.
.
.
Exhibit 99.2
EXCERPTS FROM VORNADO REALTY TRUST'S
2002 ANNUAL REPORT TO SHAREHOLDERS
<Table>
<Caption>
* * *
SELECTED CONSOLIDATED FINANCIAL DATA
VORNADO REALTY TRUST
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share
and per share amounts) 2002(2) 2001(2) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
Revenues:
Rentals............................ $ 1,248,903 $ 841,999 $ 695,078 $ 591,270 $ 425,496
Expense reimbursements ............ 159,978 133,114 120,056 96,842 74,737
Other income ...................... 26,189 10,660 10,838 8,251 9,627
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues........................ 1,435,070 985,773 825,972 696,363 509,860
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating ......................... 541,596 398,969 318,360 282,118 207,171
Depreciation and amortization ..... 205,826 123,862 99,846 83,585 59,227
General and administrative ........ 98,458 72,572 47,911 40,151 28,610
Amortization of officer's deferred
compensation expense ........... 27,500 -- -- -- --
Costs of acquisitions and
development not consummated .... 6,874 5,223 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses........................ 880,254 600,626 466,117 405,854 295,008
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income...................... 554,816 385,147 359,855 290,509 214,852
Income applicable to Alexander's ..... 29,653 25,718 17,363 11,772 3,123
Income from partially-owned entities.. 44,458 80,612 86,654 78,560 32,025
Interest and other investment income.. 31,685 54,385 32,926 18,359 24,074
Interest and debt expense ............ (239,525) (173,076) (171,398) (141,683) (114,686)
Net (loss) gain on disposition of
wholly-owned and partially-owned
assets other than real estate ..... (17,471) (8,070) -- -- 9,649
Minority interest:
Perpetual preferred unit
distributions ................... (72,500) (70,705) (62,089) (19,254) (756)
Minority limited partnership
earnings ........................ (64,899) (39,138) (38,320) (33,904) (14,822)
Partially-owned entities .......... (3,185) (2,520) (1,965) (1,840) (605)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before gains on sales of real
estate and cumulative effect of
change in accounting principle .... 263,032 252,353 223,026 202,519 152,854
Gains on sale of real estate ......... -- 15,495 10,965 -- --
Cumulative effect of change in
accounting principle .............. (30,129) (4,110) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ........................... 232,903 263,738 233,991 202,519 152,854
Preferred share dividends ............ (23,167) (36,505) (38,690) (33,438) (21,690)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common
shares ............................ $ 209,736 $ 227,233 $ 195,301 $ 169,081 $ 131,164
====================================================================================================================================
Income per share - basic .......... $ 1.98 $ 2.55 $ 2.26 $ 1.97 $ 1.62
Income per share - diluted ........ $ 1.91 $ 2.47 $ 2.20 $ 1.94 $ 1.59
Cash dividends declared for
common shares ................... $ 2.66 $ 2.63 $ 1.97 $ 1.80 $ 1.64
BALANCE SHEET DATA
Total assets ......................... $9,018,179 $6,777,343 $6,403,210 $5,479,218 $4,425,779
Real estate, at cost .................. 7,559,694 4,690,211 4,354,392 3,921,507 3,315,891
Accumulated depreciation ............. 737,426 506,225 393,787 308,542 226,816
Debt ................................. 4,071,320 2,477,173 2,688,308 2,048,804 2,051,000
Shareholders' equity ................. 2,627,356 2,570,372 2,078,720 2,055,368 1,782,678
</Table>
-----------
1
[logo art]
SELECTED CONSOLIDATED FINANCIAL DATA continued
VORNADO REALTY TRUST
================================================================================
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 2002(2) 2001(2)(3) 2000(3) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
OTHER DATA
Funds from operations(1):
Net income applicable to
common shares $ 209,736 $ 227,233 $ 195,301 $ 169,081 $ 131,164
Cumulative effect of change in
accounting principle 30,129 4,110 -- -- --
