VORNADO REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Amounts in thousands, except share and per share amounts)		June 30, 2006			December 31, 2005
ASSETS
Real estate, at cost:
Land		$	2,474,745		$	2,337,878
Buildings and improvements		9,061,052			8,467,973
Development costs and construction in progress		222,770			235,347
Leasehold improvements and equipment		341,754			326,614
Total		12,100,321			11,367,812
Less accumulated depreciation and amortization		(1,813,894		)	(1,663,777		)
Real estate, net		10,286,427			9,704,035
Cash and cash equivalents		494,390			294,504
Escrow deposits and restricted cash		206,553			192,619
Marketable securities		218,332			276,146
Investments and advances to partially-owned entities, including Alexander’s of $111,793 and $105,241		1,029,820			944,023
Investment in Toys “R” Us, including a $76,816 participation in a senior unsecured bank loan bridge facility in each period		463,701			425,830
Due from officers		23,845			23,790
Accounts receivable, net of allowance for doubtful accounts of $15,531 and $16,907		193,992			238,351
Notes and mortgage loans receivable		603,198			363,565
Receivable arising from the straight-lining of rents, net of allowance of $2,595 and $6,051		409,211			375,547
Other assets		625,945			722,392
Assets related to discontinued operations		908			76,361
		$	14,556,322		$	13,637,163
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes and mortgages payable		$	5,464,511		$	4,794,411
Senior unsecured notes		1,193,183			948,889
Exchangeable senior debentures		491,250			490,750
Americold Realty Trust revolving credit facility		3,936			9,076
Accounts payable and accrued expenses		390,420			476,523
Deferred credit		190,382			184,206
Other liabilities		165,883			148,506
Officers compensation payable		58,543			52,020
Liabilities related to discontinued operations		—			12,831
Total liabilities		7,958,108			7,117,212
Minority interest, including unitholders in the Operating Partnership		1,292,063			1,256,441
Commitments and contingencies
Shareholders’ equity:
Preferred shares of beneficial interest: no par value per share; authorized 110,000,000 shares; issued and outstanding 34,117,667 and 34,169,572 shares		831,931			834,527
Common shares of beneficial interest: $.04 par value per share; authorized, 200,000,000 shares; issued and outstanding 141,722,352 and 141,153,430 shares		5,709			5,675
Additional capital		4,270,822			4,243,465
Earnings in excess of distributions		160,320			103,061
		5,268,782			5,186,728
Common shares issued to officer’s trust		(65,753		)	(65,753		)
Deferred compensation shares earned but not yet delivered		68,285			69,547
Deferred compensation shares issued but not yet earned		(10,309		)	(10,418		)
Accumulated other comprehensive income		45,146			83,406
Total shareholders’ equity		5,306,151			5,263,510
		$	14,556,322		$	13,637,163

 

 

See notes to consolidated financial statements.

3

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VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		For The Three Months Ended June 30,						For The Six Months Ended June 30,
(Amounts in thousands, except per share amounts)		2006			2005			2006			2005
REVENUES:
Property rentals		$	393,476		$	341,091		$	761,579		$	675,477
Temperature Controlled Logistics		187,047			178,891			382,897			360,116
Tenant expense reimbursements		60,920			49,917			122,647			99,726
Fee and other income		21,589			21,576			43,246			51,405
Total revenues		663,032			591,475			1,310,369			1,186,724
EXPENSES:
Operating		319,851			282,430			651,766			578,256
Depreciation and amortization		98,880			83,234			189,185			160,522
General and administrative		52,563			45,796			98,427			86,455
Total expenses		471,294			411,460			939,378			825,233
Operating income		191,738			180,015			370,991			361,491
Income applicable to Alexander’s		14,750			13,030			11,155			38,416
(Loss) income applicable to Toys “R” Us		(7,884		)	—			44,876			—
Income from partially-owned entities		14,635			6,598			20,686			15,820
Interest and other investment income		16,623			69,923			39,098			171,121
Interest and debt expense		(120,822		)	(83,414		)	(224,716		)	(160,918		)
Net gain on disposition of wholly-owned and partially-owned assets other than depreciable real estate		56,947			—			57,495			3,488
Minority interest of partially-owned entities		3,118			1,127			2,844			1,730
Income from continuing operations		169,105			187,279			322,429			431,148
Income from discontinued operations		16,762			32,930			33,497			34,616
Income before allocation to limited partners		185,867			220,209			355,926			465,764
Minority limited partners’ interest in the Operating Partnership		(17,324		)	(23,975		)	(33,198		)	(51,170		)
Perpetual preferred unit distributions of the Operating Partnership		(5,374		)	(15,152		)	(10,347		)	(33,693		)
Net income		163,169			181,082			312,381			380,901
Preferred share dividends		(14,404		)	(8,385		)	(28,811		)	(20,771		)
NET INCOME applicable to common shares		$	148,765		$	172,697		$	283,570		$	360,130
INCOME PER COMMON SHARE — BASIC:
Income from continuing operations		$	0.93		$	1.08		$	1.77		$	2.52
Income from discontinued operations		0.12			0.25			0.24			0.27
Net income per common share		$	1.05		$	1.33		$	2.01		$	2.79
INCOME PER COMMON SHARE — DILUTED:
Income from continuing operations		$	0.88		$	1.02		$	1.68		$	2.38
Income from discontinued operations		0.11			0.23			0.22			0.25
Net income per common share		$	0.99		$	1.25		$	1.90		$	2.63
DIVIDENDS PER COMMON SHARE		$	0.80		$	0.76		$	1.60		$	1.52

See notes to consolidated financial statements.

