Overview

Vornado Realty L.P. (the “Operating Partnership” and/or the “Company”) is a Delaware limited partnership.  Vornado Realty Trust (“Vornado”) is the sole general partner of, and owned approximately 93.5% of the common limited partnership interest in the Operating Partnership at December 31, 2011.  All references to “we,” “us,” “our,” the “Company” and “Operating Partnership” refer to Vornado Realty L.P. and its consolidated subsidiaries.

 

We own and operate office, retail and showroom properties (our “core” operations) with large concentrations of office and retail properties in the New York City metropolitan area and in the Washington, DC / Northern Virginia area. In addition, we have a 32.7% interest in Toys “R” Us, Inc. (“Toys”) which has a significant real estate component, a 32.4% interest in Alexander’s, Inc. (NYSE: ALX) (“Alexander’s”), which has seven properties in the greater New York metropolitan area, as well as interests in other real estate and related investments.

 

Our business objective is to maximize Vornado shareholder value, which we measure by the total return provided to Vornado’s shareholders. Below is a table comparing Vornado’s performance to the Morgan Stanley REIT Index (“RMS”) and the SNL REIT Index (“SNL”) for the following periods ended December 31, 2011:

 

 

We intend to achieve our business objective by continuing to pursue our investment philosophy and executing our operating strategies through:

 

·      Maintaining a superior team of operating and investment professionals and an entrepreneurial spirit;

·      Investing in properties in select markets, such as New York City and Washington, DC, where we believe there is a high likelihood of capital appreciation;

·      Acquiring quality properties at a discount to replacement cost and where there is a significant potential for higher rents;

·      Investing in retail properties in select under-stored locations such as the New York City metropolitan area;

·      Developing and redeveloping existing properties to increase returns and maximize value; and

·      Investing in operating companies that have a significant real estate component.

 

We expect to finance our growth, acquisitions and investments using internally generated funds, proceeds from possible asset sales and by accessing the public and private capital markets.  We may also offer partnership units in exchange for property and may repurchase or otherwise reacquire our units or any other securities in the future.

 

We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments than we are. Principal factors of competition include rents charged, attractiveness of location, the quality of the property and the breadth and the quality of services provided. Our success depends upon, among other factors, trends of the national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.  See “Risk Factors” in Item 1A for additional information regarding these factors.

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Year Ended December 31, 2011 Financial Results Summary

 

Net income attributable to Class A unitholders for the year ended December 31, 2011 was $642,830,000, or $3.23 per diluted Class A unit, compared to $640,764,000, or $3.23 per diluted Class A unit, for the year ended December 31, 2010. Net income for the years ended December 31, 2011 and 2010 includes $61,390,000 and $63,032,000, respectively, of net gains on sale of real estate, and $28,799,000 and $108,981,000, respectively, of real estate impairment losses.  In addition, the years ended December 31, 2011 and 2010 include certain items that affect comparability which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below increased net income attributable to Class A unitholders by $260,476,000, or $1.31 per diluted Class A unit for the year ended December 31, 2011 and $203,144,000, or $1.03 per diluted Class A unit for the year ended December 31, 2010.

 

			For the Year Ended
			December 31,
(Amounts in thousands)			2011			2010
Items that affect comparability income (expense):
	Net gain on extinguishment of debt		$	83,907		$	92,150
	Mezzanine loan loss reversals and net gain on disposition			82,744			53,100
	Our share of LNR's income tax benefit, asset sales and tax settlement gains			27,377			-
	Recognition of disputed receivable from Stop & Shop			23,521			-
	Income from the mark-to-market of J.C. Penney derivative position			12,984			130,153
	Net gain from Suffolk Downs' sale of a partial interest			12,525			-
	Net gain resulting from Lexington Realty Trust's stock issuance			9,760			13,710
	Discount on preferred share and unit redemptions			7,000			11,354
	Net gain on sale of condominiums			5,884			3,149
	Tenant buy-outs and acquisition costs			(30,071)			(6,945)
	Non-cash asset write-downs:
		Real estate - development related		-			(30,013)
		Partially owned entities		(13,794)			-
	Merchandise Mart restructuring costs			(4,226)			-
	Real Estate Fund placement fees			(3,451)			(6,482)
	Default interest and fees accrued on loans in special servicing			-			(15,079)
	Income attributable to discontinued operations			15,802			14,068
	Other, net			(2,077)			(10,072)
	Items that affect comparability		$	227,885		$	249,093

 

 

The percentage increase (decrease) in GAAP basis and cash basis same store Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of our operating segments for the year ended December 31, 2011 over the year ended December 31, 2010 is summarized below.