Depreciation and amortization
of real property 195,808 119,568 97,744 82,216 58,277
Straight-lining of property
rentals for rent escalations (27,295) (24,314) (28,893) (22,881) (14,531)
Amortization of below market
leases, net (12,634) -- -- -- --
Leasing fees received in excess
of income recognized 1,318 1,954 1,259 1,705 1,339
Net gain on sale of real estate -- (12,445) (10,965) -- --
Net gain from insurance
settlement and condemnation
proceedings -- (3,050) -- -- (9,649)
Appreciation/(depreciation)
of securities held in officer's
deferred compensation trust -- 3,023 4,765 (340) 340
Gains on sale of securities
available for sale -- -- -- (383) (898)
Proportionate share of
adjustments to equity in income
of partially-owned entities to
arrive at funds from operations:
Temperature Controlled
Logistics 36,500 34,531 35,565 31,400 41,988
Alexander's (2,825) (5,980) 93 1,324 4,023
Partially-owned office buildings 2,847 1,913 2,926 50 3,561
Hotel Pennsylvania -- -- 5,779 4,866 4,083
Charles E. Smith Commercial
Realty L.P. -- 17,917 15,767 12,024 2,974
Other 12,763 10,538 9,448 7,463 219
Minority interest in partially
owned entities in excess of
preferential distributions (45,324) (16,810) (16,445) (9,020) (3,991)
Dilutive effect of Series A Preferred
Share dividends 6,150 19,505 21,689 16,268 --
- -----------------------------------------------------------------------------------------------------------------
Funds from operations(1) $ 407,173 $ 377,693 $ 334,033 $ 293,773 $ 218,899
=================================================================================================================
Cash flow provided by (used in):
Operating activities $ 499,825 $ 387,685 $ 249,921 $ 176,895 $ 189,406
Investing activities (24,117) (79,722) (699,375) (494,204) (1,257,367)
Financing activities (533,092) (179,368) 473,813 262,131 879,815
=================================================================================================================
(1) Funds from operations does not represent cash generated from operating
activities in accordance with accounting principles generally accepted in
the United States of America and is not necessarily indicative of cash
available to fund cash needs which is disclosed in the Consolidated
Statements of Cash Flows for the applicable periods. There are no material
legal or functional restrictions on the use of funds from operations. Funds
from operations should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity. Management considers funds from
operations a supplemental measure of operating performance and along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. Funds from operations may not be comparable to similarly
titled measures reported by other REITs since a number of REITs, including
the Company, calculate funds from operations in a manner different from that
used by the National Association of Real Estate Investment Trusts
("NAREIT"). Funds from operations, as defined by NAREIT, represents net
income applicable to common shares before depreciation and amortization,
extraordinary items and gains or losses on sales of real estate. Funds from
operations as disclosed above has been modified from this definition to
adjust primarily for (i) the effect of straight-lining of property rentals
for rent escalations and leasing fee income and (ii) the exclusion of
income arising from the amortization of below market leases net of above
market leases.
(2) Operating results for the year ended December 31, 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, page 33 for condensed Pro
Forma Operating Results for the year ended December 31, 2001 giving effect
to the CESCR acquisition as if it had occurred on January 1, 2001.
(3) Funds from operations as previously reported for the year ended December 31,
2001 and 2000 have been revised to include income from the early
extinguishment of debt of $1,170 in 2001 and expense from the early
extinguishment of debt of $1,125 in 2000 because such items are no longer
treated as extraordinary items in accordance with Generally Accepted
Accounting Principles.
