1
EXHIBIT INDEX ON PAGE 22
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: September 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 24
2
VORNADO REALTY L.P.
INDEX
Page Number
PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996................................................. 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1997 and September 30, 1996................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and September 30, 1996................... 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 13
PART II. Other Information:
Item 1. Legal proceedings................................................. 20
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures ............................................................. 21
Exhibit Index ............................................................. 22
Exhibit 11 ............................................................. 23
Exhibit 27 ............................................................. 24
ALL UNIT AND PER UNIT INFORMATION HAS BEEN ADJUSTED TO REFLECT A 2 FOR 1 SPLIT
OF THE UNITS EFFECTED IN CONNECTION WITH VORNADO REALTY TRUST'S STOCK SPLIT ON
OCTOBER 20, 1997.
Page 2 of 24
3
PART I. FINANCIAL INFORMATION
VORNADO REALTY L.P.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
September 30, December 31,
1997 1996
----------- ---------
ASSETS:
Real estate, at cost:
Land $ 251,028 $ 60,778
Buildings and improvements 957,028 313,885
Leasehold improvements and equipment 9,230 8,535
----------- ---------
Total 1,217,286 383,198
Less accumulated depreciation and
amortization (162,572) (147,549)
----------- ---------
Real estate, net 1,054,714 235,649
Cash and cash equivalents, including U.S.
government obligations under repurchase
agreements of $32,265 and $17,036 58,367 89,696
Restricted cash 27,571 --
Marketable securities 31,277 27,549
Investment in and advances to Alexander's, Inc. 107,446 107,628
Investments in partnerships and joint ventures 58,177 --
Investment in and advances to
management companies 13,250 5,193
Due from officers 8,664 8,634
Accounts receivable, net of allowance for
doubtful accounts of $917 and $575 15,331 9,786
Officer's deferred compensation expense 4,170 22,917
Mortgage loans receivable 84,663 17,000
Receivable arising from the
straight-lining of rents 21,999 17,052
Other assets 62,277 20,500
----------- ---------
TOTAL ASSETS $ 1,547,906 $ 561,604
=========== =========
September 30, December 31,
1997 1996
----------- ---------
LIABILITIES AND PARTNERS' CAPITAL:
Notes and mortgages payable $ 768,556 $ 228,787
Due for U.S. treasury obligations -- 9,636
Accounts payable and accrued expenses 27,050 9,905
Deferred leasing fee income 10,461 8,373
Officer's deferred compensation payable 25,000 25,000
Other liabilities 3,526 3,646
----------- ---------
Total liabilities 834,593 285,347
----------- ---------
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 277,168 --
General partnership units: 53,120,954
and 53,095,360 outstanding in each
period 360,365 359,918
Limited partnership units: 5,683,048
outstanding at September 30, 1997 178,411 --
Partnership deficit (98,657) (77,574)
----------- ---------
717,287 282,344
Unrealized gain (loss) on securities
available for sale 1,021 (998)
Due from officers for purchase of common
units of beneficial interest (4,995) (5,089)
----------- ---------
Total partners' capital 713,313 276,257
----------- ---------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $ 1,547,906 $ 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 NINE MONTHS ENDED
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
Property rentals $ 49,882 $ 21,927 $ 113,353 $ 65,084
Expense reimbursements 10,763 6,410 25,924 20,111
Other income (including fee income from
related parties of $592 and $671
and $1,236 and $1,476) 1,223 726 2,550 1,723
------------ ------------ ------------ ------------
Total revenues 61,868 29,063 141,827 86,918
------------ ------------ ------------ ------------
Expenses:
Operating 21,899 8,885 48,557 26,944
Depreciation and amortization 6,611 2,929 15,040 8,661
General and administrative 3,460 1,381 8,208 3,889
Amortization of officer's deferred
compensation expense 6,249 -- 18,747 --
------------ ------------ ------------ ------------
Total expenses 38,219 13,195 90,552 39,494
------------ ------------ ------------ ------------
Operating income 23,649 15,868 51,275 47,424
Income (loss) applicable to Alexander's:
Equity in income (loss) (40) (185) (47) (304)
Depreciation (150) (157) (450) (472)
Interest income on loan 1,534 1,708 4,683 5,167
Income from investment in management
companies 398 344 918 1,723
Equity in net income of investees 271 -- 553 --
Interest income on mortgage
loans receivable 3,403 661 7,708 1,911
Other interest and dividend income 2,351 728 9,125 2,501
Interest and debt expense (13,622) (4,208) (30,972) (12,623)
Gain on marketable securities 332 180 911 654
------------ ------------ ------------ ------------
Net Income 18,126 14,939 43,704 45,981
Preferred unit distributions (5,241) -- (10,096) --
Preferential allocations (2,500) -- (4,600) --
------------ ------------ ------------ ------------
Net Income applicable to Class A units $ 10,385 $ 14,939 $ 29,008 $ 45,981
============ ============ ============ ============
Net Income per Class A units $ .19 $ .31 $ .54 $ .94
============ ============ ============ ============
Weighted average number of Class A
units and Class A unit equivalents
outstanding during period 53,963,054 49,107,516 53,627,027 48,996,190
Cash distributions per Class A unit $ .32 $ .31 $ .96 $ .92
See notes to consolidated financial statements.
