PART I.                 FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

VORNADO REALTY TRUST

 

CONSOLIDATED BALANCE SHEETS

 

(Amounts in thousands, except share and per share amounts)

 

		(UNAUDITED) March 31, 2005			December 31, 2004
ASSETS
Real estate, at cost:
Land		$	1,685,515		$	1,681,792
Buildings and improvements		7,588,079			7,548,425
Development costs and construction in progress		191,322			180,968
Leasehold improvements and equipment		311,893			307,660
Total		9,776,809			9,718,845
Less accumulated depreciation and amortization		(1,465,703		)	(1,404,441		)
Real estate, net		8,311,106			8,314,404
Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $77,290 and $23,110		974,330			599,282
Escrow deposits and restricted cash		186,936			229,193
Marketable securities		232,300			185,394
Investments and advances to partially-owned entities, including Alexander’s of $233,502 and $204,762		742,367			605,300
Due from officers		21,145			21,735
Accounts receivable, net of allowance for doubtful accounts of $16,276 and $17,339		154,345			164,524
Notes and mortgage loans receivable		317,475			440,186
Receivable arising from the straight-lining of rents, net of allowance of $7,333 and $6,787		335,711			324,266
Other assets		668,572			577,574
Assets related to discontinued operations		119,851			118,659
TOTAL ASSETS		$	12,064,138		$	11,580,517

 

		(UNAUDITED) March 31, 2005			December 31, 2004
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes and mortgages payable		$	4,074,655		$	3,974,537
Senior unsecured notes		953,343			962,096
Exchangeable senior debentures		490,000			—
Accounts payable and accrued expenses		395,859			413,923
Officers’ compensation payable		41,445			32,506
Deferred credit		106,799			102,387
Other liabilities		111,568			113,402
Liabilities related to discontinued operations		21,056			21,054
Total liabilities		6,194,725			5,619,905
Minority interest, including unitholders in the Operating Partnership		1,798,328			1,947,871
Commitments and contingencies
Shareholders’ equity:
Preferred shares of beneficial interest: no par value per share; authorized, 70,000,000 shares; Series A: liquidation preference $50.00 per share;     issued and outstanding 312,005 and 320,604 shares		15,603			16,034
Series C: liquidation preference $25.00 per share; issued and outstanding 4,600,000 shares		—			111,148
Series D-10: liquidation preference $25.00 per share; issued and outstanding 1,600,000 shares		40,000			40,000
Series E: liquidation preference $25.00 per share; issued and outstanding 3,000,000 shares		72,248			72,248
Series F: liquidation preference $25.00 per share; issued and outstanding 6,000,000 shares		144,720			144,771
Series G: liquidation preference $25.00 per share; issued and outstanding 8,000,000 shares		193,135			193,253
Common shares of beneficial interest: $.04 par value per share; authorized, 200,000,000 shares; issued and outstanding 129,701,581 and 127,478,903 shares		5,219			5,128
Additional capital		3,357,813			3,257,731
Earnings in excess of distributions		217,570			133,899
		4,046,308			3,974,212
Common shares issued to officer’s trust		(65,753		)	(65,753		)
Deferred compensation shares earned but not yet delivered		67,283			70,727
Deferred compensation shares issued but not yet earned		(13,940		)	(9,523		)
Accumulated other comprehensive income		41,891			47,782
Due from officers for purchase of common shares of beneficial interest		(4,704		)	(4,704		)
Total shareholders’ equity		4,071,085			4,012,741
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	12,064,138		$	11,580,517

 

See notes to consolidated financial statements.