					New York		Washington, DC				Merchandise
Same Store EBITDA:					Office		Office		Retail		Mart
	December 31, 2011 vs. December 31, 2010
		GAAP basis			(0.1%)		0.9%		3.1%		0.5%
		Cash Basis			1.8%		1.8%		6.4%		3.5%

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Quarter Ended December 31, 2011  Financial Results Summary

 

Net income attributable to Class A unitholders for the quarter ended December 31, 2011 was $74,182,000, or $0.37 per diluted Class A unit, compared to $260,662,000, or $1.31 per diluted Class A unit, for the quarter ended December 31, 2010.  Net income for the quarters ended December 31, 2011 and 2010 includes $1,916,000 and $62,718,000, respectively, of net gains on sale of real estate, and $28,799,000 and $103,981,000, respectively, of real estate impairment losses.  In addition, the quarters ended December 31, 2011 and 2010 include certain other items that affect comparability which are listed in the table below.  The aggregate of net gains on sale of real estate, real estate impairment losses and the items in the table below increased net income attributable to Class A unitholders by $37,419,000, or $0.19 per diluted Class A unit for the quarter ended December 31, 2011 and $185,683,000, or $0.91 per diluted Class A unit for the quarter ended December 31, 2010.

 

			For the Three Months Ended
			December 31,
(Amounts in thousands)			2011			2010
Items that affect comparability income (expense):
	Income from the mark-to-market of J.C. Penney derivative position		$	40,120		$	97,904
	Recognition of disputed receivable from Stop & Shop			23,521			-
	Net gain from Suffolk Downs' sale of a partial interest			12,525			-
	Our share of LNR's income tax benefit			12,380			-
	Net gain on extinguishment of debt			-			93,946
	Mezzanine loan loss reversal			-			60,000
	Net gain resulting from Lexington Realty Trust's stock issuance			-			7,712
	Non-cash asset write-downs:
		Real estate - development related		-			(30,013)
		Partially owned entities		(13,794)			-
	Tenant buy-outs and acquisition costs			(10,656)			(4,094)
	Income attributable to discontinued operations			5,039			4,665
	Other, net			(4,833)			(3,174)
	Items that affect comparability		$	64,302		$	226,946

 

 

The percentage increase (decrease) in GAAP basis and cash basis same store EBITDA of our operating segments for the quarter ended December 31, 2011 over the quarter ended December 31, 2010 and the trailing quarter ended September 30, 2011 are summarized below.

					New York		Washington, DC				Merchandise
Same Store EBITDA:					Office		Office		Retail		Mart
	December 31, 2011 vs. December 31, 2010
		GAAP basis			3.3%		(3.0%)		2.4%		8.9%
		Cash Basis			5.6%		(2.5%)		6.0%		10.5%
	December 31, 2011 vs. September 30, 2011
		GAAP basis			3.7%		(3.2%)		2.5%		23.5%	(1)
		Cash Basis			1.1%		(2.9%)		6.3%		20.8%	(1)
(1)	Primarily from the timing of trade shows.

 

Calculations of same store EBITDA and reconciliations of our net income to EBITDA and the reasons we consider these non-GAAP financial measures useful are provided in the following pages of Management’s Discussion and Analysis of the Financial Condition and Results of Operations.

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Vornado Capital Partners Real Estate Fund (the “Fund”)

 

In February 2011, the Fund’s subscription period closed with an aggregate of $800,000,000 of capital commitments, of which we committed $200,000,000.  We are the general partner and investment manager of the Fund, which has an eight-year term and a three-year investment period.  During the investment period, which concludes in July 2013, the Fund is our exclusive investment vehicle for all investments that fit within its investment parameters, as defined.  The Fund is accounted for under the AICPA Investment Company Guide and its investments are reported on its balance sheet at fair value, with changes in value each period recognized in earnings.  We consolidate the accounts of the Fund into our consolidated financial statements, retaining the fair value basis of accounting. 

 

During 2011, the Fund made three investments (described below) aggregating $248,500,000 and exited two investments.  As of December 31, 2011, the Fund has five investments with an aggregate fair value of approximately $346,650,000, or $11,995,000 in excess of cost, and has remaining unfunded commitments of $416,600,000, of which our share is $104,150,000.

 

        One Park Avenue

 

On March 1, 2011, the Fund as a co-investor (64.7% interest), together with Vornado (30.3% interest), acquired a 95% interest in One Park Avenue, a 932,000 square foot office building located between 32 ^nd and 33 ^rd Streets in New York, for $374,000,000.  The purchase price consisted of $137,000,000 in cash and 95% of a $250,000,000 five-year mortgage that bears interest at 5.0%.

