1
EXHIBIT INDEX ON PAGE 20
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1997
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: 000-22685
VORNADO REALTY L. P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3925979
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
PARK 80 WEST, PLAZA II, SADDLE BROOK, NEW JERSEY 07663
(Address of principal executive offices) (Zip Code)
(201)587-1000
(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 of 94
2
VORNADO REALTY L. P.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996........................................................... 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1997 and June 30, 1996........................................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and June 30, 1996........................................... 5
Notes to Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 11
PART II. OTHER INFORMATION:
Item 1. Legal proceedings............................................................... 17
Item 6. Exhibits and Reports on Form 8-K................................................ 18
Signatures ................................................................................ 19
Exhibit Index ................................................................................ 20
Exhibit 10 ................................................................................ 21
Exhibit 11 ................................................................................ 93
Exhibit 27 ................................................................................ 94
Page 2 of 94
3
VORNADO REALTY L. P.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1997 1996
------------ -----------
ASSETS:
Real estate, at cost:
Land $ 239,370 $ 60,778
Buildings and improvements 785,040 313,885
Leasehold improvements and equipment 8,967 8,535
------------ -----------
Total 1,033,377 383,198
Less accumulated depreciation and
amortization (155,950) (147,549)
----------- ----------
Real estate, net 877,427 235,649
Cash and cash equivalents, including U.S.
government obligations under repurchase
agreements of $6,375 and $17,036 199,826 89,696
Restricted cash 29,434 -
Marketable securities 31,225 27,549
Investment in and advances to Alexander's, Inc. 108,100 107,628
Investments in partnerships 38,275 -
Investment in and advances to
management companies 13,008 5,193
Due from officers 8,652 8,634
Accounts receivable, net of allowance for
doubtful accounts of $631 and $575 15,171 9,786
Officer's deferred compensation expense 10,419 22,917
Mortgage loans receivable 243,001 17,000
Receivable arising from the
straight-lining of rents 19,619 17,052
Other assets 48,539 20,500
------------ ----------
TOTAL ASSETS $1,642,696 $ 561,604
========== =========
JUNE 30, DECEMBER 31,
1997 1996
----------- ---------
LIABILITIES AND PARTNERS' CAPITAL:
Notes and mortgages payable $ 859,283 $ 228,787
Due for U.S. treasury obligations -- 9,636
Accounts payable and accrued expenses 26,618 9,905
Deferred leasing fee income 10,550 8,373
Officer's deferred compensation payable 25,000 25,000
Other liabilities 3,811 3,646
----------- ---------
Total liabilities 925,262 285,347
----------- ---------
Commitments and contingencies
Partners' capital:
Preferred units of beneficial interest:
no par value per unit; authorized,
20,000,000 units; liquidation
preference $50.00 per unit; issued,
5,750,000 units 276,599 --
General partnership units, 26,553,161 and
26,547,680 outstanding in each period 360,111 359,918
Limited partnership units, 2,841,524
outstanding at June 30, 1997 178,093 --
Partnership deficit (92,340) (77,574)
----------- ---------
722,463 282,344
Unrealized loss on securities
available for sale (2) (998)
Due from officers for purchase of common
units of beneficial interest (5,027) (5,089)
----------- ---------
Total partners' capital 717,434 276,257
----------- ---------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $ 1,642,296 $ 561,604
=========== =========
See notes to consolidated financial statements.
4
VORNADO REALTY L. P.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands except share amounts)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
Property rentals $ 41,004 $ 21,820 $ 63,471 $ 43,157
Expense reimbursements 8,951 6,820 15,161 13,701
Other income (including fee income from
related parties of $329 and $413
and $643 and $805) 707 605 1,327 997
------------ ------------ ------------ ------------
Total revenues 50,662 29,245 79,959 57,855
------------ ------------ ------------ ------------
Expenses:
Operating 18,151 9,145 26,658 18,059
Depreciation and amortization 5,462 2,897 8,429 5,732
General and administrative 2,903 1,319 4,748 2,508
Amortization of officer's deferred
compensation expense 6,249 -- 12,498 --
------------ ------------ ------------ ------------
Total expenses 32,765 13,361 52,333 26,299
------------ ------------ ------------ ------------
Operating income 17,897 15,884 27,626 31,556
Income (loss) applicable to Alexander's:
Equity in income (loss) 54 16 (7) (120)
Depreciation (150) (157) (300) (314)
Interest income on loan 1,533 1,657 3,149 3,459
Income from investment in management
companies 303 238 520 1,379
Equity in net income of investees 282 -- 282 --
Interest income on mortgage
loans receivable 3,693 656 4,305 1,250
Other interest and dividend income 5,256 902 6,774 1,773
Interest and debt expense (13,272) (4,192) (17,350) (8,415)
Gain on marketable securities 292 116 579 474
------------ ------------ ------------ ------------
Net Income 15,888 15,120 25,578 31,042
Preferred unit distributions (4,855) -- (4,855) --
Preferential allocations (2,100) -- (2,100) --
------------ ------------ ------------ ------------
Net Income applicable to Class A units $ 8,933 $ 15,120 $ 18,623 $ 31,042
============ ============ ============ ============
Net Income per Class A units $ .33 $ .62 $ .70 $ 1.27
============ ============ ============ ============
Weighted average number of Class A
units and Class A unit equivalents
outstanding during period 26,887,984 24,465,345 26,718,841 24,464,922
Cash distributions per Class A unit $ .64 $ .61 $ 1.28 $ 1.22
See notes to consolidated financial statements.