 

3

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VORNADO REALTY TRUST

 

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 

		For The Three Months Ended March 31,
(Amounts in thousands, except per share amounts)		2005			2004
Revenues:
Property rentals		$	336,078		$	325,053
Temperature Controlled Logistics		181,225			—
Tenant expense reimbursements		50,346			48,357
Fee and other income		29,829			17,958
Total revenues		597,478			391,368
Expenses:
Operating		296,917			153,291
Depreciation and amortization		78,106			55,801
General and administrative		40,700			30,570
Total expenses		415,723			239,662
Operating income		181,755			151,706
Income (loss) applicable to Alexander’s		25,386			(2,528		)
Income from partially-owned entities		9,222			13,113
Interest and other investment income		101,198			9,244
Interest and debt expense (including amortization of deferred financing costs of $3,021 and $1,845)		(77,460		)	(58,367		)
Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate		3,488			776
Minority interest of partially-owned entities		603			3
Income from continuing operations		244,192			113,947
Income from discontinued operations		1,363			247
Income before allocation to limited partners		245,555			114,194
Limited partners’ interest in the Operating Partnership		(27,195		)	(14,457		)
Perpetual preferred unit distributions of the Operating Partnership		(18,541		)	(17,298		)
Net income		199,819			82,439
Preferred share dividends		(12,386		)	(7,982		)
NET INCOME applicable to common shares		$	187,433		$	74,457
INCOME PER COMMON SHARE – BASIC:
Income from continuing operations		$	1.45		$	.61
Income from discontinued operations		.01			—
Net income per common share		$	1.46		$	.61
INCOME PER COMMON SHARE – DILUTED:
Income from continuing operations		$	1.38		$	.59
Income from discontinued operations		.01			—
Net income per common share		$	1.39		$	.59
DIVIDENDS PER COMMON SHARE		$	.76		$	.71

 

See notes to consolidated financial statements.

 

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VORNADO REALTY TRUST

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For The Three Months Ended March 31,
(Amounts in thousands)		2005			2004
Cash Flows from Operating Activities:
Net income		$	199,819		$	82,439
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of debt issuance costs)		81,410			58,465
Minority interest of partially-owned entities		(603		)	(3		)
Allocation of income to limited partners of the Operating Partnership		27,195			14,457
Perpetual preferred unit distributions of the Operating Partnership		16,341			17,298
Net gain on conversion of Sears common shares and derivative position to Sears Holding common shares and derivative position		(86,094		)	—
Net gain on mark-to-market of Sears Holding derivative position		(7,899		)	—
Net loss on mark-to-market of GMH Communities L.P. warrants		10,178			—
Straight-lining of rental income		(11,405		)	(10,376		)
Equity in income of partially-owned entities, including Alexander’s		(34,608		)	(10,585		)
Net gains on dispositions of wholly-owned and partially-owned assets other than real estate		(3,488		)	(776		)
Amortization of below market leases, net		(2,229		)	(3,650		)
Write-off preferred unit issuance costs		2,200			3,895
Changes in operating assets and liabilities		(41,198		)	2,157
Net cash provided by operating activities		149,619			153,321
Cash Flows from Investing Activities:
Investments in notes and mortgage loans receivable		(152,000		)	—
Distributions from partially-owned entities		9,607			147,394
Acquisitions of real estate and other		(8,135		)	(54,422		)
Proceeds from sale of real estate		1,980			—
Proceeds received upon repayment of notes and mortgage loans receivable		274,711			38,500
Investments in partially-owned entities		(112,066		)	(5,102		)
Development costs and construction in progress		(32,404		)	(24,068		)
Additions to real estate		(1,744		)	(29,744		)
Purchases of marketable securities		(52,322		)	—
Cash restricted, primarily mortgage escrows		42,257			(3,944		)
Proceeds from sale of securities available for sale		7,671			—
Net cash (used in) provided by investing activities		(22,445		)	68,614
Cash Flows from Financing Activities:
Proceeds from borrowings		715,000			150,427
Repayments of borrowings		(139,345		)	(160,183		)
Dividends paid on common shares		(103,747		)	(103,692		)
Distributions to minority partners		(32,473		)	(38,937		)
Redemption of perpetual preferred shares and units		(195,000		)	(112,467		)
Exercise of share options		8,645			20,007
Dividends paid on preferred shares		(5,206		)	(6,614		)
Net cash provided by (used in) financing activities		247,874			(251,459		)
Net increase (decrease) in cash and cash equivalents		375,048			(29,524		)
Cash and cash equivalents at beginning of year		599,282			320,542
Cash and cash equivalents at end of year		$	974,330		$	291,018

 

See notes to consolidated financial statements.

