,155,000)
and $991,980,000 of debt (66% of CESCR's total debt).
This acquisition was recorded under the purchase method of accounting. The
related purchase costs were allocated to acquired assets and assumed liabilities
using their relative fair values as of January 1, 2002 based on valuations and
other studies certain of which are not yet complete. Accordingly, the initial
valuations are subject to change as such information is finalized. The Company
believes that any such change will not be significant because the allocations
were principally to real estate.
The unaudited pro forma information set forth below presents the condensed
consolidated statements of income for the Company for the three and six months
ended June 30, 2001 as if the following transactions had occurred on January 1,
2001, (i) the acquisition of CESCR described above and (ii) Vornado's November
21, 2001 sale of 9,775,000 common shares and the use of proceeds to repay
indebtedness.
<Table>
<Caption>
Condensed Consolidated Statements of Income For the Three Months Ended For the Six Months Ended
(in thousands, except per unit amounts) June 30, June 30,
-------------------------- --------------------------
Pro Forma Pro Forma
2002 2001 2002 2001
----------- ---------- ---------- ----------
Revenues........................................... $ 353,247 $ 341,686 $ 699,571 $ 679,542
=========== ========== ========== ==========
Income before cumulative effect of change in accounting
principle and extraordinary item................. $ 105,376 $ 105,947 $ 217,845 $ 206,035
Cumulative effect of change in accounting
principle........................................ -- -- (30,129) (4,110)
Extraordinary item................................. -- -- -- 1,170
----------- ---------- ---------- ----------
Net income......................................... 105,376 105,947 187,716 203,095
Preferred unit distributions....................... (5,896) (9,192) (12,027) (18,865)
Preferential allocations........................... (24,142) (33,900) (48,203) (67,500)
----------- ---------- ---------- ----------
Net income applicable to Class A Units............. $ 75,338 $ 62,855 $ 127,486 $ 116,730
=========== ========== ========== ==========
Net income per Class A Unit - basic................ $ .59 $ .61 $ 1.01 $ 1.13
=========== ========== ========== ==========
Net income per Class A Unit - diluted.............. $ .57 $ .59 $ .97 $ 1.10
=========== ========== ========== ==========
</Table>
Page 8
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS - CONTINUED
INVESTMENT IN PRIMESTONE
On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. ("Primestone"). The Company received a 1% upfront fee
and was entitled to receive certain other fees aggregating approximately 3% upon
repayment of the loan. The loan bore interest at 16% per annum. Primestone
defaulted on the repayment of this loan on October 25, 2001. The loan was
subordinate to $37,957,000 of other debt of the borrower. On October 31, 2001,
the Company purchased the other debt for its face amount. The loans were secured
by 7,944,893 partnership units in Prime Group Realty, L.P., the operating
partnership of Prime Group Realty Trust (NYSE:PGE) and the partnership units are
exchangeable for the same number of common shares of PGE. The loans are also
guaranteed by affiliates of Primestone.
On November 19, 2001, the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000.
On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership
units at a foreclosure auction. The price paid for the units by application of a
portion of Primestone's indebtedness to the Company and Cadim was $8.35 per
unit, the April 30, 2002 PGE closing price on The New York Stock Exchange. On
June 28, 2002, pursuant to the terms of the participation agreement, the Company
transferred 3,972,447 of the partnership units to Cadim.
In the second quarter, in accordance with foreclosure accounting, the
Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated
based on (i) the acquisition price of the units and (ii) its valuation of the
amounts realizable under the guarantees by affiliates of Primestone, as compared
with the net carrying amount of the investment at April 30, 2002. At June 30,
2002, the Company's carrying amount of the investment was $40,270,000, of which
$33,170,000 represents the carrying amount of the 3,972,447 partnership units
owned by the Company ($8.35 per unit) and $7,100,000 represents the amount
realizable under the guarantees (see Note 5. Investments in and Advances to
Partially-Owned Entities).
At July 30, 2002, PGE's closing stock price on the New York Stock Exchange
was $5.43 per share. The ultimate realization of the Company's investment will
depend upon the future performance of the Chicago real estate market and the
performance of PGE, as well as the ultimate realizable value of the net assets
supporting the guarantees and the Company's ability to collect under the
guarantees. The Company will continue to monitor this investment to determine
whether additional write-downs are required based on (i) declines in value of
the PGE stock (for which the partnership units are exchangeable) which are
"other than temporary" as used in accounting literature and (ii) the realizable
value of the guarantees.
CRYSTAL GATEWAY ONE
On July 1, 2002, the Company acquired a 360,000 square foot office building
from a limited partnership, which is approximately 50% owned by Mr. Robert H.
Smith and Mr. Robert P. Kogod, trustees of the Company in exchange for
approximately 325,700 newly issued Vornado Operating Partnership units (valued
at $14,800,000). The building is located in the Crystal City complex in
Arlington, Virginia where the Company already owns 24 office buildings
containing over 6.9 million square feet, which it acquired on January 1, 2002,
in connection with the Company's acquisition of CESCR. In March 2002, the
Company had purchased the mortgage on this property for $55,000,000. On June 28,
2002, the limited partnership completed a $58,500,000 mortgage refinancing which
bears interest at 6.75% and matures in July 2012 and repaid the Company's
$55,000,000 mortgage.
Page 9
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS - CONTINUED
DISPOSITIONS
The following table sets forth the details of net (loss) gain on
disposition of wholly-owned and partially-owned assets for the three and six
months ended June 30, 2002 and 2001:
<Table>
<Caption>
For the Three Months Ended For the Six Months Ended
(amounts in thousands) June 30, June 30,
--------------------------- --------------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Wholly-owned Assets:
Loss on Primestone foreclosure........................... $ (17,671) $ -- $ (17,671) $ --
Gain on sale of Kinzie Park condominiums units........... 344 -- 1,875 --
Net gain on sale of marketable securities................ 12,346 -- 12,346 --
Net gain from condemnation proceedings................... -- 3,050 -- 3,050
Write-off of investments in technology companies......... -- (13,561) -- (18,284)
Partially-owned Assets:
Net gain on sale of 50% interest in 570 Lexington Avenue -- 12,445 -- 12,445
----------- ---------- ---------- ----------
$ (4,981) $ 1,934 $ (3,450) $ (2,789)
=========== ========== ========== ==========
</Table>
5. INVESTMENTS IN AND ADVANCES TO PARTIALLY-OWNED ENTITIES
The Company's investments in and advances to partially-owned entities and
income recognized from such investments are as follows:
INVESTMENTS AND ADVANCES:
<Table>
<Caption>
(amounts in thousands) June 30, 2002 December 31, 2001
------------- -----------------
Temperature Controlled Logistics.......................... $ 458,004 $ 474,862
Charles E. Smith Commercial Realty L.P. ("CESCR")(1)...... -- 347,263
Alexander's............................................... 185,953 188,522
Newkirk Joint Ventures(2)................................. 162,247 191,534
Prime Group Realty, L.P. and other guarantees(3).......... 40,270 --
Partially-Owned Office Buildings(4)....................... 22,619 23,346
Starwood Ceruzzi Joint Ventures........................... 26,055 25,791
Park Laurel............................................... 4,357 (4,745)
Other..................................................... 49,320 23,622
------------- -----------------
$ 948,825 $ 1,270,195
============= =================
</Table>
----------
(1) On January 1, 2002, the Company acquired the remaining 66% of
CESCR it did not previously own. Accordingly, CESCR is
consolidated as of January 1, 2002.
(2) The Company's investment in and advances to Newkirk Joint Ventures
is comprised of:
<Table>
<Caption>
June 30, 2002 December 31, 2001
------------- -----------------
Investments in limited partnerships...... $ 113,982 $ 143,269
Mortgages and loans receivable........... 39,511 39,511
Other ................................... 8,754 8,754
------------- -------------
Total ................................... $ 162,247 $ 191,534
============= =============
</Table>
On January 2, 2002, the Newkirk Joint Ventures' partnership
interests were merged into a master limited partnership (the
"MLP") in which the Company has a 21% interest. In conjunction
with the merger, the MLP completed a $225,000 mortgage financing
collateralized by its properties, subject to the existing first
and certain second mortgages on those properties. The loan bears
interest at LIBOR plus 5.5% with a LIBOR floor of 3% (8.5% at June
30, 2002) and matures on January 31, 2005, with two one-year
extension options. As a result of the financing on February 6,
2002, the MLP repaid approximately $28,200 of existing debt and
distributed approximately $37,000 to the Company.
(3) The Company's carrying amount of the investment consists of
3,972,447 partnership units valued at $33,170 ($8.35 per unit)
and guarantees valued at $7,100. The Company's 14.9% share of
equity in the income or loss of Prime Group Realty L.P. for the
period from April 30, 2002 (date of acquisition) to June 30,
2002 will be recognized in earnings in the quarter ending
September 30, 2002, as the investee has not released its
earnings prior to the filing of the Company's quarterly report
on Form 10-Q. Prior to April 30, 2002, this investment was in
the form of a loan and was included in Notes and Mortgage Loans
Receivable on the balance sheet.
(4) As at June 30, 2002, includes a 20% interest in a property which
was part of the CESCR acquisition in 2002.
Page 10
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. INVESTMENTS IN AND ADVANCES TO PARTIALLY-OWNED ENTITIES - CONTINUED
Below is a summary of the debt of partially owned entities, none of which
is guaranteed by the Company.
<Table>
<Caption>
(amounts in thousands) 100% OF
PARTIALLY-OWNED ENTITIES
DEBT
-----------------------------
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
Alexander's (33.1% interest) (see "Alexander's" on page 13 for further details):
Term loan secured by all of Alexander's assets except for the Kings Plaza
Regional Shopping Center:
Portion financed by the Company due on April 15, 2003 with interest
at 12.48%................................................................. $ 95,000 $ 95,000
Portion financed by a bank, due March 15, 2003, with interest at LIBOR +
1.85% (3.69% at June 30, 2002) (repaid on July 3, 2002)................... 10,000 10,000
Unsecured Line of Credit financed by the Company, due on April 15, 2003 with
interest at 12.48%............................................................. 24,000 24,000
Rego Park mortgage payable, due in June 2009, with interest at 7.25%.............. 82,000 82,000
Kings Plaza Regional Shopping Center mortgage payable, due in June 2011,
with interest at 7.46% (prepayable with yield maintenance)..................... 220,571 221,831
Paramus mortgage payable, due in October 2011, with interest at 5.92%
(prepayable without penalty)................................................... 68,000 68,000
Other notes and mortgages payable (repaid on July 3, 2002)........................ 15,000 15,000
Temperature Controlled Logistics (60% interest):
Mortgage notes payable collateralized by 58 temperature controlled warehouses,
due in May 2008, requires amortization based on a 25 year term with
interest at 6.89% (prepayable with yield maintenance).......................... 589,893 563,782
Other notes and mortgages payable................................................. 15,324 38,748
Newkirk Joint Ventures (21.1% interest):
Portion of first mortgages and contract rights, collateralized by the
partnerships' real estate, due from 2002 to 2024, with a weighted average
interest rate of 11.32% at June 30, 2002 (various prepayment rights)........... 1,516,757 1,336,989
Charles E. Smith Commercial Realty L.P. (34% interest in 2001):
29 mortgages payable.............................................................. -- 1,470,057
Unsecured line of credit.......................................................... -- 33,000
Partially Owned Office Buildings:
330 Madison Avenue (25% interest) mortgage note payable, due in April 2008,
with interest at 6.52% (prepayable with yield maintenance)..................... 60,000 60,000
825 Seventh Avenue (50% interest) mortgage payable, due in October 2014, with
interest at 8.07% (prepayable with yield maintenance).......................... 23,416 23,552
Las Catalinas Mall (50% interest):
Mortgage notes payable, due in November 2013 with interest at 6.97%
(prepayable after December 2002 with yield maintenance)........................ 68,075 68,591
Russian Tea Room (50% interest) mortgages payable, due in March 2012, with interest at
Prime plus 50 basis points (5.25% at June 30, 2002) (1)........................ 13,000 13,000
</Table>
The Company's share of the debt of partially owned entities was
$862,529,000 and $1,319,535,000 as of June 30, 2002 and December 31, 2001,
excluding the Company's share of Prime Group Realty L.P.'s outstanding debt as
the investee has not filed its quarterly report on Form 10-Q for the period
ended June 30, 2002, subsequent to the Company's acquisition of the partnership
units. Based on Prime Group Realty L.P.'s outstanding debt of $914,253,000 at
March 31, 2002, the Company's pro-rata share would be $136,224,000 (14.9%
interest).
- ----------
(1) On July 28, 2002 the Russian Tea Room ceased operations which represented an
event of default under the loans.
Page 11
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. INVESTMENTS IN AND ADVANCES TO PARTIALLY-OWNED ENTITIES - CONTINUED
INCOME:
<Table>
<Caption>
For The Three Months For The Six Months
(amounts in thousands) Ended June 30, Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Income applicable to Alexander's:
33.1% share of equity in net (loss) income.... $ (375)(1) $ 535 $ 794(1) $ 7,691(1)
Interest income............................... 2,756 2,935 5,287 6,362
Management and leasing fee income............. 2,106 1,206 3,974 2,927
----------- ---------- ---------- ----------
$ 4,487 $ 4,676 $ 10,055 $ 16,980
=========== ========== ========== ==========
Temperature Controlled Logistics:
60% share of equity in net (loss) income (2).. $ (424) $ 2,222 $ 3,383 $ 6,686
Management fee (40% of 1% per annum of
Total Combined Assets, as defined)......... 1,511 1,499 3,009 2,983
----------- ---------- ---------- ----------
1,087 3,721 6,392 9,669
----------- ---------- ---------- ----------
CESCR-34% share of equity in net income (3)..... -- 6,828 -- 14,195
----------- ---------- ---------- ----------
Newkirk Joint Ventures:
Equity in net income of limited partnerships 5,974 6,484 11,403 12,726
Interest and other income................... 2,326 1,477 4,597 3,202
----------- ---------- ---------- ----------
8,300 7,961 16,000 15,928
----------- ---------- ---------- ----------
Partially-Owned Office Buildings (4)............ 726 1,509 1,276 2,773
Other........................................... (287) (791) (56) 653(5)
----------- ---------- ---------- ----------
$ 9,826 $ 19,228 $ 23,612 $ 43,218
=========== ========== ========== ==========
</Table>
----------
(1) Equity in income for the three and six months ended June 30, 2002
includes a charge of $1,402 representing the Company's share of
Alexander's stock appreciation rights compensation expense of $4,236
based on Alexander's closing stock price of $76.80 on June 30, 2002.
Equity in income for the six months ended June 30, 2001 includes
$6,298 representing the Company's share of Alexander's gain on sale of
its Fordham Road property and excludes $1,170 representing the
Company's share of Alexander's extraordinary gain on the early
extinguishment of debt on this property which is reflected as an
extraordinary item on the consolidated statements of income.
(2) Equity in net income for the three and six months ended June 30, 2002,
reflects (i) a decrease in rental income of $793 and $1,351,
respectively, and (ii) a $1,376 loss on the disposition of an asset.
(3) On January 1, 2002, the Company acquired the remaining 66% of CESCR it
did not previously own. Accordingly, CESCR is consolidated as of
January 1, 2002.
(4) 2002 includes a 20% interest in a property which was part of the
acquisition of CESCR, and does not include 570 Lexington Avenue which
was sold in May 2001.
(5) Includes $1,300 for the Company's share of the Starwood Ceruzzi Joint
Venture's gain on the sale of a property.
Page 12
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. INVESTMENTS IN AND ADVANCES TO PARTIALLY-OWNED ENTITIES - CONTINUED
TEMPERATURE CONTROLLED LOGISTICS
Based on the Company's policy of recognizing rental income when earned and
collection is assured or cash is received, the Company did not recognize
$3,744,000 and $5,552,000 of rent it was due for the three and six months ended
June 30, 2002 and $2,340,000 of rent it was due for the three and six months
ended June 30, 2001. At June 30, 2002, the Company's balance of the tenant's
total deferred rent is $10,553,000.
ALEXANDER'S
The Company owns 1,655,000 common shares or 33.1% of the common stock of
Alexander's at June 30, 2002.
Alexander's is managed by and its properties are leased by the Company
pursuant to management, leasing and development agreements with one-year terms
expiring in March of each year, which are automatically renewable. In
conjunction with the closing of the Alexander's Lexington Avenue construction
loan on July 3, 2002, these agreements were bifurcated to cover the Alexander's
Lexington Avenue property separately. Further, the Lexington Avenue management
and development agreements were amended to provide for a term lasting until
substantial completion of the development of the property, with automatic
renewals, and for the payment of the development fee upon the earlier of January
3, 2006, or the payment in full of the construction loan encumbering the
property.
Pursuant to both the pre and post July 3, 2002 management, leasing and
development agreements, the Company is entitled to a development fee based on 6%
of construction costs as defined. The development fee for the Alexander's
Lexington Avenue project is estimated to be approximately $26,300,000, of which
$1,957,000 and $2,988,000 have been recorded during the three and six months
ended June 30, 2002. Of these amounts, $1,425,000 and $2,115,000 have been
recognized as income and the balance has been reflected as a reduction in the
Investment account. The Company is also owed $1,073,000 under the leasing
agreement which is payable in 2002.