4

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VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

		For The Six Months Ended June 30,
(Amounts in thousands)		2006			2005
Cash Flows from Operating Activities:
Net income		$	312,381		$	380,901
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of debt issuance costs)		200,353			167,431
Equity in income of partially-owned entities, including Alexander’s and Toys “R” Us		(76,717		)	(54,236		)
Net gain on dispositions of wholly-owned and partially-owned assets other than depreciable real estate		(57,495		)	(3,488		)
Net gain on sale of real estate		(33,769		)	(31,614		)
Minority limited partners’ interest in the Operating Partnership		33,198			51,170
Straight-lining of rental income		(30,182		)	(22,059		)
Perpetual preferred unit distributions of the Operating Partnership		10,347			31,493
Amortization of below market leases, net		(8,471		)	(5,656		)
Net loss (gain) from derivative positions, including Sears Holdings, McDonalds and GMH		5,076			(134,416		)
Minority interest of partially-owned entities		(2,844		)	(1,730		)
Write-off of issuance costs of preferred units redeemed		—			2,200
Distributions of income from partially-owned entities		19,318			14,895
Changes in operating assets and liabilities:
Accounts receivable, net		44,364			4,533
Accounts payable and accrued expenses		(69,495		)	(11,948		)
Other assets		(13,545		)	(74,857		)
Other liabilities		26,722			7,834
Net cash provided by operating activities		359,241			320,453
Cash Flows from Investing Activities:
Investments in notes and mortgage loans receivable		(260,667		)	(275,000		)
Acquisitions of real estate and other		(244,938		)	(217,266		)
Proceeds received on settlement of derivatives (primarily Sears Holdings)		135,028			—
Proceeds from sale of, and return of investment in, marketable securities		132,898			29,468
Additions to real estate		(90,443		)	(26,868		)
Development costs and construction in progress		(112,650		)	(62,707		)
Proceeds from sale of real estate		110,388			126,584
Investments in partially-owned entities		(89,584		)	(182,657		)
Purchases of marketable securities		(57,992		)	(154,509		)
Distributions of capital from partially-owned entities		29,703			8,246
Proceeds received upon repayment of notes and mortgage loans receivable		20,248			358,000
Cash restricted, including mortgage escrows		(40,752		)	35,255
Deposits in connection with real estate acquisitions, including pre-acquisition costs		(44,163		)	—
Net cash used in investing activities		(512,924		)	(361,454		)

 

See notes to consolidated financial statements.

5

VORNADO REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED
(UNAUDITED)

		For the Six Months Ended June 30,
(Amounts in thousands)		2006			2005
Cash Flows from Financing Activities:
Proceeds from borrowings		1,401,291			795,000
Repayments of borrowings		(786,519		)	(185,681		)
Dividends paid on common shares		(226,310		)	(202,591		)
Distributions to minority partners		(41,265		)	(57,984		)
Dividends paid on preferred shares		(28,853		)	(14,884		)
Debt issuance costs		(8,077		)	(4,797		)
Exercise of share options		9,157			40,798
Redemption of perpetual preferred shares and units		—			(195,000		)
Proceeds from issuance of preferred shares and units		34,145			108,956
Net cash provided by financing activities		353,569			283,817
Net increase in cash and cash equivalents		199,886			242,816
Cash and cash equivalents at beginning of period		294,504			599,282
Cash and cash equivalents at end of period		$	494,390		$	842,098
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest (including capitalized interest of $6,094 and $7,200)		$	216,824		$	157,337
Non-Cash Transactions:
Financing assumed in acquisitions		$	272,846		$	98,783
Conversion of Class A Operating Partnership units to common shares		3,560			71,500
Unrealized net gain on securities available for sale		15,173			42,354

 

See notes to consolidated financial statements .

6

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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 “our,” “we,” “us,” “Company” and “Vornado” refer to Vornado Realty Trust and its consolidated subsidiaries.  We are the sole general partner of, and owned approximately 89.7% of the common limited partnership interest in, the Operating Partnership at June 30, 2006.

Substantially all of Vornado Realty Trust’s assets are held through subsidiaries of the Operating Partnership.  Accordingly, Vornado Realty Trust’s cash flow and ability to pay dividends to its shareholders is dependent upon the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors.

2.     Basis of Presentation

The accompanying consolidated financial statements are unaudited.  In our opinion, 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 our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission.  The results of operations for the three and six months ended June 30, 2006, 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 subsidiaries, including the Operating Partnership, as well as certain partially-owned entities in which we own (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 we are 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”).  In addition, we consider Emerging Issues Task Force (“EITF”) Issue No. 04-05 in determining whether our investments in limited partnerships, in which the Company is a general partner, should be consolidated.  All significant inter-company amounts have been eliminated.  Equity interests in partially-owned entities are accounted for under the equity method of accounting when they do not meet the criteria for consolidation and our ownership interest is greater than 20%.  When partially-owned investments are in partnership form, the 20% threshold for equity method accounting is generally reduced to 3% to 5%, based on our ability to influence the operating and financial policies of the partnership.  Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities.  Investments in partially-owned entities that do not meet the criteria for consolidation or for equity method accounting are accounted for on the cost method.