Page 4 of 94
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VORNADO REALTY L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
FOR THE SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,578 $ 31,042
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization (including debt issuance costs) 8,977 6,242
Amortization of officer's deferred compensation expense 12,498 --
Straight-lining of rental income (1,487) (1,277)
Equity in loss of Alexander's,
including depreciation of $300 and $314 307 434
Equity in net income of investees (282) --
Gain on marketable securities (579) (474)
Changes in assets and liabilities:
Trading securities 339 (1,854)
Accounts receivable (1,861) (2,639)
Accounts payable and accrued expenses 2,746 1,188
Other 4,753 1,114
--------- --------
Net cash provided by operating activities 50,989 33,776
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Mendik acquisition (263,790) --
Investment in mortgage loans receivable (226,000) (17,000)
Cash restricted for tenant improvements (29,434) --
Additions to real estate (107,153) (11,032)
Purchases of securities available for sale (3,436) --
Proceeds from sale or maturity of securities available for sale -- 41,192
--------- --------
Net cash (used in) provided by investing activities (629,813) 13,160
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock 276,000 --
Proceeds from borrowings 463,000 10,000
Debt issuance costs (1,857) --
Repayment of borrowings on U.S. treasury obligations (9,636) (40,242)
Proceeds from borrowings on U.S. treasury obligations -- 10,000
Repayments on mortgages (504) (353)
Distributions paid (38,242) (29,627)
Issuance of units 193 907
--------- --------
Net cash provided by (used in) financing activities 688,954 (49,315)
--------- --------
Net increase (decrease) in cash and cash equivalents 110,130 (2,379)
Cash and cash equivalents at beginning of period 89,696 19,127
--------- --------
Cash and cash equivalents at end of period $ 199,826 $ 16,748
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest $ 14,001 $ 7,905
========= ========
NON-CASH TRANSACTIONS:
Unrealized gain (loss) on securities available for sale $ 996 $ (143)
========= ========
The non-cash portion of the consideration for the Mendik acquisition of
$392,272,000 is not reflected in cash flows from investing activities above.
See notes to consolidated financial statements.
Page 5 of 94
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VORNADO REALTY L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
On April 15, 1997, Vornado Realty Trust ("Vornado") converted to an
Umbrella Partnership REIT (UPREIT) by transferring all or substantially all of
the interests in its properties and other assets to Vornado Realty L.P. (the
"Operating Partnership"), of which Vornado owns 90.4% and is the sole general
partner. As a result of such conversion, Vornado's activities will be conducted
through the Operating Partnership. The transfer has been accounted for as a
transfer of entities under common control, accordingly the financial statements
have been prepared on the historical cost basis.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1997, the consolidated
statements of income for the three and six months ended June 30, 1997 and June
30, 1996 and the consolidated statements of changes in cash flows for the six
months ended June 30, 1997 and June 30, 1996 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 generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in Vornado's 1996
Annual Report to Shareholders. The results of operations for the period ended
June 30, 1997 are not necessarily indicative of the operating results for the
full year.
The accompanying unaudited consolidated condensed financial statements
include all the accounts of the Operating Partnership. Properties which are
wholly owned or controlled by the Operating Partnership have been consolidated.
All significant intercompany amounts have been eliminated. Equity interests in
certain partnerships and joint ventures, which represent noncontrolling
ownership interests, are accounted for under the equity method of accounting as
the Operating Partnership exercises significant influence. These investments are
recorded initially at cost and subsequently adjusted for net equity in income
(loss) and cash contributions and distributions.
3. THE MENDIK TRANSACTION
Simultaneously with the formation of the Operating Partnership, Vornado
consummated the acquisition of interests in all or a portion of seven Manhattan
office buildings and a management company held by the Mendik Group (Bernard H.
Mendik, David R. Greenbaum and certain entities controlled by them) and certain
of its affiliates (the "Mendik Transaction"), which will be operated as the
Mendik Division. The Mendik properties include (i) wholly owned properties: Two
Penn Plaza, Eleven Penn Plaza, 1740 Broadway and 866 U.N. Plaza and (ii)
partially owned properties: Two Park Avenue (40% interest), 330 Madison Avenue
(24.8% interest) and 570 Lexington Avenue (5.6% interest). The consideration for
the transaction was approximately $656,000,000, including $264,000,000 in cash,
$177,000,000 in the limited partnership units of the Operating Partnership
issued to persons other than Vornado ("Minority Interests") and $215,000,000 in
indebtedness. The acquisition was recorded under the purchase method of
accounting.
Vornado financed the cash portion of this transaction with the proceeds of
a public offering completed on April 9, 1997, of 5,750,000 Convertible Preferred
Shares of Beneficial Interest, liquidation preference $50.00 per share. The
preferred shares bear a coupon of 6-1/2% and are convertible into common shares
at $72-3/4 per share. The offering, net of expenses, generated approximately
$276,000,000.
Page 6 of 94
7
VORNADO REALTY L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited proforma information set forth below presents the condensed
statement of income for the Operating Partnership for the six months ended June
30, 1997 and 1996, as if the Mendik Transaction and certain related transactions
were consummated and the offering by Vornado of Series A Preferred Shares of
Beneficial Interest, liquidation preference $50.00 per share and the use of
proceeds therefrom had occurred on January 1, 1996.