At June 30, 2002, the Company has loans receivable from Alexander's of
$119,000,000, including $24,000,000 under the $50,000,000 line of credit the
Company granted to Alexander's. On March 15, 2002, the loan and the line of
credit were extended to April 15, 2003. The interest rates on the loan and line
of credit were reset on March 15, 2002, from 13.74% to 12.48%, using a Treasury
index (with a 3% floor) plus the same spread to treasuries as previously
existed. On July 3, 2002, in conjunction with the closing of Alexander's
Lexington Avenue construction loan, the maturity of the Company's loans was
extended to the earlier of January 3, 2006 or the date the Alexander's Lexington
Avenue construction loan is repaid in full and the debt was bifurcated among
various subsidiaries of Alexander's (all guaranteed by Alexander's). In
addition, amounts which may be due under the Completion Guarantee described in
the next paragraph would be due at the same time.
On July 3, 2002, Alexander's finalized a $490,000,000 loan with HVB Real
Estate Capital (HYPO Vereinsbank) to finance the construction of its 1.3 million
square foot multi-use building at its 59th Street and Lexington Avenue location.
The estimated construction costs in excess of the construction loan of
approximately $140,000,000 will be provided by Alexander's. The loan has an
interest rate of LIBOR plus 2.5% and a term of forty-two months plus two
one-year extensions. Alexander's has received an initial funding of $55,500,000
under the loan of which $25,000,000 was used to repay existing loans and notes
payable. Pursuant to this loan, Vornado has agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of project costs in excess of a stated loan budget, if not funded by
Alexander's (the "Completion Guarantee"). The $6,300,000 estimated fee payable
by Alexander's to the Company for the Completion Guarantee is 1% of construction
costs (as defined) and is due at the same time that the development fee is due.
In addition, if the Company should advance any funds under the Completion
Guarantee in excess of the $26,000,000 currently available under the secured
line of credit, interest on those advances is at 15% per annum.
Page 13
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. DEBT AND EQUITY FINANCING
Following is a summary of the Company's debt, by segment, at June 30, 2002:
(amounts in thousands)
<Table>
<Caption>
INTEREST BALANCE AS OF
RATE AS AT ----------------------------
JUNE 30, JUNE 30, DECEMBER 31,
MATURITY 2002 2002 2001
----------- ---------- ----------- -------------
Notes and Mortgages Payable:
Fixed Interest:
NYC Office:
Two Penn Plaza.............................. 03/04 7.08% $ 156,210 $ 157,697
888 Seventh Avenue.......................... 02/06 6.63% 105,000 105,000
Eleven Penn Plaza........................... 05/07 8.39% 50,890 51,376
866 UN Plaza................................ 04/04 7.79% 33,000 33,000
CESCR Office (1):
Crystal Park 1-5............................ 07/06-08/13 7.00%-7.21% 266,691 (1)
Crystal Gateway 2, 3, 4/Crystal Square 5.... 08/13-01/25 7.11%-7.43% 158,181 (1)
Crystal Square 2, 3 and 4................... 10/10-11/14 7.14%-7.42% 146,266 (1)
Skyline Place 1, 3, 4, 5 and 6.............. 08/06-12/09 7.00% 141,636 (1)
1101 17th , 1140 Connecticut, 1730 M &
1150 17th................................. 08/10 7.00% 97,981 (1)
Courthouse Plaza 1 and 2.................... 01/08 7.06% 80,760 (1)
Crystal Gateway N., Arlington Plaza and
1919 S. Eads.............................. 11/07 7.00% 73,299 (1)
Reston Executive I, II & III................ 01/06 7.00% 74,068 (1)
Crystal Plaza 1-6........................... 10/04 7.00% 71,293 (1)
One Skyline Tower........................... 06/08 7.12% 66,207 (1)
Crystal Malls 1-4........................... 12/11 7.08% 68,281 (1)
1750 Pennsylvania Avenue.................... 06/32 7.26% 50,000 (1)
One Democracy Plaza......................... 02/05 7.00% 28,028 (1)
Retail:
Cross collateralized mortgages payable on
42 shopping centers....................... 03/10 7.93% 489,776 492,156
Green Acres Mall............................ 02/08 6.75% 151,810 152,894
Montehiedra Town Center..................... 05/17 8.23% 59,999 60,359
Merchandise Mart:
Market Square Complex....................... 07/11 7.95% 48,966 49,702
Washington Design Center.................... 10/11 6.95% 48,730 48,959
Washington Office Center.................... 02/04 6.80% 45,774 46,572
Other....................................... 03/09-06/13 7.03%-7.71% 44,864 18,951
Other:
Industrial Warehouses....................... 10/11 6.95% 49,648 50,000
Student Housing Complex..................... 11/07 7.45% 19,131 19,243
Other....................................... 7.95% 6,942 8,659
----------- -------------
Total Fixed Interest Notes and Mortgages
Payable........................... 7.29% 2,633,431 1,294,568
----------- -------------
</Table>
Page 14
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. DEBT AND EQUITY FINANCING - CONTINUED
<Table>
<Caption>
INTEREST BALANCE AS OF
RATE AS AT ---------------------------
(amounts in thousands) JUNE 30, JUNE 30, DECEMBER 31,
MATURITY SPREAD 2002 2002 2001
-------- ------ ---------- ----------- -----------
Notes and Mortgages Payable:
Variable Interest:
NYC Office:
One Penn Plaza(2)....................... 06/03 L+125 3.23% $ 275,000 $ 275,000
770 Broadway/595 Madison Avenue
cross-collateralized mortgage(3)...... 04/03 L+40 2.24% 238,659 123,500
909 Third Avenue........................ 07/03 L+165 3.49% 106,420 105,253
Two Park Avenue(5)...................... 03/03 L+145 3.35% 90,000 90,000
CESCR Office:
Tyson Dulles Plaza...................... 06/03 L+130 3.14% 70,000 (1)
Commerce Executive III, IV & V.......... 07/03 L+150 3.34% 53,670 (1)
Seven Skyline(5)........................ 10/02 L+135 3.20% 52,185 (1)
Merchandise Mart:
Merchandise Mart(5)..................... 10/02 L+150 3.34% 250,000 250,000
Furniture Plaza......................... 02/03 L+200 3.91% 48,290 43,524
33 North Dearborn Street................ 09/03 L+175 3.65% 19,000 19,000
350 North Orleans(5).................... 06/02 L+165 -- -- 70,000
Other................................... 01/03 P-50 4.25% 139 294
Other:
Palisades construction loan............. 01/03 L+185 3.90% 98,852 90,526
Hotel Pennsylvania(4)................... 10/02 L+160 -- -- 115,508
----------- -----------
Total Variable Interest Notes and
Mortgages Payable................ 3.18% 1,302,215 1,182,605
=========== ===========
Total Notes and Mortgages Payable........... $ 3,935,646 $ 2,477,173
=========== ===========
Unsecured revolving credit facility......... 03/03 L+90 -- $ -- $ --
=========== ===========
Senior unsecured debt due 2007(5)........... 06/07 L+77 2.59% $ 499,283 $ --
=========== ===========
</Table>
----------
(1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it
did not previously own. Prior to January 1, 2002, the Company's share
of CESCR's debt was netted in Investments in and Advances to
Partially-Owned Entities. In connection with the acquisition, CESCR's
fixed rate debt of $1,289,837 was fair valued at $1,322,685 upon the
application of purchase accounting.
(2) On June 21, 2002, one of the lenders purchased the other participant's
interest in the loan. At the same time, the loan was extended for one
year, with certain modifications including, (i) making the risk of a
loss due to terrorism (as defined) not covered by insurance recourse
to the Company and (ii) the granting of two 1-year renewal options to
the Company.
(3) On April 1, 2002, the Company increased its mortgage financing
cross-collateralized by its 770 Broadway/595 Madison Avenue properties
by $115,000. The proceeds of the loan are in a restricted mortgage
escrow account which bears interest at the same rate as the loan, and
at June 30, 2002 totals $238,659.
(4) On April 1, 2002, the loan was prepaid in full.
(5) On June 24, 2002, the Company completed an offering of $500,000
aggregate principal amount of 5.625% senior unsecured notes due June
15, 2007. Interest on the notes is payable semi-annually on June 15th
and December 15th, commencing December 15, 2002. The notes were priced
at 99.856% of their face amount to yield 5.659%. Of the net proceeds
of approximately $496,300, (i) $70,000 was used to repay the mortgage
payable on 350 North Orleans prior to June 30, 2002 and (ii) $393,000
was used to repay the mortgages on Two Park Avenue, the Merchandise
Mart and a portion of Seven Skyline in July and August 2002. After the
repayment of these mortgages, the balance of the Company's
wholly-owned debt was $4,041,929, as compared to $3,970,486 at March
31, 2002. On June 27, 2002, the Company entered into interest rate
swaps that effectively converted the interest rate on the $500,000
senior unsecured notes due 2007 from a fixed rate of 5.625% to a
floating rate of LIBOR plus .7725, based upon the trailing 3 month
LIBOR rate (2.59% if set on August 1, 2002).
Page 15
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. DEBT AND EQUITY FINANCING - CONTINUED
The principal repayments for the next five years and thereafter are as
follows:
(amounts in thousands)
<Table>
<Caption>
AS AT JUNE 30, AS AT JULY 31,
YEAR ENDING DECEMBER 31, 2002 2002
------------------------ ------------- -------------
2002.............................................. $ 302,185 $ --
2003.............................................. 1,000,030 910,030
2004.............................................. 306,093 306,093
2005.............................................. 27,197 27,197
2006.............................................. 259,429 259,429
Thereafter........................................ 2,539,995 2,539,995
</Table>
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its revolving
credit agreement and its senior unsecured notes due 2007, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. The Company has received
correspondence from four lenders regarding terrorism insurance coverage, which
the Company has responded to. If lenders insist on coverage for these risks, it
could adversely affect the Company's ability to finance and/or refinance its
properties and to expand its portfolio.
EQUITY
On February 25, 2002, Vornado sold 1,398,743 common shares based on the
closing price of $42.96 on the NYSE. The net proceeds to the Company were
approximately $57,042,000.
7. OTHER RELATED PARTY TRANSACTIONS
The Company currently manages and leases the real estate assets of
Interstate Properties pursuant to a management agreement. Management fees earned
by the Company pursuant to the management agreement were $381,000 and $514,000
for the three months ended June 30, 2002 and 2001 and $584,000 and $884,000 for
the six months ended June 30, 2002 and 2001.
The estate of Bernard Mendik and certain other individuals including Mr.
Greenbaum, own an entity which provides cleaning and related services and
security services to office properties, including the Company's Manhattan office
properties. The Company was charged fees in connection with these contracts of
$14,122,000 and $12,725,000 for the three months ended June 30, 2002 and 2001,
and $27,622,000 and $25,625,000 for the six months ended June 30, 2002 and 2001.
Effective January 1, 2002, Vornado extended its employment agreement with
Mr. Fascitelli for a five year period through December 31, 2006. Pursuant to the
extended employment agreement, he is entitled to receive a deferred payment on
December 31, 2006 of 626,566 Vornado common shares which are valued for
compensation purposes at $27,500,000 (the value of the shares on March 8, 2002,
the date the extended employment agreement was signed). The number of shares was
set by Vornado's Compensation Committee in December 2001 to achieve a value of
$25,000,000 and had appreciated $2,500,000 as of March 8, 2002. The shares are
being held in an irrevocable trust for the benefit of Mr. Fascitelli and will
vest on December 31, 2002. Mr. Fascitelli will also receive regular annual cash
compensation as determined by Vornado's Compensation Committee and will continue
as a member of Vornado's Board. Mr. Fascitelli may also borrow up to $20,000,000
from Vornado during the term of his 2002 employment agreement reduced by
$8,600,000, the amount of his outstanding loans under his 1996 employment
agreement. Each loan will bear interest, payable quarterly, at the applicable
Federal Rate on the date the loan is made and will mature on the fifth
anniversary of the loan.
Page 16
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. OTHER RELATED PARTY TRANSACTIONS - CONTINUED
On May 29, 2002, Mr. Roth replaced common shares of Vornado securing
Vornado's outstanding loan to Mr. Roth with options to purchase common shares of
Vornado with a value of not less than two times the loan amount. See Exhibit
10.11 to this Quarterly Report on Form 10-Q for a copy of the related agreement.
Pursuant to Vornado's annual compensation review in February 2002 with
Joseph Macnow, Vornado's Chief Financial Officer, the Compensation Committee
approved a $2,000,000 loan to Mr. Macnow, bearing interest at the applicable
federal rate of 4.65% per annum and due January 1, 2006. The loan, which was
funded on July 23, 2002, was made in conjunction with Mr. Macnow's June 2002
exercise of options to purchase 225,000 shares of Vornado's common stock. The
loan is collateralized by assets with a value of not less than two times the
loan amount.
VORNADO OPERATING COMPANY ("VORNADO OPERATING")
Pursuant to a revolving credit facility which expires December 31, 2004,
Vornado Operating owes the Company $31,489,000 at June 30, 2002. Vornado
Operating has disclosed that in the aggregate its investments do not, and for
the foreseeable future are not expected to, generate sufficient cash flow to pay
all of its debts and expenses. Further, Vornado Operating states that its only
investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a
partnership 60% owned by the Company and 40% owned by Crescent Real Estate
Equities, will need to restructure the leases between the Landlord and the
Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates a further lease restructuring and the sale of
non-core assets by AmeriCold Logistics, and accordingly, Vornado Operating is
expected to have a source to repay the debt under this facility which may be
extended. Since January 1, 2002, the Company has not recognized income on the
debt under this facility.
Page 17
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME PER UNIT
The following table sets forth the computation of basic and diluted income
per unit:
<Table>
<Caption>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
(amounts in thousands except per unit amounts)
Numerator:
Income before cumulative effect of change in
accounting principle and extraordinary item.......... $ 105,376 $ 94,052 $ 217,845 $ 180,456
Cumulative effect of change in accounting
principle............................................ -- -- (30,129) (4,110)
Extraordinary item..................................... -- -- -- 1,170
----------- ---------- ---------- -----------
Net income............................................. 105,376 94,052 187,716 177,516
Preferred unit distributions........................... (5,896) (9,192) (12,027) (18,865)
Preferential allocations............................... (24,142) (23,576) (48,203) (46,885)
----------- ---------- ---------- -----------
Numerator for basic and diluted income per
Class A Unit - net income applicable to
Class A Units.......................................... $ 75,338 $ 61,284 $ 127,486 $ 111,766
=========== ========== ========== ===========
Denominator:
Denominator for basic income per Class A Unit -
weighted average Class A Units....................... 127,255 93,638 126,347 93,591
Effect of dilutive securities:
Employee unit options................................ 4,464 2,701 4,204 2,637
Deferred compensation units issued but not yet earned 347 -- 264 --
----------- ---------- ---------- -----------
Denominator for diluted income per Class A Unit -
adjusted weighted average Class A Units and
assumed conversions.................................. 132,066 96,339 130,815 96,228
=========== ========== ========== ===========
INCOME PER CLASS A UNIT - BASIC:
Income before cumulative effect of change in
accounting principle and extraordinary item........ $ .59 $ .65 $ 1.25 $ 1.23
Cumulative effect of change in accounting
principle.......................................... -- -- (.24) (.05)
Extraordinary item................................... -- -- -- .01
----------- ---------- ---------- -----------
Net income per Class A Unit.......................... $ .59 $ .65 $ 1.01 $ 1.19
=========== ========== =========== ===========
INCOME PER CLASS A UNIT - DILUTED:
Income before cumulative effect of change in
accounting principle and extraordinary item........ $ .57 $ .64 $ 1.20 $ 1.20
Cumulative effect of change in accounting
principle......................................... -- -- (.23) (.05)
Extraordinary item................................... -- -- -- .01
----------- ---------- ---------- -----------
Net income per Class A Unit.......................... $ .57 $ .64 $ .97 $ 1.16
=========== ========== =========== ===========
</Table>
Page 18
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income:
<Table>
<Caption>
amounts in thousands) For The Three Months For The Six Months
Ended June 30, Ended June 30,
-------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- ---------- -----------
Net income applicable to Class A Units ......... $ 75,338 $ 61,284 $ 127,486 $ 111,766
Adjustment to record cumulative effect of change
in accounting principle .................... -- -- -- 4,110
Other comprehensive (loss) income .............. (11,787) 8,532 (8,862) 9,050
--------- --------- ---------- -----------
Comprehensive income ........................... $ 63,551 $ 69,816 $ 118,624 $ 124,926
========= ========= ========== ===========
</Table>
10. COMMITMENTS AND CONTINGENCIES
At June 30, 2002, the Company's revolving credit facility had a zero
balance, and the Company utilized $15,718,000 of availability under the facility
for letters of credit and guarantees.
In conjunction with the closing of Alexander's Lexington Avenue
construction loan on July 3, 2002, the Company agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of all project costs in excess of a stated loan budget, if not funded by
Alexander's.
Each of the Company's properties has been subjected to varying degrees of
environmental assessment at various times. The environmental assessments did not
reveal any 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 the
Company.
The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 do not expressly exclude coverage for hostile acts, except for acts of war.
Since September 11, 2001, insurance companies have for the most part excluded
terrorist acts from coverage in all risk policies. The Company has generally
been unable to obtain all risk insurance which includes coverage for terrorist
acts for policies it has renewed since September 11, 2001, for each of its
business. In 2002, the Company obtained $200,000,000 of separate coverage for
terrorist acts for each of its New York City Office, Washington, D.C. Office,
Retail and Merchandise Mart businesses and $60,000,000 for its Temperature
Controlled Logistics business. Therefore, the Company is at risk for financial
loss in excess of these limits for terrorist acts (as defined), which loss could
be material.