We have 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 related to discontinued operations 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 Financial Accounting Standards Board (“FASB”) issued Statement No. 123(R), Share-Based Payment (“SFAS No. 123R”).  SFAS No. 123R replaces SFAS No. 123 and 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.  We adopted SFAS No. 123R on the modified prospective method on January 1, 2006.  This adoption did not have a material effect on our consolidated financial statements.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and SFAS No. 3 .  SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring retrospective application to prior periods’ financial statements of the change in accounting principle, unless it is impracticable to do so.  SFAS No. 154 also requires that a change in depreciation or amortization for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  We adopted SFAS No. 154 on January 1, 2006.  This adoption had no effect on our consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB No. 133 and 140.  The purpose of SFAS statement No. 155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.  SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold.  SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year beginning after September 15, 2006.  We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of SFAS No. 140.    SFAS No. 156 requires separate recognition of a servicing asset and a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a servicing contract.  This statement also requires that servicing assets and liabilities be initially recorded at fair value and subsequently adjusted to the fair value at the end of each reporting period.  This statement is effective in fiscal years beginning after September 15, 2006.  We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Interpretation also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 becomes effective on January 1, 2007.  We are currently evaluating the impact of adopting this Interpretation. 

 

8

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
( Unaudited )

4.       Acquisitions and Dispositions

Acquisitions:

San Francisco Bay Area Properties

On January 10, 2006, we acquired four properties consisting of 189,000 square feet of retail and office space in the San Francisco Bay area for approximately $72,000,000 in cash, including closing costs.  We consolidate the accounts of these properties into our financial position and results of operations from the date of acquisition.

Springfield Mall

On January 31, 2006, we closed on an option to purchase the 1.4 million square foot Springfield Mall which is located on 79 acres at the intersection of Interstate 95 and Franconia Road in Springfield, Fairfax County, Virginia, and is anchored by Macy’s, and J.C. Penney and Target, who own their stores aggregating 389,000 square feet.  The purchase price for the option was $35,600,000, of which we paid $14,000,000 in cash at closing and the remainder of $21,600,000 will be paid in installments over four years. We intend to redevelop, reposition and re-tenant the mall and have committed to spend $25,000,000 in capital expenditures over a six-year period from the closing of the option agreement.  The option becomes exercisable upon the passing of one of the existing principals of the selling entity and may be deferred at our election through November 2012.  Upon exercise of the option, we will pay $80,000,000 to acquire the mall, subject to the existing mortgage of $180,000,000, which will be amortized to $149,000,000 at maturity in 2013.  Upon closing of the option on January 31, 2006, we acquired effective control of the mall, including management of the mall and right to the mall’s net cash flow.  Accordingly, we consolidate the accounts of the mall into our financial position and results of operations pursuant to the provisions of FIN 46R.  We have a 2.5% minority partner in this transaction.

BNA Complex

On February 17, 2006, we entered into an agreement to sell our 277,000 square foot Crystal Mall Two office building, located in Arlington, Virginia, to The Bureau of National Affairs, Inc. (“BNA”) for its corporate headquarters.  Simultaneously, we agreed to acquire a three building complex from BNA containing approximately 300,000 square feet, which is located in Washington D.C.’s West End between Georgetown and the Central Business District.  We will receive sales proceeds of approximately $100,000,000 for Crystal Mall Two and recognize a net gain on sale of approximately $23,000,000.  We will pay BNA $111,000,000 for the three building complex.  One of the buildings, containing 130,000 square feet, will remain an office building, while the other two buildings will be redeveloped into residential condominiums.  These transactions are expected to close in the second half of 2007.

San Jose, California Ground-up Development

On March 29, 2006, a joint venture, in which we have a 45% equity interest and are a co-managing partner, acquired 55 acres of land in San Jose, California for approximately $59,600,000, including closing costs.  The purchase price was funded with $20,643,000 of cash contributed by the partners, of which our share was $9,289,000, and $38,957,000 drawn on a $117,000,000 acquisition/construction loan.  The remainder of the loan will be used to fund the development of a 635,000 square foot retail center on the site.  As of June 30, 2006, $44,599,000 was outstanding under the loan, which bears interest at LIBOR plus 1.75% (6.94% at June 30, 2006) and matures in March 2009 with a one-year extension option.  Upon completion of the development we have an option to acquire our partner’s 55% equity interest at a 7% unlevered yield. We account for this investment on the equity method.

1925 K Street

On April 13, 2006, we acquired the 92.65% interest that we did not already own of 1925 K Street, a 150,000 square foot office building located in the Central Business District of Washington, DC.  The purchase price for the 92.65% interest was $52,800,000, consisting of $34,600,000 in cash and $18,200,000 of existing mortgage debt.   Mitchell N. Schear, President of our Washington, DC Office division, received $3,675,000 for his share of the proceeds as a partner of the selling entity.  We plan to redevelop this property into a 225,000 square foot Class A office building at a cost of approximately $80,000,000.  We consolidate the accounts of this property into our financial position and results of operations from the date of acquisition.

9

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
( Unaudited )

4.    Acquisitions and Dispositions - continued

1540 Broadway

On July 11, 2006, we acquired the retail, signage and parking components of 1540 Broadway located in Manhattan’s Times Square between 45 th  and 46 th  Street.  The purchase price was approximately $260,000,000 in cash.  The property contains 152,000 square feet of retail space which is 60% occupied.  The principal tenants are Virgin Records and Planet Hollywood.  We consolidate the accounts of this property into our financial position and results of operations from the date of acquisition.

Filene’s, Boston, Massachusetts

On July 10, 2006, we entered into an agreement to purchase the 656,000 square foot Filene’s property located in the Downtown Crossing district of Boston from Federated Department Stores, Inc.  The purchase price is approximately $100,000,000 in cash.  We plan to redevelop and expand the property for office and retail use, subject to governmental approvals.  The purchase is expected to close in the fourth quarter of 2006, subject to customary closing conditions.