Proforma
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
Revenues $ 120,136,000 $ 110,311,000
============= =============
Net income $ 42,809,000 $ 44,121,000
Preferred unit distributions (9,992,000) (9,992,000)
Preferential allocations (2,100,000) (2,100,000)
------------- -------------
Net income applicable to Class A units $ 30,717,000 $ 32,029,000
============= =============
Net income per Class A unit $ 1.14 $ 1.31
============= =============
The proforma results for the six months ended June 30, 1997, include
Mendik non-recurring lease cancellation income of $14,357,000, partially
offset by related expenses of $2,776,000. This income and related expenses
are not included in funds from operations as defined in Management's
Discussion and Analysis of Financial Condition and Results of Operations
(see page 14).
4. INVESTMENTS IN AND ADVANCES TO ALEXANDER'S (A RELATED PARTY):
Below are summarized Statements of Operations of Alexander's:
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
Revenues $ 12,759,000 $ 10,370,000
Expenses (7,043,000) (5,698,000)
------------ ------------
Operating income 5,716,000 4,672,000
Interest and debt expense (6,605,000) (6,736,000)
Interest and other income, net 864,000 1,655,000
------------ ------------
Net loss from continuing operations $ (25,000) $ (409,000)
============ ============
Vornado's 29.3% equity in loss $ (7,000) $ (120,000)
============ ============
The Operating Partnership recognized leasing fee income under a leasing
agreement (the "Leasing Agreement") with Alexander's of $195,000 and $247,000
for the three months ended June 30, 1997 and 1996 and $366,000 and $357,000 for
the six months ended June 30, 1997 and 1996. Subject to the payment of rents by
Alexander's tenants, the Operating Partnership is due $6,946,000 at June 30,
1997 under such agreement. The lease which the Operating Partnership had
previously negotiated with Caldor on behalf of Alexander's for its Fordham Road
property was rejected in June 1997 in Caldor's bankruptcy proceedings, resulting
in $1,254,000 of previously recorded leasing fees receivable and deferred
leasing fee income being reversed in the quarter ended June 30, 1997. In
addition to the leasing fees received by the Operating Partnership, Vornado
Management Corp. receives management fees from Alexander's (see Note 8).
Page 7 of 94
8
VORNADO REALTY L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT
On July 17, 1997, the Operating Partnership obtained a $600,000,000
unsecured three-year revolving credit facility from a bank group led by Union
Bank of Switzerland. The facility contains customary loan covenants including,
among others, limits on total outstanding indebtedness; maximum loan to value
ratios; minimum debt service coverage and minimum market capitalization
requirements. Interest is at LIBOR plus .70% to 1.00% depending on Vornado's
senior debt rating. The credit facility has a competitive bid option program,
which allows Vornado's to hold auctions among banks participating in the
facility for short term borrowings of up to $300,000,000. Vornado paid a fee of
$1,800,000 at closing and will pay a commitment fee quarterly over the remaining
term of the facility ranging from .15% to .20% on the full facility amount.
Simultaneously with the closing, the Operating Partnership borrowed
$250,000,000 under the facility at a blended interest rate of 6.48% (LIBOR plus
.82%) and used the proceeds, together with working capital, to repay a
$400,000,000 term loan it had obtained in April 1997.
6. OTHER ACQUISITIONS
Puerto Rico Transactions
On April 18, 1997, the Operating Partnership acquired The Montehiedra Town
Center located in San Juan, Puerto Rico, from Kmart Corporation ("Kmart") for
approximately $74,000,000, of which $63,000,000 is newly-issued ten year
indebtedness. The Montehiedra shopping center, which opened in 1994, contains
525,000 square feet, including a 135,000 square foot Kmart store. In addition,
the Operating Partnership agreed to acquire Kmart's 50% interest in the Caguas
Centrum Shopping Center, which is currently under construction, located in
Caguas, Puerto Rico. This acquisition is expected to close in 1998.
Purchase of a Mortgage
On May 7, 1997, the Operating Partnership acquired a mortgage loan from a
bank secured by a mortgage on the office building located at 90 Park Avenue, New
York, New York. The purchase price of the mortgage loan was approximately
$185,000,000. The mortgage loan, which is in default, has a face value of
$193,000,000. Management believes that the underlying fair market value of the
real estate securing the mortgage, based on signed leases in effect, exceeds the
amount of the loan due and that there are no other indications of impariment in
accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan".
Riese Transactions
On June 27, 1997, the Operating Partnership acquired for approximately
$26,000,000 four properties previously owned by affiliates of the Riese
Organization. These properties are located in Manhattan, New York. The Operating
Partnership also made a $41,000,000 mortgage loan to Riese Affiliates cross
collateralized by ten other Manhattan properties. This increasing rate loan
bears an initial interest rate of 9.75% and has a five year term.
7. MORTGAGE LOANS RECEIVABLE
At June 30, 1997, the Operating Partnership has $288,001,000 of Mortgage
loans receivable, of which $45,000,000 is reflected as part of "Investment in
and Advances to Alexander's, Inc." in the Consolidated Balance Sheets. At least
annually, and more frequently if circumstances warrant, the Operating
Partnership evaluates the collectibility of both interest and principal of each
of its loans to determine whether it is impaired. A loan is considered to be
impaired when, based on current information and events, it is probable that the
Operating Partnership will be unable to collect all amounts due according to the
existing contractual terms. When a loan is considered to be impaired, the amount
of the loss accrual is calculated by comparing the recorded investment to the
value determined by discounting the expected future cash flows at the loan's
effective interest rate. Interest on impaired loans is recognized on the cash
basis.