Page 19
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), its senior
unsecured notes due 2007 and its revolving credit agreement, contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. The Company has received
correspondence from four lenders regarding terrorism insurance coverage, which
the Company has responded to. If lenders insist on coverage for these risks, it
could adversely affect the Company's ability to finance and/or refinance its
properties and to expand its portfolio.
From time to time, the Company has disposed of substantial amounts of real
estate to third parties for which, as to certain properties, it remains
contingently liable for rent payments or mortgage indebtedness.
There are various legal actions against the Company in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the outcome of such matters will not have a material effect on the
Company's financial condition, results of operations or cash flow.
Page 20
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SEGMENT INFORMATION
The Company has four business segments: Office, Retail, Merchandise Mart
and Temperature Controlled Logistics.
<Table>
<Caption>
For The Three Months Ended June 30,
-----------------------------------------------------------------------------
(amounts in thousands) 2002
-----------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- --------- ----------- ----------- ---------
Rentals ............................... $ 309,869 $ 213,762 $ 28,922 $ 52,868 $ -- $ 14,317
Expense reimbursements ................ 36,315 19,949 11,800 3,872 -- 694
Other income .......................... 7,063 5,090 391 1,220 -- 362
--------- --------- --------- -------- --------- ---------
Total revenues ........................ 353,247 238,801 41,113 57,960 -- 15,373
--------- --------- --------- -------- --------- ---------
Operating expenses .................... 126,267 80,395 12,987 21,353 -- 11,532
Depreciation and amortization ......... 49,563 34,121 3,546 7,288 -- 4,608
General and administrative ............ 23,759 9,400 1,796 4,894 -- 7,669
Amortization of officer's deferred
compensation expense ................ 6,875 -- -- -- -- 6,875
--------- --------- --------- -------- --------- ---------
Total expenses ........................ 206,464 123,916 18,329 33,535 -- 30,684
--------- --------- --------- -------- --------- ---------
Operating income ...................... 146,783 114,885 22,784 24,425 -- (15,311)
Income applicable to Alexander's ...... 4,487 -- -- -- -- 4,487
Income from partially-owned
entities ............................ 9,826 726 (298) 11 1,087(6) 8,300
Interest and other investment
income .............................. 9,934 2,758 78 143 -- 6,955
Interest and debt expense ............. (60,119) (34,748) (14,018) (6,687) -- (4,666)
Net gain on disposition of wholly-
owned and partially-owned assets .... (4,981) -- -- 344 -- (5,325)
Minority interest ..................... (554) (906) -- 226 -- 126
--------- --------- --------- -------- --------- ---------
Income before cumulative effect
of change in accounting
principle and extraordinary item .... 105,376 82,715 8,546 18,462 1,087 (5,434)
Cumulative effect of change in
accounting principle ................ -- -- -- -- -- --
Extraordinary item .................... -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Net income ............................ 105,376 82,715 8,546 18,462 1,087 (5,434)
Cumulative effect of change in
accounting principle ................ -- -- -- -- -- --
Extraordinary item .................... -- -- -- -- -- --
Minority interest ..................... 554 906 -- (226) -- (126)
Net gain on disposition of wholly-owned
and partially-owned assets .......... -- -- -- -- -- --
Interest and debt expense(4) .......... 76,199 35,253 14,653 6,687 6,302 13,304
Depreciation and amortization(4) ...... 62,360 34,577 4,097 7,288 8,344 8,054
Straight-lining of rents(4) ........... (9,224) (7,392) (426) (742) -- (664)
Other ................................. 334 (1,127) 160 -- 912 389
--------- --------- --------- -------- --------- ---------
EBITDA(1) ............................. $ 235,599 $ 144,932 $ 27,030 $ 31,469 $ 16,645 $ 15,523
========= ========= ========= ======== ========= =========
<Caption>
For The Three Months Ended June 30,
------------------------------------------------------------------------------
(amounts in thousands) 2001
------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- --------- ----------- ----------- ---------
Rentals ............................... $ 212,252 $ 114,260 $ 28,764 $ 50,118 $ -- $ 19,110
Expense reimbursements ................ 31,543 15,920 11,711 3,858 -- 54
Other income .......................... 2,280 813 542 818 -- 107
--------- --------- --------- --------- --------- ---------
Total revenues ........................ 246,075 130,993 41,017 54,794 -- 19,271
--------- --------- --------- --------- --------- ---------
Operating expenses .................... 96,831 51,684 13,002 21,662 -- 10,483
Depreciation and amortization ......... 30,086 17,300 3,447 6,064 -- 3,275
General and administrative ............ 22,415 2,637 819 4,650 -- 14,309
Amortization of officer's deferred
compensation expense ................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total expenses ........................ 149,332 71,621 17,268 32,376 -- 28,067
--------- --------- --------- --------- --------- ---------
Operating income ...................... 96,743 59,372 23,749 22,418 -- (8,796)
Income applicable to Alexander's ...... 4,676 -- -- -- -- 4,676
Income from partially-owned
entities ............................ 19,228 8,365 495 (4) 3,721(6) 6,651
Interest and other investment
income .............................. 15,874 1,897 416 714 -- 12,847
Interest and debt expense ............. (43,994) (14,407) (14,264) (8,317) -- (7,006)
Net gain on disposition of wholly-
owned and partially-owned assets .... 1,934 12,445 3,050 -- -- (13,561)
Minority interest ..................... (409) (409) -- -- -- --
--------- --------- --------- --------- --------- ---------
Income before cumulative effect
of change in accounting
principle and extraordinary item .... 94,052 67,263 13,446 14,811 3,721 (5,189)
Cumulative effect of change in
accounting principle ................ -- -- -- -- -- --
Extraordinary item .................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income ............................ 94,052 67,263 13,446 14,811 3,721 (5,189)
Cumulative effect of change in
accounting principle ................ -- -- -- -- -- --
Extraordinary item .................... -- -- -- -- -- --
Minority interest ..................... 409 409 -- -- -- --
Net gain on disposition of wholly-owned
and partially-owned assets .......... (15,495) (12,445) (3,050) -- -- --
Interest and debt expense(4) .......... 67,151 24,859 14,906 8,317 6,773 12,296
Depreciation and amortization(4) ...... 45,918 21,992 4,612 6,064 8,403 4,847
Straight-lining of rents(4) ........... (6,339) (4,050) (534) (1,280) -- (475)
Other ................................. 2,997 (630) (498) -- 69 4,056
--------- --------- --------- --------- --------- ---------
EBITDA(1) ............................. $ 188,693 $ 97,398 $ 28,882 $ 27,912 $ 18,966 $ 15,535
========= ========= ========= ========= ========= =========
</Table>
- ----------
See footnotes on page 23.
Page 21
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SEGMENT INFORMATION- CONTINUED
The Company has four business segments: Office, Retail, Merchandise Mart
and Temperature Controlled Logistics.
<Table>
<Caption>
For The Six Months Ended June 30,
-----------------------------------------------------------------------------
(amounts in thousands) 2002
-----------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- --------- -------- --------- ---------
Rentals .......................... $ 611,629 $ 427,574 $ 57,992 $ 99,878 $ -- $ 26,185
Expense reimbursements ........... 74,119 41,356 23,817 7,215 -- 1,731
Other income ..................... 13,823 10,073 605 2,637 -- 508
--------- --------- --------- -------- --------- ---------
Total revenues ................... 699,571 479,003 82,414 109,730 -- 28,424
--------- --------- --------- -------- --------- ---------
Operating expenses ............... 253,713 162,628 27,668 42,580 -- 20,837
Depreciation and amortization .... 97,151 68,251 6,926 13,768 -- 8,206
General and administrative ....... 47,226 18,510 2,366 9,705 -- 16,645
Costs of acquisitions
not consummated ................ -- -- -- -- -- --
Amortization of officer's deferred
compensation expense ........... 13,750 -- -- -- -- 13,750
--------- --------- --------- -------- --------- ---------
Total expenses ................... 411,840 249,389 36,960 66,053 -- 59,438
--------- --------- --------- -------- --------- ---------
Operating income ................. 287,731 229,614 45,454 43,677 -- (31,014)
Income applicable to Alexander's . 10,055 -- -- -- -- 10,055
Income from partially-owned
entities ....................... 23,612 1,276 (69) 13 6,392(6) 16,000
Interest and other investment
income ......................... 19,577 3,869 157 278 -- 15,273
Interest and debt expense ........ (118,137) (69,510) (27,711) (13,870) -- (7,046)
Net gain on disposition of wholly-
owned and partially-owned
assets ......................... (3,450) -- -- 1,875 -- (5,325)
Minority interest ................ (1,543) (1,786) -- 127 -- 116
--------- --------- --------- -------- --------- ---------
Income before cumulative effect of
change in accounting principle
and extraordinary item ......... 217,845 163,463 17,831 32,100 6,392 (1,941)
Cumulative effect of change in
accounting principle ........... (30,129) -- -- -- (15,490) (14,639)
Extraordinary item ............... -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Net income ....................... 187,716 163,463 17,831 32,100 (9,098) (16,580)
Cumulative effect of change in
accounting principle ........... 30,129 -- -- -- 15,490 14,639
Extraordinary item ............... -- -- -- -- -- --
Minority interest ................ 1,543 1,786 -- (127) -- (116)
Net gain on disposition of
wholly-owned and partially-owned
assets ........................... -- -- -- -- -- --
Interest and debt expense(4) ..... 150,492 70,519 28,981 13,870 12,861 24,261
Depreciation and amortization(4) . 122,935 69,171 7,747 13,768 17,253 14,996
Straight-lining of rents(4) ...... (18,263) (14,702) (855) (1,791) -- (915)
Other ............................ 75 (2,427) 860 (123) 1,376 389
--------- --------- --------- -------- --------- ---------
EBITDA(1) ........................ $ 474,627 $ 287,810 $ 54,564 $ 57,697 $ 37,882 $ 36,674
========= ========= ========= ======== ========= =========
<Caption>
For The Six Months Ended June 30,
-----------------------------------------------------------------------------------
(amounts in thousands) 2001
-----------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- --------- --------- -------- ----------
Rentals .......................... $ 416,970 $ 228,120 $ 56,901 $ 97,123 $ -- $ 34,826
Expense reimbursements ........... 66,635 34,961 23,506 7,831 -- 337
Other income ..................... 5,080 1,385 905 1,537 -- 1,253
--------- --------- --------- --------- -------- ----------
Total revenues ................... 488,685 264,466 81,312 106,491 -- 36,416
--------- --------- --------- --------- -------- ----------
Operating expenses ............... 197,214 107,445 27,854 42,794 -- 19,121
Depreciation and amortization .... 61,951 35,944 7,007 12,506 -- 6,494
General and administrative ....... 36,663 6,007 1,402 9,245 -- 20,009
Costs of acquisitions
not consummated ................ 5,000 -- -- -- -- 5,000
Amortization of officer's deferred
compensation expense ........... -- -- -- -- -- --
--------- --------- --------- --------- -------- ----------
Total expenses ................... 300,828 149,396 36,263 64,545 -- 50,624
--------- --------- --------- --------- -------- ----------
Operating income ................. 187,857 115,070 45,049 41,946 -- (14,208)
Income applicable to Alexander's . 16,980 -- -- -- -- 16,980
Income from partially-owned
entities ....................... 43,218 17,060 2,392 109 9,669(6) 13,988
Interest and other investment
income ......................... 29,347 4,195 416 1,377 -- 23,359
Interest and debt expense ........ (93,389) (31,014) (28,413) (17,986) -- (15,976)
Net gain on disposition of wholly-
owned and partially-owned
assets ......................... (2,789) 12,445 3,050 -- -- (18,284)
Minority interest ................ (768) 768 -- -- -- --
--------- --------- --------- --------- -------- ----------
Income before cumulative effect of
change in accounting principle
and extraordinary item ......... 180,456 116,988 22,494 25,446 9,669 5,859
Cumulative effect of change in
accounting principle ........... (4,110) -- -- -- -- (4,110)
Extraordinary item ............... 1,170 -- -- -- -- 1,170
--------- --------- --------- --------- -------- ----------
Net income ....................... 177,516 116,988 22,494 25,446 9,669 2,919
Cumulative effect of change in
accounting principle ........... 4,110 -- -- -- -- 4,110
Extraordinary item ............... (1,170) -- -- -- -- (1,170)
Minority interest ................ 768 768 -- -- -- --
Net gain on disposition of
wholly-owned and partially-owned
assets ........................... (15,495) (12,445) (3,050) -- -- --
Interest and debt expense(4) ..... 140,405 52,306 29,697 17,986 13,486 26,930
Depreciation and amortization(4) . 93,836 45,636 9,339 12,506 16,811 9,544
Straight-lining of rents(4) ...... (14,076) (10,005) (695) (2,388) -- (988)
Other ............................ (7,560) (2,220) (1,335) -- 181 (4,186)(5)
--------- --------- --------- --------- -------- ----------
EBITDA(1) ........................ $ 378,334 $ 191,028 $ 56,450 $ 53,550 $ 40,147 $ 37,159
========= ========= ========= ========= ======== ==========
</Table>
- ----------
See footnotes on page 23.
Page 22
<Page>
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SEGMENT INFORMATION- CONTINUED
Notes to segment information:
(1) EBITDA represents income before interest, taxes, depreciation and
amortization, extraordinary or non-recurring items, gains or losses on
sales of depreciable real estate, the effect of straight-lining of
property rentals for rent escalations and minority interest. Management
considers EBITDA a supplemental measure for making decisions and
assessing the performance of its segments. EBITDA may not be comparable
to similarly titled measures employed by other companies.
(2) Other EBITDA is comprised of:
<Table>
<Caption>
(amounts in thousands) For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Hotel Pennsylvania (3).......................... $ 2,152 $ 6,141 $ 2,906 $ 11,421
Newkirk Joint Ventures:
Equity in income of limited partnerships...... 15,500 12,107 30,529 26,708
Interest and other income..................... 2,200 1,590 4,471 3,202
Other partially-owned entities (Alexander's and
other)........................................ 6,760 4,834 14,766 9,639
Investment income and other (7)................. 8,163 13,611 17,849 26,193
Palisades (8)................................... (260) -- (260) --
Unallocated general and administrative
expenses.................................... (6,792) (9,187) (14,512) (16,720)
Amortization of Officer's deferred compensation
expense..................................... (6,875) -- (13,750) --
Loss on Primestone foreclosure.................. (17,671) -- (17,671) --
Net gain on sale of marketable equity securities 12,346 -- 12,346 --
Costs of acquisitions not consummated........... -- -- -- (5,000)
Write-off of investments in technology
companies................................... -- (13,561) -- (18,284)
--------- ------- --------- ---------
Total.................................. $ 15,523 $ 15,535 $ 36,674 $ 37,159
========= ========= ========= =========
</Table>
(3) Average occupancy and REVPAR for the Hotel Pennsylvania was 66% and
$59.37 for the three months ended June 30, 2002 compared to 77% and
$88.37 for the prior year's quarter. Average occupancy and REVPAR for
the Hotel Pennsylvania was 58% and $52.39 for the six months ended June
30, 2002 compared to 67% and $76.54 for the prior year's six months
(4) Interest and debt expense, depreciation and amortization and
straight-lining of rents included in the reconciliation of net income to
EBITDA reflects amounts which are netted in income from partially-owned
entities.
(5) Includes the elimination of $6,298 representing the Company's share of
Alexander's gain on sale of its Fordham Road property on January 12,
2001.
(6) Net of rent not recognized of $3,744 and $5,552 for the three and six
months ended June 30, 2002 and $2,340 for the three and six months ended
June 30, 2001.
(7) No income was recognized on the Company's loans to Primestone and
Vornado Operating Company for the three and six months ended June 30,
2002.
(8) The development of the Palisades residential complex was substantially
complete as of March 1, 2002. Accordingly the Company has placed the
property into service on March 1, 2002 and discontinued the
capitalization of interest and other property specific costs. As of June
30, 2002, the property is 23.8% occupied (128 of the 538 total
apartments have been leased).
Page 23
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Our future results, financial condition
and business may differ materially from those expressed in these forward-looking
statements. You can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "intends," "plans" or similar expressions
in this quarterly report on Form 10-Q. These forward-looking statements are
subject to numerous assumptions, risks and uncertainties. Many of the factors
that will determine these items are beyond our ability to control or predict.
Factors that may cause actual results to differ materially from those
contemplated by the forward-looking statements include, but are not limited to,
those set forth in our Annual Report on Form 10-K for the year ended December
31, 2001 under "Forward-Looking Statements." For these statements, we claim
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements for the
three and six months ended June 30, 2002 and 2001. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and 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. A summary of the Company's
significant accounting policies is included in Note 2 - Summary of Significant
Accounting Policies to the Company's annual report on Form 10-K for the year
ended December 31, 2001.
Operating results for the three and six months ended June 30, 2002, reflect
the Company's January 1, 2002 acquisition of the remaining 66% of Charles E.