Other

In addition to the acquisitions described above, during 2006 we completed $205,950,000 of other real estate acquisitions and investments, comprised of $191,450,000 in cash and $14,500,000 of existing mortgage debt as follows:

(Amounts in thousands)		Amount			Segment
West 57 th  Street properties (50% interest)		$	68,450		Office
Wasserman Joint Venture - additional investment (95% interest)		53,000			Other
3040 M Street, Washington, DC		36,400			Retail
Tonnelle Avenue Land (40 acres), North Bergen, New Jersey		24,500			Retail
Verde Group - additional investment (8% interest)		12,500			Other
122-124 Spring Street, New York, NY		11,100			Retail
		$	205,950

 

Dispositions:

33 North Dearborn Street

On March 14, 2006, we sold 33 North Dearborn Street, a 336,000 square foot office building located in Chicago, Illinois, for $46,000,000, which resulted in a net gain of $4,835,000.  All of the proceeds from the sale were used to fund a portion of the purchase price of the San Francisco Bay area properties (see Acquisitions above) pursuant to Section 1031 of the Internal Revenue Code.

424 Sixth Avenue

On March 13, 2006, we sold 424 Sixth Avenue, a 10,000 square foot retail property located in New York City, for $22,000,000, which resulted in a net gain of $9,218,000.

1919 South Eads Street

On June 22, 2006, we sold 1919 South Eads Street, a 96,000 square foot office building located in Arlington, Virginia, for $38,400,000, which resulted in a net gain of $17,609,000.

10

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
( Unaudited )

5.       Derivative Instruments and Marketable Securities

Investment in McDonald’s Corporation (“McDonalds”) (NYSE: MCD)

In July 2005, we acquired an aggregate of 858,000 common shares of McDonalds for $25,346,000, an average price of $29.54 per share. These shares are recorded as marketable equity securities on our consolidated balance sheet and are classified as “available for sale.”  Appreciation or depreciation in the fair market value of these shares is recorded as an increase or decrease in “accumulated other comprehensive income” in the shareholders’ equity section of our consolidated balance sheet and not recognized in income.  At June 30, 2006, based on McDonalds’ closing stock price of $33.60 per share, $3,482,000 of appreciation in the value of these shares was included in “accumulated other comprehensive income.”

During the second half of 2005, we acquired an economic interest in an additional 14,565,500 McDonalds common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on McDonalds’ common shares.  These call and put options had an initial weighted-average strike price of  $32.66 per share, or an aggregate of $475,692,000, expire on various dates between July 30, 2007 and September 10, 2007 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points (up to 95 basis points under certain circumstances) and is credited for the dividends received on the shares.  The options provide us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate purchase price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statement of income.

In the three months ended March 31, 2006, we sold 2,119,500 of the option shares in the derivative position at a weighted average sales price of $35.49.  In the three months ended June 30, 2006, we acquired an additional 1,250,000 option shares at a weighted average purchase price of $33.08.  As of June 30, 2006, there are 13,696,000 option shares in the derivative position with an adjusted weighted average strike price of $32.70 per share or an aggregate of $447,822,000.  For the three and six months ended June 30, 2006, we recognized a net loss of $14,515,000 and $8,215,000, respectively, representing the mark-to-market of the shares in the derivative and the expense resulting from the LIBOR charges.

Our aggregate net gain realized from inception of this investment through June 30, 2006 is $9,039,000.

11

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
( Unaudited )

5.       Derivative Instruments and Marketable Securities

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

In August and September 2004, we acquired an economic interest in 7,916,900 Sears common shares through a series of privately negotiated transactions with a financial institution pursuant to which we purchased a call option and simultaneously sold a put option at the same strike price on Sears common shares.  These call and put options had an initial weighted-average strike price of $39.82 per share, or an aggregate of $315,250,000, expire in April 2006 and provide for net cash settlement.  Under these agreements, the strike price for each pair of options increases at an annual rate of LIBOR plus 45 basis points and is credited for the dividends received on the shares.  The options provide us with the same economic gain or loss as if we had purchased the underlying common shares and borrowed the aggregate strike price at an annual rate of LIBOR plus 45 basis points.  Because these options are derivatives and do not qualify for hedge accounting treatment, the gains or losses resulting from the mark-to-market of the options at the end of each reporting period are recognized as an increase or decrease in “interest and other investment income” on our consolidated statement of income.

On March 30, 2005, as a result of the merger between Sears and Kmart and pursuant to the terms of the contract, our derivative position representing 7,916,900 Sears common shares became a derivative position representing 2,491,819 common shares of Sears Holdings, Inc. (“Sears Holdings”) (NYSE: SHLD) valued at $323,936,000 based on the then closing share price of $130.00 and $146,663,000 of cash.  As a result, we recognized a net gain of $58,443,000 based on the fair value of the derivative position on March 30, 2005.  In 2005 we sold 402,660 of the option shares at a weighted average sales price of $124.44 per share.  In the first quarter of 2006, we settled the entire derivative position by selling the remaining 2,089,159 option shares at a weighted average sales price of $125.43, which resulted in a net gain of $18,611,000, comprised of $20,673,000 from the remaining option shares sold, partially offset by, $2,062,000 of expense resulting from the increase in strike price for the LIBOR charge.

Our aggregate net gain realized from inception of this investment through settlement was $142,877,000.

Sears Canada, Inc. (“Sears Canada”)

On April 3, 2006, we tendered the 7,500,000 Sears Canada shares we owned to Sears Holdings at the increased tender price of $15.68 per share, which resulted in a net gain of $55,438,000 representing the difference between the tender price and our carrying amount of $8.29 per share.  The net gain is reflected as a component of “net gains on dispositions of wholly-owned assets other than depreciable real estate” on our consolidated statement of income.  Together with income recognized in the fourth quarter of 2005 that resulted from a Sears Canada special dividend, the aggregate net gain from inception on our $143,737,000 investment was $78,323,000.