Page 4 of 24
5
VORNADO REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
FOR THE NINE MONTHS ENDED
----------------------------
September 30, September 30,
1997 1996
--------- --------
Cash flows from operating activities:
Net income $ 43,704 $ 45,981
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization (including debt issuance costs) 16,012 9,431
Amortization of officer's deferred compensation expense 18,747 --
Straight-lining of rental income (4,947) (1,912)
Equity in loss of Alexander's,
including depreciation of $450 and $471 497 776
Equity in net income of investees (553) --
Gain on marketable securities (911) (654)
Changes in operating assets and liabilities (8,532) (3,725)
--------- --------
Net cash provided by operating activities 64,017 49,897
--------- --------
Cash flows from investing activities:
Mendik acquisition (263,790) --
Investment in mortgage loans receivable (67,663) (17,000)
Investments in partnerships and joint ventures (19,912) --
Cash restricted for tenant improvements (27,571) --
Additions to real estate (288,383) (11,459)
Purchases of securities available for sale (3,436) --
Proceeds from sale or maturity of securities available for sale -- 41,490
--------- --------
Net cash (used in) provided by investing activities (670,755) 13,031
--------- --------
Cash flows from financing activities:
Proceeds from the issuance of preferred units 276,000 --
Proceeds from borrowings 523,000 10,000
Repayments on borrowings (151,177) (781)
Debt issuance costs (3,038) --
Repayment of borrowings on U.S. treasury obligations (9,636) (40,312)
Proceeds from borrowings on U.S. treasury obligations -- 10,000
Distributions paid (60,187) (44,559)
Issuance of units 447 5,366
--------- --------
Net cash provided by (used in) financing activities 575,409 (60,286)
--------- --------
Net (decrease) increase in cash and cash equivalents (31,329) 2,642
Cash and cash equivalents at beginning of period 89,696 19,127
--------- --------
Cash and cash equivalents at end of period $ 58,367 $ 21,769
========= ========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 29,983 $ 11,853
========= ========
Non-cash transactions:
Unrealized gain (loss) on securities available for sale $ 2,019 $ (173)
========= ========
The non-cash portion of the consideration for the Mendik acquisition of
$392,272 is not reflected in cash flows from investing activities above.
See notes to consolidated financial statements.
Page 5 of 24
6
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 are 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 September 30, 1997, the consolidated
statements of income for the three and nine months ended September 30, 1997 and
September 30, 1996 and the consolidated statements of changes in cash flows for
the nine months ended September 30, 1997 and September 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 September 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 non-controlling
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. Acquisitions
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 is 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.
Page 6 of 24
7
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vornado financed the cash portion of this transaction with the proceeds of
a public offering completed on April 9, 1997, of 5,750,000 Series A 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 $36-3/8 per share. The offering, net of expenses, generated
approximately $276,000,000.
Puerto Rico Transactions
On April 18, 1997, the Operating Partnership acquired The Montehiedra Town
Center ("Montehiedra") located in San Juan, Puerto Rico, from Kmart for
approximately $74,000,000, of which $63,000,000 was 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. The purchase price for Caguas
Centrum Shopping Center is expected to be approximately $68,000,000 (of which
$11,000,000 would be cash and $57,000,000 would be newly issued debt), including
approximately $9,000,000 for the Kmart store, which the Operating Partnership
has the option to acquire. The acquisition is expected to close in 1998.
90 Park Avenue
On May 7, 1997, the Operating Partnership acquired a mortgage loan from a
consortium of banks secured by a mortgage on the office building located at 90
Park Avenue, Manhattan, New York. On August 21, 1997, the Operating Partnership
entered into an agreement with the owners of 90 Park Avenue pursuant to which
the Operating Partnership restructured the mortgage, took title to the land and
obtained a 43-year lease on the building under which the Operating Partnership
manages the building and receives the building's cash flow. As part of the
restructuring, the amount of the debt was adjusted from the face value of
$193,000,000 to the May 1997 acquisition cost of $185,000,000, the maturity date
of the debt was extended to August 31, 2022 and the interest rate was set at
7.5%. The Operating Partnership purchased the land from the borrower for
$8,000,000, which was further applied to reduce the debt to $177,000,000.
The remaining investment has been classified as real estate.
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 midtown Manhattan. The Operating
Partnership also made a $41,000,000 mortgage loan to Riese affiliates
cross-collateralized by ten other Manhattan properties. This five-year
increasing rate loan bears an initial interest rate of 9.75%.