 

5

 

VORNADO REALTY TRUST

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

 

		For The Three Months Ended March 31,
(Amounts in thousands)		2005			2004
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest (including capitalized interest of $3,048 and $1,659)		$	69,682		$	48,933
Non-Cash Transactions:
Conversion of Class A Operating Partnership units to common shares		$	83,966		$	266,189
Financing assumed in acquisitions		15,600			18,500
Unrealized gain on securities available for sale		14,914			3,306

 

See notes to consolidated financial statements.

 

6

 

VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

1.              Organization

 

Vornado Realty Trust is a fully-integrated real estate investment trust (“REIT”) and conducts its business through Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”).  All references to the “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership.  Vornado is the sole general partner of, and owned approximately 88.1% of the common limited partnership interest in, the Operating Partnership at March 31, 2005.

 

2.              Basis of Presentation

 

The accompanying consolidated financial statements are unaudited.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.  The results of operations for the three months ended March 31, 2005 , are not necessarily indicative of the operating results for the full year.

 

The accompanying consolidated financial statements include the accounts of Vornado and its majority-owned subsidiary, the Operating Partnership, as well as certain partially-owned entities in which the Company owns (i) more than 50% unless a partner has shared board and management representation and authority and substantive participation rights on all significant business decisions or (ii) 50% or less when the Company is considered the primary beneficiary and the entity qualifies as a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised) — Consolidation of Variable Interest Entities (“FIN 46R”).  All significant intercompany amounts have been eliminated.  Equity interests in partially-owned corporate entities are accounted for under the equity method of accounting when the Company’s ownership interest is more than 20% but less than 50%.  When partially-owned investments are in partnership form, the 20% threshold for equity method accounting may be reduced.  Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company’s share of the net income or loss and cash contributions and distributions to or from these entities.  For all other investments, the Company uses the cost method.

 

Management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Certain prior year balances have been reclassified in order to conform to current year presentation.

 

7

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

 

3.              Recently Issued Accounting Literature

 

On December 16, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29 (“SFAS No. 153”). The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 153 on June 15, 2005 will have a material effect on the Company’s consolidated financial statements.

 

On December 16, 2004, the FASB issued SFAS No. 123: (Revised 2004) - Share-Based Payment (“SFAS No. 123R”).  SFAS 123R replaces SFAS No. 123, which the Company adopted on January 1, 2003. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements and measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R is effective as of the first interim or annual reporting period that begins after June 15, 2005.  The Company does not believe that the adoption of SFAS No. 123R on June 15, 2005, will have a material effect on the Company’s consolidated financial statements.

 

4.              Acquisitions, Dispositions and Financings

 

Acquisitions:

 

Rockville Town Center

 

On March 3, 2005, the Company acquired a 94,078 square foot property located in Rockville, Maryland for $24,785,000, of which $9,185,000 was paid in cash and $15,600,000 was debt assumed.  The operations of Rockville Town Center are consolidated into the accounts of the Company from the date of acquisition.

 

Beverly Connection

 

On March 5, 2005, the Company acquired a 50% interest in a venture that owns Beverly Connection, a two-level urban shopping center, containing 322,000 square feet, located in Los Angeles, California for $10,700,000 in cash.  In addition, the Company provided the venture with $35,000,000 of preferred equity yielding 13.5% for up to a three-year term and a $59,500,000 first mortgage loan due February 2006 bearing interest at 8.1%.  The Company will also provide up to an additional $35,000,000 of preferred equity, if requested by the venture.  The shopping center is anchored by a Ralph’s Supermarket, Old Navy and Sports Chalet.  The venture plans to redevelop the property and add retail, residential condominiums and assisted living facilities.  The redevelopment is subject to government approvals.  This investment is accounted for under the equity method of accounting.

 

Toys “R” Us

 

On March 17, 2005, the Company entered into an agreement under which it expects to provide approximately $450,000,000 of equity in cash for a one-third interest in a joint venture to be owned equally with Bain Capital and Kohlberg Kravis Roberts & Co. to acquire Toys “R” Us, Inc. (NYSE: TOY).  The venture has signed a definitive merger agreement to acquire all of the outstanding equity of Toys “R” Us, Inc. for $26.75 per share in cash or approximately $6.6 billion, which was approved by the Board of Directors of Toys “R” Us, Inc.  The obligation of the Company to fund its equity commitment is conditioned upon the merger closing, which is expected in the third quarter of 2005.  The merger is subject to the approval of the stockholders of Toys “R” Us, Inc., and other customary conditions.  This investment will be accounted for under the equity method of accounting.