Smith Commercial Realty L.P. ("CESCR") and the resulting consolidation of
CESCR's operations. See Supplemental Information beginning on page 42 for
Condensed Pro Forma Operating Results for the three and six months ended June
30, 2001 giving effect to the CESCR acquisition as if it had occurred on January
1, 2001. Further, the Supplemental Information contains data regarding (i)
details of the changes by segment in EBITDA for the three months ended June 30,
2002 compared to the three months ended March 31, 2002, (ii) leasing activity
and (iii) pro forma senior unsecured debt covenant compliance ratios.
Page 24
<Page>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30,
2001
Below is a summary of Net income and EBITDA (1):
<Table>
<Caption>
(amounts in thousands) Three Months Ended June 30, 2002
------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- --------- --------- --------- ----------
Rentals ........................................... $ 309,869 $ 213,762 $ 28,922 $ 52,868 $ -- $ 14,317
Expense reimbursements ............................ 36,315 19,949 11,800 3,872 -- 694
Other income ...................................... 7,063 5,090 391 1,220 -- 362
--------- --------- --------- --------- --------- ---------
Total revenues .................................... 353,247 238,801 41,113 57,960 -- 15,373
--------- --------- --------- --------- --------- ---------
Operating expenses ................................ 126,267 80,395 12,987 21,353 -- 11,532
Depreciation and amortization ..................... 49,563 34,121 3,546 7,288 -- 4,608
General and administrative ........................ 23,759 9,400 1,796 4,894 -- 7,669
Amortization of officer's deferred
compensation expense ............................ 6,875 -- -- -- -- 6,875
--------- --------- --------- --------- --------- ---------
Total expenses .................................... 206,464 123,916 18,329 33,535 -- 30,684
--------- --------- --------- --------- --------- ---------
Operating income .................................. 146,783 114,885 22,784 24,425 -- (15,311)
Income applicable to Alexander's .................. 4,487 -- -- -- -- 4,487
Income from partially-owned entities .............. 9,826 726 (298) 11 1,087(5) 8,300
Interest and other investment income .............. 9,934 2,758 78 143 -- 6,955
Interest and debt expense ......................... (60,119) (34,748) (14,018) (6,687) -- (4,666)
Net gain on disposition of wholly-owned and
partially-owned assets ........................... (4,981) -- -- 344 -- (5,325)
Minority interest ................................. (554) (906) -- 226 -- 126
--------- --------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle and extraordinary item ...... 105,376 82,715 8,546 18,462 1,087 (5,434)
Cumulative effect of change in accounting principle -- -- -- -- -- --
Extraordinary item ................................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income ........................................ 105,376 82,715 8,546 18,462 1,087 (5,434)
Cumulative effect of change in accounting principle -- -- -- -- -- --
Extraordinary item ................................ -- -- -- -- -- --
Minority interest ................................. 554 906 -- (226) -- (126)
Net gain on disposition of assets ................. -- -- -- -- -- --
Interest and debt expense(4) ...................... 76,199 35,253 14,653 6,687 6,302 13,304
Depreciation and amortization(4) .................. 62,360 34,577 4,097 7,288 8,344 8,054
Straight-lining of rents(4) ....................... (9,224) (7,392) (426) (742) -- (664)
Other ............................................. 334 (1,127) 160 -- 912 389
--------- --------- --------- --------- --------- ---------
EBITDA(1) ......................................... $ 235,599 $ 144,932 $ 27,030 $ 31,469 $ 16,645 $ 15,523
========= ========= ========= ========= ========= =========
</Table>
Page 25
<Page>
<Table>
<Caption>
(amounts in thousands) Three Months Ended June 30, 2001
-----------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- --------- ----------- ----------- ---------
Rentals........................................... $ 212,252 $ 114,260 $ 28,764 $ 50,118 $ -- $ 19,110
Expense reimbursements............................ 31,543 15,920 11,711 3,858 -- 54
Other income...................................... 2,280 813 542 818 -- 107
--------- --------- --------- ----------- ----------- ---------
Total revenues.................................... 246,075 130,993 41,017 54,794 -- 19,271
--------- --------- --------- ----------- ----------- ---------
Operating expenses................................ 96,831 51,684 13,002 21,662 -- 10,483
Depreciation and amortization..................... 30,086 17,300 3,447 6,064 -- 3,275
General and administrative........................ 22,415 2,637 819 4,650 -- 14,309
Costs of acquisitions not consummated............. -- -- -- -- -- --
--------- --------- --------- ----------- ----------- ---------
Total expenses.................................... 149,332 71,621 17,268 32,376 -- 28,067
--------- --------- --------- ----------- ----------- ---------
Operating income.................................. 96,743 59,372 23,749 22,418 -- (8,796)
Income applicable to Alexander's.................. 4,676 -- -- -- -- 4,676
Income from partially-owned entities.............. 19,228 8,365 495 (4) 3,721(5) 6,651
Interest and other investment income.............. 15,874 1,897 416 714 -- 12,847
Interest and debt expense......................... (43,994) (14,407) (14,264) (8,317) -- (7,006)
Net gain on disposition of wholly-owned and
partially-owned assets........................... 1,934 12,445 3,050 -- -- (13,561)
Minority interest................................. (409) (409) -- -- -- --
--------- --------- --------- ----------- ----------- ---------
Income before cumulative effect of change in
accounting principle and extraordinary item...... 94,052 67,263 13,446 14,811 3,721 (5,189)
Cumulative effect of change in accounting
principle........................................ -- -- -- -- -- --
Extraordinary item................................ -- -- -- -- -- --
--------- --------- --------- ----------- ----------- ---------
Net income........................................ 94,052 67,263 13,446 14,811 3,721 (5,189)
Minority interest................................. 409 409 -- -- -- --
Net gain on disposition........................... (15,495) (12,445) (3,050) -- -- --
Interest and debt expense(4)...................... 67,151 24,859 14,906 8,317 6,773 12,296
Depreciation and amortization(4).................. 45,918 21,992 4,612 6,064 8,403 4,847
Straight-lining of rents(4)....................... (6,339) (4,050) (534) (1,280) -- (475)
Other............................................. 2,997 (630) (498) -- 69 4,056
--------- --------- --------- ----------- ----------- ---------
EBITDA(1)......................................... $ 188,693 $ 97,398 $ 28,882 $ 27,912 $ 18,966 $ 15,535
========= ========= ========= =========== =========== =========
</Table>
- ----------
(1) EBITDA represents income before interest, taxes, depreciation and
amortization, extraordinary or non-recurring items, gains or losses on
sales of depreciable real estate, the effect of straight-lining of property
rentals for rent escalations and minority interest. Management considers
EBITDA a supplemental measure for making decisions and assessing the
performance of its segments. EBITDA may not be comparable to similarly
titled measures employed by other companies.
(2) Other EBITDA is comprised of:
<Table>
<Caption>
(amounts in thousands) For the Three Months
Ended June 30,
----------------------
2002 2001
--------- ----------
Hotel Pennsylvania (3)............................................ $ 2,152 $ 6,141
Newkirk Joint Ventures:
Equity in income of limited partnerships......................... 15,500 12,107
Interest and other income........................................ 2,200 1,590
Other partially-owned entities (Alexander's and other)............ 6,760 4,834
Investment income and other (6)................................... 8,163 13,611
Palisades (7)..................................................... (260) --
Unallocated general and administrative expenses................... (6,792) (9,187)
Amortization of Officer's deferred compensation expense........... (6,875) --
Loss on Primestone foreclosure.................................... (17,671) --
Net gain on sale of marketable securities......................... 12,346 --
Costs of acquisitions not consummated............................. -- --
Write-off of investments in technology companies.................. -- (13,561)
--------- ----------
Total...................................................... $ 15,523 $ 15,535
========= ==========
</Table>
(3) Average occupancy and REVPAR for the Hotel Pennsylvania was 66% and $59.37
for the three months ended June 30, 2002 compared to 77% and $88.37 for the
prior year's quarter.
(4) Interest and debt expense, depreciation and amortization and
straight-lining of rents included in the reconciliation of net income to
EBITDA reflects amounts which are netted in income from partially-owned
entities.
(5) Net of rent not recognized of $3,744 and $2,340 for the three months ended
June 30, 2002 and 2001.
(6) No income was recognized on the Company's loans to Primestone and Vornado
Operating Company for the three months ended June 30, 2002.
(7) The development of the Palisades residential complex was substantially
complete as of March 1, 2002. Accordingly the Company has placed the
property into service on March 1, 2002 and discontinued the capitalization
of interest and other property specific costs. As of June 30, 2002, the
property is 23.8% occupied (128 of the 538 total apartments have been
leased).
Page 26
<Page>
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Below are the details of the changes by segment in EBITDA.
<Table>
<Caption>
Temperature
Merchandise Controlled
(amounts in thousands) Total Office Retail Mart Logistics Other
----------- ----------- ---------- ----------- ----------- ----------
Three months ended June 30, 2001.......... $ 188,693 $ 97,398 $ 28,882 $ 27,912 $ 18,966 $ 15,535
2002 Operations:
Same store operations(1).............. 1,714 4,466 897 1,172 (2,321)(3) (2,500)
Acquisitions, dispositions and
non-recurring income and expenses... 45,192 43,068 (2,749) 2,385 -- 2,488
----------- ----------- ---------- ----------- ----------- ----------
Three months ended June 30, 2002.......... $ 235,599 $ 144,932(2) $ 27,030 $ 31,469 $ 16,645 $ 15,523
=========== =========== ========== =========== =========== ==========
% increase (decrease) in same
store operations.................... 0.9% 4.6%(2) 3.1% 4.2% (12.2%)(3) (16.1)%
</Table>
- ----------
(1) Represents operations which were owned for the same period in each year and
excludes non-recurring income and expenses.
(2) EBITDA and the same store percentage increase was $78,073 and 4.8% for the
New York City office portfolio and $66,859 and 4.0% for the CESCR
portfolio.
(3) The Company reflects its 60% share of the Vornado/Crescent Partnerships'
("the Landlord") equity in the rental income it receives from AmeriCold
Logistics, its tenant, which leases the underlying temperature controlled
warehouses used in its business. Based on the Company's policy of
recognizing rental income when earned and collection is assured or cash is
received, the Company did not recognize $3,744 of rent it was due for the
three months ended June 30, 2002. The tenant has advised the Landlord that
(i) its revenue for the quarter ended June 30, 2002 from the warehouses it
leases from the Landlord, was higher than last year by 0.4 %, and (ii) its
gross profit before rent at these warehouses for the corresponding period
decreased by $483 (a 1.3% decrease). The increase in revenue is primarily
attributable to higher occupancy rates, offset by a reduction in customer
inventory turns. The decrease in gross profit is primarily attributable to
higher insurance costs, partially offset by lower payroll expenses. In
addition, the tenant's cash requirements for capital expenditures, debt
service and pension liability funding were $1,579 higher in the current
quarter than in the prior year's quarter, which impacted the ability of the
tenant to pay rent.
Page 27
<Page>
REVENUES
The Company's revenues, which consist of property rentals, tenant expense
reimbursements, hotel revenues, trade shows revenues and other income, were
$353,247,000 for the three months ended June 30, 2002, compared to $246,075,000
in the prior year's quarter, an increase of $107,172,000 of which $99,558,000
resulted from the acquisition of the remaining 66% of CESCR and the resulting
consolidation of their operations. Below are the details of the increase
(decrease) by segment:
<Table>
<Caption>
(amounts in thousands)
Date of Merchandise
Acquisition Total Office Retail Mart Other
----------- --------- -------- -------- ----------- ---------
Property rentals:
Acquisitions:
CESCR (effect of acquisition of
66% and consolidation vs.
equity method accounting for
34%) .............................. January 2002 $ 94,300 $ 94,300 $ -- $ -- $ --
715 Lexington Avenue ................. July 2001 481 481 -- -- --
Hotel activity ........................ (4,666)(1) -- -- -- (4,666)(1)
Trade Shows activity .................. 3,439 -- -- 3,439 --
Leasing activity ...................... 4,063 4,721 158 (689) (127)
--------- -------- -------- --------- ---------
Total increase (decrease) in
property rentals ................... 97,617 99,502 158 2,750 (4,793)
--------- -------- -------- --------- ---------
Tenant expense reimbursements:
Increase (decrease) due to
acquisitions ....................... 1,817 1,817 -- -- --
Other ................................. 2,955 2,212 89 14 640
--------- -------- -------- --------- ---------
Total increase (decrease) in
tenant expense reimbursements ...... 4,772 4,029 89 14 640
--------- -------- -------- --------- ---------
Other Income:
Increase due to acquisitions .......... 3,441 3,441 -- -- --
Other ................................. 1,342 836 (151) 402 255
--------- -------- -------- --------- ---------
Total increase (decrease) in other
income ............................. 4,783 4,277 (151) 402 255
--------- -------- -------- --------- ---------
Total increase (decrease) in
revenues ........................... $ 107,172 $107,808 $ 96 $ 3,166 $ (3,898)
========= ======== ======== ========= =========
</Table>
(1) Average occupancy and REVPAR for the Hotel Pennsylvania was 66% and $59.37
for the three months ended June 30, 2002 compared to 77% and $88.37 for
the prior year's quarter.
See supplemental information beginning on page 42 for further details.
Page 28
<Page>
EXPENSES
The Company's expenses were $206,464,000 for the three months ended June
30, 2002, compared to $149,332,000 in the prior year's quarter, an increase of
$57,132,000 of which $47,481,000 resulted from the acquisition of the remaining
66% of CESCR and the resulting consolidation of their operations. Below are the
details of the increase (decrease) by segment:
<Table>
<Caption>
(amounts in thousands) Merchandise
Total Office Retail Mart Other
------- ------- ------- ----------- ---------
Operating:
Acquisitions:
CESCR (effect of acquisition of 66% and
consolidation vs. equity method accounting for 34%) ... $25,841 $25,841 $ -- $ -- $ --
715 Lexington Avenue .................................... 251 251 -- -- --
Hotel activity .......................................... (252) -- -- -- (252)
Trade Shows activity .................................... 505 -- -- 505 --
Same store operations ................................... 3,091 2,619 (15) (814) 1,301
------- ------- ------- ------- ---------
29,436 28,711 (15) (309) 1,049
------- ------- ------- ------- ---------
Depreciation and amortization:
Acquisitions ............................................ 15,635 15,635 -- -- --
Same store operations ................................... 3,842 1,186 99 1,224 1,333
------- ------- ------- ------- ---------
19,477 16,821 99 1,224 1,333
------- ------- ------- ------- ---------
General and administrative:
Appreciation in value of Vornado shares and other
securities held in officers' deferred compensation
trust in the three months ended June 30, 2001 ......... (4,021) -- -- -- (4,021)
Acquisitions ............................................ 6,005 6,005 -- -- --
Other expenses .......................................... (640) 758 977 244 (2,619)(1)
------- ------- ------- ------- ---------
Total increase (decrease) in general and
administrative ........................................ 1,344 6,763 977 244 (6,640)
------- ------- ------- ------- ---------
Amortization of officer's deferred compensation expense .... 6,875 -- -- -- 6,875
------- ------- ------- ------- ---------
$57,132 $52,295 $ 1,061 $ 1,159 $ 2,617
======= ======= ======= ======= =========
</Table>
----------
(1) Primarily results from lower professional fees.
INCOME APPLICABLE TO ALEXANDER'S
Income applicable to Alexander's (loan interest income, management,
leasing, development and commitment fees, and equity in income) was $4,487,000
in the three months ended June 30, 2002, compared to $4,676,000 in the prior
year's quarter, a decrease of $189,000. This decrease resulted from Alexander's
recognizing stock appreciation rights compensation expense of $4,236,000 in the
current quarter, of which the Company's share is $1,402,000; partially offset by
higher development fees.