12

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
( Unaudited )

6.       Investments in Partially-Owned Entities

The carrying amount of our investments in partially-owned entities and income recognized from such investments are as follows:

Investments:

(Amounts in thousands)		June 30, 2006			December 31, 2005
Toys “R” Us, Inc. (“Toys”) (see page 17)		$	463,701		$	425,830
H Street Building Corporation (“H Street”) non-consolidated subsidiaries (1)		$	200,868		$	196,563
Newkirk Master Limited Partnership (“Newkirk MLP”)		174,193			172,488
Alexander’s Inc. (“Alexander’s”) (see page 18)		111,793			105,241
GMH Communities L.P. (“GMH”) (see page 18)		108,798			90,103
Beverly Connection (2)		80,256			103,251
Other		353,912			276,377
		$	1,029,820		$	944,023

 

Equity in Net Income (Loss):		For The Three Months Ended June 30,								For The Six Months Ended June 30,
(Amounts in thousands)		2006			2005					2006					2005
Toys:
32.9% share of equity in net (loss) income		$	(11,169	)	$	—				$	38,106				$	—
Interest and other income		3,285			—					6,770					—
		$	(7,884	)	$	—				$	44,876				$	—
Alexander’s:
33% share of:
Equity in net income before net gain on sale of condominiums and stock appreciation rights compensation expense		$	4,453		$	3,455				$	8,596				$	8,229
Net gain on sale of condominiums		2,722			5,541					4,580					26,174
Stock appreciation rights compensation income (expense)		4,836			(2,034			)		(7,559		)			(9,467		)
Equity in net income		12,011			6,962					5,617					24,936
Management and leasing fees		2,545			2,046					5,133					5,421
Development and guarantee fees		194			975					405					4,236
Interest income		—			3,047					—					3,823
		$	14,750		$	13,030				$	11,155				$	38,416
Beverly Connection:
50% share of equity in net loss		$	(2,056	)	$	(1,132		)		$	(6,023	)			$	(1,491	)
Interest and fee income		3,405			2,305					6,337					3,022
		1,349			1,173					314					1,531
Newkirk MLP:
15.8% in 2006 and 22.5% in 2005 share of equity in net income		4,357			2,333			(3)		8,515					8,144		(3)
Interest and other income		13			600					58					1,257
		4,370			2,933					8,573					9,401
GMH (see page 18):
13.5% in 2006 and 12.22% in 2005 share of equity in net income		—			439					—					500
H Street:
50% share of equity in income (1)		4,311			—					4,311					—
Other		4,605			2,053					7,488					4,388
		$	14,635		$	6,598				$	20,686				$	15,820

---

See notes on following page.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
( Unaudited )

6.       Investments in Partially-Owned Entities - continued

Notes to preceding tabular information:

(Amounts in thousands)

(1)           We account for our investment in H Street partially owned entities on the equity method on a one-quarter lag basis.  Prior to the quarter ended June 30, 2006, two 50% owned entities that are contesting our acquisition of H Street impeded access to their financial information and accordingly, we were unable to record our pro rata share of their earnings.  During the quarter ended June 30, 2006, based on the financial information provided to us, we recognized equity in net income of $4,387 from these entities, of which $2,807 was for the period from July 20, 2005 (date of acquisition) to December 31, 2005 and $1,580 was for the quarter ended March 31, 2006.

(2)           In connection with our preferred equity investment to this venture, we provided the venture with a $59,500 first mortgage loan, which bore interest at 10% through its scheduled maturity in February 2006.  On February 11, 2006, $35,000 of our loan to the venture was converted to additional preferred equity on the same terms as our existing preferred equity and the maturity date of the loan was extended.  On June 30, 2006, the venture completed a $100,000 refinancing and repaid to us the remaining $24,500 balance of the loan.  The venture’s new loan bears interest at LIBOR (capped at 5.5%) plus 2.20% (7.55% as of June 30, 2006) and matures in July 2008 with 3 one-year extension options.

(3)           Includes our share of impairment losses of $3,520 and $4,016 for the three and six months ended June 30, 2005, respectively.

 

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

6.             Investments in Partially-Owned Entities - continued

Below is a summary of the debt of partially-owned entities as of June 30, 2006 and December 31, 2005, none of which is guaranteed by us.