 

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

 

4.              Acquisitions, Dispositions and Financings - continued

 

Westbury Retail Condominium

 

On March 24, 2005, the Company entered into an agreement to acquire the retail condominium of the former Westbury Hotel for $113,000,000 in cash.  This Manhattan property occupies the entire Madison Avenue block-front between 69 ^th and 70 ^th Streets, contains approximately 17,000 square feet and is fully occupied by luxury retailers, Cartier, Chloe and Gucci under leases that expire in 2018.  The purchase is expected to close in the second quarter of 2005, subject to customary closing conditions.

 

Investment in Sears, Roebuck and Co.(“Sears”)

 

As a result of the merger between Sears and Kmart on March 30, 2005, in exchange for 1,176,600 Sears common shares owned, the Company received 370,330 common shares of Sears Holdings Corporation (Nasdaq:  SHLD) (“Sears Holding”) valued at $48,143,000 based on the $130.00 closing share price that day and $21,797,000 of cash.  The Company recognized a net gain of $27,651,000 in the first quarter of 2005, which is the difference between the aggregate cost basis in the Sears shares of $42,289,000 and the market value of the total consideration received on March 30, 2005 of $69,940,000.  The Sears Holding shares are recorded as marketable equity securities on the Company’s consolidated balance sheet and are classified as “available-for-sale.”  At March 31, 2005, based on Sears Holding’s closing stock price of $133.17 per share, $1,174,000 of appreciation in the value of these shares was included in “accumulated other comprehensive income.”

 

In addition, as a result of the merger, pursuant to the terms of the contract the Company’s derivative position representing 7,916,900 Sears common shares became a derivative position representing 2,491,819 common shares of Sears Holding valued at $323,936,000 based on the $130.00 per share closing price on March 30, 2005, the date of the merger, and $146,663,000 of cash.  As a result, the Company recognized a net gain of approximately $58,443,000 based on the fair value of the Company’s derivative position.  On March 31, 2005, the Company recorded additional income of $7,899,000 from the mark-to-market of the derivative position based on Sears Holding’s closing share price of $133.17.

 

The Company’s aggregate net gain recognized on the owned shares and the derivative position from inception to March 31, 2005 was $175,723,000, which is after deducting $13,236,000 for a third-party performance based participation.  On April 4, 2005, the Company satisfied the performance based participation through the transfer of 99,393 of its Sears Holding shares.  As a result of these transactions, the Company owns 270,937 common shares of Sears Holding and has an economic interest in an additional 2,491,819 common shares through its derivative position.

 

478-486 Broadway

 

On November 2, 2004, the Company acquired a 50% joint venture interest in a 92,500 square foot property located at Broome Street and Broadway in New York City.  The Company contributed $4,462,000 of equity in cash and provided a $24,000,000 bridge loan with interest at 10% per annum.  On April 5, 2005, the Company replaced the bridge loan to the venture with a $20,000,000 new loan and $2,000,000 of cash contributed by each of the venture partners.  The new loan bears annual interest at 90-day LIBOR plus 3.15% (6.27% as of March 31, 2005) and matures in October 2007.

 

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

 

4.              Acquisitions, Dispositions and Financings - continued

 

Dispositions:

 

On April 21, 2005, the Company, through its 85% owned joint venture, sold 400 North LaSalle, a 452-unit high-rise residential tower in Chicago, Illinois, for $126,000,000.  The Company’s share of the proceeds was approximately $107,000,000, resulting in a net gain on sale after closing costs of approximately $30,000,000.  Substantially all of the proceeds from the sale will be reinvested in tax-free “like-kind” exchange investments pursuant to Section 1031.