Page 29
<Page>
INCOME FROM PARTIALLY-OWNED ENTITIES
In accordance with accounting principles generally accepted in the United
States, the Company reflects the income it receives from (i) entities it owns
less than 50% of and (ii) entities it owns more than 50% of, but which have a
partner who exercises significant control, on the equity method of accounting
resulting in such income appearing on one line in the Company's consolidated
statements of income. Below is the detail of income from partially-owned
entities by investment as well as the increase (decrease) in income of
partially-owned entities for the three months ended June 30, 2002 as compared to
the prior year's quarter:
<Table>
<Caption>
Starwood
Temperature Newkirk Las Ceruzzi
Controlled Joint Catalinas Joint
(amounts in thousands) Total CESCR Logistics Venture Mall Venture
--------- --------- ----------- -------- --------- --------
JUNE 30, 2002:
Revenues ......................... $ 115,347 $ 29,143 $ 72,707 $ 3,937 $ 117
Expenses:
Operating, general and
administrative .............. (8,597) (2,302) (912) (1,030) (363)
Depreciation .................. (29,447) (14,870) (12,516) (501) (261)
Interest expense .............. (44,583) (10,941) (30,629) (1,476) --
Other, net .................... (2,671) (1,987) (336) -- (400)
--------- --------- -------- -------- -------
Net income/(loss) $ 30,049 $ (957) $ 28,314 $ 930 $ (907)
========= ========= ======== ======== =======
Vornado's interest ............... 60% 21% 50% 80%
Equity in net income ............. $ 5,839 $ (574) $ 5,974 $ 428 $ (726)
Interest and other income ........ 2,476 150 2,326 -- --
Fee income ....................... 1,511 1,511 -- -- --
--------- --------- -------- -------- -------
Income from partially-owned
entities ...................... $ 9,826 $ --(1) $ 1,087 $ 8,300 $ 428 $ (726)
========= ========= ========= ======== ======== =======
JUNE 30, 2001:
Revenues ......................... $ 214,090 $ 94,755 $ 30,465 $ 73,114 $ 4,115 $ 414
Expenses:
Operating, general and
administrative .............. (44,964) (33,285) (1,839) (3,505) (1,119) (169)
Depreciation .................. (43,385) (13,168) (14,471) (14,264) (491) (289)
Interest expense .............. (77,098) (28,417) (11,519) (33,574) (1,491) --
Other, net .................... 1,157 188 471 (158) (1) 657
--------- --------- --------- -------- -------- -------
Net income/(loss) ................ $ 49,800 $ 20,073 $ 3,107 $ 21,613 $ 1,014 $ (45)
========= ========= ========= ======== ======== =======
Vornado's interest ............... 34% 60% 30% 50% 80%
Equity in net income ............. 15,895 $ 6,828 $ 1,863 $ 6,484 $ 531 $ (36)
Interest and other income ........ $ 1,834 -- 359 1,475 -- --
Fee income ....................... 1,499 -- 1,499 -- -- --
--------- --------- --------- -------- -------- -------
Income from partially-owned
entities ...................... $ 19,228 $ 6,828 $ 3,721 $ 7,959 $ 531 $ (36)
========= ========= ========= ======== ======== =======
(DECREASE) INCREASE ININCOME FROM
PARTIALLY-OWNED ENTITIES ...... $ (9,402) $ (6,828)(1) $ (2,634) $ 341 $ (103) $ (690)
========= ========= ========= ======== ======== =======
<Caption>
Partially-
Owned Office
(Amounts in Thousands) Buildings Other
------------ --------
JUNE 30, 2002:
Revenues .............................. $ 9,443
Expenses:
Operating, general and
administrative ................... (3,990)
Depreciation ....................... (1,299)
Interest expense ................... (1,537)
Other, net ......................... 52
--------
Net income/(loss) ..................... $ 2,669
========
Vornado's interest .................... 25%
Equity in net income .................. $ 673 $ 64
Interest and other income ............. -- --
Fee income ............................ -- --
-------- --------
Income from partially-owned
entities ........................... $ 673 $ 64
======== ========
JUNE 30, 2001:
Revenues .............................. $ 11,227
Expenses:
Operating, general and
administrative ................... (5,047)
Depreciation ....................... (702)
Interest expense ................... (2,097)
Other, net.......................... 657
--------
Net income/(loss) ..................... $ 4,038
========
Vornado's interest..................... 38%
Equity in net income .................. $ 1,537 $ (1,312)
Interest and other income ............. -- --
Fee income ............................ -- --
-------- --------
Income from partially-owned
entities ........................... $ 1,537 $ (1,312)
======== ========
(DECREASE) INCREASE IN INCOME FROM
PARTIALLY-OWNED ENTITIES ........... $ (864)(2) $ 1,376(3)
======== ========
</Table>
- ----------
(1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did
not previously own. Accordingly, CESCR is consolidated as of January 1,
2002.
(2) The quarter ended June 30, 2002 excludes 570 Lexington Avenue which was
sold in May 2001.
(3) The prior year's quarter includes $720 for the Company's share of equity in
loss of its Russian Tea Room ("RTR") investment. In the third quarter of
2001, the Company wrote-off its entire net investment in RTR based on the
operating losses and an assessment of the value of the real estate.
Page 30
<Page>
INTEREST AND OTHER INVESTMENT INCOME
Interest and other investment income (interest income on mortgage loans
receivable, other interest income, and dividend income) was $9,934,000 for the
three months ended June 30, 2002, compared to $15,874,000 in the prior year's
quarter, a decrease of $5,940,000. Of this decrease (i) $956,000 resulted from
the lower yield on the investment of the proceeds received from the repayment of
its loan to NorthStar Partnership, L.P. in May 2002, (ii) $3,751,000 resulted
from not recognizing income on its loans to Primestone and Vornado Operating
Company (see "Liquidity and Capital Resources -- Vornado Operating Company") for
the three months ended June 30, 2002 and (iii) $1,233,000 resulted from lower
yields on other investments.
INTEREST AND DEBT EXPENSE
Interest and debt expense was $60,119,000 for the three months ended June
30, 2002, compared to $43,994,000 in the prior year's quarter, an increase of
$16,125,000. This increase was primarily comprised of (i) $24,375,000 from the
acquisition of the remaining 66% of CESCR and the resulting consolidation of
their operations, partially offset by (ii) a $8,250,000 savings from a 227 basis
point reduction in weighted average interest rates of the Company's variable
rate debt and (iii) lower average outstanding debt balances.
NET GAIN (LOSS) ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS
The following table sets forth the details of net (loss) gain on
disposition of wholly-owned and partially-owned assets for the three months
ended June 30, 2002 and 2001:
<Table>
<Caption>
For the Three Months Ended
(amounts in thousands) June 30,
-------------------------
2002 2001
Wholly-owned Assets:
Loss on Primestone foreclosure. ................................ $ (17,671) $ --
Gain on sale of Kinzie Park condominiums units ................. 344 --
Net gain on sale of marketable securities ...................... 12,346 3,050
Write-off of investments in technology companies ............... -- (13,561)
Partially-owned Assets:
Net gain on sale of 50% interest in 570 Lexington Avenue ....... -- 12,445
---------- ---------
$ (4,981) $ 1,934
========== =========
</Table>
INVESTMENT IN PRIMESTONE
On September 28, 2000, the Company made a $62,000,000 loan to Primestone
Investment Partners, L.P. ("Primestone"). The Company received a 1% upfront fee
and was entitled to receive certain other fees aggregating approximately 3% upon
repayment of the loan. The loan bore interest at 16% per annum. Primestone
defaulted on the repayment of this loan on October 25, 2001. The loan was
subordinate to $37,957,000 of other debt of the borrower. On October 31, 2001,
the Company purchased the other debt for its face amount. The loans were secured
by 7,944,893 partnership units in Prime Group Realty, L.P., the operating
partnership of Prime Group Realty Trust (NYSE:PGE) and the partnership units are
exchangeable for the same number of common shares of PGE. The loans are also
guaranteed by affiliates of Primestone.
Page 31
<Page>
On November 19, 2001, the Company sold, pursuant to a participation
agreement with a subsidiary of Cadim inc., a Canadian pension fund, a 50%
participation in both loans at par for approximately $50,000,000 reducing the
Company's net investment in the loans at December 31, 2001 to $56,768,000
including unpaid interest and fees of $6,790,000.
On April 30, 2002, the Company and Cadim acquired the 7,944,893 partnership
units at a foreclosure auction. The price paid for the units by application of a
portion of Primestone's indebtedness to the Company and Cadim was $8.35 per
unit, the April 30, 2002 PGE closing price on The New York Stock Exchange. On
June 28, 2002, pursuant to the terms of the participation agreement, the Company
transferred 3,972,447 of the partnership units to Cadim.
In the second quarter, in accordance with foreclosure accounting, the
Company recorded a loss on the Primestone foreclosure of $17,671,000 calculated
based on (i) the acquisition price of the units and (ii) its valuation of the
amounts realizable under the guarantees by affiliates of Primestone, as compared
with the net carrying amount of the investment at April 30, 2002. At June 30,
2002, the Company's carrying amount of the investment was $40,270,000, of which
$33,170,000 represents the carrying amount of the 3,972,447 partnership units
owned by the Company ($8.35 per unit) and $7,100,000 represents the amount
realizable under the guarantees (see Note 5. Investments in and Advances to
Partially-Owned Entities).
At July 30, 2002, PGE's closing stock price on the New York Stock Exchange
was $5.43 per share. The ultimate realization of the Company's investment will
depend upon the future performance of the Chicago real estate market and the
performance of PGE, as well as the ultimate realizable value of the net assets
supporting the guarantees and the Company's ability to collect under the
guarantees. The Company will continue to monitor this investment to determine
whether additional write-downs are required based on (i) declines in value of
the PGE stock (for which the partnership units are exchangeable) which are
"other than temporary" as used in accounting literature and (ii) the realizable
value of the guarantees.
Page 32
<Page>
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Below is a summary of Net income and EBITDA(1):
<Table>
<Caption>
(amounts in thousands) Six Months Ended June 30, 2002
-------------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
--------- --------- -------- ----------- ----------- --------
Rentals ....................................... $ 611,629 $ 427,574 $ 57,992 $ 99,878 $ -- $ 26,185
Expense reimbursements ........................ 74,119 41,356 23,817 7,215 -- 1,731
Other income .................................. 13,823 10,073 605 2,637 -- 508
--------- --------- -------- ----------- ---------- --------
Total revenues ................................ 699,571 479,003 82,414 109,730 -- 28,424
--------- --------- -------- ----------- ---------- --------
Operating expenses ............................ 253,713 162,628 27,668 42,580 -- 20,837
Depreciation and amortization ................. 97,151 68,251 6,926 13,768 -- 8,206
General and administrative .................... 47,226 18,510 2,366 9,705 -- 16,645
Amortization of officer's deferred
compensation expense ....................... 13,750 -- -- -- -- 13,750
--------- --------- -------- ----------- ---------- --------
Total expenses ................................ 411,840 249,389 36,960 66,053 -- 59,438
--------- --------- -------- ----------- ---------- --------
Operating income .............................. 287,731 229,614 45,454 43,677 -- (31,014)
Income applicable to Alexander's .............. 10,055 -- -- -- -- 10,055
Income from partially-owned entities .......... 23,612 1,276 (69) 13 6,392(6) 16,000
Interest and other investment income .......... 19,577 3,869 157 278 -- 15,273
Interest and debt expense ..................... (118,137) (69,510) (27,711) (13,870) -- (7,046)
Net gain on disposition of wholly-owned and
partially-owned assets ..................... (3,450) -- -- 1,875 -- (5,325)
Minority interest ............................. (1,543) (1,786) -- 127 -- 116
--------- --------- -------- ----------- ---------- --------
Income before cumulative effect of change in
accounting principle and extraordinary
item ....................................... 217,845 163,463 17,831 32,100 6,392 (1,941)
Cumulative effect of change in accounting
principle .................................. (30,129) -- -- -- (15,490) (14,639)
Extraordinary item ............................ -- -- -- -- -- --
--------- --------- -------- ----------- ---------- --------
Net income .................................... 187,716 163,463 17,831 32,100 (9,098) (16,580)
Cumulative effect of change in accounting
principle .................................. 30,129 -- -- -- 15,490 14,639
Extraordinary item ............................ -- -- -- -- -- --
Minority interest ............................. 1,543 1,786 -- (127) -- (116)
Net gain on disposition of assets ............. -- -- -- -- -- --
Interest and debt expense(4) .................. 150,492 70,519 28,981 13,870 12,861 24,261
Depreciation and amortization(4) .............. 122,935 69,171 7,747 13,768 17,253 14,996
Straight-lining of rents(4) ................... (18,263) (14,702) (855) (1,791) -- (915)
Other ......................................... 75 (2,427) 860 (123) 1,376 389
--------- --------- -------- ----------- ---------- --------
EBITDA(1) ..................................... $ 474,627 $ 287,810 $ 54,564 $ 57,697 $ 37,882 $ 36,674
========= ========= ======== =========== ========== ========
</Table>
Page 33
<Page>
<Table>
<Caption>
(amounts in thousands) Six Months Ended June 30, 2001
--------------------------------------------------------------------------
Temperature
Merchandise Controlled
Total Office Retail Mart Logistics Other(2)
---------- ---------- -------- ----------- ----------- ---------
Rentals ....................................... $ 416,970 $ 228,120 $ 56,901 $ 97,123 $ -- $ 34,826
Expense reimbursements ........................ 66,635 34,961 23,506 7,831 -- 337
Other income .................................. 5,080 1,385 905 1,537 -- 1,253
---------- ---------- -------- ---------- ---------- ---------
Total revenues ................................ 488,685 264,466 81,312 106,491 -- 36,416
---------- ---------- -------- ---------- ---------- ---------
Operating expenses ............................ 197,214 107,445 27,854 42,794 -- 19,121
Depreciation and amortization ................. 61,951 35,944 7,007 12,506 -- 6,494
General and administrative .................... 36,663 6,007 1,402 9,245 -- 20,009
Costs of acquisitions not consummated ......... 5,000 -- -- -- -- 5,000
---------- ---------- -------- ---------- ---------- ---------
Total expenses ................................ 300,828 149,396 36,263 64,545 -- 50,624
---------- ---------- -------- ---------- ---------- ---------
Operating income .............................. 187,857 115,070 45,049 41,946 -- (14,208)
Income applicable to Alexander's .............. 16,980 -- -- -- -- 16,980
Income from partially-owned entities .......... 43,218 17,060 2,392 109 9,669(6) 13,988
Interest and other investment income .......... 29,347 4,195 416 1,377 -- 23,359
Interest and debt expense ..................... (93,389) (31,014) (28,413) (17,986) -- (15,976)
Net gain on disposition of wholly-owned and
partially-owned assets ..................... (2,789) 12,445 3,050 -- -- (18,284)
Minority interest ............................. (768) (768) -- -- -- --
---------- ---------- -------- ---------- ---------- ---------
Income before cumulative effect of change in
accounting principle and extraordinary item. 180,456 116,988 22,494 25,446 9,669 5,859
Cumulative effect of change in accounting
principle .................................. (4,110) -- -- -- -- (4,110)
Extraordinary item ............................ 1,170 -- -- -- -- 1,170
---------- ---------- -------- ---------- ---------- ---------
Net income .................................... 177,516 116,988 22,494 25,446 9,669 2,919
Cumulative effect of change in accounting
principle .................................. 4,110 -- -- -- -- 4,110
Extraordinary item ............................ (1,170) -- -- -- -- (1,170)
Minority interest ............................. 768 768 -- -- -- --
Net gain on disposition of wholly-owned and
partially-owned assets ..................... (15,495) (12,445) (3,050) -- -- --
Interest and debt expense(4) .................. 140,405 52,306 29,697 17,986 13,486 26,930
Depreciation and amortization(4) .............. 93,836 45,636 9,339 12,506 16,811 9,544
Straight-lining of rents(4) ................... (14,076) (10,005) (695) (2,388) -- (988)
Other ......................................... (7,560) (2,220) (1,335) -- 181 4,186(5)
---------- ---------- -------- ---------- ---------- ---------
EBITDA(1) ..................................... $ 378,334 $ 191,028 $ 56,450 $ 53,550 $ 40,147 $ 37,159
========== ========== ======== ========== ========== =========
</Table>
- ----------
(1) EBITDA represents income before interest, taxes, depreciation and
amortization, extraordinary or non-recurring items, gains or losses on
sales of depreciable real estate, the effect of straight-lining of property
rentals for rent escalations and minority interest. Management considers
EBITDA a supplemental measure for making decisions and assessing the
performance of its segments. EBITDA may not be comparable to similarly
titled measures employed by other companies.
(2) Other EBITDA is comprised of:
<Table>
<Caption>
(amounts in thousands) For The Six Months
Ended June 30,
----------------------
2002 2001
-------- --------
Hotel Pennsylvania (3) .................................... $ 2,906 $ 11,421
Newkirk Joint Ventures:
Equity in income of limited partnerships ................ 30,529 26,708
Interest and other income ............................... 4,471 3,202
Other partially-owned entities (Alexander's and other) .... 14,766 9,639
Investment income and other (7) ........................... 17,849 26,193
Palisades ................................................. (260) --
Unallocated general and administrative expenses ........... (14,512) (16,720)
Amortization of Officer's deferred compensation expense ... (13,750) --
Loss on Primestone foreclosure. ........................... (17,671) --
Net gain on sale of marketable securities ................. 12,346 --
Costs of acquisitions not consummated ..................... -- (5,000)
Write-off of investments in technology companies .......... -- (18,284)
-------- --------
Total $ 36,674 $ 37,159
======== ========
</Table>
(3) Average occupancy and REVPAR for the Hotel Pennsylvania was 58% and $52.39
for the six months ended June 30, 2002 compared to 67% and $76.54 for the
prior year's six months.
(4) Interest and debt expense, depreciation and amortization and
straight-lining of rents included in the reconciliation of net income to
EBITDA reflects amounts which are netted in income from partially-owned
entities.
(5) Includes the elimination of $6,298 representing the Company's share of
Alexander's gain on sale of its Fordham Road property on January 12, 2001.
(6) Net of rent not recognized of $5,552 and $2,340 for the six months ended
June 30, 2002 and 2001.
(7) No income was recognized on the Company's loans to Primestone and Vornado
Operating Company for the six months ended June 30, 2002.
Page 34
<Page>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Below are the details of the changes by segment in EBITDA.
<Table>
<Caption>
Temperature
Merchandise Controlled
(amounts in thousands) Total Office Retail Mart Logistics Other
--------- -------- --------- ----------- ----------- -------
Six months ended June 30, 2001 ............ $ 378,334 $191,028 $56,450 $53,550 $40,147 $37,159
2002 Operations:
Same store operations(1)................. 10,418 11,245 1,764 2,272 (2,265)(3) (2,598)
Acquisitions, dispositions and
non-recurring income and expenses ..... 85,875 85,537 (3,650) 1,875 -- 2,113
--------- -------- ------- ------- ------- -------
Six months ended June 30, 2002 ............ $ 474,627 $287,810(2) $54,564 $57,697 $37,882 $36,674
========= ======== ======= ======= ======= =======
% increase (decrease) in same store
operations ............................ 2.8% 5.9%(2) 3.1% 4.2% (5.6%)(3) (7.0%)
</Table>
- ----------
(1) Represents operations which were owned for the same period in each year and
excludes non-recurring income and expenses.