 

Crowne Plaza Times Square

 

On December 16, 2011, the Fund formed a joint venture with the owner of the property to recapitalize the Crowne Plaza Hotel in Times Square.  The property is located at 48th Street and Broadway in Times Square and is comprised of a 795-key hotel, 14,000 square feet of prime retail space, 212,000 square feet of office space, nine large signage offerings, a 159-space parking garage and a health club.  The joint venture plans to reconfigure and reposition the retail and office space as well as add additional signage.  Vornado will manage and lease the commercial components of the property and the joint venture partner will asset manage the hotel.  This transaction was initiated by us in May 2011, when the Fund acquired a $34,000,000 mezzanine position in the junior most tranche of the property’s mezzanine debt.  In December 2011, the Fund contributed $31,000,000 and its partner contributed $22,000,000 of new capital to pay down third party debt and for future capital expenditures.  The new capital was contributed in the form of debt that is convertible into preferred equity that receives a priority return and then will receive a profit participation.  The Fund has an economic interest of approximately 38% in the property.  The Fund’s investment is subordinate to the property’s $259,000,000 of senior debt which matures in December 2013, with a one-year extension option.

 

11 East 68 ^th Street

 

On December 29, 2011, the Fund committed to acquire the retail portion of 11 East 68th Street, an 11-story residential and retail property located on Madison Avenue and 68th Street, for $50,500,000.  The retail portion of the property consists of two retail units aggregating 5,000 square feet.  The Fund provided $21,200,000 at closing and will provide the remaining $29,300,000 over the next two years.  In addition, the Fund has also provided a $21,000,000 mezzanine loan on the residential portion of the property, which bears paid-in-kind interest at 15%, matures in three years and has a one-year extension option.  

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2011 Acquisitions and Investments

 

1399 New York Avenue (the “Executive Tower”)

 

On December 23, 2011, we acquired the 97.5% interest that we did not already own in the Executive Tower, an 11-story, 128,000 square foot Class A office building located in the Washington, CBD East End submarket close to the White House, for $104,000,000 in cash.

 

666 Fifth Avenue Office

 

On December 16, 2011, we formed a joint venture with an affiliate of the Kushner Companies to recapitalize the office portion of 666 Fifth Avenue, a 39-story, 1.4 million square foot Class A office building in Manhattan, located on the full block front of Fifth Avenue between 52nd and 53rd Street.  We acquired a 49.5% interest in the property from the Kushner Companies, the current owner.  In connection therewith, the existing $1,215,000,000 mortgage loan was modified by LNR, the special servicer, into a $1,100,000,000 A-Note and a $115,000,000 B-Note and extended to February 2019; and a portion of the current pay interest was deferred to the B-Note.  We and the Kushner Companies have committed to lend the joint venture an aggregate of $110,000,000 (of which our share is $80,000,000) for tenant improvements and working capital for the property, which is senior to the $115,000,000 B-Note. In addition, we have provided the A-Note holders a limited recourse and cooperation guarantee of up to $75,000,000 if an event of default occurs and is ongoing.

 

Independence Plaza

 

On June 17, 2011, a joint venture in which we are a 51% partner invested $55,000,000 in cash (of which we contributed $35,000,000) to acquire a face amount of $150,000,000 of mezzanine loans and a $35,000,000 participation in a senior loan on Independence Plaza, a residential complex comprised of three 39-story buildings in the Tribeca submarket of Manhattan.

 

280 Park Avenue Joint Venture

 

On March 16, 2011, we formed a 50/50 joint venture with SL Green Realty Corp to own the mezzanine debt of 280 Park Avenue, a 1.2 million square foot office building located between 48th and 49th Streets in Manhattan (the “Property”).  We contributed our mezzanine loan with a face amount of $73,750,000 and they contributed their mezzanine loans with a face amount of $326,250,000 to the joint venture.  We equalized our interest in the joint venture by paying our partner $111,250,000 in cash and assuming $15,000,000 of their debt.  On May 17, 2011, as part of the recapitalization of the Property, the joint venture contributed its debt position for 99% of the common equity of a new joint venture which owns the Property.  The new joint venture’s investment is subordinate to $710,000,000 of third party debt.  The new joint venture expects to spend $150,000,000 for re-tenanting and repositioning the Property.

 

 

2011 Dispositions

 

On January 6, 2012, we completed the sale of 350 West Mart Center, a 1.2 million square foot office building located in Chicago, Illinois, for $228,000,000 in cash, which resulted in a net gain of $54,200,000 that will be recognized in the first quarter of 2012.

 

On March 31, 2011, the receiver completed the disposition of the High Point Complex in North Carolina.  In connection therewith, the property and related debt were removed from our consolidated balance sheet and we recognized a net gain of $83,907,000 on the extinguishment of debt.

 

On January 12, 2011, we sold 1140 Connecticut Avenue and 1227 25 ^th Street in Washington, DC, for $127,000,000 in cash, which resulted in a net gain of $45,862,000.

 

In 2011, we sold three retail properties in separate transactions for an aggregate of $40,990,000 in cash, which resulted in net gains of $5,761,000.