Page 8 of 94
9
VORNADO REALTY L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MANAGEMENT COMPANIES
As part of the Mendik Transaction, the Operating Partnership acquired 100%
of the non-voting preferred stock of the Mendik Management Company for
$7,425,000. The Operating Partnership previously assigned its management and
development agreement (the "Management Agreement") with Alexander's to Vornado
Management Corp. ("VMC"), an affiliate in which it also owns 100% of the
non-voting preferred stock. The Operating Partnership's preferred stock
ownership entitles it to 95% of the economic benefits of the management
companies through distributions. The Common Stock of the management companies is
owned by officers and directors of Vornado. Below are summarized Statements of
Operations of the management companies:
For The Three Months Ended For The Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- ------- ------- ------
Revenues:
Management fees from:
Alexander's $ 938,000 $ 938,000 $ 1,875,000 $ 3,368,000
Mendik properties 756,000 -- 756,000 --
----------- ----------- ----------- -----------
1,694,000 938,000 2,631,000 3,368,000
Expenses:
General and administrative (1,422,000) (671,000) (2,126,000) (1,234,000)
Interest, net (217,000) (73,000) (291,000) (142,000)
----------- ----------- ----------- -----------
Income before income taxes 55,000 194,000 214,000 1,992,000
Income taxes (22,000) (79,000) (87,000) (814,000)
----------- ----------- ----------- -----------
Net income 33,000 115,000 127,000 1,178,000
Preferred dividends (31,000) (109,000) (121,000) (1,119,000)
----------- ----------- ----------- -----------
Net income available to
common shareholders $ 2,000 $ 6,000 $ 6,000 $ 59,000
=========== =========== =========== ===========
The management fee income from Alexander's in the six months ended June 30,
1996, includes $1,343,000 of fees recorded in the first quarter of 1996 related
to the completion of the redevelopment of Alexander's Rego Park I property. In
addition to the preferred dividends the Operating Partnership received, it also
earned interest income on its loans to the management companies of $272,000 and
$129,000 for the three months ended June 30, 1997 and 1996 and $399,000 and
$260,000 for the six months June 30, 1997 and 1996.
9. OTHER RELATED PARTY TRANSACTIONS
The Operating Partnership currently manages and leases the real estate
assets of Interstate Properties pursuant to a management agreement. Management
fees earned by the Operating Partnership pursuant to the management agreement
were $184,000 and $216,000 for the three months ended June 30, 1997 and 1996 and
$377,000 and $547,000 for the six months ended June 30, 1997 and 1996.
The Mendik Group owns an entity which provides cleaning and related
services and security services to office properties. The Operating Partnership
has entered into contracts with the Mendik Group to provide such services in the
seven Manhattan office buildings acquired in the Mendik Transaction. Although
the terms and conditions of the contracts pursuant to which these services are
provided were not negotiated at arms length, the Operating Partnership believes
based upon comparable fees charged to other real estate companies, that the
terms and conditions of such contracts are fair to the Operating Partnership.
The Operating Partnership was charged fees of $2,585,000 in connection with
these contracts for the period from April 15, 1997 to June 30, 1997.
Page 9 of 94
10
VORNADO REALTY L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PREFERENTIAL ALLOCATIONS
Holders of Class C, D and E Units distributed in connection with the
Mendik Transaction are entitled to preferential distributions. Holders of Class
D and E Units are entitled to a preferential annual distribution rate of $4.03.
Holders of Class C Units are entitled to a preferential annual distribution rate
of $3.38. Class C Units will automatically convert to Class A Units when the
distributions paid to holders of Class A Units equal $.8450 per quarter ($3.38
annually) for four consecutive quarters. Class D and E Units will automatically
convert to Class A Units when the distributions paid to holders of Class A Units
equal $1.0075 per quarter ($4.03 annually) for four consecutive quarters.
Generally, the value of each Class A Unit, equates to one common share of
beneficial interest of Vornado. Preferential distributions aggregated $2,100,000
for the period from April 15, 1997 to June 30, 1997 and will aggregate
$10,370,000 on an annual basis.
11. CONTINGENCIES
Vornado 90 Park Avenue L.L.C., a subsidiary of the Operating Partnership,
is a plaintiff in an action to foreclose the mortgage on the building at 90 Park
Avenue, New York, pending in the Supreme Court of the State of New York, County
of New York. The action was initially brought by Sumitomo Trust & Banking Co.,
Ltd., New York Branch ("Sumitomo"), as the owner of the mortgage. Vornado 90
Park Avenue L.L.C. was substituted as plaintiff after acquiring an assignment of
the mortgage from Sumitomo. The mortgagors and other defendants have asserted
certain defenses to the foreclosure action, including the defense that the
mortgage and underlying note should be deemed void and declared satisfied.
Although there has not yet been any court adjudication and therefore no
assurances can be given, management believes it will ultimately prevail in this
action.