Arbor Property Trust
On August 22, 1997, Vornado entered into an Agreement and Plan of Merger
among Vornado, Arbor Property Trust ("Arbor") and Trees Acquisition Subsidiary,
Inc. ("Merger Sub"), a wholly-owned subsidiary of the Operating Partnership,
pursuant to which Arbor is to be merged with and into Merger Sub. Upon the
merger becoming effective, each common share of beneficial interest of Arbor
will be converted into the right to receive, and become exchangeable for, at the
election of the holder, 0.243810 Common Shares or 0.153846 Series A Convertible
Preferred Shares, each such Series A Preferred Share being convertible into
1.37456 Common Shares. The closing of this transaction is subject to the
approval of Arbor's shareholders and certain other conditions; accordingly,
there can be no assurance that the proposed transaction will ultimately be
completed. A meeting of Arbor shareholders to vote on the merger is scheduled
for December 4, 1997.
Page 7 of 24
8
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Arbor is a single-property real estate investment trust organized as a
business trust under the laws of the state of Delaware. Arbor, through its
wholly-owned subsidiary Green Acres Mall, L.L.C., owns and operates the Green
Acres Mall, a 1.7 million square foot super-regional enclosed shopping mall
complex situated in southwestern Nassau County, Long Island, New York. The Green
Acres Mall is anchored by four major department stores: Sears, Roebuck and Co.,
J.C. Penney Company, Inc., and Federated Department Stores, Inc., doing business
as Stern's and as Macy's. The complex also includes The Plaza at Green Acres, a
179,000 square foot shopping center which is anchored by Kmart and Waldbaums.
Hotel Pennsylvania Investment
On September 24, 1997, the Operating Partnership acquired a 40% interest
in the Hotel Pennsylvania, which is located on Seventh Avenue opposite Madison
Square Garden in Manhattan, New York. The property was acquired in a joint
venture with Hotel Properties Limited and Planet Hollywood International, Inc.
The venture intends to create a sports-themed hotel and entertainment complex.
Under the joint venture agreement, Hotel Properties Limited and Planet Hollywood
International, Inc. have 40% and 20% interests, respectively. The joint venture
acquired the hotel for approximately $159,000,000, of which $120,000,000 was
newly issued five-year financing. The Hotel Pennsylvania contains approximately
800,000 square feet of hotel space with 1,700 rooms and 400,000 square feet of
retail and office space. The Operating Partnership manages the site's retail and
office space, and Hotel Properties manages the hotel.
YMCA Development
On September 24, 1997, the Operating Partnership entered into an agreement
to acquire a portion of a property now occupied by the YMCA which overlooks
Central Park and is located between West 63rd and 64th Streets in Manhattan, New
York. Pursuant to the agreement, a preferred stock affiliate of Vornado will
develop approximately 44,000 square feet for use by the YMCA and develop
approximately 150,000 square feet for sale as residential condominiums. The
agreement contemplates the negotiation and execution of additional related
agreements. The purchase price for the property is approximately $8,400,000, and
the Operating Partnership estimates that development costs (including
development of the YMCA facilities) will be approximately $55,000,000. The
transaction is expected to close by the end of 1997; however, there can be no
assurance that the proposed transaction will ultimately be completed.
20 Broad Street Mortgage
On September 24, 1997, the Operating Partnership purchased at a discount a
mortgage on a 460,000 square foot office building at 20 Broad Street in
Manhattan, New York from a bank for $27,000,000. The mortgage, which is in
default, will yield approximately 12% on the purchase price. The property is
leased to a number of tenants. The largest such tenant, the New York Stock
Exchange, leases approximately 53% of the property. As part of the Mendik
Transaction described above, the Operating Partnership obtained an option to
acquire from the Mendik Group its portion of the fee interest in this property.
Page 8 of 24
9
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information
The unaudited pro forma information set forth below presents the condensed
statements of income for Operating Partnership for the nine months ended
September 30, 1997 and 1996 as if the following had occurred on January 1, 1996:
(a) the Mendik Transaction, (b) the acquisitions of, or investments in, 90 Park
Avenue, Arbor, Montehiedra, Riese and the Hotel Pennsylvania (each as described
above) and (c) the acquisitions of, or investments in, Charles E. Smith
Commercial Realty L.P. and the Cold Storage Companies and the sale of Common
Shares and the use of proceeds therefrom (as described in Note 11 -
"Subsequent Events").
Pro Forma
--------------------------------------
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Revenues $ 226,864,000 $ 223,079,000
============= =============
Net income $ 82,534,000 $ 78,742,000
Preferred unit distributions (15,233,000) (15,233,000)
------------- -------------
Net income applicable to
Class A units $ 67,301,000 $ 63,509,000
============= =============
Net income per Class A unit $ .95 $ .92
============= =============
The pro forma results for the nine months ended September 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 16).