------------
2
* * *
<Table>
<Caption>
========================================================================================================================
December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------
Temperature
Merchandise Controlled
($ in thousands) Total Office Retail Mart Logistics Other(2)
- ------------------------------------------------------------------------------------------------------------------------
Rentals $1,248,903 $867,938 $127,561 $195,899 $ -- $ 57,505
Expense reimbursements 159,978 89,890 51,750 14,754 -- 3,584
Other income 26,189 21,221 1,653 2,951 -- 364
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 1,435,070 979,049 180,964 213,604 -- 61,453
- ------------------------------------------------------------------------------------------------------------------------
Operating expenses 541,596 343,723 65,455 86,022 -- 46,396
Depreciation and amortization 205,826 146,746 15,507 26,716 -- 16,857
General and administrative 98,458 34,346 5,036 20,382 -- 38,694
Costs of acquisitions and
development not consummated 6,874 -- -- -- -- 6,874
Amortization of officer's deferred
compensation expense 27,500 -- -- -- -- 27,500
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 880,254 524,815 85,998 133,120 -- 136,321
- ------------------------------------------------------------------------------------------------------------------------
Operating income 554,816 454,234 94,966 80,484 -- (74,868)
Income applicable to Alexander's 29,653 -- -- -- -- 29,653
Income from partially-owned entities 44,458 1,966 (687) (339) 9,707 33,811
Interest and other investment income 31,685 6,472 323 507 -- 24,383
Interest and debt expense (239,525) (141,044) (56,643) (22,948) -- (18,890)
Net (loss) gain on disposition of
wholly-owned and partially-owned
assets other than real estate (17,471) -- -- 2,156 -- (19,627)
Minority interest (140,584) (119,910) (13,736) (23,910) 2,093 14,879
- ------------------------------------------------------------------------------------------------------------------------
Income before gains on sale of
real estate and cumulative effect
of change in accounting principle 263,032 201,718 24,223 35,950 11,800 (10,659)
Gains on sale of real estate -- -- -- -- -- --
Cumulative effect of change
in accounting principle (30,129) -- -- -- (15,490) (14,639)
- ------------------------------------------------------------------------------------------------------------------------
Net income 232,903 201,718 24,223 35,950 (3,690) (25,298)
Cumulative effect of change in
accounting principle 30,129 -- -- -- 15,490 14,639
Interest and debt expense(3) 302,009 139,157 58,409 23,461 25,617 55,365
Depreciation and amortization(3) 257,707 149,361 17,532 27,006 34,474 29,334
- ------------------------------------------------------------------------------------------------------------------------
EBITDA 822,748 490,236 100,164 86,417 71,891 74,040
Adjustments:
Minority interest 140,584 119,910 13,736 23,910 (2,093) (14,879)
Gains (losses) on sale of real
estate(3) (1,405) -- -- -- 2,026 (3,431)
Straight-lining of rents(3) (29,837) (24,352) (1,863) (1,772) -- (1,850)
Amortization of below market
leases, net (12,634) (12,469) (165) -- -- --
Other 1,549 -- 860 323 -- 366
- ------------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA(1) $921,005 $573,325 $112,732 $108,878 $71,824 $54,246
========================================================================================================================
See Notes on page 10.
</Table>
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<Table>
<Caption>
VORNADO REALTY TRUST
====================================================================================================================================
December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Temperature
Merchandise Controlled
($ in thousands) Total Office Retail Mart Logistics Other(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Rentals $ 841,999 $461,606 $121,023 $197,668 $ -- $ 61,702
Expense reimbursements 133,114 67,470 49,436 13,801 -- 2,407
Other income 10,660 3,775 1,154 3,324 -- 2,407
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 985,773 532,851 171,613 214,793 -- 66,516
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses 398,969 217,581 56,547 83,107 -- 41,734
Depreciation and amortization 123,862 71,425 14,767 25,397 -- 12,273
General and administrative 72,572 12,421 3,576 18,081 -- 38,494
Costs of acquisitions not consummated 5,223 -- -- -- -- 5,223
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 600,626 301,427 74,890 126,585 -- 97,724
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 385,147 231,424 96,723 88,208 -- (31,208)
Income applicable to Alexander's 25,718 -- -- -- -- 25,718
Income from partially-owned entities 80,612 32,746 1,914 149 17,447(4) 28,356
Interest and other investment income 54,385 6,866 608 2,045 -- 44,866
Interest and debt expense (173,076) (54,667) (55,358) (33,354) -- (29,697)
Net (loss) gain on disposition of
wholly-owned and partially-owned
assets other than real estate (8,070) -- -- 160 -- (8,230)
Minority interest (112,363) (55,932) (16,562) (15,650) (10,968) (13,251)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before gains on sales of
real estate and cumulative effect
of change in accounting principle 252,353 160,437 27,325 41,558 6,479 16,554
Gains on sale of real estate 15,495 12,445 3,050 -- -- --
Cumulative effect of change in
accounting principle (4,110) -- -- -- -- (4,110)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 263,738 172,882 30,375 41,558 6,479 12,444
Cumulative effect of change in
accounting principle 4,110 -- -- -- -- 4,110
Interest and debt expense(3) 266,784 92,410 57,915 33,354 26,459 56,646
Depreciation and amortization(3) 188,859 91,085 18,957 25,397 33,815 19,605
- -----------------------------------------------------------------------------------------------------------------------------------
EBITDA 723,491 356,377 107,247 100,309 66,753 92,805
Adjustments:
Gains on sale of real estate(3) (21,793) (12,445) (3,050) -- -- (6,298)
Minority interest 112,363 55,932 16,562 15,650 10,968 13,251
Net gain on disposition of
wholly-owned and partially-owned
assets other than real estate (160) -- -- (160) -- --
Straight-lining of rents(3) (26,134) (20,064) 727 (4,997) -- (1,800)
Other (2,715) -- (2,337) -- 716 (1,094)
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA(1) $ 785,052 $379,800 $119,149 $110,802 $ 78,437 $ 96,864
===================================================================================================================================
See Notes on Page 10.