		100% of Partially-Owned Entities Debt
(Amounts in thousands)		June 30, 2006			December 31, 2005
Toys (32.9% interest):
$1.3 billion senior credit facility, due 2008, LIBOR plus 3.00% (8.11% at June 30, 2006)		$	1,300,000		$	—
$1.9 billion bridge loan, due 2012, LIBOR plus 5.25% (10.34% at June 30, 2006)		973,000			1,900,000
Mortgage loan, due 2007, LIBOR plus 1.30% (6.50% at June 30, 2006)		800,000			800,000
Senior U.K. real estate facility, due 2013, 4.56% plus 0.28% to 1.50% (5.02% at June 30, 2006)		650,000			—
7.625% bonds, due 2011 (Face value — $500,000)		475,000			475,000
7.875% senior notes, due 2013 (Face value — $400,000)		368,000			366,000
7.375% senior notes, due 2018 (Face value — $400,000)		326,000			324,000
Toys “R” Us - Japan short-term borrowings, 2006, tiered rates (weighted-average rate 0.31% at June 30, 2006)		253,000			—
6.875% bonds, due 2006 (Face value — $250,000)		250,000			253,000
8.750% debentures, due 2021 (Face value — $200,000)		193,000			193,000
Spanish real estate facility, due 2013, 1.50% plus EURIBOR (4.51% at June 30, 2006)		170,000			—
Toys “R” Us - Japan bank loans, due 2011-2014, 1.20%-2.80%		155,000			—
$1.0 billion senior facility, due 2006-2011, LIBOR plus 1.50% (5.76% at June 30, 2006)		126,000			1,035,000
Junior U.K. real estate facility, due 2013, LIBOR plus 2.25% (6.81% at June 30, 2006)		114,000			—
French real estate facility, due 2013, 1.50% plus EURIBOR (4.51% at June 30, 2006)		82,000			—
Note at an effective cost of 2.23% due in semi-annual installments through 2008		65,000			82,000
$2.0 billion credit facility, due 2010, LIBOR plus 1.75%-3.75%		5,000			1,160,000
Other		39,000			32,000
		6,344,000			6,620,000
Alexander’s (33% interest):
731 Lexington Avenue mortgage note payable collateralized by the office space, due in February 2014, with interest at 5.33% (prepayable without penalty)		397,794			400,000
731 Lexington Avenue mortgage note payable, collateralized by the retail space, due in July 2015, with interest at 4.93% (prepayable without penalty)		320,000			320,000
Kings Plaza Regional Shopping Center mortgage note payable, due in June 2011, with interest at 7.46% (prepayable with yield maintenance)		208,845			210,539
Rego Park mortgage note payable, due in June 2009, with interest at 7.25% (prepayable without penalty after March 2009)		80,530			80,926
Paramus mortgage note payable, due in October 2011, with interest at 5.92% (prepayable without penalty)		68,000			68,000
		1,075,169			1,079,465
Newkirk MLP (15.8% interest in 2006 and 22.5% interest in 2005):
Portion of first mortgages collateralized by the partnership’s real estate, due from 2006 to 2024, with a weighted average interest rate of 6.74% at June 30, 2006 (various prepayment terms)		830,501			742,879
GMH (13.5% interest in 2006 and 12.22% interest in 2005):
Mortgage notes payable, collateralized by 47 properties, due from 2007 to 2015, with a weighted average interest rate of 5.01% (various prepayment terms)		688,412			688,412
H Street (50% interest):
Mortgage notes payable, collateralized by 6 properties, due from 2006 to 2029 with a weighted average interest rate of 6.77% at June 30, 2006		320,233			—

 

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

6.             Investments in Partially-Owned Entities - continued

		100% of Partially Owned Entities Debt
(Amounts in thousands)		June 30, 2006			December 31, 2005
Partially-Owned Office Buildings:
Kaempfer Properties (2.5% to 5.0% interests in two partnerships) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2011 to 2031, with a weighted average interest rate of 6.43% at June 30, 2006 (various prepayment terms)		$	146,160		$	166,460
Fairfax Square (20% interest) mortgage note payable, due in August 2009, with interest at 7.50%		65,715			66,235
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)		22,325			22,484
Rosslyn Plaza (46% interest) mortgage note payable, due in November 2007, with interest at 7.28% (prepayable without penalty)		57,758			58,120
West 57 th  Street (50% interest) mortgage note payable, due in October 2009, with interest at 4.94% (prepayable without penalty after July 2009)		29,000			—
Verde LLC & Verde Realty Master Limited Partnership (8.33% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2006 to 2029, with a weighted average interest rate of 6.05% at June 30, 2006 (various prepayment terms)		139,921			176,345
Monmouth Mall (50% interest) mortgage note payable, due in September 2015, with interest at 5.44% (prepayable with yield maintenance)		165,000			165,000
Green Courte Real Estate Partners, LLC (8.3% interest) mortgage notes payable, collateralized by the partnerships’ real estate, due from 2006 to 2015, with a weighted average interest rate of 5.62% at June 30, 2006 (various prepayment terms)		188,227			159,573
San Jose, California Ground-up Development (45% interest) construction loan, due in March 2009, with a one-year extension option and interest at 6.94% (LIBOR plus 1.75%)		44,599			—
Beverly Connection (50% interest) mortgage and mezzanine loans payable, due in March 2008 and July 2008, with a weighted average interest rate of 10.00%, $70,000 of which is due to Vornado (prepayable with yield maintenance)		170,000			69,003
TCG Urban Infrastructure Holdings (25% interest) mortgage notes payable, collateralized by the entity’s real estate, due from 2008 to 2012, with a weighted average interest rate of 9.00% at June 30, 2006 (various prepayment terms)		41,569			40,239
478-486 Broadway (50% interest) mortgage note payable, due October 2007, with interest at 8.02% (LIBOR plus 3.15%) (prepayable with yield maintenance)		20,000			20,000
Wells/Kinzie Garage (50% interest) mortgage note payable, due in May 2009, with interest at 7.03%		14,914			15,067
Orleans Hubbard Garage (50% interest) mortgage note payable, due in March 2009, with interest at 7.03%		9,358			9,455
Other		24,041			24,426

 

Based on our ownership interest in the partially-owned entities above, our pro rata share of the debt of these partially-owned entities was $3,062,067,000 and $3,002,346,000 as of June 30, 2006 and December 31, 2005, respectively.

16

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

6.       Investments in Partially-Owned Entities - continued

Toys

On July 21, 2005, a joint venture owned equally by us, Bain Capital and Kohlberg Kravis Roberts & Co. acquired Toys for $26.75 per share in cash or approximately $6.6 billion.  In connection therewith, we invested $428,000,000 of the $1.3 billion of equity in the venture, consisting of $407,000,000 in cash and $21,000,000 in Toys common shares held by us.  This investment is accounted for under the equity method of accounting.