4. Investments in and Advances to Alexander's (a related party):
Below are summarized Statements of Operations of Alexander's:
Nine Months Nine Months
Ended Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Revenues $ 18,775,000 $ 15,749,000
Expenses (10,158,000) (8,689,000)
------------ ------------
Operating income 8,617,000 7,060,000
Interest and debt expense (9,855,000) (10,393,000)
Interest and other income, net 1,078,000 2,294,000
------------ ------------
Net loss from continuing operations $ (160,000) $ (1,039,000)
============ ============
Vornado's 29.3% equity in loss $ (47,000) $ (304,000)
============ ============
The Operating Partnership recognized leasing fee income under a leasing
agreement (the "Leasing Agreement") with Alexander's of $173,000 and $157,000
for the three months ended September 30, 1997 and 1996 and $539,000 and $514,000
for the nine months ended September 30, 1997 and 1996. Subject to the payment of
rents by Alexander's tenants, the Operating Partnership is due $6,408,000 at
September 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
September 30, 1997. In addition to the leasing fees received by the Operating
Partnership, Vornado Management Corp. receives management fees from Alexander's
(see Note 7).
Page 9 of 24
10
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 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 and used the proceeds, together with working capital, to repay a
$400,000,000 term loan it had obtained in April 1997. At September 30, 1997, the
Operating Partnership had $310,000,000 outstanding under the facility at a
blended rate of 6.50% (LIBOR plus .82%). On October 27, 1997, these borrowings
were repaid with a portion of the proceeds from the sale of common shares.
6. Mortgage Loans Receivable
At September 30, 1997, the Operating Partnership has $129,663,000 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.
7. 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 Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Revenues:
Management fees from:
Alexander's $ 938,000 $ 1,037,000 $ 2,813,000 $ 4,405,000
Mendik properties 1,102,000 -- 1,858,000 --
----------- ----------- ----------- -----------
2,040,000 1,037,000 4,671,000 4,405,000
Expenses:
General and administrative (1,623,000) (585,000) (3,749,000) (1,819,000)
Interest, net (241,000) (74,000) (532,000) (216,000)
----------- ----------- ----------- -----------
Income before income taxes 176,000 378,000 390,000 2,370,000
Income taxes (70,000) (154,000) (158,000) (968,000)
----------- ----------- ----------- -----------
Net income 106,000 224,000 232,000 1,402,000
Preferred dividends (101,000) (213,000) (220,000) (1,332,000)
----------- ----------- ----------- -----------
Net income available to
common shareholders $ 5,000 $ 11,000 $ 12,000 $ 70,000
=========== =========== =========== ===========
The management fee income from Alexander's in the nine months ended
September 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 $297,000 and $131,000 for the three months ended September 30, 1997
and 1996 and $698,000 and $391,000 for the nine months September 30, 1997 and
1996.
Page 10 of 24
11
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 $470,000 and $565,000 for the three months ended September 30, 1997 and
1996 and $847,000 and $1,112,000 for the nine months ended September 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 in connection with these contracts of
$3,292,000 for the three months ended September 30, 1997 and $5,899,000 for the
period from April 15, 1997 to September 30, 1997.
9. 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 $2.015. Holders
of Class C Units are entitled to a preferential annual distribution rate of
$1.69. Class C Units will automatically convert to Class A Units when the
distributions paid to holders of Class A Units equal $.4225 per quarter ($1.69
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 $.503750 per quarter ($2.015 annually) for four consecutive quarters.
Generally, the value of each Class A Unit, equates to one common share of
beneficial interest of Vornado. These per unit distribution rates have been
adjusted to reflect a 2 for 1 split of the units effected in connection with
Vornado's stock split on October, 20, 1997. Preferential distributions
aggregated $2,500,000 for the three months ended September 30, 1997 and
$4,600,000 for the period from April 15, 1997 to September 30, 1997 and will
aggregate $10,370,000 on an annual basis.
10. Contingencies
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 effect on the Operating Partnership.
Page 11 of 24
12
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events
Stock Split
On October 20, 1997, Vornado paid a 100% common share dividend to
shareholders of record of Common Shares at the close of business on October 15,
1997. The Operating Partnership units were split 2 for 1 in connection
therewith.
Sale of Common Shares
On October 27, 1997, Vornado completed the sale of 14,000,000 common shares
at a price of $45.00 per share which, net of expenses, yielded approximately
$598,740,000. On November 7, 1997, Vornado's underwriters exercised their
over-allotment option in full and purchased an additional 2,100,000 shares at
$45.00 per share. The net proceeds were used to repay $310,000,000 outstanding
under the Operating Partnership's line of credit and to fund a portion of the
purchase price of certain acquisitions noted below.
Charles E. Smith Commercial Realty Investment
On October 31, 1997, the Operating Partnership acquired a 15% limited
partnership interest in Charles E. Smith Commercial Realty L.P. for $60,000,000.
Charles E. Smith Commercial Realty L.P. owns interests in and manages
approximately 7.2 million square feet of office properties in Crystal City,
Arlington, Virginia, a suburb of Washington, D.C., and manages an additional 14
million square feet of office and other commercial properties in the Washington
D.C. area.
Cold Storage
On October 31, 1997, two partnerships in which preferred stock affiliates
of Vornado have 60% interests and affiliates of Crescent Real Estate Equities
Company have 40% interests acquired Americold Corporation ("Americold") and URS
Logistics, Inc. ("URS"). Americold and URS are cold storage and logistics
warehouse companies. The consideration for these transactions totaled
approximately $950,000,000, including $660,000,000 of indebtedness.