</Table>
-----------
8
<Table>
<Caption>
===================================================================================================================================
December 31, 2000
(after giving effect to consolidation of PSA's -- see reclassifications below):
- -----------------------------------------------------------------------------------------------------------------------------------
Temperature
Merchandise Controlled
($ in thousands) Total Office Retail Mart Logistics Other(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Rentals $ 788,469 $406,261 $129,902 $171,001 $ -- $ 81,305
Expense reimbursements 120,074 60,767 45,490 10,654 -- 3,163
Other income 17,608 5,499 2,395 4,661 -- 5,063
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 926,151 472,527 177,787 186,316 -- 89,521
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses 379,524 199,424 55,671 74,553 -- 49,876
Depreciation and amortization 108,109 58,074 17,464 21,984 -- 10,587
General and administrative 63,468 10,401 667 16,330 -- 36,070
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 551,101 267,899 73,802 112,867 -- 96,553
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 375,050 204,628 103,985 73,449 -- (7,012)
Income applicable to Alexander's 17,363 -- -- -- -- 17,363
Income from partially-owned entities 79,694 29,210 667 -- 28,778(4) 21,039
Interest and other investment income 33,798 6,162 -- 2,346 -- 25,290
Interest and debt expense (180,505) (62,162) (54,305) (38,569) -- (25,469)
Minority interest (102,374) (46,917) (16,550) (12,660) (12,483) (13,764)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before gains on sales of real estate 223,026 130,921 33,797 24,566 16,295 17,447
Gains on sales of real estate 10,965 8,405 2,560 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 233,991 139,326 36,357 24,566 16,295 17,447
Interest and debt expense(3) 260,573 96,224 55,741 38,566 27,424 42,618
Depreciation and amortization(3) 167,268 76,696 18,522 20,627 34,015 17,408
- -----------------------------------------------------------------------------------------------------------------------------------
EBITDA 661,832 312,246 110,620 88,759 77,734 77,473
Adjustments:
Minority interest 102,374 46,917 16,550 12,660 12,483 13,764
Gains on sale of real estate(3) (10,965) (8,405) (2,560) -- -- --
Straight-lining of rents(3) (30,001) (19,733) (2,295) (5,919) (1,121) (933)
Other 14,510 -- (1,654) 1,358 4,064(2) 10,742(5)
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA(1) $ 737,750 $331,025 $120,661 $ 91,858 $ 93,160 $101,046
===================================================================================================================================
</Table>
See Notes on page 10.