(2) EBITDA and the same store percentage increase was $155,171 and 6.8% for the
New York City office portfolio and $132,639 and 2.7% for the CESCR
portfolio.
(3) The Company reflects its 60% share of the Vornado/Crescent Partnerships'
("the Landlord") equity in the rental income it receives from AmeriCold
Logistics, its tenant, which leases the underlying temperature controlled
warehouses used in its business. Based on the Company's policy of
recognizing rental income when earned and collection is assured or cash is
received, the Company did not recognize $5,552 of rent it was due for the
six months ended June 30, 2002. The tenant has advised the Landlord that
(i) its revenue for the six months ended June 30, 2002 from the warehouses
it leases from the Landlord, is lower than last year by 0.9%, and (ii) its
gross profit before rent at these warehouses for the corresponding period
decreased by $116 (a 0.1% decrease). The decrease in revenue is primarily
attributable to a reduction in customer inventory turns. The decrease in
gross profit is primarily attributable to higher insurance costs partially
offset by lower payroll expenses. In addition, the tenant's cash
requirements for capital expenditures, debt service and pension liability
funding were $1,853 higher in the current six month period than in the
prior year's six months, which impacted the ability of the tenant to pay
rent.
Page 35
<Page>
REVENUES
The Company's revenues, which consist of property rentals, tenant expense
reimbursements, hotel revenues, trade shows revenues and other income were
$699,571,000 for the six months ended June 30, 2002, compared to $488,685,000 in
the six months ended June 30, 2001, an increase of $210,886,000 of which
$199,419,000 resulted from the acquisition of the remaining 66% of CESCR and the
resulting consolidation of their operations. Below are the details of the
increase (decrease) by segment:
<Table>
<Caption>
(amounts in thousands)
Date of Merchandise
Property rentals: Acquisition Total Office Retail Mart Other
------------ -------- -------- ------- ----------- --------
Acquisitions:
CESCR (effect of acquisition of 66% and
consolidation vs. equity method accounting
for 34%) ................................. January 2002 $187,776 $187,776 $ -- $ -- $ --
715 Lexington Avenue ...................... July 2001 939 939 -- -- --
Hotel activity ............................. (7,939)(1) -- -- -- (7,939)(1)
Trade Shows activity ....................... 1,117 -- -- 1,117 --
Leasing activity ........................... 12,766 10,739 1,091 1,638 (702)
-------- -------- ------- ------- --------
Total increase (decrease) in property
rentals................................... 194,659 199,454 1,091 2,755 (8,641)
-------- -------- ------- ------- --------
Tenant expense reimbursements:
Increase (decrease) due to
acquisitions/dispositions ................. 4,200 4,200 -- -- --
Other ...................................... 3,284 2,195 311 (616) 1,394
-------- -------- ------- ------- --------
Total increase (decrease) in tenant expense
reimbursements ............................ 7,484 6,395 311 (616) 1,394
-------- -------- ------- ------- --------
Other Income:
Increase due to acquisitions/dispositions .. 7,443 7,443 -- --
Other ...................................... 1,300 1,245 (300) 1,100 (745)
Total increase (decrease) in other income .... 8,743 8,688 (300) 1,100 (745)
-------- -------- ------- ------- --------
Total increase (decrease) in revenues ....... $210,886 $214,537 $ 1,102 $ 3,239 $ (7,992)
======== ======== ======= ======= ========
</Table>
(1) Average occupancy and REVPAR for the Hotel Pennsylvania was 58% and $52.39
for the six months ended June 30, 2002 compared to 67% and $76.54 for the
prior year's six months.
See supplemental information beginning on page 42 for further details.
Page 36
<Page>
EXPENSES
The Company's expenses were $411,840,000 for the six months ended June 30,
2002, compared to $300,828,000 in the six months ended June 30, 2001, an
increase of $111,012,000 of which $95,526,000 resulted from the acquisition of
the remaining 66% of CESCR and the resulting consolidation of their operations.
Below are the details of the increase (decrease) by segment:
<Table>
<Caption>
(amounts in thousands)
Merchandise
Total Office Retail Mart Other
-------- ------- ------- ----------- -------
Operating:
Acquisitions:
CESCR (effect of acquisition of 66% and consolidation
vs. equity method accounting for 34%) .................... $ 52,815 $52,815 $ -- $ -- $ --
715 Lexington Avenue ........................................ 509 509 -- -- --
Hotel activity .............................................. (486) -- -- -- (486)
Trade Shows activity ........................................ 172 -- -- 172 --
Same store operations ....................................... 3,489 1,859 (186) (386) 2,202
-------- ------- ------- --------- -------
56,499 55,183 (186) (214) 1,716
-------- ------- ------- --------- -------
Depreciation and amortization:
Acquisitions ................................................ 31,215 31,215 -- -- --
Same store operations ....................................... 3,985 1,092 (81) 1,262 1,712
-------- ------- ------- --------- -------
35,200 32,307 (81) 1,262 1,712
-------- ------- ------- --------- -------
General and administrative:
Appreciation in value of Vornado shares and other
securities held in officers' deferred compensation
trust in the six months ended June 30, 2001 ............. (739) -- -- -- (739)
Acquisitions ................................................ 11,496 11,496 -- -- --
Other expenses .............................................. (194) 1,007 964 460 (2,625)
-------- ------- ------- --------- -------
Total increase (decrease) in general and administrative ..... 10,563 12,503 964 460 (3,364)
-------- ------- ------- --------- -------
Amortization of officer's deferred compensation expense ....... 13,750 -- -- -- 13,750
-------- ------- ------- --------- -------
Costs of acquisitions not consummated ......................... (5,000) -- -- -- (5,000)
-------- ------- ------- --------- -------
$111,012 $99,993 $ 697 $ 1,508 $ 8,814
======== ======= ======= ========= =======
</Table>
INCOME APPLICABLE TO ALEXANDER'S
Income applicable to Alexander's (loan interest income, management,
leasing, development and commitment fees, and equity in income) was $10,055,000
in the six months ended June 30, 2002, compared to $16,980,000 in the six months
ended June 30, 2001, a decrease of $6,925,000. This decrease resulted primarily
from (i) the Company's $6,298,000 share of Alexander's gain on the sale of its
Fordham Road property in the prior year's six months and (ii) the Company's
$1,402,000 share of Alexander's stock appreciation rights compensation expense
in the current quarter.
Page 37
<Page>
INCOME FROM PARTIALLY-OWNED ENTITIES
In accordance with accounting principles generally accepted in the United
States, the Company reflects the income it receives from (i) entities it owns
less than 50% of and (ii) entities it owns more than 50% of, but which have a
partner who exercises significant control, on the equity method of accounting
resulting in such income appearing on one line in the Company's consolidated
statements of income. Below is the detail of income from partially-owned
entities by investment as well as the increase (decrease) in income of
partially-owned entities for the six months ended June 30, 2002 as compared to
the prior year:
<Table>
<Caption>
Starwood
Temperature Newkirk Las Ceruzzi
Controlled Joint Catalinas Joint
(amounts in thousands) Total CESCR Logistics Venture Mall Venture
----------- ---------- ----------- ----------- ---------- ----------
JUNE 30, 2002:
Revenues ................................. $ 234,857 $ 62,709 $ 146,050 $ 7,329 $ 117
Expenses:
Operating, general and administrative ... (19,616) (4,217) (4,578) (1,939) (913)
Depreciation ............................ (60,373) (29,686) (26,498) (1,032) (523)
Interest expense ........................ (88,050) (21,873) (60,594) (2,519) --
Other, net .............................. (1,556) (1,805) (336) -- 62
----------- ----------- ----------- ---------- ----------
Net income/(loss) ........................ $ 65,262 $ 5,128(2) $ 54,044 $ 1,839 $ (1,257)
=========== =========== =========== ========== ==========
Vornado's interest ....................... 60% 21% 50% 80%
Equity in net income ..................... $ 15,700 $ 3,077 $ 11,403 $ 937 $ (1,006)
Interest and other income ................ 4,903 306 4,597 -- --
Fee income ............................... 3,009 3,009 -- -- --
----------- ----------- ----------- ---------- ----------
Income from partially-owned entities ..... $ 23,612 $ --(1) $ 6,392 $ 16,000 $ 937 $ (1,006)
=========== ========== =========== =========== ========== ==========
JUNE 30, 2001:
Revenues ................................. $ 430,355 $ 188,692 $ 64,961 $ 143,808 $ 7,206 $ 800
Expenses:
Operating, general and administrative ... (88,137) (63,949) (4,071) (6,875) (1,823) (406)
Depreciation ............................ (86,603) (25,292) (29,113) (27,979) (1,007) (321)
Interest expense ........................ (154,045) (57,811) (22,935) (65,857) (2,546) --
Other, net .............................. 3,515 111 1,110 (677) -- 1,743
----------- ---------- ----------- ----------- ---------- ----------
Net income/(loss) ........................ $ 105,085 $ 41,751 $ 9,952 $ 42,420 $ 1,830 $ 1,816
=========== ========== =========== =========== ========== ==========
Vornado's interest ....................... 34% 60% 30% 50% 80%
Equity in net income ..................... $ 36,318 $ 14,195 $ 5,971 $ 12,726 $ 939 $ 1,453
Interest and other income ................ 3,917 -- 715 3,202 -- --
Fee income ............................... 2,983 -- 2,983 -- -- --
----------- ----------- ----------- ---------- ----------
Income from partially-owned entities ..... $ 43,218 $ 14,195 $ 9,669 $ 15,928 $ 939 $ 1,453
=========== =========== =========== ========== ==========
(DECREASE) INCREASE IN
INCOME FROM PARTIALLY-OWNED ENTITIES ..... $ (19,606) $ (14,195)(1) $ (3,277) $ $72 $ -(2) $ (2,459)(3)
=========== =========== =========== ========== ==========
<Caption>
Partially-
Owned
Office
(amounts in thousands) Buildings Other
----------- ---------
JUNE 30, 2002:
Revenues ................................. $ 18,652
Expenses:
Operating, general and administrative ... (7,969)
Depreciation ............................ (2,634)
Interest expense ........................ (3,064)
Other, net .............................. 523
-----------
Net income/(loss) ....................... $ 5,508
===========
Vornado's interest ...................... 22%
Equity in net income .................... $ 1,237 $ 52
Interest and other income ............... -- --
Fee income .............................. -- --
----------- ---------
Income from partially-owned entities ..... $ 1,237 $ 52
=========== =========
JUNE 30, 2001:
Revenues ................................. $ 24,888
Expenses:
Operating, general and administrative ... (11,013)
Depreciation ............................ (2,891)
Interest expense ........................ (4,896)
Other, net .............................. 1,228
-----------
Net income/(loss) ....................... $ 7,316
===========
Vornado's interest ...................... 39%
Equity in net income .................... $ 2,865 $ (1,831)
Interest and other income ............... -- --
Fee income .............................. -- --
----------- ---------
Income from partially-owned entities ...... $ 2,865 $ (1,831)(5)
=========== =========
(DECREASE) INCREASE IN
INCOME FROM PARTIALLY-OWNED ENTITIES ..... $ (1,628)(4) $ 1,883(5)
=========== =========
</Table>
- ----------
(1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did
not previously own. Accordingly, CESCR is consolidated as of January 1,
2002.
(2) Excludes the write-off of goodwill of $25,817 upon the adoption of SFAS 142
- "Goodwill and Other Intangible Assets." The Company's share of this
write-off of $15,490 is reflected as a cumulative effect of change in
accounting principle on the Company's Consolidated Statements of Income.
(3) The prior year's six months includes $1,300 for the Company's share of a
gain on sale of a property.
(4) The six months ended June 30, 2002 excludes 570 Lexington Avenue which was
sold in May 2001.
(5) The prior year's six months includes $1,352 for the Company's share of
equity in loss of its Russian Tea Room ("RTR") investment. In the third
quarter of 2001, the Company wrote-off its entire net investment in RTR
based on the operating losses and an assessment of the value of the real
estate.
Page 38
<Page>
INTEREST AND OTHER INVESTMENT INCOME
Interest and other investment income (interest income on mortgage loans
receivable, other interest income, and dividend income) was $19,577,000 for the
six months ended June 30, 2002, compared to $29,347,000 in the six months ended
June 30, 2001, a decrease of $9,770,000. Of this decrease (i) $1,244,000
resulted from the lower yield on the investment of the proceeds received from
the repayment of its loan to NorthStar Partnership, L.P. in May 2002, (ii)
$7,599,000 resulted primarily from the Company not recognizing income on its
loans to Primestone and Vornado Operating Company (see "Liquidity and Capital
Resources -- Vornado Operating Company") for the six months ended June 30, 2002
and (iii) $927,000 resulted from lower yields on other investments.
INTEREST AND DEBT EXPENSE
Interest and debt expense was $118,137,000 for the six months ended June
30, 2002, compared to $93,389,000 in the six months ended June 30, 2001, an
increase of $24,748,000. This increase was primarily comprised of (i)
$49,404,000 from the acquisition of the remaining 66% of CESCR and the resulting
consolidation of their operations, partially offset by (ii) a $24,656,000
savings from a 282 basis point reduction in weighted average interest rates of
the Company's variable rate debt and (iii) lower average outstanding debt
balances.
NET GAIN (LOSS) ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS
The following table sets forth the details of net (loss) gain on
disposition of wholly-owned and partially-owned assets for the six months ended
June 30, 2002 and 2001:
<Table>
<Caption>
For the Six Months Ended
(amounts in thousands) June 30,
------------------------
2002 2001
----------- ----------
Wholly-owned Assets:
Loss on Primestone foreclosure ............................................. $ (17,671) $ --
Gain on sale of Kinzie Park condominiums units ............................. 1,875 --
Net gain on sale of marketable securities .................................. 12,346 --
Net gain from condemnation proceedings ..................................... -- 3,050
Write-off of investments in technology companies ........................... -- (18,284)
Partially-owned Assets:
Net gain on sale of 50% interest in 570 Lexington Avenue ................... -- 12,445
----------- ----------
$ (3,450) $ (2,789)
=========== ==========
</Table>
Page 39
<Page>
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 2002
Cash flow provided by operating activities of $247,298,000 was primarily
comprised of (i) income of $187,716,000, (ii) adjustments for non-cash items of
$89,967,000, partially offset by (iii) the net change in operating assets and
liabilities of $33,835,000. The adjustments for non-cash items were primarily
comprised of (i) a cumulative effect of change in accounting principle of
$30,129,000, (ii) amortization of Officer's deferred compensation expense of
$13,750,000, (iii) depreciation and amortization of $97,151,000, (iv) minority
interest of $1,543,000, partially offset by (v) the effect of straight-lining of
rental income of $18,939,000, and (vi) equity in net income of partially-owned
entities and income applicable to Alexander's of $33,667,000.
Net cash used in investing activities of $75,791,000 was primarily
comprised of (i) recurring capital expenditures of $27,851,000, (ii)
non-recurring capital expenditures of $13,603,000, (iii) development and
redevelopment expenditures of $34,831,000, (iv) investment in notes and
mortgages receivable of $741,000, (v) investments in partially-owned entities of
$21,984,000, (vi) cash restricted of $113,831,000 for funds escrowed in
connection with a mortgage financing, partially offset by (vii) distributions
from partially-owned entities of $67,454,000, (viii) repayments on notes
receivable of $60,000,000 and (ix) proceeds from the sale of marketable
securities of $53,445,000.
Net cash provided by financing activities of $247,092,000 was primarily
comprised of (i) distributions to Class A unitholders of $169,838,000, (ii)
distributions to preferred unitholders of $82,809,000, (iii) repayments of
borrowings of $200,612,000, partially offset by proceeds from (iv) the issuance
of common units of $56,658,000, (v) notes and mortgages payable of $622,765,000,
of which $500,000,000 was from the issuance of the Company's senior unsecured
notes on June 24, 2002, and (vi) the exercise of employee unit options of
$23,728,000.
Below are the details of capital expenditures, leasing commissions and
development and redevelopment expenditures.
Capital expenditures are categorized as follows:
Recurring -- capital improvements expended to maintain a property's
competitive position within the market and tenant improvements and leasing
commissions for costs to re-lease expiring leases or renew or extend
existing leases.
Non-recurring -- capital improvements completed in the year of
acquisition and the following two years which were planned at the time of
acquisition and tenant improvements and leasing commissions for space which
was vacant at the time of acquisition of a property.
Development and redevelopment expenditures include all hard and soft costs
associated with the development or redevelopment of a property, including tenant
improvements, leasing commissions and capitalized interest and operating costs
until the property is substantially complete and ready for its intended use.