Establishment of New Operating Company
Vornado is contemplating the establishment of a new taxable operating
company to conduct certain activities that would not be permitted to be
conducted by Vornado as a REIT and is currently in the process of preparing a
registration statement to be filed with the Securities and Exchange Commission
with respect thereto. If such action takes place, the Operating Partnership
would spin off pro rata to its partners, including Vornado, the shares of the
new company, and Vornado would distribute pro rata to holders of its Common
Shares the shares it receives. No assurance can be given concerning the timing
of any such transactions, or whether such transaction will occur.
Page 12 of 24
13
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 $61,868,000 in the quarter
ended September 30, 1997, compared to $29,063,000 in the prior year's quarter,
an increase of $32,805,000. Revenues were $141,827,000 for the nine months ended
September 30, 1997 compared to $86,918,000 in the prior year's nine months, an
increase of $54,909,000. These increases reflect revenues of $28,621,000 and
$47,538,000 for the quarter and the nine months ended September 30, 1997 from
properties acquired in 1997.
Property rentals were $49,882,000 in the quarter ended September 30, 1997,
compared to $21,927,000 in the prior year's quarter, an increase of $27,955,000.
Property rentals were $113,353,000 for the nine months ended September 30, 1997
compared to $65,084,000 in the prior year's nine months, an increase of
$48,269,000. The increases for the quarter and the nine months ended September
30, 1997, resulted from:
Quarter Nine Months
----------- -----------
1997 Acquisitions:
Mendik $19,780,000 $36,204,000
90 Park Avenue 3,382,000 3,382,000
Montehiedra shopping center 2,086,000 3,809,000
Riese 1,351,000 1,351,000
----------- -----------
26,599,000 44,746,000
1996 Acquisitions:
825 Seventh Avenue -- 472,000
Shopping center leasing activity 822,000 1,707,000
Step-ups in shopping center leases 534,000 1,344,000
----------- -----------
$27,955,000 $48,269,000
=========== ===========
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 $10,763,000 in the
quarter ended September 30, 1997, compared to $6,410,000 in the prior year's
quarter, an increase of $4,353,000. Tenant expense reimbursements were
$25,924,000 for the nine months ended September 30, 1997, compared to
$20,111,000 in the prior year's nine months, an increase of $5,813,000. Of these
increases for the quarter and nine months, respectively, (i) $2,686,000 and
$4,758,000 resulted from properties acquired in the Mendik Transaction, (ii)
$763,000 in each period resulted from the acquisition of 90 Park Avenue and
(iii) $904,000 and $292,000 resulted from expenses passed through to tenants at
the Operating Partnership's other properties.
Operating expenses were $21,899,000 in the quarter ended September 30,
1997, as compared to $ 8,885,000 in the prior year's quarter, an increase of
$13,014,000. Operating expenses were $48,557,000 in the nine months ended
September 30, 1997, compared to $26,944,000 in the prior year's nine months, an
increase of $21,613,000. Of these increases for the quarter and nine months,
respectively, (i) $11,018,000 and $19,887,000 resulted from properties acquired
in the Mendik Transaction and (ii) $1,664,000 in each period resulted from the
acquisition of 90 Park Avenue.
Page 13 of 24
14
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and amortization expense increased in 1997 as compared to
1996, primarily as a result of acquisitions.
General and administrative expenses were $3,460,000 in the quarter ended
September 30, 1997 compared to $1,381,000 in the prior year's quarter, an
increase of $2,079,000. General and administrative expenses were $8,208,000 in
the nine months ended September 30, 1997 compared to $3,889,000 in the prior
year's nine months, an increase of $4,319,000. These increases resulted
primarily from (i) Mendik division payroll and corporate office expenses of
$997,000 and $1,464,000 for the quarter ended September 30, 1997 and the period
from April 15, 1997 to September 30, 1997, (ii) cash compensation attributable
to the employment of Vornado's President and (iii) higher professional fees.
The Operating Partnership recognized an expense of $6,249,000 in the
quarter ended September 30, 1997 and $18,747,000 in the nine months ended
September 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 $1,344,000 in the quarter ended September 30, 1997,
compared to $1,366,000 in the prior year's quarter, a decrease of $22,000.