----------
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
VORNADO REALTY TRUST
================================================================================
Prior to 2001, income from the Company's investments in preferred stock
affiliates ("PSAs") was included in income from partially-owned entities. On
January 1, 2001, the Company acquired the common stock of its PSAs and converted
these entities to taxable REIT subsidiaries. Accordingly, the operations of the
Hotel portion of the Hotel Pennsylvania and the operations of the management
companies (which provide services to the Company's business segments and operate
the Trade Show business of the Merchandise Mart division) have been consolidated
effective January 1, 2001. Amounts for the year ended December 31, 2000 have
been reclassified to give effect to the consolidation of these entities, as of
January 1, 2000. The effect of these reclassifications in 2000 was as follows:
<Table>
(i) reduction in equity in income of partially-owned entities $ (8,599,000)
(ii) increase in rental revenues 64,501,000
(iii) increase in other income 8,325,000
(iv) increase in operating expenses (41,233,000)
(v) increase in depreciation and amortization (6,906,000)
(vi) increase in general and administrative expenses (6,984,000)
(vii) increase in interest and debt expense (9,104,000)
- --------------------------------------------------------------------------------
(viii) net impact $ --
================================================================================
</Table>
These reclassifications had no effect on reported Net Income or Adjusted EBITDA
for the year ended December 31, 2000 and no impact on any other year.
NOTES:
(1) Adjusted 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 rent
escalations, amortization of acquired below market leases net of above
market leases and minority interest. Management considers Adjusted EBITDA a
supplemental measure for making decisions and assessing the performance of
its segments. Adjusted EBITDA should not be considered a substitute for net
income or a substitute for cash flow as a measure of liquidity. Adjusted
EBITDA is presented as a measure of "operating performance" which enables
the reader to identify trends from period to period and may be used to
compare "same store" operating performance to other companies, as well as
providing a measure for determining funds available to service debt.
Adjusted EBITDA may not be comparable to similarly titled measures employed
by other companies. In addition, the Company has revised Adjusted EBITDA as
previously reported for the year ended December 31, 2001 and 2000 to include
income from the early extinguishment of debt of $1,170 in 2001 and expense
from the early extinguishment of debt of $1,125 in 2000 because such items
are no longer treated as Extraordinary Items in accordance with Generally
Accepted Accounting Principles.
---------------
10
(2) Adjusted EBITDA -- Other is comprised of:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Newkirk Master Limited Partnership:
Equity in income $60,756 $54,695 $43,685
Interest and other income 8,795 8,700 7,300
Hotel Pennsylvania 7,636 16,789 26,866
Alexander's 34,381 19,362 18,330
Investment income and other 31,261 44,097 34,990
Corporate general and administrative expenses (34,743) (33,515) (30,125)
Primestone foreclosure and impairment losses (35,757) -- --
Amortization of Officer's deferred compensation expense (27,500) -- --
Write-off of 20 Times Square pre-development costs (2002)
and World Trade Center acquisition costs (2001) (6,874) (5,223) --
Net gain on sale of marketable securities 12,346 -- --
Gain on transfer of mortgages 2,096 -- --
Net gain on sale of air rights. 1,688 -- --
Palisades 161 -- --
After-tax net gain on sale of Park Laurel condominium units -- 15,657 --
Write-off of net investments in Russian Tea Room -- (7,347) --
Write-off of investments in technology companies -- (16,513) --
- -----------------------------------------------------------------------------------------------
TOTAL $54,246 $96,864 $101,046
- -----------------------------------------------------------------------------------------------
</Table>
(3) Interest and debt expense, depreciation and amortization, straight-lining of
rents and gains on sale of real estate included in the reconciliation of net
income to EBITDA or Adjusted ABITDA include amounts which are netted in income
from partially-owned entities.
(4) Excludes rent not recognized of $19,348, $15,281 and $9,787 for the years
ended December 31, 2002, 2001 and 2000.
(5) Includes the reversal of $1,266 and $4,765 of expenses in 2001 and 2000
representing the non-cash appreciation in value of shares held in a rabbi trust
in connection with a deferred compensation arrangement for the Company's
President.