In January 1997, two individual investors in Mendik Real Estate Limited
Partnership ("RELP"), the publicly held limited partnership that indirectly owns
a 60% interest in the Two Park Avenue Property, filed a purported class action
against NY Real Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp.,
B&B Park Avenue, L.P. (an indirect subsidiary of the Operating Partnership which
acquired the remaining 40% interest in Two Park Avenue) and Bernard H. Mendik in
the Supreme Court of the State of New York, County of New York, on behalf of all
persons holding limited partnership interests in RELP. The complaint alleges
that, for reasons which include purported conflicts of interest, the defendants
breached their fiduciary duty to the limited partners, that the then proposed
transfer of the 40% interest in Two Park Avenue would result in a burden on the
operation and management of Two Park Avenue and that the transfer of the 40%
interest violates RELP's right of first refusal to purchase the interest being
transferred and fails to provide limited partners in RELP with a comparable
transfer opportunity. Shortly after the filing of the complaint, another limited
partner represented by the same attorneys filed an essentially identical
complaint in the same court. Both complaints seek unspecified damages, an
accounting and a judgment requiring either the liquidation of RELP and the
appointment of a receiver or an auction of Two Park Avenue. Discussions to
settle the actions have been ongoing, but no settlement has been reached. In
August 1997, a fourth limited partner, represented by separate counsel,
commenced another purported class action in the same court by serving a
complaint essentially identical to the complaints in the two previously
commenced actions. Management believes that the ultimate outcome of these
matters will not have a material adverse affect on the Operating Partnership.
Page 10 of 94
11
VORNADO REALTY L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Operating Partnership to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, which
will, among other things, affect demand for retail space or retail goods,
availability and creditworthiness of prospective tenants, lease rents and the
terms and availability of financing; adverse changes in the real estate markets
including, among other things, competition with other companies and technology;
risks of real estate development and acquisition; governmental actions and
initiatives; and environmental/safety requirements.
RESULTS OF OPERATIONS
The Operating Partnership's revenues, which consist of property rentals,
tenant expense reimbursements and other income were $50,662,000 in the quarter
ended June 30, 1997, compared to $29,245,000 in the prior year's quarter, an
increase of $21,417,000 or 73.2%. Revenues were $79,959,000 for the six months
ended June 30, 1997 compared to $57,855,000 in the prior year's six months, an
increase of $22,104,000 or 38.2%. These increases reflect revenues of
$18,917,000 from the properties acquired in the Mendik Transaction.
Property rentals were $41,004,000 in the quarter ended June 30, 1997,
compared to $21,820,000 in the prior year's quarter, an increase of $19,184,000
or 87.9%. Property rentals were $63,471,000 for the six months ended June 30,
1997 compared to $43,157,000 in the prior year's six months, an increase of
$20,314,000 or 47.1%. Of these increases for the quarter and six months,
respectively, (i) $16,424,000 resulted from properties acquired in the Mendik
Transaction, (ii) $316,000 and $885,000 resulted from property rentals
applicable to shopping centers received from new tenants in excess of property
rentals lost from vacating tenants, (iii) $534,000 and $810,000 resulted from
step-ups in shopping center leases which are not subject to the straight-line
method of revenue recognition, (iv) $187,000 and $472,000 resulted from the
Operating Partnership's purchase of an office building in June 1996 and (v)
$1,723,000 resulted from the Operating Partnership's purchase of a shopping
center in San Juan, Puerto Rico in April 1997.
Tenant expense reimbursements, which consist of the tenant's pro-rata share
of common area maintenance expenses (such as snow removal costs, landscaping and
parking lot repairs) real estate taxes and insurance, were $8,951,000 in the
quarter ended June 30, 1997, compared to $6,820,000 in the prior year's quarter,
an increase of $2,131,000. Tenant expense reimbursements were $15,161,000 for
the six months ended June 30, 1997, compared to $13,701,000 in the prior year's
six months, an increase of $1,460,000. These increases reflect tenant expense
reimbursements of $2,072,000 from properties acquired in the Mendik Transaction.
The increase for the six months was offset by lower operating expenses at the
Operating Partnership's other properties.
Operating expenses were $18,151,000 in the quarter ended June 30, 1997, as
compared to $ 9,145,000 in the prior year's quarter, an increase of $9,006,000.
Operating expenses were $26,658,000 in the six months ended June 30, 1997,
compared to $18,059,000 in the prior year's six months, an increase of
$8,599,000. These increases reflect operating expenses of $8,869,000 from
properties acquired in the Mendik Transaction. The increase for the six months
was offset by lower snow removal costs at the Operating Partnership's other
properties.
Depreciation and amortization expense increased in 1997 as compared to
1996, primarily as a result of the Mendik Transaction.
Page 11 of 94
12
VORNADO REALTY L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and administrative expenses were $2,903,000 in the quarter ended
June 30, 1997 compared to $1,319,000 in the prior year's quarter, an increase of
$1,584,000. General and administrative expenses were $4,748,000 in the six
months ended June 30, 1997 compared to $2,508,000 in the prior year's six
months, an increase of $2,240,000. The increases resulted primarily from Mendik
division payroll and corporate office expenses of $467,000, cash compensation
attributable to the employment of Vornado's President and higher professional
fees.
The Operating Partnership recognized an expense of $6,249,000 in the
quarter ended June 30, 1997 and $12,498,000 in the six months ended June 30,
1997 representing the amortization of the $25,000,000 deferred payment due to
Vornado's President. The balance of the deferred payment will be amortized in
1997.