Income applicable to Alexander's was $4,186,000 in the nine months ended
September 30, 1997, compared to $4,391,000 in the prior year's nine months, a
decrease of $205,000. 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 $398,000 in the quarter
ended September 30, 1997, compared to $344,000 in the prior year's quarter, an
increase of $54,000. Income from investment in management companies was $918,000
in the nine months ended September 30, 1997, compared to $1,723,000 in the prior
year's nine months, a decrease of $805,000. The increase in the current year's
quarter resulted primarily from dividends from the Management Company acquired
as part of the Mendik Transaction. The decrease in the current year's nine 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 $271,000 in the quarter ended
September 30, 1997 and $553,000 in the nine months ended September 30, 1997,
represents income primarily 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
$6,086,000 for the quarter ended September 30, 1997, compared to $1,569,000 in
the prior year's quarter, an increase of $4,517,000. Investment income was
$17,744,000 for the nine months ended September 30, 1997, compared to $5,066,000
in the prior year's nine months, an increase of $12,678,000. Of these increases
for the quarter and nine months, respectively, (i) $1,623,000 and $6,624,000
resulted primarily from income earned on the proceeds from the December 1996
public stock offering and the April 1997 term loan, (ii) $1,542,000 and
$4,586,000 resulted from the Operating Partnership's mortgage loan on 90 Park
Avenue and (iii) $1,118,000 in each period resulted from the Operating
Partnership's mortgage loan in connection with the Riese transaction.
Interest and debt expense was $13,622,000 for the quarter ended September
30, 1997, compared to $4,208,000 in the prior year's quarter, an increase of
$9,414,000. Interest and debt expense was $30,972,000 for the nine months ended
September 30, 1997, compared to $12,623,000 in the prior year's nine months, an
increase of $18,349,000. Of these increases, (i) $4,869,000 and $10,003,000
resulted from borrowings under the Operating Partnership's revolving credit
facility and a term loan (ii) $3,134,000 and $5,896,000 resulted from debt on
the Mendik properties and (iii) $1,411,000 and $2,450,000 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 $2,500,000 for the quarter ended September 30,
1997 and $4,600,000 for the period from April 15, 1997 to September 30, 1997.
The preferred unit distributions of $5,241,000 and $10,096,000 are for the
quarter ended September 30, 1997 and the period from April 9, 1997 to September
30, 1997 and include amortization of expenses in connection therewith of
$569,000 and $1,168,000.
Page 14 of 24
15
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1997
Cash flows provided by operating activities of $64,017,000 was comprised of
(i) net income of $43,704,000 and (ii) adjustments for non-cash items of
$28,845,000, partially offset by (iii) the net change in operating assets and
liabilities of $8,532,000. The adjustments for non-cash items are primarily
comprised of (i) amortization of deferred officer's compensation expense of
$18,747,000, (ii) depreciation and amortization of $16,012,000, (iii) equity in
loss of Alexander's of $497,000, and (iv) minority interest of $4,600,000,
partially offset by (v) the effect of straight-lining of rental income of
$4,947,000 and (vi) equity in net income of investees of $553,000.
Net cash used in investing activities of $670,755,000 was primarily
comprised of (i) expenditures of $263,790,000 in connection with the Mendik
Transaction, (ii) investments in mortgage loans receivable of $67,663,000,
(iii) capital expenditures and investments in partnerships and joint ventures
of $308,295,000 (see details below) and (iv) restricted cash for tenant
improvements of $27,571,000. Investments in mortgage loans receivable are
comprised of (a) a loan to affiliates of the Riese Organization cross
collateralized by ten Manhattan properties of $41,000,000 and (b) a mortgage on
a 460,000 square foot office building at 20 Broad Street in Manhattan, New York
purchased at a discount from a bank for $27,000,000. Capital expenditures and
investments in partnerships and joint ventures are comprised of:
Montehiedra shopping center $ 74,000,000
90 Park Avenue office building 185,000,000
Riese properties 26,000,000
40% interest in Hotel Pennsylvania 19,215,000
Other 4,080,000
--------------
$308,295,000
============
Net cash provided by financing activities of $575,409,000 was primarily
comprised of proceeds from (i) borrowings of $523,000,000, and (ii) issuance of
preferred units of $276,000,000, partially offset by (iii) repayment of
borrowings of $151,177,000, (iv) distributions paid of $60,187,000 and (v) the
repayment of borrowings on U.S. Treasury obligations of $9,636,000.
Nine Months Ended September 30, 1996
Cash flows provided by operating activities of $49,897,000 was comprised of
(i) net income of $45,981,000 and (ii) adjustments for non-cash items of
$7,641,000, less (iii) the net change in operating assets and liabilities of
$3,725,000. The adjustments for non-cash items are primarily comprised of
depreciation and amortization of $9,431,000, plus equity in income (loss) of
Alexander's of $776,000, offset by the effect of straight-lining of rental
income of $1,912,000. 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 $1,592,000
were collected during this period. These amounts have been included in the net
change in operating assets and liabilities shown in item (iii) above.
Page 15 of 24
16
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by investing activities of $13,031,000 was comprised of
(i) proceeds from sale or maturity of securities available for sale of
$41,490,000, offset by (ii) the Operating Partnership's investment in a mortgage
note receivable of $17,000,000 and (iii) capital expenditures of $11,459,000
(including $8,923,000 for the purchase of an office building).
Net cash used in financing activities of $60,286,000 was primarily
comprised of (i) the net repayment of borrowings on U.S. Treasury obligations of
$30,312,000 and (ii) distributions paid of $44,559,000, offset by (iii) the
proceeds from borrowings of $10,000,000.