On January 9, 2006, Toys announced plans and is in the process of closing 87 Toys “R” Us stores in the United States, of which twelve stores will be converted into Babies “R” Us stores, the leases on five stores are expiring and one store has been sold.  We are handling the leasing and disposition of the real estate of the remaining 69 stores.

As a result of the store-closing program, Toys incurred restructuring and other charges aggregating approximately $149,000,000 before tax, which includes $43,000,000 for the cost of liquidating the inventory.  Of this amount, $94,000,000 was recognized in Toys’ fourth quarter ending January 28, 2006 and $55,000,000 was recorded in Toys’ first quarter ending April 29, 2006.  Our 32.9% share of the $149,000,000 charge is $49,000,000, of which $33,000,000 had no income statement effect as a result of purchase price accounting and the remaining portion relating to the cost of liquidating inventory of approximately $10,000,000 after-tax, was recognized as an expense as part of our equity in Toys’ net income in the first quarter of 2006.

The business of Toys is highly seasonal.  Historically, Toys’ fourth quarter net income accounts for more than 80% of its fiscal year net income.  Because Toys’ fiscal year ends on the Saturday nearest January 31, we record our 32.9% share of Toys’ net income or loss on a one-quarter lag basis.  Equity in net loss from Toys for the three months ended June 30, 2006 was $7,884,000 which consisted of (i) our $11,169,000 share of Toys’ net loss for their quarter ended April 29, 2006, partially offset by (ii) $2,209,000 of interest income for our share of Toys’ senior unsecured bridge loan and (iii) $1,076,000 of management fees.  Equity in net income from Toys for the six months ended June 30, 2006 was $44,876,000, which consisted of (i) our $38,106,000 share of Toys’ net income for the period from October 30, 2005 to April 29, 2006, (ii) $4,865,000 of interest income from our share of Toys’ senior unsecured bridge loan and (iii) $1,905,000 of management fees.

On July 19, 2006, Toys completed a financing, consisting of an $804,000,000, six-year term loan bearing interest at LIBOR plus 4.25% and a $200,000,000, two-year term loan bearing interest at an initial rate of LIBOR plus 3.00% for the first three months (increasing to 3.50% for the next three months and then to 4.00% for the remainder of the term).  The proceeds from these loans were used to repay Toys’ $973,000,000 bridge loan, including the $76,816,000 balance due to us.

The unaudited information set forth below presents our pro forma condensed consolidated statement of income for the three and six months ended June 30, 2005 (including Toys’ results for the three and six months ended April 29, 2005) as if the above transaction occurred on February 1, 2004.   The unaudited pro forma information below is not necessarily indicative of what our actual results would have been had the Toys transaction been consummated on February 1, 2004, nor does it represent the results of operations for any future periods.  In our opinion, all adjustments necessary to reflect this transaction have been made.

Condensed Consolidated Statements of Income (in thousands, except per share amounts)		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		Actual			Pro Forma			Actual			Pro Forma
		2006			2005			2006			2005
Revenues		$	663,032		$	591,475		$	1,310,369		$	1,186,724
Income before allocation to limited partners		$	185,867		$	185,989		$	355,926		$	496,588
Minority limited partners’ interest in the Operating Partnership		(17,324		)	(19,698		)	(33,198		)	(55,023		)
Perpetual preferred unit distributions of the Operating Partnership		(5,374		)	(15,152		)	(10,347		)	(33,693		)
Net income		163,169			151,139			312,381			407,872
Preferred share dividends		(14,404		)	(8,385		)	(28,811		)	(20,771		)
Net income applicable to common shares		$	148,765		$	142,754		$	283,570		$	387,101
Net income per common share — basic		$	1.05		$	1.10		$	2.01		$	2.99
Net income per common share — diluted		$	0.99		$	1.04		$	1.90		$	2.82

 

17

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

 

6.       Investments in Partially-Owned Entities - continued

Alexander’s (NYSE: ALX):

We own 33% of the outstanding common stock of Alexander’s at June 30, 2006.  As of June 30, 2006, the market value of our investment in Alexander’s was $450,646,000, based on Alexander’s June 30, 2006 closing share price of $271.76.  We manage, lease and develop Alexander’s properties pursuant to agreements, which expire in March of each year and are automatically renewable.  In addition, we provide property management services for the common area of 731 Lexington Avenue for an annual fee of $220,000, escalating at 3% per annum.

As of June 30, 2006, Alexander’s owed to us $34,401,000 for fees under the above agreements.

GMH Communities L.P. (“GMH”)

As of June 30, 2006, we own 7,337,857 limited partnership units (which are exchangeable on a one-for-one basis into common shares of GMH Communities Trust (“GCT”) (NYSE: GCT), a real estate investment trust that conducts its business through GMH and of which it is the sole general partner, and 2,517,247 common shares of GCT (1,817,247 shares were received upon exercise of our warrants discussed below), or 13.5% of the limited partnership interest of GMH.  As of June 30, 2006, the market value of our investment in GMH and GCT was $129,890,000, based on GCT’s June 30, 2006 closing share price of $13.18.