 

Net gains on disposition of wholly-owned and partially-owned assets other than depreciable real estate:

 

		For The Three Months Ended March 31,
(Amounts in thousands)		2005			2004
Net gains on sale of marketable securities		$	2,019		$	—
Net gains on sale of land parcels		1,469			—
Net gain on sale of residential condominiums		—			776
		$	3,488		$	776

 

Financings:

 

On January 19, 2005, the Company redeemed all of its Series C Cumulative Redeemable Preferred Shares at a redemption price equal to $25.00 per share or $115,000,000 plus accrued distributions.  In addition, the Company also redeemed $80,000,000 of Series D-3 Perpetual Preferred Units of the Operating Partnership.  The redemption amounts exceeded the carrying amounts by $6,052,000, representing the original issuance costs.  Upon redemption, these issuance costs were recorded as a reduction to earnings in arriving at net income applicable to common shares, in accordance with the July 2003 EITF clarification of Topic D-42.

 

On March 29, 2005, the Company completed a public offering of $500,000,000 aggregate principal amount of 3.875% exchangeable senior debentures due 2025 pursuant to an effective registration statement.  The notes were sold at 98.0% of their aggregate principal amount.  The aggregate net proceeds from this offering, after the underwriters’ discount were approximately $490,000,000.  The debentures are exchangeable, under certain circumstances, for common shares of the Company at an initial exchange rate of 10.9589 common shares per $1,000 of principal amount of debentures.  The initial exchange price of $91.25 represented a premium of 30% to the closing price for the Company’s common shares on March 22, 2005 of $70.25.  The Company may elect to settle any exchange right in cash.  The debentures permit the Company to increase its common dividend 5% per annum, cumulatively, without an increase to the exchange rate.  The debentures are redeemable at the Company’s option beginning in 2012 for the principal amount plus accrued and unpaid interest.  Holders of the debentures have the right to require the issuer to repurchase their debentures in 2012, 2015 and 2020 and in the event of a change in control.  The net proceeds from the offering will be used for working capital, which may include funding the commitment in respect of the acquisition of Toys “R” Us, Inc.

 

On March 31, 2005, the Company completed a $225,000,000 refinancing of its 1.4 million square foot New York City office building located at 909 Third Avenue.  The loan bears interest at a fixed rate of 5.64% and matures in April 2015.  The Company realized net proceeds of approximately $100,000,000 after repaying the existing floating rate loan on the property and closing costs.

 

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

 

5.              Investments in Partially-Owned Entities

 

The Company’s investments in partially-owned entities and income recognized from such investments are as follows:

 

Investments:

 

(Amounts in thousands)		March 31, 2005			December 31, 2004
Alexander’s		$	233,502		$	204,762
Newkirk MLP		162,475			158,656
Beverly Connection (see page 8)		105,460			—
GMH Communities L.P.		83,669			84,782
Partially-Owned Office Buildings		48,497			48,682
Monmouth Mall Joint Venture		29,082			29,351
478-486 Broadway		29,464			29,170
Starwood Ceruzzi Joint Venture		19,435			19,106
Other		30,783			30,791
		$	742,367		$	605,300

 

Equity in Income (loss):

 

		For The Three Months Ended March 31,
(Amounts in thousands)		2005			2004
Income (loss) applicable to Alexander’s:
33% share of:
Equity in income before stock appreciation rights compensation expense		$	4,774		$	2,161
Net gain on sale of condominiums		20,633			—
Stock appreciation rights compensation expense		(7,433		)	(9,913		)
Equity in net income (loss)		17,974			(7,752		) (1)
Interest income		2,374			2,672
Development and guarantee fees		3,261			1,074
Management and leasing fees		1,777			1,478
		$	25,386		$	(2,528	)
Temperature Controlled Logistics (2):
60% share of equity in net income		$	—		$	1,074
Management fees		—			1,378
Other		—			89
		—			2,541
Newkirk MLP:
22.5% share of equity in income		5,810		(3)	7,813		(3)
Interest and other income		658			1,266
		6,468			9,079
Partially-Owned Office Buildings		720			523
Other		2,034			970
		$	9,222		$	13,113

 

(1)         Includes the Company’s $1,010 share of Alexander’s loss on early extinguishment of debt.

(2)         On November 18, 2004, the Company’s investment in Americold was consolidated into the accounts of the Company.