Funds from Operations for the Three and Nine Months ended September 30,
-----------------------------------------------------------------------
1997 and 1996.
- --------------
Funds from operations were $17,056,000 in the quarter ended September 30,
1997, compared to $17,575,000 in the prior year's quarter, a decrease of
$519,000 or 2.9%. Funds from operations were $43,789,000 in the nine months
ended September 30, 1997, compared to $53,550,000 in the prior year's nine
months, a decrease of $9,761,000 or 18.2%. Funds from operations for the three
and nine months ended September 30, 1997 reflect amortization of the deferred
payment due to Vornado's President and related compensation of $6,854,000 and
$20,516,000. The following table reconciles funds from operations and net
income:
For The Three Months Ended For The Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net income applicable to Class A
units $ 10,385,000 $ 14,939,000 $ 29,008,000 $ 45,981,000
Depreciation and amortization of
real property 6,466,000 2,828,000 14,623,000 8,394,000
Straight-lining of property rentals
for rent escalations (830,000) (635,000) (2,317,000) (1,912,000)
Leasing fees received in excess
of income recognized 480,000 468,000 1,333,000 1,358,000
Proportionate share of adjustments
to Alexander's loss
to arrive at funds from operations (100,000) (25,000) (73,000) (271,000)
Proportionate share of adjustments to
net income of investees to arrive
at funds from operations 655,000 -- 1,215,000 --
------------ ------------ ------------ ------------
Funds from operations $ 17,056,000 $ 17,575,000 $ 43,789,000 $ 53,550,000
============ ============ ============ ============
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
Page 16 of 24
17
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- ------------
Operating activities $ 13,028,000 $ 16,121,000 $ 64,017,000 $ 49,897,000
============= ============ ============= ============
Investing activities $ (40,942,000) $ (129,000) $(670,755,000) $ 13,031,000
============= ============ ============= ============
Financing activities $(113,545,000) $(10,971,000) $ 575,409,000 $(60,286,000)
============= ============ ============= ============
The Operating Partnership has budgeted approximately $25,000,000 for
capital expenditures over the next year of which $21,000,000 is for tenant
improvements at its office properties and $4,000,000 is for tenant improvements
and renovations at its shopping center properties. In addition, the Operating
Partnership expects to invest approximately $55,000,000 in connection with its
YMCA Development and approximately $25,000,000 in connection with its portion of
the Hotel Pennsylvania investment (see below).
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 919,540 of its Common Shares or the
cash equivalent of their appreciated value. Accordingly, cash of $5,000,000 and
919,540 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 3,500,000 Common Shares of Vornado.
On April 15, 1997, Vornado consummated the acquisition, through the
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 are 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 Series A 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 $36-3/8 per share. The offering, net of expenses, generated
approximately $276,000,000.
Below is a summary of other transactions affecting the Operating
Partnership's liquidity:
Arbor Property Trust
On August 22, 1997, Vornado entered into an Agreement and Plan of
Merger among Vornado, Arbor Property Trust ("Arbor") and Trees Acquisition
Subsidiary, Inc. ("Merger Sub"), a wholly-owned subsidiary
Page 17 of 24
18
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of the Operating Partnership, pursuant to which Arbor is to be merged with and
into Merger Sub. Upon the merger becoming effective, each common share of
beneficial interest of Arbor will be converted into the right to receive, and
become exchangeable for, at the election of the holder, 0.243810 Common Shares
or 0.153846 Series A Convertible Preferred Shares, each such Series A Preferred
Share being convertible into 1.37456 Common Shares. The closing of this
transaction is subject to the approval of Arbor's shareholders and certain other
conditions; accordingly, there can be no assurance that the proposed transaction
will ultimately be completed. A meeting of Arbor shareholders to vote on the
merger is scheduled for December 4, 1997.
Arbor is a single-property real estate investment trust organized as a
business trust under the laws of the state of Delaware. Arbor, through its
wholly-owned subsidiary Green Acres Mall, L.L.C., owns and operates the Green
Acres Mall, a 1.7 million square foot super-regional enclosed shopping mall
complex situated in southwestern Nassau County, Long Island, New York. The Green
Acres Mall is anchored by four major department stores: Sears, Roebuck and Co.,
J.C. Penney Company, Inc., and Federated Department Stores, Inc., doing business
as Stern's and as Macy's. The complex also includes The Plaza at Green Acres, a
179,000 square foot shopping center which is anchored by Kmart and Waldbaums.
Hotel Pennsylvania Investment
On September 24, 1997, the Operating Partnership acquired a 40% interest
in the Hotel Pennsylvania, which is located on Seventh Avenue opposite Madison
Square Garden in Manhattan, New York. The property was acquired in a joint
venture with Hotel Properties Limited and Planet Hollywood International, Inc.
The venture intends to create a sports-themed hotel and entertainment complex.