Income applicable to Alexander's (loan interest income, equity in income
(loss) and depreciation) was $1,437,000 in the quarter ended June 30, 1997,
compared to $1,516,000 in the prior year's quarter, a decrease of $79,000.
Income applicable to Alexander's was $2,842,000 in the six months ended June 30,
1997, compared to $3,025,000 in the prior year's six months, a decrease of
$183,000. These decreases resulted primarily from the reset of the interest rate
on the loan to Alexander's from 16.43% to 15.60% in March 1997.
Income from investment in management companies was $303,000 in the quarter
ended June 30, 1997, compared to $238,000 in the prior year's quarter, an
increase of $65,000. Income from investment in management companies was $520,000
in the six months ended June 30, 1997, compared to $1,379,000 in the prior
year's six months, a decrease of $859,000. The increase in the current year's
quarter resulted primarily from dividends from the Management Operating
Partnership acquired as part of the Mendik Transaction. The decrease in the
current year's six month period resulted primarily from additional fee income of
$794,000 earned by VMC in the first quarter of the prior year relating to the
substantial completion of the redevelopment of Alexander's Rego Park I property.
Equity in net income of investees of $282,000 in 1997 represents income
from investments in partnerships which own the partially owned properties
acquired as part of the Mendik Transaction.
Investment income (interest income on mortgage loans receivable, other
interest and dividend income and net gains on marketable securities) was
$9,241,000 for the quarter ended June 30, 1997, compared to $1,674,000 in the
prior year's quarter, an increase of $7,567,000. Investment income was
$11,658,000 for the six months ended June 30, 1997, compared to $3,497,000 in
the prior year's six months, an increase of $8,161,000. Of these increases
$3,045,000 resulted from the Operating Partnership's purchase in May 1997 of a
mortgage loan secured by an office building at 90 Park Avenue, New York, New
York. The remaining increases of $4,522,000 and $5,116,000 for the quarter and
six months respectively, resulted primarily from income earned on the proceeds
from the December 1996 public stock offering and the April 1997 term loan.
Interest and debt expense was $13,272,000 for the quarter ended June 30,
1997, compared to $4,192,000 in the prior year's quarter, an increase of
$9,080,000. Interest and debt expense was $17,350,000 for the six months ended
June 30, 1997, compared to $8,415,000 in the prior year's six months, an
increase of $8,935,000. Of these increases, (i) $2,762,000 resulted from debt on
the Mendik properties, (ii) $5,504,000 resulted from $400,000,000 of borrowings
under a term loan and (iii) $1,039,000 resulted from borrowings related to the
acquisition of the Montehiedra Town Center in April 1997.
The preferential allocations to Class C, D and E unit holders in the
Operating Partnership aggregated $2,100,000 for the period from April 15, 1997
to June 30, 1997.
The preferred unit distributions of $4,855,000 is for the period from April
9, 1997 to June 30, 1997 and includes amortization of expenses in connection
therewith of $600,000.
Page 12 of 94
13
VORNADO REALTY L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 1997
Cash flows provided by operating activities of $50,989,000 was comprised of
(i) net income of $25,578,000, (ii) adjustments for non-cash items of
$21,534,000 and (iii) the net change in operating assets and liabilities of
$5,977,000. The adjustments for non-cash items are primarily comprised of (i)
amortization of deferred officer's compensation expense of $12,498,000, (ii)
depreciation and amortization of $8,977,000 and (iii) equity in loss of
Alexander's of $307,000, partially offset by (iv) the effect of straight-lining
of rental income of $1,487,000 and (v) equity in net income of investees of
$282,000.
Net cash used in investing activities of $629,813,000 was primarily
comprised of (i) expenditures of $263,790,000 in connection with the Mendik
Transaction, (ii) investments in mortgage loans receivable of $226,000,000,
(iii) capital expenditures of $107,153,000 (including the acquisition of a
shopping center for $75,587,000 in April 1997 (Puerto Rico Transaction) and the
acquisition of four other properties in June 1997 for $26,000,000 (Riese
Transaction)) and (iv) restricted cash for tenant improvements of $29,434,000.
Net cash provided by financing activities of $688,954,000 was primarily
comprised of proceeds from (i) borrowings of $463,000,000, and (ii) issuance of
preferred shares of $276,000,000, partially offset by (iii) dividends paid of
$38,242,000 and (iv) the repayment of borrowings on U.S. Treasury obligations of
$9,636,000.
Six Months Ended June 30, 1996
Cash flows provided by operating activities of $33,776,000 was comprised of
(i) net income of $31,042,000 and (ii) adjustments for non-cash items of
$4,925,000, less (iii) the net change in operating assets and liabilities of
$2,191,000. The adjustments for non-cash items are primarily comprised of
depreciation and amortization of $6,242,000, plus equity in income (loss) of
Alexander's of $434,000, offset by the effect of straight-lining of rental
income of $1,277,000. Further, during this period in connection with the
rejection of a lease by an Alexander's tenant "Leasing fees and other
receivables" decreased by $1,717,000 and "Deferred leasing fee income"
correspondingly decreased. "Leasing fees and other receivables" of $1,250,000
were collected during this period. These amounts have been included in "Changes
in assets and liabilities: other" in the Consolidated Statements of Cash Flows
and are part of the net change in operating assets and liabilities shown in item
(iii) above.