<Table>
<Caption>
(amounts in thousands)
New York Merchandise
Capital Expenditures: Total City Office CESCR Retail Mart Other
--------- ----------- --------- -------- ------------- --------
Expenditures to maintain the assets:
Recurring ............................. $ 6,095 $ 2,411 $ 1,734 $ 397 $ 1,112 $ 441
Non-recurring ......................... 7,090 3,762 1,570 -- 1,758 --
--------- ----------- --------- -------- ------------- --------
13,185 6,173 3,304 397 2,870 441
--------- ----------- --------- -------- ------------- --------
Tenant improvements:
Recurring ............................. 21,756 6,857 12,783 765 1,351 --
Non-recurring ......................... 6,513 1,525 4,988 -- -- --
--------- ----------- --------- -------- ------------- --------
28,269 8,382 17,771 765 1,351 --
--------- ----------- --------- -------- ------------- --------
Total $ 41,454 $ 14,555 $ 21,075 $ 1,162 $ 4,221 $ 441
========= =========== ========= ======== ============= ========
Leasing Commissions:
Recurring ............................. $ 3,659 $ 2,028 $ 1,292 $ 153 $ 98 $ 88
Non-recurring ......................... 2,644 1,630 1,014 -- -- --
--------- ----------- -------- ------- ------------ -------
$ 6,303 $ 3,658 $ 2,306 $ 153 $ 98 $ 88
--------- ----------- --------- -------- ------------- --------
Total Capital Expenditures and Leasing Commissions:
Recurring ............................. $ 31,510 $ 11,296 $ 15,809 $ 1,315 $ 2,561 $ 529
Non-recurring ......................... 16,247 6,917 7,572 -- 1,758 --
--------- ----------- --------- -------- ------------- --------
$ 47,757 $ 18,213 $ 23,381 $ 1,315 $ 4,319 $ 529
--------- ----------- --------- -------- ------------- --------
Development and Redevelopment Expenditures:
Palisades-Fort Lee, NJ (1) ............ $ 9,287 $ -- $ -- $ -- $ -- $ 9,287
Other ................................. 25,544 20,189 5,097 (871)(2) 558 571
--------- ----------- --------- -------- ------------- --------
$ 34,831 $ 20,189 $ 5,097 $ (871) $ 558 $ 9,858
========= =========== ========= ======== ============= ========
</Table>
- ----------
(1) Does not include $15,421 of Fort Lee development costs funded by a
construction loan.
(2) Represents reimbursements from tenants for expenditures incurred in the
prior year.
Page 40
<Page>
VORNADO OPERATING COMPANY ("VORNADO OPERATING")
Pursuant to a revolving credit facility which expires December 31, 2004,
Vornado Operating owes the Company $31,489,000 at June 30, 2002. Vornado
Operating has disclosed that in the aggregate, its investments do not, and for
the foreseeable future, are not expected to generate sufficient cash flow to pay
all of its debts and expenses. Further, Vornado Operating states that its only
investee, AmeriCold Logistics ("Tenant"), anticipates that its Landlord, a
partnership 60% owned by the Company and 40% owned by Crescent Real Estate
Equities, will need to restructure the leases between the Landlord and the
Tenant to provide additional cash flow to the Tenant (the Landlord has
previously restructured the leases to provide additional cash flow to the
Tenant). Management anticipates further lease restructuring and the sale of
non-core assets by AmeriCold Logistics, and accordingly, Vornado Operating is
expected to have a source to repay the debt under this facility which may be
extended. Since January 1, 2002, the Company has not recognized income on the
debt under this facility.
SIX MONTHS ENDED JUNE 30, 2001
Cash flows provided by operating activities of $192,866,000 was primarily
comprised of (i) income of $177,516,000 and (ii) adjustments for non-cash items
of $8,903,000 and (iii) the net change in operating assets and liabilities of
$21,642,000. The adjustments for non-cash items are primarily comprised of (i)
cumulative effect of change in accounting principle of $4,110,000, (ii) the
write-off of equity investments in technology companies of $18,284,000, (iii)
depreciation and amortization of $61,951,000 and (iv) minority interest of
$768,000, partially offset by (v) the effect of straight-lining of rental income
of $14,542,000 and (vi) equity in net income of partially-owned entities and
income applicable to Alexander's of $60,198,000.
Net cash used in investing activities of $59,966,000 was primarily
comprised of (i) recurring capital expenditures of $26,490,000, (ii)
non-recurring capital expenditures of $22,836,000, (iii) development and
redevelopment expenditures of $74,856,000, (iv) investment in notes and
mortgages receivable of $30,767,000, (v) investments in partially-owned entities
of $25,221,000 partially offset by, (vi) distributions from partially-owned
entities of $93,032,000 and (vii) a decrease in restricted cash arising
primarily from the repayment of mortgage escrows of $27,851,000.
Net cash used in financing activities of $149,969,000 was primarily
comprised of (i) proceeds from borrowings of $118,853,000, partially offset by,
(ii) repayments of borrowings of $111,748,000, (iii) distributions to Class A
unitholders of $90,992,000, and (iv) distributions to preferred unitholders of
$71,636,000.
Below are the details of capital expenditures, leasing commissions and
development and redevelopment expenditures.
<Table>
<Caption>
New York Merchandise
(amounts in thousands) Total City Office Retail Mart Other
---------- ------------- --------- ------------- ---------
Capital Expenditures:
Expenditures to maintain the assets:
Recurring ........................................ $ 8,268 $ 4,937 $ 412 $ 1,187 $ 1,732
Non-recurring .................................... 19,732 10,523 -- 3,259 5,950
---------- ------------- --------- ------------- ---------
28,000 15,460 412 4,446 7,682
---------- ------------- --------- ------------- ---------
Tenant improvements:
Recurring ........................................ 18,222 15,242 265 2,715 --
Non-recurring .................................... 3,104 3,104 -- -- --
---------- ------------- --------- ------------- ---------
21,326 18,346 265 2,715 --
---------- ------------- --------- ------------- ---------
Total .............................................. $ 49,326 $ 33,806 $ 677 $ 7,161 $ 7,682
========== ============= ========= ============= =========
Leasing Commissions:
Recurring ........................................ $ 6,090 $ 5,710 $ 195 $ 48 $ 137
Non-recurring .................................... -- -- -- -- --
---------- ------------- --------- ------------- ---------
$ 6,090 $ 5,710 $ 195 $ 48 $ 137
---------- ------------- --------- ------------- ---------
Development and Redevelopment:
Expenditures:
Park Laurel (80% interest) ....................... $ 29,212 $ -- $ -- $ -- $ 29,212
Market Square on Main Street ..................... 17,597 -- -- 17,597 --
Other ............................................ 28,047 14,682 1,964 1,863 9,538(1)
---------- ------------- --------- ------------- ---------
$ 74,856 $ 14,682 $ 1,964 $ 19,460 $ 38,750
---------- ------------- --------- ------------- ---------
</Table>
- ----------
(1) Does not include $37,592 of Fort Lee development costs funded by a
construction loan.
Page 41
<Page>
SUPPLEMENTAL INFORMATION
Below is a summary of net income, EBITDA and funds from operations for the
three and six months ended June 30, 2002 and 2001, giving effect to the
following transactions as if they had occurred on January 1, 2001: (i) the
acquisition of the remaining 66% of CESCR on January 1, 2002 and (ii) Vornado's
November 21, 2001 sale of 9,775,000 common shares and the use of proceeds to
repay indebtedness.
<Table>
<Caption>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30,
(amounts in thousands) June 30, 2001 June 30, 2001
2002 (Pro Forma) 2002 (Pro Forma)
---------- ------------- ---------- -------------
Revenues.............................. $ 353,247 $ 341,686 $ 699,571 $ 679,542
========== ============= ========== =============
Net income............................ $ 105,376 $ 105,947 $ 187,716 $ 203,095
Preferred unit distributions.......... (5,896) (9,192) (12,027) (18,865)
Preferential allocations.............. (24,142) (33,900) (48,203) (67,500)
---------- ------------- ---------- -------------
Net income applicable to Class A Units $ 75,338 $62,855 $ 127,486 $ 116,730
========== ============= ========== =============
Net income per Class A Unit - diluted $ .57 $ .59 $ .97 $ 1.10
========== ============= ========== =============
EBITDA................................ $ 235,599 $ 229,575 $ 474,627 $ 461,745
========== ============= ========== =============
</Table>
Below are the details of the changes by segment in EBITDA for the three
months ended June 30, 2002 from the three months ended March 31, 2002.
<Table>
<Caption>
Temperature
Merchandise Controlled
(amounts in thousands) Total Office Retail Mart Logistics Other
---------- ---------- ---------- ----------- ----------- ----------
Three months ended March 31, 2002...... $ 239,028 $ 142,878 $ 27,534 $ 26,228 $ 21,237 $ 21,151
2002 Operations:
Same store operations(1)............ 4,739 1,954 496 6,018 (4,592) 863
Non-recurring income and expenses (8,168) 100 (1,000) (777) -- (6,491)
---------- ---------- ---------- ----------- ----------- ----------
Three months ended June 30, 2002....... $ 235,599 $ 144,932 $ 27,030 $ 31,469 $ 16,645 $ 15,523
========== ========== ========== =========== =========== ==========
% increase (decrease) in same
store operations.................. 2.0% 1.4%(2) 1.8% 22.9%(3) (21.6)%(4) 4.1%
========== ========== ========== =========== =========== ==========
</Table>
- ----------
(1) Represents operations which were owned for the same period in each year and
excludes non-recurring income and expenses.
(2) Same store percentage increase was 1.1% for the New York City office
portfolio, and 1.6% for the CESCR portfolio.
(3) Increase results primarily from (i) EBITDA generated by the Chicago NeoCon
and High Point North Carolina furniture shows in the three months ended
June 30, 2002 in excess of the EBITDA generated by shows in the three
months ended March 31, 2002 and (ii) a .7% same store increase in other
operations.
(4) The tenant has advised the Landlord that (i) its revenue for the quarter
ended June 30, 2002 from the warehouses it leases from the Landlord, was
higher than last quarter by .6%, and (ii) its gross profit before rent at
these warehouses decreased by $2,724 (6.2%). The increase in revenue is
primarily attributable to higher occupancy rates, offset by a reduction in
customer inventory turns. The decrease in gross profit is primarily
attributable to higher insurance costs, partially offset by lower payroll
expenses. In addition, the tenant's cash requirements for capital
expenditures, debt service and pension liability funding were $1,668 higher
in the current quarter than in the prior quarter, which impacted the
ability of the tenant to pay rent.
Page 42
<Page>
LEASING ACTIVITY
The following table sets forth certain information for the properties
the Company owns directly or indirectly, including leasing activity for
space previously occupied:
<Table>
<Caption>
(Square Feet and Cubic Feet in Thousands)
Office Merchandise Mart
------------------------ ------------------------
Temperature
As of June 30, 2002: New York Controlled
City Cescr Retail Office Showroom Logistics
---------- ---------- ---------- ---------- ---------- -----------
Square feet .......................... 14,325 13,008 11,301 2,831 5,497 17,509
Cubic feet ........................... -- -- -- -- -- 441,500
Number of properties ................. 22 51 55 9 9 88
Occupancy rate ....................... 96.1% 94.7% 88.5%(3) 89.8% 94.9% 78.6%
Leasing Activity:
For the quarter ended
June 30, 2002:
Square feet ................... 100(2) 454 403 29 213 --
Rent per square foot:
Initial rent(1) ............. $ 42.69 $ 32.25 $ 12.04 $ 20.51 $ 19.80 --
Prior escalated rent ........ $ 36.33 $ 31.44 $ 9.91 $ 18.35 $ 20.16 --
Percentage increase(decrease) 17.5% 2.6% 21.5% 11.8% (1.7)% --
For the Six Months Ended
June 30, 2002:
Square feet ................... 221(2) 913 509 85 416 --
Rent per square foot:
Initial Rent(1) ............. $ 46.27 $ 32.03 $ 12.35 $ 20.88 $ 17.45 --
Prior escalated rent ........ $ 34.51 $ 30.50 $ 9.67 $ 19.81 $ 16.95 --
Percentage increase ......... 34.1% 5.0% 27.7% 5.4% 3.0% --
As of March 31, 2002:
Square feet .......................... 14,317 13,008 11,301 2,822 5,490 17,695
Cubic feet ........................... -- -- -- -- -- 445,200
Number of properties ................. 22 51 55 9 9 89
Occupancy rate ....................... 96.7% 94.1% 91.0% 90.4% 95.3% 75.1%
As of December 31, 2001:
Square feet .......................... 14,300 4,386 11,301 2,840 5,532 17,695
Cubic feet ........................... -- -- -- -- -- 445,200
Number of properties ................. 22 51 55 9 9 89
Occupancy rate ....................... 97.4% 94.7% 92.0% 90.9% 95.5% 80.7%
As of June 30, 2001:
Square feet .......................... 14,465 4,249 11,301 2,869 5,044 17,569
Cubic feet ........................... -- -- -- -- -- 440,200
Number of properties ................. 22 50 55 9 9 88
Occupancy rate ....................... 95.0% 96.0% 92.0% 90.2% 96.8% 74.06%
</Table>
- ----------
(1) Most leases include periodic step-ups in rent, which are not reflected in
the initial rent per square foot leased.
(2) In addition to the above, the Company leased 45 and 67 square feet of
previously vacant space (first generation space - space which has been
vacant for more than nine months) at an average initial rent per square
foot of $50.83 and $53.03 for the three and six months ended June 30, 2002.
(3) On June 29, 2002, K-Mart rejected its lease at the Company's Green Acres
location (131 square feet at $13.64 per square foot).
Page 43
<Page>
SENIOR UNSECURED DEBT COVENANT COMPLIANCE RATIOS
The following ratios as of and for the three months ended June 30, 2002,
are computed pursuant to the covenants and definitions of the Company's senior
unsecured notes due 2007 and are presented on a basis to give effect to the
Company's sale of the notes and the subsequent repayment of $463 million of
mortgages payable as if these transactions had occurred on January 1, 2002.
<Table>
<Caption>
Actual Required
------ -----------------
Total Outstanding Debt/Total Assets .................. 42% Less than 60%
Secured Debt/Total Assets ............................ 37% Less than 55%
Interest coverage (Annualized Combined EBITDA to
Annualized Interest Expense) ....................... 3.04 Greater than 1.50
Unencumbered Assets/ Unsecured Debt .................. 636% Greater than 150%
</Table>
The covenants and definitions of the Company's senior unsecured notes due
2007 are described in Exhibit 4.2 to this quarterly report on Form 10-Q.
Page 44
<Page>
FINANCINGS
The Company anticipates that cash from continuing operations will be
adequate to fund business operations and the payment of distributions on an
on-going basis for more than the next twelve months; however, capital outlays
for significant acquisitions would require funding from borrowings or equity
offerings.
On June 24, 2002, the Company completed an offering of $500,000,000
aggregate principal amount of 5.625% senior unsecured notes due June 15, 2007.
Interest on the notes is payable semi-annually on June 15th and December 15th,
commencing December 15, 2002. The notes were priced at 99.856% of their face
amount to yield 5.659%. Of the net proceeds of approximately $496,300,000, (i)
$70,000,000 was used to repay the mortgage payable on 350 North Orleans prior to
June 30, 2002, and (ii) $393,000,000 was used to repay the mortgages on Two Park
Avenue, the Merchandise Mart and a portion of Seven Skyline in July and August
2002. After the repayment of these mortgages, the balance of the Company's
wholly-owned debt was $4,041,929, as compared to $3,970,486 at March 31, 2002.
On June 27, 2002, the Company entered into interest rate swaps that effectively
converted the interest rate on the $500,000,000 senior unsecured notes due 2007
from a fixed rate of 5.625% to a floating rate of LIBOR plus .7725, based upon
the trailing 3 month LIBOR rate (2.59 % if set on August 1, 2002).
COMMITMENTS
In conjunction with the closing of Alexander's Lexington Avenue
construction loan on July 3, 2002, the Company agreed to guarantee, among other
things, the lien free, timely completion of the construction of the project and
funding of all project costs in excess of a stated loan budget, if not funded by
Alexander's.
Page 45
<Page>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to a change in interest rates on its wholly-owned
and partially-owned debt (all of which arises out of non-trading activity) is as
follows:
<Table>
<Caption>
(Amounts in Thousands
Except Per Unit Amounts)
June 30, 2002 December 31, 2001
------------------------------------------ ---------------------------
Weighted Effect of 1% Weighted
Average Change In Average
Balance Interest Rate Base Rates Balance Interest Rate
----------- ------------- ------------ ----------- -------------
Wholly-owned debt:
Variable rate ................ $ 1,801,498 3.04% $ 11,707(1) $ 1,182,605 3.39%
Fixed rate ................... 2,633,431 7.29% -- 1,294,568 7.53%
----------- ------------ -----------
$ 4,434,929 5.56% 11,707 $ 2,477,173
=========== ============ ===========
Partially-owned debt:
Variable rate ................ $ 14,775 5.07% 559(2) $ 85,516 5.63%
Fixed rate ................... 847,754 8.66% -- 1,234,019 8.29%
----------- ------------ -----------
$ 862,529 8.60% 559 $ 1,319,535
=========== ============ ===========
Preferential allocations ......... (2,503)
============
Total decrease in the
Company's annual net income .... $ 9,763
===========
Per Class A Unit-diluted ..... $ .07
===========
</Table>
- ----------
(1) The effect of a 1% change in wholly-owned debt base rates shown above is
calculated after giving effect to (i) the Company's issuance of $500,000
senior unsecured notes due 2007 and the use of proceeds to repay existing
variable rate debt and (ii) the exclusion of $238,659 of variable rate
mortgage financing, cross-collateralized by the Company's 770 Broadway and
595 Madison Avenue office properties as the proceeds are held in a
restricted mortgage escrow account which bears interest at the same rate as
the loans.