(3)         The three months ended March 31, 2005 includes the Company’s $496 share of an impairment loss.  The three months ended March 31, 2004 includes the Company’s $1,917 share of net gains on sale of real estate.

 

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

 

5.              Investments in Partially-Owned Entities - continued

 

Below is a summary of the debt of partially owned entities as of March 31, 2005 and December 31, 2004, none of which is guaranteed by the Company.

 

		100% of Partially-Owned Entities Debt
(Amounts in thousands)		March 31, 2005			December 31, 2004
Alexander’s (33% interest):
Lexington Avenue mortgage note payable collateralized by the office space, due in February 2014, with interest at 5.33%		$	400,000		$	400,000
Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011, with interest at 7.46% (prepayable with yield maintenance)		212,877			213,699
Due to Vornado in January 2006, with interest at 9.0% (one-year treasuries plus 6.0% with a 3.0% floor for treasuries) (prepayable without penalty)		124,000			124,000
Rego Park mortgage note payable, due in June 2009, with interest at 7.25%		81,462			81,661
Paramus mortgage note payable, due in October 2011, with interest at 5.92% (prepayable without penalty)		68,000			68,000
Lexington Avenue construction loan payable, due in January 2006, plus two one-year extensions, with interest at 5.35% (LIBOR plus 2.50%)		84,948			65,168
Newkirk MLP (22.5% interest):
Portion of first mortgages collateralized by the partnership’s real estate, due from 2005 to 2024, with a weighted average interest rate of 7.65% at March 31, 2005 (various prepayment terms)		826,901			859,674
GMH Communities L.P. (12.25% interest):
Mortgage notes payable, collateralized by 27 properties, due from 2005 to 2014, with a weighted average interest rate of 5.41% at March 31, 2005		493,799			359,276
Monmouth Mall (50% interest):
Mortgage note payable, due in November 2005, with interest at LIBOR plus 2.05% and two one-year extension options 4.53% at March 31, 2005		135,000			135,000
Partially-Owned Office Buildings:
Kaempfer Properties (2.5% to 10% interests in five partnerships) Mortgage notes payable, collateralized by the partnerships’ real estate, due from 2007 to 2031, with a weighted average interest rate of 6.31% at March 31, 2005 (various prepayment terms)		358,329			346,869
Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%		66,556			67,215
330 Madison Avenue (25% interest) mortgage note payable, due in April 2008, with interest at 6.52% (prepayable with yield maintenance)		60,000			60,000
825 Seventh Avenue (50% interest) mortgage note payable, due in October 2014, with interest at 8.07% (prepayable with yield maintenance)		22,711			23,104
Wells/Kinzie Garage (50% interest) mortgage note payable, due in May 2009, with interest at 7.03%		15,263			15,334
Orleans Hubbard (50% interest) mortgage note payable, due in March 2009, with interest at 7.03%		9,581			9,626

 

Based on the Company’s ownership interest in the partially-owned entities above, the Company’s share of the debt of these partially-owned entities was $686,936,000 and $669,942,000 as of March 31, 2005 and December 31, 2004, respectively.

 

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

 

5.              Investments in Partially-Owned Entities - continued

 

Alexander’s, Inc.

 

The Company owns 33% of the outstanding common stock of Alexander’s, Inc. (“Alexander’s”) at March 31, 2005.  The Company manages, leases and develops Alexander’s properties pursuant to agreements, which expire in March of each year and are automatically renewable, except for the 731 Lexington Avenue development agreement which provides for a term lasting until substantial completion of the development of the property.

 

As of March 31, 2005, the Company had a receivable from Alexander’s of $57,534,000 under the agreements discussed above.  In addition, Alexander’s paid $188,000 to Building Management Services, a wholly-owned subsidiary of the Company, for cleaning and engineering services at Alexander’s Lexington Avenue property.

 

On January 24, 2005, the condominium offering plan for Alexander’s Lexington Avenue property was declared effective by the State of New York and at March 31, 2005, 72 of the condominium units were under sales contract and 18 unit sales closed.  In connection therewith, the Company recognized a net gain of $20,633,000, comprised of (i) the Company’s $13,192,000 share of Alexander’s after tax net gain during the three months ended March 31, 2005, using the percentage-of-completion method and (ii) $7,441,000 of income the Company had previously deferred.