Net cash provided by investing activities of $13,160,000 was comprised of
(i) proceeds from sale or maturity of securities available for sale of
$41,192,000, offset by (ii) the Operating Partnership's investment in a mortgage
note receivable of $17,000,000 and (iii) capital expenditures of $11,032,000
(including $8,900,000 for the purchase of an office building).
Net cash used in financing activities of $49,315,000 was primarily
comprised of (i) the net repayment of borrowings on U.S. Treasury obligations of
$30,242,000 and (ii) dividends paid of $29,627,000, offset by (iii) the proceeds
from borrowings of $10,000,000.
Funds from Operations for the Three and Six Months Ended June 30, 1997 and
1996
Funds from operations were $14,950,000 in the quarter ended June 30, 1997,
compared to $17,556,000 in the prior year's quarter, a decrease of $2,606,000 or
14.8%. Funds from operations were $27,183,000 in the six months ended June 30,
1997, compared to $35,972,000 in the prior year's six months, a decrease of
$8,789,000 or 24.4%. Funds from operations for the three and six months ended
June 30, 1997 reflect amortization of the deferred payment due to Vornado's
President and related compensation of $6,825,000 and $13,601,000, partially
Page 13 of 94
14
VORNADO REALTY L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
offset by $2,206,000 from the Mendik operations. The following table reconciles
funds from operations and net income:
For The Three Months Ended For The Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net income applicable to Class A
units $ 8,933,000 $ 15,120,000 $ 18,623,000 $ 31,042,000
Depreciation and amortization of
real property 5,173,000 2,639,000 7,857,000 5,251,000
Straight-lining of property rentals
for rent escalations (818,000) (635,000) (1,487,000) (1,277,000)
Leasing fees received in excess
of income recognized 849,000 376,000 1,303,000 890,000
Proportionate share of adjustments
to Alexander's income (loss)
to arrive at funds from operations 253,000 56,000 327,000 66,000
Proportionate share of adjustments to
net income of investees to arrive
at funds from operations 560,000 -- 560,000 --
------------ ------------ ------------ ------------
Funds from operations $ 14,950,000 $ 17,556,000 $ 27,183,000 $ 35,972,000
============ ============ ============ ============
Funds from operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles 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 Operating Partnership's
operating performance or as an alternative to cash flows as a measure of
liquidity. Management considers funds from operations a relevant supplemental
measure of operating performance because it provides a basis for comparison
among REITs; however, funds from operations may not be comparable to similarly
titled measures reported by other REITs since the Operating Partnership's method
of calculating funds from operations is 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 to adjust for the effect of straight-lining of property
rentals for rent escalations and leasing fee income. Below are the cash flows
provided by (used in) operating, investing and financing activities:
For The Three Months Ended For The Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- ------- ------- ------
Operating activities $ 31,236,000 $ 15,574,000 $ 50,989,000 $ 33,776,000
Investing activities $(629,530,000) $ (9,531,000) $(629,813,000) $ 13,160,000
Financing activities $ 705,693,000 $(14,967,000) $ 688,954,000 $(49,315,000)
Page 14 of 94
15
VORNADO REALTY L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Operating Partnership has budgeted approximately $21,000,000 for
capital expenditures over the next year of which $16,000,000 is for tenant
improvements at its office properties and $5,000,000 is for tenant improvements
and renovations at its shopping center properties.
In December 1996, Michael D. Fascitelli became the President of
Vornado and was elected to the Vornado Board. Mr. Fascitelli signed a five year
employment contract under which, in addition to his annual salary, he received a
deferred payment consisting of $5,000,000 in cash and a $20,000,000 convertible
obligation payable at Vornado's option in 459,770 of its Common Shares or the
cash equivalent of their appreciated value. Accordingly, cash of $5,000,000 and
459,770 Common Shares are being held in an irrevocable trust. The deferred
payment obligation to Mr. Fascitelli vests as of December 2, 1997. Further, Mr.
Fascitelli was granted options for 1,750,000 Common Shares of Vornado.
On April 15, 1997, Vornado consummated the acquisition, through an
operating partnership, of interests in all or a portion of seven Manhattan
office buildings and a management company held by the Mendik Group and certain
of its affiliates. Simultaneously with the closing of this transaction, and in
connection therewith, Vornado converted to an Umbrella Partnership REIT (UPREIT)
by transferring (by contribution, merger or otherwise) all or substantially all
of the interests in its properties and other assets to the Operating
Partnership, of which Vornado is the sole general partner. As a result of such
conversion, Vornado's activities will be conducted through the Operating
Partnership.
The consideration for the Mendik transaction was approximately
$656,000,000, including $264,000,000 in cash, $177,000,000 in the limited
partnership units of the Operating Partnership and $215,000,000 in indebtedness.
Vornado financed the cash portion of this transaction with the proceeds of a
public offering completed on April 9, 1997, of 5,750,000 Convertible Preferred
Shares of Beneficial Interest, liquidation preference $50.00 per share. The
preferred shares bear a coupon of 6-1/2% and are convertible into common shares
at $72- 3/4 per share. The offering, net of expenses, generated approximately
$276,000,000.
On April 18, 1997, the Operating Partnership acquired The Montehiedra
Town Center located in San Juan, Puerto Rico, from Kmart Corporation ("Kmart")
for approximately $74,000,000, of which $63,000,000 is newly-issued ten year
indebtedness. The Montehiedra shopping center, which opened in 1994, contains
525,000 square feet, including a 135,000 square foot Kmart store. In addition,
the Operating Partnership agreed to acquire Kmart's 50% interest in the Caguas
Centrum Shopping Center, which is currently under construction, located in
Caguas, Puerto Rico. This acquisition is expected to close in 1998.