(2) The effect of a 1% change in partially-owned debt base rates shown above is
calculated after including $41,148, representing the Company's 14.9% share
of Prime Group Realty L.P.'s ("PGE") outstanding variable rate debt as at
March 31, 2002. PGE has not filed its quarterly report on Form 10-Q for the
quarter ended June 30, 2002, prior to the filing of this quarterly report
on Form 10-Q.
Page 46
<Page>
PART II. OTHER INFORMATION
ITEM1. LEGAL PROCEEDINGS
The Company is from time to time involved in legal actions arising in the
ordinary course of its business. In the opinion of management, after
consultation with legal counsel, the outcome of such matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
As a result of the Company's April 30, 2002 foreclosure on the partnership
units of Prime Group Realty L.P., the Company's litigation against Primestone
discussed in the quarterly report on Form 10-Q for the quarter ended March 31,
2002, has been dismissed pursuant to the parties stipulation on May 28, 2002.
As previously disclosed, on February 13, 2002, Primestone counterclaimed
against the Company, alleging, among other things, that the Company tortiously
interfered with a prospective contract with Cadim inc., and on March 4, 2002,
the Company filed an answer denying the essential allegations of the
counterclaim. On May 20, 2002, the Company served a motion for summary judgment
asking the Court to enter judgment in its favor on its claims against Primestone
and to dismiss Primestone's counterclaims. On July 31, 2002, Primestone moved
for leave to amend its counterclaim, primarily to assert that Vornado's April
30, 2002 foreclosure on the collateral pledged by Primestone did not comply with
the Uniform Commercial Code. This litigation is continuing. See "Item 3. Legal
Proceedings" of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 for more information about this litigation.
Primestone and several affiliates commenced an action against the Company
on May 3, 2002 in New York Supreme Court, alleging substantially the same causes
of action as in Primestone's February 13, 2002 counterclaim. In the May 3, 2002
action, Primestone also alleges that Vornado's foreclosure on the collateral
pledged by Primestone did not comply with the Uniform Commercial Code. On June
10, 2002, Vornado moved to dismiss this action. This litigation is continuing.
On May 9, 2002, five affiliates of Primestone asserted counterclaims in an
action which the Company had commenced against them on March 2, 2002 in New York
Supreme Court. The counterclaims are virtually identical to the claims asserted
in the May 3, 2002 action. On May 29, 2002, Vornado filed answer denying the
essential allegations of this counterclaim. This litigation is continuing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K are incorporated herein
by reference and are listed in the attached Exhibit Index.
(b) Reports on Form 8-K:
During the quarter ended June 30, 2002, the Company filed the
following report on Form 8-K.
<Table>
<Caption>
Period Covered
(Date of Earliest
Event Reported) Items Reported Dated Filed
----------------- -------------- -----------
June 24, 2002 Issuance and sale of $500,000,000 aggregate principal June 24, 2002
amount of 5.625% Notes due 2007 of the Operating
Partnership.
</Table>
Page 47
<Page>
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)
By: Vornado Realty Trust, the General Partner
Date: August 14, 2002 By: /s/ Joseph Macnow
-----------------------------------------
Joseph Macnow, Executive Vice President -
Finance and Administration,
Chief Financial Officer
Page 48
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO.
- -------
2.1 -- Agreement and Plan of Merger, dated as of October 18, 2001, by and among Vornado, Vornado Merger Sub L.P.,
Charles E. Smith Commercial Realty L.P., Charles E. Smith Commercial Realty L.L.C., Robert H. Smith,
individually, Robert P. Kogod, individually, and Charles E. Smith Management, Inc.-- Incorporated by
reference to Exhibit 2.1 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on January
16, 2002..................................................................................................... *
3.1 -- Amended and Restated Declaration of Trust of Vornado, as filed with the State Department of Assessments and
Taxation of Maryland on April 16, 1993-- Incorporated by reference to Exhibit 3(a) of Vornado's
Registration Statement on Form S-4 (File No. 333-60286), filed on April 15, 1993.............................. *
3.2 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on May 23, 1996-- Incorporated by reference to Exhibit 3.2 of Vornado's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 11, 2002....... *
3.3 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on April 3, 1997-- Incorporated by reference to Exhibit 3.3 of Vornado's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No. 1-11954), filed on March 11, 2002......... *
3.4 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on October 14, 1997-- Incorporated by reference to Exhibit 3.2 of Vornado's
Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000................................ *
3.5 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on April 22, 1998-- Incorporated by reference to Exhibit 3.1 of Vornado's Current
Report on Form 8-K, dated April 22, 1998 (File No. 001-11954), filed on April 28, 1998....................... *
3.6 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on November 24, 1999-- Incorporated by reference to Exhibit 3.4 of Vornado's
Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000................................ *
3.7 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on April 20, 2000-- Incorporated by reference to Exhibit 3.5 of Vornado's
Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000................................ *
3.8 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments
and Taxation of Maryland on September 14, 2000-- Incorporated by reference to Exhibit 4.6 of Vornado's
Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001............................ *
3.9 -- Articles of Amendment of Declaration of Trust of Vornado dated May 31, 2002, as filed with the Department
of Assessments and Taxation of the State of Maryland on June 13, 2002-- Incorporated by reference to
Exhibit 3.9 of Vornado's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File No.
001-11954), filed on August 7, 2002.......................................................................... *
</Table>
- ---------------
* Incorporated by reference
Page 49
<Page>
<Table>
<Caption>
EXHIBIT
NO.
- --------
3.10 -- Articles of Amendment of Declaration of Trust of Vornado dated June 6, 2002, as filed with the Department
of Assessments and Taxation of the State of Maryland on June 13, 2002-- Incorporated by reference to
Exhibit 3.10 of Vornado's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File No.
001-11954), filed on August 7, 2002.......................................................................... *
3.11 -- Articles Supplementary Classifying Vornado's $3.25 Series A Preferred Shares of Beneficial Interest,
liquidation preference $50.00 per share-- Incorporated by reference to Exhibit 4.1 of Vornado's Current
Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997......................... *
3.12 -- Articles Supplementary Classifying Vornado's $3.25 Series A Convertible Preferred Shares of Beneficial
Interest, as filed with the State Department of Assessments and Taxation of Maryland on December 15,
1997-- Incorporated by reference to Exhibit 3.10 to Vornado's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 001-11954), filed on March 31, 2002........................................ *
3.13 -- Articles Supplementary Classifying Vornado's Series D-1 8.5% Cumulative Redeemable Preferred Shares of
Beneficial Interest, no par value (the "Series D-1 Preferred Shares")-- Incorporated by reference to
Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed
on November 30, 1998......................................................................................... *
3.14 -- Articles Supplementary Classifying Additional Series D-1 8.5% Preferred Shares of Beneficial Interest,
liquidation preference $25.00 per share, no par value -- Incorporated by reference to Exhibit 3.2 of
Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9,
1999......................................................................................................... *
3.15 -- Articles Supplementary Classifying 8.5% Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest, liquidation preference $25.00 per share, no par value -- Incorporated by reference to Exhibit
3.3 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17,
1999......................................................................................................... *
3.16 -- Articles Supplementary Classifying Vornado's Series C 8.5% Cumulative Redeemable Preferred Shares of
Beneficial Interest, liquidation preference $25.00 per share, no par value-- Incorporated by reference to
Exhibit 3.7 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed on May 19,
1999......................................................................................................... *
3.17 -- Articles Supplementary Classifying Vornado Realty Trust's Series D-2 8.375% Cumulative Redeemable Preferred
Shares, dated as of May 27, 1999, as filed with the State Department of Assessments and Taxation of
Maryland on May 27, 1999-- Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form
8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999.......................................... *
3.18 -- Articles Supplementary Classifying Vornado's Series D-3 8.25% Cumulative Redeemable Preferred Shares, dated
September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September
3, 1999-- Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated
September 3, 1999 (File No. 001-11954), filed on October 25, 1999............................................ *
3.19 -- Articles Supplementary Classifying Vornado's Series D-4 8.25% Cumulative Redeemable Preferred Shares, dated
September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September
3, 1999-- Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated
September 3, 1999 (File No. 001-11954), filed on October 25, 1999............................................ *
</Table>
- ---------------
* Incorporated by reference
Page 50
<Page>
<Table>
<Caption>
EXHIBIT
NO.
- ---------
3.20 -- Articles Supplementary Classifying Vornado's Series D-5 8.25% Cumulative Redeemable Preferred Shares --
Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 24, 1999
(File No. 001-11954), filed on December 23, 1999............................................................. *
3.21 -- Articles Supplementary Classifying Vornado's Series D-6 8.25% Cumulative Redeemable Preferred Shares, dated
May 1, 2000, as filed with the State Department of Assessments and Taxation of Maryland on May 1, 2000--
Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File
No. 001-11954), filed May 19, 2000........................................................................... *
3.22 -- Articles Supplementary Classifying Vornado's Series D-7 8.25% Cumulative Redeemable Preferred Shares, dated
May 25, 2000, as filed with the State Department of Assessments and Taxation of Maryland on June 1, 2000--
Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File
No. 001-11954), filed on June 16, 2000....................................................................... *
3.23 -- Articles Supplementary Classifying Vornado's Series D-8 8.25% Cumulative Redeemable Preferred Shares --
Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 8, 2000
(File No. 001-11954), filed on December 28, 2000............................................................. *
3.24 -- Articles Supplementary Classifying Vornado's Series D-9 8.75% Preferred Shares, dated September 21, 2001,
as filed with the State Department of Assessments and Taxation of Maryland on September 25, 2001--
Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 001-11954),
filed on October 12, 2001.................................................................................... *
3.25 -- Amended and Restated Bylaws of Vornado, as amended on March 2, 2000-- Incorporated by reference to Exhibit
3.12 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954),
filed on March 9, 2000....................................................................................... *
3.26 -- Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of
October 20, 1997 (the "Partnership Agreement")-- Incorporated by reference to Exhibit 3.4 of Vornado's
Annual Report on Form 10-K for the year ended December 31, 1997 filed on March 31, 1998...................... *
3.27 -- Amendment to the Partnership Agreement, dated as of December 16, 1997-Incorporated by reference to Exhibit
3.5 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-11954)
filed on March 31, 1998...................................................................................... *
3.28 -- Second Amendment to the Partnership Agreement, dated as of April 1, 1998-- Incorporated by reference to
Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998.... *
3.29 -- Third Amendment to the Partnership Agreement, dated as of November 12, 1998-- Incorporated by reference to
Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed
on November 30, 1998......................................................................................... *
3.30 -- Fourth Amendment to the Partnership Agreement, dated as of November 30, 1998-- Incorporated by reference to
Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 1, 1998 (File No. 001-11954), filed on
February 9, 1999............................................................................................. *
3.31 -- Exhibit A to the Partnership Agreement, dated as of December 22, 1998-- Incorporated by reference to
Exhibit 3.4 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed
on February 9, 1999.......................................................................................... *
</Table>
- ---------------
* Incorporated by reference
Page 51
<Page>
<Table>
<Caption>
EXHIBIT
NO.
- ---------
3.32 -- Fifth Amendment to the Partnership Agreement, dated as of March 3, 1999 -- Incorporated by reference to
Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on
March 17, 1999 .............................................................................................. *
3.33 -- Exhibit A to the Partnership Agreement, dated as of March 11, 1999-- Incorporated by reference to Exhibit
3.2 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17,
1999......................................................................................................... *
3.34 -- Sixth Amendment to the Partnership Agreement, dated as of March 17, 1999 -- Incorporated by reference to
Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on
July 7, 1999................................................................................................. *
3.35 -- Seventh Amendment to the Partnership Agreement, dated as of May 20, 1999-- Incorporated by reference to
Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on
July 7, 1999................................................................................................. *
3.36 -- Eighth Amendment to the Partnership Agreement, dated as of May 27, 1999-- Incorporated by reference to
Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on
July 7, 1999................................................................................................. *
3.37 -- Ninth Amendment to the Partnership Agreement, dated as of September 3, 1999-- Incorporated by reference to
Exhibit 3.3 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 25, 1999.......... *
3.38 -- Tenth Amendment to the Partnership Agreement, dated as of September 3, 1999-- Incorporated by reference to
Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed
on October 25, 1999.......................................................................................... *
3.39 -- Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999-- Incorporated by reference
to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954),
filed on December 23, 1999................................................................................... *
3.40 -- Twelfth Amendment to the Partnership Agreement, dated as of May 1, 2000 -- Incorporated by reference to
Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed on May
19, 2000..................................................................................................... *
3.41 -- Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000-- Incorporated by reference to
Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on
June 16, 2000................................................................................................ *
3.42 -- Fourteenth Amendment to the Partnership Agreement, dated as of December 8, 2000-- Incorporated by reference
to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed
on December 28, 2000......................................................................................... *
3.43 -- Fifteenth Amendment to the Partnership Agreement, dated as of December 15, 2000-- Incorporated by reference
to Exhibit 4.35 of Vornado Realty Trust's Registration Statement on Form S-8 (File No. 333-68462), filed
on August 27, 2001........................................................................................... *
3.44 -- Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001-- Incorporated by reference to
Exhibit 3.3 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed on October
12, 2001..................................................................................................... *
</Table>
- ---------------
* Incorporated by reference
Page 52
<Page>
<Table>
<Caption>
EXHIBIT
NO.
- ---------
3.45 -- Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001-- Incorporated by
reference to Exhibit 3.4 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed
on October 12, 2001.......................................................................................... *
3.46 -- Eighteenth Amendment to the Partnership Agreement, dated as of January 1, 2002-- Incorporated by reference
to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002........... *
3.47 -- Nineteenth Amendment to the Partnership Agreement, dated as of July 1, 2002-- Incorporated by reference to
Exhibit 3.47 of Vornado's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (File No.
001-11954), filed on August 7, 2002.......................................................................... *
4.1 -- Indenture, dated as of June 24, 2002, between Vornado Realty L.P. and The Bank of New York, as Trustee--
Incorporated by reference to Exhibit 4.1 to Vornado Realty L.P.'s Current Report on Form 8-K dated June
19, 2002 (File No. 000-22685), filed on June 24, 2002........................................................ *
4.2 -- Officer's Certificate pursuant to Sections 102 and 301 of the Indenture, dated June 24, 2002-- Incorporated
by reference to Exhibit 4.2 of Vornado's Quarterly Report on Form 10-Q for the period ended June 30,
2002 (File No. 001-11954), filed on August 7, 2002........................................................... *
10.1 -- Amended and Restated Credit Agreement dated July 3, 2002, between 59th Street Corporation and Vornado
Lending L.L.C. (evidencing $40,000,000 of debt) -- Incorporated by reference to Exhibit 10(i)(B)(1) of
Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on
August 7, 2002............................................................................................... *
10.2 -- Credit Agreement, dated July 3, 2002, between Alexander's Inc. and Vornado Lending L.L.C. (evidencing a
$20,000,000 loan)-- Incorporated by reference to Exhibit 10(i)(B)(2) of Alexander's Inc.'s quarterly
report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7,
2002......................................................................................................... *
10.3 -- Amended and Restated Credit Agreement, dated July 3, 2002, between Alexander's Inc. and Vornado Lending
L.L.C. (evidencing a $50,000,000 line of credit facility)-- Incorporated by reference to Exhibit
10(i)(B)(3) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No.
001-06064), filed on August 7, 2002.......................................................................... *
10.4 -- Credit Agreement, dated July 3, 2002, between Alexander's and Vornado Lending L.L.C. (evidencing a
$35,000,000 loan)-- Incorporated by reference to Exhibit 10(i)(B)(4) of Alexander's Inc.'s quarterly
report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002...................... *
10.5 -- Guaranty of Completion, dated as of July 3, 2002, executed by Vornado Realty L.P. for the benefit of
Bayerische Hypo--and Vereinsbank AG, New York Branch, as Agent for the Lenders-- Incorporated by reference
to Exhibit 10(i)(C)(5) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No.
001-06064), filed on August 7, 2002.......................................................................... *
10.6 -- Reimbursement Agreement, dated as of July 3, 2002, by and between Alexander's, Inc., 731 Commercial LLC,
731 Residential LLC and Vornado Realty L.P.-- Incorporated by reference to Exhibit 10(i)(C)(8) of
Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on
August 7, 2002............................................................................................... *
10.7 -- 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) of Alexander's Inc.'s quarterly
report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002...................... *
</Table>
- ---------------
* Incorporated by reference
Page 53
<Page>
<Table>
<Caption>
EXHIBIT
NO.
- -------
10.8 -- 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) of
Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on
August 7, 2002............................................................................................... *
10.9 -- 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) of Alexander's Inc.'s quarterly report for the period ended June 30, 2002 (File No.
001-06064), filed on August 7, 2002.......................................................................... *
10.10 -- 59th Street Management and Development Agreement, dated as of July 3, 2002, by and between 731 Commercial
LLC and Vornado Management Corp. -- Incorporated by reference to Exhibit 10(i)(F)(2) of Alexander's Inc.'s
quarterly report for the period ended June 30, 2002 (File No. 001-06064), filed on August 7, 2002 ........... *
10.11 -- Amendment to the Stock Pledge Agreement between Vornado Realty Trust and Steven Roth dated May 29, 2002--
Incorporated by reference to Exhibit 5 of Interstate Properties' Schedule 13D dated May 29, 2002 (File No.
005-44144), filed on May 30, 2002............................................................................ *
</Table>
- ---------------
* Incorporated by reference
Page 54