We account for our investment in GMH on the equity method and record our pro rata share of GMH’s net income or loss on a one-quarter lag basis as we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that GCT files its financial statements.  On July 31, 2006 GCT filed its annual report on Form 10-K for the year ended December 31, 2005, which restated the quarterly financial results of each of the first three quarters of 2005.  Because GMH’s earnings for the year ended December 31, 2005 were not available in time to be recorded in our consolidated financial statements, our earnings for the three and six months ended June 30, 2006 do not include a $94,000 net loss representing our share of GMH’s fourth quarter results, net of adjustments to restate its first three quarters of 2005.   In addition, as of the date of this filing, GCT has not filed its quarterly report on Form 10-Q for the quarter ended March 31, 2006 and accordingly, our earnings for the three and six months ended June 30, 2006 do not include our share of GMH’s first quarter 2006 earnings.

On May 2, 2006, the date our GMH warrants were to expire, we received 1,817,247 GCT common shares through an automatic cashless exercise.  The amount of the shares received was equal to the excess of GCT’s average closing share price for the trailing 20-day period ending on May 1, 2006 and the $8.22 exercise price, divided by GCT’s average closing share price for the trailing 20-day period ending on May 1, 2006, then multiplied by 6,085,180 warrants.  Accordingly, in the three months ended June 30, 2006, we recognized a net gain of $4,105,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price on March 31, 2006.  For the six months ended June 30, 2006, we recognized a net loss of $16,370,000, the difference between the value of the GCT common shares received on May 2, 2006 and GCT’s closing share price on December 31, 2005.  From inception of our investment in the warrants, including the first tranche of warrants exercised on November 3, 2004, the aggregate net gain recognized was $51,352,000.

18

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

 

7.       Notes and Mortgage Loans Receivable

Equinox Loan

On February 10, 2006 we acquired a 50% interest in a $115,000,000 note issued by Related Equinox Holdings II, LLC (the “Note”), for $57,500,000 in cash.  The Note is secured by a pledge of the stock of Related Equinox Holdings II.  Related Equinox Holdings II owns Equinox Holdings, which in turn owns all of the assets and obligations, including the fitness clubs, operated under the Equinox brand.  The Note is junior to a $50,000,000 (undrawn) revolving loan and $280,000,000 of senior unsecured obligations.  The Note is senior to $125,000,000 of cash equity contributed by third parties for their acquisition of the Equinox fitness club business.  The Note matures on February 15, 2013 and bears interest at 14% through February 15, 2011, increasing by 3% per annum through maturity.  The Note is prepayable at any time after February 15, 2009.

LNR Loans

In 2005 we made a $135,000,000 loan to Riley HoldCo Corp., consisting of a $60,000,000 mezzanine loan and a $75,000,000 fixed rate unsecured loan.  We received principal payments on the mezzanine loan of $5,557,000 and $13,901,000, on February 6, 2006 and June 2, 2006, respectively.  On July 12, 2006, the remaining $40,541,000 balance of the mezzanine loan was repaid with a pre-payment premium of $972,000, which will be recognized as “interest and other investment income” in the three months ended September 30, 2006.

Tharaldson Lodging Companies Loan

On June 16, 2006, we acquired an 81.5% interest in a $95,968,000 mezzanine loan to Tharaldson Lodging Companies for $78,166,000 in cash.  The loan is secured by a 107 hotel property portfolio with brands including Fairfield Inn, Residence Inn, Comfort Inn, and Courtyard by Marriott.  The loan is subordinate to $671,778,000 of debt and is senior to approximately $192,000,000 of other debt and equity.  The loan matures in April 2008, with three one-year extensions, provides for a 0.75% placement fee and bears interest at LIBOR plus 4.30% (9.63% at June 30, 2006).

280 Park Avenue Loan

On June 30, 2006, we made a $74,000,000 mezzanine loan secured by the equity interests in 280 Park Avenue, a 1.2 million square foot office building, located between 48 th  and 49 th  Street in Manhattan.  The loan bears interest at 10.25% and matures in June 2016.  The loan is subordinate to $1.036 billion of other debt and is senior to approximately $270,000,000 of equity and interest reserves.

Sheffield Loan

On July 7, 2006, we were repaid the $108,000,000 outstanding balance of the Sheffield mezzanine loan, together with accrued interest of $1,165,000 and a prepayment premium of $2,288,000, which will be recognized as “interest and other investment income” in the three months ended September 30, 2006.

Mervyn’s Loans

On April 12, 2006, we acquired a 23.6% interest in two mezzanine loans totaling $138,136,000, for $32,560,000 in cash.  The loans mature in January 2008 with two one-year extension options and bear interest at LIBOR plus 3.84% (9.19% at June 30, 2006).

Drake Hotel Loan

On June 19, 2006, we acquired a 49% interest in a $37,789,000 mezzanine loan for $18,517,000 in cash.  The loan matures in April 2007, with a six month extension option and bears interest at LIBOR plus 10% (15.35% at June 30, 2006).

19

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VORNADO REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(UNAUDITED)

8.       Identified Intangible Assets, Intangible Liabilities and Goodwill

The following summarizes our identified intangible assets, intangible liabilities (deferred credit) and goodwill as of June  30, 2006 and December 31, 2005.

(Amounts in thousands)		June 30, 2006			December 31 , 2005
Identified intangible assets (included in other assets):
Gross amount		$	276,313		$	266,268
Accumulated amortization		(86,925		)	(73,893		)
Net		$	189,388		$	192,375
Goodwill (included in other assets):
Gross amount		$	10,384		$	11,122
Identified intangible liabilities (included in deferred credit):
Gross amount		$	232,173		$	217,640
Accumulated amortization		(76,839		)	(66,748		)
Net		$	155,334		$	150,892

 

Amortization of acquired below market leases, net of acquired above market leases (a component of rental income) was $3,672,000 and $8,471,000 for the three and six months ended June 30, 2006 and $3,436,000 and $5,674,000 for the three and six months ended June 30, 2005.  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:

 

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