On May 7, 1997, the Operating Partnership acquired a mortgage loan
from a bank secured by a mortgage on the office building located at 90 Park
Avenue, New York, New York. The purchase price of the mortgage loan was
approximately $185,000,000. The mortgage loan, which is in default, has a face
value of $193,000,000.
Further, on June 27, 1997, the Operating Partnership acquired for
approximately $26,000,000 four properties previously owned by affiliates of the
Riese Organization. These properties are located in Manhattan, New York. Vornado
also made a $41,000,000 mortgage loan to Riese Affiliates cross collateralized
by ten other Manhattan properties. This increasing rate loan bears an initial
interest rate of 9.75% and has a five year term.
On July 17, 1997, the Operating Partnership obtained a $600,000,000
unsecured three-year revolving credit facility from a bank group led by Union
Bank of Switzerland. The Operating Partnership borrowed $250,000,000 under the
facility at a blended interest rate of 6.48% (LIBOR plus .82%). The Operating
Partnership used the proceeds from the borrowing together with working capital
to repay a $400,000,000 term loan facility it had obtained in April 1997.
Page 15 of 94
16
VORNADO REALTY L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Operating Partnership anticipates that cash from continuing
operations will be adequate to fund business operations and the payment of
dividends and distributions on an ongoing basis for more than the next twelve
months; however, capital outlays for significant acquisitions may require
funding from borrowings or equity offerings.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board adopted
Statement No. 128, "Earnings Per Share". The statement is effective for fiscal
years ending after December 15, 1997. The Operating Partnership believes that
this pronouncement will not have a material effect on its net income per share.
Page 16 of 94
17
VORNADO REALTY L. P.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Vornado 90 Park Avenue L.L.C., a subsidiary of the Operating
Partnership, is a plaintiff in an action to foreclose the
mortgage on the building at 90 Park Avenue, New York, pending in
the Supreme Court of the State of New York, County of New York.
The action was initially brought by Sumitomo Trust & Banking
Co., Ltd., New York Branch ("Sumitomo"), as the owner of the
mortgage. Vornado 90 Park Avenue L.L.C. was substituted as
plaintiff after acquiring an assignment of the mortgage from
Sumitomo. The mortgagors and other defendants have asserted
certain defenses to the foreclosure action, including the
defense that the mortgage and underlying note should be deemed
void and declared satisfied. Although there has not yet been any
court adjudication and therefore no assurances can be given,
management believes it will ultimately prevail in this action.
In January 1997, two individual investors in Mendik Real
Estate Limited Partnership ("RELP"), the publicly held limited
partnership that indirectly owns a 60% interest in the Two Park
Avenue Property, filed a purported class action against NY Real
Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp.,
B&B Park Avenue, L.P. (an indirect subsidiary of the Operating
Partnership which acquired the remaining 40% interest in Two
Park Avenue) and Bernard H. Mendik in the Supreme Court of the
State of New York, County of New York, on behalf of all persons
holding limited partnership interests in RELP. The complaint
alleges that, for reasons which include purported conflicts of
interest, the defendants breached their fiduciary duty to the
limited partners, that the then proposed transfer of the 40%
interest in Two Park Avenue would result in a burden on the
operation and management of Two Park Avenue and that the
transfer of the 40% interest violates RELP's right of first
refusal to purchase the interest being transferred and fails to
provide limited partners in RELP with a comparable transfer
opportunity. Shortly after the filing of the complaint, another
limited partner represented by the same attorneys filed an
essentially identical complaint in the same court. Both
complaints seek unspecified damages, an accounting and a
judgment requiring either the liquidation of RELP and the
appointment of a receiver or an auction of Two Park Avenue.
Discussions to settle the actions have been ongoing, but no
settlement has been reached. In August 1997, a fourth limited
partner, represented by separate counsel, commenced another
purported class action in the same court by serving a complaint
essentially identical to the complaints in the two previously
commenced actions. Management believes that the ultimate outcome
of these matters will not have a material adverse affect on the
Operating Partnership.
Page 17 of 94
18
VORNADO REALTY L. P.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following exhibits are filed with this
Quarterly Report on Form 10-Q.
10 Revolving Credit Agreement.
11 Statement Re Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
Page 18 of 94
19
VORNADO REALTY L. P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VORNADO REALTY L. P.
--------------------------------
(Registrant)
BY: VORNADO REALTY TRUST
--------------------------------
(General Partner)
Date: August 7, 1997 /s/ Joseph Macnow
-------------------------------
JOSEPH MACNOW
Vice President - Chief Financial
Officer and Chief Accounting Officer
Page 19 of 94
20
VORNADO REALTY L. P.
EXHIBIT INDEX
PAGE NUMBER IN
SEQUENTIAL
EXHIBIT NO. NUMBERING
----------- ---------
10 Revolving Credit Agreement dated as of July 17, 1997
among Vornado Realty L.P., as borrower, Vornado
Realty Trust, as General Partner, and Union Bank of
Switzerland, as Bank and Administrative Agent. 21
11 Statement Re Computation of Per Share Earnings. 93
27 Financial Data Schedule. 94
Page 20 of 94