 

Equity in income (loss) from Alexander’s also includes Alexander’s stock appreciation rights compensation expense of which the Company’s share was $7,433,000 and $9,913,000 for the three months ended March 31, 2005 and 2004, based on Alexander’s closing stock price of $241.50 and $160.00 on March 31, 2005 and 2004, respectively.

 

GMH Communities L.P.

 

As of March 31, 2005, the Company owns 7.3 million limited partnership units, or 12.25% of the limited partnership interest of GMH Communities L.P. (“GMH”), a partnership focused on the student and military housing sectors.  The Company accounts for its interest in the partnership units on the equity-method based on its 12.25% ownership interest and right to appoint one of its executive officers to GMH Community Trust’s (“GCT”) Board of Trustees.  GCT is a real estate investment trust that conducts its business through GMH, of which it is the sole general partner.

 

The Company records its pro rata share of GMH’s net income or loss on a one-quarter lag basis as the Company files its financial statements on Form 10-K or 10-Q prior to the time GCT files its financial statements.  Equity in income from GMH for the three months ended March 31, 2005, was $61,000, representing the Company’s share of GMH’s net income from November 3, 2004 to December 31, 2004.

 

In addition to the above, the Company holds warrants to purchase an additional 5.7 million limited partnership units of GMH or common shares of GCT at a price of $8.82 per unit or share through May 6, 2006.  Because these warrants are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the warrants at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on the Company’s consolidated statement of income.  In the three months ended March 31, 2005, the Company recognized a loss of $10,178,000 from the mark-to-market of these warrants, which were valued using a trinomial option pricing model based on GCT’s closing stock price on the NYSE of $11.71 per share on March 31, 2005.

 

13

 

VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

 

6.              Notes, Mortgage Loans Receivable and Other Investments

 

On January 7, 2005, all of the outstanding General Motors Building loans aggregating $275,000,000 were repaid.  In connection therewith, the Company received a $4,500,000 prepayment premium and $1,996,000 of accrued interest and fees through January 14, 2005, which is included in “interest and other income” on the Company’s consolidated statement of income.

 

On February 3, 2005, the Company made a $135,000,000 mezzanine loan to Riley Holdco Corp., an entity formed to complete the acquisition of LNR Property Corporation (NYSE: LNR).  Riley Holdco Corp. is a wholly-owned subsidiary of LNR Property Holdings, Ltd., which is 75% owned by funds and accounts managed by Cerbus Capital Management, L.P. and its real estate affiliate Blackacre Institutional Capital Management, LLC.  The terms of the financings are as follows: (i) $60,000,000 of a $325,000,000 mezzanine tranche of a $2,400,000,000 credit facility which is secured by certain equity interests.  This tranche is junior to $1,900,000,000 of the credit facility, bears interest at LIBOR plus 5.25%, and matures in February 2008 with two one-year extensions; and (ii) $75,000,000 of $400,000,000 of unsecured notes which are subordinate to the $2,400,000,000 credit facility and senior to over $700,000,000 of equity contributed to finance the acquisition.  These notes mature in February 2015, provide for a 1.5% placement fee, and bear interest at 10% for the first five years and 11% for years six through ten.

 

On February 4, 2005, the Company made a $17,000,000 mezzanine loan secured by Roney Palace Phase II, in Miami Beach, Florida, a 593-room hotel to be converted to residential condominiums.  The loan, which is subordinate to $141,000,000 of other debt, bears interest at LIBOR plus 9.53% (12.4% as of March 31, 2005), until 25% of the loan is repaid and LIBOR plus 7.48% thereafter until maturity in October 2006.  The loan has a one-year extension option.

 

On April 7, 2005, the Company made a $108,000,000 mezzanine loan secured by The Sheffield, a mixed-use residential property in Manhattan, containing 845 apartments, 109,000 square feet of office space and 6,900 square feet of retail space.  The loan is subordinate to $378,500,000 of other debt, matures in April 2007 with a one-year extension, provides for a 1% placement fee, and bears interest at LIBOR plus 7.75% (10.6% if set on March 31, 2005).