-------------
11
* * *
The following table reconciles funds from operations and net income:
<Table>
================================================================================
For the Year Ended December 31,
- --------------------------------------------------------------------------------
($ in thousands) 2002 2001
- --------------------------------------------------------------------------------
Net income applicable to common shares $209,736 $227,233
Cumulative effect of a change in accounting principle 30,129 4,110
Depreciation and amortization of real property 195,808 119,568
Straight-lining of property rentals for rent escalations,
net of a $4,071 allowance in 2002 (27,295) (24,314)
Amortization of below market leases, net (12,634) --
Leasing fees received in excess of income recognized 1,318 1,954
Appreciation of securities held in officer's deferred
compensation trust -- 3,023
Net gain on sale of 570 Lexington Avenue through a
partially-owned entity -- (12,445)
Net gain from condemnation proceeding -- (3,050)
Proportionate share of adjustments to equity in net income
of partially-owned entities to arrive at funds from
operations:
Depreciation and amortization of real property 51,881 65,588
Net gain on sales of real estate (3,431) (6,298)
Other 835 (371)
Minority interest in excess of preferential distributions (45,324) (16,810)
- --------------------------------------------------------------------------------
401,023 358,188
Series A preferred shares 6,150 19,505
- --------------------------------------------------------------------------------
Funds from operations -- diluted(2) $407,173 $377,693
================================================================================
</Table>
______
43
(LETTERHEAD GRAPHIC)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
VORNADO REALTY TRUST
- -------------------------------------------------------------------------------
The number of shares used for determining funds from operations per share is as
follows:
- -------------------------------------------------------------------------------
<Table>
<Caption>
For the Year Ended December 31,
- -------------------------------------------------------------------------------
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Weighted average shares used for determining
diluted income per share 109,669 92,073
Series A preferred shares 2,931 7,646
- -------------------------------------------------------------------------------
Shares used for determining diluted
funds from operations per share(2) 112,600 99,719
- -------------------------------------------------------------------------------
</Table>
Funds from operations does not represent cash generated from operating
activities in accordance with accounting principles generally accepted in the
United States of America and is not necessarily indicative of cash available to
fund cash needs which is disclosed in the Consolidated Statements of Cash Flows
for the applicable periods. There are no material legal or functional
restrictions on the use of funds from operations. Funds from operations should
not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flows as a measure
of liquidity. Management considers funds from operations a supplemental measure
of operating performance and along with cash flow from operating activities,
financing activities and investing activities, it provides investors with an
indication of the ability of the Company to incur and service debt, to make
capital expenditures and to fund other cash needs. Funds from operations may not
be comparable to similarly titled measures reported by other REITs since a
number of REITs, including the Company, calculate funds from operations in a
manner different from that used by NAREIT. Funds from operations, as defined by
NAREIT, represents net income applicable to common shares before depreciation
and amortization, extraordinary items and gains or losses on sales of real
estate. Funds from operations as disclosed above has been modified from this
definition to adjust primarily for the (i) effect of straight-lining of property
rentals for rent escalations and leasing fee income and (ii) the exclusion of
income arising from the amortization of acquired below market leases, net of
above market leases.
(1) Certain items which affect comparability included in funds from operations
above are as follows:
<Table>
<Caption>
For the Year Ended December 31,
- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Primestone foreclosure and impairment losses $(35,757) $ -
Amortization of officer's deferred compensation (27,500) -
Gains on sale of marketable securities 12,346 -
Gain on sale of residential condominium units 2,156 15,657
Gains on transfer of mortgages 2,096 -
Gains on sale of air rights 1,688 -
Write-off of investments in technology companies - (16,513)
Write-off of net investment in Russian Tea Room - (7,374)
Donations to Twin Towers and NYC Fireman's Funds - (1,250)
Write-off of 20 Times Square pre-development costs
(2002) and World Trade Center acquisition
costs (2001) (6,874) (5,223)
- -------------------------------------------------------------------------------
Minority interest 10,629 1,800
- -------------------------------------------------------------------------------
$(41,216) $(12,903)
- -------------------------------------------------------------------------------
</Table>
(2) Assuming all of the convertible units of the Operating Partnership were
converted to shares, the minority interest in partnership earnings would not
be deducted in calculating funds from operations and the shares used in
calculating funds from operations per share would be increased to reflect
the conversion. Funds from operations per share would not change. The
following table reconciles funds from operations as shown above, to the
Operating Partnership's funds from operations for the years ended December
31, 2002 and 2001:
-------------
44
* * *