Under the joint venture agreement, Hotel Properties Limited and Planet Hollywood
International, Inc. have 40% and 20% interests, respectively. The joint venture
acquired the hotel for approximately $159,000,000, of which $120,000,000 was
newly issued five-year financing. The Hotel Pennsylvania contains approximately
800,000 square feet of hotel space with 1,700 rooms and 400,000 square feet of
retail and office space. The Operating Partnership manages the site's retail and
office space, and Hotel Properties manages the hotel.
YMCA Development
On September 24, 1997, the Operating Partnership entered into an agreement
to acquire a portion of a property now occupied by the YMCA which overlooks
Central Park and is located between West 63rd and 64th Streets in Manhattan, New
York. Pursuant to the agreement, a preferred stock affiliate of Vornado will
develop approximately 44,000 square feet for use by the YMCA and develop
approximately 150,000 square feet for sale as residential condominiums. The
agreement contemplates the negotiation and execution of additional related
agreements. The purchase price for the property is approximately $8,400,000, and
the Operating Partnership estimates that development costs (including
development of the YMCA facilities) will be approximately $55,000,000. The
transaction is expected to close by the end of 1997; however, there can be no
assurance that the proposed transaction will ultimately be completed.
20 Broad Street Mortgage
On September 24, 1997, the Operating Partnership purchased at a discount a
mortgage on a 460,000 square foot office building at 20 Broad Street in
Manhattan, New York from a bank for $27,000,000. The mortgage, which is in
default, will yield approximately 12% on the purchase price. The property is
leased to a number of tenants. The largest such tenant, the New York Stock
Exchange, leases approximately 53% of the property. As part of the Mendik
Transaction described above, the Operating Partnership obtained an option to
acquire from the Mendik Group its portion of the fee interest in this property.
Charles E. Smith Commercial Realty Investment
On October 31, 1997, the Operating Partnership acquired a 15% limited
partnership interest in Charles E. Smith Commercial Realty L.P. for $60,000,000.
Charles E. Smith Commercial Realty L.P. owns interests in and manages
approximately 7.2 million square feet of office properties in Crystal City,
Arlington, Virginia, a suburb of Washington, D.C., and manages an additional 14
million square feet of office and other commercial properties in the Washington
D.C. area.
Page 18 of 24
19
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cold Storage
On October 31, 1997, two partnerships in which preferred stock affiliates
of Vornado have 60% interests and affiliates of Crescent Real Estate Equities
Company have 40% interests acquired Americold Corporation ("Americold") and URS
Logistics, Inc. ("URS"). Americold and URS are cold storage and logistics
warehouse companies. The consideration for these transactions totaled
approximately $950,000,000, including $660,000,000 of indebtedness.
Sale of Common Shares
On October 27, 1997, Vornado completed the sale of 14,000,000 common
shares at a price of $45.00 per share which, net of expenses, yielded
approximately $598,740,000. On November 7, 1997, Vornado's underwriters
exercised their over-allotment option in full and purchased an additional
2,100,000 shares at $45.00 per share. The net proceeds were used to repay
$310,000,000 outstanding under the Operating Partnership's line of credit and
will be used to fund a portion of the purchase price of certain acquisitions
noted above.
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. Simultaneously with the closing, the Operating Partnership
borrowed $250,000,000 and used the proceeds, together with working capital, to
repay a $400,000,000 term loan it had obtained in April 1997. At September 30,
1997, the Operating Partnership had $310,000,000 outstanding under the facility
at a blended rate of 6.50% (LIBOR plus .82%). On October 27, 1997, these
borrowings were repaid with a portion of the proceeds from the sale of common
shares.
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 unit.
Page 19 of 24
20
VORNADO REALTY L.P.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 effect on the
Operating Partnership.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: The following exhibits are filed with this
Quarterly Report on Form 10-Q.
11 Statement Re Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended september 30, 1997, Vornado
Realty L.P. filed the reports on Form 8-K described
below:
Date of Report
(Date of Earliest
Event Reported) Item Reported Date Filed
----------------- ---------------------------- -------------
June 27, 1997 Acquisition of properties July 8, 1997
from affiliates of the Riese
Organization.
August 21, 1997 Acquisition of 90 Park Avenue August 29, 1997
Other events - pending merger
with Arbor Property Trust.
August 21, 1997 Financial statements and pro September 11, 1997
forma financial information
in connection with the
acquisition of 90 Park Avenue
and the pending merger with
Arbor Property Trust.
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21
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: November 6, 1997
------------------------------------
JOSEPH MACNOW
Vice President - Chief Financial
Officer and Chief Accounting Officer
Page 21 of 24
22
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: November 6, 1997 /s/ Joseph Macnow
------------------------------------
JOSEPH MACNOW
Vice President - Chief Financial
Officer and Chief Accounting Officer
Page 21 of 24
23
VORNADO REALTY L.P.
EXHIBIT INDEX
Page Number in
Sequential
Exhibit No. Numbering
----------- ---------
11 Statement Re Computation of Per Share Earnings. 23
27 Financial Data Schedule. 24
Page 22 of 24