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2011 Financing Activities

 

Senior Unsecured Debt

 

On November 30, 2011, we completed a public offering of $400,000,000 aggregate principal amount of 5.0%, ten-year senior unsecured notes and retained net proceeds of approximately $395,584,000.  The notes were sold at 99.546% of their face amount to yield 5.057%.

 

In 2011, we renewed both of our unsecured revolving credit facilities aggregating $2,500,000,000.  The first facility, which was renewed in June 2011, bears interest on drawn amounts at LIBOR plus 1.35% and has a 0.30% facility fee (drawn or undrawn).  The second facility, which was renewed in November 2011, bears interest on drawn amounts at LIBOR plus 1.25% and has a 0.25% facility fee (drawn or undrawn).  The LIBOR spread and facility fee on both facilities are based on our credit ratings.  Both facilities mature in four years and have one-year extension options.  As of December 31, 2011, an aggregate of $138,000,000 was outstanding under these facilities.   

 

 

Secured Debt

 

On January 9, 2012, we completed a $300,000,000 refinancing of 350 Park Avenue, a 557,000 square foot Manhattan office building. The five-year fixed rate loan bears interest at 3.75% and amortizes based on a 30-year schedule beginning in the third year. The proceeds of the new loan and $132,000,000 of existing cash were used to repay the existing loan and closing costs.

 

On December 28, 2011, we completed a $330,000,000 refinancing of Eleven Penn Plaza, a 1.1 million square foot Manhattan office building. The seven-year loan bears interest at LIBOR plus 2.35% and amortizes based on a 30-year schedule beginning in the fourth year. We retained net proceeds of approximately $126,000,000 after repaying the existing loan and closing costs.              

 

On September 1, 2011, we completed a $600,000,000 refinancing of 555 California Street, a three-building office complex aggregating 1.8 million square feet in San Francisco’s financial district, known as the Bank of America Center, in which we own a 70% controlling interest.  The 10-year fixed rate loan bears interest at 5.10% and amortizes based on a 30-year schedule beginning in the fourth year.  The proceeds of the new loan and $45,000,000 of existing cash were used to repay the existing loan and closing costs.

 

On May 11, 2011, we repaid the outstanding balance of the construction loan on West End 25, and closed on a $101,671,000 mortgage at a fixed rate of 4.88%.  The loan has a 10-year term and amortizes based on a 30-year schedule beginning in the sixth year.

 

On February 11, 2011, we completed a $425,000,000 refinancing of Two Penn Plaza, a 1.6 million square foot Manhattan office building.  The seven-year loan bears interest at LIBOR plus 2.00%, which was swapped for the term of the loan to a fixed rate of 5.13%.  The loan amortizes based on a 30-year schedule beginning in the fourth year.  We retained net proceeds of approximately $139,000,000 after repaying the existing loan and closing costs.

 

On February 10, 2011, we completed a $150,000,000 financing of 2121 Crystal Drive, a 506,000 square foot office building located in Crystal City, Arlington, Virginia.  The 12-year fixed rate loan bears interest at 5.51% and amortizes based on a 30-year schedule beginning in the third year.  This property was previously unencumbered.

 

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2011 Financing Activities – continued

 

Secured Debt – continued

 

 

On January 18, 2011, we repaid the outstanding balance of the construction loan on 220 20 ^th Street and closed on a $76,100,000 mortgage at a fixed rate of 4.61%.  The loan has a seven-year term and amortizes based on a 30-year schedule.

 

On January 10, 2011, we completed a $75,000,000 financing of North Bergen (Tonnelle Avenue), a 410,000 square foot strip shopping center.  The seven-year fixed rate loan bears interest rate at 4.59% and amortizes based on a 25-year schedule beginning in the sixth year. This property was previously unencumbered.

 

On January 6, 2011, we completed a $60,000,000 financing of land under a portion of the Borgata Hotel and Casino complex. The 10-year fixed rate loan bears interest at 5.14% and amortizes based on a 30-year schedule beginning in the third year.

 

 

Preferred Equity

 

On April 20, 2011, Vornado sold 7,000,000 6.875% Series J Cumulative Redeemable Preferred shares at a price of $25.00 per share, in an underwritten public offering pursuant to an effective registration statement.  On April 21, 2011, the underwriters exercised their option to purchase an additional 1,050,000 shares to cover over-allotments.  On May 5, 2011 and August 5, 2011 Vornado sold an additional 800,000 and 1,000,000 shares, respectively, at a price of $25.00 per share.  Vornado retained aggregate net proceeds of $238,842,000, after underwriters’ discounts and issuance costs and contributed the net proceeds to us in exchange for 9,850,000 Series J Preferred Units (with economic terms that mirror those of the Series J Preferred Shares). 

 

 

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Leasing Activity

 

The leasing activity presented below is based on leases signed during the period and is not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Tenant improvements and leasing commissions presented below are based on square feet leased during the period.