 

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VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

 

7.              Identified Intangible Assets, Intangible Liabilities and Goodwill

 

The following summarizes the Company’s identified intangible assets, intangible liabilities (deferred credit) and goodwill as of March 31, 2005 and December 31, 2004.

 

(Amounts in thousands)		March 31, 2005			December 31, 2004
Identified intangible assets (included in other assets):
Gross amount		$	239,299		$	238,064
Accumulated amortization		(65,849		)	(61,942		)
Net		$	173,450		$	176,122
Goodwill (included in other assets):
Gross amount		$	11,182		$	10,425
Identified intangible liabilities (included in deferred credit):
Gross amount		$	121,471		$	121,202
Accumulated amortization		(53,887		)	(50,938		)
Net		$	67,584		$	70,264

 

Amortization of acquired below market leases, net of acquired above market leases was $2,229,000 and $3,603,000 for the three months ended March 31, 2005 and 2004, respectively.  The estimated annual amortization of acquired below market leases, net of acquired above market leases for each of the five succeeding years is as follows:

 

 

The estimated annual amortization of all other identified intangible assets (a component of depreciation and amortization expense) including acquired in-place leases, customer relationships, and third party contracts for each of the five succeeding years is as follows:

 

 

15

 

VORNADO REALTY TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

 

8.              Debt

 

Following is a summary of the Company’s debt:

 

				Interest Rate as at		Balance as of
(Amounts in thousands)		Maturity		March 31, 2005		March 31, 2005			December 31, 2004
Notes and Mortgages Payable:
Fixed Interest:
Office:
NYC Office:
Two Penn Plaza		02/11		4.97%		$	300,000		$	300,000
888 Seventh Avenue		02/06		6.63%		105,000			105,000
Eleven Penn Plaza		12/14		5.20%		219,007			219,777
866 UN Plaza		05/07		8.39%		47,820			48,130
909 Third Avenue (1)		04/15		5.64%		225,000			—
CESCR Office:
Crystal Park 1-5		07/06-08/13		6.66%-8.39%		252,957			253,802
Crystal Gateway 1-4 Crystal Square 5		07/12-01/25		6.75%-7.09%		212,267			212,643
Crystal Square 2, 3 and 4		10/10-11/14		6.82%-7.08%		141,029			141,502
Skyline Place		08/06-12/09		6.60%-6.93%		131,748			132,427
1101 17 th , 1140 Connecticut, 1730 M and 1150 17 th		08/10		6.74%		94,072			94,409
Courthouse Plaza 1 and 2		01/08		7.05%		77,183			77,427
Reston Executive I, II and III		01/06		6.75%		71,414			71,645
Crystal Gateway N and 1919 S. Eads		11/07		6.77%		55,267			55,524
One Skyline Tower		06/08		7.12%		63,534			63,814
Crystal Malls 1-4		12/11		6.91%		53,771			55,228
1750 Pennsylvania Avenue		06/12		7.26%		48,738			48,876
One Democracy Plaza		05/05		6.75%		26,015			26,121
Retail:
Cross collateralized mortgages payable on 42 shopping centers		03/10		7.93%		474,550			476,063
Green Acres Mall		02/08		6.75%		145,236			145,920
Las Catalinas Mall		11/13		6.97%		65,427			65,696
Montehiedra Town Center		05/07		8.23%		57,779			57,941
Forest Plaza		05/09		4.00%		20,709			20,924
Lodi Shopping Center		06/14		5.12%		12,157			12,228
386 West Broadway		05/13		5.09%		5,057			5,083
Rockville		12/10		5.52%		15,411			—
Merchandise Mart:
Washington Design Center		11/11		6.95%		47,347			47,496
Market Square Complex		07/11		7.95%		45,004			45,287
Furniture Plaza		02/13		5.23%		44,129			44,497
Other		10/10-06/28		7.52%-7.71%		18,064			18,156
Temperature Controlled Logistics:
Cross collateralized mortgages payable on 57 properties		05/08		6.89%		480,098			483,533
Other:
Industrial Warehouses		10/11		6.95%		48,232			48,385
Total Fixed Interest Notes and Mortgages Payable				6.93%		3,604,022			3,377,534

 

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